23 Oct

Will 3Q15 Results Change Enbridge Energy Partners’ Valuation?

WRITTEN BY Rekha Khandelwal, CFA

Enbridge Energy Partners’ forward yield

Enbridge Energy Partners’ (EEP) forward distribution yield of 8.5% is ~100 basis points lower than its selected peer average. Peers included in the average calculation are ONEOK Partners (OKS), Plains All American Pipeline (PAA), and Williams Partners (WPZ). Forward distribution yield is calculated as estimated distribution per share for the current fiscal year divided by market price per share. Crude oil transport MLPs Magellan Midstream Partners (MMP) and Sunoco Logistics (SXL) trade at the lower forward yields of 4.7% and 6.5%, respectively.

Will 3Q15 Results Change Enbridge Energy Partners’ Valuation?

Comparing forward distribution yields

The Alerian MLP Index (AMZ) currently trades at a yield of 7.7%. The graph above compares the forward distribution yields of the four MLPs relative to their expected distribution growth. Low distribution coverage, high leverage, and low expected distribution growth contribute to Enbridge Energy Partners’ relatively higher forward yield. To learn more about Plains All American Pipeline’s and Williams Partners’ high yields, please read Will 3Q15 Results Change Plains All American’s Valuation? and Magellan Midstream Partners’ Expected Distribution Growth.

Expected distribution growth

For the next two years, Enbridge Energy Partners is expected to have a compounded distribution growth of 4.5%. In comparison, ONEOK Partners, Plains All American Pipeline, and Williams Partners are expected to have distribution growths of 1.6%, 3.2%, and 7.0%, respectively. In comparison, Sunoco Logistics, and Magellan Midstream Partners are expected to have distribution growths of 17.7% and 11.2%, respectively. Enbridge Energy Partners’ lower yield seems to be justified by its higher-than-average forward distribution growth amongst selected peers.We looked at Enbridge Energy Partners’ expected distribution growth and coverage ratio in the previous part of this series.

EV/EBITDA multiple

Enbridge Energy Partners’ EV/EBITDA[1. enterprise value to earnings before interest, taxes, depreciation, and amortization] ratio using a trailing 12-month EBITDA is 13.6. In comparison, the ratios for Plains All American Pipeline, ONEOK Partners, and Williams Partners were 11.7, 11.5, and 20.6, respectively.

Enbridge Energy Partners’ forward EV/EBITDA multiple is 11.3. The forward ratio is based on the estimates for the current fiscal year’s EBITDA. This indicates expectations of higher EBITDA in the third and fourth quarters of 2015.

Impact of IDRs

It should be noted that the EV/EBITDA ratio can be misleading when you’re trying to understand the unit valuation of limited partners. This is because the entire EBITDA in the EV/EBITDA ratio calculation may not be available to limited partners.

Enbridge Energy Partners has IDRs, or incentive distribution rights, in its structure. It currently operates in the highest distribution tier with a 25%-75% split. This split means its general partner gets 25% of incremental cash flows above $0.54 distribution per unit. Enbridge Energy Partners forms ~1% of the Guggenheim Multi-Asset Income ETF (CVY).

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