A Closer Look at Enbridge's Earnings

Canada's midstream heavyweights have finally reported fourth-quarter earnings, as both TransCanada  (NYSE: TRP  ) and Enbridge  (NYSE: ENB  ) released their information last week. TransCanada reported on Wednesday, missing analysts' expectations on EPS and revenue. Enbridge reported on Friday, missing on EPS but beating on revenue. Now that the dust has settled, let's take a closer look at Enbridge's fourth quarter.

General rundown
Enbridge's earnings came in at $0.18 per share, thanks to an asset-impairment charge on its Stingray and Garden Banks assets, two natural gas pipelines offshore of the Gulf of Mexico which the company has deemed irrelevant. Adjusted earnings were $0.42 a share, up from $0.36 last year. Revenue was $7.17 billion, which was down from $7.31 billion last year.

Full-year adjusted earnings climbed to $1.62 per share, an 11% increase over the full-year 2011. Shares of the stock climbed 16% in 2012.

Q4: Digging deeper
With some good news and some bad news coming out of the Enbridge camp, it's all the more important to break down performance segment by segment, so let's get started.

The best performing segment was the liquids pipelines group, which posted a $57 million improvement for the quarter, and a $148 million boost for the full year, as compared to 2011. The growth came largely because 2012 was the first full year for Enbridge's mainline Competitive Tolling Settlement. Volumes and tolls both increased on the line. Enbridge's Seaway pipeline joint venture with Enterprise Products Partners also contributed to the improved performance.

Gas distribution improved $15 million over the fourth quarter of last year, and eked out a $3 million gain for the full year. Management attributes the gains in this segment to customer growth, rate variances, and pipeline capacity optimization. Spending increased on system integrity and safety-related costs, as well as employee costs. In reality, this should be the case with every pipeline company. Top-notch employees are in high demand across all aspects of the oil and gas industry right now; as always, safety should be a priority. I'm glad to see the increases.

Gas pipelines, processing, and energy services dropped $4 million compared to the fourth quarter of last year, and fell $9 million for the full year. This is mainly because of the poor performance of the offshore pipeline division of this segment.

The sponsored investments segment was down $7 million in the fourth quarter and up $19 million for the full year. Enbridge Energy Partners (NYSE: EEP  ) hurt more than it helped this quarter. Despite a higher contribution from its liquids pipelines, the MLP's natural gas business decreased, and it was also hit with increased operating, safety, and personnel costs. Again, especially given the Line 6B disaster from 2010, those costs are not worrisome. Sponsored investments did get a boost from the Enbridge Income Fund, which posted a full year of earnings from Enbridge's renewable projects, as well as some asset drop-downs.

A look ahead
Last week Energy Transfer Partners (NYSE: ETP  ) officially announced it was partnering with Enbridge in the conversion of certain segments of its Trunkline system from natural gas to crude oil. The line connects the eastern portion of the Gulf Coast refining district to the hub at Patoka, Ill. Right now gas flows north to south, so the project entails not only switching commodities, but flipping directions. The line has a 30-inch diameter and should have a capacity of up to 420,000-660,000 barrels per day. This will be the first pipeline to connect crude oil from Patoka to St. James and it is scheduled to come online in 2015.

Aside from that 50/50 joint venture, Enbridge also plans to expand its Canadian Mainline system, which stretches from Hardisty, Alberta, to the Canada/U.S. border at Gretna, Manitoba. Paired with an expansion of Enbridge Energy Partners' Lakehead System that begins at Neche, N.D. (right over the border from Gretna), this $600 million undertaking is expected to increase capacity on the both systems by 230,000 barrels per day, and should be in service by 2015.

And, of course, the drama of the Northern Gateway pipeline will continue to unfold. Not a single question about the $6 billion project came up during the company's conference call Q&A. For now at least, it remains a courtroom battle.

Foolish takeaway
There is plenty of good news here, particularly with the liquids pipelines. The other item that came to light on the conference call was how much effort Enbridge is putting into safety and maintenance, which includes inspecting all of its pipe and making appropriate replacements. The company has spent close to $1 billion a year for the last two years, and will spend about that much in 2013 en route to establishing and implementing best practices for safety and maintenance. Enbridge should be in great shape going forward.

Enbridge's partner on the Seaway Pipeline is Enterprise Products Partners. The company, with its superior integrated asset base, has been profiting from the massive bottlenecks in takeaway capacity by taking on large-scale projects. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand-new premium research report on the company.


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