A Closer Look At Williams Pipeline Partners Distributable Cash Flow

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 |  About: Williams Partners L.P. (WPZ), Includes: BPL, CMLP, EPB, EPD, ETP, PAA
by: Ron Hiram

In prior articles I reviewed a variety of factors causing distributable cash flow (DCF) as reported by the MLP to differ from sustainable DCF as I calculated it. These include cash generated from working capital, asset write-downs, risk management activities, proceeds from asset sales, amounts attributable to non-controlling interests, transaction expenses, incentives paid to bondholders for early debt repayment, and other factors. Having applied my method to Buckeye Partners, L.P. (NYSE:BPL), El Paso Pipeline Partners, L.P (NYSE:EPB), Enterprise Products Partners L.P (NYSE:EPD), Energy Transfer Partners, L.P. (NYSE:ETP), Inergy L.P. (NRGY) and Plains All American Pipeline, L.P. (NYSE:PAA), I will now focus on how the sustainable DCF generated by Williams Partners L.P. (NYSE:WPZ) compares with its reported DCF.

The analysis begins with the table below:

9 months ending:

9/30/11

9/30/10

Net cash provided by operating activities

1,517

1,412

Less: Maintenance capital expenditures

(288)

(197)

Less: Working capital (generated)

(71)

(177)

Less: Net income attributable to noncontrolling interests

-

(16)

Sustainable DCF

1,158

1,022

Add: Net income attributable to noncontrolling interests

-

16

Working capital used

-

-

Risk management activities

-

-

Proceeds from sale of assets / disposal of liabilities

-

-

Other

48

(209)

DCF as reported

1,206

829

Click to enlarge

Figures in $ Millions

There do not seem to be material differences between reported DCF and sustainable DCF for the 9 months ended 9/20/11. For the prior year period, the $16 million item represents a net loss attributable to joint ventures which is added back to reported DCF but which, in order to be conservative for purposes of calculating sustainable DCF, I treat as a cash loss and therefore do not add back. The $209 million item in the prior year period relates to cash generated by assets prior to their purchase by the MLP. Since these assets did not belong to WPZ at the time, the cash they generated was deducted in deriving reported DCF. I have no problem with excluding the $209 million from sustainable DCF in the prior year period; consequently, the impact on coverage ratios would be as indicated in the table below:

9 months ending:

9/30/11

9/30/10

Distributions to unitholders ($ Millions)

830

410

Coverage ratio based on sustainable DCF (ex $209m in 2010)

1.40

1.98

Coverage ratio based on reported DCF

1.45

2.02

Click to enlarge

These figures are calculated based on distributions actually made during the relevant period. WPZ has been increasing its distribution per unit so these coverage ratios may be somewhat overstated. Distributions actually made averaged approximately $0.72 per unit for the 9 months ended 9/30/11, so the $0.7625 distribution declared for 1Q12 (~6% higher) should not significantly reduce the robust coverage ratio.

I find it helpful to look at a simplified cash flow statement by netting certain items (e.g., acquisitions against dispositions) and by separating cash generation from cash consumption.

Here is what I see for WPZ:

Simplified Sources and Uses of Funds

9 months ended:

9/30/11

9/30/10

Capital expenditures ex maintenance, net of proceeds from sale of PP&E

(310)

(325)

Acquisitions, investments (net of sale proceeds)

(468)

(3,876)

Cash contributions/distributions related to affiliates & noncontrolling interests

-

(18)

Other CF from investing activities, net

-

(14)

Other CF from financing activities, net

-

(6)

(778)

(4,239)

Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions

399

614

Cash contributions/distributions related to affiliates & noncontrolling interests

-

-

Debt incurred (repaid)

311

3,164

Partnership units issued

16

400

Other CF from investing activities, net

6

-

Other CF from financing activities, net

2

-

734

4,178

Net change in cash

(44)

(61)

Click to enlarge

Figures in $ Millions

Net cash from operations, less maintenance capital expenditures, less net income from non-controlling interests fell more than covered distributions in both periods. The excess was $399 million for the 9 months ended 9/30/11 and $614 million in the prior year period. The reduction in the excess amount is not a cause for concern because it is not due to operational reasons but rather to the significant increase in amounts distributed to WPZ's partners. These excess amounts help fund expansion projects (acquisitions & investments), reducing the reliance on issuance of additional debt and equity.

WPZ's results should give comfort to investors regarding distribution sustainability.

Disclosure: I am long BPL, EPB, EPD, ETP, PAA.