Energy MLPs Are Talking About Collateral
Most company executives hope to make it through their corporate careers without ever having to utter such sentences as: "We are confident in the strength of our counterparties and associated collateral."
In recent weeks, however, some master limited partnerships (MLPs) in the energy sector have begun providing extra information on their trading partners, offering a range of additional data about who owes them what and how much.
Such midstream MLPs typically offer services for oil producers—everything from pipelines to gas processing—all bundled in a convenient package of financial engineering that offers low-tax and hopefully continuous dividends to investors.
Here, for instance, is Boardwalk Pipeline Partners LP in its most recent 10-K filing:
"Although nearly all of our customers pay for our services on a timely basis, we actively monitor the credit exposure to our customers. We include in our ongoing assessments, amounts due pursuant to services we render plus the value of any gas we have lent to a customer through no-notice or PAL services and the value of gas due to us under a transportation imbalance. Our natural gas pipeline tariffs contain language that allow us to require a customer that does not meet certain credit criteria to provide cash collateral, post a letter of credit or provide a guarantee from a creditworthy entity in an amount equaling up to three months of capacity reservation charges. For certain agreements, we have included contractual provisions that require additional credit support should the credit ratings of those customers fall below investment grade."
And here's Enbridge Energy Partners LP, a Candian pipeline company, in its recent earnings presentation:
"95% of revenues from investment grade customers or security received."
And finally, Oneok Partners LP in the 10-K it filed earlier this week:
"In 2015, more than 85 percent of the revenues in this segment [natural gas pipeline assets] were from investment-grade customers, as rated by S&P or Moody’s, or our comparable internal ratings, or secured by letters of credit or other collateral. In addition, the majority of the Natural Gas Pipeline segment’s pipeline tariffs provide ONEOK Partners the ability to require security from shippers."
While such disclosures vary in their detail, they are all meant to reassure investors who may be worried such companies may be exposed to losses as oil prices remain firmly stuck in the low $30s. Whether the transparency will have the added effect is unclear, however.
Certainly the analysts at CreditSights Inc., a bond research shop known for a slightly bearish bent, have yet to be won over.
"While the additional disclosure is appreciated, the natural question is how much collateral is actually being posted by distressed counterparites," write analysts Charles Johnston and Andy DeVries.
Citing the example of Kinder Morgan Inc., which lost about $45 million in revenue in the fourth quarter of last year following the bankruptcies of Alpha Natural Resources Inc. and Arch Coal Inc., the worry is that midstream MLPs may end up losing years of remaining payments rather than a few months' worth. In January, Arch Coal filed a motion to reject terminal and rail contracts, including previously booked deals with Kinder Morgan.
"This implies midstream MLPs haven't written strong collateral clauses within their contracts," the analysts note. "So far it seems this collateral value is minimal."