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Analyzing Cash Flows of Master Limited Partnerships

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2014-07-30 16:00

EPD: A Closer Look at Enterprise Products Partners' Distributable Cash Flow as of 2Q 2012

Author: Ron Hiram

Published: August 11, 2012

On August 1, 2012, Enterprise Products Partners L.P. (EPD) reported results of operations for 2Q 2012. Revenues, operating income, net income and earnings before interest, depreciation & amortization and income tax expenses (EBITDA) were as follows:

Period::
2Q12
2Q11
1H12
1H11
Operating revenues9,79011,21621,04221,400
Operating income7496441,4981,269
Net income5674491,223883
EBITDA1,0348882,1081,754
Adjusted EBITDA1,0459162,1351,807
Weighted average units outstanding (million)890851890851

 

Table 1: Figures in $ Millions, except units outstanding

In 2Q 2012, lower revenues resulting from decreases in NGL, natural gas, crude oil and petrochemical prices were more than offset by lower costs of sales attributable to these decreases and by improved hedging results, hence the significant improvement in operating income.

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 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 6/30/12 was $4,770 million ($5.43 per unit), up from $2,615 in the comparable prior year period ($4.37 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 differ from what I call sustainable DCF are reviewed in an article titled Estimating Sustainable DCF-Why and How. Applying the method described there to EPD results through 6/30/12 generates the comparison outlined in the table below:

12 months ending:
6/30/2012
6/30/2011
Net cash provided by operating activities2,9143,134
Less: Maintenance capital expenditures-340-272
Less: Working capital (generated)--496
Less: Net income attributable to noncontrolling interests (excluding $469m for TTM 6/30/11-see below)-18
Sustainable DCF2,5562,367
Add: Net income attributable to noncontrolling interests18
Working capital used375-
Risk management activities-95-3
Proceeds from sale of assets / disposal of liabilities1,944332
Other-28-81
DCF as reported4,7702,615

 

Table 2: Figures in $ Millions

The principal difference between reported DCF and sustainable DCF relates to EPD’s proceeds from asset sales. The bulk of the $1,944 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 (ETE) 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 6/30/11.This is because the bulk of that $469 million figure is attributable to EPD itself. As I calculate it, sustainable DCF increased by ~8% in the TTM ending 6/30/12 vs. the comparable prior year period.

Based on my calculations, the DCF per unit numbers and coverage ratios are as indicated in the table below:

12 months ending:
6/30/2012
6/30/2011
Distributions to unitholders ($ Millions)$2,110 $1,917
reported DCF per unit$5.43$4.37
Sustainable DCF per unit$2.91$3.17
Coverage ratio based on reported DCF2.261.36
Coverage ratio based on sustainable DCF1.210.99

 

Table 3

The 2011 per unit numbers are overstated because of the change in the way weighted average units outstanding are calculated and the resultant sharp increase in units outstanding following the November 22, 2010 merger. I am therefore not concerned with the ostensible decline in sustainable DCF per unit. I think the 1.21 coverage ratio based on sustainable DCF for the TTM ended 6/30/12 is impressive.

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:
6/30/2012
6/30/2011
Capital expenditures ex maintenance, net of proceeds from sale of PP&E-3,624-2,739
Acquisitions, investments (net of sale proceeds)1,940239
Other CF from investing activities, net-11-80
Other CF from financing activities, net-116-11
-1,811-2,591
Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions464945
Cash contributions/distributions related to affiliates & noncontrolling interests12144
Debt incurred (repaid)685540
Partnership units issued556574
1,7162,203
Net change in cash-95-388

 

Table 4: Figures in $ Millions

As seen in Table 4, other than a modest of equity issuance (~13.2 million units in December of 2010 and ~10.4 million units in December of 2011), EPD has financed its growth capital expenditures via asset sales, internally generated cash flow and debt. For 2012, EPD projects spending $3.8 billion (up from the $3.5 billion estimate in the prior quarter) on growth capital projects and $330 million for sustaining capital expenditures (vs. $297 million in 2011). Of that $4.1 billion total, $1.9 billion has been spent through 6/30/12. I am not sure how much more can be generated through the sale of non-core assets, but assume that the amount in the second half of the year will be significantly less than in the first. While EPD did state earlier this year that it does not expect to be issuing equity in 2012, I nevertheless expect to see additional units issued by the end of 2012 in light of the increase in capital expenditure in 2012 and what’s coming up in 2013. But even if EPD were to issue 15 million units, it would amount to only a 1.7% dilution to existing holders. Of course, I will be pleasantly surprised if this will be lower or altogether avoided via internally generated cash and additional debt.

Overall, EPD has ~$8 billion of growth projects under construction that are scheduled to begin service in the second half of 2012 through 2015. 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, Marcellus/Utica) in anticipation of growing demand for NGLs vs. crude oil derivatives by the U.S. petrochemical industry and by international markets.

EPD recently announced its 32nd consecutive quarterly cash distribution increase to $0.635 per unit ($2.54 per annum), a 5% increase over the distribution declared with respect to the second quarter of 2011. EPD’s current yield of 4.81% (as of 8/10/12) is at the low end of the MLP universe. Magellan Midstream Partners (MMP) is lower at 4.78%, but all the other MLPs I cover are higher. For example: 4.99% for Plains All American Pipeline (PAA); 6.01% for Kinder Morgan Energy Partners (KMP), 6.19% for Williams Partners (WPZ); 6.46% for El Paso Pipeline Partners (EPB); 6.50% for Targa Resources Partners (NGLS); 7.75% for Buckeye Partner (BPL); 7.85% for Boardwalk Pipeline Partners (BWP), and 8.05% for Energy Transfer Partners (ETP).

I think the premium is justified on a risk-reward basis 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 limited partner dilution and performance track record.

2 comments to EPD: A Closer Look at Enterprise Products Partners’ Distributable Cash Flow as of 2Q 2012

  • bill

    Sustainable CF and attendent ratio coverages are THE critical measurements in my opinion.

    Nearly impossible to construct meaningful analysis/critique of capital expenditures in a given period to relevant balance sheet affects…while a scorecard is warranted, meaningful analysis, I believe, adds clutter and tends to provide readers with data-overload…with many throwing hands up to short-sided belief that MLPs appear “too complicated”.

    You and i know that given: i) projects are not started without long term “take or pay” type contracts and often times for ONLY 75% or less of capacity ii) percentage of insider ownership versus Fortune500 and proven track record of management iii) “having” to go to debt and equity market often(more than once a year for many) is a good thing! as smart eyes are constantly scrubbing, assuring against untoward leverage is maintained “in-line”…those ‘debt/equity’ external eyes scubbing once/twice a year! are far superior to Rating Agency eyes iv) Federal Tariff and protection against unwarranted competition Plus the PPI inflator factors v) US population growth and thirst, necessity to generate gas/liquids from within our borders!…seem to me to be Primary and most important factors.

    Certainly, “responsible” research has a high bar/necessity for ‘thoroughness’ so I’m not under-playing the importance of covering entire spectrum. Unfortunately, for individual investors MLPs carry additional tax and partnership complexity that when layer those on top;…I believe, many potential investors “lose interest” before they Really comprehend what the real pillars of MLPs truly are.

    Good report!

  • bill

    addendum to comments sent a few minutes ago: vi) sustainable growth will be achieved via “drop-downs” from primaries like Exxon, Chevron as they are measured by reserves plus ‘Exxon’s’ existing pipelines and storage facilites are an actual drag on operating performance…while those fixed assets thrive within an MLP model

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