Seeking Alpha
, Wise Analysis (348 clicks)
Research analyst, dividend investing, oil & gas, mid-cap
Profile| Send Message|
( followers)  

El Paso Pipeline Partners, L.P. (NYSE:EPB) reported its results of operations for 2Q 2013 on July 17, 2013. This article focuses on some of the key facts and trends revealed by this report. Given the significant quarterly fluctuations in important business parameters, trailing 12 months ("TTM") figures are also reviewed, in addition to the quarterly numbers.

As mentioned in a prior report, the lack of revenue growth shown in Table 1 below is troubling.

(click to enlarge)Table 1: Figures in $ Millions (except % change)

Revenues contracted despite full period contributions by Colorado Interstate Gas Company, L.L.C. ("CIG") and Cheyenne Plains Investment Company, L.L.C., which owns Cheyenne Plains Gas Pipeline Company, L.L.C. ("CPG"). On May 24, 2012, EBD acquired the remaining 14% interest in CIG and 100% of CPG; thus, results for 2Q12 and the TTM ending 6/30/12 include ~6 weeks of contributions from CIG and CPG compared to full period contributions for 2Q13 and the TTM ending 6/30/13. In addition, the Elba Express pipeline expansion project began contributing in 2Q13 (it came online on April 1, 2013). Despite all this, total revenues declined.

Management seems to be doing an excellent job in terms of expense controls, resulting in substantial increases in operating income and EBITDA as shown in Table 2 below:

(click to enlarge)Table 2: Figures in $ Millions (except per unit amounts and % change)

Distributable cash flow ("DCF") dropped in 2Q13, principally due to larger incentive distribution rights ("IDR") payments made to Kinder Morgan Management Inc. (NYSE:KMI), EPB's general partner. However, DCF per unit increased on a TTM basis, as shown in Table 3 below:

(click to enlarge)Table 3: Figures in $ Millions (except % change)

EPB increased its quarterly distribution to $0.63 per unit and reported coverage in 2Q13 will be negative. But the Kinder Morgan entities calculate DCF (and consequently DCF coverage) differently than some of the other MLPs I cover with respect to the general partner's share of DCF (see article dated June 2, 2013). Specifically, EPB reports a DCF number that covers only that portion attributable to limited partners. I prefer to look at total coverage ratio, one that includes all sustainable cash generated by the partnership vs. the distributions made to all the partners (general and limited).

The press release providing preliminary 2Q13 results issued by EPB on July 17 does not contain sufficient information to assess the sustainability of the 2Q13 DCF number. A comparison of reported to sustainable DCF, and calculation of coverage ratios that take into account all sustainable cash generated vs. distributions made to all partners, will have to wait a few weeks until EPB provides the necessary information as part of its quarterly report on Form 10-Q.

In the meantime, I look at another cash flow indicator, one that is less susceptible than DCF to subjective interpretations, to help assess EPB's cash generation capability. Operating income, plus depreciation, less interest expense, less maintenance capital expenditures is shown in Table 4 below:

(click to enlarge)

Table 4: Figures in $ Millions (except per unit amounts and % change)

Although DCF per unit for 2Q13 is lower than the prior year period, the cash flow indicator less susceptible to subjective interpretations improved in 2Q13 vs. the prior year period reflecting reduced operations and maintenance costs. Maintenance capital expenditures continue to be much lower than they were when EPB was part of El Paso Corp. Hopefully the lower levels reflect careful pruning of maintenance expenditures and corners are not being cut.

Table 5 below adds TTM numbers to EPB's July17 press release that provides a reconciliation of net income to reported DCF for 2Q13 and 2Q12:

(click to enlarge)

Table 5: Figures in $ Millions

Table 5 reflects the fact mentioned above that EPB now follows the method used by KMP to determine DCF. This method is detailed in an article titled Distributable Cash Flow ("DCF") which also provides a comparison to definitions used by other MLPs. I find this method of deriving DCF (referred to as "DCF before certain items") complex. It also differs considerably from the method used by other MLPs I cover.

Table 6 below compares KMP's current yield to some of the other MLPs I follow:

As of 07/19/13:

Price

Quarterly Distribution

Yield

Magellan Midstream Partners (NYSE:MMP)

$55.29

$0.50750

3.67%

Plains All American Pipeline (NYSE:PAA)

$56.39

$0.58750

4.17%

Enterprise Products Partners (NYSE:EPD)

$63.65

$0.67000

4.21%

Targa Resources Partners (NYSE:NGLS)

$52.04

$0.69750

5.36%

El Paso Pipeline Partners

$43.04

$0.63000

5.86%

Buckeye Partners (NYSE:BPL)

$71.64

$1.05000

5.86%

Kinder Morgan Energy Partners (NYSE:KMP)

$86.31

$1.32000

6.12%

Williams Partners (NYSE:WPZ)

$52.55

$0.84750

6.45%

Boardwalk Pipeline Partners (NYSE:BWP)

$32.44

$0.53250

6.57%

Regency Energy Partners (NYSE:RGP)

$27.76

$0.46000

6.63%

Energy Transfer Partners (NYSE:ETP)

$51.87

$0.89375

6.89%

Suburban Propane Partners (NYSE:SPH)

$48.40

$0.87500

7.23%

Inergy (NRGY)

$15.77

$0.29000

7.36%

Table 6

EPB increased its quarterly distribution by 15% from 2Q12 to 2Q13 and by ~20% in the TTM period ending 6/30/13. Management projects distributions in 2013 will total $2.55 per unit, up 13% from the $2.25 per unit in 2012, and that EPB will end the year with excess coverage of $25 million. EPB's budget includes the expected purchase (dropdown) of 50% of Gulf LNG from KMI during the second half of 2013. Analysts have estimated a $750 million purchase price for this asset. The long-term debt to LTM EBITDA as of 6/30/13 was 3.6x so the balance sheet can absorb additional debt to fund the acquisition; but I expect EPB will issue additional equity to pay for a portion of that dropdown.

Source: Preliminary Review Of El Paso Pipeline Partners' Results For Q2 2013