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 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.
The tables in this report provide selected performance metrics for the 13 MLPs whose results for the period ending 12/31/12 I have reviewed. Price per unit data is as of 4/19/13 and the closest trading date to April 19, of the two prior years. The trailing twelve months ("TTM") distribution growth compares the most recently declared distribution per unit to the prior-year number.
A comparison of unit prices (current vs. a year ago and two years ago) is provided in below:
Price as of:
Buckeye Partners (NYSE:BPL)
Boardwalk Pipeline Partners (NYSE:BWP)
El Paso Pipeline Partners (NYSE:EPB)
Enterprise Products Partners (NYSE:EPD)
Energy Transfer Partners (NYSE:ETP)
Kinder Morgan Energy Partners (NYSE:KMP)
Magellan Midstream Partners (NYSE:MMP)
Targa Resources Partners (NYSE:NGLS)
Plains All American Pipeline (NYSE:PAA)
Regency Energy Partners (NYSE:RGP)
Suburban Propane Partners (NYSE:SPH)
Williams Partners (NYSE:WPZ)
Table 1: list of MLPs reviewed and unit price comparison
Per unit distribution levels and current yields are depicted in Table 2 below:
Table 2: Distribution yield (current, 1 year ago, 2 years ago)
Twelve and 24 months price appreciation is provided in Table 3:
Table 3: 12 and 24 unit price appreciation
Total returns (price appreciation for the 12 or 24 months ended 4/19/13 plus distributions for the 12 or 24 months ended 12/31/12) are provided in Table 4:
Table 4: Total returns
For the past two years, PAA, MMP, NGLS, and EPD have been the best overall performers of the ~13 MLPs I follow closely.
Year-over-year distribution growth is summarized in Table 5:
Table 5: Distribution growth
Over the three-year period from 2010-2012, the highest distribution growth within these selected was achieved by EPB, MMP, NGLS and WPZ.
Finally, I look at whether DCF covered distributions. Table 6 below compares coverage of distributions using reported DCF vs. sustainable DCF for the TTM ending 12/31/12. It also lays out sustainable DCF coverage as it was one and two years ago:
Table 6: Distribution coverage comparison
For some of these MLPs, the delta between reported and sustainable DCF coverage as of 4/19/13 is quite significant. The underlying reasons are described in the individual analysis I provided for each. The largest deltas are for ETP, EPD, PAA and RGP.
In the case of ETP, a large investment in working capital accounts for the bulk of the difference, as detailed in a prior article dated March 17, 2013. Under ETP's definition, reported DCF always excludes working capital changes, whether positive or negative. In contrast, as detailed in my prior articles, in deriving sustainable DCF I generally do not add back working capital used but, on the other hand, I exclude working capital generated. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the master limited partnerships should, on the one hand, generate enough capital to cover normal working capital needs. On the other hand, cash generated from working capital is not a sustainable source and I therefore ignore it. Over reasonably lengthy measurement periods, working capital generated tends to be offset by needs to invest in working capital. I therefore do not add working capital consumed to net cash provided by operating activities in deriving sustainable DCF.
In the case of EPD, the difference results primarily from proceeds of asset sales, as detailed in a prior article dated March 4, 2013. In the TTM ending 12/31/12 these totaled $1,037 million and were generated principally from the sale of 29 million units of Energy Transfer Equity, LP between January and April, 2012. As readers of my prior articles are aware, I do not include proceeds from asset sales in my calculation of sustainable DCF.
In the case of PAA, as detailed in an article dated March 12, 2013, the divergence was created due to an investment in working capital (similarly to ETP) and because of foreign currency adjustments and losses from derivative activities. Management added back these losses in calculating reported DCF. I do not do so when calculating sustainable DCF.
In the case of RGP, the variance relates to proceeds from asset sales and RGP's substantial, but non-controlling, stakes in joint venture entities. I do not regard proceeds from asset sales as a sustainable source of DCF and therefore exclude them from my definition of sustainable DCF. As for the joint venture entities, I explained my position in an article dated April 18, 2013
These tables illustrate the importance of the selection process when investing in MLPs. 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. Even those that exhibit solid, sustainable, coverage of sustainable DCF sometimes disappoint. 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. There is no formula for selecting MLPs. These tables constitute rear-view mirror parameters that can help put performance in perspective, but must be accompanied by assessment of many additional factors.