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The website explains how distributable cash flow (DCF) is defined and why it is important to analyze it and derive a sustainable measure of DCF. Results reported by master limited partnerships (MLPs) are analyzed. comparisons of reported DCF to sustainable DCF are generated, and various coverage ratios and reports analyzing performance are generated. Simplified sources and uses of funds statements are presented to focus readers' attention on key cash flow items. The website also features general articles about MLPs and about other topics of interest to yield-focused investors.

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BPL - What to look for in Buckeye Partners' results for 2Q 2017

 

 

 

 

Author: Ron Hiram

Published: July 24, 2017

Summary:

  • Operating income declined in 1Q17 vs. 1Q16, despite the boost given by the first contribution from VTTI. It is important to see whether this recurs in 2Q17.
  • Per unit, DCF growth has outpaced distributions in 6 of the past 9 quarters, but not in the recent two. It is important to see whether this recurs in 2Q17.
  • Coverage ratios based on reported DCF improved markedly in the latest quarter and TTM period; sustainable DCF in that period also improved, but coverage remained under 1x.
  • BPL used debt and equity to fund $85 million of its distributions in the TTM ended 3/31/17; will this recur for the TTM ending 6/30/17, and to what extent?

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Based on some of the key facts and trends revealed by 1Q17 results reported by Buckeye Partners L.P. (BPL), this article points to several variables investors should closely evaluate when BPL reports results for 2Q17.

BPL is a liquid petroleum products pipeline operator with approximately 6,000 miles of pipeline and a terminal and storage operator with more than 120 liquid petroleum products terminals with aggregate storage capacity of over 115 million barrels. It has three business segments:

  • Pipelines & Terminals: Transports refined products as well as crude oil, principally in the Northeastern and upper Midwestern states. The refined products include gasoline, jet fuel, diesel fuel, heating oil, kerosene, propane, butane, and refinery feedstock and blending components. The pipelines generally operate as a common carrier, providing transportation services at posted tariffs and without long-term contracts. Pipelines and Terminals accounted for ~55% of BPL’s earnings before interest, depreciation & amortization and income tax expenses (EBITDA) in the trailing twelve months (“TTM”) ended 3/31/17.
  • Global Marine Terminals: Provides marine accessible bulk storage blending services, rail and truck loading/unloading, and petroleum processing services. The segment includes facilities in the Caribbean (principally the Buckeye Bahamas Hub, one of the largest marine crude oil and petroleum products terminals and storage facilities in the world), in New York Harbor, in Puerto Rico and in St. Lucia. It also includes Buckeye Texas Partners; a joint venture 80% owned by BPL and 20% by Trafigura AG that owns marine terminal facilities in Corpus Christi, Texas, gathering and storage facilities in the Eagle Ford shale formation, and pipelines from the Eagle Ford to Corpus Christi. Global Marine Terminals accounted for ~43% of BPL’s EBITDA in the TTM ended 3/31/17. On January 4, 2017, BPL acquired a 50% interest in VTTI B.V. (“VTTI”) for $1.15 billion in cash. VTTI owns and operates 13 marine terminals with storage capacity of approximately 54 million barrels of refined petroleum products, liquid petroleum gas and crude oil. The terminals are located in key global energy hubs, including Amsterdam, Rotterdam, Antwerp, the United Arab Emirates, Singapore, and Malaysia.
  • Merchant Services: 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. Accounted for ~3% of BPL’s EBITDA in the TTM ended 3/31/17.

Operating results are summarized in Table 1:

Table 1: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Both operating income and operating income per unit declined in 1Q17 and 4Q16 when measuring each quarter vs. the corresponding prior year period. Results in 4Q16 included the effect of a 6.7% increase in the weighted average number of units outstanding due to the 8.9 million units issued to partially fund the acquisition of the 50% equity interest in VTTI, but did not include any operating income contribution from this acquisition; hence the decline. But operating income the decline in 1Q17 is on both an absolute and per unit basis, and despite the boost given by the first contribution from VTTI. It will be important to see whether this recurs in 2Q17.

BPL’s management uses Adjusted EBITDA, a non-GAAP financial metric, to evaluate each business segment’s overall performance and rates of return on proposed projects. Adjusted EBITDA excludes: a) non-cash expenses such as depreciation and amortization; b) unit-based compensation expenses; and c) items that management deems not indicative of core operating performance results and business outlook.

Adjusted EBITDA is derived as follows:

Table 2: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

As shown in Table 2, Adjusted EBITDA per unit increased in 7 of the past 9 quarters, measuring each quarter vs. the corresponding prior year period. The decline in 4Q16 vs. 4Q15 reflects an increase in the number of units outstanding coupled with the absence of any EBITDA contribution with respect to the 50% equity interest in VTTI. In 1Q17, this equity interest contributed $20.2 million to Adjusted EBITDA.

The depreciation figure added by management in deriving Adjusted EBITDA includes 100% of the depreciation and amortization expense for Buckeye Texas, although BPL’s ownership position is 80%. Buckeye Texas was acquired in September 2014 and owns storage, petroleum processing and marine terminal facilities along the Corpus Christi Ship Channel in Texas. This expense amounted to $17.5 million and $16.8 million 1Q17 and 1Q16, respectively.

For 1Q17 BPL includes, for the first time, its share of VTTI’s Adjusted EBITDA ($28.6 million). The non-GAAP adjustment made by management in deriving Adjusted EBITDA totals ~$20.2 million (arrived at by eliminating BPL’s equity in VTTI’s 1Q17 earnings ($8.4 million) and adding in its place a number calculated by management to equal 50% of VTTI’s Adjusted EBITDA in 1Q17 ($28.6 million). Management only applies this non-GAAP adjustment to VTTI, but not to other equity method investments (for these BPL records just its equity in undistributed earnings or losses, reduced by distributions received). Management justifies the inconsistency based on the size of the VTTI investment.

Adjusted EBITDA by segment is presented in Table 3.

Table 3: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Adjusted EBITDA at the Pipelines and Terminals segment in 1Q17 increased 8.5% vs. 1Q16. The increase was driven by a 2.8% increase in pipeline throughput, a 0.7% increase in terminal throughput, and a 6.9% increase in average pipeline tariffs.

Improved performance at the Global Marine Terminals segment in 1Q17 over 1Q16 primarily reflects the contribution, for the first time, from the acquisition of the 50% interest in VTTI. The segment reported lower processing revenue at Buckeye Texas, lower ancillary revenues, principally due to lower berthing activity, and higher operating expenses. Capacity utilization rates remained very high.

Overall, Adjusted EBITDA in the TTM ended 3/31/17 totaled $1,061 million, up 17.9% on an absolute basis and up 12.3% on a per unit basis vs. the comparable prior year period.

To derive Distributable Cash Flow (“DCF”), BPL deducts from Adjusted EBITDA cash interest payments, maintenance capital expenditures and other items (e.g., taxes). Table 4 shows DCF, distributions and reported coverage ratios:

Table 4: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Table 4 shows that DCF per unit has been increasing at a faster pace than distributions per unit in 6 of the past 9 quarters. But that has not been the case in the two most recent quarters. It will be important to see whether DCF growth in 2Q17 outpaces distribution growth.

DCF is one of the primary measures typically used by a midstream energy master limited partnership (“MLP”) to evaluate its operating results. Because there is no standard definition of DCF, each MLP can derive this metric as it sees fit; and because the definitions used vary considerably, it is exceedingly difficult to compare across entities using this metric. Additionally, because the DCF definitions are usually complex, and because some of the items they typically include are non-sustainable, it is important (albeit quite difficult) to qualitatively assess DCF numbers reported by MLPs.

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 BPL’s results generates the following comparison between reported and sustainable DCF:

Table 5: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

For 1Q17 BPL includes, for the first time, its share of VTTI’s DCF ($20.6 million) based on the non-GAAP adjustment previously described with respect to EBITDA. The actual amount of cash that will flow to BPL from VTTI may differ from management’s calculation. In 1Q17, VTTI declared a dividend of $18.5 million to BPL. I used that amount, rather than the $20.6 million, in deriving sustainable DCF.

Other variances between reported and sustainable DCF result, in part, from differing treatments of working capital cash flows. DCF numbers reported by BPL ignores all such cash flows, while my sustainable DCF calculation deducts cash used for working capital because cash consumed is not available to be distributed. However, despite the apparent contradiction in the methodology, I ignore cash generated by liquidating working capital because I do not consider it a sustainable source. Over reasonably lengthy measurement periods, working capital is typically not a huge consumer of funds for MLPs.

Variances between reported and sustainable DCF also result from risk management activities. These reflect fluctuations in the value of derivatives used to hedge exposure to commodity prices and interest rates. On a quarter-to-quarter basis, BPL’s results can be significantly impacted by these fluctuations. On a TTM basis the impact is typically more muted. Some of the gains and losses related to these cash flows are not reflected in BPL’s statement of operations. Rather, they increase or reduce total equity through the statement of comprehensive income. I do not take these into account when calculating sustainable DCF.

Further variances between reported and sustainable DCF result from a variety of items grouped under “Other”. These include non-cash compensation expenses, amortization of deferred financing costs and debt discounts, hurricane-related expenses, acquisition-related expenses, and other items.

BPL’s business is seasonal. The second and third calendar quarters typically generate lower coverage ratios. Stronger performance is typical of the first and fourth calendar quarters due to the seasonal rebound in heating oil margins and butane blending opportunities. It therefore makes sense to focus more on TTM coverage ratios because the seasonal fluctuations are neutralized:

Table 6: Figures in $ Millions (except Coverage Ratios). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Coverage ratios based on reported DCF improved markedly in the latest quarter and TTM period. Coverage based on sustainable DCF in that period also improved, but remained under 1x. The simplified cash flow statement in Table 7 shows BPL has been funding a portion (albeit small) of its distributions by issuing debt and limited partnership units. this:

Table 7: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Table 7 shows BPL used debt and equity to fund $85 million of its distributions in the TTM ended 3/31/17. I would reduce that shortfall by the $18.5 million dividend to be received from VTTI. But that still leaves a shortfall even though reported DCF was greater than 1x. This apparent contradiction is due to reported DCF being boosted by including proceeds from liquidating working capital (as shown in Table 5). Absent that, coverage for the period would be below 1x, as shown by the sustainable DCF ratio.

Distributions have been increasing at the modest rate of $0.0125 per quarter since 1Q13. In the conference call discussing 1Q17 results, management indicated distributions increases will continue at the same pace in the near term: “we expect to maintain our quarterly distribution growth rate at $0.0125 per limited partner unit throughout the remainder of 2017”.  It also indicated that disclosures regarding VTTI would be limited to BPL’s share of Adjusted EBITDA, BPL’s share of DCF, and the dividend to BPL declared by VTTI. I think this reduces the quality of the non-GAAP numbers provided by management and makes BPL more difficult to evaluate.

Management expects investments in organic growth capital projects to total between $295 million and $345 in 2017. Cash flows from new projects commencing operations and VTTI should bring down the leverage ratio (total debt to adjusted EBITDA) from its 4.5x level as of 3/31/17 and bring a modest improvement in coverage ratios. However, management did sound a note of caution regarding lower operating income from the global marine terminals segment. That segment had benefited from “exceptionally high utilization levels and favorable service rates” and management noted that “while utilization remains high through the first quarter of 2017, we expect changing market conditions and evolving structural flows to have some effect on both utilization and rates as we progress through the balance of year. We anticipate slightly lower utilization starting in the second quarter, partly as a result of being unable to reach an acceptable commercial agreement with a long-term customer” (BPL earnings call transcript, 5/5/17).

I remain long BPL.

 

 

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