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Analyzing Cash Flows of Master Limited Partnerships

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2014-10-20 16:01

Preliminary Look at Q2 2012 Distributable Cash Flow Generated by El Paso Pipeline Partners

Author: Ron Hiram

Published: July 31, 2012

On July 18, 2012, El Paso Pipeline Partners, L.P. (EPB) reported its financial results for 2Q12. This is EPB’s first report since the acquisition of EPB’s parent, El Paso Corporation, by Kinder Morgan, Inc. (KMI). Revenues and net income were as follows:

Period::
2Q12
2Q11
6M 2012
6M 2012
Operating revenues367383757777
Costs, expenses and other :
Operation and maintenance-100-106-200-202
Depreciation and amortization-45-45-91-90
Taxes, other than income taxes-20-21-42-42
Operating income202211424443
Earnings from equity investments & other45911
Interest and debt expense, net-72-63-144-125
Net income134153289329
Less: attributable to noncontrolling interests-4-27-10-80
Net income attributable to EPB.130126279249

 

Table 1: Figures in $ Millions

On May 24, 2012, contemporaneously with KMI’s acquisition of El Paso Corporation, EPB acquired the remaining 14% interest in Colorado Interstate Gas Company, L.L.C. (“CIG”) and all of Cheyenne Plains Investment Company, L.L.C., which owns Cheyenne Plains Gas Pipeline Company, L.L.C. from El Paso Corporation for $635 million and the assumption of approximately $242 million of proportional debt. The transaction was with approximately $571 million of cash from borrowings under EPB’s revolving credit facility and $64 million of equity from the issuance of common units to El Paso Corporation. The 2Q12 numbers reflect the contributions from CIG and Cheyenne Plains Gas from May 24 through June 30. Despite that, revenues and operating income were down for the quarter and the 6 months ending 6/30/12.

Of the Kinder Morgan entities, only Kinder Morgan Energy Partners has, to date, issued a second quarter 10-Q. My analysis of sustainable Distributable Cash Flow (“DCF”) will be completed after EPB provides additional cash flow information as part of its 10-Q filing expected very shortly. However, some information regarding cash flows for the first two quarters of 2012 and 2011 can be derived from EPB’s July 18 press release:

Period:
2Q12
2Q11
1Q12
1Q11
1H12
1H11
Net income before certain items134153155176289329
"Certain items"
Cheyenne Plains before dropdown-8-15-14-13-22-28
CIG environmental reserve adjst.-6----6-
Loss on write-off of asset11---11-
Project cancellation payment-14---14
Net income before certain items131124141163272287
Less: Net income attributable to Noncontrolling Interests before certain items-4-22-6-48-10-70
Less: General Partner’s 2% interest-2-3-3-2-5-5
Less: GP’s incentive distribution-29-15-21-10-50-25
Depreciation and amortization434243428684
Net income attributable to Noncontrolling Interests before certain items4226481070
Declared distributions to Noncontrolling Interests before certain items--4-8-34-8-38
Other--1-1-1-1-2
Sustaining capital expenditures-8-25-8-20-16-45
DCF before certain items135118143138278256
DCF as reported pre KMINA146170152NA298

 

Table2: Figures in $ Millions

The first item of note regarding Table 2 is that, having become a Kinder Morgan company, EPB now follows the method used by Kinder Morgan Energy Partners LP (KMP) to determine DCF. This method is detailed in an article titled Distributable Cash Flow (“DCF”) which also provides a comparison to definitions used by other master limited partnerships (“MLPs”). I find KMP’s method (now also EPB’s method) of deriving of DCF (what these partnerships refer to as “DCF before certain items”) complex. It also differs considerably from the method used by other MLPs I have covered.

Perhaps more light will b shed on the improvement in DCF cited by management (up $17 million in 2Q12 vs. 2Q11 and up $22 million in 1H12 vs. 1H11) when EPB provides additional information as part of its 10-Q filing. In the meantime, note that the DCF numbers originally reported by EPB in its 1Q12, 2Q11, 1Q11 and 1H11 were higher than those indicated by the press release of July 18. The principal reason for the differences seems to be the “certain items” which reduced the DCF in the past periods and make the current period look better by comparison. The current period also looks better by comparison because maintenance capital expenditures were much lower (management expects $55-60 million in total for 2012 vs. ~$100 million actually spent in 2011 and ~$94 million actually spent in 2010). I am not encouraged by these kinds of positive adjustments and was disappointed to see revenue, operating and income all comparing unfavorably with their corresponding numbers in the prior year periods. The major offsetting negative adjustment is higher incentive distribution paid to the general partner, an item that is not of a onetime nature.

The good news for investors is that EPB increased its quarterly distribution to $0.55, up 15% from the second quarter of 2011 and 7.8% from 1Q12, that management expects 2012 distributions to total $2.25 per unit and to end the year with excess coverage of $80 million. Also, the full impact of the CIG and Cheyenne Plains Gas drop downs has yet to be felt and EPB may benefit from cost reductions initiatives put in place by KMI for all Kinder Morgan companies.  .

I have seen signs of weakness that concern me but continue to hold EPB.

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