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Why EEP Lowered Its 2018 Distributable Cash Flow Guidance

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4Q17 and 2017 earnings

Enbridge Energy Partners (EEP), a subsidiary of Enbridge (ENB), reported an 8.3% YoY (year-over-year) fall in adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) during 4Q17. EEP’s adjusted EBITDA was $430 million in 4Q17 compared to $469 million in 4Q16. However, the partnership beat its 4Q17 EBITDA estimate by 3.8%.

The YoY fall in the partnership’s 4Q17 EBITDA was mainly due to its sale of the Ozark pipeline system, its divestment of its natural gas business, and its throughput volume decline along the North Dakota system.

For the whole of 2017, EEP’s adjusted EBITDA fell 4.6% compared to 2016. This led to a fall in the partnership’s distributable cash flow and distribution coverage. Furthermore, this resulted in distribution cuts.

EEP declared a flat distribution of $0.35 per unit in 4Q17. The partnership’s 4Q17 distribution represents a 40% YoY fall compared to the same quarter of the previous year. Based on its recent distribution, EEP is trading at an attractive distribution yield of 10.9%.

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2018 guidance

The partnership lowered its 2018 guidance due to the impact of US tax reform. It now expects its 2018 distributable cash flows to lie between $720 million and $770 million compared to its previous guidance of between $775 million and $825 million. Moreover, it also lowered its distribution coverage target for 2018 to 1.15x from 1.2x, further reducing the chance of distribution growth resumption in 2018.

Analysts’ recommendations

A total of 66.7% of analysts have rated Enbridge Energy Partners as “hold,” 16.7% have rated it as “buy,” and the remaining 16.7% have rated it as a “sell” as of February 22.

Morgan Stanley last downgraded EEP to “underweight,” which is equivalent to a “sell.” EEP is currently trading below the low range ($13) of analysts’ target price. EEP’s average target price of $16.1 implies a 26% upside potential from its current price level.

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