Q: Regarding your article, "Warning: The Master Limited Partnership Business Model May Not Survive," it seems that you are lumping both “growth capex” and “maintenance capex” into the same category. The two should be separated out since “growth capex” has to do with future cash flows (building of new pipelines) and “maintenance capex” has to do with current cash flows. If you were to do this, it shows that the dividends are NOT financially engineered. Can you explain further?
A: Thank you for your question.
The severe imbalance, in your example, rests in the idea that once "growth capex" is backed out of the valuation equation, then by extension, future growth driven by such capex in net income, a component of the industry's definition of 'distributable cash flow,' and cash flow from operations cannot therefore be assumed. Therein lies the severe valuation imbalance that rests in valuing a midstream corporate or MLP on its dividend/distribution or on future growth in the industry's definition of 'distributable cash flow'. By backing out growth capex but giving the entity credit for the growth related to such capex, one is therefore ignoring a key cash outflow in the equity valuation process.
