Enterprise, Tallgrass Raise Investor Payouts

At a time when most master limited partnerships (MLPs) are holding distributions to investors flat (at best) or reducing the payouts to conserve cash, two have announced that they will raise distributions in 2016. Enterprise Product Partners L.P. (NYSE: EPD), the largest of the MLPs by market cap, and Tallgrass Energy Partners L.P. (NYSE: TEP), one of the smallest, have both announced that 2016 payouts will rise.

Enterprise announced on Monday that management plans to recommend to the company’s board an increase of 5.2% in its annual distribution, from $1.53 in 2015 to $1.61 in 2016. In its announcement, Enterprise CEO Jim Teague said:

Our distribution growth is supported by approximately $6.0 billion of new projects that will begin commercial operations and generate new sources of cash flow during 2016. These projects include our recently completed expansion of the partnership’s LPG export facility on the Houston Ship Channel and the final phase of the Aegis ethane pipeline. One of our long-held financial goals has been to balance consistent distribution growth for our partners with the retention of distributable cash flow to reinvest in the partnership. We expect to successfully execute on this goal again in 2016.

The company also will get a cash injection of $200 million by selling common units to Enterprise Products Co. and its general partner in the first quarter. Enterprise plans to use the proceeds to fund a portion of its growth capital investments and for general company purposes.

The much smaller Tallgrass and its general partner, Tallgrass Energy G.P. L.P. (NYSE: TEGP), announced fourth-quarter distributions of $0.64 per common unit and $0.173 per class A share, respectively. The payments reflect a 32% boost for Tallgrass, compared with its fourth-quarter 2014 distribution, and a sequential increase of 20.1% for the general partner’s payout.
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Tallgrass also said it will acquire an additional 31.3% stake in the Pony Express pipeline for $475 million in cash and 6.52 million common units, increasing its ownership interest in the pipeline to 98%. CEO David Dehaemers Jr. said:

Consistent with our first two Pony Express acquisitions, we expect this transaction to be immediately accretive to unitholders and intend to recommend that our board of directors increase our quarterly distribution for the first quarter of 2016 by at least $0.06 per unit over our distribution of $0.64 per unit for the fourth quarter of 2015. We continue to affirm our previous distribution growth guidance of approximately 20 percent annually from 2015 through 2017.

The energy midstream business has been hit hard by low prices for oil and gas. Kinder Morgan Inc. (NYSE: KMI) cut its dividend by 75% and will use the cash to fund capital projects instead. What Enterprise and Tallgrass appear to have been able to accomplish is to fund capital growth with cash from elsewhere while maintaining dividend growth. This is no small accomplishment and not many more MLPs will be able to follow suit.