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In 1Q 2012, Magellan Midstream Partners, L.P. (NYSE:MMP) increased its revenues 1.4% vs. the prior quarter and 11.4% vs. 1Q 2011 (by comparison, revenues in 1Q 2011 increased 11.1% vs. 4Q 2010 and were up 34.3% over 1Q 2010). Earnings before interest expense, depreciation & amortization and income taxes (EBITDA) decreased 9.4% in 1Q 2012 vs. the prior quarter but were up 5.7% over the prior year and were in line with consensus estimates for the quarter. MMP's definition of Distributable Cash Flow ("DCF") and a comparison to definitions used by other master limited partnerships ("MLPs") are described in one of my prior articles. Using that definition, DCF for the 12 month period ending 3/31/12 was $468 million ($4.14 per unit), up from $432 million in the TTM ending 3/31/11 ($3.89 per unit).

As always, I first attempt to assess how these DCF figures compare with what I call sustainable DCF for these periods and whether distributions were funded by additional debt or issuing additional units. 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 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 1Q 2012 generates the comparison outlined in the table below:

12 months ending:

03/31/12

03/31/11

Net cash provided by operating activities

520

499

Less: Maintenance capital expenditures

(73)

(47)

Less: Working capital (generated)

-

(27)

Sustainable DCF

446

424

Working capital used

52

-

Risk management activities

(15)

16

Other

(16)

(8)

DCF as reported

469

432

Table 1: Figures in $ Millions

Table 1 presents a clean picture indicating no appreciable difference between reported DCF and what I term sustainable DCF for the two TTM periods.

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

12 months ending:

03/31/12

03/31/11

Distributions to unitholders ($ Millions)

$358

$328

Weighted average units outstanding (millions)

113

111

reported DCF per unit

$4.14

$3.89

Sustainable DCF per unit

$3.95

$3.82

Coverage ratio based on reported DCF

1.31

1.32

Coverage ratio based on sustainable DCF

1.25

1.29

Table 2

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:

03/31/12

03/31/11

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

(109)

(177)

Acquisitions, investments (net of sale proceeds)

(22)

(424)

Other CF from financing activities, net

(7)

-

(139)

(601)

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

89

123

Cash contributions/distributions related to affiliates & non-controlling interests

1

4

Debt incurred (repaid)

171

228

Partnership units issued

-

258

Other CF from investing activities, net

2

-

Other CF from financing activities, net

-

9

262

622

Net change in cash

123

22

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 $89 million in the TTM ending 3/31/12 and by $123 million in the comparable prior year period. 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. Since 3Q 2010, MMP has not sold partnership units and its net income has exceeded distributions in each quarter, relatively rare occurrences in the MLP universe. In addition, it benefits from low cost of capital given there are no general partner incentive distribution rights.

Over the last 8 years MMP has spent ~$2.5 billion on acquisitions and organic growth projects, and currently has $680 million of organic growth projects underway of which it projects spending approximately $500 million in 2012 with additional spending of approximately $180 million in 2013 to complete these projects. Of particular note is the conversion of a large portion of the partnership's Houston-to-El Paso pipeline to crude oil service. At $375 million, this is the largest organic growth project ever undertaken by MMP. The reversed pipeline system will transport crude oil from Crane, Texas to refiners or third-party pipelines in Houston and Texas City, Texas. Based on a successful open season, the capacity is being expanded from approximately 135,000 to 225,000 barrels per day and the entire capacity is fully subscribed with Permian Basin production. The reversed pipeline is expected to be operational by early 2013 and to have a materially favorable impact on MMP's results of operations beginning in 2013.

In 1Q 2012 only ~$25 million was spent on growth capital expenditures, so roughly $475 million remains to be expended during 2012. MMP has been retaining an extraordinarily high level of cash on its balance sheet since 3Q 20Cash and cash equivalents increased from $13 million as of 6/30/11 to ~$210 million at year-end. Although the balance declined to ~$152 million as of 3/31/12 11, it can fund almost one-third of the remaining 2012 growth capital requirements. Long term debt stands at a comfortable 3.3x EBITDA for the TTM ending 3/31/12, so I see no need (barring a major acquisition) for MMP to dilute its unit holders through additional issuances. Management prides itself on being fiscally disciplined and has stated it is unwilling to pay the premiums that other MLPs have been paying for acquisitions.

Management's guidance for distribution growth is 9% for 2012 and 8-10% for 2013. There is no reason to doubt management's ability to achieve that.

One note of caution - MMP's current unit price provides a yield of ~4.85%. Although this is less than the 4.5% as of my prior report on MMP, it is still 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.

Source: A Closer Look At Magellan Midstream Partners' Distributable Cash Flow As Of 1Q 2012