Just received my MMP annual report. While the Longhorn Pipeline is certainly an asset with huge profit potential in the future, there is one area of concern.
40% of their pipeline receipts are FERC regulated. These rates are at the inflation plus currently an additional 1.3% until July 2010 when future rate changes will be resaet for July 2011 and beyond.
In July of 2009 MMP increased tariffs 7.6% on 40% of thier pipeline business. This resulted in about $11M in increased revenues for 6 onths in 2009 and will put a simlar amount into 2010. However, for 2010 the FERC regulations will REDUCE charges by about 1.2% or a bit over $8M from July 2010 to July 2011.
This inflation adjusted charge has provided a steady built in rate of increase that will go away in July. Comments
It is a concern however, I am not overly concerned. MMP has chosen to keep the distribution flat while they build their coverage ratio. If anything, the Longhorn deal, which I agree will eventually become a profit machine, is currently a drain. I doubt management would have purchased the pipeline if they felt that the base business was so weak to the point that they would struggle.
I am not concerned about MMP over the longer term, but do think a significant swing in DCF that they have no control over is certainly not a positive. Going from an additional $23M (using MMP numbers) to giving back about $5M beginning in July is tough.
Your comment on Longhorn is very important since it is now a large drain on finances and could provide a big cash flow since they paid a very distressed price for it. Longhorn ulitmately should be very full. The return on Longhorn sould be huge since it is not subject to FERC regulation.