Published: March 8, 2014
This article supplements my preliminary review of 4Q13 results recently reported by Enterprise Products Partners L.P. (EPD). I now evaluate 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’s business segments are:
- NGL Pipelines & Services: This segment includes EPD’s natural gas processing plants and related NGL marketing activities, ~16,700 miles of NGL pipelines, NGL and related product storage facilities, 14 NGL fractionators and NGL import and export terminal operations.
- Onshore Natural Gas Pipelines & Services: This segment includes approximately 19,900 miles of onshore natural gas pipeline systems that provide for the gathering, transportation and marketing of natural gas in Colorado, Louisiana, New Mexico, Texas and Wyoming. It also includes leased (Texas and Louisiana) and owned (Texas) underground salt dome natural gas storage.
- Onshore Crude Oil Pipelines & Services: This segment includes approximately 5,100 miles of onshore crude oil pipelines, crude oil storage terminals located in Oklahoma and Texas, and crude oil marketing activities.
- Offshore Pipelines & Services: This segment includes approximately 2,300 miles of offshore natural gas and crude oil pipelines and six offshore hub platforms. It serves some of the most active drilling and development regions, including deep-water production fields, in the northern Gulf of Mexico offshore Texas, Louisiana, Mississippi and Alabama.
- Petrochemical & Refined Products Services: This segment includes (i) propylene fractionation and related operations; (ii) a butane isomerization facility and related pipeline system; (iii) octane enhancement and high purity isobutylene production facilities; (iv) refined products pipelines and related marketing activities; and (v) marine transportation and other services.
EPD’s breadth of operations and diversification is expressed through an asset portfolio that includes ~44,000 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.
DCF and “Adjusted EBITDA” are the primary measures typically used master limited partnerships (“MLPs”) to evaluate their operating results. However, each MLP may define these terms differently, making comparisons difficult. In addition, DCF as reported may include non-sustainable items. Evaluating an MLP based on sustainable DCF is an exercise that must be undertaken (in conjunction with an evaluation of its growth prospects) because sustainable distributions coverage provides some protection in a downside scenario. When faced with such a scenario, MLPs that cannot maintain their distributions, or are totally reliant on debt and equity to finance growth capital, are likely to suffer significantly greater price deterioration.
EPD’s reported DCF per unit for 2013 was $4.07 ($3,750 million in total), down from $4.63 ($4,133 million in total) for 2012. The primary reason for the decline was higher proceeds from asset sales in 2012. The method used by EPD to derive DCF is shown in Table 1 below:
|Net income attributable to partners||699||616||2,597||2,420|
|Depreciation, amortization and accretion||315||287||1,218||1,105|
|Distributions received from unconsolidated affiliates||64||49||252||117|
|Equity in income of unconsolidated affiliates||-41||-22||-167||-64|
|Sustaining capital expenditures||-78||-84||-292||-366|
|Loss (gain) from asset sales and investments||-15||17||-83||-86|
|Proceeds from asset sales, investments, recoveries||24||31||281||1,199|
|Monetization of derivative instruments||-||-||-169||-148|
|Deferred income tax expense (benefit)||6||2||38||-66|
|Non-cash asset impairment charges||39||6||93||63|
|Distributable cash flow||1,021||886||3,750||4,133|
Table 1: Figures in $ Millions
The largest component of asset sales was generated by the sale of 29 million units of Energy Transfer Equity, LP (ETE) for $1,095 million between January and April 2012.
In an article titled “Distributable Cash Flow” I present EPD’s definition of DCF and also provide definitions used by other MLPs. 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 2 below:
|Net cash provided by operating activities||1,499||1,275||3,866||2,891|
|Less: Maintenance capital expenditures||-78||-84||-292||-366|
|Less: Working capital (generated)||-416||-328||-||-|
|Working capital used||-||-||98||583|
|Risk management activities||-||-||-169||-148|
|Proceeds vs. gains from asset sales or disposal of liabilities||24||31||281||1,199|
|DCF as reported||1,021||886||3,750||4,133|
Table 2: Figures in $ Millions
Reported DCF for 2013 includes $98 million of cash consumed by working capital. Under EPD’s definition, reported DCF always excludes working capital changes, whether positive or negative. In contrast, as detailed in my prior articles, in deriving sustainable DCF I generally do not add back working capital used but, on the other hand, I exclude working capital generated. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the master limited partnerships should, on the one hand, generate enough capital to cover normal working capital needs. On the other hand, cash generated from working capital is not a sustainable source and I therefore ignore it. Over reasonably lengthy measurement periods, working capital generated tends to be offset by needs to invest in working capital. I therefore do not add working capital consumed to net cash provided by operating activities in deriving sustainable DCF.
Another principal difference between reported DCF and sustainable DCF relates to risk management activities. The $169 million downward adjustment for 2013 reflects monetization of interest rate derivative instruments. I generally ignore cash generated or consumed by interest rate hedging activities in calculating sustainable DCF. EPD accounts for gains and losses related to these activities for the most part as a component of “accumulated other comprehensive income” and amortizes them to earnings (as an increase or decrease in interest expense) over ten years.
The largest component of the differences between reported and sustainable DCF relates to the previously mentioned asset sales ($281 million in 2013 vs. $1,199 million in 2012). As readers of my prior articles are aware, I do not include proceeds from asset sales in my calculation of sustainable DCF.
Therefore, although EPD’s reported DCF declined in 2013 vs. 2012, the analysis in Table 2 shows that sustainable DCF increased significantly in the periods under review. Sustainable DCF also increased when viewed on a per unit basis and coverage ratios appear very strong, as shown in Table 3 below:
|Distributions to unitholders ($ Millions)||625||567||2,409||2,192|
|Reported DCF per unit||$1.10||$0.98||$4.07||$4.63|
|Sustainable DCF per unit||$1.08||$0.96||$3.88||$2.83|
|Coverage ratio based on reported DCF||1.64||1.56||1.56||1.89|
|Coverage ratio based on sustainable DCF||1.61||1.52||1.48||1.15|
Table 3: Figures in $ Millions, except per unit amounts
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 2013:
|Sustainable DCF per unit||1.08||0.96||3.88||2.83|
|Change over prior year:|
|Sustainable DCF per unit||13%||3%||37%||-11%|
|Distribution per unit||6%||6%||7%||6%|
Table 4: Figures in $ Millions, except per unit amounts and % changes
Table 5 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:
|Capital exp. (ex maintenance) net of sale proceeds||-917||-822||-3,117||-3,256|
|Acquisitions, investments (net of sale proceeds)||24||31||281||1,199|
|Debt incurred (repaid)||-175||-||-||-|
|Other CF from investing activities, net||-349||-249||-1,130||-596|
|Other CF from financing activities, net||-1||-1||-214||-173|
|Net cash from operations, less maintenance capex, less distributions||797||624||1,165||333|
|Cash contributions/distributions related to affiliates & non-controlling interests||11||0||115||7|
|Debt incurred (repaid)||-||261||1,149||1,665|
|Partnership units issued (retired)||657||158||1,792||817|
Table 5: Figures in $ Millions
Net cash from operations, less maintenance capital expenditures, exceeded distributions by $1,165 million in 2013 and by $333 million in 2012. 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.
Of the $115 million capital contribution from non-controlling interests in 2013, ~$90 million reflects the amount paid in 2Q13 by Western Gas Partners, LP (an affiliate of Anadarko Petroleum) for a 25% stake in a joint venture EPD (75% stake) that will own 2 new NGL fractionators (the seventh and eighth) at Mont Belvieu.
Table 6 below provides selected metrics comparing EPD to some of the other MLPs I follow based on the latest available trailing twelve months (“TTM”) results.
As of 03/07/14:
EV / TTM EBITDA
|Buckeye Partners (BPL)||$72.84||5.97%||627||18.2||710|
|Boardwalk Pipeline Partners (BWP)||$13.05||3.07%||689||9.5||650|
|El Paso Pipeline Partners (EPB)||$30.04||8.66%||1,113||9.6||1,200|
|Enterprise Products Partners (EPD)||$67.22||4.17%||4,685||17.1||-|
|Energy Transfer Partners (ETP)||$55.12||6.68%||2,746||13||-|
|Kinder Morgan Energy (KMP)||$75.24||7.23%||5,165||10.1||5,900|
|Magellan Midstream Partners (MMP)||$69.14||3.38%||845||21.8||936|
|Targa Resources Partners (NGLS)||$53.62||5.58%||661||13.2||750|
|Plains All American Pipeline (PAA)||$53.53||4.60%||2,168||11.9||2,150|
|Regency Energy Partners (RGP)||$27.38||6.94%||477||19.1||-|
|Suburban Propane Partners (SPH)||$42.86||8.17%||307||12.3||-|
|Williams Partners (WPZ)||$49.71||7.18%||2,215||13.9||-|
Table 6: Enterprise Value (“EV”) and TTM EBITDA figures in $ Millions
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 management expects to invest ~$4.2 billion in growth capital projects and to place into service another $2.4 billion of projects, of which $1.5 billion was completed through 9/30/13 and $0.9 billion is to be completed in 4Q3. Management expects an additional $4.5 billion of projects under construction to be completed in 2014 (~$3 billion will be placed in service in 1Q14) and ~$3 billion will be placed in service in 2015. The revenues from these projects will be predominantly fee-based and supported by long-term contracts.
EPD’s current yield is at the low end of the MLPs I follow and its EV/EBITDA multiple is at the high end. On the other hand, its breadth of operations, strong management team, portfolio of growth projects, structure (no general partner incentive distributions), relatively low leverage, excess cash from operations, history of minimizing limited partner dilution and performance track record make it a core MLP holding.