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Are Midcoast Energy Partners’s Distributions Sustainable?

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Sep. 23 2016, Updated 11:04 a.m. ET

MEP’s distributable cash flows

Midcoast Energy Partners’s (MEP) distributable cash flows have been stagnant in the last three quarters. One of the factors contributing to MEP’s flat distributable cash flows is its distribution agreement with its parent, Enbridge Energy Partner (EEP).

According to the agreement, if “MEP has a distributable cash flow result that is less than 1.0x distribution coverage for any quarter, EEP will forgo a portion of its quarterly distribution from Midcoast Operating to help MEP achieve a 1.0x distribution coverage during that period.”

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In 2Q16, the distribution support agreement contributed $2.3 million to MEP’s distributable cash flow for the quarter. The agreement contributed $0.8 million to MEP’s 1Q16 distributable cash flow. In the absence of the agreement, MEP’s distributable cash flows would have declined. This agreement will be effective until 4Q17.

The above graph shows Midcoast Energy Partners’s distributable cash flows and total capital expenditures over the last five quarters. The right axis shows MEP’s per-unit distributions.

Capital expenditures

As the above graph shows, Midcoast Energy Partners’s capital expenditures have been declining over the illustrated quarters. The company spent $28.5 million in the first six months of 2016, compared to $104.3 million spent during the same period in 2015. The 3Q15 expenditures in the graph exclude $85 million spent on its NGR (New Gulf Resources, LLC) acquisition.

MEP’s distributions

Midcoast Energy Partners’s distributions have remained flat at ~$0.36 for the last three quarters. The company currently trades at a yield near 16%.

In the next part of this series, we’ll discuss how Midcoast Energy Partners’s stock price is correlated to commodity prices.

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