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By Siraj Sarwar

Williams Partners (WPZ) is one of the most solid cash-generating master limited partnerships in the business. The partnership offers a trailing yield of 6.32%, which is project to be 6.5% in this year. The company has a strategy to increase its distribution by 8 percent this year and 9% for the fiscal 2013 and 2014. Thus, it is projected to increase its cash distributions from $3.14 per unit in 2012 to a minimum of $3.75 per unit by 2014.

The partnership exhibits both solid profitability metrics and eye-catching valuation metrics. For instance, its stock is trading at a price-to-book ratio of 2.0. The average stock in the peer group trades at a price to book ratio of 2.4 and has a yield of 4.7%.

To determine the company's financial strength for potential distributions, I analyze the distributable cash flows. I also examine its competitors to see where the partnership stands compared to peers.

Distributable Cash Flows

(x1 million)

2012 future guidance

2013 future guidance

2014 future guidance

Low

High

Low

High

Low

High

Net income

$1080

$1180

$1440

$1770

$1950

$2330

Distributable Cash flow

$1460

$1540

$1925

$2225

$2525

$2875

Cash Distributions

$1570

$1601

$1981

$2082

$2304

$2509

Cash Distributions coverage ratio

0.93x

0.96x

0.97x

1.07x

1.10x

1.15x

Lately, the partnership modified its outlook for fiscal 2012, 2013 and 2014. It reduced its earnings guidance for the same period as a result of poor commodity prices. However, the partnership retained its fiscal 2012 distribution of $3.14 per unit. Williams Partners guided that the distribution for fiscal 2013 and 2014 will grow by 9% to $3.43 and $3.75, respectively.

The revenues for the first nine months stands at $778 million. Revenue of the partnership contracted by $209 million compared to the last year. Notably, the company generated huge distributable cash flows of $1.08 billion at the end of first nine months of this year. The distributable cash flows also contracted compared to the last year. In spite of low revenues and cash flows, the partnership increased its cash distribution by 8.0% to 79.25 cents per unit for the Q3 of 2012.

The company has shrunken its fiscal 2012 distributable cash flow goals to $1.4 billion in lower case scenario and $1.6 billion in a favorable situation. Its cash distribution coverage ratio still looks attractive and above peers group. The strong cash distribution coverage enabled the partnership to continue its cash distribution expansion during a period of poor commodity prices.

Williams Partners has issued a large amount of equity during the past year to finance various projects that are at the premature stages of development. The partnership is taking steps to meet $1.9 billion of distributable cash flows for 2013. The projection of distributable cash flows for 2014 is $2.3 billion. Williams Partners contracted its cash flows due to lower-than-predicted natural gas liquid [NGL] prices and larger-than-expected maintenance capital expenditures. WPZ has well-read from the turn-down in the prices of NGL as it shifts towards fee-based businesses. The fee-based business grew by 12% in the Q3 of 2012.

The company is seeking to increase its revenue by acquisitions. Most recently, the partnership made an agreement of acquisition with Williams Companies (WMB). As per agreement, Williams Partners will acquire WMB's 83.3-percent interest in the Geismar olefins production facility. In addition, it will also acquire WMB's refinery-grade propylene splitter and pipelines in the Gulf region, for around $2.36 billion. I believe Gulf Olefins acquisition will shift commodity exposure to ethylene. It will also give more firmness in the cash flows.

Competition

The company's main industry peers are Enterprise Products Partners (EPD) and Calumet Specialty Products Partners (CLMT).

WPZ

CLMT

EPD

Industry Average

P/E TTM

17.6

10

19.5

29.7

P/B

2.0

2.2

3.8

2.8

Trailing Yield

6.32

7.24

4.66

4.7

Rev Growth (3 Yr Avg)%

119.4

8.0

7.7

7.1

EPS Growth (3 Yr Avg)

6.2

-10.1

9.0

-6.5

Operating Margin % TTM

22.8

5.0

7.0

11.1

Net Margin % TTM

13.7

3.9

5.5

4.7

ROE TTM

13.8

25.5

20.4

10.8

Debt/Equity

0.9

1.0

1.1

1.4

Source; Morningstar.com

Williams Partners have a market capitalization of $18.2 billion. Calumet and Enterprise have market capitalizations of $1.8 billion and $48.6 billion. Williams Partners has a yield of 6.20%. Williams Partners has improved its distributions by 8 percent in fiscal 2012 and projected to raise distributions by 9% in fiscal 2013 and 2014. Most MLPs offer high-yields thanks to favorable tax rules. Calumet and Enterprise support yields of 7.24 percent and 4.66 percent, respectively. The average yield in the industry stands at 4.7 percent.

The partnership's most striking metrics are its margins and growth rate compared to its peers. Margins and growth rate give the upper hand to Williams Partners over competitors. It has raised its revenue by 119.1% in the past three years. Enterprise and Calumet increased their revenues by 7.7 percent and 8 percent in past three years. In my view, revenue growth is the vital metric which make or break business models. Williams Partners also looks better in terms of margins.

Final Thoughts

Williams Partners is a great pick for income-seekers. The company is a nifty cash generating machine for retirees. The partnership projected to increase its distributions by 9% in the following two years. Moreover, the addition of olefins production to its business would make a momentous additional income.

The partnership's growth rate and margins are better than most of its industry peers. Williams Partners has projected 90 percent growth in its fee-based business from fiscal 2011 to 2014. I believe the fall in its earnings and cash flow will diminish as the partnership is moving towards fee-based businesses.

Source: Williams Partners: A Nifty Cash Generating Machine For Income Seekers