Energy Transfer Partners (ETP) announced solid second quarter results marked by nice growth in distributable cash flow (DCF). Because of its many acquisitions, revenue was significantly higher than the prior-year period at $11.6 billion, in-line with consensus expectations. Earnings per share were also significantly higher year-over-year at $0.53, which is also far better than consensus estimates.
Ultimately, for a yield instrument like Energy Transfer Partners, cash flow metrics are far more important than headline numbers. After the Linn Energy (LINE) distributable cash flow debacle, ETP has improved its distributable cash flow reporting, providing investors with DCF attributable to the partners of ETP. This excludes DCF attributable to Sunoco Logistics (SXL), as well as DCF attributable to Regency. We applaud the move to more transparent reporting, and it should provide a more accurate picture of distribution coverage.
DCF attributable to partners of ETP increased 40% year-over-year to $442 million thanks to cash flow from new acquisitions that didn't occur in the prior year. The coverage ratio for the second quarter was 0.94x-not ideal, but certainly not low enough to elicit panic. ETP is investing a lot through the course of 2013, and while the short-term investment will weigh on cash flow, the new projects should generate strong cash flows and lead to longer-term distribution growth.
ETP recently spent a bundle to convert part of the Trunkline natural gas pipeline to a crude oil pipeline. CEO Mackie McCrea declared an open season on shipments, saying on the conference call:
"We are continuing to negotiate with shippers to accommodate the shippers requested to deliver the barrels to the premium market and so we anticipate that extending to probably the end of September and we are very optimistic that we will fill up that pipeline where the initial market will be, whether it's St. James or another market remains to be seen, but things are going well from a financing perspective.
We very likely will have a partner with that being SXL, bringing their expertise and their financial balance sheet, very likely will play a large role but that will be determined as time goes on after we see the project is initially and the commitments that we have."
As ETP is able to fill these pipelines with crude, we should see a nice increase in revenue and cash flow generation.
Another positive development for distribution growth came from the firm exchanging 50% of its interest in Sunoco Logistics to Energy Transfer Equity (ETE) for 50.16 million ETP units that were owned by ETE. The transaction lowers ETP's unit count by a whopping 13.5% (think of it along the lines of a stock buyback). This lowers the total distributions required, allowing ETP to raise its distribution $0.01 per unit in the third quarter with potential for more distribution increases in the future. After this transaction, distribution coverage jumps to 1.05x.
We were somewhat disappointed by distribution coverage at ETP, but the transaction with Energy Transfer Equity solidifies coverage and gives unit holders some breathing room. Overall, we're optimistic about distribution growth heading into the back half of 2013, and we continue to hold units in the portfolio of our Dividend Growth Newsletter.
Additional disclosure: ETP is included in our Dividend Growth portfolio.