Last year was a transitional one for Enbridge Energy Partners (EEP +0.00%). That created some volatility for investors early on, with units of the oil pipeline MLP getting hammered after the company and its parent Enbridge (ENB +0.04%) announced a series of strategic initiatives to stabilize its cash flow and balance sheet. However, as the company's fourth-quarter results and outlook demonstrate, that plan worked, and it's back on a firm footing. Because of that, the company's now 10.5%-yielding payout should be safe for the long term.
Drilling down into the numbers
Enbridge Energy Partners recently reported a solid finish to 2017:
|
Metric |
Q4 2017 |
Q4 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) |
$430 million |
$469 million |
-8.3% |
|
Distributable cash flow (DCF) |
$211 million |
$221 million |
-4.5% |
|
Distribution coverage ratio |
1.30 times |
0.83 times |
56.6% |
Data source: Enbridge Energy Partners.
Image source: Getty Images.
The number that sticks out as the most significant is the improvement in the distribution coverage ratio, which is mainly due to the decision to reduce the payout rate to somethine Energy Energy Partners could more comfortably cover with cash flow.
Speaking of cash flow, while it was lower year-over-year, that's mainly because of a change in the makeup of the company's portfolio:
Data source: Enbridge Energy Partners. Chart by author. In millions of dollars.
As the chart above shows, the main factor driving the year-over-year decline in earnings is the company's "other" segment. However, that's because it sold its troubled natural gas gathering and processing business to its parent earlier in the year as part of its strategic repositioning program. With those more volatile assets now out of the picture, the fourth-quarter results appear weaker, but they were very stable overall.
That's clear if one takes a closer look at its retained portfolio. While earnings in both the Lakehead and Mid-Continent systems declined versus the year-ago period, there were reasonable explanations for those drops. In the Lakehead System, for example, Enbridge Energy Partners collected lower local tolls and experienced higher operating costs; however, those expenses will be partially recoverable in 2018. Meanwhile, Mid-Continent earnings dipped because the company sold the Ozark Pipeline to MPLX (MPLX +0.05%) for $220 million in cash.
That deal helped pay for Enbridge Energy's acquisition of a stake in the recently built Bakken Pipeline System from Energy Transfer Partners (ETP +0.00%). It was part of a series of transactions that benefited all three companies. In trading Ozark for the Bakken Pipeline, Enbridge Energy bolstered the earnings from its Bakken assets, which should grow further in the future. Meanwhile, Ozark helped diversify MPLX's portfolio and provided it with another cash flow stream to support its payout. Finally, Energy Transfer Partners gained some much-needed cash to help stabilize its financial situation.
Image source: Getty Images.
A look at what's ahead
While those transactions made last year messy, "2017 was an important transitional year for EEP," according to President Mark Maki. "EEP is now well positioned with one of the lowest business risk profiles in the sector," he asserted. "Following the restructuring announced earlier in 2017, our stable financial results have reflected this enhanced value proposition, and we have finished the year in-line with our guidance expectations." As a result, the company now "look[s] forward to 2018 to continue to provide investors with reliable financial results and stable distributions from one of North America's most strategically positioned liquids pipeline infrastructure assets."
That reliability is evident in the company's guidance. After generating $784 million in DCF last year, the oil pipeline MLP expects to produce between $720 million to $770 million in DCF this year, which will cover its high-yielding payout by a comfortable 1.15 times. What's noteworthy about cash flow going forward is that while there might be some slight variation, it's highly predictable overall due to the long-term contracts that back the bulk of its assets.
Meanwhile, the company continues to make progress on enhancing the long-term sustainability of its payout. First, the excess cash it generates this year will reduce debt further, keeping it on pace to hit its year-end leverage target. In addition, parent company Enbridge continues work on its massive Line 3 Replacement Program. The Canadian pipeline giant has already completed sections of that pipeline in Wisconsin and North Dakota, and expects to receive the necessary approvals to begin work in Minnesota next quarter. That puts the project on pace to be in service by the second half of next year. That's noteworthy because Enbridge Energy Partners has an option to buy a 39% stake in that system. It's one of three options the company holds to invest up to $1.6 billion in acquiring stakes in oil pipeline systems in the coming years to boost cash flow further.
A low-risk, high-yield stock to hold for income
Enbridge Energy Partners isn't a flashy growth stock. Instead, after pulling riskier assets out of its portfolio last year, the company has become a very low-risk income producer. That income stream is quite attractive these days since the MLP's valuation has tumbled during the past year as it worked to complete its strategic repositioning program. However, that decline makes it, in my opinion, just too cheap not to buy.
