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Analyzing Cash Flows of Master Limited Partnerships

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2014-09-18 16:00

BPL - Preliminary review of Buckeye Pipeline Partners' 4Q 2103 results

master limited partnership logos-BPL

Author: Ron Hiram

Published: February 12, 2014

Buckeye Pipeline Partners L.P. (BPL) reported its results of operations for 4Q 2013 on February 7, 2014. This article focuses on some of the key facts and trends revealed by this report. Given the significant quarterly fluctuations in important business parameters, full year results are also reviewed, in addition to the quarterly numbers.

As part of its report, BPL management announced an exit from one of its business segments and a realignment of others to reflect the integration of the 20 liquid petroleum products terminals (total storage capacity of ~39 million barrels) acquired from Hess Corporation for $850 million in October 2013. BPL now operates and reports in four business segments. Its two major segments are:

  • Pipelines & Terminals: this is BPL’s largest business unit., transporting refined products principally in the Northeastern and upper Midwestern states on its 6,000-mile pipeline system. It also provides aggregate storage capacity of over 70 million barrels through >100 refined petroleum products terminals owned by BPL. Most of the 20 liquid petroleum products terminals acquired from Hess are now part of this segment. The others (some of the New York Harbor facilities) are part of the new Global Marine Terminals segment.  Pipelines and Terminals accounts for ~73% of BPL’s earnings before interest, depreciation & amortization and income tax expenses (EBITDA).
  • Global Marine Terminals: Provides marine bulk storage and marine terminal throughput services.  It includes the Bahamas Oil Refining Company International Limited (“BORCO”), one of the largest marine crude oil and petroleum products terminals and storage facilities in the world, the Yabucoa terminal (Puerto Rico), the Perth Amboy terminal (New York Harbor), and some of the terminals acquired from Hess. The latter include the St. Lucia terminal (Caribbean) and the Port Reading and Raritan Bay terminals (New York Harbor). This segment incorporates what was previously called the International Operation segment. Global Marine Terminals accounts for ~23% of BPL’s EBITDA.

The Merchant Services segment includes the legacy Energy Services segment, the Caribbean fuel oil supply and distribution business and new merchant activities supporting the terminals recently acquired from Hess. The Development & Logistics segment operates and/or maintains third-party pipelines under turnkey agreements with major oil and gas, petrochemical and chemical companies, and performs certain engineering and construction management services for third parties. These segments account for ~4% of BPL’s EBITDA.

In a prior article I noted management is setting expectations for additional write-offs in the Natural Gas Storage segment. Indeed, BPL just recorded an asset impairment charge of $169 million related to its announced exit from this business. As a reminder, BPL entered it through the ~$440 million Lodi purchase in mid-2007. This acquisition has not proved to be successful. A $170 million goodwill impairment charge was taken in 3Q11 but the segment remained challenged by reduced lease rates, lower capacity utilization, reduced price volatility and lower summer-winter spreads. BPL plans to complete the disposition of this business and its assets in 2014, classified it as discontinued operations in its financial statements, and restated prior period results to reflect this change.

Adjusted EBITDA is the primary measure used by BPL’s management to evaluate each business segment, overall performance, resource & capital allocation, and the viability of, and rates of return on, proposed projects. Prior period numbers were restated so that Adjusted EBITDA now reflects only results of continuing operations, as shown in Table 1 below:

Period:
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2013
2012
Pipelines & Terminals132116108115117112471410
Global Marine Terminals403638353734150129
Merchant Services205692131
Development & Logistics4443341513
Adjusted EBITDA179156154160165151649552

Table 1: Adjusted EBITDA from continuing operations; figures in $ Millions

The increase in Adjusted EBITDA at the Pipelines & Terminals segment for the periods reviewed is driven by several factors, including volume growth, improved margins, lower operating costs, expanded butane blending capabilities and crude-handling services, as well an increase in storage contracts, including those associated with the Perth Amboy Facility acquired in July 2012. Results for 2012 include only 6 months of contributions from Perth Amboy.

Likewise, the increase in Adjusted EBITDA at Global Marine Terminals reflects customer utilization of incremental storage capacity brought online at the BORCO facility. Results for 2012 reflect approximately 2 quarter’s worth of contributions from BORCO’s 2012 expansions (since these were brought online in the second half of 2012). In addition, higher ancillary revenues, including berthing and heating revenue, were generated due to increased customer utilization of the BORCO facilities.

A comparison of Adjusted EBITDA from continuing operations to prior year periods is provided in Table 2:

Period:
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2013
2012
Adjusted EBITDA ($ m)179156154160165151649552
Change over prior year8%3%28%38%41%20%17%14%
Adj. EBITDA per unit1.571.461.451.551.681.546.035.66
Change vs. prior year-7%-5%18%28%34%13%6%6%

Table 2: Adjusted EBITDA from continuing operations

The drop in per unit EBITDA in recent quarters was attributed to the timing of the equity issuance to fund the Hess terminals acquisition. Units were issued in the third and fourth quarters of 2013, yet the assets acquired contributed EBITDA for only 21 days

Distributable cash flow (“DCF”) reported by BPL and distributions for the periods under review are presented in Table 3 below:

Period:
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2013
2012
DCF11896107124118112454386
DCF per unit1.030.91.011.21.21.144.223.95
Distributions per unit1.091.081.061.051.041.044.284.15
Change vs. prior year:
DCF / unit-14%-21%20%56%55%31%7%13%
Distributions / unit5%4%2%1%0%1%3%2%

Table 3: Figures in $ Millions (except per unit amounts and % change)

BPL’s reported DCF coverage for 2013 was 0.99x, an improvement over the 0.95x coverage in 2012. But for the spillover of maintenance capital expenditures from 2012 to 2013 ($71.5 million for 2013 compared with $54.1 million for 2012) and the previously mentioned adverse impact of the units issued in 2H13 in connection with the Hess acquisition, the coverage would have shown further improvement.

In an article titled “Distributable Cash Flow” I present BPL’s definition of DCF and also provide definitions used by other master limited partnerships (“MLPs”). Based on this definition, BPL’s DCF for 2013 was $454 million ($4.22 per unit), up from $386 million ($3.95 per unit) in 2012. 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”. I will calculate sustainable DCF and sustainable DCF coverage, as I define those terms, once BPL provides additional data as part of its Form 10-K for 2013.

BPL has made substantial acquisitions in recent years. These include $1.7 billion for BORCO in 2010, $165 million for Perth Amboy (refined products terminals purchased from BP North America, Inc.) in 2011, $260 million for refined products terminals purchased from Chevron Corp. in 2012, and most recently the $850 million Hess transaction that management estimates will achieve 8x EBITDA in 2015 or ~$106 million. Subtracting ~$38 million of additional cash required for distributions (at the current level) on the 8.6 million units issued to fund the acquisition, and an estimated $20 million of annual interest costs on debt issued to fund the acquisition, and reserving 10% of EBITDA for maintenance capital expenditures (on the assumption this level is sufficient), still leaves an excess that accretes to the benefit of limited partners. All the more so since BPL is not burdened by incentive distribution rights (“IDRs”) payable to its general partner. Acquisitions in this pricey market are generally riskier than internal growth projects and much depends on management’s ability to achieve its projections. As noted with respect to Lodi, that does not always happen.

BPL did not provide guidance for 2014 but did state that numerous projects that came online in 2013 are expected to reach full run rate in 2014, that there are opportunities for additional investments at attractive multiples that could contribute to 2014 and beyond, that results so far this year are encouraging, and that it would consider an accelerated rate of distribution increases in 2014.

BPL trades at a premium (in terms of enterprise value to EBITDA) relative to other MLPs I follow. Table 4 below presents a comparison based on the latest available trailing twelve months (“TTM”) results:

As of 02/11/14:
Price
Enterprise Value (EV)
TTM EBITDA
EV / TTM EBITDA
2014 EBITDA Guidance
Boardwalk Pipeline Partners (BWP)$13.436,5756899.5650
El Paso Pipeline Partners (EPB)$30.0410,6421,1139.61,200
Energy Transfer Partners (ETP)$54.1635,9193,58710
Kinder Morgan Energy Partners (KMP)$80.6954,7515,16510.65,900
Plains All American Pipeline (PAA)$53.2425,6342,16811.82,150
Suburban Propane Partners (SPH)$44.873,89830712.7
Williams Partners (WPZ)$50.0529,4552,29012.9
Targa Resources Partners (NGLS)$53.668,46756215.1
Enterprise Products Partners (EPD)$66.9079,8704,68517
Buckeye Partners (BPL)$74.7311,23362717.9
Regency Energy Partners (RGP)$26.898,59944419.4
Magellan Midstream Partners (MMP)$70.2218,47884521.9936

Table 4: EV and TTM EBITDA figures in $ Millions

EBITDA data in Table 4 is as of December 2013, except for ETP, NGLS, RGP and WPZ that areas of September 2013.

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.

BPL is expensive also on the basis of price per unit to reported DCF per unit. By my calculations this multiple stands at 18.1, higher than EPD (15.3x) and MMP (16.9x). While BPL achieved superior returns for its investors in 2013, I don’t think this current price level is justified.

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