Please ensure Javascript is enabled for purposes of website accessibility

Is Enbridge Energy Partners, L.P. a Buy?

By Reuben Gregg Brewer - Sep 6, 2018 at 9:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Enbridge Energy has an offer on the table to be acquired by its parent, but the outcome of that is unclear. Is this special situation a buy?

Enbridge Energy Partners, L.P. (EEP) is dealing with difficult times. It started the year with high expectations, but it got hit by a Federal Energy Regulatory Commission (FERC) rule change that altered just about everything. Although the partnership offers a generous 12% yield, there's a lot going on right now. Here's what you need to know to understand if this high-yielder is a buy.

Out of the blue

When 2018 began, Enbridge Energy described 2017 as a transitional year, with president Mark Maki stating, "We now look 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." Clearly, management had high hopes for the year, projecting distribution coverage of around 1.15 times. 

A woman drawing a risk versus reward chart

Image source: Getty Images.

Those plans got thrown for loop on March 15, when FERC announced a rule change that would effectively reduce the income that Enbridge Energy would generate from its midstream assets. The partnership estimated the change would reduce distribution coverage to just 1 time, a tight number that would leave little room for error. The partnership's shares fell sharply on the news.   

That, in turn, limited the benefit that parent Enbridge Inc. (ENB -1.45%) could derive from the partnership. Effectively, the lower unit price increased the cost of drop-downs (Enbridge Inc. selling assets to Enbridge Energy Partners, L.P., to raise cash at the parent level for investment) to the point where they no longer made sense. So, Enbridge Inc. offered to buy Enbridge Energy Partners, L.P., and another partnership it controlled, Spectra Energy Partners, L.P. (SEP).   

Where we stand now

Enbridge Inc. owns 83% of Spectra's units, so it shouldn't be surprising that the acquisition of that partnership was quickly approved. But Enbridge Inc. only controls around 46% of Enbridge Energy Partners, L.P.'s units. No deal has been approved yet, though a special committee is looking at the offer. Getting Enbridge Energy Partners to approve a deal is not a slam-dunk since Enbridge would need two thirds of unitholders (including itself) to agree to the acquisition.   

Things got more complicated, though, when FERC announced an update that softened the blow of the new rule it created and would improve the partnership's distribution coverage. Although Enbridge Energy Partners hasn't offered a new estimate on coverage at this point, this positive turn of events materially changes the equation with regard to Enbridge Inc.'s acquisition offer. In fact, that offer may no longer be in the best interest of unitholders.   

EEP Chart

EEP data by YCharts.

The problem here is that, as Motley Fool's Matthew DiLallo recently estimated, agreeing to the deal would effectively mean a 40% distribution cut for Enbridge Energy Partners unitholders. And that doesn't include the tax headache such a transaction could cause because of the partnership's dissolution. With distribution coverage likely to be stronger than originally expected in March, it may be hard for Enbridge Energy Partners to justify selling itself without a shareholder fight and, perhaps, shareholder lawsuits.

What to do now?

Right now, Enbridge Energy Partners is a special-situation stock that's only appropriate for more aggressive investors. And even then, I'm not sure the benefits of getting involved in this mess are worth the effort. Most investors should avoid this complex situation until there is more clarity on the acquisition offer. Current unitholders, meanwhile, should probably sit tight and collect the high yield while they can. Selling now wouldn't materially improve your situation, and you would miss out on any premium paid should the acquisition go through.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Enbridge Energy Partners, L.P. Stock Quote
Enbridge Energy Partners, L.P.
Enbridge Inc. Stock Quote
Enbridge Inc.
$44.24 (-1.45%) $0.65
Spectra Energy Partners Stock Quote
Spectra Energy Partners

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.