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EARNINGS BEFORE INTEREST AND INCOME TAXES
For the three and six months ended June 30, 2017, EBIT was $2,099 million and $3,728 million, respectively, compared with $731 million and $2,907 million for the three and six months ended June 30, 2016. Earnings for the three and six months ended June 30, 2017 were positively impacted by contributions from new assets following the completion of the Merger Transaction.
The positive impact to EBIT resulting from the Merger Transaction's new assets was partially offset by lower results in the Energy Services and Liquids Pipelines segments as discussed below.
The comparability of the Company's earnings period-over-period is also impacted by a number of unusual, non-recurring or non-operating factors that are enumerated in the Non-GAAP Reconciliation tables, the most significant of which are changes in unrealized derivative fair value gains and losses. For the three months ended June 30, 2017, the Company's EBIT reflected $461 million of unrealized derivative fair value gains, compared with losses of $98 million in the corresponding 2016 period. For the six months ended June 30, 2017, the Company's EBIT reflected $877 million of unrealized derivative fair value gains, compared with gains of $834 million in the corresponding 2016 period. The Company has a comprehensive long-term economic hedging program to mitigate interest rate, foreign exchange and commodity price risks which creates volatility in short-term earnings. Over the long-term, Enbridge believes its hedging program supports the reliable cash flows and dividend growth upon which the Company's investor value proposition is based.
In addition, the comparability of period-over-period EBIT was impacted by the recognition of an impairment of $176 million ($103 million after-tax attributable to Enbridge) in the second quarter of 2016 related to Enbridge's 75 percent joint venture interest in Eddystone Rail Company, LLC, a rail-to-barge transloading facility located in Greater Philadelphia, Pennsylvania.
EBIT for the six months ended June 30, 2017 also reflected charges of $178 million ($130 million after-tax) with respect to costs incurred in conjunction with the Merger Transaction, as well as $208 million ($146 million after-tax) of employee severance costs in relation to the Company's enterprise-wide reduction of workforce in March 2017 and restructuring costs in connection with the completion of the Merger Transaction.
EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS
Earnings attributable to common shareholders for the three months ended June 30, 2017 were $919 million, or $0.56 per common share, compared with $301 million, or $0.33 per common share, for the three months ended June 30, 2016. Earnings attributable to common shareholders for the six months ended June 30, 2017 were $1,557 million, or $1.11 per common share, compared with $1,514 million, or $1.69 per common share, for the six months ended June 30, 2016.
In addition to the factors discussed in EBIT above, interest expense for the three and six months ended June 30, 2017 was higher, compared with the corresponding 2016 periods, as a result of debt assumed in the Merger Transaction. Preference share dividends were also higher reflecting additional preference shares issued in the fourth quarter of 2016 to partially fund the Company's growth capital program.
Income tax expense increased for the three and six months ended June 30, 2017, compared with the corresponding 2016 periods, largely due to the increase in earnings.
Earnings attributable to noncontrolling interests and redeemable noncontrolling interests increased in the second quarter and the first half of 2017, compared with the corresponding 2016 periods. The increase was driven by additional noncontrolling interests associated with the assets acquired in the Merger Transaction and lower earnings attributable to noncontrolling interests in Enbridge Energy Partners, L.P. (EEP) during 2016.
Lower earnings per common share for the six months ended June 30, 2017, compared with the corresponding 2016 period, reflected the issuance of approximately 691 million common shares in February 2017 as part of the consideration for the Merger Transaction, the issuance of approximately 75 million common shares in 2016 through a 56 million follow-on common share offering in the first quarter of 2016, and ongoing issuances under the Company's Dividend Reinvestment Program.
ADJUSTED EARNINGS BEFORE INTEREST AND INCOME TAXES
For the three and six months ended June 30, 2017, adjusted EBIT was $1,713 million and $3,228 million, respectively, an increase of $624 million and $765 million over the corresponding three and six-month periods in 2016. The largest driver of adjusted EBIT growth over the prior year periods was the contributions of new assets acquired in the Merger Transaction. Also contributing to the period-over-period growth in adjusted EBIT were increased contributions from the Green Power and Transmission segment. These positive contributions were partially offset by warmer weather in the franchise areas served by the Company's gas distribution utilities and lower results in the Energy Services and Liquids Pipelines segments.
Growth in adjusted EBIT was most pronounced in the Gas Pipelines and Processing segment, where a majority of the new assets acquired through the Merger Transaction are reported. Growth for this segment also reflected contributions from the Tupper Main and Tupper West gas plants acquired in April 2016.
Excluding contributions from Express-Platte as part of the Merger Transaction, Liquids Pipelines adjusted EBIT decreased in the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The second quarter of 2017 was impacted by several transitory items including a significant unexpected outage and accelerated maintenance at a customer's upstream facility, additional related and unrelated production disruptions, and a hydrostatic testing program on Line 5 during the month of June 2017. The combined impact on the Mainline System of these factors was approximately $50 million in the second quarter of 2017. Up until the month of June, the Mainline System had been delivering near record volumes and operating under apportionment in heavy crude oil service. Apportionment on the Mainline System also impacted the adjusted EBIT contribution of certain downstream pipelines during the first and second quarters of 2017. Liquids Pipelines reported performance was further impacted by a change in practice whereby the Company no longer includes cash received under certain take-or-pay contracts with make-up rights in its determination of adjusted EBIT. In addition, the divestiture of certain assets and lower surcharge revenues decreased adjusted EBIT. Adjusted EBIT generated by Liquids Pipelines is expected to grow over the second half of 2017 as throughput on the Mainline System is expected to return to record levels achieved earlier in the year and capacity optimization projects, undertaken in the first half of the year to alleviate apportionment on the Mainline System, are operationalized.
Within the Gas Distribution segment, EGD generated lower adjusted EBIT for the six months ended June 30, 2017, compared with the corresponding 2016 period, primarily due to lower distribution revenues attributable to warmer than normal weather in the first half of 2017. Effective January 1, 2017, EGD ceased to exclude the effect of warmer/colder weather from its adjusted EBIT. In the first half of 2017, warmer than normal weather impacted EGD's adjusted EBIT by approximately $23 million. The period-over-period decrease in EGD's adjusted EBIT was more than offset by contributions from Union Gas since the completion of the Merger Transaction.
Energy Services adjusted EBIT for the three and six months ended June 30, 2017 reflected compressed location and quality differentials in certain markets, lower refinery demand for certain products and fewer opportunities to achieve profitable margins on facilities where the Company holds capacity obligations. Adjusted EBIT from Energy Services is dependent on market conditions and results achieved in one period may not be indicative of results to be achieved in future periods.
The increase in adjusted loss before interest and income taxes reported within Eliminations and Other reflects higher unallocated corporate costs which primarily resulted from the Merger Transaction, partially offset by synergies achieved thus far on integration of corporate functions.
ADJUSTED EARNINGS
Adjusted earnings were $662 million, or $0.41 per common share, for the three months ended June 30, 2017, compared with $456 million, or $0.50 per common share, for the three months ended June 30, 2016. Adjusted earnings were $1,337 million, or $0.95 per common share, for the six months ended June 30, 2017, compared with $1,119 million, or $1.25 per common share, for the six months ended June 30, 2016.
In addition to the factors discussed in Adjusted Earnings Before Interest and Income Taxes above, the comparability of adjusted earnings is consistent with the discussion in Earnings Attributable to Common Shareholders above.
AVAILABLE CASH FLOW FROM OPERATIONS
ACFFO for the three months ended June 30, 2017 was $1,324 million, or $0.81 per common share, compared with $868 million, or $0.95 per common share, for the three months ended June 30, 2016. ACFFO was $2,539 million, or $1.81 per common share, for the six months ended June 30, 2017, compared with $1,982 million, or $2.21 per common share, for the six months ended June 30, 2016. The year-over-year growth in ACFFO was driven by the same factors as discussed in Adjusted EBIT above, as well as other items discussed below. However, ACFFO per common share has decreased quarter-over-quarter due to the increase in the number of common shares outstanding which resulted from the completion of the Merger Transaction, and other issuances in 2016, as noted above in Earnings Attributable to Common Shareholders.
Also contributing to the quarter-over-quarter increase in ACFFO were higher cash distributions that the Company received from its equity investments, resulting from their improved operating performance as well as distributions from newly acquired equity investments which were a part of the Merger Transaction.
The above positive effects on ACFFO quarter-over-quarter were partially offset by higher maintenance capital expenditures in the first half of 2017, which reflected the spending on assets acquired in the Merger Transaction and higher spending in Liquids Pipelines on certain leasehold improvements. The increase was partially offset by a decrease in maintenance capital expenditures in the Gas Distribution segment due to the timing of higher spending in 2016 on EGD's Work and Asset Management System program; and a decrease, excluding the effect of the Merger Transaction, in the Gas Pipelines and Processing segment due to a shift in the timing of maintenance capital expenditures to the later quarters of 2017.
Also partially offsetting the increase in ACFFO was higher interest expense and higher preference share dividends for the three and six months ended June 30, 2017, compared with the corresponding periods, as discussed in Earnings Attributable to Common Shareholders above.
The increase in ACFFO quarter-over-quarter was also impacted by the increased distributions to noncontrolling interests related to assets acquired in the Merger Transaction, which was partially offset by the decrease in distributions to noncontrolling interests in EEP resulting from the reduction in its quarterly distribution as well as the purchase of Midcoast Energy Partners, L.P.'s outstanding publicly-held common units. Refer to United States Sponsored Vehicle Strategy in the Company's MD&A.
Also offsetting the positive effects on ACFFO were higher distributions to redeemable noncontrolling interests due to increased public ownership in the Fund Group (comprising the Enbridge Income Fund, Enbridge Commercial Trust, Enbridge Income Partners LP (EIPLP) and the subsidiaries and investees of EIPLP) resulting from Enbridge Income Fund Holdings Inc.'s secondary offering in the second quarter of 2017.
Other non-cash adjustments include various non-cash items presented in the Company's Consolidated Statements of Cash Flows, as well as adjustments for unearned revenues received in each period.
CONFERENCE CALL
Enbridge will host a joint conference call and webcast on Thursday, August 3, 2017 at 9:00 a.m. Eastern Time (7:00 a.m. Mountain Time) with Enbridge Income Fund Holdings Inc., Enbridge Energy Partners, L.P. and Spectra Energy Partners, LP to discuss the second quarter 2017 results. Analysts, members of the media and other interested parties can access the call toll free at (877) 930-8043 or within and outside North America at (253) 336-7522 using the access code of 51403910#. The call will be audio webcast live at http://edge.media-server.com/m/p/7gd26ak2. A webcast replay and podcast will be available approximately two hours after the conclusion of the event and a transcript will be posted to the website within 24 hours. The replay will be available for seven days after the call toll-free (855) 859-2056 or within and outside North America at (404) 537-3406 (access code 51403910#).
The conference call format will include prepared remarks from the executive team followed by a question and answer session for the analyst and investor community only. Enbridge's media and investor relations teams will be available after the call for any additional questions.
FORWARD-LOOKING INFORMATION
Forward-looking information, or forward-looking statements, have been included in this news release to provide information about the Company and its subsidiaries and affiliates, including management's assessment of Enbridge and its subsidiaries' future plans and operations. This information may not be appropriate for other purposes. Forward-looking statements are typically identified by words such as "anticipate", "expect", "project", "estimate", "forecast", "plan", "intend", "target", "believe", "likely" and similar words suggesting future outcomes or statements regarding an outlook. Forward-looking information or statements included or incorporated by reference in this document include, but are not limited to, statements with respect to the following: expected EBIT or expected adjusted EBIT; expected earnings/(loss) or adjusted earnings/(loss); expected earnings/(loss) or adjusted earnings/(loss) per share; expected ACFFO or ACFFO per share; expected future cash flows; expected performance of the Liquids Pipelines business; financial strength and flexibility; expectations on sources of liquidity and sufficiency of financial resources; expected costs related to announced projects and projects under construction; expected in-service dates for announced projects and projects under construction; expected capital expenditures; expected equity funding requirements for the Company's commercially secured growth program; expected future growth and expansion opportunities; expectations about the Company's joint venture partners' ability to complete and finance projects under construction; expected closing of acquisitions and dispositions; estimated future dividends; recovery of the costs of the Canadian portion of the Line 3 Replacement Program (Canadian L3R Program); expected expansion of the T-South System; expected future actions of regulators; expected costs related to leak remediation and potential insurance recoveries; expectations regarding commodity prices; supply forecasts; expectations regarding the impact of the Merger Transaction including the combined Company's scale, financial flexibility, growth program, future business prospects and performance; impact of the Canadian L3R Program on existing integrity programs; dividend payout policy; dividend growth and dividend payout expectation; and expectations on impact of hedging program.
Although Enbridge believes these forward-looking statements are reasonable
based on the information available on the date such statements are made and
processes used to prepare the information, such statements are not guarantees
of future performance and readers are cautioned against placing undue reliance
on forward-looking statements. By their nature, these statements involve a
variety of assumptions, known and unknown risks and uncertainties and other
factors, which may cause actual results, levels of activity and achievements to
differ materially from those expressed or implied by such statements. Material
assumptions include assumptions about the following: the expected supply of and
demand for crude oil, natural gas, natural gas liquids (NGL) and renewable
energy; prices of crude oil, natural gas, NGL and renewable energy; exchange
rates; inflation; interest rates; availability and price of labour and
construction materials; operational reliability; customer and regulatory
approvals; maintenance of support and regulatory approvals for the Company's
projects; anticipated in-service dates; weather; the realization of anticipated
benefits and synergies of the Merger Transaction; governmental legislation;
acquisitions and the timing thereof; the success of integration plans; impact
of the dividend policy on the Company's future cash flows; credit ratings;
capital project funding; expected EBIT or expected adjusted EBIT; expected
earnings/(loss) or adjusted earnings/(loss); expected earnings/(loss) or
adjusted earnings/(loss) per share; expected future cash flows and expected
future ACFFO and ACFFO per share; and estimated future dividends. Assumptions
regarding the expected supply of and demand for crude oil, natural gas, NGL and
renewable energy, and the prices of these commodities, are material to and
underlie all forward-looking statements.
These factors are relevant to all forward-looking statements as they may impact
current and future levels of demand for the Company's services. Similarly,
exchange rates, inflation and interest rates impact the economies and business
environments in which the Company operates and may impact levels of demand for
the Company's services and cost of inputs, and are therefore inherent in all
forward-looking statements. Due to the interdependencies and correlation of
these macroeconomic factors, the impact of any one assumption on a
forward-looking statement cannot be determined with certainty, particularly
with respect to the impact of the Merger Transaction on the Company, expected
EBIT, adjusted EBIT, earnings/(loss), adjusted earnings/(loss) and associated
per share amounts, or estimated future dividends. The most relevant assumptions
associated with forward-looking statements on announced projects and projects
under construction, including estimated completion dates and expected capital
expenditures, include the following: the availability and price of labour and
construction materials; the effects of inflation and foreign exchange rates on
labour and material costs; the effects of interest rates on borrowing costs;
the impact of weather and customer, government and regulatory approvals on
construction and in-service schedules and cost recovery regimes.
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