Dividend Growth Newsletter portfolio holding Energy Transfer Partners (ETP) posted solid first-quarter results as the firm continues to benefit from several acquisitions completed in 2012. Adjusted EBITDA more than doubled compared to the same period of 2012, to $956 million, and distributable cash flow increased 77% year-over-year to $622 million.
So far in 2013, Energy Transfer Partners has announced a number of positive events: the acquisition of Holdco from Energy Transfer Equity (ETE); the selling of its interest in the Southern Union Company to Regency Energy Partners (RGP) for cash and Regency units; and that its Sunoco Logistics (SXL) subsidiary entered an agreement to move forward with a liquefied petroleum gas project.
In particular, we're excited about the Mariner South project Sunoco Logistics announced with Lone Star. CFO Martin Salinas added some interesting commentary on the deal, saying:
"…only this week Sunoco Logistics and Lone Star announced the Mariner South project which will further extend our capabilities by integrating SXL's existing Nederland Marine Terminal and pipeline from Mont Belvieu, to Nederland with Lone Star's Mont Belvieu fractionation and storage facilities, creating a world class LPG export/import operation along the U.S. Gulf Coast. This project is expected to be operational in the first quarter of 2015, is a clear example of the value created from the synergies between Sunoco Logistics and Lone Star that will provide an expedited solution to meet the growing customer demand for LPG exports."
Energy Transfer Partners continues to monitor a variety of other projects, and we think the potential for growing distributable cash flow over the long term is great. Unfortunately, ramping up and investing in such projects will likely require significant near-term cash flow, making distribution increases harder for the firm to stomach. Still, we like the growth potential.
On a segment basis, Interstate Transportation and Storage performed exceptionally well thanks to the integration of Southern Union, with adjusted EBITDA growing to $287 million compared to just $90 million during the same period a year ago. On the other hand, Intrastate Transportation and Storage declined 32% year-over-year to $132 million as the segment swung from a hedging gain of $82 million to a hedging loss of $12 million. Gross margins also declined materially to 28.1% compared to 34.9% during the same period a year ago.
Midstream was a tad weaker in spite of higher gross margins, with EBITDA falling 11% year-over-year to $79 million due to higher operating expenses. Still, production continues to rise at the Eagle Ford Shale, and we think midstream opportunities remain plentiful as long as shale carbons keep flowing.
NGL Transportation and Services posted a 60% jump in EBITDA as gross margin dollars improved substantially. Fractionation capacity certainly has room to rise in the next few years, and management believes this segment will ramp cash flow nicely going forward.
Overall, we continue to like the fundamentals driving Energy Transfer Partner's business. Although its near-term capital allocation may tilt towards internal growth initiatives, we think Energy Transfer Partners remains a solid dividend growth option, and we will continue to hold shares in the portfolio of Dividend Growth Newsletter.
Additional disclosure: ETP is included in the portfolio of our Dividend Growth Newsletter.