I'm not an accountant and I don't buy into conclusions like LINE having to cut the distribution.
However, one point from these attacks does make some sense - why does LINE not expense the cost of the puts for their hedging program (apparently they capitalize rather than expense that cost)?
I see LINE's hedging as a good thing. But if the gains from the hedging flows to the bottom line, how is it reasonable not to similarly treat the cost of that hedging? Surely it would be more transparent to expense the cost of the puts along with the revenue they bring? Especially if the cost is significant due to purchasing 'deep in the money' puts.
I'm not an accountant but it does seem like 'creative accounting'.
Can we get some serious discussion on this rather than the usual mocking replies from sand and norris without any attempt to answer the question.
I don't see how this accounting could be deemed "creative." As an accountant, I do not see much of an issue as it pertains to the relationship between GAAP earnings via the Income Statement and utterly the EPS, and that of Cash-based earnings as reflected in EBITDA, a non-GAAP concept.
What this article in Barron's and this analyst fail to connect is, there is a HUGE difference in Cash Flow analysis and that of the analysis toward the Income Statement (just like a HUGE difference in a Financial Analysts ability to understand accounting and that of an accountant). Putting in a hedge via a Put, requires an initial cash outlay, and said outlay would be inclusive of the Distributable Cash Flow at time of purchase within that particular period. As time lapses, that Put would be amortized since it was capitalized initially on the Balance Sheet as an asset. That amortization would reflect in an expense, hitting the Income Statement and impacting EPS. No cash is involved once the put was purchased. This is legitimate GAAP accounting.
I don't see any concern here from a Cash Distribution level, nor anything regarding the EPS calculation. You are trying to compare Apples and Oranges with two different types of accounting/finance methods GAAP vs. DCF. GLTA.
You are not mocked for your subject matter ignorance. You are correctly mocked for your choice to obfuscate and dissemble rather than adhere to objectivity and intellectual honesty necessary under the Gift of Free Speech to have productive discussion.
The treatment of the acquisition outs is of course not as simple as the shorts play on their stage.
As the puts are put in place at point of acquisition it is by nature a capital use of cash.
The 'analyst' at Weil lowered his DCF from $3.03 to below the distribution to reflect 'cost'. However, the puts have been purchased and will have no further demand for cash. So questioning the sustainability distribution on this basis was flawed to say the least and assume the best.
However, non-cash amortization does tend to overestimate true realized prices on production but not future cash flow on those sales.
LINE management has disclosed that the majority of their hedge book was built on below 'market' prices at the point in the futures curve. To the extent this is done the cost of put hedging is by definition included in the realized sales price of production.
If LINE happened to add in the money puts five years out it certainly is not and was not an attempt to manipulate current or near term DCF coverage ratios. Plus the reason for doing so can be related to the premiums or real wasting time value of the puts. As both Munger and Buffett have noted BlackS option pricing methodology does not always result in a rational calculation of value as in not all that efficient.
What is important to DFC calculations is the cash need to keep the hedge book intact for now 2018 puts. The cash requirement could be zero if LINE management accepted below futures market price strike price. So trying to bring back sunk capital cost into the equation is pointless.
I am sure tomorrow we will learn all about the accounting and the strategy. There will be fuller reporting going forward which will have the cost of tipping off the markets.
What is important to individual investors if that the puts bought in the past can not impact true cash flow to support the distribution. This is why the claims on selling short term deep in the money puts had to be made without actually claiming it directly.
Back fitting of historical equity returns has no predicative power of future returns.
Increasing Incentive Distribution Rights in any form change future cash flows and returns and lower valuations.
If you do not wish to be rightfully mocked for spreading ignorance stop spreading ignorance in a childishly willful way.
There is no such thing with you as you have shown over and over.
I have no mocking response as you mentioned......and norris calls you part of the OLB (Occupy LINE Board)
for a reason.
Now things are becomming a bit clearer.
Maybe Jack will tell you about Northern Oil & Gas from a couple of years ago, or do you already know all about it?
You try to belittle and discredit anyone who posts an opinion that is factual when it does not conform to yours.
This has been going on for as long as norris has been noticing that there is an OLB......and you seem to be part of it, as far as I can see from his posts.
Maybe he can post some examples for you.
So, while you are just looking for another debate so you can distort the facts again.....most who have been reading here for a while see right through your games.
They do expense the hedges, as amortization. and they do match the expense with the time period for which the put is applicable. If the put is for three years, they expense(amortize) the cost over three years. the cash is reflected in their cash flow statement when paid, at time of entering into the put.
Reading Linn's 8k of 2-15-13 tells me that the hedges are amortized and since amortized expenses are not deducted in reaching ADJ Ebitda then you reach Adj Ebitda without taking out the yearly expense for amortization.Now from reading Jack's post it appears that this amortized yearly hedge cost is taken out inreaching net income .VNR clearly takes the amortized yearly cost of hedges out in reaching Adj Ebitda.I don't see it in Linn's statement.But if they do account for it wish they'd do it like VNR
Also, the amortization of hedges is the common accounting approach among the vast majority of other MLP/LLCs. There's nothing inconsistent with the tax code, and both expensing and amortization are allowed because a logically acceptable argument can be made for either one. There's no "creative accounting" involved when what they practice is wholly acceptable with the IRS.
And re ITM puts, Linn rarely uses these and only when there's a clearcut financial advantage to doing so, as the company explained in its 8K. And they haven't been "deep" ITM puts.. Finally, puts are only 30% of their hedging while Swaps comprise the other 70%, and those contracts are expensed up front.. It should all be a non-issue, really.