A Ranking Protocol For The MLP Space

Jul. 20, 2012 12:10 PM ETBWP, EPB, EPD, ET, KMP, KMR, OKE, SEP, TCP, WPZ38 Comments
Philip Trinder profile picture
Philip Trinder

There are unique aspects of Master Limited Partnerships ("MLP") that warrant a more specialized approach when it comes to comparing various MLP investment choices:

  • As a Limited Partner ("LP") unitholder you need to remain cognizant of the amount of cash flow that is being paid to the General Partner ("GP") under the Incentive Distribution Right ("IDR") structures.
  • The amount of the LP distribution that is effectively tax deferred varies across the space.
  • The Distribution Coverage Ratio ("DCR" = Trailing Twelve Month ("TTM") Distributable Cash Flow divided by TTM Limited Partner and General Partner Distributions) is a relative indicator of the safety of the distribution (i.e. if it is less than 1.0x that is a red flag).
  • The DCR is also a relative indicator of potential forward distribution growth (all else being equal an MLP with a consistently higher DCR can more comfortably grow its distributions).

One approach to using MLP specific analysis and ratios involves the following:

3YR FYAT: The 3 Year Forward Yield After Tax ("3YR FYAT") is calculated by projecting the forward distributions after tax for each MLP taking into account the estimated growth rate of their distributions and the estimated portion of the distributions that will be tax deferred and for simplicity sake assuming the highest tax bracket (35% for now, I do know that will change unless Congress extends it before year end, but for now the assumption remains flat at 35%, also the potential end of those tax cuts is comparatively less detrimental to MLP investors when compared to the larger relative increase in C-Corp cash dividend tax rates). The sum of the projected distribution stream after estimated taxes is then divided by the current LP unit price.

Valuation Coverage Ratio ("VCR"): The VCR compound ratio is calculated by taking the Total Enterprise Value ("TEV" = total

This article was written by

Philip Trinder profile picture
President of MLP Protocol, investor, trader, and proponent of Master Limited Partnerships. Also on Twitter as @MLP_Protocol. The primary driving force behind 99%+ of the activity on Seeking Alpha appears to be investors' confirmation bias. Do you want to be part of the 99% or are you trying to get to the 1%? IF AN INVESTMENT GENERATES A K-1 INSTEAD OF A 1099-DIV I WON'T INVEST IN IT USING ANY TAX ADVANTAGED ACCOUNT. Here's why: http://www.wsj.com/articles/thousands-hit-with-surprise-tax-bill-on-income-in-iras-1447427436

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