Fundamental Analysis: The Case of Midcoast Energy Partners, L.P. (MEP) - A Historical Look
An attempt to perform a fundamental analysis on the publicly-traded stock of Midcoast Energy Partners, L.P. (MEP) must immediately address the fact that the company, as an independent public entity, no longer exists. MEP was a Master Limited Partnership (MLP) that was ultimately taken private by its general partner, Enbridge Inc. This historical context is the most critical fundamental data point for any former or current investor.
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| Fundamental Analysis: The Case of Midcoast Energy Partners, L.P. (MEP) - A Historical Look |
I. The Final Fundamental Event: Privatization and Delisting
Midcoast Energy Partners, L.P. (MEP) was formed by Enbridge Energy Partners, L.P. (EEP) to serve as its primary vehicle for owning and growing its U.S. natural gas and natural gas liquids (NGL) midstream business. Its public life ended with a series of transactions culminating in the full consolidation of its assets under its parent company.
A. The Merger Transaction
In 2017, Enbridge Inc. (ENB), through a wholly-owned subsidiary, executed a merger agreement to acquire all of the outstanding publicly-held common units of MEP. This transaction effectively took MEP private, removing it from public exchanges such as the New York Stock Exchange (NYSE), where it traded under the ticker symbol MEP.
Consideration: Public unitholders of MEP received a cash payment of $8.00 per common unit.
Fundamental Implication: For any investor holding MEP units at that time, the fundamental analysis concluded with the certainty of a cash distribution, effectively locking in capital gains or losses at the time of the transaction. From that point on, MEP's financial metrics were folded into the private or consolidated reporting of its parent, Enbridge.
B. Subsequent Asset Divestiture
Following the privatization of MEP, the underlying business (Midcoast Operating, L.P.) was fully owned by Enbridge. Later, in 2018, Enbridge sold the entirety of its U.S. midstream businesses, including the former MEP assets, to an affiliate of ArcLight Capital Partners for approximately $1.12 billion. This sale underscored Enbridge's strategy to divest non-core assets and transition toward a pure regulated pipeline and utility model.
Conclusion: The company known to public investors as Midcoast Energy Partners, L.P. (MEP) is defunct. Any current fundamental analysis must focus on the financial health of the private entities that now own the former Midcoast assets (currently led by private equity-backed entities) or, more accurately, the financials of the company that acquired it (Enbridge Inc.) during the period of consolidation.
II. MLP Fundamentals (Pre-Merger Historical Context)
For a complete historical perspective, it's useful to understand the key fundamental metrics that MEP would have been judged on during its time as a publicly traded MLP.
A. Business Model: Midstream Operations
MEP was a typical midstream MLP, meaning its revenues were primarily derived from the transport, gathering, and processing of natural gas and NGLs, mostly in the Gulf Coast and Mid-Continent regions (Texas and Oklahoma).
Fee-Based Revenue: A strong fundamental trait for midstream companies is a high proportion of fee-based revenues derived from long-term, take-or-pay contracts. This structure provides cash flow stability, insulating the company somewhat from the direct volatility of commodity prices (natural gas, oil).
Volume Risk: The primary operational risk was tied to production volumes in its operating basins. If producers cut drilling due to low prices, volumes flowing through MEP's pipelines and plants would decline, impacting its fundamental growth potential.
B. Financial Metrics Unique to MLPs
MLPs, like REITs, have specialized metrics that supersede traditional Net Income/EPS.
Distributable Cash Flow (DCF): This was the most crucial metric. DCF measures the cash generated that is actually available for distribution to unitholders. Unlike a traditional company's EPS, DCF is a better proxy for the MLP's profitability and ability to sustain its distributions.
Distribution Coverage Ratio: This ratio compares the DCF to the actual distributions paid to unitholders.
A ratio consistently above 1.0x was fundamental proof that the distribution was safe and sustainable. A falling ratio signaled potential distribution cuts or high financial strain.
Incentive Distribution Rights (IDRs): As EEP was the general partner, it held IDRs, which fundamentally entitled it to a disproportionately higher share of cash flows as the distribution rate increased. The IDR structure often created an increasing cost of capital, which was a key fundamental headwind for MLPs like MEP. The elimination of the IDRs (often done via a simplification transaction or merger) was typically seen as a highly bullish fundamental event, which in MEP's case, was solved by the take-private transaction.
III. Summary: No Longer Publicly Tradable
In summary, a fundamental analysis of Midcoast Energy Partners, L.P. (MEP) reveals that the stock has been defunct since its privatization by Enbridge Inc. in 2017. The final analysis was a straight valuation of the $8.00 per unit cash offer. For educational purposes, MEP's existence as an MLP highlights the importance of analyzing DCF, Distribution Coverage, and the impact of IDRs—metrics that drove its fundamental valuation prior to its acquisition and subsequent asset sales to private equity.