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Enbridge Nailing Down Financing Needs, Management Says

During a week in which unitholders of another midstream master limited partnership (MLP) were rocked by a distribution cut and unit sell-off, management of Enbridge Energy Partners LP (EEP) sought Thursday to assure analysts and investors that their story is different, and “distribution is secure.”

On Monday, Boardwalk Pipeline Partners LP hacked its distribution in order to husband cash for debt reduction and project development (see Daily GPI, Feb. 10). At least one blogger suggested that Enbridge -- citing the partnership's coverage ratio -- could be vulnerable to something similar. While EEP net income during the fourth quarter was beaten down by weak natural gas liquids (NGL) prices, this year will be better than last, management said, before enumerating the ways EEP is different from Boardwalk.

"First, we expect improved financial performance in 2014. Second, we have made substantial progress in addressing the partnership's long-term financing needs," said EEP President Mark Maki. "In the second quarter of 2014, EEP will benefit from a large component of our Eastern Access project entering service. The cash flows from this phase of Eastern Access, the full-year contribution from projects completed during 2013 and increasing volumes will improve our earnings and distribution coverage. As our distribution coverage improves, we will be positioned to grow our distribution at our target growth rate of 2% to 5% per annum."

Earlier this week, a Motley Fool writer called out EEP's low distribution coverage ratio and its lack of growth. According to the partnership's earnings presentation, cash coverage last year was 0.82x and it was 0.70x when including the effect of paid-in-kind distributions to shareholders of Enbridge Energy Management LLC (EEQ). This compares with 0.89x and 0.79x, respectively, for 2012. Coverage of less than 1x could mean a partnership's distribution is threatened.

Maki had heard the talk.

"Distribution news was in the markets this week..." he told analysts. "Management believes EEP's distribution is secure. Executing against our long-range plan is what we always do at Enbridge. If we execute against that plan, our coverage will improve and our distribution will increase. Our confidence in this view comes from the nature of our pipeline business and cash flows. Our cash flows are predominantly underpinned by low-risk, cost-of-service and fee-based revenues. Our organic projects are largely backstopped by long-term, low-risk arrangements, such as cost-of-service or take-or-pay."

EEP's unit price has been burdened by a financing overhang that Maki said the partnership is working to address. During the fourth quarter, Enbridge closed on the initial public offering of Midcoast Energy Partners LP (MEP), which was formed by EEP to own, operate, develop and acquire U.S. natural gas and NGL midstream assets (see Daily GPI,June 12, 2013).

MEP will be an additional capital source for EEP to fund growth among its liquids pipelines, Maki said. Ultimately, MEP is expected to be the home for all of the gas business ownership interests held by EEP.

"This series of dropdowns will provide significant funding for EEP's attractive liquids pipelines growth projects and will substantially satisfy our equity capital requirements," Maki said. "The partnership also sold $1.2 billion of preferred units, with an initial deferred distribution period to our general partner in May 2013. Collectively, these financing transactions have substantially reduced the equity funding needs of EEP over the next five years."

The market apparently liked what it heard as EEP units were up nearly 2% in early afternoon trading Thursday.

In the natural gas segment, fourth quarter adjusted operating income was down by $38.9 million from the year-ago period due to a narrowing of spreads between NGL market ups, lower NGL prices and lower natural gas and NGL volumes on the partnership's systems. Extreme winter weather and consequent producer well freeze-offs, as well as downstream at a partnership facility also dinged income.

Things were better on the liquids side where adjusted operating income increased $52.8 million to $185.8 million from $133.0 million for the comparable period in 2012. Revenues increased due to higher transportation rates and deliveries on the Lakehead and North Dakota pipeline systems. Revenue contributions were also attributable to growth projects that entered service earlier in the year, specifically from the Bakken Pipeline Expansion, Bakken Berthold Rail and Lakehead system expansion projects.

EEP's adjusted net income of $73.1 million for the fourth quarter was $14.1 million lower than that in the year-ago quarter. Higher deliveries and associated revenues from the liquids businesses were more than offset by the combination of lower NGL prices in the natural gas business; the inclusion of a deferred distribution of $22.4 million relating to preferred units issued during the second quarter as a decrease in net income available to the general and limited partners; and higher non-controlling interest resulting from the MEP IPO.

The partnership posted a net loss for the quarter of $16.8 million (minus 15 cents/unit) compared with net income of $54.3 million (7 cents/unit) in the year-ago quarter. For 2013, net income was $4.7 million, which on a per-unit basis was a loss of 39 cents; compared with net income in 2012 of $493.1 million ($1.27/unit).

The partnership said expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for 2014 to increase approximately 30%, to between $1.5 billion and $1.6 billion. Adjusted EBITDA in 2013 was $1.143 billion.

Also in midstream MLP land this week, El Paso Pipeline Partners LP (EPB) is another that bloggers have tipped as possibly the next Boardwalk. However on Tuesday, the day after the Boardwalk implosion, Rich Kinder, CEO of EPB parent Kinder Morgan Inc., threw another $3 million of his money into the partnership, acquiring 100,000 common units. EPB units were up more than 1% Thursday afternoon.

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