Enterprise Products Partners (EPD) reported Q4 2011 earning results on Feb 25, 2012. Being the largest MLP my market cap I think its important to look at their results and more importantly their outlook. Details of the earnings can be found here. In short, EPD does not only continue to outperform, they continue to knock the cover off the ball driven by the NGL businesses. Also, there are some important differences between EPD and other MLPs that are worth paying attention to. Lets dive in.
CEO Micheal Creel summarize the results as follows: “We generated $3.7 billion of distributable cash flow and increased our cash distributions with respect to 2011 by 5.2 percent to $2.435 per unit. In terms of consistent distribution growth, Enterprise has increased its cash distribution rate for the last 30 consecutive quarters, the longest period for any of the large cap partnerships, and in excess of 5 percent for each of the last seven years, including during the 2008/2009 financial crisis. We accomplished this distribution growth over the past seven years while retaining over $3.0 billion in distributable cash flow to provide financial flexibility and reinvest in the partnership to support future distribution growth. In 2011 alone, we retained approximately $1.7 billion of distributable cash flow to reinvest in our growth capital expenditures and reduce the need to issue additional equity. This retained distributable cash flow included $1.0 billion of cash proceeds from the sales of non-core assets that were earning lower rates of return on capital. We are reinvesting these proceeds in organic growth projects that should generate higher returns on capital and incremental distributable cash flow without growing our balance sheet.”
The strong results were driven by EPD’s biggest business, NGLs which is 56% of their business. 70% of the business is fee based. The breakout of their businesses for the quarter were:
Q4 2011 distributions were increased by 5% vs a year ago. Distribution coverage was a staggering 2.57x. Even excluding some one time items coverage was 1.53x. And here is where the difference between EPD and other MLPs begins to show up. On the surface one can argue that EPD offers low future returns. After all, it currently yields about 5.2% and its distribution is growing about 5% a year. Other MLPs are offering higher growth rates. But here is a case where looking under the hood matters. The first thing I like to do when comparing various MLPs is to adjust the DCF coverage ratios to 1 to get a more equal comparison. Adjusting EPD’s distribution for a coverage ration of 1 says that EPD could have paid out $1.60 per unit, or $0.95 excluding one time items, instead of the $0.62 it just announced. Needless to say that would have been massive growth. That’s an indication of how strong their business is.
So, what are they doing with all the extra cash flow? They are retaining it and re-investing it in growth projects. They currently have $6.5B in growth projects in the pipeline which is well over 2 times the amount of the next largest MLP, KMP. What that means for shareholders is more future growth. And here is the real kicker. Because of that retained cash flow they stated that they do not need to issue equity this year to fund their growth plans. This is also quite unheard of for MLPs. Again this means higher returns for shareholders.
Lastly, something important to keep in mind that is often overlooked with many MLPs is the MLPs relationship to the general partner. A lot of this growth potential for EPD is made possible by their organizational structure. EPD has no general partner with IDRs. They bought their GP last year. That means a lower cost of capital for the company and higher returns for shareholders. Many MLPs have IDRs that reach 50% of cashflows. That means that in order for the MLP to generate 5% growth for the limited partners they need to generate overall growth of 10% since 50% of the cashflow goes to the GP. This doesn’t mean an MLP with high IDRs can’t grow it just means the hurdle rate for capital projects is higher. And more importantly I think will matter even more when times get tough. The chart below, from EPD, shows some of these differences between MLPs. All else being equal, I’d prefer to invest in an MLP with no GP IDRs. For MLPs with a public GP, like Kinder Morgan, I would look to invest in the GP.
In summary, EPD is performing incredibly well. It is using the strength of its business to invest for the future instead of paying out all its extra cash to shareholders. Based on their track record I’m all in favor of this tradeoff and look forward to many more years of great returns.
Disclosure: long EPD
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