UPDATE: Analyst Actions: El Paso Pipeline Partner Downgraded, But Target Up At Credit Suisse; Shares Down 2%, But High End of Yr Range
Distribution Growth Priced In: We are downgrading EPB to Neutral (from Outperform) on valuation. We are projecting decelerating distribution growth as EPB absorbs dropdowns from KMI. Our three-year CAGR of distributions is roughly 5.5%. While we believe upside remains over the next 12 months, in our opinion it is not enough to keep us at Outperform given its current level.
Minor Changes to Outlook: We made minor adjustments to our FY2013 outlook with DCF/unit falling by $0.04 to $2.71 while EBITDA drops just $4mm to $1.158B after entering actual operational data from the 10-K. Our estimates assume dropdown of the remaining 50% of the Gulf LNG asset from KMI at the end of 2Q:13.
Raising TP to $44 (from $43): Despite our rating downgrade, we are raising our TP by $1 to $44 as we believe EPB will trade at a slight premium to the AMZX given its highly predictable cash flows and distribution growth largely in-line with the sector. Applying a combination of a target yield range 5.75%-6% in combination with a 3-stage DDM, and yield vs growth regression, we obtain a valuation range of $43-$45. Assuming $2.55 in distribution over the next 12 months, we expect total return of 9%-13% which is still solid but not enough to keep us at Outperform. We are revising our 2013/2014/2015 EPU estimates to $2.14/$2.05/$2.08 (from $2.13/$2.00/$1.93) respectively
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