Revenues in 1Q 2012 declined 2.9% vs. the prior quarter and increased 10.5% vs. 1Q 2011 (by comparison, revenues in 1Q 2011 increased 6.3% vs. 4Q 2010 and were up 19% over 1Q 2010). Earnings before interest expense, depreciation & amortization and income taxes (EBITDA) in 1Q 2012 decreased 8.7% vs. the prior quarter and were up 24% over the prior year period. Excluding $100 million of one-time gains related to an income tax benefit and to the sale of the remaining stake in Energy Transfer Equity, L.P. (ETE), EBITDA decreased 17.4% vs. the prior quarter and were up 12.3% over the prior year period.
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 Enterprise Products Partners L P (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 3/31/12 was $4,672 million ($5.35 per unit), up from $2,370 in the comparable prior year period ($4.33 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 differs 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:||3/31/12||3/31/11|
|Net cash provided by operating activities||3,133||2,406|
|Less: Maintenance capital expenditures||(334)||(260)|
|Less: Net income attrib. to non-controlling interests ($754m TTM 3/31/11))||(32)|
|Add: Net income attrib. to non-controlling interests ($754m TTM 3/31/11)||32|
|Working capital used||54||156|
|Risk management activities||(94)||(2)|
|Proceeds from sale of assets / disposal of liabilities||1,951||168|
|DCF as reported||4,672||2,370|
Table 1: Figures in $ Millions
The principal difference between reported DCF and sustainable DCF relates to EPD's proceeds from asset sales. The bulk of the $1,951 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 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 3/31/11.This is because the bulk of that $754 million figure is attributable to EPD itself. As I calculate it, sustainable DCF increased by ~29% in the TTM ending 3/31/12 vs. the comparable prior year period, an impressive performance.
Based on my calculations, the DCF per unit numbers and coverage ratios are as indicated in the table below:
|12 months ending:||3/31/12||3/31/11|
|Distributions to unitholders ($ Millions)||$2,075||$1,857|
|reported DCF per unit||$5.35||$4.33|
|Sustainable DCF per unit||$2.67||$2.82|
|Coverage ratio based on reported DCF||2.25||1.28|
|Coverage ratio based on sustainable DCF||1.33||0.75|
These figures are calculated based on distributions actually made during the relevant period. EPD has been increasing its distribution per unit for the last 31 consecutive quarters so these coverage ratios may be somewhat overstated. Distributions actually made averaged approximately $0.6175 per unit for the TTM ended 3/31/12, so the $0.6275 distribution declared for 1Q12 (~1.6% higher) should not significantly reduce the very robust coverage ratio in the latest TTM period.
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:||3/31/12||3/31/11|
|Capital expenditures ex maintenance, net of proceeds from sale of PP&E||(3,793)||(2,146)|
|Acquisitions, investments (net of sale proceeds)||1,948||(1,143)|
|Other CF from investing activities, net||(61)||(151)|
|Other CF from financing activities, net||(106)||(12)|
|Cash contributions/distributions related to affiliates & noncontrolling interests||12||688|
|Debt incurred (repaid)||510||1,848|
|Partnership units issued||551||550|
|Other CF from investing activities, net||153||93|
|Net change in cash||(62)||15|
Table 3: 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). Overall, EPD has ~$7.5 billion of growth projects under construction. 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, and Marcellus / Utica) in anticipation of growing demand for NGLs vs. crude oil derivatives by the U.S. petrochemical industry and by international markets.
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.
EPD's current yield of 4.92% (as of 5/10/12) is at the low end of the MLP universe and the price per unit is now close to the 12-month high. However, for investors not fearful of the market downturn we are currently in the midst of, the current price level should be attractive 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 LP dilution and performance track record.