Enterprise Products Partners (EPD) is one of the largest midstream master limited partnerships and a significant component of the Alerian MLP ETF (AMLP). The company recently gave a comprehensive investor day presentation outlining key points of its growth plans (which we outlined here) and discussing how it plans to fund them. Note that EPD is also a major component of major MLP closed-end funds including the ClearBridge Energy MLP Fund (CEM), the Tortoise Energy Infrastructure Corp. (TYG), and the Kayne Anderson MLP Investment Co. (KYN). This series discusses a few key financial points that Enterprise Products Partners outlined during its recent presentation.
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Firstly, Enterprise had noted in January that it expected to spend about $3.9 million to $4.4 billion in capital over 2014 (including ~$350 million for sustaining or maintaining capex). This means that EPD has roughly ~$4 billion of growth capex to fund for this year.
The company asserted that despite its ambitious growth-targeted spending plans, it believes equity issuance over 2014 shouldn’t be a major overhang on the stock. Already, EPD raised $553 million of equity in November 2013 through a secondary market offering. Plus, EPD issued $2 billion of long-term notes in February 2014, of which $1.15 billion was used to replace debt maturing this year. However, that leaves a balance of ~$850 million to use towards capital expenditures. So through capital markets transactions, EPD has already funded ~$1.4 billion.
Enterprise stated in its analyst day presentation that the remaining needs for 2014 are expected to be funded by proceeds from at-the-market equity (or ATM) issuances, its distribution reinvestment plan (or DRIP), and retained distributable cash flow. An ATM offering allows a company to offer small amounts of equity over time on the open market and is generally less disruptive than a traditional secondary equity offering. EPD’s DRIP allows unitholders to reinvest their quarterly cash distributions into the purchase of new units. Plus, while EPD pays out most of its distributable cash flow (which is roughly the cash flow generated from operations, excluding swings in working capital, and after maintenance capex), it retains a significant portion of its DCF and deploys it towards growth capital projects.
Wall Street analysts have pegged EPD’s 2014E DCF at roughly $4 billion. Assuming that EPD grows its distribution by ~6% (close to the historical year-over-year average) from 2013’s total distributions per unit of $2.70 to ~$2.86 per unit, the company would pay out roughly ~$2.7 billion over 2014 based on the amount of current units outstanding. This means that roughly $4 billion to $2.7 billion of DCF would be left over to fund growth capex, or $1.3 billion. So the company has growth capex plans of ~$4 billion, of which ~$1.3 billion could be funded from retained DCF, and another ~$1.4 billion has been funded from capital markets transactions over the past few months, for a total of $2.7 billion of funding. EPD could easily fund this remaining ~$1.3 billion using availability under its credit facilities (a total size of $4.5 billion), and as stated in the presentation, it will supplement some of this with proceeds from ATM and DRIP equity offerings.
In the following part of this series, we briefly discuss EPD’s current financial condition.