A Closer Look At Enterprise Products Partners' 2011 Distributable Cash Flow

| About: Enterprise Products (EPD)

In an article titled "Distributable Cash Flow ("DCF")," I present the definition of DCF used by Enterprise Products Partners L P (NYSE:EPD) and provide a comparison to definitions used by other master limited partnerships (MLPs). Using EPD's definition, DCF for the 12 month period ending 12/31/11 was $3,737 million ($4.35 per unit), up from $2,256 in 2010 (equivalent, per my calculations, to approximately $3.11 per unit had the November 22, 2010 merger referred to below been in effect for the entire year). 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 call sustainable DCF are reviewed in an article titled "Estimating Sustainable DCF-Why and How." Applying the method described there to EPD results through December 31, 2011 generates the comparison outlined in the table below:

12 months ending: 12/31/11 12/31/10
Net cash provided by operating activities 3,330.5 2,300.0
Less: Maintenance capital expenditures (296.4) (240.3)
Less: Working capital (generated) (266.9)
Less: Net income attributable to non-controlling interests (41.4) (62.9)
Sustainable DCF 2,725.8 1,996.8
Add: Net income attributable to non-controlling interests 41.4 62.9
Working capital used - 202.1
Risk management activities (23.2) 6.8
Proceeds from sale of assets / disposal of liabilities 1,037.2 105.9
Other (44.7) (118.1)
DCF as reported 3,736.5 2,256.4

Figures in $ Millions

The principal difference between reported DCF and sustainable DCF relates to EPD's proceeds from asset sales. The bulk of the $1,037.2 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 9.8 million Energy Transfer Partners, LP (NYSE:ETE) units for $375.2 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 2010 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, of the $1,062.9 million net income attributable to non-controlling interests in 2010, approximately $1 billion is attributable to EPD and I therefore do not deduct that amount in calculating sustainable DCF. As I calculate it, sustainable DCF increased in 2011 by ~37% vs. 2010, an impressive performance.

In attempting to calculate per unit DCF I encounter another example of how the merger makes comparisons with 2010 more difficult: the weighted average number of units outstanding reported for each quarter in 2010 relates to the general partner of EPD, rather than EPD itself.Based on my calculations, the DCF per unit numbers and coverage ratios are as indicated in the table below:

12 months ending: 12/31/11 12/31/10
Distributions to unitholders ($ Millions) $2,035 $1,786
reported DCF per unit $4.35 $3.11
Sustainable DCF per unit $3.17 $2.76
Coverage ratio based on reported DCF 1.84 1.26
Coverage ratio based on sustainable DCF 1.34 1.12

These figures are calculated based on distributions actually made during the relevant period. EPD has been increasing its distribution per unit for the last 30 consecutive quarters so these coverage ratios may be somewhat overstated. Distributions actually made averaged approximately $0.6013 per unit for the 12 months ended 12/31/11, so the $0.62 distribution declared for 1Q12 (~3% higher) should not significantly reduce the very robust coverage ratio.

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: 12/31/11 12/31/10
Capital expenditures ex maintenance, net of proceeds from sale of PP&E (3,571.1) (1,800.5)
Acquisitions, investments (net of sale proceeds) 1,033.8 (1,208.0)
Other CF from investing activities, net - (2.8)
Other CF from financing activities, net (28.6) (2.5)
(2,565.9) (3,013.8)
Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions 999.1 273.6
Cash contributions/distributions related to affiliates & noncontrolling interests 8.5 1,103.7
Debt incurred (repaid) 913.6 1,117.5
Partnership units issued 542.9 528.5
Other CF from investing activities, net 56.1 -
2,520.2 3,023.3
Net change in cash (45.7) 9.5

Figures in $ Millions

In 2011 EPD spent $3.6 billion on growth capital projects, of which approximately $867 million was for the Haynesville Extension and $1.59 billion for Eagle Ford Shale projects. Note that only ~40% of that amount was funded by the issuance of additional partnership units ($543 million) and additional debt ($914 million). The balance was funded by non-core assets earning a lower rate of return on capital ($1 billion) and, impressively, by $1 billion of excess net cash from operations (after deducting maintenance capital expenditures and net income from non-controlling interests, and after making distributions). For 2012, EPD projects spending $3.5 billion on growth capital projects (unchanged from 2011 levels) and $315 million for sustaining capital expenditures (vs. $297 million in 2011).

In January 2012, EPD sold another 22.8 million ETE units in a private transaction, which generated cash proceeds of approximately $825.1 million (EPD's remaining holdings total ~6 million ETE units). If EPD continues on its trajectory, 2012 will be the fifth year in a row of zero or modest equity issuance and minimal dilution for current limited partners. If only ~40% of this year's growth capital expenditures will need to be funded by the issuance of additional partnership units and additional debt (as seems likely to be the case), very solid support will have been built for sustained long term distribution growth.

For a further drill-down that reviews the breakdown by quarter of the 2011 numbers in this report, click here.

Disclosure: I am long EPD, ETE.