Whenever a company posts a surprise loss, the first thing investors do is go into investigator mode to see whether the change in prospects was a one-time fluke or the sign of something worse. In the case of Enbridge Energy Partners (EEP +0.00%), the company's eye-popping loss isn't the biggest concern.
Let's take a quick look at Enbridge Energy Partners' third-quarter results to see what caused the company to post a big loss, and what investors should be focusing on in the future.
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Enbridge Energy Partners results: The raw numbers
| Results | Q3 2016 | Q2 2016 | Q3 2015 |
| Revenue |
$1,120 | $1,048 | $1,267 |
| Adjusted EBITDA | $456.8 | $489.3 | $460.7 |
| Net income per share attributable to Enbridge Energy Partners | ($1.31) | $0.08 | $0.07 |
| Distributable cash flow | $214.7 | $262.7 | $248.8 |
All figures in millions, except per-share data. EBITDA = earnings before interest, taxes, depreciation, and amortization. Data source: Enbridge Energy Partners earnings release.
The big decline in Enbridge Energy Partners' earnings wasn't because of any material issues with its existing pipeline system. On the contrary, the company's liquids pipeline system did very well, as production in Alberta ramped back up again after wildfires caused a minor setback in the prior quarter. The swing into the loss column had to do with the decision to halt work on the Sandpiper project in the Bakken shale formation. A $757 million asset writedown came with that decision, and that is why we see such a steep drop in net income but little impact on revenue, adjusted EBITDA, or distributable cash flow.
The one thing that has been causing headaches for Enbridge in recent quarters is its natural gas segment. This part of the business, which is mostly its investment in Midcoast Energy Partners (NYSE: MEP), continues to see declining profitability. This past quarter, it swung into the loss column thanks to lower volumes and lower commodity prices.
What happened with Enbridge Energy Partners this quarter?
There were two big announcements this past quarter that are really shaking things up a bit at Enbridge Energy Partners. The first has to do with the Sandpiper pipeline cancellation. As oil and gas production has declined in the region, takeaway capacity has not been as hot of a priority of late, so Enbridge Energy Partners has decided to table that investment for a later date. It was forced to take the writedown on the asset because the timetable for restarting that project is beyond the company's five-year planning window.
Instead of walking completely away from this oil-producing region, the company also decided to participate in the Dakota Access Pipeline and the Energy Transfer Crude Oil Pipeline. Enbridge Energy Partners and parent company Enbridge (ENB +1.79%) will take 25% and 75% interest in Enbridge's $1.5 billion portion of the pipeline's costs. Enbridge Energy Partners will pay for its part in the pipe by issuing shares to Enbridge, and skirt having to go to the capital markets to raise the money.
The other big story this past quarter was that parent company Enbridge and Spectra Energy (SE +0.00%) have decided to merge, in a $28 billion deal. There are clear benefits of the tie-up that were highlighted when the two announced the deal back in September, but this earnings release threw a little cold water on that deal for Enbridge Energy Partners' investors. As per the earnings release, all of Enbridge's U.S.-based investment vehicles -- that includes Enbridge Energy Partners and Midcoast Energy Partners -- will be under comprehensive review. What that means is uncertain, but it does mean that the company has delayed making any decisions around Midcoast, which management had said it would complete by the end of the year.
What management had to say
One thing that is a little concerning for Enbridge Energy Partners investors is that the company's distributable cash flow doesn't look like it will cover its payout for the entirety of 2016; that can be a red flag. Previously, the addition of the Sandpiper pipeline was going to help turn that around, but without that on the books, CEO Mark Maki was asked how the company plans to fix this lingering issue. Here's his response:
The path back to 1 [distribution] coverage was very much predicated here on Sandpiper and Line 3. That was how we looked at it before ... I would say probably more clarity on getting back to 1 coverage will really come out of the strategic review work that we're going to be doing.
So basically, investors need to sit tight and see what the management teams at Enbridge and Spectra Energy come up with in the coming quarters.
Your 10-second takeaway
While Enbridge Energy Partners has shown time and time again that its liquids pipeline system is a solid return generator, its investments in natural gas have not been as robust and have caused a couple cash-flow headaches. Now that it and Midcoast Energy Partners are under what management is calling a comprehensive review, as part of the Enbridge-Spectra Energy merger, it could potentially be a very different company than what we see today. In that case, investors should look for any news related to how the parent companies want to handle this merger.
