Author: Ron Hiram
Published: August 9, 2015
Summary:
- On a TTM basis, reported and sustainable DCF per unit declined by ~2.5%, while distributions per unit increased 5.7% in the TTM ending 6/30/15.
- Although coverage ratios based on both reported and sustainable DCF are lower, they are still robust; sustainable DCF continues to substantially exceeded distributions.
- Given the strong coverage ratios and cash flows from new projects being placed into service, I do not see the current level of quarterly distribution growth threatened.
- Notwithstanding the significant challenges posed by the current environment, I am considering adding to my position in light of the recent sharp price declines.
This article supplements my preliminary review of 2Q15 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.
The brief description of EPD and its business segments provided in aprior article is still valid, except that following the July 24, 2015, completion of the $1.5 billion sale of the Offshore Pipelines & Services segment to Genesis Energy, L.P., this business was classified as “held for sale” as of June 30, 2015. Also, the Onshore Crude Oil Pipelines & Services segment has been renamed “Crude Oil Pipelines & Services” and the Onshore Natural Gas Pipelines & Services segment has been renamed “Natural Gas Pipelines & Services”.
EPD’s reported DCF per unit for the trailing twelve months (“TTM”) ending 6/30/15 2014 was $2.08 ($4,055 million in total), down from $2.13 ($3,970 million in total) for the TTM ending 6/30/14. The method used by EPD to derive DCF is shown in Table 1 below:
Table 1: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.
The generic reasons why DCF as reported by a master limited partnership (“MLP”) may differ from what I call sustainable DCF are reviewed in an article titled “Estimating sustainable DCF-why and how“. EPD’s definition of DCF and a comparison to definitions used by other MLPs are described in an article titled “Distributable Cash Flow”.
A comparison between reported and sustainable DCF is presented in Table 2:
Table 2: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.
Reported DCF for the TTM ending 6/30/15 excludes $160 million of cash consumed by working capital (i.e., the $160 million is added back in deriving reported DCF). 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 and I exclude working capital generated. Despite appearing to be inconsistent, this makes sense; in order to meet my definition of sustainability the MLP should 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 difference between reported DCF and sustainable DCF relates to risk management activities. The $28 million upward adjustment for the TTM ending 6/30/15 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.
Reported DCF for the TTM periods ending 6/30/15 and 6/30/14 includes proceeds from asset sales ($38 million and $195 million, respectively). But as readers of my prior articles are aware, I do not include proceeds from asset sales in my calculation of sustainable DCF.
When viewed on a per unit basis, sustainable DCF decreased in the TTM ending 6/30/15 vs. the corresponding prior year period. On a TTM basis, the decline in sustainable DCF per unit is on the same order of magnitude as the decline in reported DCF per unit (~2.5%):
Table 3: Figures in $ Millions, except per unit amounts and ratios. Source: company 10-Q, 10-K, 8-K filings and author estimates.
Although coverage ratios are lower in the TTM ended 6/30/15 vs. the corresponding prior year period, they are still very strong. EPD’s conservative approach to distribution growth will enable it to better weather the unfavorable market conditions now faced by midstream energy MLPs.
But while coverage ratios remain strong, Table 4 shows total distributions grew at much faster rate than sustainable DCF in the TTM ending 6/30/15:
Table 4: Figures in $ Millions, except % changes. Source: company 10-Q, 10-K, 8-K filings and author estimates.
The 10.7% growth in total dollars distributed reflects a combination of growth in distributions per unit and an increase in the number of units outstanding.
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:
Table 5: 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 $1,026 million in the TTM ended 6/30/15 and by $1,351million in the 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.
In the last three quarters, EPD completed ~$6 billion of acquisitions and placed into service ~$3 billion of capital growth projects. It has $8.3 billion of projects currently under construction that will begin commercial operations by 2017 (of which $2.4 billion are scheduled to be completed in the second half of this year).
Given the strong coverage ratios and cash flows from new projects being placed into service, I do not see the current level of quarterly distribution growth threatened.
I am considering adding to my position in light of the recent sharp price declines, but have not yet done so.