- Outstanding returns for unit holders in 2013, but operationally a less convincing performance.
- BPL funded 2013 distributions by issuing debt and equity.
- Sustainable cash flows declined in 2013 vs. 2012 and coverage ratios based on sustainable cash flows deteriorated.
- Management projects appreciable uplift in cash flows in 2014 from past growth capital expenditure projects.
- Relatively high level of enterprise value to EBITDA.
This article supplements, and should be read in conjunction with, my preliminary review of 4Q13 results reported by Buckeye Partners L.P. (NYSE:BPL). I now evaluate the sustainability of BPL's Distributable Cash Flow ("DCF") and assess 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:
There are significant differences between reported and sustainable DCF for the quarter and twelve months ending 12/31/13. DCF as reported increased in 2013 while sustainable DCF deteriorated. The differences relate primarily to the treatment of working capital and to risk management activities.
Under BPL's definition, reported DCF always excludes working capital changes, whether positive or negative. In contrast, as detailed in my prior articles, I generally do not include working capital generated in the definition of sustainable DCF but I do deduct working capital invested. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the master limited partnerships should 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 the $74 million of working capital consumed to net cash provided by operating activities in deriving sustainable DCF for 2013.
The risk management item reflects large fluctuations in the value of derivatives used to hedge exposure to commodity prices and interest rates. BPL's results can be significantly impacted by these fluctuations. The cash outflow on risk management activities in 2013 relates principally to a $62 million payment to terminate interest rate swap agreements in connection with BPL's issuance in June 2013 of $500 million 4.15% notes due July 1, 2023. Management's reported DCF number is higher than my sustainable DCF number in part because management adds back this cash outflow, while I do not. Having reviewed the history of similar types of cash outflows, I conclude it is hard to argue that they reflect events of a "one-time" nature. For example, risk management cash outflows in excess of $70 million were recorded in 2Q13, 3Q11 and 1Q11; a cash inflow in excess of $70 million was recorded in 4Q11. 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.
Coverage ratios are presented in Table 2 below:
Coverage based on DCF as reported by management improved in 2013 vs. 2012. However, coverage based on sustainable DCF declined, reflecting a reduction in cash generated by operating activities.
Note that BPL reported 4Q13 and 2012 coverage ratios at 0.94 and 0.99, respectively, i.e., lower than the 0.96 and 1.06, respectively, shown in Table 2. This is because the Table 2 ratios are based on what was actually distributed in these periods, while BPL's coverage ratio is based on what was declared (a portion of which will have actually been distributed in 1Q14).
Distribution growth has been slow. Following zero growth in the 5 quarters ending 12/31/12, the rate was increased by 1.25 cents per unit each quarter in 2013. Management expects increases of no more than this same modest amount of $0.0125 per unit per quarter over the next few quarters.
Management characterized 2013 performance as "terrific" both financially and operationally. Financially indeed it was. BPL's unit price increased from $45 to $71 per unit during 2013. Including distributions, a unit holder's return in 2013 was ~ 67%. Operationally, BPL's performance was less convincing. As detailed in the preliminary review previously referred to above, some operational parameters did indeed improve (particularly operating income per unit and EBITDA per unit). DCF coverage, as reported by management, also improved.
Table 3 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
Table 3 indicates that despite the improvements, in 2013 BPL funded distributions by issuing debt and equity. Net cash from operations, less maintenance capital expenditures fell short of covering distributions by ~$115 million in 2013 and by ~$50 million in 4Q13. In addition, as previously noted, Tables 1 and 2 show that sustainable cash flows declined in 2013 vs. 2012 and that coverage ratios based on sustainable cash flows deteriorated.
Table 4 below presents a comparison of BPL to other MLPs I follow based on selected parameters for the latest available trailing twelve months ("TTM") results:
As of 03/21/14:
EV / TTM EBITDA
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 4: Enterprise Value ("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.
Management reported a positive development regarding the Federal Energy Regulatory Commission (FERC) matter dating back to a March 2012 FERC order disallowing proposed rate increases and challenging BPL's method of determining such increases. Had BPL been forced to resort to FERC's generic rate setting mechanism, the adverse impact could have been substantial, as BPL would have been forced to reduce rates on key pipelines. The resolution of a significant portion of this matter allows BPL to resume tariff increases in mid-2014. However, tariffs on BPL pipelines serving the New York City airports remain subject to the ongoing FERC matter.
Management expects an appreciable uplift in cash flows in 2014 from past growth capital expenditure projects, including from the crude-by-rail Perth Amboy activities and full-year contribution from the BORCO expansion. Despite this, I would not purchase BPL units at their current price level. BPL has not been generating excess cash that could help fund its capital expenditures, its level of debt is relatively high (4.9x debt to TTM EBITDA as of 12/31/13), DCF coverage in 2013 and the latest quarter was weak, it funded distributions from non-sustainable sources, and its enterprise value to EBITDA ratio is relatively high.