Enterprise Products Partners L.P. (NYSE:EPD) reported its results of operations for 4Q 2013 on January 30, 2014. This article focuses on some of the key facts and trends revealed by this report. Given the significant quarterly fluctuations in important business parameters, full year results are also reviewed, in addition to the quarterly numbers.
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). In 2013 an estimated $2.3 billion of projects were placed in service with a further $2.1 billion placed into service in January 2014. Moreover, the portion of these investments that was financed by excess cash from operations (rather than by issuing debt and/or partnership units) is far greater than almost all other midstream energy master limited partnerships ("MLPs"). In 2013 and 2012 EPD retained ~$1.3 billion and $1.9 billion, respectively, of its distributable cash flow ("DCF") to reinvest in growth projects. The spread between the return on capital and the cost of capital for such internally financed projects is substantially greater than for projects financed with debt and/or equity. The benefits of this strategy are reflected in EPD's 4Q13 results and will be seen in future periods as well.
Revenue growth is shown in Table 1 below:
EPD uses gross operating margin, a non-GAAP financial measure, to evaluate performance of its business segments (a prior article provides a description of these segments). This measure forms the basis of its internal financial reporting and is used by management in deciding how to allocate capital resources. The principal differences between gross operating margin and operating income are that the former excludes: a) depreciation, amortization and accretion expenses; b) impairment charges; c) gains and losses attributable to asset sales and insurance recoveries; and d) general and administrative costs. Another difference is that gross operating margin includes equity in income of unconsolidated affiliates.
Steady growth in gross operating margin is shown in Table 2 below. The performance is all the more impressive when considering EPD's size.
Gross operating margin on a per unit basis, although choppy if looked at quarterly, showed good growth in 2013 and 2012:
Growth in earnings before interest, depreciation & amortization and income tax expenses (EBITDA) is presented in Table 4 below:
Growth in reported DCF and distributions for the periods under review are presented in Table 5 below:
In an article titled "Distributable Cash Flow" I present EPD's definition of DCF and also provide definitions used by other MLPs. Based on this definition, EPD's DCF for 2013 was $3,750 million ($4.07 per unit), down from $4,133 million ($4.63 per unit) in 2012. The generic reasons why DCF as reported by an MLP may differ from what I call sustainable DCF are reviewed in an article titled "Estimating sustainable DCF-why and how". The decline in DCF per unit reported by EPD for 2013 is principally due to much higher levels of cash proceeds from asset sales and insurance recoveries in 2012. I do not consider such items sustainable and will calculate sustainable DCF and sustainable DCF coverage, as I define those terms, once EPD provides additional data as part of its Form 10-K for 2013. I expect the 2013 numbers will show an increase over 2012 in terms of EPD's sustainable DCF per unit.
EPD has ~ $7.8 billion of major capital projects under construction that are scheduled to begin commercial operations from 2014 to 2016 (of which ~$5.0 billion are expected to begin operations and start generating cash flow in 2014). The revenues from these projects will be predominately fee-based and supported by long-term contracts.
EPD's breadth of operations and diversification is expressed through an asset portfolio that includes ~50,000 miles of onshore and offshore pipelines, 200 MMBls of storage capacity for NGLs, petrochemicals, refined products and crude oil, 14 billion cubic feet of natural gas storage capacity, 24 natural gas processing plants, 21 NGL and propylene fractionators, six offshore hub platforms located in the Gulf of Mexico, a butane isomerization complex, NGL import and export terminals, and octane enhancement and high-purity isobutylene production facilities.
EPD's premium price is justified on a risk-reward basis given this breadth, strong & disciplined management team, portfolio of growth projects, low cost of capital, alignment of interests with management (no general partner incentive distributions), relatively low leverage, excess cash from operations, history of minimizing limited partner dilution and performance track record. I consider EPD to be a core MLP holding.
Disclosure: I am long EPD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.