The 3rd largest MLP by market cap, Energy Transfer Partners (ETP) reported Q4 2010 results that were as expected. The full press-release can be found here . Total distributable cash flow (DCF) for the year was $1.03B which was only about a 7.4% increase from 2009. The Q4’10 declared distribution of $0.895 was unchanged and has been at the same level since Q2 of 2008. Compared to results posted by the other two big boys in the MLP space, KMP and EPD , ETP’s were less than impressive. However, it looks like distribution growth is set to resume at ETP pretty soon.

Over the past two years, ETP has suffered some pretty significant impacts to their core business which I think illustrates the strength and stability potential of MLPs. ETP has the largest intrastate natural gas pipelines in Texas and those pipelines represented the majority of their business up two years ago (57%). Margins in that business have collapsed over the past two years (lower volumes, lower gas prices, and lower intrastate spreads) and earnings in that core business have declined about 25% in that time. During those two years, ETP embarked and two big capital intensive interstate pipeline projects to grow their other businesses. So, not only did their core business decline but they took on some big growth projects, which resulted in big equity issuances. Sounds like a deadly mix, right? During that time they were able to ramp up their other businesses and complete the big projects ahead of schedule so that from 2008 to 2010 their total DCF over that time remained about flat. But due to the increased shares the DCF per unit available to unit holders declined about 24%! They have been able to hold their distributions flat during this time due to the buffer they had in their coverage ratio, about 1.2x in 2008. Their coverage ratio for the full year 2010 ended about 0.96x. It is hard to imagine a worse impact to a pipeline business than what ETP suffered in the last two years – a major recession combined with a fundamental change in their economic model (lower spreads across Texas pipelines) and yet they were able to maintain their dividend.

Going forward it looks like the intrastate business has stabilized. Even though intrastate spreads are low and least volumes are at records. And now their interstate pipelines are starting to kick in. Also, in the last 6 months ETP has announced several new projects in the Eagle Ford shale which will also help them grow. Due to this turn around and positive trends ETP has said they will resume distribution growth soon. They have not said when but I wouldn’t be surprised if they announced a small increase this quarter.

Based on these results how does ETP’s valuation look? Below is my chart comparing historical yields and spreads to the 10yr note for ETP shares.

ETP is trading below its average yield and just below its average spread to the 10 yr note. It has participated in the run-up in MLPs but not as much as others, mainly due to the issues I went through above.  Historically, it has traded at much higher valuations. At its current price it yields 6.56%. When distribution growth resumes it will most likely be in the 3% range this year as the new pipelines ramp to full capacity. Further on down the line I could see them returning to 5% growth. A new investor then would be looking at potential returns of 9.56% to 11.56%. I also think their could be a change in valuation to the upside as investors realize the business is back in growth mode.

In summary, as a current investor, ETP has really tested my patience with the stall in growth, but I am impressed by the resiliency of the business in general. It also think its given me a good insight into how an MLP can combat some pretty tough challenges in their core business. It gives me even greater comfort in my other MLP holdings. For new investors, ETP could make a good core holding in the MLP space depending on their return expectations. It finally looks likes their is growth at the end of the tunnel!

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