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Q2 in Review: Aggressive MLP Portfolio

By Elliott H. Gue on Aug. 29, 2014

Enbridge Energy Partners posted solid second-quarter results, headlined by a 2.1 percent increase to the MLP’s quarterly payout–the first hike since July 2012 and an indication of the progress that the partnership has made in its restructuring effort.

Although the MLP generated enough distributable cash flow to cover 104 percent of its cash distribution, this coverage ratio shrinks to 87 percent if you treat the general partner’s paid-in-kind distributions as cash. We expect this ratio to improve as Enbridge Energy Partners brings expansion projects onstream and completes drop-down transactions from its sponsor.

In the second quarter, Enbridge Energy Partners raised additional capital to support these endeavors by dropping down an additional 12.9 percent interest in its gas-related infrastructure to Midcoast Energy Partners LP (NYSE: MEP) for $350 million in cash. Management expects to complete the sale of these assets by 2017.

Not only does Midcoast Energy Partners give Enbridge Energy Partners a vehicle to monetize its gas-related assets and raise low-cost capital, but also the MLP Portfolio holding could eventually transfer its general-partner interest to its parent, Enbridge, in exchange for retiring some of its common units or MLP-qualifying assets. And Enbridge Energy Partners can also raise capital by gradually disposing of its equity interest in Midcoast Energy Partners.

From an operational perspective, an increase in rates and record-setting throughput on its Lakehead and North Dakota liquids pipeline systems were the big stories from the second quarter.

The MLP also started commercial operations on a big portion of its Eastern Access pipeline system, which also contributed to volume and revenue growth.

All told, deliveries on Enbridge Energy Partners liquids systems increased by 29 percent from year-ago levels.

This momentum should continue into the back half of 2014. Management expects volumes on the Lakehead system to ramp up, while a 160,000 barrels per day expansion to the MLP’s Mainline pipeline system comes onstream in the third quarter and the remaining 50 miles of pipe on its Line 6B pipeline replacement project will start commercial operations in the fourth quarter.

We also expect throughput on the MLP’s pipelines serving the Bakken Shale to benefit from tightening regulations on shipping crude by rail.

Enbridge Energy Partners will also complete a number of expansion projects in 2015 that should more than offset any cash flow lost from dropping down its gas-related assets to Midcoast Energy Partners.

That being said, Enbridge Energy Partners plans significant capital expenditures for 2015, suggesting that the MLP’s distribution coverage ratio will fluctuate around 100 percent before increasing in 2016.

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