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 clearly 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 thirteen MLPs I have reviewed to date. Price per unit data is as of 6/13/12. DCF, earnings before interest, taxes, depreciation & amortization ("EBITDA"), interest expense and long-term debt numbers are as of 3/31/12. The trailing twelve months ("TTM") distribution growth compares the most recently declared distribution per unit to the prior year number.
The 13 MLPs are: El Paso Pipeline Partners (NYSE:EPB); Enterprise Products Partners (NYSE:EPD); Energy Transfer Partners (NYSE:ETP); Plains All American Pipeline (NYSE:PAA); Buckeye Partners (NYSE:BPL); Targa Resources Partners (NYSE:NGLS); Regency Energy Partners (NYSE:RGP); Inergy LP (NRGY); Williams Partners (NYSE:WPZ); Magellan Midstream Partners (NYSE:MMP); Kinder Morgan Energy Partners (NYSE:KMP); Boardwalk Pipeline Partners (NYSE:BWP); and Suburban Propane Partners (NYSE:SPH).
These tables illustrate the importance of the selection process when investing in MLPs. The highest yielders don't necessarily provide the best performance. The best performing MLPs seem to be the more conservatively managed ones -- those with solid, sustainable, DCF coverage, low ratios of long-term debt to EBITDA and high ratios of EBITDA to interest expense.