A Closer Look At Enterprise Products Partners' Distributable Cash Flow As Of 1Q 2014

May.11.14 | About: Enterprise Products (EPD)


Strong DCF coverage ratios.

Growth in DCF per unit exceeding growth in distributions.

Favorable structure: no IDRs, low leverage, breadth and diversification.

Plan to build a fully-refrigerated ethane export facility on the Texas Gulf Coast is of major significance.

Remains a core MLP holding.

Enterprise Products Partners L.P. (NYSE:EPD) recently reported its results of operations for 1Q 2014. This article analyzes some of the key facts and trends revealed by this and prior KMP reports, evaluates the sustainability of EPD's Distributable Cash Flow ("DCF") and assesses whether EPD is financing its distributions via issuance of new units or debt.

EPD is a leading North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids ("NGLs"), crude oil, refined products and petrochemicals. Its integrated midstream energy asset network links producers of natural gas, NGLs and crude oil from some of the largest supply basins in the U.S., Canada and Gulf of Mexico with domestic consumers and international markets.

EPD uses gross operating margin, a non-GAAP financial measure, to evaluate performance of its business segments (a brief summary of which is provided in a prior article dated March 8, 2014). 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.

Gross operating margin by the business segment for recent quarters and the trailing twelve months ("TTM") ended 3/31/14 and 3/31/13 is presented in Table 1 below. The performance is all the more impressive when considering EPD's size. Gross operating margin is presented on a 100% basis before any allocation of earnings to non-controlling interests.

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Table 1: Figures in $ Millions (except % change); Source: company 10-Q, 10-K, 8-K filings

Gross operating margin on a per unit basis, has shown significant growth in the last 3 quarters:

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Table 2: Figures in $ Millions (except % change); Source: company 10-Q, 10-K, 8-K filings

DCF and adjusted earnings before interest, depreciation & amortization and income tax expenses ("Adjusted EBITDA") are the primary measures typically used master limited partnerships ("MLPs") to evaluate their operating results. However, making comparisons between MLPs is difficult, as there are no standard definitions for these terms differently. In addition, DCF as reported may include non-sustainable items. EPD's Adjusted EBITDA for recent quarters and the TTM ended 3/31/14 and 3/31/13 is presented in Table 3 below:

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Table 3: Figures in $ Millions (except % change); Source: company 10-Q, 10-K, 8-K filings

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 the TTM ended 3/31/14 was $3,922 million ($4.23 per unit), up from $3,402 million ($3.78 per unit) in the TTM ended 3/31/13. Growth in reported DCF and distributions for the periods under review are presented in Table 4 below:

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Table 4: Figures in $ Millions (except % change); Source: company 10-Q, 10-K, 8-K filings and author estimates

EPD's conservative approach to distribution growth can be demonstrated by comparing that growth to the growth in sustainable DCF. Table 4 indicates the pace of the latter was far greater than that of the former in the TTM ended 3/31/14. The decline in reported DCF per unit shown in Table 4 for the TTM ended 3/31/13 is due to much higher levels of cash proceeds from asset sales and insurance recoveries in the preceding 12-month period. Absent these, DCF per unit would have shown greater growth than distributions per unit in that period too.

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." A comparison between reported and sustainable DCF is presented in Table 5 below:

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Table 5: Figures in $ Millions; Source: company 10-Q, 10-K, 8-K filings and author estimates

The largest component of the differences between reported and sustainable in the TTM ended 3/31/14. DCF relates to the previously-mentioned asset sales ($246 million vs. $331 million in the corresponding prior year period). As readers of my prior articles are aware, I do not include proceeds from asset sales in my calculation of sustainable DCF.

The analysis in Table 5 shows that sustainable DCF increased significantly in the latest TTM period. Sustainable DCF also increased when viewed on a per unit basis, and coverage ratios appear very strong, as shown in Table 6 below:

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Table 6: Figures in $ Millions, except per unit amounts; Source: company 10-Q, 10-K, 8-K filings and author estimates

Table 7 below presents a simplified cash flow statement that nets certain items (e.g., acquisitions against dispositions, debt incurred vs. repaid) and separates cash generation from cash consumption in order to get a clear picture of how distributions have been funded:

Simplified Sources and Uses of Funds

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Table 7: Figures in $ Millions; Source: company 10-Q, 10-K, 8-K filings and author estimates

Net cash from operations, less maintenance capital expenditures, exceeded distributions by $1,481 million in the TTM ended 3/31/14 and by $718 million in the corresponding prior year period. EPD is not using cash raised from issuance of debt and equity to fund distributions. On the contrary, the excess cash it generates enables EPD to reduce reliance on the issuance of additional partnership units or debt to fund expansion projects.

The major component of "Other CF from investing activities" includes amounts invested by EPD in various joint ventures in which its stake is 50% or less. These investments are not consolidated and are accounted for using the equity method.

Other of the $115 million capital contribution from non-controlling interests in the TTM ended 3/31/14, ~$90 million reflects the amount paid in 2Q13 by Western Gas Partners, LP [an affiliate of Anadarko Petroleum (NYSE:APC)] for a 25% stake in a joint venture (EPD has a 75% stake) that will own 2 new NGL fractionators (the seventh and eighth) at Mont Belvieu.

In 1Q14, EPD completed construction and began operations with respect to $2.5 billion of new infrastructure projects. Over the remainder of 2014, management expects to complete construction and begin commercial operations of growth capital projects valued at a further $2.5 billion. In 2015-2016, management projects completing construction and beginning commercial operations of growth capital projects valued at $4.2 billion.

EPD's recent announcement of a plan to build a fully-refrigerated ethane export facility on the Texas Gulf Coast is of major significance. The facility will enable waterborne exports of ethane, the second-largest component of natural gas. Ethane is primarily used as a feedstock for ethylene production by the petrochemical industry. Excess ethane supply in the U.S. has driven down price and has given the U.S. petrochemical industry an enormous advantage over petrochemical plants in Europe and elsewhere. There should be a lot of foreign demand for cheap U.S. ethane. EPD has already executed long-term contracts to support the development of the facility (including construction of tankers that can economically transport sufficient quantities of ethane). Designed to have an aggregate loading rate of approximately 240 thousand barrels per day ("MBPD"), the facility is expected to begin operations in 3Q16.

Table 8 below provides selected metrics comparing EPD to some of the other MLPs I follow:

As of 05/09/14:


Current Yield






Buckeye Partners (NYSE:BPL)






Boardwalk Pipeline Partners (NYSE:BWP)






El Paso Pipeline Partners (NYSE:EPB)






Enterprise Products Partners






Energy Transfer Partners (NYSE:ETP)






Kinder Morgan Energy (NYSE:KMP)






Magellan Midstream Partners (NYSE:MMP)






Targa Resources Partners (NYSE:NGLS)






Plains All American Pipeline (NYSE:PAA)






Regency Energy Partners (NYSE:RGP)






Suburban Propane Partners (NYSE:SPH)






Williams Partners (NYSE:WPZ)






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Table 8: Enterprise Value ("EV") and TTM EBITDA figures are in $ Millions; EPB, KMP and EPD TTM numbers are as of 3/31/14; others as of 12/31/13. Source: company 10-Q, 10-K, 8-K filings

It would be more meaningful to use 2014 EBITDA estimates rather than TTM numbers, but not all MLPs provide guidance for this year. Of those I follow, the ones that I have seen do so are included in the table.

It not surprising to see MLPs that do not pay their general partner incentive distributions ("IDRs"), such as Buckeye Partners (BPL), EPD and Magellan Midstream Partners (MMP), trade at higher EBITDA multiples. This is because IDRs siphon off a significant portion of cash available for distribution to limited partners (typically 48%).

EPD's current yield is at the low end of the MLPs I follow, and its EV/EBITDA multiple is at the high end (although after adjusting for IDRs the gap is not that glaring). On the other hand, in addition to a favorable structure and a better alignment of the interests of LPs and management, EPD benefits from breadth of operations and diversification, a strong and disciplined management team, a portfolio of growth projects, low cost of capital, relatively low leverage, excess cash from operations, history of minimizing limited partner dilution and an impressive performance track record. I continue to consider it a core MLP holding.

Disclosure: I am long EPB, EPD, ETP, MMP, PAA. 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.