On August 1, 2012, Enterprise Products Partners L.P. (EPD) reported results of operations for 2Q 2012. Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses (EBITDA) were as follows:
|Weighted average units outstanding (million)||890||851||890||851|
Table 1: Figures in $ Millions, except units outstanding
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In 2Q 2012, 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 and by improved hedging results, hence the significant improvement in operating income.
Given quarterly fluctuations in revenues, working capital needs and other items, it makes sense to review trailing 12 months (“TTM”) numbers rather than quarterly numbers for the purpose of analyzing changes in reported and sustainable distributable cash flows. 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 6/30/12 was $4,770 million ($5.43 per unit), up from $2,615 in the comparable prior year period ($4.37 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 6/30/12 generates the comparison outlined in the table below:
|12 months ending:||6/30/12||6/30/11|
|Net cash provided by operating activities||2,914||3,134|
|Less: Maintenance capital expenditures||(340)||(272)|
|Less: Working capital (generated)||–||(496)|
|Less: Net income attributable to noncontrolling interests (excluding $469m for TTM 6/30/11-see below)||(18)|
|Add: Net income attributable to noncontrolling interests||18|
|Working capital used||375||–|
|Risk management activities||(95)||(3)|
|Proceeds from sale of assets / disposal of liabilities||1,944||332|
|DCF as reported||4,770||2,615|
Table 2: Figures in $ Millions
The principal difference between reported DCF and sustainable DCF relates to EPD’s proceeds from asset sales. The bulk of the $1,944 million in proceeds is accounted for by the sale of EPD’s Crystal ownership interests (natural gas storage facilities in Petal and Hattiesburg, Mississippi) for $547.8 million and the sale of 36 million Energy Transfer Partners, LP (ETE) units for $1,351 million. As readers of my prior articles are aware, I do not include proceeds from asset sales in my calculation of sustainable DCF. Comparisons to prior year TTM numbers are difficult because, for accounting purposes, the surviving consolidated entity of the November 22, 2010 merger between EPD and its general partner was the holding company of the general partner rather than EPD itself. As a result, in the 2010 financials EPD is classified as a non-controlling shareholder. So, for example, in the case of EPD it is not necessary to deduct, as I normally do, net income attributable to non-controlling interests to derive sustainable DCF for the TTM ending 6/30/11.This is because the bulk of that $469 million figure is attributable to EPD itself. As I calculate it, sustainable DCF increased by ~8% in the TTM ending 6/30/12 vs. the comparable prior year period.
Based on my calculations, the DCF per unit numbers and coverage ratios are as indicated in the table below:
|12 months ending:||6/30/12||6/30/11|
|Distributions to unitholders ($ Millions)||$2,110||$1,917|
|reported DCF per unit||$5.43||$4.37|
|Sustainable DCF per unit||$2.91||$3.17|
|Coverage ratio based on reported DCF||2.26||1.36|
|Coverage ratio based on sustainable DCF||1.21||0.99|
The 2011 per unit numbers are overstated because of the change in the way weighted average units outstanding are calculated and the resultant sharp increase in units outstanding following the November 22, 2010 merger. I am therefore not concerned with the ostensible decline in sustainable DCF per unit. I think the 1.21 coverage ratio based on sustainable DCF for the TTM ended 6/30/12 is impressive.
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
|12 months ending:||6/30/12||6/30/11|
|Capital expenditures ex maintenance, net of proceeds from sale of PP&E||(3,624)||(2,739)|
|Acquisitions, investments (net of sale proceeds)||1,940||239|
|Other CF from investing activities, net||(11)||(80)|
|Other CF from financing activities, net||(116)||(11)|
|Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions||464||945|
|Cash contributions/distributions related to affiliates & noncontrolling interests||12||144|
|Debt incurred (repaid)||685||540|
|Partnership units issued||556||574|
|Net change in cash||(95)||(388)|
Table 4: Figures in $ Millions
As seen in Table 4, other than a modest of equity issuance (~13.2 million units in December of 2010 and ~10.4 million units in December of 2011), EPD has financed its growth capital expenditures via asset sales, internally generated cash flow and debt. For 2012, EPD projects spending $3.8 billion (up from the $3.5 billion estimate in the prior quarter) on growth capital projects and $330 million for sustaining capital expenditures (vs. $297 million in 2011). Of that $4.1 billion total, $1.9 billion has been spent through 6/30/12. I am not sure how much more can be generated through the sale of non-core assets, but assume that the amount in the second half of the year will be significantly less than in the first. While EPD did state earlier this year that it does not expect to be issuing equity in 2012, I nevertheless 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. But even if EPD were to issue 15 million units, it would amount to only a 1.7% dilution to existing holders. Of course, I will be pleasantly surprised if this will be lower or altogether avoided via internally generated cash and additional debt.
Overall, EPD has ~$8 billion of growth projects under construction that are scheduled to begin service in the second half of 2012 through 2015. These investments in new natural gas, natural gas liquids (“NGLs”) and crude oil infrastructure are being made to support development of shale plays (Haynesville / Bossier, Eagle Ford, Rockies, Permian Basin/Avalon Shale/Bone Spring, Marcellus/Utica) in anticipation of growing demand for NGLs vs. crude oil derivatives by the U.S. petrochemical industry and by international markets.
EPD recently announced its 32nd consecutive quarterly cash distribution increase to $0.635 per unit ($2.54 per annum), a 5% increase over the distribution declared with respect to the second quarter of 2011. EPD’s current yield of 4.81% (as of 8/10/12) is at the low end of the MLP universe. Magellan Midstream Partners (MMP) is lower at 4.78%, but all the other MLPs I cover are higher. For example: 4.99% for Plains All American Pipeline (PAA); 6.01% for Kinder Morgan Energy Partners (KMP), 6.19% for Williams Partners (WPZ); 6.46% for El Paso Pipeline Partners (EPB); 6.50% for Targa Resources Partners (NGLS); 7.75% for Buckeye Partner (BPL); 7.85% for Boardwalk Pipeline Partners (BWP), and 8.05% for Energy Transfer Partners (ETP).
I think the premium 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.