- BPL funded distributions in the quarter and TTM ended 3/31/14 by issuing debt and equity.
- Stark differences between reported and sustainable DCF due, in part, to cash consumed by higher inventories and accounts receivable.
- Management’s expected uplift in this year’s cash flows will not occur before the second half of 2014.
- High level of enterprise value to EBITDA relative to EPD and MMP.
- I would not purchase BPL units at their current price level.
Buckeye Partners L.P. (NYSE:BPL) recently reported its results of operations for 1Q 2014. This article analyses some of the key facts and trends revealed by this and prior BPL reports, evaluates the sustainability of BPL's Distributable Cash Flow ("DCF") and assesses whether BPL is financing its distributions via issuance of new units or debt.
BPL now operates and reports in four business segments:
- Pipelines & Terminals: Transports refined products, principally in the Northeastern and upper Midwestern states, on a 6,000-mile pipeline system. Also provides storage capacity of over 70 million barrels through >100 refined petroleum products terminals owned by BPL. Most of the 20 liquid petroleum products terminals (storage capacity of ~39 million barrels) acquired from Hess Corporation (NYSE:HES) ("Hess") are now part of this segment. The others (some of the New York Harbor facilities) are part of the Global Marine Terminals segment. Pipelines and Terminals accounted for ~67% of BPL's earnings before interest, depreciation & amortization and income tax expenses ((EBITDA)) in 1Q14.
- 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). Global Marine Terminals and accounted for ~28% of BPL's EBITDA in 1Q14.
- 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 ~2% of BPL's EBITDA in 1Q14.
- Development & Logistics: 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. Accounted for ~3% of BPL's EBITDA in 1Q14.
Adjusted EBITDA for recent quarters and the trailing twelve months ("TTM") ended 3/31/14 and 3/31/13 is presented in Table 1 below. Adjusted EBITDA, a non-GAAP measure, is one of the primary measures 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. Adjusted EBITDA and DCF eliminate: 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.
Losses from natural gas storage operations are excluded from Table 1. This follows BPL's December 2013 decisions to approve of a plan to divest its natural gas storage segment facility operating in Northern California, classify the segment's assets and liabilities as "held for sale", and adjust prior period results of the natural gas storage segment so that they appear under "discontinued operations". Table 1 therefore reflects only results of continuing operations.
In their first full quarter of operations under BPL, the Hess terminals (acquired in December 2013 for $856.4 million) generated ~$34 million of revenues and ~$18 million of expenses. They exceeded management's expectations and made a meaningful contribution to the increase in 1Q14 Adjusted EBITDA over 1Q13. The favorable comparison was also driven by expanded butane blending capabilities, crude oil handling services, increased demand for heating oil due to the cold winter, and increases in average pipeline tariff rates and longer-haul shipments reported for the Pipelines & Terminals segment. Results for Global Marine Terminals in the TTM ended 3/31/14 reflect a full year's contribution from BORCO's 2012 expansions (brought online in the second half of 2012) vs. approximately 3 quarters' worth of contributions for the TTM ended 3/31/13. In addition, BORCO reported higher revenues from crude oil storage and re-contracting of its largest storage customers on a major, multi-commodity, long-term, storage agreement at higher rates.
Tables 2 compares each period's Adjusted EBITDA on a per unit basis to that of the corresponding prior year period. It indicates very modest growth (2%) in the TTM ended 3/31/14:
The drop in Adjusted EBITDA per unit in recent quarters was attributed to the timing of the equity issuance to fund the acquisition of the Hess terminals. In October 2013 BPL issued 8.6 million units, yet the assets acquired contributed EBITDA for only 21 days during 3Q13 and 4Q13.
BPL's definition of DCF is presented in an article titled "Distributable Cash Flow". The article also provides definitions used by other master limited partnerships ("MLPs"). Based on this definition, DCF reported by BPL for the TTM ended 3/31/14 was $453 million ($4.09 per unit), down from $438 million ($4.40 per unit) in the corresponding prior year period, as shown in Table 3 below:
In the TTM ended 3/31/14 and for the last 3 quarters, DCF per unit declined while distributions per unit increased.
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:
There are significant differences between reported and sustainable DCF for the quarter and twelve months ending 3/31/14. DCF as reported increased, while sustainable DCF in those periods 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 MLP 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 $300 million of working capital consumed to net cash provided by operating activities in deriving sustainable DCF for the TTM ended 3/31/14. Similarly, I do not add the $173 million of working capital consumed to net cash provided by operating activities in deriving sustainable DCF for 1Q14.
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 the TTM ended 3/31/14 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, 3Q11and 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 profit and loss statement. Rather, they increase or reduce total equity through the statement of comprehensive income.
Coverage ratios presented in Table 5 below show dramatic differences between reported and sustainable DCF:
The major source of these large differences is, as seen in Table 4, the treatment of cash consumed by working capital. In Q1 '14 there was a $105 million increase in inventory and a $90 million increase in trade receivables resulting primarily from the expanding Caribbean fuel oil supply and distribution business and the new merchant activities supporting the terminals acquired from Hess in December 2013. By adding back such items management is reducing the variability of DCF. But my view is that these are normal business requirements that reduce cash generated by operating activities. Therefore they cannot be deemed available for distribution to partners. I prefer the DCF to more closely track the sustainable cash generated even if it means having to deal with lumpy results.
Readers who disagree can recalculate the coverage ratio after adding $195 million to sustainable DCF in the quarter and $300 million to the TTM ended 3/31/14. The resulting coverage would still be thin at 1.02x for 1Q14 and 0.81 for the TTM ended 3/31/14.
Note that BPL reported 4Q13 and 2012 coverage ratios at 1.03 and 1.21, respectively, i.e., lower than the 1.05 and 1.25, respectively, shown in Table 5. This is because the Table 5 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 2Q14).
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 and in 1Q14. Management expects increases of no more than this same modest amount of $0.0125 per unit per quarter over the next few quarters.
Table 6 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 6 indicates that in the quarter and more significantly the TTM ended 3/31/14, BPL funded distributions by issuing debt and equity. Net cash from operations, less maintenance capital expenditures fell short of covering distributions by $191 million in 1Q14 and by $383 million in the TTM period ending 3/31/14. In addition, as previously noted, Table 5 shows sustainable cash flows declined in the periods under review and coverage ratios based on sustainable cash flows deteriorated.
Table 7 below provides selected metrics comparing BPL to some of the other MLPs I follow based on the latest available TTM results.
As of 05/23/14:
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 (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 7: Enterprise Value ("EV") and TTM EBITDA figures are in $ Millions; BWL, NGLS, RGP and SPH TTM numbers are as of 12/31/13; others as of 3/31/14. Source: company 10-Q, 10-K, 8-K filings and author estimates
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.
It not surprising to see MLPs that do not pay their general partner incentive distributions ("IDRs"), such as BPL, EPD and MMP, trade at higher EBITDA multiples. This is because IDRs siphon off a significant portion of cash available for distribution to limited partners. BPL, EPD and MMP are not burdened by IDRs while others typically pay 48% at the margin.
Management expects distribution coverage to fall below 1 in 2Q14 but a strong rebound in the second half of 2014. Overall, it is highly confident of an appreciable uplift in cash flows for the full year 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 (5.0x debt to TTM EBITDA as of 3/31/14), DCF coverage in the latest quarter and TTM was, at best, weak; and BPL funded distributions by issuing equity and debt. On top of that, its enterprise value to EBITDA ratio is higher than EPD's and not much lower than MMP's. Although BPL's current yield is higher, I believe its value proposition is not nearly as compelling.
Disclosure: I am long EPB, EPD, ETP, MMP, PAA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.