This is an update to a prior article dated January 24, 2012, in which I reviewed the distributable cash flows generated by Williams Partners, L.P. (WPZ). Since then results for 4Q11 and full year 2011 have been published, a ~$505 million public offering of 8.05 million units at $62.81 per unit was completed (on January 25), a further 7.5 million of units valued at $465 million were issued, plus $325 million in cash was paid, in connection with the February 17, 2012, Delphi Midstream Partners acquisition, WPZ filed a registration statement with the SEC on March 5, 2012, to sell yet another 7.5 million units, and management provided its outlook for 2012. The unit price has declined from $64.84 to $60.53. WPZ now yields 5.04% (vs. the 5.6% median for large capitalization pipeline master limited partnerships.
The definition of DCF used by WPZ is described in an article titled Distributable Cash Flow (“DCF”). That article also provides, for comparison purposes, definitions used by other master limited partnerships. Using WPZ’s definition, DCF for the 12 month period ending 12/31/11 was $1,650 million ($5.68 per unit), up from $1,164 million in 2010 ($5.45 per unit).
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 WPZ results through December 31, 2011 generates the comparison outlined in the table below:
There do not seem to be material differences between reported DCF and sustainable DCF for the 12 months ended 12/31/11. 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 $204 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 $204 million from sustainable DCF in the prior year period; consequently, the impact on coverage ratios would be as indicated in the table below:
Distributions actually made averaged approximately $0.725 per unit for the 12 months ended 12/31/11, so the $0.7625 distribution declared for 1Q12 (~6% higher) should not significantly reduce the strong coverage ratios. WPZ’s results should give comfort to investors regarding distribution sustainability.
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:
In both 2011 and 2010, net cash from operations, less maintenance capital expenditures, less net income from non-controlling interests, more than covered distributions. The excess was $628 million for 2011 and $703 million in 2010. These excess amounts help fund expansion projects (acquisitions & investments), reducing the reliance on issuance of additional debt and equity.
Having said that, WPZ reported $991 million of capital expenditures in 2011, of which $414 million was for maintenance, but plans on spending ~$2,900 million in 2012, of which $480 million will be for maintenance. Whether acquisitions may add to these totals is not clear. A large acquisition could dwarf these numbers. Recall that Williams Companies, Inc. (WMB), which holds ~ 73% of WPZ limited partnership interests and the 2% general partner interest, bid ~$5.5 billion for Southern Union Gas (SUG) and presumably would have dropped a significant portion of the assets into WPZ had it been successful in bidding against Energy Transfer Equity, Inc. (ETE), the general partner of Energy Transfer Partners, L.P. (ETP).
WPZ announcements so far in 2012 will increase the number of its outstanding units by ~8% vs. the 2011 year-end number. If further unit issuances are required (in addition to debt financings) to meet the 2012 capital expenditure targets, this could put additional pressure on the per unit price. Given past performance and management’s announced expectation of increasing quarterly limited partner cash distributions by ~6% to ~10% annually, buying on pullbacks such as the one that recently occurred may make sense despite the fact that WPZ is trading near its historical highs.