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Why Did Enterprise Products Increase Its 3Q17 Distribution?

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3Q17 distribution

Enterprise Products Partners’ (EPD) decision to lower its distribution growth rate for the next six quarters reflects the continued challenging environment that the sector is facing. While Enterprise Products has maintained its earnings—unlike many peers that saw their earnings fall—earnings growth is a challenge.

As the above graph shows, Enterprise Products Partners consistently grew its distribution at a steady pace, while earnings were relatively stable during this period.

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Strong coverage

Enterprise Products Partners maintained strong financial discipline over the years. Its coverage ratio has been well above one—which is very important for distribution sustainability. For 3Q17, the company expects a coverage of ~1.2x. Enterprise Products Partners will announce its earnings for 3Q17 on November 2, 2017.

“We will reassess our distribution growth rate for 2019 as we consider our investment opportunities and alternatives for returning capital to investors,” said A.J. “Jim” Teague, CEO of Enterprise Products Partners’ general partner.

Financial flexibility

According to Enterprise Products Partners, the lower distribution growth rate enhances the company’s financial flexibility. “While small, this moderation in distribution growth will compound to further strengthen our distribution coverage, increase our retained distributable cash flow available to fund growth capital opportunities, and reduce unitholder dilution,” said Teague.

The company expects increased cash flows from new projects in the rest of 2017 and 2018. The higher cash flows combined with the savings due to lower distribution increases should allow it to fund the equity portion of its capital investments internally. Currently, Enterprise Products Partners has ~$9 billion of projects under construction. It expects an annual capital investment of $2.5 billion. It might consider buying back units by 2019.

Leverage

As the above graph shows, Enterprise Products Partners’ debt-to-adjusted EBITDA ratio rose from 2014 to 2016 due to the Oiltanking Partners and EFS Midstream acquisitions. The company expects a ratio of 4.3x for 2017. Although it’s rising, the ratio is below most MLP peers. Considering its track record of financial discipline, Enterprise Products Partners intends to keep its balance sheet strong through proactive measures like the recent decision to moderate the distribution growth.

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