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Analyzing Cash Flows of Master Limited Partnerships

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BPL77.36  chart-0.64
BWP16.18  chart+0.17
EPB33.27  chart+0.02
EPD73.15  chart-0.77
ETP55.88  chart-0.22
KMP77.00  chart+0.01
MMP74.19  chart-0.24
NGLS59.9375  chart-1.09
CEQP13.97  chart-0.12
RGP27.29  chart-0.24
PAA57.04  chart+0.04
SPH43.39  chart+0.01
WPZ52.35  chart+0.14
NLY11.40  chart-0.01
AGNC22.38  chart+0.02
2014-04-23 16:00

Model for assessing sustainability of AGNC‘s dividend

REIT logos-AGNC

Author: Ron Hiram

Published: April 15, 2014

In a prior article I outlined a methodology for assessing the dividend sustainability of American Capital Agency Corp. (AGNC), a Nasdaq-listed mortgage real estate investment trust (“mREIT”) with a market capitalization of ~$7.9 billion and assets on the balance sheet as of 12/31/13 totaling ~$76 billion. The conclusion was that a quarterly dividend of $0.80 per common share is not sustainable based on AGNC’s portfolio leverage and interest rate spreads as of 4Q13. I now apply the same methodology to and examine whether AGNC’s reduced dividend (currently $0.65 per quarter) is sustainable in light of the latest available information (4Q13 data) on leverage and interest rate spreads. Continue reading Model for assessing sustainability of AGNC‘s dividend

Methodology for Assessing Sustainability of Annaly‘s Dividend

REIT logos-NLY

 

Author: Ron Hiram

Published: April 10, 2014

In a prior article I outlined a methodology for assessing the dividend sustainability of Annaly Capital Management, Inc. (NLY). The conclusion was that a dividend of $0.35 per common share is not sustainable given NLY’s portfolio leverage and interest rate spreads as of 3Q13. I now apply the same methodology to and examine whether NLY’s current dividend of $0.30 is sustainable in light of the latest available information (4Q13 data) on leverage and interest rate spreads. Continue reading Methodology for Assessing Sustainability of Annaly‘s Dividend

Two-Year Performance Comparison of Selected MLPs

Author: Ron Hiram

Published: March 31, 2014

As an investment class, master limited partnerships (“MLPs”) have been highly correlated with the S&P 500 for the past 2 years. I derived Chart 1 using March 31, 2012 as the starting level for both the Alerian MLP Index, a composite of the 50 most prominent energy MLPs, calculated on a total return basis (“AMZX”), and for the S&P 500 Total Return Index (“S&P500 TR”). I then set both starting points to 1.00 and all subsequent data is presented as a multiple of the March 31, 2012 levels.

Two-Year Performance Comparison of Selected MLPs (3/31/14)

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart 1: S&P 500 and the Alerian MLP Index (Mar 31 2012 = 100)

In the latest two-year period (March 31, 2012 to March 31, 2014), the S&P500 TR and the AMZX registered gains of 38.9% and 33.6%, respectively. But, as seen in Chart 1, the AMZX has significantly underperformed the S&P500 TR since March 2013. Returns from April 1, 2013 to Mar

There are twelve MLPs that I follow fairly closely. Their performance has diverged widely. Table 1 shows total returns for the one-year holding period from April 1, 2013 to March 31, 2014:ch 31, 2014 were 21.9% for the S&P500 TR and 8.5% for the AMZX.

12-months ending March 31, 2014
Price change
Distributions
% Return
Buckeye Partners (BPL)13.364.2829%
Boardwalk Pipeline Partners (BWP)-16.221.7-50%
El Paso Pipeline Partners (EPB)-13.872.55-26%
Enterprise Products Partners (EPD)8.752.7419%
Energy Transfer Partners (ETP)3.373.6114%
Kinder Morgan Energy Partners (KMP)-16.125.33-12%
Magellan Midstream Partners (MMP)14.982.1832%
Targa Resources Partners (NGLS)9.542.8927%
Plains All American Pipeline (PAA)-1.822.381%
Regency Energy Partners (RGP)1.841.8715%
Suburban Propane Partners (SPH)-3.613.50%
Williams Partners (WPZ)-1.163.484%

Table 1: $ per unit, except percent returns

Table 2 shows total returns for the one-year holding period from April 1, 2012 to March 31, 2013:

12-months ending March 31, 2013
Price change
Distributions
% Return
Buckeye Partners (BPL)-2.844.152%
Boardwalk Pipeline Partners (BWP)-3.482.13-4%
El Paso Pipeline Partners (EPB)16.872.2571%
Enterprise Products Partners (EPD)17.092.5746%
Energy Transfer Partners (ETP)-1.63.584%
Kinder Morgan Energy Partners (KMP)15.544.9828%
Magellan Midstream Partners (MMP)24.461.8888%
Targa Resources Partners (NGLS)11.142.6139%
Plains All American Pipeline (PAA)24.482.1683%
Regency Energy Partners (RGP)-21.84-1%
Suburban Propane Partners (SPH)-2.253.433%
Williams Partners (WPZ)-0.083.216%

Table 2: $ per unit, except percent returns

Table 3 shows total returns for a two-year holding period (April 1, 2012 to March 31, 2014):

Table 3: $ per unit, except percent returns

24-months ending March 31, 2014
Price change
Distributions
% Return
per annum
Buckeye Partners (BPL)10.528.4314%
Boardwalk Pipeline Partners (BWP)-19.73.83-28%
El Paso Pipeline Partners (EPB)34.814%
Enterprise Products Partners (EPD)25.845.3131%
Energy Transfer Partners (ETP)1.777.198%
Kinder Morgan Energy Partners (KMP)-0.5810.316%
Magellan Midstream Partners (MMP)39.444.0657%
Targa Resources Partners (NGLS)20.685.532%
Plains All American Pipeline (PAA)22.664.5436%
Regency Energy Partners (RGP)-0.163.716%
Suburban Propane Partners (SPH)-5.866.931%
Williams Partners (WPZ)-1.246.695%
Buckeye Partners (BPL)10.528.4314%

The following table divides the MLPs reviewed into performance groups based on my arbitrary 10% per annum return cut-off point. In Column 1 are the less consistent achievers for the 1-year holding period ending March 31, 2013. In Column 2 are the less consistent achievers for the 1-year holding period ending March 31, 2014. In Column 3 are those that performed consistently (whether well or poorly) in both holding periods:

 
Column 1
Column 2
Column 3
(Mar 2012- 2013)(Mar 2013-2014)Both Years
Total return of 10% per annum or greaterEPB, KMP, PAABPL, ETP, RGPEPD, MMP, NGLS
0%BPL, ETPPAASPH, WPZ
Total return <0% per annumRGPEPB, KMPBWP

Table 4: Rough performance classification

There is, of course, no formula for selecting MLPs. Tables 1-3 constitute rear view mirror parameters that can help put performance in perspective, but must be accompanied by assessment of many additional factors. Nevertheless, they do provide a starting point and, in the case of Table 3, a crude classification system showing, over a two-year period, which MLPs were:

  • Consistently above 10% per annum returns: EPD, MMP, NGLS
  • Consistently positive, but below 10% per annum, returns: SPH WPZ
  • Consistently positive, but below 10% per annum, returns: SPH WPZ
  • Generating consistently negative returns: BWP
  • Showing improved performance, in some cases after expensive acquisitions: BPL, ETP, RGP
  • Showing somewhat poorer performance: PAA
  • Showing significantly poorer performance: EPB, KMP

Distributable cash flow (“DCF”) is a quantitative standard viewed by investors, analysts and the general partners of many master limited partnerships (“MLPs”) as an indicator of the MLP’s ability to generate cash flow at a level that can sustain or support an increase in quarterly distribution rates. Since DCF is not a Generally Accepted Accounting Principles (“GAAP”) measure, its definition is not standardized. In fact, as shown in a prior article, each MLP may define DCF differently.

I use the term sustainable DCF to distinguish my definition from those used by the MLPs. Since “sustainability” is not a clearly defined term, my definition is a subjective one. In that respect, it is not different. But by minimizing deviations from the GAAP term “net cash from operating activities”, I create a measurement tool that I believe provides better consistency in evaluating an individual MLP’s performance. See a prior article for a review of the variety of factors causing reported DCF to differ from sustainable DCF as I calculate it. I then use sustainable DCF as a common yardstick to improve my ability to compare MLPs. Of course, it is by no means a sole yardstick.

A comparison sustainable DCF coverage of total distributions made, including, the general partner’s incentive distribution rights (“IDRs”) for the last three years is provided in Table 5 below:

 
2013
2012
2011
Buckeye Partners (BPL)0.721.030.73
Boardwalk Pipeline Partners (BWP)0.871.020.86
El Paso Pipeline Partners (EPB)1.051.171.46
Enterprise Products Partners (EPD)1.481.151.34
Energy Transfer Partners (ETP)1.030.640.86
Kinder Morgan Energy Partners (KMP)1.081.161.16
Magellan Midstream Partners (MMP)1.431.331.4
Targa Resources Partners (NGLS)0.771.281.23
Plains All American Pipeline (PAA)1.441.071.54
Regency Energy Partners (RGP)0.980.810.99
Suburban Propane Partners (SPH)0.710.720.85
Williams Partners (WPZ)0.850.941.4
Buckeye Partners (BPL)0.721.030.73

Table 5

Note that BPL, EPD and MMP do not make incentive distribution right (“IDR”) payments to their respective general partners. For these 3 MLPs the coverage ratios at the limited partner level and the partnership level are the same. Calculating coverage ratios at the limited partner level for the other MLPs requires several adjustments. I will attempt to show those in a future article.

The highlighted cells show that EPD and MMP are in a class onto themselves as far as sustainable distribution coverage. They also appear in Table 4 as consistently good performers. PAA’s coverage ratios are also very strong.

The deltas between reported and sustainable DCF coverage can be quite significant. The underlying reasons are described in the analysis of the individual MLPs. Some relate to investments in working capital, others to proceeds of asset sales, foreign currency adjustments and losses from derivative activities.

To reemphasize, the selection process for MLP investments is not formula driven. The highest total return performers for the past two years were not necessarily those providing the highest yields. Nor were they necessarily those showing fastest growth in distributions or best coverage ratios. For example, WPZ was a strong performer in 2011 and had one of the highest coverage ratios, but reliance on acquisitions (vs. internally generated growth) and issuances of large amounts of units to finance them drove down the unit price. Likewise, EPB showed strong coverage ratios prior to the acquisition of its general partner by a Kinder Morgan entity. Tables such as those herein can help put performance in perspective, but must be accompanied by assessment of many additional factors.

 

 

MMP - A Closer Look at Magellan Midstream Partners' Distributable Cash Flow as of 4Q 2013

master limited partnership logos-MMP

Author: Ron Hiram

Published: March 25, 2014

This article supplements, and should be read in conjunction with, my preliminary review of 4Q13 results reported by Magellan Midstream Partners, L.P. (MMP). It evaluates the sustainability of MMP’s Distributable Cash Flow (“DCF”) and assesses whether MMP is financing its distributions via issuance of new units or debt. MMP’s definition of DCF is presented in an article titled “Distributable Cash Flow”. The article also provides definitions used by other master limited partnerships (“MLPs”).

MMP’s reported DCF for 2013 was $670 million ($2.95 per unit), up $30 million from management’s guidance for 2013 and up from $540 million ($2.38 per unit) in 2012. Growth in DCF per unit has exceeded growth in distributions, as shown in Table 1 below:

Period:
4Q13
4Q12
2013
2012
DCF237179670540
DCF per unit1.040.792.952.38
Distributions per unit0.590.52.181.88
Change vs. prior year:
DCF / unit32%36%24%17%
Distributions / unit17%23%16%18%

Table 1: Figures in $ Millions (except per unit amounts and % change)

However, reported DCF may differ from sustainable DCF for a variety of reasons. These are reviewed in an article titled “Estimating sustainable DCF-why and how”. Applying the method described there to MMP’s results generates the comparison between reported and sustainable DCF presented in Table 2 below:

Period:
4Q13
4Q12
2013
2012
Net cash provided by operating activities251233773645
Less: Maintenance capital expenditures-21-17-76-64
Less: Working capital (generated)-11-31-16-43
Sustainable DCF220185681538
Risk management activities14-6013
Other30-11-11
DCF as reported237179670540

Table 2: Figures in $ Millions

Table 2 indicates the differences between reported and sustainable DCF in the periods under review are not material.

MMP’s strong coverage ratios are shown in Table 3:

Period:
4Q13
4Q12
2013
2012
Distributions actually made126110475403
Reported DCF237179670540
Sustainable DCF220185681538
Coverage ratio based on reported DCF1.871.631.411.34
Coverage ratio based on sustainable DCF1.741.691.431.33

Table 3: Figures in $ Millions, except ratios

MMP’s 4Q13 DCF and coverage ratios were boosted by significant butane blending on which MMP enjoys strong margins, and by the ramp up of the Longhorn crude oil pipeline.

Table 4 below presents 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

Simplified Sources and Uses of Funds

Period:
4Q13
4Q12
2013
2012
Capital exp. ex maintenance & PP&E sale proceeds-80-96-342-234
Acquisitions, investments (net of sale proceeds)-204-37-465-75
Other CF from financing activities, net0--12-2
-285-134-819-311
Net cash from operations, less maintenance capital expenditures & distributions105106221177
Cash contributions/distributions related to affiliates & non-controlling interests0415
Debt incurred (repaid)191241294247
296361516429
Net change in cash11228-303119

Table 4: Figures in $ Millions

Net cash from operations, less maintenance capital expenditures, exceeded distributions by $221 million in 2013 and by $177 million in 2012. In the periods under review MMP did not issued equity and clearly is not using cash raised from issuance of debt to fund distributions. On the contrary, the excess cash generated constitutes a significant source of capital for MMP and enables it to reduce reliance on the issuance of additional partnership units that dilute existing holders, or issuance of debt to fund expansion projects.

Of these expansion projects, Longhorn (the conversion of a large portion of the partnership’s Houston-to-El Paso pipeline to crude oil service) is of particular note. At $375 million, it is the largest organic growth project ever undertaken by MMP. The reversed pipeline system transports crude oil from Crane, Texas, to refiners or third-party pipelines in Houston and Texas City, Texas. Deliveries of crude oil began in mid-April 2013 and averaged 185,000 barrels per day in 4Q13. Overall, Longhorn generated ~$73 million of incremental revenues in 2013. Its capacity is 90% subscribed (10% of capacity is set aside for spot shippers). MMP plans to expand the capacity of the Longhorn pipeline by 50,000 barrels per day, all fully subscribed. Subject to regulatory approval, the operating capacity of the Longhorn pipeline is expected to reach 275,000 barrels per day by mid-2014.

Another major project is the BridgeTex Pipeline Company, LLC (“BridgeTex”), a joint venture formed in November 2012 by MMP and affiliates of Occidental Petroleum Corporation for the purpose of constructing and operating a 400-mile pipeline capable of transporting 300,000 barrels per day of Permian Basin crude oil from Colorado City, Texas for delivery to MMP’s East Houston, Texas terminal; a 50-mile pipeline between East Houston and Texas City, Texas; and approximately 2.6 million barrels of storage. Completion is expected in mid-2014 and MMP expects to spend a total of ~$600 million for its 50% stake in BridgeTex (of which $250 million had been spent as of 12/31/13). Contracts already at hand are sufficient to generate an 8x EBITDA multiple on this investment, with a significant upside.

In 2013 MMP spent ~$773 million on growth projects, acquisitions and investments in non-controlled entities vs. $365 million in 2012. Management anticipates an additional $550 million will be spent during 2014 to complete current projects. The $192 million purchase of the New Mexico and Rocky Mountain pipelines from PAA was MMP’s major acquisition in 2013. BridgeTex is MMP’s major investment in a non-controlled entity.

MMP’s current yield is lower and its multiple of enterprise value to EBITDA is higher, relative to other MLPs. Table 5 below presents a comparison based on the latest available trailing twelve months (“TTM”) results:

As of 03/25/14:
Price
Enterprise Value (EV)
TTM
EV / TTM EBITDA
EBITDA Guidance
EBITDA
Buckeye Partners (BPL)$73.205.94%62718.2710
Boardwalk Pipeline Partners (BWP)$13.083.06%6899.5650
El Paso Pipeline Partners (EPB)$29.198.91%1,1139.51,200
Enterprise Products Partners (EPD)$68.524.09%4,68517.3-
Energy Transfer Partners (ETP)$53.286.91%2,74612.7-
Kinder Morgan Energy Partners (KMP)$73.207.43%5,165105,900
Magellan Midstream Partners (MMP)$68.223.43%84521.6936
Targa Resources Partners (NGLS)$54.445.49%66113.4750
Plains All American Pipeline (PAA)$53.484.60%2,16811.92,150
Regency Energy Partners (RGP)$26.307.22%47718.6-
Suburban Propane Partners (SPH)$40.618.62%30711.9-
Williams Partners (WPZ)$49.887.16%2,21513.9-

Table 5: EV and TTM EBITDA figures in $ Millions

It would be more meaningful to use 2014 EBITDA estimates rather than TTM numbers, but not all MLPs provide guidance for this year. Of those I follow, the ones that I have seen do so are included in the table.

It is perhaps not surprising to see MLPs that do not pay their general partner incentive distributions (“IDRs”), such as MMP, EPD and BPL, trade at higher multiples. This is because IDRs siphon off a significant portion of cash available for distribution to limited partners (typically 48%). In addition to a favorable structure, MMP has a management team that is disciplined and unwilling to pay the premiums that other MLPs have been paying for acquisitions, an impressive portfolio of growth projects, an ability to generate significant excess cash from operations, and a proven performance track record. On top of all that, MMP has been able to minimize limited partner dilution.

In over three years (since 3Q 2010), MMP has not issued additional partnership units (excluding units issued in connection with compensation arrangements), a significant accomplishment and rare achievement in the MLP universe. This is all the more so given that MMP has done this while keeping its leverage much lower than most MLPs (currently 3.15x EBITDA on a TTM basis). Another impressive performance metric is MMP’s net income per unit. It exceeded distributions per unit in 2013 ($2.56 vs. $2.18 per unit). That too is unusual for an MLP.

Given these factors, I consider MMP to be a high quality MLP and would continue to accumulate on weakness.

BPL - A Closer Look at Buckeye Partners' Distributable Cash Flow as of 4Q 2013

master limited partnership logos-BPL Author: Ron Hiram

Published: March 23, 2014

This article supplements, and should be read in conjunction with, my preliminary review of 4Q13 results reported by Buckeye Partners L.P.  (BPL). I now evaluate the sustainability of BPL’s Distributable Cash Flow (“DCF”) and assesses whether BPL is financing its distributions via issuance of new units or debt.

The generic reasons why DCF as reported by an MLP may differ from what I call sustainable DCF are reviewed in an article titled “Estimating sustainable DCF-why and how”. Applying the method described there to BPL’s results generates the comparison between reported and sustainable DCF presented in Table 1 below: Continue reading BPL – A Closer Look at Buckeye Partners’ Distributable Cash Flow as of 4Q 2013