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Kinder Morgan Energy Partners, Message Board

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  • enronbuddy enronbuddy Aug 17, 2012 8:28 PM Flag

    Dropdown Math Fail

    Look…without a doubt…a pipeline can be made to last more than 40 years…. You may have not caught this part in my initial post
    “….if you think these already aging pipelines are still going to be around in 25 years…without a significant capital infusion”

    The mistake you, and a lot of people seem to be making is mingling the cash flows from future capex with cash flows with the initial investment…and then ignoring the cost of both. Right now…we, or at least I…am only talking about this 6.2B dropdown. I can understand how this might be confusing, but when evaluating capital projects, you must identify and segregate cash flows and assign them properly to the capital expenditures that produced them.
    So let’s think about this 6.2 B purchase as a single project….I am exchanging 6.2B in cash today…that is -6.2B…for future cash flows of around $246M a year. Lets say that after 10 years…I start needing to do some more aggressive maintenance to stay ahead of the curve. Pumps need to be replaced, maybe I need to cut out and repair some damaged portions at the rate of $100M per year above the initial run rate. Not to worry…the GP just puts these costs in the “expansion” capital bucket and thoughtfully excludes that from the DCF calculation…thus increasing both his payout, and your payout. Of course…it has to be paid for…so $50M of shares and debt are issued, and voila…DCF is maintained.
    However….if you are an honest analyst…you have to recognize that part of your DCF…still 246M now rightfully belongs with your expansion capital project…the 100M….not the original 6.2B of project capital. So while I have managed to keep my pipeline going, and through some creative accounting maintained my DCF…the cash flow attributable to the El Paso dropdown continues to decrease as more and more of that cash flow…even if stable is attributable to additional capital expenditures…each which need to be examined in their own right. It is simply bad analysis to include the benefits of future capital projects…yet ignore those costs…This is the same faulty logic that would have you believe that buying undiscounted cash flow at 25X is not somewhat insane.

 
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