I sounded a first note of caution regarding Buckeye Partners (BPL) in an article dated December 19, 2011 (price per unit was $63.00), a second note of caution in an article dated February 13, 2012 (price per unit was $62.20), and a third in an article dated April 19, 2012 (price per unit was $54.04). On May 18, 2012 BPL closed at $45.71, a 28.5% decline from the $63.98 price at year-end 2011. This compares to a ~6.8% decline in the Alerian MLP Index on a price-return basis over this period. BPL's distribution yield has increased from ~6.7% to almost 9.1%. But management suspended further distribution increases and this article looks at whether this level of distributions sustainable.
Given quarterly fluctuations in revenues, working capital needs and other items, it makes sense to review trailing 12 months ("TTM") numbers rather than quarterly numbers for the purpose of analyzing changes in reported and sustainable distributable cash flows.
The definition of DCF used by BPL is described in an article titled Distributable Cash Flow ("DCF"). That article also provides, for comparison purposes, definitions used by other master limited partnerships ("MLPs"). Using BPL's definition, DCF for the TTM ending 3/31/12 was $304 million, up from $288 million in the TTM ending 3/31/112010 (per unit comparisons are not meaningful due to the November 19, 2010, merger between BPL, BGH (the general partner),and the general partner of BGH.
The generic reasons why DCF as reported by the MLP may differ from sustainable DCF are reviewed in an article titled Estimating Sustainable DCF-Why and How. Applying the method described there to BPL results through December 31, 2011 generates the comparison outlined in the table below:
|12 months ending:||3/31/12||3/31/11|
|Net cash provided by operating activities||429||305|
|Less: Maintenance capital expenditures||(63)||(35)|
|Less: Working capital (generated)||(47)||(82)|
|Less: Net income attributable to noncontrolling interests||(6)|
|Add: Net income attributable to noncontrolling interests||6|
|Risk management activities||(15)||105|
|DCF as reported||304||288|
Table 1: Figures in $ Millions
Risk management activities presented the major difference between reported and sustainable cash flow for the TTM ending 3/31/11, but there is no appreciable difference between reported DCF and what I term sustainable DCF for the TTM ending 3/31/12. Coverage ratios are provided in the table below:
|12 months ending:||3/31/12||3/31/11|
|Distributions ($ millions)||350.3||226.1|
|DCF as reported ($ millions)||303.6||288.1|
|Sustainable DCF ($ millions)||312.8||187.7|
|Coverage ratio based on reported DCF||0.87||1.09|
|Coverage ratio based on sustainable DCF||0.89||0.83|
I find it helpful to look at a simplified cash flow statement by netting certain items (e.g., acquisitions against dispositions) and by separating cash generation from cash consumption. Here is what I see for BPL:
Simplified Sources and Uses of Funds
|12 months ending:||3/31/12||3/31/11|
|Capital expenditures ex maintenance, net of proceeds from sale of PP&E||(193)||(68)|
|Acquisitions, investments (net of sale proceeds)||(195)||(956)|
|Cash contributions/distributions related to affiliates & noncontrolling interests||(10)||(1)|
|Debt incurred (repaid)||(239)||-|
|Other CF from investing activities, net||-||(22)|
|Other CF from financing activities, net||(6)||(25)|
|Net cash from operations, less maintenance capex, less net income from non-controlling interests, less distributions||16||5|
|Debt incurred (repaid)||-||690|
|Partnership units issued||567||423|
|Other CF from investing activities, net||8||-|
|Net change in cash||(51)||46|
Table 3: Figures in $ Millions
In both TTM periods, net cash from operations, less maintenance capital expenditures, less net income from non-controlling interests covered distributions, but just barely. In February 2012 BPL signed a definitive agreement with Chevron U.S.A. Inc. to acquire the Perth Amboy Facility marine terminal facility for liquid petroleum products in New York Harbor for $260 million in cash. In 1Q 2012 BPL revised upwards its 2012 projected spending on expansion and cost reduction projects from ~$230 million to ~$285 million. Unlike some of the MLPs I have covered, including El Paso Pipeline Partners (EPB), Enterprise Products Partners (EPD), Plains All American Pipeline (PAA) and Targa Resource Partners (NGLS), BPL currently relies solely on debt and equity financing for expansion capital projects and has stated its goal is to fund at least half of these expenditures with proceeds from equity offerings. In 1Q 2012 BPL raised ~$250 million via the issuance of ~ 4.3 million units at $58.65. This amount is close to 50% of the total needed to fund Perth Amboy plus expansion projects, but I estimate BPL will have to offer additional equity, further diluting current limited partners, because its long term debt is 6.6x EBITDA and 4.7x Adjusted EBITDA on a TTM basis. On April 25, 2012 Moody's Investors Service downgraded BPL's outlook to negative from stable stating that its financial leverage is highest in the Baa3-rated midstream MLP peer group and that it leverage is high mostly because of acquisitions paid at high multiples and declining operating performance.
Revenues in 1Q 2012 decreased 5.4% vs. the prior quarter and 5.9% vs. 1Q 2011 (by comparison, revenues in 1Q 2011 increased 22% vs. 4Q 2010 and were up 36.5% over 1Q 2010). Earnings before interest expense, depreciation & amortization and income taxes (EBITDA) in 1Q 2012 decreased 5.9% vs. the prior quarter and were down 5.7% over the prior year period. Adjusted EBITDA in 1Q12 was 12% below consensus, 5.4% below 4Q11 and 5.9% below 1Q11. Although the partnership reported that Distributable Cash Flow in 1Q 2012 increased 1.9% over 4Q11, it was down 15.9% vs. the comparable prior year period. Declining operating performance over the past 5 quarters is also evident from Table 4 below:
|3 months ending:||3/31/12||12/31/11||9/30/11||6/30/11||3/31/11|
|Pipelines & Terminals||88||100||87||84||90|
|Natural Gas Storage||(1)||4||0||(3)||2|
|Development & Logistics||3||2||3||2||1|
|Total Adjusted EBITDA||115||122||127||118||122|
Table 4: Figures in $ Millions
In 2011 BPL missed consensus estimates every single quarter, an unfavorable trend that continued into the first quarter of 2012. Also of concern is the Federal Energy Regulatory Commission (FERC) order of March 30, 2012, that disallowed proposed rate increases on the Buckeye System that would have become effective April 1, 2012. The proposed rate increases were expected to increase BPL's annual revenues (and, I presume, EBITDA) by approximately $8 million. But if forced to resort to FERC's generic rate setting mechanism, the adverse impact goes well beyond forgoing this increase and could have a substantial adverse affect on BPL because it would lower tariffs on pipelines that account for ~70% of BPL's revenues.
On the other hand, there are arguments for taking a risk on BPL at this price level : (i) heating oil volumes in 1Q 2012 were down 32% vs. 1Q 2011 due to lower demand driven by high prices and lower than normal weather; oil prices have declined and if next winter exhibits normal temperatures, performance could improve; (ii) BORCO is being substantially expanded based on robust customer demand; (iii ) management expects the natural gas and development and logistics segments to show improved performance in 2012 over 2011 in its May 15 response to FERC, BPL's suggested an alternative rate setting methodology should FERC reject its arguments for keeping intact the current method and the adverse effect could be mitigated if this alternative is accepted; and (iv) distributions growth is suspended but the current price offers an attractive yield of close to 9%.