It’s earnings season, and last week Enterprise Products Partners (NYSE:EPD) reported another solid quarter. An appealing feature of EPD is the absence of a General Partner (GP). So unlike many other MLPs, EPD LP unit-holders do not suffer a haircut to Distributable Cash Flow (DCF) from GP Incentive Distribution Rights (IDRs) before the cash makes its way to the LPs for their distribution. This allows the growth of DCF from EPD’s portfolio of assets to flow right through to EPD unit-holders, thereby giving it a lower cost of capital than would be the case if there was a GP. Insiders also own 35% of the units, a significant alignment of interests.
EPD’s full year results came in modestly better than expected and their distribution growth from 2013 was +5.8%. They also have unusually high DCF coverage of 1.4X which allows them to fund part of their planned growth through this excess of DCF over declared distributions. EPD is positioning itself to support the U.S. shift to role of refined products exporter, and its planned growth capex is on the same trajectory as it was last Summer when oil was above $100 bbl.
Kinder Morgan (NYSE:KMI) held their Analyst Day on Wednesday and provided further detail on the business following their earnings release the prior week. As they pointed out numerous times during the day of presentations, 85% of their 2015 cash flows are fee-based and a further 9% are hedged, leaving only 6% subject to commodity price swings.
NuStar (NYSE:NS) was also interesting, in that their reported earnings showed distribution coverage of 1.1, at last sufficient to cover payouts to unit-holders. It’s not that long ago that their distribution was at risk, but they have exited the asphalt business, greatly reduced their commodity sensitivity and focused on the storage business. Analysts on the earnings call were even asking about the timing of a distribution increase.
NS has a publicly traded GP called NuStar GP Holdings (NSH). Its current distribution generates a yield of 5.8%, very high for a GP. NSH receives up to 23% of the DCF of NS and it is currently at that level. As the business returns to growth, NSH’s IDRs, 13.1% LP interest and smaller outstanding number of unit compared with NS should translate into roughly twice the distribution growth rate as that experienced by the other LP unit-holders in NS. It’s why we prefer the GPs.
Disclosure: We are invested in EPD, KMI and NSH.