Energy Transfer Partners, L.P. (ETP) will report results of operations for 2Q 2013 around August 8, 2013. Cash distribution for 2Q13 will probably be announced around July 24. Distributions have not increased since the second quarter of 2008. This article focuses on whether this is likely to change.
I assume Energy Transfer Equity, Inc. (ETE), ETP's general partner, will leave the current rate of $0.89375 per unit per quarter in place unless it believes a higher number is sustainable. Non-recurring items such as the July 8 sale of 7.5 million AmeriGas Partners L.P. (APU) units at $47.60 per unit will not figure in the calculation.
So the question is whether, putting aside genuinely non-recurring items, there are indicators pointing to growth in cash available for distribution.
Management considers Segment Adjusted EBITDA an important performance measure of the core profitability of ETP's operations. This measure represents the basis of management's internal financial reporting and is one of the performance measures used by in allocating capital resources among business segments. While distributions have been held steady, Segment Adjusted EBITDA for the past 8 quarters has increased, as shown in Table 1 below:
For the past 4 quarters, distributable cash flow ("DCF"), as reported by ETP, has exhibited growth over the comparable prior year period, as shown in Table 2 below:
Readers of my prior articles are familiar with the reasons why DCF a reported by an MLP may differ from what I call sustainable DCF (see "Estimating sustainable DCF-why and how" and a comparison of ETP's definition of DCF to definitions used by other MLPs in an article titled "Distributable Cash Flow"). Because of its definition, DCF can swing widely from quarter to quarter, which is why I prefer to review it on a trailing 12 months ("TTM") basis. However, in the case of ETP there have been several transformative transactions over the past 16 months that limit the value of a TTM review of DCF.
Another indicator I look at that is less susceptible than DCF to subjective interpretations and can help assess ETP's cash generation capability is operating income, plus depreciation, less interest expense, less maintenance capital expenditures. The numbers in Table 3 below are based on ETP's updated, restated and reclassified numbers as they appear in ETP's website (i.e., they fifer from the originally reported numbers and are available only for the past 6 quarters):
Table 3: $ Millions, except per unit amounts
If, based on the 1Q13 numbers in Table 2 and 3, we assume ETP generates ~$600 million of sustainable DCF in 2Q13, the question is - will that support an increase in distributions, and if so by how much? My very rough analysis is set forth below.
First, we must consider that the number of units outstanding has increased significantly since 3/31/13. The two major contributors to this were the sale of 13.8 million units at $48.05 per share on 4/10/13 and the acquisition of ETE's 60% stake in Holdco for $3.75 billion on 4/30/13. Acquisition consideration consisted of $2.35 billion worth of newly issued ETP common units and $1.4 billion in cash. Based on ETP's $49.79 closing price that day, approximately 47.2 million units were issued. In total, units outstanding increased to 369.5 million as of May 1, 2013, up from a weighted average of 301.8 million in 1Q13.
Second, we must consider ETE's Incentive Distribution Rights ("IDR"). At ETP's current distribution rate of $0.89375 per quarter, I calculate ETE's IDR to be $0.52 per unit. This means each unit must generate DCF amounting to $1.414 per quarter in order to be able o distribute $0.89375 to each limited partner.
The third factor to consider is that ETE waived 12 full quarters (8 at 100% and 8 at 50%) of IDR distributions with respect to the ~47.2 million shares issued on 4/30/13.
The fourth factor to consider is payments due to non-controlling interests. Third parties have a claim to a portion of the cash flow generated by ETP's assets because ETP does not always have 100% ownership. For example, Regency Energy Partners L.P. (RGP) owns 30% of the Lone Star venture and is entitled to 30% of the Lone Star distributions (it must, of course, also contribute 30% of investments made in Lone Star). ETP must also make cash distributions to the partners of Sunoco Logistics Partners L.P. (SXL) It is hard to project what this requirement will total in 2Q13; using 1Q13 data ($113 million) I estimate it to be ~$80 million.
Putting all this together: there are ~370 million shares outstanding, of which ~47 million must generate DCF amounting to $0.89375 per quarter ($42 million) and 323 million must generate DCF amounting to $1.414 per quarter ($457 million). Add to that ~$80 million in payments to non-controlling interests and we reach a total of $580 million. Of course, this does not take into consideration the temporary nature of ETE's IDR waiver.
Therefore, I conclude that if ETP sustains or betters the improvements in Segment Adjusted EBITDA and DCF exhibited in 1Q13, we may see a modest distribution increase. For example, a ~3% distribution increase (say to $0.92) would get us to a total DCF requirement of ~$596 million. If DCF and/or operating income, plus depreciation, less interest expense, less maintenance capital expenditures reach the $600 million level in 2Q13, and if Segment Adjusted EBITDA does not deteriorate, we may see a small increase in distributions.
The report ETP will issue at the beginning of August will not contain sufficient information to assess the sustainability of the 2Q13 DCF number. A comparison of reported to sustainable DCF will have to wait a few weeks, until ETP provides the necessary information as part of its quarterly report on Form 10-Q.