A Closer Look At Magellan Midstream Partners' 2011 Distributable Cash Flow

| About: Magellan Midstream (MMP)

In an article titled, "Distributable Cash Flow ("DCF")," I present the definition of DCF used by Magellan Midstream Partners, L.P. (NYSE:MMP) and provide a comparison to definitions used by other master limited partnerships. Using MMP's definition, DCF for the 12 month period ending 12/31/11 was $461 million ($4.08 per unit), up from $400 million in 2010 ($3.60-$3.65 per unit, depending on which weighted average number of units number is selected). As always, I first attempt to assess how these figures compare with what I call sustainable DCF for these periods and whether distributions were funded by additional debt or issuing additional units.

The generic reasons why DCF as reported by the MLP may differ from sustainable DCF are reviewed in an article titled, "Estimating Sustainable DCF-Why and How." Applying the method described there to MMP results through December 31, 2011 generates the comparison outlined in the table below:

12 months ending: 12/31/11 12/31/10
Net cash provided by operating activities 577.3 424.7
Less: Maintenance capital expenditures (70.0) (44.6)
Less: Working capital (generated) (14.5) -
Less: Net income attributable to non-controlling interests (0.1) (0.4)
Sustainable DCF 492.8 379.6
Add: Net income attributable to non-controlling interests 0.1 0.4
Risk management activities (22.4) 7.8
Other (9.9) (4.2)
DCF as reported 460..5 399.8

Figures in $ Millions

Results for 2011 present a very clean picture. There is no appreciable difference between reported DCF and what I term sustainable DCF. The principal difference relates to risk management activities. Generally I do not generally consider cash generated by risk management activities to be sustainable, although I recognize that one could reasonable argue that bona fide hedging of commodity price risks should be included. The MMP risk management activities seem to be directly related to such hedging, so I could go both ways on this (in which case there would be almost no difference between reported and sustainable DCF).

Coverage ratios appear strong, as indicated in the table below:

12 months ending: 12/31/11 12/31/10
Distributions to unitholders ($ Millions) $351 $319
reported DCF per unit $4.08 $3.65
Sustainable DCF per unit $4.36 $3.47
Coverage ratio based on reported DCF 1.31 1.25
Coverage ratio based on sustainable DCF 1.40 1.19

The simplified cash flow statement in the table below gives a clear picture of how distributions have been funded in the last two years. The table nets certain items (e.g., debt incurred vs. repaid) and separates cash generation from cash consumption.

Simplified Sources and Uses of Funds

12 months ending: 12/31/11 12/31/10
Capital expenditures ex maintenance, net of proceeds from sale of PP&E (121) (172)
Acquisitions, investments (net of sale proceeds) (69) (374)
Other CF from financing activities, net (1) -
(192) (546)
- -
Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions 156 61
Cash contributions/distributions related to affiliates & noncontrolling interests - 4
Debt incurred (repaid) 236 212
Partnership units issued - 258
Other CF from investing activities, net 2 -
394 549
Net change in cash 202 3

Figures in $ Millions

The numbers indicate solid, sustainable, performance. Net cash from operations, less maintenance capital expenditures, less cash related to net income attributable to non-partners exceeded distributions by $156 million in 2011 and by $61 million in 2010. MMP is not using cash raised from issuance of debt and equity to fund distributions. The excess enables MMP to reduce reliance on the issuance of additional partnership units or debt to fund expansion projects. As an aside, 2011 net income more than covered distributions, a relatively rare occurrence in the MLP universe.

MMP spent $198.9 million and $549.8 million on acquisitions and growth projects during 2011 and 2010, respectively, and projects spending approximately $430.0 million in 2012 on projects now underway, with additional spending of approximately $90.0 million in 2013 to complete these projects.

It seems that approximately 50% of the acquisitions and growth projects budgeted for 2012 appears to have already been prefunded because MMP has been retaining an extraordinarily high level of cash on its balance sheet since 3Q11 (for a further drill-down that reviews the breakdown by quarter of the 2011numbers in this report, click here). During that quarter MMP issued, at a premium, an additional $250.0 million of its 4.25% notes due 2021 and generated net proceeds of $258.7 million. Although MMP noted that these proceeds were used to repay $193 million of borrowings outstanding under its revolving credit facility, the fact is cash balance as of year-end totaled approximately $210 million. Management notes there is a pipeline of more than $500.0 million of other potential growth projects in earlier stages of development. Perhaps the high level of cash held indicates management expects some of these may come to fruition sooner rather than later.

Management's guidance for distribution growth is 9% for 2012 and 8-10% for 2013.

One note of caution - MMP's current unit price provides a yield of ~4.5%, one of the lowest of the large capitalization pipeline MLPs.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MMP over the next 72 hours.