Distributable Cash Flow Explained

When evaluating the performance of a business, one of the first things you want to know is how profitable it is.  From an accounting standpoint profit is a more complex calculation than simply taking revenue and subtracting operating costs.  Items such as depreciation and amortization attempt to capture the loss in value over time of assets the business owns.  However, while these items impact profits “on the books”, they don’t represent actual cash leaving the business.  For MLPs, this is where Distributable Cash Flow (DCF) comes into play.

Distributable Cash Flow – Cash is King

Since MLPs are yield oriented investments, investors are primarily concerned with how much cash the business is generating.  More precisely, we want to understand how much cash is potentially “distributable” to the partnership in a given period.  Therefore, we need to make adjustments to net income to reverse any of the accounting items that distort cash flow.  The calculation can be seen below.