I spoke to Mike Mercer, EVEP CFO about the distribution coverage and he confirmed that the distribution includes payments to general partners as well as limited partners, so the coverage for Q2 was .99. There was a one time charge of about one million related to the acquistion, so adjusted for that it would be 1.04. He expects coverage to improve in 2011 and 2012 as higher price hedges kick in. I suggested the the reports give a coverage ratio and he was open to the suggestion. I am also sending him the Factoid request for better metrics which he is most interested in seeing.
Is there a target range for MLPs for the distribution coverage ratio? If I understand it correctly, the "perfect" number would be 1.0, but if it is less than that they don't necessarily reduce the distriubtion amount, they can borrow from future distribution rates (assuming it will improve) or keep some in reserve in case coverage later on isn't up to par.
So my question is, is the ratio target between .90 and 1.2? And if the ratio goes much above the target over a few quarters is when they raise the distribution? (Or vice versa).
would suggest need to be around 1.1 to 1.2 if you are a E&P mlp to protect for production problems, price fluctuations on un unhedeged sales, operated by others unexpected issus, etc. the less hedged the higher the coverage ratio should be
Also would suggest need to be around 1.2 average for infrastrcture mlps to protect for issues similar to E&P's given theirs is a supply issue vs a procutions issue, for price issues on non fee sales, etc. If totally fee then would suggest 1.1 is good coverage. If adequatly hedged then around 1.2 should cover. If totally at market risk on sales then would want to be way over 1.2
Every MLP has different goals for distribution coverage, ranging from 1.0 to 1.5, with most waiting for 1.1 at least to raise the distribution. EVEP will likely keep on raising it by a token penny each quarter until they get to over 1.2 and can sustain that for several years with the hedges they have in place. A long haul pieline MLP might be comfortable with lower coverage than anE&P like EVEP, since the risks of cash flow dropping are so much less with little or no commodity price risk.
birdluck thanks for going the extra step to validate calculations, again 1st quarter was also .99 so looks like they are close but not quite there. Acquisitions will need to be immediately accreative to cash to not slide any lower. Hopefully they can get to around 1.1 to 1.2