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Summary

  • The unit performance and the growth in cash distributions has been poor compared to some of its peers in the sector.
  • The partnership might be on the verge of growth with the new expansion projects coming online over the next few quarters.
  • Natural gas segment has been a poor performer for the partnership.

The energy sector has some of the highest-yielding stocks in the industry. Enbridge Energy Partners (NYSE:EEP), structured as a Master Limited Partnership, is one of the attractive picks for income investors, with a cash distribution yield of 7%. The partnership owns and operates crude oil transportation and storage assets, along with natural gas gathering, processing and transportation assets in the U.S. Moreover, it conducts its business mainly through three segments: liquids, natural gas and marketing petroleum products.

Enbridge is the largest crude oil transporter of Canada into the U.S and has strong future growth prospects following increasing crude demand. The partnership also holds significant operational acreage in the Bakken and Three Forks formation in North Dakota, which adds more value to its liquids business segment. The unit performance was almost flat in the last year due to stagnant cash distributions - the common unit recorded a gain of 3% over the period. However, the trend has improved now, and it has gained over 4% year-to-date, outpacing its rivals Kinder Morgan Energy Partners (NYSE:KMP) and Energy Transfer Partners (NYSE:ETP) - KMP and ETP have lost over 5% and 1%, respectively.

General Partners and Cash Distributions

Enbridge Energy Company, Inc. is the general partner of Enbridge Energy Partners, which owns 2% royalty interests in its distributable cash flows and holds 21% interest in the partnership.

Source: Company Website

Over the last five years, the increase in cash distributions for Enbridge has been lower at around 2%, compared to 5% average annual growth rate for KMP. The reason for a poor average is that the cash distributions have remained constant for the partnership over the last eight quarters - with a current annual distribution of $2.17 per common unit.

(click to enlarge)

Source: Company Website

The volatile natural gas market has deeply affected the profits of Enbridge's gas processing business, due to which, the operating cash flows have been unable to fully pay for the declared cash distributions for more than two years. The oil spillage expenses for the Michigan pipeline in 2010 further increased the earnings shortfall during the period. However, the relationship of Enbridge with its general partner enabled the partnership to distribute constant cash distributions during the period. The general partner brings a stronger credit rating and firm financial support through various debt and equity issuances throughout Enbridge's history.

Further, the partnership has indulged itself in a substantial growth program, operational by 2017, that will deliver largely fee-based revenues over the next few years. The liquids business segment also reported strong growth prospects for the partnership, which will enable it to increase its cash distributions in the future.

Operational Performance

Enbridge reported impressive first quarter earnings with total revenues of $2.1 billion, up 23% year-over-year. However, the quarterly distribution remained consistent at $0.5435 per common unit. The impressive growth came from the liquids segment, with operating income increasing 33% to $205.2 million year-over-year. The rise is due to the higher indexed transportation rates, primarily on the North Dakota and Lakehead pipeline systems. Further, the growth projects such as Bakken pipeline expansion, Bakken Berthold Rail, Bakken Access and Lakehead System expansion started contributing towards higher revenues in the period.

On the other hand, the natural gas segment faced severe downturn during the first quarter. The operating income of the segment stood at $8.8 million, which is down around 67% year-over-year. This shortfall is due to the lower natural gas throughput and NGL production volumes during the period. Moreover, the production volumes reported a decrease of 19% due to worse than ever weather conditions in certain areas of the country.

Expansion Plans Ensuring Future Growth

Despite the unimpressive distributable cash flow performance of Enbridge over the last few years, the partnership is targeting strong future growth through its essential pipeline system, which carries Canadian and Bakken crude south and east to the Gulf Coast and East Coast, respectively. The partnership derives a major portion - almost 80% - of its earnings from the liquids business segment and has initiated a series of expansion projects.

These expansion projects mainly include Line 67, Line 61 and Sandpiper pipeline systems. Moreover, the partnership is also in process of replacing its Line 3 pipeline system in Wisconsin. This pipeline was built in 2007 and has been carrying the same amount of crude oil since then; however, the stronger crude demand has prompted the partnership to triple its capacity from 400,000 bpd to 1.2 million bpd by 2016. Further, the Sandpiper pipeline is establishing a new export pipeline from the Bakken Shale formation, with a capacity of approx. 225,000 - 375,000 barrels per day extending over 610 miles. The pipeline will be operational by the first half of 2016 and will add significant gain to the operational throughput of Enbridge.

Conclusion

The unit performance as well as the growth in cash distributions has been poor for Enbridge over the last few quarters. However, the future growth projects indicate the partnership will be able to enhance its cash flows substantially, which should allow it to grow its cash distributions. Increased revenues from these projects and growing cash flows should also push the unit price up. We believe Enbridge Energy Partners is a good investment.

Source: Is Enbridge Energy Partners A Good Investment?