A Closer Look At Enterprise Products Partners' Q2'14 Distributable Cash Flow

Aug.18.14 | About: Enterprise Products (EPD)


Consistently strong DCF coverage ratios.

Substantial excess cash reduces reliance on capital markets and minimizes dilution.

Growth in DCF per unit exceeding growth in distributions.

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

Core MLP holding; premium price vs. other MLPs justified.

This article analyses some of the key facts and trends revealed by 2Q14 results reported by Enterprise Products Partners L.P. (NYSE:EPD). It evaluates the sustainability of the partnership'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's assets include ~51,000 miles of onshore and offshore pipelines; 200 million barrels ("MMBbls") of storage capacity for NGLs, petrochemicals, refined products and crude oil; 14 billion cubic feet ("Bcf") of natural gas storage capacity; 24 natural gas processing plants, 22 NGL and propylene fractionators, six offshore hub platforms located in the Gulf of Mexico, a butane isomerization complex, NGL import and LPG export terminals, and octane enhancement and high-purity isobutylene production facilities.

EPD uses gross operating margin, a non-GAAP financial measure, to evaluate performance of its five 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 business segment for recent quarters and the trailing twelve months ("TTM") ended 6/30/14 and 6/30/13 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.

Click to enlargeTable 1: Figures in $ Millions (except % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Gross operating margin on a per unit basis showed impressive growth in the 3 quarters ended March 31, 2014. But the most recent quarter is flat vs. the prior year period:

Click to enlarge Table 2: Figures in $ Millions (except % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

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 because there are no standard definitions for these terms. EPD's Adjusted EBITDA for recent quarters and the TTM ended 6/30/14 and 6/30/13 is presented in Table 3 below:

Click to enlarge Table 3: Figures in $ Millions (except % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

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 6/30/14 was $3,951 million ($4.23 per unit), up from $3,450 million ($3.81 per unit) in the TTM ended 6/30/13. Growth in reported DCF and distributions for the periods under review are presented in Table 4 below:

Click to enlarge 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 DCF per unit grew 11% in the TTM ended 6/30/14, while distributions in that period increased by 6%. The decline in reported DCF per unit shown in Table 4 for the TTM ended 6/30/13 is due to much higher levels of cash proceeds from asset sales and insurance recoveries generated in the TTM ended 6/30/12. Absent these, DCF per unit for the TTM ended 6/30/13 would have also shown greater growth than distributions per unit.

Comparing DCF across MLPs, even those with a similar definition of this metric, can be difficult because the definitions may include non-sustainable items. 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 below:

Click to enlarge Table 5: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Table 5 shows that sustainable DCF increased significantly in the latest TTM period.

The largest component of the differences between reported and sustainable DCF in the TTM ended 6/30/14 relates to asset sales ($195 million). As readers of my articles are aware, I do not include proceeds from asset sales in my calculation of sustainable DCF.

Sustainable DCF also increased when viewed on a per unit basis:

Click to enlargeTable 6: Figures in $ Millions, except per unit amounts. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Table 6 also shows that coverage ratio in the latest TTM period is very strong. Due to the seasonality of the business, coverage ratios tend to be weak in the second and third calendar quarters and strong in the first and fourth calendar quarter of each year. Analyzing coverage on a TTM basis is therefore more meaningful.

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

Click to enlargeTable 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 $1,351 million in the TTM ended 6/30/14 and by $474 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 principal component ($1,045 million of $1,057 million) of cash outflows classified as "Other CF from investing activities" is investments made 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. They amounted to classified as cash flow from other investment activities.

In 2Q14, EPD completed construction and began operations with respect to ~$1 billion of new infrastructure projects (~$3.4 billion in the first half of 2014 and ~$6 billion since the beginning of 2013). Over the remainder of 2014 management expects to complete construction and begin commercial operations of growth capital projects valued at a further $820 million. In 2015-2016 management anticipates completing construction and beginning commercial operations of growth capital projects valued at $4.2 billion.

On March 4, 2014, following a five-week trial, a Texas jury found that Energy Transfer Partners LP (NYSE:ETP) and EPD had formed a binding partnership that EPD breached the terms of that partnership by working with Enbridge Inc. (NYSE:ENB) and cutting ETP out of the eventual final project, the Seaway and Seaway Twin pipelines that run from Cushing, Oklahoma, to refineries near the Gulf of Mexico. On July 29, 2014, the court entered a $535.8 million judgment against EPD. Note that EPD has not recorded a provision for this matter, as management will appeal and believes payment of damages in this case is not probable.

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

As of 08/15/14:


Current Yield






Buckeye Partners (NYSE:BPL)






Boardwalk Pipeline Partners (NYSE:BWP)






El Paso Pipeline Partners (NYSE:EPB)






Enterprise Products Partners






Energy Transfer Partners






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)






Click to enlarge

Table 8: Enterprise Value ("EV") and TTM EBITDA figures are in $ Millions; TTM numbers are as of 6/30/14, except for BWP, RGP and SPH which are as of 3/31/14. Source: company 10-Q, 10-K, 8-K filings and author estimates.

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. Note that BPL, EPD, and MMP are not burdened by general partner incentive distribution rights ("IDRs"); hence their multiples can be expected to be much higher.

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 & disciplined management team, a predominantly fee-based business model, 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: The author is long EPB, EPD, ETP, MMP, PAA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.