Date Published: Apr 9, 2012
In a prior article dated January 2, 2012, I reviewed results for Targa Resources Partners LP (NGLS) for the period ended 9/30/11 and noted that given the rapid growth in revenues and the large fluctuations between 2nd and 3rd quarter working capital needs, it makes sense to redo the analysis based on 12 month numbers rather than draw possibly premature conclusions from the declines in net cash from operations and sustainable DCF. NGLS has since filed its 10-K and it is therefore possible to compare reported to sustainable distributable cash flows for 2011.
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. Using NGLS’ definition, DCF for the 12 month period ending 12/31/11 was $337 million ($4.00 per unit), up from $277 million ($3.91 per unit) in 2010.
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 December 31, 2011 generates the comparison outlined in the table below:
12 months ending:
|Net cash provided by operating activities||400.9||371.2|
|Less: Maintenance capital expenditures||-81.8||-50.4|
|Less: Working capital (generated)||-||-13.1|
|Less: Net income attributable to noncontrolling interests||-41||-24.9|
|Working capital used||24.2||-|
|Risk management activities||23.9||2.6|
|Proceeds from sale of assets / disposal of liabilities||-0.2||-|
|DCF as reported||336.7||277|
Figures in $ Millions
The principal differences of between sustainable and reported DCF numbers in 2011 and 2010 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:
|Distributions ($ millions)||225.2||164|
|DCF as reported ($ millions)||336.7||277|
|Sustainable DCF ($ millions)||278.1||282.8|
|Coverage ratio based on reported DCF||1.5||1.69|
|Coverage ratio based on sustainable DCF (including risk management)||1.34||1.74|
|Coverage ratio based on sustainable DCF||1.23||1.72|
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 distribution increase announced by NGLS in 4Q11 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:
|Capital expenditures ex maintenance, net of proceeds from sale of PP&E||-246.9||-86.6|
|Acquisitions, investments (net of sale proceeds)||-177.7||-|
|Cash contributions/distributions related to affiliates & noncontrolling interests||-18.2||-189.7|
|Debt incurred (repaid)||-||-201.6|
|Other CF from financing activities, net||-6.2||-13.4|
|Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions||93.9||156.8|
|Debt incurred (repaid)||30||-|
|Partnership units issued||304.1||317.8|
|Other CF from investing activities, net||0.3||2.1|
|Net change in cash||-20.7||-14.6|
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 $94 million in 2011 and by $157 million in 2010. 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.
NGLS spent $408 million and $95 million on acquisitions and growth projects in 2011 and 2010, respectively, and projects spending approximately ~$570 million in 2012. The three major capital projects extending through 2013 are:
- The $360 million Cedar Bayou Fractionator expansion project at Mont Belvieu (adding a fourth fractionation train and related infrastructure enhancements);
- The $250 million expansion of the Mont Belvieu complex and the existing import/export marine terminal at Galena Park to export international grade propane; and
- The $150 million North Texas Longhorn project for a new cryogenic processing plant with associated projects.
On January 23, 2012, NGLS completed a public offering of 4 million units at a price of $38.30, raising approximately $150 million. The numbers indicate additional offerings (equity and/or debt) will be required during 2012 even absent a major business acquisition.
Management’s guidance for EBITDA in 2012 is $515-$550 million, about the same level as was achieved in 2011 ($535 million). The high coverage ratios discussed above indicate that a 10%+ growth in distributions in 2012 is sustainable even absent EBITDA growth.