Enterprise Products Partners L.P. Recommendation HOLD
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Enterprise Products Partners L.P. Recommendation HOLD
Krause Fund Research Spring 2016 Enterprise Products Partners L.P. (NYSE: EPD) Recommendation: HOLD ENERGY April 12, 2016 Analysts Katherine Boyle [email protected] Ryan Dowd [email protected] Jack Abrahamson [email protected] Elliott Smith [email protected] Company Overview Enterprise Products Partners L.P. (EPD) is an industry leading Master Limited Partnership (MLP) in the transportation and storage subsector for energy companies. EPD has current infrastructure to transport and store crude oil, natural gas liquids (NGLs), and petrochemicals throughout the United States, Mexico, and Canada and is always expanding its vast network of pipelines. Its integrated midstream network of transportation pipelines, processing plants, terminals, and storage facilities allows for ease in linking oil and natural gas producers with the largest supply basins and downstream refineries in North America. For the fiscal year ended December 31, 2015, EPD reported revenue of $27.03B and net income of $2.52B. Stock Performance Highlights 52 week High 52 week Low Beta Value Average Daily Volume Share Highlights Market Capitalization Shares Outstanding Book Value per share EPS (as of FYE ended 12/21/15) P/E Ratio Distribution Yield Distribution Payout Ratio Company Performance Highlights ROA ROE ROIC $34.30 $19.79 0.845 3.97M Current Price: $25.01 Target Price Range: $27.00 - $30.00 EPD Maintains Strong Distributions and Capital Investment Despite Low Commodity Prices • EPD exhibited record years both in terms of gross operating margin and distributable cash flow of $5.3B and $4.0B, respectively, providing 1.3 times the coverage of required cash distributions in 2015. • Cash Distributions have increased in 47 consecutive quarters with a compound annual growth rate of 7% leading the way among its peers as a value stock MLP. • The recent acquisition of Eagle Ford Shale Midstream added over 470 miles of natural gas liquids transportation and increased condensate process capabilities achieving synergies through deeper integration into the NGL rich areas of Eagle Ford Shale. • EPD has $6.8B worth of capital projects to be completed by 2018 to increase their natural gas and NGL exporting abilities leading to greater potential revenue growth and expanded market reach. $48.47B 2.013B $10.08 $1.25 18.40 6.40% 99.37% 5.15% 12.30% 9.33% 1 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● We predict this low growth to be short-term and should begin picking up in 2017 when stronger oil prices are realized and net exports increase as the U.S. dollar starts losing value. Real GDP can expect to see about a 2.7% increase and an average of 3.25% growth for the years 2018-2021. ECONOMIC OUTLOOK Real Gross Domestic Product Real gross domestic product (GDP) is a general measure of the economic climate. By adjusting for inflation, it properly reflects the monetary value of all the goods and services that a country produces. Real GDP growth has a strong correlation with the demand for oil. In order to produce more goods and services, more energy resources are required to power the machines that manufacture the goods and services, and fuel transportation. The graph below illustrates this correlation between oil demand and GDP growth. Europe Europe had a real GDP growth of 1.8% in 2015 but has had a rough start to 2016 due to a sharp drop in banking stocks that stimulated recession fears. However, the majority of these stock drops were based on bad loans to energy companies facing 15 year lows in oil prices. The lack of consumer spending has also hurt European growth outlook. The European Central Bank (ECB) is attempting to solve this issue by setting negative interest rates on bonds to encourage lending and negative deposit rates on consumer deposit accounts to encourage spending. At the end of March, the yield on 10-year bonds in the Eurozone hit negative rates. Currently about 40% of European government bonds are negative as seen in the graph below. Source: EIAxx We predict that real GDP will increase gradually in 2017 to approximately 2.5%, and will continue to rise in the following years until peaking at around 3.5-3.75%. Similarly, we predict oil prices will eventually recover to around $60 a barrel by the end of 2017. We expect that strong recoveries will happen in Europe and that emerging markets will help drive up the demand for oil as more goods and services are being produced. Domestic Growth Outlook Real GDP growth for the U.S. in 2015 was 2%, a decline from 2.47% in 2014.xxvii This decrease is due to a yearlong appreciation of the U.S. dollar which has widened the trade gap by reducing external demand for U.S. goods. Real GDP growth is expected to sit around 2% in 2016, a decrease from earlier forecasts by the Fed which forecasted it at 2.8%. The unemployment rate decline has stalled at around 5.0%. This decline, paired with an expected increase in the federal funds rate will further slow U.S. GDP growth for the remainder of 2016. Despite this bleak economic data for the U.S., it is faring well compared to many other industrialized nations. Source: FRAviii We believe that Europe will have a decrease in real GDP growth in 2016 of approximately 1.6% but will bounce back to 2% growth in 2017 as consumer spending increases again and a larger labor force welcomes more millennials and migrants. We forecast that Europe should have real GDP growth of around 2.5-3% for the years 2018-2021. China In 2015, China had its lowest GDP growth in decades at around 6.7% and expects it to slump to as low as 6% in 2016.iv This has been driven by deflationary trends suggesting that Chinese consumers and businesses are not spending as much as they used to. They also exported less in 2015 than 2014 indicating that exports may have reached their peak at around 2.3 trillion (USD) and will likely have more modest growth in the future.iii This slowdown has contributed to a lower demand for oil. April 12, 2016 2 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● We believe that the years of 12-14% real GDP growth are over, and that rates will fluctuate more modestly between 6-7.5% in the future. However, by modern country standards, these expected growth rates are still large in stature. We believe that China’s economy has begun to stabilize due to peaks in the working age population and export growth. Additionally, the technology gap between China and other modern countries has closed and will now grow at a slower rate than it had in the 2000s. South America and OPEC Growth in OPEC and South American countries has been decimated by the rapid decline in oil and other commodity prices. In these countries, commodities have substantial contribution to economic growth. For example, in Saudi Arabia, oil can contribute between 45-50% of GDP and 80% of government revenue.xv South America has had increases in unemployment, inflation and political instability in big economies such as Venezuela, Argentina, and Brazil. These relatively large economies were either flat or contracted in terms of real GDP growth. The country best positioned to succeed is Iran which is coming off of trade restrictions and receiving economic incentives which will dramatically increase trade in the oil rich nation. Iran’s real GDP growth is estimated to be around 4.2 % in 2016 and could hit 6% by 2020.xx Other OPEC countries have cut real GDP growth from around 3.3% to 2.9% for 2016 due mostly to a decrease in oil revenue.xiii We believe that South America’s real GDP growth will narrow again this year due to a slower rebound of commodity prices, significant value decreases in currencies, and current political unrest which inhibits economies from stabilizing. We project GDP to reduce about 2-3% and then have a slight positive growth in 2017, eventually reaching 2% by 2020. For middleeastern OPEC countries we predict real GDP growth will be about 3% this year and should slowly increase as oil prices and oil demand increases in 2017 when foreign economies begin to recover. We also expect these countries to invest more in technology and manufacturing to become less reliant on oil as the quintessential revenue source in the future. Interest and Currency Exchange Rates The usage of widespread quantitative easing and manipulation of national interest rates in order to promote spending is devaluing currencies, and is causing interest rates to fluctuate around the world. The U.S. dollar has been increasing in value for a couple years as it has recovered from the 2008-2009 recession quicker than other countries. In 2011 $1 equaled .65 Euro. Today that gap has closed to around .9 Euro.vii This strong appreciation has had a substantial effect on U.S. imports across the world. Multinational businesses particularly those that recognize revenue in other currencies have suffered from these devaluation effects. In order to find a solution, the ECB, Bank of Japan (BOJ), and People’s Bank of China (PBC) initially devalued their currencies by turning to negative national interest rates. These reductions are intended to increase inflation, boost consumer spending, and promote the exportation of their goods and services. These events should make their exports cheaper than other industrialized countries. We expect exchange rates to stabilize in the next year as the ECB ends quantitative easing and other foreign banks stop reducing interest rates. Long-term, we expect the dollar to realize minor devaluations relative to the Euro and the Chinese Yuan. This expectation will be spurred by GDP growth in respective countries. However, it will be mostly offset by the U.S. raising its own rates at a steady pace as the federal funds rate reaches around .7% by 2017 and 3-3.25% by the end of 2020. This will slow consumer and business spending. Country Interest Rate % United States 0.50% Euro Area 0.00% China 4.35% Japan -0.10% Germany 0.00% United Kingdom 0.50% France 0.00% Brazil 14.25% India 6.50% Russia 11.00% Canada 0.50% Australia 2.00% Saudi Arabia Source: Trading Economics 2.00% xi Oil Prices Since September of 2014 oil prices have fallen over 60% from $105 to $40/barrel which has hurt companies whose earnings are at all tied to the oil industry. Prices are expected to rebound over the next 3 years, reaching $60-65/barrel for Crude oil before leveling off.xi We believe that oil will not go back to $100/barrel or anywhere near it due to the substantial amount of oil producers, such as Iran which will start harvesting large quantities of oil. The low prices have caused solvency concerns for many small firms who do not have economies of scale, have no way to raise capital due to extremely low prices of stock, or have little access to debt markets. The graph below better demonstrates the intense drop in the price per barrel of crude oil in the past year and a half. April 12, 2016 3 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● 2015. As shown below, the Baker Hughes rig count, an important industry metric indicating the extent of drilling activity, provides insight into current production trends. (BHI rig count) Source: Baker Hughes Rig Countxxi Source: ThomsonOnexix Oil Inventories The large decline in oil prices was caused by stunted or negative economic growth around the world and an increase of production in North America from the shale oil and fracking boom. This growth occurred in states such as Texas, North Dakota and New Mexico who increased production around 2011 when oil was over $100/barrel. Through innovation, the breakeven price has dropped from $75-$90 to between $40$50/barrel in 2015 depending on location.xx However, the market is now oversupplied with oil as OCED countries oil inventories totaled 3.04 billion at the end of 2015 and are expected to rise to 3.24 billion by the end of 2016. The chart below shows the oil inventories’ dramatic increase in early 2015 from 57 days of supply to 69 days of supply in April of 2016. As illustrated by blue trend line, the inventory levels are well outside the normal range. We expect the declining rig count to help reduce the oil supply glut and stimulate upward mobility in oil prices over the next three years when demand increases in the world’s big economies as they start to recover from the current economic slowdown. In the short term, this will hurt the revenue of firms in the oil service industry which is reflected in our forecasts for EPD. INDUSTRY ANALYSIS Industry Description and Overview EPD operates in the Oil & Gas Storage & Transportation industry. The company is known for serving as essentially a “toll road” for upstream E&P companies. Firms operating in this industry are known as midstream companies delivering value through their pipelines and storage facilities. EPD and its competitive peers in this industry of the Energy sector provide transport and storage services to oil producers. Source: EIAxx The U.S. alone has 530 million barrels in reserve as of April 1, 2016. This is a net increase of 140 million barrels since January of 2015. The rise has slowed in recent weeks as less rigs remain active. The large supply of oil has prompted many oil producers to slow production and extraction of oil due to the sharp increase of oil supply relative to demand which began in early Source: EIAxx April 12, 2016 4 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● As of the beginning of 2015 there was 199,243 miles of pipeline in the US. There are 66,649 miles of pipeline for crude oil, 61,681 miles for refined products, and 65,595 miles for natural gas or NGL’s. The map above shows the extensiveness of the current pipeline systems and they are going to continue to expand in the coming years. NGLs and natural gas lines have increased 27.5% in the last 10 years and are expected to grow the most over the next 5 years as 27,866 miles were planned to begin construction in 2015. Crude oil and refined products are expected to grow by 10,626 and 3,247 miles over the next 5 years in comparison. This continued growth of pipeline speaks to the room for growth in this industry and suggest that there will be sufficient demand for these oil and gas products. Recent Development and Trends Natural gas storage increases Source: EIAxx Natural gas storage levels are at near all-time highs due to a warm winter which affected heating needs and are projected to continue to be at a high level for the foreseeable future. The current levels show a stark contrast from mid-2013 to mid-2015 when storage was far lower than usual. We expect demand to increase in 2017 due to a recovering oil price which will make natural gas cheaper compared to oil and a stronger demand in Mexico and Canada resulting from increased electrical power needs. Additionally, exports are expected to grow in Asia due to new trade agreements and continued economic growth in these markets. Natural gas production decreases Competition Analysis Com pany Nam e Source: EIAxx Natural Gas production has been on the rise in recent years and fell late in 2015 due to low oil prices and declining rig counts, which hurts the demand for natural gas. The production is anticipated to increase again in 2017 according to the EIA. We project steady increases as foreign and domestic industrial and commercial demand increase in the coming years. This is illustrated by increasing sales for EPD to 29.156 billion in 2016 and 32.071 billion in 2017 as demand and natural gas prices increase. The U.S. is projected to be a net exporter by 2018, which will help the major NGL and natural gas firms, such as EPD, grow their revenues significantly from 2018-2022 as demand rises. Mkt. Cap Sales ROE Enterprise Product Partners L.P. Magellan Midstream Partners L.P. 48.47 B 15.00 B 27.03 B 2.19 B 13.10% 47.11% 18.4 19.8 Spectra Energy Partners L.P. 13.57 B 2.50 B 9.33% 14.3 Energy Transfer Partners L.P. 23.22 B 34.30 B 1.93% 26.1 Williams Companies Inc. 13.16 B 7.36 B -7.65% 21.8 Energy Transfer Equity L.P. 9.37 B 42.13 B - 7.4 Kinder Morgan 40.55 B 13.92 B 0.69% 26 Plains All American Pipelines L.P. 8.76 B 22.97 B 3.97% 16.1 - 19.04 B 9.78% 18.74 Mean P/E 17 Source: Factsetvii Despite the downturn that affected the energy sector as a whole, the oil pipeline industry remained profitable. Most companies performed well in 2015 and had a net income consistent to prior years. This is largely due to the only major expense being cost of goods sold which rises and falls with revenue. Williams Company (WMB) and Energy Transfer Equity (ETE) performed poorly due to high interest expense from debt necessary to finance expansion projects. EPD had interest expense of $927 million which is small relative to EPD’s size. Smaller firms had interest expense of over $1 billion which has caused their net incomes to drop. April 12, 2016 5 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● Capital Expenditures Source: Factsetvii Source: Factsetvii The graph above illustrates the diversity of the product offerings for different companies. EPD is the most diversified company with significant exposure to all three pipelines listed above. NGLs and Natural Gas make up 87.7% and Crude Oil being the remaining 13.3% of EPD’s pipeline coverage. Others offer only one or two types of pipeline service which makes firms in the industry react differently based on energy prices. Below is the revenue generated per mile of pipeline. Companies with more miles of pipeline used for natural gas or NGLs had a larger drop in revenue compared to firms who had bigger operations with oil pipelines. Magellan Midstream Partners (MMP) operates exclusively in the oil pipeline space and was not affected by the drop in natural gas or NGL prices. Though oil prices dropped, it transported almost double the value of oil. ETE and Kinder Morgan (KMI) have more miles of pipeline than EPD. However, EPD earns more revenue per mile of pipeline than they do. Thus, EPD has more productive assets. Strong capital expenditures are a good indicator that there is potential for growth. Every company in the industry has had consistent capital expenditures with ETP having a strong increase in 2015. EPD has had about industry average capital expenditures which will remain consistent in 2016. We complied management’s guidance for projected capital expenditures for 2016 and it shows consistency in its capital expenditures which suggests a strong future for this industry even though revenues dipped last year. These figures suggest firms are continuing to build more pipelines and are expanding their operations. Comparisons Among MLP firms MLP Name Enterprise Product Partners L.P. Magellan Midstream Partners L.P. Energy Transfer Partners L.P. Plains All American Pipelines L.P. Energy Transfer Equity L.P. Spectra Energy Partners L.P. Mean vii Distribution Mkt. Cap EV/EBITDA Cash Flow P/DCF 17 Net Income 48.47 B 16.08 4.03 B 12.00 2.51 B 15.00 B 18.96 .94 B 15.70 0.82 B 23.22 B 12.17 3.37 B 5.10 0.31 B 8.76 B 13.68 1.47 B 7.80 0.31 B 9.37 B 15.64 1.32 B 11.0 1.18 B 13.57 B 13.18 1.21 B 13.00 0.98 B 14.95 2.06 B 10.77 1.02 B Source: Factset Source: Factsetvii The above table compares only MLP’s omitting corporations like Kinder Morgan (KMI) and Energy Transfer Equity (ETE). We limited this comparison to MLP’s since EPD possesses that corporate structure. MLPS compare better to each other because they use Price-to-Distributive-Cash-Flow (P/DCF) instead of Price/Earnings (P/E) as an accurate metric for comparison despite some having smaller operations than companies such as KMI. This is because P/E ratios can be misleading when doing relative valuation. MLPs normally have high depreciation expenses due to the heavy fixed-asset nature of their industry. The large amounts of depreciation can give a negative view of company earnings regardless of company performance, it does not affect cash flows. These MLP’s 2017E P/E average is 19.5 which can make their stocks look expensive earnings wise. However, the P/DCF ratio is 10.75 on average which paints a much more reasonable picture for trading prices. EV/EBITDA is also important because it includes debt in the multiple. Due to the heavy capital requirements for building April 12, 2016 6 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● and maintaining oil pipelines, it is useful to use this multiple when comparing MLPs. EPD tends to trade at a premium as it is an industry leader and has performed well relative to peers during the drop in oil prices which has affected all three facets (upstream, midstream, and downstream) of the oil industry. It has also increased its quarterly dividend 47 straight quarters, including Q1 2016, and is expected to continue this into the future. According to our model, we expect the distribution to be $1.58 for 2016 and grow by around $.07 per year to around $2.00 in 2022. Porter’s 5-Forces Analysis: Supplier Power Suppliers in the pipeline industry cater primarily to companies in the energy sector, which currently are being hit hard by low commodity prices. Just as the upstream companies in the sector are struggling, so are those supplying servicing them. The suppliers need their product to be purchased in order to make a profit. Often times in this industry, the suppliers have entered into long-term contracts with the purchasing companies. These contracts typically only get negotiated every few years. For companies like EPD that are primarily pipeline based, the supplier costs are mostly paid all at once and up front. Overall, the supplier power in the industry is low due to the inability to negotiate regularly. Buyer Power Demand for oil, gas, and the respective pipeline services is relatively inelastic, meaning consumers will always need it no matter what price it is currently trading at. Buyers in general do not have much power in setting the prices. They are primarily set by the drilling companies and organizations. However, if buyers are pessimistic and shareholders divest shares of equity then the company may have to leverage more of its operations with debt which could be detrimental for the company in the long run if it cannot meet payments. That being said, the buyers power is set currently at a medium level of influence in terms of equity pricing versus commodity pricing which is primarily set by larger companies and organizations. Competitive Rivalry Competition is usually what leads to volatile markets. Currently a variety of companies and associations are dumping oil and gas into the market to drive prices down or are building up reserve supplies in order to drive prices up. Major sources of oil in the industry are WTI and Brent. EPD and most other U.S. pipeline MLP’s deal with WTI. OPEC and other institutions influence the competition for price by communicating various announcements and setting drilling policies. Currently OPEC has decided to continue to drill despite already low prices. This type of news hurts the energy commodities market further. The price in this industry is driven by the competition over market share between companies and organizations. Additionally, strong competition is the primary reason for smaller companies going bankrupt and larger companies struggling. Threat of Substitution The oil industry in general does not have many substitutions other than wind and solar energy. Both of these are more expensive than energy provided by oil and gas due to low commodity prices. Infrastructure in many buildings and cities is also set up to run on oil and gas energy. Creating a whole new infrastructure to enable cities and buildings to use alternative forms of energy would require incredibly high costs. As far as pipelines and transportation of oil and gas more specifically, the only substitute would be boats and trucks. In order to get energy to these transportation services, the use of pipelines is still required. At this point in time, there are virtually no alternatives or substitutes for pipelines in terms of transporting energy across the U.S. Threat of New Entry The oil and gas industry is one of the toughest industries to enter right now. Currently, there are few banks are giving out loans to companies looking to invest in the industry. Many small companies already involved are having to default on loan payments and either go bankrupt or get acquired by larger companies who have the cash flow to withstand these rough times. Due to such poor conditions the threat of entry for this industry is extremely low. COMPANY ANALYSIS Enterprise Product Partners, L.P. (EPD) is a leading North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products. As a leader of midstream energy services, it has been able to endure the low energy commodity prices well in comparison to its competitors. It has managed to increase its distributions by over 5% from 2014 to 2015 reporting 47 consecutive quarters of cash distribution increases. In 2015, EPD generated 1.85 times the coverage needed to meet shareholder distribution requirements set forth by its board of directors. Despite the economic downturn, EPD is still able to invest large amounts of money into acquisitions as well as capital expenditures. In 2014, EPD acquired Oiltanking Partners L.P. The deal has greatly increased its storage and transportation capacity along the Texas Gulf Coast. EPD also sold its offshore Gulf of Mexico pipeline and services business segment to Genesis Oil and Gas April 12, 2016 7 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● Consultants Ltd. for $1.5 billion in cash. The cash infusion allows EPD to invest in better suited projects more likely to generate long-term future cash flows. This year, EPD plans to complete the final payment installment necessary to acquire EFS Midstream. Capital spending exceed $6 billion in 2015 and the company expects that figure to be similar at the end of 2016. In comparison with its competitors, EPD has the size, geographic exposure, and diversity of business segments to separate itself in the industry and provide a positive long-term outlook to unit holders. EPD has proven that it can remain profitable within a tough economic environment for energy companies. Its revenue is dependent on the health of its upstream clients. When E&P companies see their margins falling due to slumping commodity prices, transportation and storage firms feel pressure to decrease rates. EPD has felt this pressure, and while revenues suffered in 2015 compared to the year before, its profit margins remained stable. The company is gearing up for the long run. Between its quarterly increases in cash distributions and capital expenditures, EPD seems confident that an oil and gas price turnaround is looming. As energy prices rebound, EPD is poised to realize significantly larger revenues and an attractive bottom line. General Information EPD’s operations include the gathering, treating, processing, transportation, and storage of natural gas. It also transports, fracks, stores, imports, and exports NGLs. EPD gathers, transports, and stores crude oil in addition to having offshore production platforms. It deals with refined products and petrochemicals and also has a marine transportation business that operates primarily on the U.S. inland, Intracoastal Waterway systems, and in the Gulf of Mexico. EPD generates revenue mainly through fee-based services that involve the transportation, refining, and storage of these energy products. It accomplishes these services through its extensive network of onshore and offshore pipelines, over 44,000 miles worth. Its revenue streams are broken down into five reportable segments: NGL pipelines & services, onshore natural gas pipelines & services, onshore crude oil pipelines & services, offshore pipelines & services, and petrochemical & refined products services. Reported revenues were down by almost 45% from a year ago to just over $27 billion mostly due to falling commodity prices. Costs also fell proportionally leading to only a slight decline in net income from a year ago. Source: 10-Kxxvi The onshore natural gas pipeline & services business segment also includes about 19,300 miles of onshore natural gas pipeline systems that provide transportation across Colorado, Louisiana, New Mexico, Texas, and Wyoming. EPD has underground salt domes for natural gas storage that it leases out and are vital to its natural gas pipeline operations. Its onshore crude oil pipelines & services include 5,400 miles of onshore crude oil pipelines and crude oil storage terminals. Included in this business segment is approximately 560 tractortrailer tank trucks that EPD leases and operates to transport crude oil for itself and its customers. EPD’s offshore pipeline & services recently got smaller with the sale of part of its assets to Genesis, but still serves some of the most active drilling and development regions. These regions include Deepwater production fields, some as deep as 7 km below the water. It also has about 2,350 miles of offshore natural gas and crude oil pipelines paired with six offshore hub platforms for drilling and storage. Its petrochemical & refined products services business segment includes propylene fractionation and related operations with 680 miles of pipelines. It also includes a butane isomerization complex with the associated deisobutanizer units, octane enhancement and high purity isobutylene production facilities, refined products pipelines stretching over 4,200 miles, and marine transportation. Products and Markets EPD’s NGL pipelines and services business segment includes a natural gas processing plant, 19,300 miles of pipelines, storage facilities, and 15 NGL fractionators. Within this segment, it also has an import and export terminal it can operate out of. Source: Factsetvi April 12, 2016 8 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● Recent Earnings and Distribution Payout Revenues were down from a year ago by almost 45% and earnings per share also decreased by $0.21 from a year ago. That being said, distributions continued to increase achieving 1.3 times its coverage ratio. The stock price has taken a big hit in the past year currently towards the low end of the range trading around the $23 - $25 mark in recent weeks. Positive earnings reports and guidance have improved the price slightly, but investor attitude in the energy space is low and will remain that way until commodity prices see a rebound. Net income has remained steady from 2014 to 2015 from $2.78 billion to $2.5 billion because cost of goods sold are mostly proportional to revenue, the only other major expense is interest expense used to finance acquisitions and capital expenditures. EPD is famously consistent with its quarterly distribution increases. This continued in or model by increasing at a rate of near $.07 per year before reaching $2.00 in 2022. The unitholder distribution is what makes EPD such a popular investment for investors. Source: Factsetvii Products and Distribution Source: Factsetvii As an MLP, EPD technically does not have employees and rather leases out its assets for set fees. It is involved minimally in the production of energy resources, but is rather almost entirely focused on the distribution and transportation of energy products. In order to thrive with fee-based compensation, it is pivotal to always have the competitive advantage and be looking for ways to increase transportation and storage infrastructure. EPD has completed over $6 billion of projects and acquisitions in the past two years and has close to $4 billion planned for 2016 already. It is continually looking for ways to set itself apart from competition because customer satisfaction and ease of service is a large part of determining fees charged to customers. Business Segment Revenue Projections Other Topics EPD has been extremely consistent with each business segment’s portion of revenue the past 5 years. No segment has deviated more than 2% of the average for each segment: NGL’s have always been approximately 37% of revenue, natural gas 8%, crude oil 40%, and petrochemicals 14% the past 5 years. For years 2016-2022 we continued a similar distribution of revenue. This assumption is grounded in out expectation that all segments will continue to grow at a similar pace. By way of definition, EPD is a Master Limited Partnership (MLP). MLPs are flow through entities where the tax burden is placed upon the shareholders rather than the corporation. It is essentially a hybrid between a publicly traded corporation and a partnership. They are essentially publicly traded partnerships. They deal in “units” not “shares” and receive distributions instead of dividends. However, dividends and distributions are valued the same way. EPD also owns many subsidiaries under the name Enterprise Products Holdings. Many of these subsidiaries were strategic acquisitions to further EPD’s already vast network of pipelines and transportation related services. April 12, 2016 9 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● Catalysts for Growth/Change The catalysts that will drive growth or a business restructuring are the strength of the economy and population growth in countries identified as emerging markets. As population increases in nations such as India, China, and Indonesia demand for energy will increase. EPD could be a potential supplier of natural gas in 2018 when the U.S. will allow companies to export natural gas. Currently however, there is an oversupply of oil on the market. This has driven the price per barrel down to around $40 per barrel. This is the lowest it has been in ten years. An excess supply combined with a demand increasing at a slower pace does not bode well for companies operating in the energy sector. Oil reserves are nearing capacity and with prices so low, E&P companies are pumping less. This means less new oil in the pipelines of companies like EPD, and pumping natural gas is less profitable as its price also drops. While onshore rig counts in the United States have seen a sharp decline, the amount of oil on the market is still too high. When this happens companies in this sector make budget cuts and downsize. EPD is focusing on its long term contracts by continuing to spend at least $4 billion on capital expenditures in 2016 to build more pipelines for anticipated increased future demand. An increase in the price for oil will lead to increased activity and earnings for E&Ps. In turn, they will require more midstream services which will help EPD and its sub-industry rebound. Key Investment Positives/Negatives: Strengths EPD’s corporate strategy and instrumental services are strengths that should be positive indicators to potential investors. This midstream service provider has a large scale and integrated network of diversified assets in close proximity to domestic supply basins and production hubs. It has built strong relationships with major oil, natural gas, and petrochemical companies. From those relationships it has been able to secure long term contracts yielding fee based revenue. This avenue of earnings should be viewed as a positive as fee based revenue is less susceptible to the volatility of commodity prices. EPD’s four different business segments under the midstream service umbrella combined with its billions of dollars invested in growth projects and acquisitions give the company a diversified portfolio of assets. Another strength of EPD is its size and partnership structure which gives it the ability to access debt and equity financing with ease. In 2010, EPD acquired Enterprise GP Holdings L.P. which resulted in a more simplified partnership structure. The ensuing capital structure gave EPD a lower long-term cost of equity which enables it to acquire new assets more effectively. Lastly, EPD’s proven track record as a dependable provider of midstream services has allowed it to build a strong reputation within the industry. The partnership prides itself on its management team’s well established industry experience and ability to operate nearly all of its facilities itself. As long as oil and natural gas commodities are trading in North America, EPD will be realizing revenue from its transportation and storage services. Weaknesses EPD’s business relies heavily on the market, demand, and production of hydrocarbon products. Even though oil and NGLs must be transported or stored, EPD has to adjust its fees and rates associated with transportation to keep customers happy. It will not be able to justify keeping its pipeline and storage rates high when their customers have to sell a barrel now at $40 when it was almost double that a year ago and even triple that when going three years back. Opportunities EPD has recently acquired Oiltanking Partners giving it access to waterborne markets through marine terminals on the Houston Ship Channel. EPD will also finish its final installment payment for the purchase EFS Midstream in 2016. Strategic acquisitions such as the ones listed above are going to be opportunities facing larger MLP’s like EPD as smaller companies are not able to withstand the low commodity prices and are having to default on their loans. Growth is key for any company to thrive as long as they are well thought out moves and it is also important for investor confidence to know that EPD is able to continue to grow despite the hard economic times. Threats Other midstream energy MLPs might be turned to during these times if they offer lower fees. With production not halting and storage capacities being reached with many MLP’s, downstream oil companies will increasingly be looking for alternative companies to transport their energy products. ANALYSIS OF VALUATION METHODS Overview We are issuing a HOLD recommendation on Enterprise Product’s Partners (EPD) stock based on the results of our valuation model and key assumptions. We calculate EPD’s intrinsic value to be between $27.00 and $30.00 with our DCF/EP model and dividend discount model (DDM) producing a $28.77 and $27.22 partially adjusted present value of the stock, respectively. EPD has been able to endure the commodity price cycle that is occurring supported largely by its liquefied petroleum (LPG) exports to compensate for its lost revenue in April 12, 2016 10 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● their natural gas liquids (NGLs) business segment. Despite the low commodity prices, EPD was able to have record years both in terms of gross operating margin, and distributable cash flow. It posted figures of $5.3 billion and $4.00 billion respectively. It was also able to maintain its coverage providing 1.3 times the coverage of cash distributions paid in 2015 meaning it was able to retain $2.6 billion. This can go towards capital expenditures and other growth projects. The key assumptions used in our financial models are revenue forecasts, distributions per share payouts, capital expenditures and acquisitions, our WACC estimation, and our continuing value growth assumptions. Discounted Cash Flow (DCF) - Economic Profit (EP) Model Our DCF/EP model calculates the intrinsic value, as of today, to be $28.77. The DCF/EP model is the most accurate and best representation of the true value EPD unitholders get when investing. With the current price (as of 4/12/2016) being $25.01, our valuation range of $27.00 to $30.00 would result in a small premium of between 5% and 10% over EPD’s current price. This slight premium represents small growth potential. The major factors playing into the small premium and overall HOLD rating are the continuing value growth assumptions, our continuing value return on invested capital (ROIC), our WACC calculation, and our cost of equity calculation. The DCF/EP valuation model represents EPD’s intrinsic value well due to the emphasis placed on invested capital and NOPLAT which have historically shown steady growth. Historical information paired with capital projects guidance from the board of directors establishes the credibility of this valuation method as an accurate representation of EPD’s intrinsic value. Distributions Discount Model (DDM) The DDM produces an output partially adjusted intrinsic value of $27.22. In the nature of Master Limited Partnerships (MLPs), almost all the cash income made is paid out in the form of distributions to its unitholders, or limited partners. Once an MLP meets its distribution coverage, it invests the remaining cash in capital projects to further growth of its pipelines. In looking at historical distributions for EPD, it has raised distributions in 47 consecutive quarters while also providing greater coverages allowing surpluses of cash that is able to be invested back in the company. Since EPD has a historical track record of raising distributions by an average of $0.07 per year, we have forecasted this to continue through to our continuing value year of 2022. The consistency and strong distribution growth over the past years makes forecasting distributions easier and leads to an accurate representation of EPD’s intrinsic value of $27.22 as reflected in the DDM. Relative Price to Earnings (P/E) The relative P/E model bears a price of $28.65 and $25.82 in the years 2016 and 2017 respectively. When assessing key competitors and players in the MLP space with EPD, most companies maintain relatively stable financial measurements such as P/E since most all costs associated with MLPs are variable costs. MLPs have no employees so their administrative costs are low and they primarily function as “toll roads” for oil so their prices, and therefore their costs, are largely dependent upon their customers and the current market price of oil. The consistent financial measures and cost structure of MLPs leads to a valuable relative P/E model and an accurate representation of the intrinsic value of the stock. Forecasting Summary Important notes to keep in mind when examining our forecasted financial statements are that goodwill and accumulated other comprehensive income were froze and remain constant throughout the model. We also did not predict any of the sale of fixed assets/investments line items and when we do, it is either through guidance or a consistent growth rate based on historical data. The “Other Funds” accounts on the cash flow statement were treated as “plug” accounts to maintain an average cash balance. We have chosen to forecast both assets from acquisitions and sale of fixed assets based on historical data with the help of guidance from management. Many other Master Limited Partnerships (MLPs) are getting hit hard with the current economic conditions and EPD is well positioned to strategically acquire some of the smaller companies adding to its already vast network of pipelines. We chose 2022 as our continuing value year with a constant growth rate of 4% moving forward. The key assumptions used in our financial models are revenue forecasts, distributions per share payouts, capital expenditures and acquisitions, our WACC estimation, and our continuing value growth assumptions. All other financial statement forecasting assumptions were based upon historical data from the past 10 years. Forecasts were based upon both year over year growth rates for certain growth oriented line items. This is typically most balance sheet accounts. Other more variable line items such as those on the income statement, were forecasted as a percentage of sales. All assumptions were in line with analyst estimates and company guidance where applicable. Key Assumptions: Revenue Forecasts EPD’s revenue segments can be broken into five main segments: NGL pipelines & services, onshore natural gas pipelines & services, onshore crude oil pipelines & services, and petrochemical & refined products services. Its largest revenue sources are from NGL pipelines & services and onshore crude oil pipelines & services with all revenue streams increasing and decreasing in a uniform matter. Revenues dropped almost 50% in the past fiscal year, but we expect increases for the 2016 April 12, 2016 11 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● fiscal year. For revenue forecasts, we largely went in line with analyst estimates and company guidance. Paired with historical segmentation data, we arrived at our revenue forecasts. We, as well as other analysts, predict increases in revenue beginning in the current fiscal year in all business segments. We expect the increases to continue until they level off at 4% in the continuing value year of 2022. Distributions per Share EPD has increased its distributions for 47 consecutive quarters by an average of $0.07 per year. Based upon these historical figures, company guidance, and an already increased first quarter FY2016 distribution, we have forecasted an increase of $0.07 per year until our continuing value year. This increase will have them at a $2.00 distribution to unitholders by 2022. Capital Expenditures and Acquisitions EPD has a history of successful capital investments leading to heightened organic growth. It has completed $36 billion of capital projects in its history with $16 billion of those projects coming within the past five years. The capital expenditures are solely aimed at broadening and extending its already integrated midstream pipeline system and network. EPD announced three more capital projects to be completed in 2016 to widen its reach in the United States. It will add over 400 miles of crude oil pipelines and two more natural gas processing plants. These projects sum up to $6.8 billion of growth capital projects currently under construction and are primarily financed through long-term debt contracts. EPD also recently completed the acquisition of Eagle Ford Shale Midstream LLC in July 2015. This acquisition provided EPD with condensate gathering and processing services in addition to natural gas gathering, treating, and compression services. EPD also gained access to the rich areas once owned exclusively by Eagle Ford Shale further integrating its system of NGL and condensates. It managed to pay for most of the acquisition through the sale of offshore assets that had declining earnings and were not a part of EPD’s overall growth strategy as a company. The Eagle Ford Shale acquisition will provide much greater synergies as well as higher, risk-adjusted returns on invested capital. year Treasury bond yields, the risk premium was a percentage we chose as a group based on historical data, and our beta was derived from a Bloomberg terminal using monthly beta data over the course of the past five years. We used a 5.92% rate for the after tax cost of debt. For the tax rate, we took its marginal tax rate of -0.10% for the 2015 fiscal year pulled off the 10-K. EPD had many bonds outstanding past the 30 year mark so we took an average of the stated coupon rates for the bonds maturing between the years of 2046 and 2076 to arrive at an average bond yield of 5.91%. After multiplying the bond yield by one minus the marginal tax rate, we reached an after tax cost of debt of 5.92%. Our model utilized the capital asset pricing model (CAPM) for the calculation of the WACC. The weight of equity is 68% and the weight of debt is 32%. When multiplied by their respective cost of capital, the WACC estimation comes out to be 6.533%. We expect the weights of the two primary sources of capital to rise to around 75% equity and 25% debt in the coming years as EPD will have a tough time issue debt as most bonds in the energy sector have “junk” ratings. We expect its operations to balance back out to approximately 70% equity and 30% debt by the continuing value year. CV Growth Assumptions We arrived at the continuing value of growth assumption of 4% through a combination of variables. The primary drivers of the continuing value assumption is last years’ GDP growth for the United States of 1.9% and the fact that EPD consistently increases distributions and has a track record of success when it comes to capital investments and meeting desired coverage ratios. Due to the combination of these factors, we multiplied the United States prior year GDP growth rate by two to arrive at or 4% continuing value growth rate. EPD shows promise in the midstream energy industry and has proved this through its ability to produce record years by many financial measures despite a volatile energy commodity market. It will continue this trend of steady growth through increased distributions and successful capital investment projects and be able to maintain a 4% continuing value growth rate with ease. SENSITIVITY ANALYSIS WACC Estimation We determined EPD’s weighted average cost of capital (WACC) to be 6.533%. This percentage is derived after taking into consideration the cost of equity, cost of debt, and included in the cost of debt is EPD’s operating leases. For our calculation of cost of equity, we utilized a 2.60% risk free rate, a 5.00% risk premium, and a 0.845 beta arriving at a final cost of equity of 6.83%. The risk free rate was based on 30 Risk Free Rate vs. Equity Risk Premium When comparing the risk free rate to the equity risk premium, both are derived from historical data and were decided upon as a group. Small deviations from these metrics can result in a change in stock price with a lower risk free rate and lower risk premium both being advantageous for the intrinsic value of the stock. April 12, 2016 12 | EPD ENTERPRISE PRODUCTS PARTNERS L.P. (NYSE: EPD) ● Recommendation: HOLD ● bonds more than 30 years outstanding and being issued all the way until 2076. Since the weight of the cost of debt is only 32%, and the marginal tax rate is close to 0% on a yearly basis, neither variable has that big of an effect on the stock price. Even if EPD leveraged more of its operations with debt rather than equity than the marginal tax rate still would not have a big effect on the intrinsic value due to the nature of MLPs. Beta vs. Equity Risk Premium The beta and equity risk premium metrics are pivotal measurements when arriving at our target price range. A small decrease in the beta could mean a stock price increase of almost $5.00, because of this we spent much time and deliberation in choosing to measure the beta with a monthly average over the last five years. When examining EPD’s historical performance, many different economic and market conditions are captured in the past five years and in the highly cyclical industry of midfield energy transportation services we feel as though a 0.845 beta best represents EPD’s performance with respect to market fluctuations. The equity risk premium was chosen by our group based upon historical average risk premiums. Small deviations in the risk premium by even 25 basis points results in large fluctuations in stock price. Continuing Value NOPLAT vs Pretax Cost of Debt The CV Growth percentage was derived from consistent and steady growth in capital expenditures over the past five years spending over $16B and having over $6B planned in the next three years. Further explanations are above in the assumptions section, but this metric is also very important as small changes in assumptions can have an effect on the intrinsic value of the stock by more $10.00 if increased 100 bps. The pretax cost of debt was arrived upon based on the average of the coupon rates of bonds more than 30 years outstanding but has much less of an effect on the intrinsic value due to EPD being primarily financed through equity and being structured as an MLP and flow through entity. Revenue Growth vs. SG&A Growth We carefully arrived at the initial revenue growth rate of 8%, which is in line with analyst estimates and management guidance. We chose to portray the variable about SG&A Growth to show how in the MLP space SG&A costs are minimal and lead to very little to no change in intrinsic value. MLP’s do not have employees, just limited and general partners so their SG&A expense is far lower than other companies in the oil & gas industry. Marginal Tax Rate vs. Pretax Cost of Debt EPD’s marginal tax rate remains fairly constant between -1% and 1% as all of its income is treated as flow through and taxed at the individual unitholder level. As described earlier, the pretax cost of debt is the bond coupon rate from the average of Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report. April 12, 2016 13 | EPD SOURCES: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. "Baker Hughes 10-K." Yahoo.com. Accessed February 17, 2016. http://yahoo.brand.edgaronline.com/DisplayFiling.aspx?TabIndex=2. "Economic Calendar." Bloomberg.com. Accessed April 19, xvi. 2016. http://www.bloomberg.com/markets/economiccalendar. xvii. "China's Exports & Imports, 1952-2014." China's Trade Performance. Accessed April 19, 2016. xviii. http://www.chinability.com/Trade.htm. "China GDP Annual Growth Rate | 1989-2016 | Data | Chart | Calendar." China GDP Annual Growth Rate | 1989-2016 | Data | Chart | Calendar. Accessed April 19, 2016. http://www.tradingeconomics.com/china/gdpxix. growth-annual. "Deepwater Trends & Challenges - News Updates | xx. Depthwize Nigeria." 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Revenue Decomposition Millions Fiscal Years Ending Dec. 31 Revenue YoY Growth Business Segmentation NGL Pipelines & Services YoY Growth Onshore Natural Gas Pipelines & Services YoY Growth Offshore Pipelines & Services YoY Growth Onshore Crude Oil Pipelines & Services YoY Growth Petrochemical & Refined Products Services YoY Growth TOTAL GROWTH NGL Pipelines & Services Sales of NGLs YoY Growth Midstream services YoY Growth Selected Volumetrics NGL Transportational Volume (MBPD) NGL Fractionation Volume (MBPD) Equity NGL production (MBPD) Fee-based natural gas processing (MMcf/d) Onshore Crude Oil Pipelines & Services Sales of crude oil YoY Growth Midstream services YoY Growth Selected Volumetric Crude oil transportation volumes (MBPD) Crude oil marine terminal volumes(MBPD) Onshore Natural Gas Pipelines & Services Sales of natural gas YoY Growth Midstream services YoY Growth Selected Volumetric Natural gas transportation volumes(Bbtus/d) Petrochemical & Refined Products & Services Sales of petrochemical and refined products YoY Growth Midstream services YoY Growth Selected Volumetrics Propylene fractional volumes (MBPD) Butane isomerization volumes (MBPD) Standalone DIB processing volumes (MBPD) Octane additive and related plant production volumes (MBPD) Transportation volumes, primarily refined products and petrochemicals (MBPD) Refined products and petrochemical marine terminal volumes (MBPD) Offshore Pipelines & Services Sales of natural gas YoY Growth Sales of crude oil YoY Growth Midstream services YoY Growth Selected Volumetrics Natural gas transporation volumes (BBtus/d) Crude oil transportation volumes (MBPD) Platform natural gas processing (MMcf/d) Platform crude oil processing (MBPD) 2013 2014 2015 47,547 11.65% 47,952 0.85% 27,028 -43.64% 17,120 12.87% 3,359 0.18% 159 -17.19% 20,650 16.92% 6,259 0.81% 47,547 17,090 -0.18% 4,204 25.16% 157 -1.26% 20,184 -2.26% 6,317 0.93% 47,952 9,788 -42.73% 2,743 -34.75% 79 -49.68% 10,306 -48.94% 4,112 -34.91% 27,028 15,916 11.94% 1,204 26.77% 15,460 -2.86% 1,630 35.33% 8,045 -47.96% 1,743 6.96% 2,787 726 126 4,612 2,892 824 116 4,786 3,002 826 133 4,905 20,371 16.08% 279 146.99% 19,784 -2.88% 400 43.46% 9,733 -50.80% 573 43.11% 1,175 210 1,278 691 1,474 557 2,772 15.71% 967 1.01% 3,182 14.80% 1,022 5.71% 1,723 -45.86% 1,021 -0.14% 12,936 12,476 12,321 5,569 1.79% 690 -6.54% 5,576 0.12% 741 7.44% 3,334 -40.21% 778 5.05% 74 94 67 20 702 5 75 93 82 17 758 270 71 96 79 17 784 355 0.50 25.00% 5.70 72.73% 153 -18.42% 678 307 202 16 0.30 -40.00% -100.00% 8.60 3.20 50.88% -62.79% 148 76 -3.46% -48.88% 627 330 145 14 587 357 101 13 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 29,156 32,071 35,920 39,512 7.87% 10.00% 12.00% 10.00% 41,882 6.00% 43,558 4.00% 45,300 4.00% 14,326 10.00% 3,968 10.00% 115 10.00% 15,084 10.00% 6,018 10.00% 39,512 15,185 6.00% 4,207 6.00% 122 6.00% 15,989 6.00% 6,379 6.00% 41,882 15,793 4.00% 4,375 4.00% 127 4.00% 16,628 4.00% 6,635 4.00% 43,558 16,425 4.00% 4,550 4.00% 132 4.00% 17,294 4.00% 6,900 4.00% 45,300 8,688 9,557 10,704 11,774 8.00% 10.00% 12.00% 10.00% 1,883 2,071 2,319 2,551 8.00% 10.00% 12.00% 10.00% 12,481 6.00% 2,704 6.00% 12,980 4.00% 2,813 4.00% 13,499 4.00% 2,925 4.00% 4,394 1,209 195 7,179 4,657 1,281 206 7,610 4,844 1,333 215 7,914 5,037 1,386 223 8,231 10,512 11,563 12,950 14,245 8.00% 10.00% 12.00% 10.00% 619 681 762 839 8.00% 10.00% 12.00% 10.00% 15,100 6.00% 889 6.00% 15,704 4.00% 925 4.00% 16,332 4.00% 962 4.00% 2,157 815 2,287 864 2,378 899 2,473 935 1,826 2,009 2,250 2,475 6.00% 10.00% 12.00% 10.00% 1,102 1,213 1,358 1,494 8.00% 10.00% 12.00% 10.00% 2,623 6.00% 1,584 6.00% 2,728 4.00% 1,647 4.00% 2,837 4.00% 1,713 4.00% 13,307 18,033 19,115 19,880 20,675 3,600 3,960 4,435 4,879 8.00% 10.00% 12.00% 10.00% 841 925 1,036 1,139 8.00% 10.00% 12.00% 10.00% 5,172 6.00% 1,208 6.00% 5,379 4.00% 1,256 4.00% 5,594 4.00% 1,306 4.00% 104 141 116 25 1,147 520 110 149 123 26 1,216 551 115 155 127 27 1,265 573 119 161 133 29 1,316 596 0.00% 0.00% 0.00% 0.00% 3.46 3.80 4.26 4.68 8.00% 10.00% 12.00% 10.00% 82 90 101 111 8.00% 10.00% 12.00% 10.00% 0.00% 4.96 6.00% 117 6.00% 0.00% 5.16 4.00% 122 4.00% 0.00% 5.37 4.00% 127 4.00% 911 554 157 20 947 576 163 21 985 599 169 22 10,571 8.00% 2,928 6.76% 85 7.73% 11,130 8.00% 4,441 8.00% 29,156 3,242 892 144 5,297 1,592 602 77 104 85 18 847 383 634 386 109 14 11,628 10.00% 3,221 10.00% 94 10.00% 12,243 10.00% 4,885 10.00% 32,071 3,566 981 158 5,827 1,751 662 14,637 84 114 94 20 931 422 697 424 120 15 13,024 12.00% 3,608 12.00% 105 12.00% 13,713 12.00% 5,471 12.00% 35,920 3,994 1,099 177 6,526 1,961 741 16,394 94 128 105 23 1,043 472 781 475 134 17 859 523 148 19 Enterprise Products Partners L.P. Income Statement Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 REVENUE 47,727 47,951 27,028 29,156 32,071 35,920 39,512 41,882 43,558 45,300 EXPENSES Total operating costs & expenses Depreciation & amortization Total general & administrative costs TOTAL EXPENSES 43,090 1,149 188 44,427 42,938 1,283 215 44,435 22,358 1,311 193 23,861 23,908 1,206 147 25,261 26,619 1,279 163 28,061 29,813 1,465 182 31,460 33,585 1,472 204 35,261 36,019 1,637 210 37,865 37,895 1,620 213 39,729 38,958 1,713 226 40,897 167 3,467 260 3,776 374 3,540 102 3,998 119 4,130 140 4,600 159 4,410 177 4,194 195 4,024 218 4,621 (962) (22.5) (984) (1,074) 0.5 3.0 (1,071) (1,128) 0.7 (2.0) (1,129) (1,173) 0.8 6.0 (1,166) (1,212) 0.9 2.0 (1,209) (1,223) 1.0 (1.0) (1,223) (1,223) 1.1 1.0 (1,221) (1,228) 1.3 2.0 (1,225) Equity in income (loss) of unconsolidated affiliates OPERATING INCOME OTHER REVENUE (EXPENSES) AND GAINS (LOSSES) Interest expense Interest income Other income (expense), net TOTAL OTHER REVENUE (EXPENSES) AND GAINS (LOSSES) (803) 0.9 (1.1) (803) (921) 1.3 0.6 (919) INCOME BEFORE INCOME TAXES Provision for (benefit from) income taxes 2,665 58 2,857 23 2,556 23 2,927 (7) 3,001 3 3,434 5 3,201 27 2,971 34 2,803 39 3,397 51 NET INCOME 2,607 2,834 2,533 2,934 2,998 3,429 3,173 2,937 2,764 3,346 Net income (loss) attributable to noncontrolling interests (10) (46) (37) - - - - - - - NET INCOME ATTRIBUTABLE LIMITED PARTNERS 2,597 2,787 2,521 2,934 2,998 3,429 3,173 2,937 2,764 3,346 Basic EPS Units Outstanding Distributions per share 1.39 1,871 1.35 1.44 1,937 1.43 1.25 2,013 1.51 1.41 2,083 1.58 1.39 2,152 1.65 1.54 2,228 1.72 1.38 2,308 1.79 1.23 2,390 1.86 1.12 2,473 1.93 1.31 2,560 2.00 Enterprise Products Partners L.P. Balance Sheet Fiscal Years Ending Dec. 31 ASSETS Current Assets: Cash & cash equivalents Accounts & notes receivable - trade, net Inventories Derivative assets Prepaid & other current assets Total Current Assets 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 57 5,482 1,093 326 7,023 74 3,826 1,014 226 576 5,491 35 2,571 1,038 259 410 4,313 54 2,920 704 203 262 4,142 45 3,229 773 213 487 4,748 51 3,553 884 236 529 5,253 37 4,074 1,034 208 637 5,990 33 4,235 1,107 280 665 6,320 45 4,349 1,141 297 702 6,534 63 4,511 1,183 252 723 6,732 34,018 (7,071) 26,947 2,437 1,462 2,080 189 40,139 38,047 (8,165) 29,882 3,042 4,302 4,200 184 47,101 40,612 (8,577) 32,035 2,629 4,037 5,745 193 48,952 43,861 (8,920) 34,941 2,525 3,916 5,745 187 51,455 46,493 (9,277) 37,216 2,452 3,838 5,745 190 54,188 48,817 (9,648) 39,169 3,318 3,761 5,745 198 57,443 50,770 (10,034) 40,736 4,203 3,686 5,745 202 60,560 52,801 (10,435) 42,365 4,970 3,575 5,745 210 63,185 54,913 (10,853) 44,060 5,359 3,432 5,745 218 65,347 57,109 (11,287) 45,822 5,028 3,295 5,745 227 66,849 1,125 6,483 304 327 8,239 2,206 4,746 336 586 7,874 1,864 3,428 993 352 529 7,166 1,550 3,468 863 326 574 6,781 1,890 3,924 817 253 468 7,352 1,249 4,343 936 384 501 7,412 1,271 5,197 982 316 438 8,204 1,572 5,518 990 331 453 8,864 1,932 5,792 783 346 427 9,280 1,016 5,963 999 396 497 8,871 Total long-term debt Deferred tax liabilities Other long-term liabilities TOTAL LIABILITIES 16,227 61 172 24,698 19,157 67 311 27,409 20,827 46 412 28,451 21,660 96 239 28,777 22,526 65 209 30,153 23,202 67 342 31,023 23,666 77 379 32,326 24,140 89 339 33,432 24,381 67 314 34,042 24,625 94 403 33,993 EQUITY Minority/Noncontrolling interests Total partners' equity TOTAL EQUITY 226 15,215 15,440 1,629 18,063 19,692 206 20,295 20,501 760 21,919 22,679 363 23,672 24,035 854 25,566 26,420 623 27,611 28,234 485 29,268 29,753 282 31,024 31,306 592 32,265 32,857 TOTAL LIABILITIES & EQUITY 40,139 47,101 48,952 51,455 54,188 57,443 60,560 63,185 65,347 66,849 Property, plant & equipment, at cost Less: accumulated depreciation Property, plant & equipment, net Investments in unconsolidated affiliates Intangible assets, net Goodwill Other assets TOTAL ASSETS LIABILITIES Current Liabilities Current maturities of debt Accounts Payable Accrued expenses Accrued interest Derivative liabilities Other current liabilities Total current liabilities Enterprise Products Partners L.P. Cash Flow Statement Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 CASH FLOW FROM OPERATING ACTIVITIES Net income Depreciation, amortization & accretion Deferred Taxes & Investment Tax Credit Other Funds Changes in Working Capital NET OPERATING CASH FLOW 2,934 1,405 16 42 25 4,423 2,998 1,425 (10) 196 77 4,686 3,429 1,594 3 227 (16) 5,237 3,173 1,692 11 224 183 5,284 2,937 1,760 20 4 87 4,807 2,764 1,827 8 145 126 4,870 3,346 1,865 17 92 (33) 5,287 CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures Net Assets from Acquisitions Sale of Fixed Assets & Businesses Purchase/Sale of Investments Other Funds NET INVESTING CASH FLOW (4,100) (1,044) 1,643 (321) 36 (3,786) (3,310) (1,692) 1,330 (628) 134 (4,166) (3,194) (1,659) 1,162 (90) 74 (3,707) (2,954) (1,764) 418 (78) (82) (4,460) (3,393) (1,825) 335 (519) 19 (5,383) (3,346) (1,287) 1,423 (691) 11 (3,890) (3,967) (1,589) 1,316 (864) (77) (5,181) CASH FLOW FROM FINANCING ACTIVIES Cash Disbursements Paid Change in Capital Stock Issuance/Reduction of Debt, Net Other Funds NET FINANCING CASH FLOW (3,292) 1,624 1,248 (198) (618) (3,551) 1,753 1,323 (54) (528) (3,833) 1,894 655 (240) (1,524) (4,131) 2,045 1,606 (359) (838) (4,445) 1,657 3,417 (57) 572 (4,773) 1,756 2,103 (54) (968) (5,119) 1,241 4,031 (240) (87) - - - - - - - Exchange Rate Effect NET CHANGE IN CASH Beginning Cash Balance Net Change in Cash Ending Cash Balance 19 (8) 6 (14) (4) 12 19 35.0 18.7 53.7 53.7 (8.3) 45.4 45.4 5.6 51.1 51.1 (14.3) 36.8 36.8 (4.0) 32.8 32.8 11.8 44.6 44.6 18.6 63.2 Enterprise Products Partners L.P. Common Size Income Statement Fiscal Years Ending Dec. 31 REVENUE EXPENSES Total operating costs & expenses Depreciation & amortization Total general & administrative costs TOTAL EXPENSES Equity in income (loss) of unconsolidated affiliates OPERATING INCOME OTHER REVENUE (EXPENSES) AND GAINS (LOSSES) Interest expense Interest income Other income (expense), net TOTAL OTHER REVENUE (EXPENSES) AND GAINS (LOSSES) INCOME BEFORE INCOME TAXES Provision for (benefit from) income taxes NET INCOME Net income (loss) attributable to noncontrolling interests NET INCOME ATTRIBUTABLE LIMITED PARTNERS 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 90.28% 2.41% 0.39% 93.09% 89.54% 2.68% 0.45% 92.67% 82.72% 4.85% 0.71% 88.28% 82.00% 4.14% 0.50% 86.64% 83.00% 3.99% 0.51% 87.49% 83.00% 4.08% 0.51% 87.58% 85.00% 3.73% 0.52% 89.24% 86.00% 3.91% 0.50% 90.41% 87.00% 3.72% 0.49% 91.21% 86.00% 3.78% 0.50% 90.28% 0.35% 7.26% 0.54% 7.87% 1.38% 13.10% 0.35% 13.71% 0.37% 12.88% 0.39% 12.81% 0.40% 11.16% 0.42% 10.01% 0.45% 9.24% 0.48% 10.20% -1.68% 0.00% 0.00% -1.68% -1.92% 0.00% 0.00% -1.92% -3.56% 0.00% -0.08% -3.64% -3.68% 0.00% 0.01% -3.67% -3.52% 0.00% -0.01% -3.52% -3.27% 0.00% 0.02% -3.25% -3.07% 0.00% 0.01% -3.06% -2.92% 0.00% 0.00% -2.92% -2.81% 0.00% 0.00% -2.80% -2.71% 0.00% 0.00% -2.70% 5.58% 0.12% 5.96% 0.05% 9.46% 0.09% 10.04% -0.03% 9.36% 0.01% 9.56% 0.01% 8.10% 0.07% 7.09% 0.08% 6.44% 0.09% 7.50% 0.11% 5.46% 5.91% 9.37% 10.06% 9.35% 9.55% 8.03% 7.01% 6.35% 7.39% -0.02% -0.10% -0.14% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 5.44% 5.81% 9.33% 10.06% 9.35% 9.55% 8.03% 7.01% 6.35% 7.39% Enterprise Products Partners L.P. Common Size Balance Sheet Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 ASSETS Current Assets: Cash & cash equivalents Accounts & notes receivable - trade, net Inventories Derivative assets Prepaid & other current assets Total Current Assets 0.12% 11.49% 2.29% 0.00% 0.68% 14.72% 0.16% 8.02% 2.13% 0.47% 1.21% 11.50% 0.13% 9.51% 3.84% 0.96% 1.52% 15.96% 0.18% 10.01% 2.41% 0.70% 0.90% 14.21% 0.14% 10.07% 2.41% 0.66% 1.52% 14.81% 0.14% 9.89% 2.46% 0.66% 1.47% 14.62% 0.09% 10.31% 2.62% 0.53% 1.61% 15.16% 0.08% 10.11% 2.64% 0.67% 1.59% 15.09% 0.10% 9.99% 2.62% 0.68% 1.61% 15.00% 0.14% 9.96% 2.61% 0.56% 1.60% 14.86% Property, plant & equipment, at cost Less: accumulated depreciation Property, plant & equipment, net Investments in unconsolidated affiliates Intangible assets, gross Less: accumulated amortization - intangible assets Intangible assets, net Goodwill Other assets TOTAL ASSETS 71.28% -14.82% 56.46% 5.11% 5.47% -2.41% 3.06% 4.36% 0.40% 84.10% 79.72% -17.11% 62.61% 6.37% 11.63% -2.61% 9.01% 8.80% 0.39% 98.69% 150.26% -31.73% 118.53% 9.73% 0.00% 0.00% 14.94% 21.26% 0.71% 181.12% 150.44% -30.59% 119.84% 8.66% 0.00% 0.00% 13.43% 19.70% 0.64% 176.48% 144.97% -28.93% 116.04% 7.64% 0.00% 0.00% 11.97% 17.91% 0.59% 168.96% 135.91% -26.86% 109.05% 9.24% 0.00% 0.00% 10.47% 15.99% 0.55% 159.92% 128.49% -25.39% 103.10% 10.64% 0.00% 0.00% 9.33% 14.54% 0.51% 153.27% 126.07% -24.92% 101.15% 11.87% 0.00% 0.00% 8.54% 13.72% 0.50% 150.86% 126.07% -24.92% 101.15% 12.30% 0.00% 0.00% 7.88% 13.19% 0.50% 150.02% 126.07% -24.92% 101.15% 11.10% 0.00% 0.00% 7.27% 12.68% 0.50% 147.57% LIABILITIES Current Liabilities Current maturities of debt Payable Accrued expenses Accrued interest Derivative liabilities Other current liabilities Total current liabilities 2.36% 13.58% 0.00% 0.64% 0.00% 0.68% 17.26% 4.62% 9.94% 0.00% 0.70% 0.00% 1.23% 16.50% 6.90% 12.68% 3.67% 1.30% 0.00% 1.96% 26.51% 5.32% 11.89% 2.96% 1.12% 0.00% 1.97% 23.26% 5.89% 12.24% 2.55% 0.79% 0.00% 1.46% 22.92% 3.48% 12.09% 2.60% 1.07% 0.00% 1.39% 20.63% 3.22% 13.15% 2.49% 0.80% 0.00% 1.11% 20.76% 3.75% 13.18% 2.36% 0.79% 0.00% 1.08% 21.16% 4.44% 13.30% 1.80% 0.79% 0.00% 0.98% 21.30% 2.24% 13.16% 2.20% 0.87% 0.00% 1.10% 19.58% Total long-term debt Deferred tax liabilities Other long-term liabilities TOTAL LIABILITIES 34.00% 0.13% 0.36% 51.75% 40.14% 0.14% 0.65% 57.43% 77.06% 0.17% 1.52% 105.27% 74.29% 0.33% 0.82% 98.70% 70.24% 0.20% 0.65% 94.02% 64.59% 0.19% 0.95% 86.37% 59.90% 0.19% 0.96% 81.81% 57.64% 0.21% 0.81% 79.82% 55.97% 0.15% 0.72% 78.15% 54.36% 0.21% 0.89% 75.04% EQUITY Minority/Noncontrolling interests Total partners' equity TOTAL EQUITY 0.47% 31.88% 32.35% 3.41% 37.85% 41.26% 0.76% 75.09% 75.85% 2.61% 75.18% 77.78% 1.13% 73.81% 74.94% 2.38% 71.17% 73.55% 1.58% 69.88% 71.46% 1.16% 69.88% 71.04% 0.65% 71.22% 71.87% 1.31% 71.22% 72.53% TOTAL LIABILITIES & EQUITY 84.10% 98.69% 181.12% 176.48% 168.96% 159.92% 153.27% 150.86% 150.02% 147.57% Enterprise Products Partners L.P. Value Driver Estimation Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 Marginal Tax Rate 2.16% 0.81% -0.10% -0.25% 0.10% 0.15% 0.85% 1.15% 1.40% 1.50% WACC Normal Cash (% of sales) Cost of Debt 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 6.53% 3.40% 7.03% 47,727 (43,090) (1,149) (188) (1,337) 18.9 3,319 47,951 (42,938) (1,283) (215) (1,497) 29.9 3,546 27,028 (22,358) (1,311) (193) (1,504) 62.0 3,229 29,156 (23,908) (1,206) (147) (1,353) 55.8 3,951 32,071 (26,619) (1,279) (163) (1,441) 54.7 4,065 35,920 (29,813) (1,465) (182) (1,647) 56.4 4,516 39,512 (33,585) (1,472) (204) (1,676) 59.7 4,310 41,882 (36,019) (1,637) (210) (1,847) 64.5 4,082 43,558 (37,895) (1,620) (213) (1,833) 67.1 3,896 45,300 (38,958) (1,713) (226) (1,939) 69.8 4,473 Less: Adjusted Taxes: Provision for Income Taxes (+)Tax Shield on Interest Expense (-)Tax Sheild on Non-Operating Income, Net (+)Tax Shield on Interest on Operating Leases Total Adjusted Taxes 57.50 17.33 (0.02) 0.41 75.22 23.10 7.46 (0.01) 0.24 30.79 23.10 (0.96) (0.06) 22.08 (7.32) (2.69) 0.00 (0.14) (10.14) 3.00 1.13 (0.00) 0.05 4.18 5.15 1.76 (0.00) 0.08 6.99 27.21 10.30 (0.01) 0.51 38.01 34.17 14.07 (0.01) 0.74 48.96 39.25 17.12 (0.02) 0.94 57.29 50.95 18.42 (0.02) 1.05 70.39 Plus: Change in Deffered Tax (DT) Liabilities: DT Liabilities DT Current Assets DT Long-Term Assets Net DT Liabilities Change in DT Liabilities (YoY) 60.80 61 38.30 66.60 67 5.80 46.00 46 (20.60) 96.00 96 50.00 65.00 65 (31.00) 67.00 67 2.00 77.00 77 10.00 89.00 89 12.00 67.00 67 (22.00) 94.00 94 27.00 NOPLAT = EBITA - Adjusted Taxes + Change in DT 3,282 3,521 3,186 4,011 4,030 4,511 4,282 4,045 3,817 4,430 Operating Current Assets: Normal Cash Short-Term Receivables, Net Inventory Other Current Assets Operating Current Assets 57 5,482 1,093 326 6,958 74 3,826 1,014 576 5,491 35 2,571 1,038 410 4,054 54 2,920 704 262 3,939 45 3,229 773 487 4,535 51 3,553 884 529 5,017 37 4,074 1,034 637 5,782 33 4,235 1,107 665 6,040 45 4,349 1,141 702 6,237 63 4,511 1,183 723 6,480 Operating Current Liabilities: Accounts Payable & Accrued Liabilities Other Operating Liabilities Operating Current Liabilities 6,483 327 6,809 4,746 586 5,332 4,421 529 4,950 4,331 574 4,905 4,741 468 5,209 5,278 501 5,779 6,179 438 6,617 6,508 453 6,961 6,575 427 7,002 6,962 497 7,459 NOPLAT Computation EBITA: Net Sales (-)Cost of Goods Sold (-)Depreciation & Amortization (-)Other SG&A (-)Operating Expenses (+)Implied Interest on Operating Leases EBITA Invested Capital Computation 148 159 (896) (966) (674) (763) (836) (921) (765) (979) 26,947 269 1,462 189 (327) 29,882 425 4,302 184 (586) 32,035 882 4,037 193 (529) 34,941 794 3,916 187 (574) 37,216 778 3,838 190 (468) 39,169 801 3,761 198 (501) 40,736 849 3,686 202 (438) 42,365 917 3,575 210 (453) 44,060 954 3,432 218 (427) 45,822 992 3,295 227 (497) 28,689 34,366 35,722 38,297 40,879 42,665 44,199 45,693 47,472 48,860 NOPLAT Beginning Invested Capital 12.48% 3,282 26,294 12.27% 3,521 28,689 9.27% 3,186 34,366 11.23% 4,011 35,722 10.52% 4,030 38,297 11.04% 4,511 40,879 10.04% 4,282 42,665 9.15% 4,045 44,199 8.35% 3,817 45,693 9.33% 4,430 47,472 Beginning Invested Captial ROIC WACC 1,564 26,294 12.48% 6.53% 1,647 28,689 12.27% 6.53% 941 34,366 9.27% 6.53% 1,677 35,722 11.23% 6.53% 1,528 38,297 10.52% 6.53% 1,840 40,879 11.04% 6.53% 1,495 42,665 10.04% 6.53% 1,157 44,199 9.15% 6.53% 832 45,693 8.35% 6.53% 1,328 47,472 9.33% 6.53% NOPLAT Change in Invested Capital 887 3,282 2,394 (2,156) 3,521 5,677 1,830 3,186 1,356 1,436 4,011 2,575 1,449 4,030 2,582 2,725 4,511 1,786 2,749 4,282 1,533 2,550 4,045 1,494 2,038 3,817 1,779 3,041 4,430 1,389 Net Operating Working Capital Plus: Net PPE Plus: PV of Operating Leases Plus: Net Intangible (Non-Goodwill) Assets Plus: Other Operating Assets Less: Other Operating Liabilities Invested Capital Value Drivers: ROIC EP FCF Enterprise Products Partners L.P. Weighted Average Cost of Capital (WACC) Estimation Cost of Equity Risk Free Rate Risk Premium Beta Cost of Equity Cost of Debt Bond Yield Tax Rate After Tax Cost of Debt 2.60% 5.00% 0.845 6.83% 5.91% -0.10% 5.92% Variable Weights Total Equity # Shares $/Share Total Debt Enterprise Value Weight of Equity Weight of Debt 50,345 2,013 $25.01 23,573 73,918 68% 32% WACC 6.533% Enterprise Products Partners L.P. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth CV ROIC WACC Cost of Equity DCF Model Fiscal Years Ending Dec. 31 NOPLAT Change in Invested Capital FCF Continuing Value 4.00% 9.33% 6.53% 6.83% 2015 3,186 1,356 1,830 Periods to Discount Present Value of FCF Value of Operating Assets Add: Excess Cash Add: Derivative Securities Add: Investment in affiliated companies Less: St Debt Less: LT Debt Less: Accumulated Minority Interests Less: PV of Operating Leases Less: Employee Stock Options Value of Equity Shares Outstanding Intrinsic Value Intrinsic Value (Adjusted) EP Model Fiscal Years Ending Dec. 31 Beginning Invested Capital ROIC Economic Profit Continuing Value Periods to Discount PV(EP) Present Value of Economic Profit Plus: Beginning Invested Capital Value of Operating Assets Add: Excess Cash Add: Derivative Securities Add: Investment in affiliated companies Less: St Debt Less: LT Debt Less: Accumulated Minority Interests Less: PV of Operating Leases Less: Employee Stock Options Value of Equity Shares Outstanding Intrinsic Value Intrinsic Value (Adjusted) 2016E 4,011 2,575 1,436 2017E 4,030 2,582 1,449 2018E 4,511 1,786 2,725 2019E 4,282 1,533 2,749 2020E 4,045 1,494 2,550 2021E 3,817 1,779 2,038 CV 2022 4,430 1,389 3,041 99,900 1 1,348 2 1,276 3 2,254 4 2,134 5 1,858 6 1,394 6 68,337 2016E 35,722 11.23% 1,677 2017E 38,297 10.52% 1,528 2018E 40,879 11.04% 1,840 2019E 42,665 10.04% 1,495 2020E 44,199 9.15% 1,157 2021E 45,693 8.35% 832 1 1,574 2 1,346 3 1,522 4 1,160 2022E 47,472 9.33% 1,328 52,428 6 35,864 78,601 259 2,629 (1,864) (20,827) (206) (882) (3) $57,707.71 2013 $28.67 $28.77 2015 34,366 9.27% 42,879 35,722 78,601 259 2,629 (1,864) (20,827) (206) (882) (3) $57,707.71 2013 $28.67 $28.77 5 843 6 569 Enterprise Products Partners L.P. Distribution Discount Model (DDM) or Fundamental P/E Valuation Model Fiscal Years Ending Dec. 31 EPS 2016E $ Key Assumptions CV growth CV ROE Cost of Equity 1.41 $ 2017E 1.39 $ 2018E 1.54 $ 2019E 1.38 $ 2020E 1.23 $ 2021E CV 2022 1.12 $ 1.31 4.00% 10.18% 6.83% Future Cash Flows P/E Multiple (CV Year) EPS (CV Year) Future Stock Price Dividends Per Share Period 1.58 1 1.50 2 1.72 3 1.79 4 1.86 5 1.93 6 21.49 1.31 28.09 2.00 6 Discounted Cash Flows 1.48 1.31 1.41 1.37 1.34 1.30 18.90 Intrinsic Value As of Today $ $ $ 27.12 27.22 Enterprise Products Partners L.P. Relative Valuation Models Ticker Company ETP PPA SEP KMI MMP Energy Transfer Partners Plains All American Piplines Spectra Energy Partners Kinder Morgan Inc. Magellan Midstream Partners Price $34.87 $36.19 $48.52 $19.24 $68.48 EPS 2016E EPS 2017E $1.38 $2.05 $3.24 $0.70 $3.43 $2.42 $2.31 $3.41 $0.82 $3.74 Average EPD Enterprise Products Partners L.P. Implied Value: Relative P/E (EPS16) Relative P/E (EPS17) EV/EBITDA 16 EV/EBITDA 17 $25.01 $1.36 $ $ $ $ 28.65 25.82 15.32 15.53 $1.50 P/E 16 P/E 17 EV/EBITDA 16 EV/EBITDA 17 25.3 17.7 15.0 27.5 20.0 21.1 14.4 15.7 14.2 23.5 18.3 17.2 8.7 9.94 10.4 10.9 16.4 11.3 7.5 9.26 9.4 10.3 15.3 10.4 18.4 16.7 13.4 12.5 Enterprise Products Partners L.P. Key Management Ratios Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 0.85 0.72 0.00 0.70 0.57 0.00 0.60 0.46 0.00 0.61 0.51 0.00 0.65 0.54 0.00 0.71 0.59 0.00 0.73 0.60 0.00 0.71 0.59 0.00 0.70 0.58 0.00 0.76 0.63 0.00 1.19 1.77 10.73 1.02 1.60 9.75 0.55 0.84 5.81 0.57 0.83 9.12 0.59 0.86 11.68 0.63 0.92 11.68 0.65 0.97 11.65 0.66 0.99 10.98 0.67 0.99 10.48 0.68 0.99 10.55 0.43 1.12 1.05 0.17 0.45 1.08 0.97 0.14 0.46 1.11 1.02 0.12 0.45 1.02 0.96 0.13 0.45 1.02 0.94 0.12 0.43 0.93 0.88 0.13 0.41 0.88 0.84 0.11 0.41 0.86 0.81 0.10 0.40 0.84 0.78 0.09 0.38 0.78 0.75 0.10 Liquidity Ratios Current Ratio Quick Ratio Cash Ratio Current Assets / Current Liabilities (Total Current Assets - Inventories) / TotalCurrent Liabilities (Cash + Cash Equivalents) / Total Liaiblities Asset-Management Ratios Total Asset Turnover Ratio Fixed Asset Turnover Ratio Receivables Turnover Ratio Revenue / Total Assets Revenue / Net PPE Revenue / Average Accounts Receivable Financial Leverage Ratios Debt/Total Assets Debt to Equity Ratio LT Debt to Equity Ratio Interest Coverage Ratio Total Debt / Total Assets Total Debt / Total Shareholder's Equity Long Term Debt / Total Shareholder's Equity Net Income / Total Shareholder's Equity Profitability Ratios Gross Margin Operating Margin Return on Equity Return on Assets (Revenue - Cost of goods sold) / Revenues Operating Income / Net Sales Net Income / Total Shareholder's Equity Net Income / Total Assets 9.32% 7.26% 16.82% 6.47% 10.01% 7.87% 14.15% 5.92% 16.57% 13.10% 12.30% 5.15% 17.50% 13.71% 12.94% 5.70% 16.49% 12.88% 12.47% 5.53% 16.49% 12.81% 12.98% 5.97% 14.48% 11.16% 11.24% 5.24% 13.50% 10.01% 9.87% 4.65% 12.51% 9.24% 8.83% 4.23% 13.50% 10.20% 10.18% 5.00% Payout Policy Ratios Payout Ratio Dividend Coverage Ratio Dividends / EPS Net Income / Dividend Payout 97.26% 1.03 99.37% 1.01 120.56% 0.83 112.18% 0.89 118.44% 0.84 111.78% 0.89 130.16% 0.77 151.35% 0.66 172.70% 0.58 153.01% 0.65 Present Value of Operating Lease Obligations (2015) Fiscal Years Ending Dec. 31 2016 2017 2018 2019 2020 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments Operating Leases 298 246 225 29 56 142 996 114 882 Capitalization of Operating Leases 4.52% 2.5 Lease Commitment 298 246 225 29 56 56 Present Value of Operating Lease Obligations (2011) Fiscal Years Ending Dec. 31 2012 2013 2014 2015 2016 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments Year 1 2 3 4 5 6 & beyond PV of Minimum Payments Operating Leases 58.3 47.4 39.7 38.2 32.3 170.5 386.4 75 311 Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments 4.52% 5.3 Lease Commitment 58.3 47.4 39.7 38.2 32.3 32.3 Present Value of Operating Lease Obligations (2007) Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments Lease Commitment 60.5 62 56.4 48.9 42.3 42.3 Present Value of Operating Lease Obligations (2010) Year 1 2 3 4 5 6 & beyond PV of Minimum Payments Operating Leases 27.789 25.866 23.306 23.785 23.187 201.826 325.759 85 241 Fiscal Years Ending Dec. 31 2007 2008 2009 2010 2011 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments Year 1 2 3 4 5 6 & beyond PV of Minimum Payments Operating Leases 48.2 45.9 38.7 31.4 25.8 185.8 375.8 82 294 Fiscal Years Ending Dec. 31 2010 2011 2012 2013 2014 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments 4.52% 7.2 Lease Commitment 48.2 45.9 38.7 31.4 25.8 25.8 Present Value of Operating Lease Obligations (2006) PV Lease Payment 46.1 42.0 33.9 26.3 20.7 124.8 293.8 4.52% 8.7 Lease Commitment 27.789 25.866 23.306 23.785 23.187 23.187 PV Lease Payment 26.6 23.7 20.4 19.9 18.6 131.4 240.6 Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment Year 1 2 3 4 5 6 & beyond PV of Minimum Payments 4.52% 4.7 Lease Commitment 42.4 41.2 38.2 35.4 30.7 30.7 Present Value of Operating Lease Obligations (2009) Operating Leases 19.19 19.877 16.374 15.688 16.263 187.308 274.7 83 192 4.52% 11.5 Lease Commitment 19.19 19.877 16.374 15.688 16.263 16.263 PV Lease Payment 18.4 18.2 14.3 13.1 13.0 115.1 192.2 Operating Leases 51.3 44.1 42.8 37.5 33.3 154 363 69 294 Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment PV Lease Payment 40.6 37.7 33.5 29.7 24.6 102.5 268.6 Year 1 2 3 4 5 6 & beyond PV of Minimum Payments Operating Leases 37.6 35.3 32.7 27.3 21.5 189.5 343.9 84 260 Fiscal Years Ending Dec. 31 2009 2010 2011 2012 2013 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments 4.52% 4.6 Lease Commitment 51.3 44.1 42.8 37.5 33.3 33.3 Present Value of Operating Lease Obligations (2008) PV Lease Payment 49.1 40.4 37.5 31.4 26.7 109.2 294.3 Operating Leases 32.299 27.541 27.831 27.066 24.481 192.201 331.419 81 250 Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment Year 1 2 3 4 5 6 & beyond PV of Minimum Payments Present Value of Operating Lease Obligations (2012) Fiscal Years Ending Dec. 31 2013 2014 2015 2016 2017 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment PV Lease Payment 57.9 56.8 49.4 41.0 33.9 186.0 424.9 Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment Operating Leases 42.4 41.2 38.2 35.4 30.7 144.9 332.8 64 269 Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment PV Lease Payment 55.8 43.4 34.8 32.0 25.9 119.2 311.1 Capitalization of Operating Leases Year 1 2 3 4 5 6 & beyond PV of Minimum Payments 4.52% 6.4 Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment Present Value of Operating Lease Obligations (2013) Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment PV Lease Payment 285.1 225.2 197.1 24.3 44.9 105.3 881.9 Capitalization of Operating Leases Year 1 2 3 4 5 6 & beyond PV of Minimum Payments Operating Leases 60.5 62 56.4 48.9 42.3 272.6 542.7 118 425 Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment Year 1 2 3 4 5 6 & beyond PV of Minimum Payments Present Value of Operating Lease Obligations (2014) Fiscal Years Ending Dec. 31 2015 2016 2017 2018 2019 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments 4.52% 8.8 Lease Commitment 37.6 35.3 32.7 27.3 21.5 21.5 PV Lease Payment 36.0 32.3 28.6 22.9 17.2 123.1 260.1 Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment Year 1 2 3 4 5 6 & beyond PV of Minimum Payments 4.52% 7.9 Lease Commitment 32.299 27.541 27.831 27.066 24.481 24.481 PV Lease Payment 30.9 25.2 24.4 22.7 19.6 127.3 250.1 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding Number of Options Outstanding (shares): Average Time to Maturity (years): Expected Annual Number of Options Exercised: Current Average Strike Price: Cost of Equity: Current Stock Price: Increase in Shares Outstanding: Average Strike Price: Increase in Common Stock Account: Change in Treasury Stock Expected Price of Repurchased Shares: Number of Shares Repurchased: Shares Outstanding (beginning of the year) Plus: Shares Issued Through ESOP Less: Shares Repurchased in Treasury Shares Outstanding (end of the year) 317,800 1.34 237,640 $ 16.14 6.83% $25.01 2016E 2017E 2018E 2019E 2020E 2021E CV 2022 237,640 237,640 237,640 237,640 237,640 237,640 237,640 $ 16.14 $ 16.14 $ 16.14 $ 16.14 $ 16.14 $ 16.14 $ 16.14 3,835,504 3,835,504 3,835,504 3,835,504 3,835,504 3,835,504 3,835,504 $ 0 25.01 $ 2,013 237,640 239,653 0 26.72 $ 2,083 237,640 239,723 0 28.54 $ 2,152 237,640 239,791 0 30.49 $ 2,228 237,640 239,868 0 32.57 $ 2,308 237,640 239,947 0 34.79 $ 2,390 237,640 240,029 0 37.17 2,473 237,640 240,113 VALUATION OF OPTIONS GRANTED IN ESOP Ticker Symbol Current Stock Price Risk Free Rate Current Dividend Yield Annualized St. Dev. of Stock Returns EPD $25.01 2.60% 6.40% 22.58% Number of Shares in Average Average Exercise Remaining Price Life (yrs) 16.14 1.00 16.14 2.00 16.14 1.34 Range of Outstanding Options Range 1 Range 2 Total 0.21 0.11 0.32 B-S Option Value of Options Price Granted in MM $ 8.25 $ 1.74 $ 7.61 $ 0.82 $ 24.11 $ 2.55