First off, don't lay into me for not knowing the answer to this question but it appears the coverage ratio has increased from 1.14 to 1.26 since last quarter. Good thing or bad? I believe it is a good indicator.
The range of coverage ratio for MLPs is about 1.1 to 1.5. The higher ratio means a more secure distribution and the possibility of an increase in the distribution, but that is not all one has to consider. All MLPs hedge commodity price risk and the E&Ps such as Line, EVEP, LGCY, PSE and ENP hedge much more than the pipeline MLPS. The more annual production and the longer term the hedging, the safer the distribution. Line is 100% hedged for two years and 70% hedged for three years and is now adding hedges for the fourth year. This also contributes to the safety of the distribution. There are other factors such as the amount of drilling expenditure needed to maintain production that also need to be considered.
And production from the two new purchases should cover the 8.625% interest rate on the new senior unsecured note. The $1.3 billion loan provides $1 billion dollars for further production expansion via acquisitions. Also,the note will not need to be rolled over for ten years.
Q3 ‘08 Linn’s coverage ratio was 1.6x 2009 year average coverage ratio of 1.14x; Q4 ‘09, coverage ratio of 1.04x Q1 ‘10 coverage ratio of 1.26x – things are slowly coming back
Distribution Coverage Ratio. The higher the ratio the more room the company has if things turn temporarily lower to keep the distribution up.
(Not MLP specific) A coverage ratio of less than one indicates the company is burning through more cash than it’s taking in and a dividend cut is likely. A ratio of 2 would be considered acceptable while a ratio of 3 or even 4 would be ideal.
Can you post the names of any MLPs that have distribution coverage rates of "2" or greater?
A distribution coverage ratio of "2" indicates that the MLP distributes only half of its cash which is not allowed in order to maintain its beneficial tax structure. MLPs are expected to distribute over 90% of their cash, which provides a distribution ratio of 1.11.
If revenues fall unexpectedly and a MLP wishes to maintain its previous distribution then the distribution ratio will fall. When the distribution ratio falls below "1.0" the MLP must support its distribution through debt. Some MLPs have done this.