Submitted by Ron Hiram of Wise Analysis using our Trefis Contributors tool On March 1, 2013, Enterprise Products Partners L.P. (EPD) provided its 2012 annual report on Form 10-K. Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses (EBITDA) are summarized in Table 1: Period: 4Q12 4Q11 2012 2011 2010 Operating revenues 11,014 11,586 42,583 44,313 33,739 Operating income 823 909 3,109 2,859 2,147 Net income 617 726 2,428 2,088 1,384 EBITDA 1,110 1,178 4,288 3,867 3,137 Adjusted EBITDA 1,132 1,198 4,330 3,960 3,256 Weighted avg. units o/s (million) 903 879 893 860 279 Table 1: Figures in $ Millions, except weighted average units outstanding Fluctuations in revenues and cost of sales amounts are explained in large part by changes in energy commodity prices, especially those for natural gas liquids (“NGL”), natural gas and crude oil. Energy commodity prices in 2012 were lower than they were in 2011 (by ~23% for NGLs, by ~31% for natural gas, and by ~1% for crude oil). Therefore, with one exception, segment revenues in 4Q12 and 2012 were down vs. the prior year periods, as seen in Table 2: Period: 4Q12 4Q11 2012 2011 2010 NGL Pipelines Services 4,090 4,771 15,168 17,483 14,203 Onshore Natural Gas Pipelines Services 952 964 3,353 3,730 3,702 Onshore Crude Oil Pipelines Services 4,494 4,452 17,662 16,061 10,795 Offshore Pipelines Services 41 68 192 256 311 Petrochemical Refined Products Services 1,495 1,331 6,209 6,782 4,730 Total consolidated revenues 11,072 11,586 42,583 44,313 33,739 Table 2: Figures in $ Millions However, lower revenues resulting from decreases in NGL, natural gas, crude oil and petrochemical prices were more than offset by lower costs of sales attributable to these decreases, hence, with one exception, the significant and impressive improvement in gross operating margins, as seen in Table 3 below: Period: 4Q12 4Q11 2012 2011 2010 NGL Pipelines Services 632 635 2,469 2,184 1,733 Onshore Natural Gas Pipelines Services 210 199 776 675 527 Onshore Crude Oil Pipelines Services 135 67 388 234 114 Offshore Pipelines Services 42 60 173 228 298 Petrochemical Refined Products Services 143 137 580 535 585 Other investments - 4 2 15 (3) Total segment gross operating margin 1,162 1,101 4,387 3,872 3,253 Table 3: Figures in $ Millions The Offshore Pipeline Services segment underperformed in 2012 and is expected to continue to decline in 2013 because natural gas producers are switching more of their resources to increasing crude oil production (both onshore and offshore) and to increasing onshore NGL-rich natural gas production. EPD estimates average volumes on its largest offshore natural gas asset, the Independence Hub platform (80% owned by EPD), will approximate only 100 MMcf/d during 2013, a sharp decline from an average of 313 MMcf/d and 455 MMcf/d during 2012 and 2011, respectively. This will, hopefully, be somewhat offset by a recovery in crude oil volumes handled by EPB’s offshore Gulf of Mexico assets in 2013 from the lower volumes experienced since 2010. Total segment gross operating margin in Table 3 above is defined by EPD as operating income before: (1) depreciation, amortization and accretion expenses; (2) non−cash asset impairment charges; (3) operating lease expenses for which it did not have the payment obligation; (4) gains and losses from sales of assets and investments; and (5) general and administrative costs. In an article titled Distributable Cash Flow (“DCF”) I present the definition of DCF used by EPD and provide a comparison to definitions used by other master limited partnerships (“MLPs”). Using EPD’s definition, DCF for the trailing twelve month (“TTM”) period ending 12/31/12 was $4,133 million ($4.63 per unit), up from $3,737 in the comparable prior year period ($4.35 per unit). As always, I first attempt to assess how these figures compare with what I call sustainable DCF for these periods and whether distributions were funded by additional debt or issuing additional units. The generic reasons why DCF as reported by the MLP may differ from what I call sustainable DCF are reviewed in an article titled Estimating Sustainable DCF-Why and How . Applying the method described there to EPD results through 12/31/12 generates the comparison outlined in Table 4 below: Period: 4Q12 4Q11 2012 2011 Net cash provided by operating activities 1,275 1,102 3,331 2,300 Less: Maintenance capital expenditures (84) (79) (296) (240) Less: Working capital (generated) (328) (205) (267) - Less: risk management gains (losses) Less: net income attributable to GP Less: Net income attributable to noncontrolling interests - (5) (4) (63) Sustainable DCF 864 814 2,726 1,997 Add: Net income attributable to noncontrolling interests - 5 41 63 Working capital used - - - 202 Risk management activities - - (23) 7 Proceeds from sale of assets / disposal of liabilities 31 613 1,037 106 Other (9) (2) (45) (118) DCF as reported 886 1,429 3,737 2,256 Table 4: Figures in $ Millions The principal differences between reported DCF and sustainable DCF relate working capital (in 2011) and to proceeds from asset sales. In deriving reported DCF for 2011 management added back to net cash from operations $202 million of working capital used. Under EPD’s definition, reported DCF always excludes working capital changes, whether positive or negative. In contrast, as detailed in my prior articles, in deriving sustainable DCF I generally do not add back working capital used but, on the other hand, I exclude working capital generated. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the master limited partnerships should, on the one hand, generate enough capital to cover normal working capital needs. On the other hand, cash generated from working capital is not a sustainable source and I therefore ignore it. Over reasonably lengthy measurement periods, working capital generated tends to be offset by needs to invest in working capital. I therefore do not add working capital consumed to net cash provided by operating activities in deriving sustainable DCF. Also, in deriving its reported DCF, EPD adds back proceeds from asset sales. In the TTM ending 12/31/12 these totaled $1,037 million, the largest component of which was generated by the sale of 29 million units of Energy Transfer Equity, LP (ETE) for $1,095 million between January and April, 2012. As readers of my prior articles are aware, I do not include proceeds from asset sales in my calculation of sustainable DCF. Coverage ratios appear strong, and coverage was particularly impressive in 4Q12, as indicated in Table 5 below: Period: 4Q12 4Q11 2012 2011 Distributions to unitholders ($ Millions) 567 523 2,192 2,035 Reported DCF per unit $0.98 $1.63 $4.63 $4.35 Sustainable DCF per unit $0.96 $0.93 $2.83 $3.17 Coverage ratio based on reported DCF 1.56 2.73 1.89 1.84 Coverage ratio based on sustainable DCF 1.52 1.55 1.15 1.34 Table 5 I find it helpful to look at a simplified cash flow statement by netting certain items (e.g., acquisitions against dispositions) and by separating cash generation from cash consumption. Here is what I see for EPD: Simplified Sources and Uses of Funds Period: 4Q12 4Q11 2012 2011 Capital expenditures ex maintenance & net of proceeds from sale of PP&E (822) (997) (3,256) (3,571) Acquisitions, investments (net of sale proceeds) 31 593 1,199 1,034 Debt incurred (repaid) - (628) - - Other CF from investing activities, net (249) - (596) - Other CF from financing activities, net (5) (1) (173) (29) (1,045) (1,032) (2,825) (2,566) Net cash from operations, less maintenance capex, net income from non-controlling interests, & distributions 624 500 333 999 Cash contributions/distributions related to affiliates & noncontrolling interests 0 4 7 9 Debt incurred (repaid) 261 - 1,665 914 Partnership units issued (retired) 162 476 817 543 Other CF from investing activities, net - 43 - 56 1,047 1,023 2,821 2,520 Net change in cash 2 (9) (4) (46) Table 6: Figures in $ Millions Net cash from operations, less maintenance capital expenditures, less cash related to net income attributable to non-controlling interests exceeded distributions by $333 million in the TTM ending 12/31/12 and by $999 million in the comparable prior year period. EPD is not using cash raised from issuance of debt and equity to fund distributions. The excess enables EPD to reduce reliance on the issuance of additional partnership units or debt to fund expansion projects. EPD stated early in 2012 that it does not expect to be issuing equity in 2012. I nevertheless said in a prior article that I expect to see additional units issued by the end of 2012 in light of the increase in capital expenditure in 2012 and what’s coming up in 2013. While I was off somewhat on the timing (the issuance occurred on 2/5/13), I was pleased with the relatively modest number of EPD units issued (9.2 million, ~1% dilution). The issue was priced at $54.56 per unit and generated net cash proceeds of $486.6 million. The prior issuance of units occurred in September 2012 when EPD issued 10.4 million units at $53.07 per unit and generated total net cash proceeds of $473.3 million. Overall, major capital projects in which EPD had invested $2.9 billion were completed and put into service in 2012 (i.e., started generating fee-based cash flows). Management expects to complete another $2.4 billion of project in 2013 and has an additional $4.8 billion of projects under construction that it expects to be completed in 2014 and the first half of 2015. The revenues from these projects will be predominantly fee-based and supported by long-term contracts. EPD recently announced its 34th consecutive quarterly cash distribution increase to $0.66 per unit ($2.64 per annum), a 6.45% increase over the distribution declared with respect to the fourth quarter of 2011. EPD’s current yield is at the low end of the MLPs I follow: As of 3/4/13: Price Quarterly Distribution Yield Magellan Midstream Partners (MMP) $50.07 $0.50000 3.99% Plains All American Pipeline (PAA) $54.59 $0.56250 4.12% Enterprise Products Partners (EPD) $56.82 $0.66000 4.65% Inergy (NRGY) $20.45 $0.29000 5.67% El Paso Pipeline Partners (EPB) $41.30 $0.61000 5.91% Kinder Morgan Energy Partners (KMP) $86.77 $1.29000 5.95% Targa Resources Partners (NGLS) $41.97 $0.68000 6.48% Williams Partners (WPZ) $50.15 $0.82750 6.60% Buckeye Partners (BPL) $56.33 $1.03750 7.37% Energy Transfer Partners (ETP) $47.62 $0.89375 7.51% Regency Energy Partners (RGP) $23.74 $0.46000 7.75% Boardwalk Pipeline Partners (BWP) $26.49 $0.53250 8.04% Suburban Propane Partners (SPH) $42.69 $0.87500 8.20% Table 7 I think EPD’s premium price is justified on a risk-reward basis given EPD’s size, breadth of operations, strong management team, portfolio of growth projects, structure (no general partner incentive distributions), excess cash from operations, history of minimizing limited partner dilution and performance track record. The price drop to $50.75 cited in a prior article did, in fact, present a buying opportunity. I consider EPD to be a core MLP holding and would continue to accumulate on weakness.