BPL – A Closer Look at Buckeye Partners’ 2Q15 Distributable Cash Flow

BPL operates and reports in four business segments. These are described in aprior article. BPL’s management used Adjusted EBITDA, a non-GAAP financial metric, to evaluate each business segment’s overall performance and rates of return on proposed projects. Adjusted EBITDA excludes: a) non-cash expenses such as depreciation and amortization; b) unit-based compensation expenses; and c) items that management deems not indicative of core operating performance results and business outlook.

Adjusted EBITDA by segment is shown in Table 1.

Table 1: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Losses from natural gas storage operations previously categorized as discontinued operations and disposed of on 12/31/14 are excluded from Table 1.

The increase in total Adjusted EBITDA in 2Q15 over 2Q14 reflects higher utilization (96% vs. 82%) and improved storage rates at the Global Marine Terminals segment, lower expenses combined with higher revenues at the Pipelines and Terminals segment, and a positive contribution from Merchant Services in contrast with losses incurred a year ago (explained in a prior article). The combination of increasing capacity (via expansion projects), higher utilization rates, and higher storage rates at Global Marine Terminals should lift results for the balance of the year.

In the trailing twelve months (“TTM”) ended 6/30/15, Adjusted EBITDA increased 25% in absolute dollar terms and 13% on a per unit basis vs. the TTM ended 6/30/14 which, as previously noted, was adversely impacted by Merchant Services losses.

To derive DCF, BPL deducts from Adjusted EBITDA cash interest payments, taxes and maintenance capital expenditures. DCF, distributions and coverage ratios for the periods under review are presented in Table 2 below.

Table 2: Figures in $ Millions (except per unit amounts and % change). Source: company 10-Q, 10-K, 8-K filings and author estimates.

In the TTM ended 6/30/15, DCF increased 36% in absolute dollar terms and 22% on a per unit basis vs. the TTM ended 6/30/14. Again, the favorable comparison is partly aided by Merchant Services losses in 2Q14.

Improvements in per unit Adjusted EBITDA and DCF for the latest TTM period lag the improvement measured in terms of total dollars due to the ~11% increase in the weighted average number of units outstanding, primarily the result of two unit offerings of an aggregate 10.8 million units in August and September 2014. Proceeds were utilized to reduce the balance outstanding under BPL’s revolving credit facility as well as to fund a portion of the Trafigura acquisition (renamed Buckeye Texas Partners). From a timing perspective, EBIDTA and DCF contributions from this acquisition lag behind the immediate increase in unit count. The acquisition is not expected to be accretive until 2016.

Reported DCF may differ from sustainable DCF for a variety of reasons. These are reviewed in an article titled “Estimating sustainable DCF-why and how“. Applying the method described there to BPL’s results generates the following comparison between reported and sustainable DCF:

Table 3: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Under BPL’s definition, reported DCF always excludes working capital changes, whether positive or negative. In contrast, as detailed in my prior articles, I generally do not include working capital generated in the definition of sustainable DCF but I do deduct working capital invested. Despite appearing to be inconsistent, this makes sense because in order to meet my definition of sustainability the MLP should generate enough capital to cover normal working capital needs (for example, due to the seasonal build-up of inventory for the heating season). On the other hand, cash generated from working capital is not a sustainable source and I therefore ignore it. Over reasonably lengthy measurement periods, working capital generated tends to be offset by needs to invest in working capital.

Table 3 indicates that in the TTM ended 6/30/15, BPL generated $525 million of sustainable DCF, a substantial improvement over the TTM ended 3/31/14.

Distributions grew by 4.5% and 4.6% in the quarter and TTM ended 6/30/15. They have been increasing at a steady rate of 1.25 cents per unit per quarter since 1Q13. Management noted it would soon consider accelerating the distribution growth rate.

Coverage ratios tend to be higher in the first and fourth calendar quarters due primarily to cash flow generated by butane blending activities and by higher heating oil volumes. I therefore focus more on TTM coverage ratios:

Table 4: Figures in $ Millions (except Coverage Ratios). Source: company 10-Q, 10-K, 8-K filings and author estimates.

Coverage ratios, both based on reported DCF and sustainable DCF, improved markedly in the latest TTM period. Management expects to report in excess of 1x coverage for 2015.

Table 5 presents a simplified cash flow statement that nets certain item (e.g., acquisitions against dispositions, debt incurred vs. repaid) and separates cash generation from cash consumption in order to get a clear picture of how distributions have been funded:

Table 5: Figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Table 5 indicates that in the TTM ended 6/30/15, BPL did not fund distributions by issuing debt and/or equity. Net cash from operations less maintenance capital expenditures exceeded distributions (including distributions to non-controlling interests) by $233 million.

Table 6 provides selected metrics comparing the MLPs I follow based on the latest available TTM results. Of course, investment decisions should be take into consideration other parameters as well as qualitative factors. Though not structured as an MLP, I include KMI as its business and operations make it comparable to midstream energy MLPs.

Table 6: Enterprise Value (“EV”) and TTM EBITDA figures in $ Millions. Source: company 10-Q, 10-K, 8-K filings and author estimates.

Note that BPL, EPD, KMI, MMP and SPH are not burdened by general partner incentive IDRs that siphon off a significant portion of cash available for distribution to limited partners (typically 48%). Hence multiples of MLPs without IDRs can be expected to be much higher (see Table 4, column 5). In order to make the multiples somewhat more comparable, I added column 6, a second EV/EBITDA column. I derived this column by subtracting IDR payments from EBITDA for the TTM period. Other approaches can also be used to adjust for the IDRs of the relevant MLPs.

A constructive development deserving mention is the resolution of complaints lodged with the Federal Energy Regulatory Commission (FERC) in 2012 by certain airlines regarding jet fuel rates to the three major New York City area airports. I have been concerned with the potential repercussions of this matter, but it appears to have been settled, albeit at a cost to BPL of ~$53.5 million. While BPL also agreed to reduce its jet fuel rates prospectively, the rate reductions will not have a material impact. The settlement leaves BPL free to pursue market-based rates for transportation of other refined petroleum products to other destinations within the New York City market.

I am becoming more positive on BPL. At current price levels and given its strong operating performance in recent quarters, it should be considered by investors wishing to broaden their exposure to midstream energy MLPs or to replace MLPs in their portfolios whose operational results, leverage, valuations and prospects appear less attractive.