Ron Hiram | Aug 06, 2012 02:39AM ET
On August 3, 2012, El Paso Pipeline Partners, L.P. (EPB) provided its quarterly report on Form 10-Q for 2Q12. This is EPB’s first report since the May 24, 2012, acquisition of EPB by Kinder Morgan, Inc. (KMI) (on that date, EPB’s parent, El Paso Corporation, was acquired by KMI). Revenues, operating income and net income were as follows:
In the first half of 2012 and of 2011, the major differences between reported and sustainable DCF are attributable to working capital, non-controlling interests and other items. In deriving reported DCF for the 6 months ending 6/30/12, management added back to net cash from operations $75 million of working capital used (of which ~$70 million attributable to the termination of the accounts receivable sales program). I generally do not add back working capital used, but do deduct working capital generated, from net cash from operations in deriving sustainable DCF. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the MLP should generate enough capital to cover normal working capital needs. On the other hand, cash generated by the MLP through the liquidation or reduction of 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 used to net cash provided by operating activities in deriving sustainable DCF.
Reported DCF for the 6 month period ending 6/30/12 also includes numerous adjustments that reduce reported vs. sustainable DCF by $107 million. The principal components of these are the general partner’s share of net income (~$55 million) and non-cash severance costs (~$29 million). Adjustments relating to net income attributable to non-controlling interest are decreasing due to the acquisition of additional interstate natural gas transportation and terminal facilities (e.g., the remaining 49% interest in each of Southern LNG Company (SLNG) and Elba Express in November 2010, the 28% interest in CIG in June 2011, the remaining 40% interest in SNG in March and June 2011, and the remaining 14% interest in CIG in May 2012).
Coverage ratios are as indicated in the table below:
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 EPB:
Simplified Sources and Uses of Funds
EPB closed at $34.65 on 8/3/12 and, with a $2.20 per annum current rate of distributions per unit, the yield is 6.35%. EPB expects total distributions declared in 2012 to reach $2.25 per unit (i.e., $1.19 per unit in 2H12 vs. $1.06 in 1H12) and to reach ~$2.67 by 2015 (growth of ~ 9% per annum from 2011).
In summary, despite some signs of weakness I continue to hold EPB.
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