elliot_mllr

On EPS and MLPs

Moreover, depreciation is a P & L charge, as are depletion allowances, but when a new capital asset is needed (pipeline, refinery, etc.) that is a balance sheet item and does not impact the P & L or DCF. That capital asset is paid for by debt, new equity or a combination of those.


On Nov 01 02:52 PM Elliott Gue wrote:

> Thanks for the comment. There are refineries in the US that have
> been in operation for a century, long beyond what would be considered
> the useful life of such an asset. However, over the years, every
> piece of this equipment has been replaced and upgraded, likely several
> times.
>
> To use your example, the effect would be the same as you replacing
> every part of your car gradually over time including the body itself.
>
>
> Maintenance expenses from an MLP are designed to reflect normal replacement
> and upgrading of equipment surrounding the asset over time. It's
> likely that these pipelines will not be replaced if, by replacement,
> you mean totally dismantled, scrapped and rebuilt.
>
> Adding back depreciation and then factoring in a maintenance expense
> that reflects the need for ongoing replacement and upgrading is the
> most relevant measure of an MLP's earnings power in my view. Of course,
> as I noted in the article, one has to account for the reasonableness
> of the maintenance expenses the particular MLP uses to calculate
> DCF.