Archive for the ‘MLPs’ Category
Sunday, November 16th, 2008 |
As investors prepare for president elect Obama to take office, many are anticipating any policy changes or modifications he may implement. Unfortunately, this period of uncertainty has spawned a few rumors that have misled the investing public. One of these rumors is the idea that Master Limited Partnerships (MLPs) will be taxed in the same manner as C corporations moving forward.
Luckily, according to the National Association of Publicly Traded Partnerships this is not the case. Per the NAPTP:
…a memo circulated by an investment firm that was based on the Tax Policy Center analysis described below but like other summaries we have seen, neglected to include the all-important word “financial”. The investment firm has admitted that this was an error. Therefore, it continues to be true that the only matter involving PTPs on which the President-elect has taken a public position is his cosponsorship of legislation–which has gone nowhere–to tax PTPs which are investment advisors as corporations. We have no reason to believe that he has taken any position with regard to other PTPs.
So, looks like we’re in the clear for now. The only publicly traded partnerships Obama has considered are “financial” in nature. In my opinion, it just doesn’t make sense to go after MLPs. It is in the best interest of the nation to promote building and maintaining quality energy infrastructure - the tax benefits of master limited partnerships encourage this.
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Tuesday, September 23rd, 2008 |
The Master Limited Partnership is a tax efficient, cash generating machine. In the MLP model, the majority of cash generated in a given period is passed directly through to investors. However, some cash is retained in order to fund future projects or growth. Understanding the difference between how much was paid out to investors and how much could have been paid out is key.
Distributable Cash Flow (DCF)
Stock investors typically use a metric called “Free Cash Flow” as a gauge of a company’s ability to generate cash (after adjusting for expenses relating to maintaining its assets). This cash can then be used to fund additional projects or pay out dividends. Similarly, MLP investors use Distributable Cash Flow (DCF) as a measure of cash available to distribute to unitholders or fund growth.
Calculating DCF is fairly simple, and involves working backward from Net Income on the Income Statement and adding back accounting related items. Remember that accounting items like depreciation and amortization are typically subtracted from income to represent the loss of value of different assets over time. However, they don’t really have anything to do with generating cash, so we want to make sure we add them back to net income. The calculation is:
The Coverage Ratio
So, now we know how to calculate Distributable Cash Flow (which represents what we could pay to investors if we wanted to). However, it’s always a smart idea to retain some of the cash generated to fund future growth or as an emergency fund. Thus, the amount actually paid out (the actual distributed amount) will typically be less than DCF. As a general rule, we like to see the ratio of DCF to the actual distribution to be greater or equal to 1.3. This ratio is referred to as the “coverage” ratio and is calculated as:
Coverage Ratio = Distributable Cash Flow / Actual Distributed Cash Flow
In our example above, if we have $225 million in DCF, we would likely actually distribute around $173 million to investors to maintain a coverage ratio of 1.3x.
Posted in MLP Investing, MLP Metrics, MLPs | 1 Comment »
Friday, August 8th, 2008 |
The Master Limited Partnership (MLP) has two key components. At the core of the MLP is the General Partner (GP), which actually runs daily operations (e.g., physical management of a pipeline, billing, accounting, etc.) Limited Partners (LPs), on the other hand, are passive investors in the business and have no part in daily operations. The goal of the GP is to grow cash distributions (similar to a stock dividend) to the LPs and, since most MLPs operate in the energy space, these distributions tend to grow steadily over time. (more…)
Posted in MLP Investing, MLPs, Midstream MLPs | No Comments »
Wednesday, August 6th, 2008 |
Standard & Poors has a pretty good article on its website outlining the basics of MLPs. Of particular interest is the low correlation of MLP returns with those of stocks and bonds. For those not familiar with asset allocation theory, combining investment classes that have low correlations with each other is a good way to remain diversified. Further, it can allow you to boost returns while actually lowering portfolio risk.
Related Links:
Standard & Poors MLP Primer
Posted in MLP Investing, MLPs | No Comments »
Sunday, August 3rd, 2008 |
Many investors assume, incorrectly, that fluctuations in oil & gas prices can significantly impact MLP unit prices. However, the truth is that revenue from MLP assets (the majority of which are pipelines) is generated from a “toll road” model. That is, it doesn’t matter how expensive the commodity shipped is - it only matters how much of it gets shipped. Of course, high (or low) prices can impact the amount shipped - but energy demand has been growing fairly consistently over time.
A good analogy is, unsurprisingly, an actual toll road. It doesn’t matter if 100 Honda Civics use the road or 100 Aston Martins - the same toll is collected and, consequently, the same amount of revenue.
Posted in MLPs, Midstream MLPs | No Comments »
Sunday, October 21st, 2007 |
One of the largest MLPs, Enterprise Products Partners LP (NYSE: EPD), increased its quarterly distribution almost 7% from $0.46 in Q3 2006 to $0.49 in Q3 2007. According to the CEO, Michael Creel, it is the MLP’s 22nd distribution increase since its founding in 1998. The announcement comes ahead of EPD’s Q3 earnings announcement and subsequent analyst call on October 25th.
EPD provides a variety of midstream services including oil & natural gas transportation, gathering, processing, storage, as well as natural gas liquids (NGL) fractionation. The Houston, Texas based company has a market cap of almost $14 billion, and an enterprise value (EV) of almost $19 billion.
Related Links:
Enterprise Products Partners Homepage
Posted in MLPs, Midstream MLPs | No Comments »
Sunday, September 16th, 2007 |
Today, natural gas supplies about a quarter of energy in the US. However, forecasts by the US Energy Information Administration are calling for natural gas consumption to increase by over 40% by 2025! This is fueled primarily by the increased use of natural gas for electricity generation instead of coal. However, gas supply in the US is facing uncertainty as existing conventional wells continue to mature and dry up. This presents a problem for the US, as it begins assessing the possibility of increasing energy independence and using cleaner burning fuels.
(more…)
Posted in MLPs, Midstream MLPs, Natural Gas | No Comments »
Monday, August 27th, 2007 |
Enterprise Products Partners LP (NYSE:EPD) and Questar announced plans to develop the White River Hub, a new pipeline hub which will connect EPD’s natural gas facilities located near Meeker, CO with 6 other interstate pipelines (including Questar pipeline). Slated for completion in the Fall of 2008, the system will allow shippers increased access to key markets on both the east and west coasts.
Posted in MLPs, Midstream MLPs, Natural Gas | No Comments »
Thursday, August 23rd, 2007 |
Teppco Partners recently purchased an underground Liquified Petroleum Gas (LPG) storage cavern in Middleton, Ohio, helping raise the midstream company’s capacity for storage by over 300,00 barrels. The purchase is in line with the MLP’s expansion into the midstream LPG space, and has helped boost delivery capability of the Greensburg / Eagle pipeline segment by around 40%.
LPG is essentially a mixture of hydrocarbon gas (typically propane and butane) that can be used for heating or, as is increasingly the case, as a refrigerant in air conditioning systems. This recent trend was sparked by the need to decrease use of chlorofluorocarbons in cooling systems due to their environmental impact.
Related Links:
TEPPCO Press Release
Posted in MLPs, Midstream MLPs | No Comments »
