Energy Transfer Partners Back On Track

| About: Energy Transfer (ETP)

The master limited partnership space has been in flux since Boardwalk Pipeline (NYSE:BWP) slashed its distribution payout and Kinder Morgan Energy Partners (NYSE:KMP) fell prey to a recent Barron's article. Valuentum members know that we're on high alert at the moment.

That said, let's dig into the fundamental performance of Energy Transfer Partners (NYSE:ETP). The master limited partnership recently reported solid fourth-quarter results February 19. Adjusted EBITDA for increased $38 million from the same period a year ago, to $986 million. Distributable cash flow attributable to the partners of ETP for the quarter totaled $530 million, up $284 million from the same period a year ago. Though the increases in adjusted EBITDA and distributable cash flow were due in part to acquisitions, we're very pleased at the significant improvement in the entity's distribution coverage ratio, which advanced to 1.09x from 0.63x in the same period a year ago.

Image Source: Energy Transfer Partners

As dividend growth investors, we're laser-focused on the distribution coverage, as it reveals both the security of the distribution as well as the excess potential for distribution growth. There's been much talk about the potential risks related to sustaining/maintenance capital spending in the distributable cash flow calculation of MLPs, but we continue to emphasize that we have no reasonable basis to believe that any management team is making up numbers just to bolster the distribution.

Energy Transfer Partners has a Dividend Cushion Score of 2.3, signaling the firm's ability to cover the current distribution with net cash on hand plus future free cash flows (a score below 1 indicates there may be trouble on the horizon). We note that the Valuentum proprietary Dividend Cushion measure for Energy Transfer Partners is based on its ability to continue raising capital in the equity/debt markets for growth projects. This, of course, is never guaranteed, but the likelihood of any liquidity disruptions is minimal, even after recent skepticism brought about by Barron's coverage Kinder Morgan.

Valuentum's Take

Though there is much to like about Energy Transfer Partners' renewed distribution coverage, it's worth reiterating that the hefty distributions that master limited partnerships issue make the group extremely dependent on the healthy-functioning of the capital markets for incremental equity and debt (see below for a breakdown of ETP's capital structure). Still, we don't foresee an event such as that which happened to Boardwalk Pipeline occurring with ETP on the basis of the company's improved distribution coverage. Energy Transfer Partners remains a holding in the portfolio of the Dividend Growth Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: ETP is included in the portfolio of our Dividend Growth Newsletter.