Given that 40% of eeps earnings come from gathering and processing gas, there is a real possibility that they'll have to cut the distribution. Thus the sky high yield on todays price. It simply is not sustainable. The gas business has totally collapsed. Even eeps last earnings showed a big drop in the gas earnings and its getting worse by the minute in that field. They talked about selling the gas business for equity capital for the new pipelines but recent attempts at asset sales in the gas business have been dismal. And with the huge inventory build in gas, don't expect that business to recover anytime soon.
As for the distribution rate, yes, in normal times a 16% rate would be warning signal, but we've just experienced a panic and forced selloff in the market and especially the mlps. The entire group is sporting ridiculous dis rates but that is a consequence of panic, not anything to do with the fundamentals of the group, save one or two. And the distribution rate won't stay this high for long. This mlp is too sound for a number this high.
Actually a triple B rating is considered above ave in the pipeline mlp field. Thats one of the things EEP wants to maintain so they get investment grade rates. As for Lehman, on the conf call they said lehman had about a 80 mil credit line that obviously EEP can't access now and they've accounted for that. EEP really doesn't have any one lender that can really hurt them since thier credit line is composed of about 12 different lenders. Thats a good thing.
Read this regarding MLP's and their tax treatment.
I don't know what EEP's tax exempt portion of their distribution is [anybody know?], but another I own [ETP] shows 80% on their website. As I understand it, this means that 80% of the distribution that I receive from them reduces my basis in the stock with no current tax implications and 20% of the distribution I have to pay ordinary income tax on.
I recently purchased shares of EEP and was looking to possibly increase my position, but I have a couple of questions I am hoping someone can help me with.
I noticed their debt rating is BBB. Not good, right? Why would this be? Their financial look decent to me, so I am thinking I am not seeing something.
Also, I read something about the collapse of Lehman being especially hard on MLPs. How does this effect long term EEP, or short term?
Do you pay tax rates at the normal dividend rates, or are the distributions taxed at normal income rates? The amount you pay taxes on sounds somewhat complicated, is there an easy way to explain this for the lay person?
All help is appreciated.
Another thing, estimates have been slashed for next year by at least .50 per unit. And with them attempting to finance pipes, I doubt they will borrow to maintain the distribution. Look for about a 1.00 per unit reduction if not a total suspension. The market knows.
I warned you. EEP can't even fetch a bid over two explosive up days in the market. ENB on the other hand has growing earnings and much better assets and NO gas stuff other than a gas utility which is a different animal from the commodity side of the biz. Too many fleas on this mutt.
Aren't they required to pass on 90% of profits? Which means the only way they can suspend the distribution is if they have no profits at all and retain all the depreciation. That doesn't seem likely to me. Also, they just picked up $500M in equity from Enbridge to finish the pipelines. It seems to me much more likely that they'll sustain the current distribution until those come on line - even if profits drop a bit.