On the one hand, Enbridge Energy Partners' (EEP +0.00%) sky-high 15%-yielding payout looks like it's on solid ground: The master limited partnership produced more than enough cash flow to cover it in the first quarter. On the other, while numbers don't lie, these don't tell the whole story: A recent policy change could cause cash flow to plummet in the coming year. So there's a significant cloud of uncertainty surrounding the company at the moment, which doesn't appear as if it will dissipate anytime soon.
Drilling down into the results
As the table below shows, Enbridge Energy Partners reported solid financial results across the board:
|
Metric |
Q1 2018 |
Q1 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) |
$430 million |
$414 million |
3.9% |
|
Distributable cash flow (DCF) |
$212 million |
$198 million |
7.1% |
|
Distribution coverage ratio |
1.30 |
1.24 |
4.8% |
Data source: Enbridge Energy Partners.
Earnings and cash flow both increased year over year, which enabled the company to cover its massive distribution with cash by what looked like a very comfortable ratio of 1.3. Driving the improvement, the company had higher earnings across its operating segments:
Data source: Enbridge Energy Partners. Chart by author.
The biggest contributor to growth during the quarter was Enbridge Energy's Bakken assets, where earnings jumped 77% due to the completion of the Bakken Pipeline System last June. Income also rose on the Lakehead System, though that was mostly due to the timing of operating expenses, which helped offset lower pipeline rates resulting from the impact of lower U.S. corporate taxes. The Mid-Continent System's profitability also improved due to higher storage revenue and lower costs, which offset the impact from the sale of the Ozark Pipeline to MPLX LP (MPLX +1.24%) last year.
This growth helped more than offset a loss in the company's "other" segment, which used to house its Midcoast gas gathering and processing business. Last year the MLP sold that entity back to its parent Enbridge (ENB +0.00%), and Enbridge unloaded it this week.
Image source: Getty Images.
A look at what lies ahead
While Enbridge Energy Partners' first-quarter results were solid, a major crack developed in the foundation after the Federal Energy Regulatory Commission (FERC) recently revised a long-standing policy; it will no longer allow MLPs to collect an allowance for income taxes as part of their rate structure on some pipelines.
This change impacted some MLPs more than others. MPLX, for example, won't see any impact on earnings or cash flow because it doesn't operate pipelines with these cost-of-service rates. Enbridge Energy Partners, on the other hand, was hit hard by the decision because it had collected the full tax allowance on its Lakehead System, which supplies the majority of its earnings.
Now Enbridge Energy Partners expects distributable cash flow to come in $125 million less than initially expected this year. That would result in its full-year coverage ratio falling to a tight 1.0, which isn't a sustainable level. While the company has requested that FERC reconsider and is evaluating options to mitigate the impact, there's an elevated risk that it might need to reduce its lucrative payout to a more comfortable level. Other possibilities are that Enbridge could take Enbridge Energy Partners private, or merge it with its other MLP.
Abounding in uncertainty
Earlier in the year, it looked like Enbridge Energy Partners was back on solid ground after completing several strategic initiatives in 2017 to bolster its finances and growth prospects. Instead, FERC blindsided the company by changing a long-standing policy, which could have a significant impact. Until there's more clarity on the exact impact the change will have on the distribution, I think investors should hold off on buying this high-yield stock for now.
