On Tuesday, energy pipeline operator and Dividend Growth portfolio holding Energy Transfer Partners (ETP) reported solid third-quarter results. Adjusted EBITDA totaled $942 million in the quarter, up $282 million from past year’s period, while distributable cash flow totaled $527 million, up $149 million from the year-ago quarter. Income from continuing operations in the third quarter also showed a nice increase of $185 million over the same period last year, to $391 million. Though strategic acquisitions in 2012 (including Sunoco) bolstered year-over-year comparisons, we were extremely impressed with ETP’s distribution coverage ratio of 1.14 in the quarter, which compares to 0.97 in the year-ago period (1). ETP recently increased its quarterly distribution to $0.905 per unit, but with coverage ratios as robust as the one in this year’s quarter, future distribution increases should be expected.
Image Source: Energy Transfer Partners
(1, h) ETP’s distribution coverage ratio is calculated as distributable cash flow attributable to the partners of ETP divided by net distributions to the partners of ETP. The Valuentum Dividend Cushion measure is a variant of such a measure, factoring in the limited partner’s flexibility to access the capital markets by issuing equity in future periods. We believe both measures should be used together to ascertain the underlying strength of a master limited partnership’s future distribution.
Valuentum’s Take
Energy Transfer Partners’ distribution growth has returned to life after years of being dormant. The company’s recent acquisitions (ETE’s 60% interest in ETP Holdco) have facilitated a distribution coverage ratio in the third quarter that hasn’t been this high in some time. ETP continues to invest primarily in fee-based midstream and NGL projects that will further improve distributable cash flow in coming periods. We believe ETP has an attractive portfolio of assets (it owns and operates approximately 43,000 miles of natural gas, natural gas liquids, refined products, and crude oil pipelines), and the master limited partnership remains a core holding in the portfolio of our Dividend Growth Newsletter.