In a prior article dated April 9, 2012, I reviewed 2011 results for Targa Resources Partners LP (NGLS) and noted that management's guidance for EBITDA in 2012 is $515-$550 million, about the same level as was achieved in 2011 ($535 million), that the high coverage ratios indicate that a 10%+ growth in distributions in 2012 is sustainable even absent EBITDA growth, and that even absent a major business acquisition, additional equity and/or debt offerings will be required during 2012 (beyond the January 23, 2012, public offering of 4 million units at a price of $38.30 which raised ~ $150 million) in light of projected capital expenditures of ~$570 million in 2012.
Revenues in 1Q 2012 declined 15% vs. the prior quarter and were up less than 2% vs. 1Q 2011 (by comparison, revenues in 1Q 2011 increased 6% vs. 4Q 2010 and were up almost 9% over 1Q 2010). Given quarterly fluctuations in revenues, working capital needs and other items, it makes sense to review trailing 12 months ("TTM") numbers rather than quarterly numbers for the purpose of analyzing changes in reported and sustainable distributable cash flows.
The definition of DCF used by NGLS is described in an article titled Distributable Cash Flow ("DCF"). That article also provides, for comparison purposes, definitions used by other master limited partnerships ("MLPs"). Using NGLS' definition, DCF for the TTM period ending 3/31/12 was $368 million ($4.30 per unit), up from $272 million ($3.97 per unit) for the TTM period ending 3/31/11.
The generic reasons why DCF as reported by an MLP may differ from sustainable DCF are reviewed in an article titled Estimating Sustainable DCF-Why and How. Applying the method described there to NGLS' results through March 31, 2012 generates the comparison outlined in the table below:
|12 months ending:||3/31/12||3/31/11|
|Net cash provided by operating activities||449||349|
|Less: Maintenance capital expenditures||(87)||(56)|
|Less: Net income attributable to non-controlling interests||(45)||(26)|
|Working capital used||23||7|
|Risk management activities||24||1|
|DCF as reported||368||272|
Table 1: Figures in $ Millions
The principal differences of between sustainable and reported DCF numbers in the two TTM periods are attributable to working capital consumed and risk management activities. As detailed in my prior articles, I generally do not include working capital generated in the definition of sustainable DCF but I do deduct working capital invested. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the master limited partnerships should, on the one hand, generate enough capital to cover normal working capital needs. On the other hand, cash generated from working capital is not a sustainable source and I therefore ignore it. Over reasonably lengthy measurement periods, working capital generated tends to be offset by needs to invest in working capital. I therefore do not add working capital consumed to net cash provided by operating activities in deriving sustainable DCF.
Risk management activities present a more complex issue. 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 NGLS risk management activities seem to be directly related to such hedging, so I could go both ways on this.
Distributions, reported DCF, sustainable DCF and the resultant coverage ratios are as follows:
|12 months ending:||3/31/12||3/31/11|
|Distributions ($ millions)||238||179|
|DCF as reported ($ millions)||368||272|
|Sustainable DCF ($ millions)||317||267|
|Coverage ratio based on reported DCF||1.55||1.52|
|Coverage ratio based on sustainable DCF (including risk management)||1.43||1.50|
|Coverage ratio based on sustainable DCF||1.33||1.50|
NGLS's coverage ratios are robust. The figures are calculated based on distributions actually made during the relevant period, so the coverage ratios do not incorporate the ~3% distribution increase announced by NGLS for 1Q12 and are therefore somewhat, albeit not materially, overstated.
I find it helpful to look at a simplified cash flow statement that nets certain items (e.g., acquisitions against dispositions, debt incurred vs. repaid) and separates cash generation from cash consumption in order to get a clear picture of how distributions have been funded in the last two years
Here is what I see for NGLS:
Simplified Sources and Uses of Funds
12 months ending: 3/31/12 3/31/11 Capital expenditures ex maintenance, net of proceeds from sale of PP&E (288.5) (117.2) Acquisitions, investments (net of sale proceeds) (150.5) (33.6) Cash contributions/distributions related to affiliates & noncontrolling interests (26.0) (170.4) Debt incurred (repaid) - (307.0) Other CF from investing activities, net (0.3) (1.1) Other CF from financing activities, net (4.4) (26.4) (469.7 (655.7) Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions 123.9 114.3 Debt incurred (repaid) 198.7 - Partnership units issued 168.1 479.1 Other CF from investing activities, net 1.7 3.2 Other CF from financing activities, net - 6.8 492.4 603.4 Net change in cash 22.7 (52.3)
Table 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 $124 million in the TTM ended 3/31/12 and by $114 million in the prior year period. NGLS is not using cash raised from issuance of debt and equity to fund distributions. The excess enables NGLS to reduce reliance on the issuance of additional partnership units or debt to fund expansion projects.
Although revenues in 1Q 2012 were up less than 2% vs. 1Q 2011, gross margins and net income were up significantly. EBITDA was up ~35% ($158 million vs. $117 million), so based on first quarter results it seems that this MLP is well on its way to exceeding management's 2012 guidance. Distributions are up 7.8% on a TTM basis.
Investors looking for MLPs with solid, sustainable, DCF coverage plus potential for rapid distribution growth should look at NGLS. My only hesitation is investment timing since the unit price is at an all-time high.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.