A special relationship
Note that EXLP has a special relationship with its general partner, Exterran Holdings (EXH). (For more on general partners’ role in MLPs, see Master limited partnership basics). Exterran Holdings owns the GP of EXLP, and also a significant portion of the limited partner interests of EXLP. EXLP leases some equipment that EXH owns, and it uses some of the parent company’s services. Under a certain agreement, EXLP’s obligation to repay EXH for cost of sales and SG&A (sales, general, and administrative expenses) beyond a certain level is capped. In 2013, EXLP’s cost of sales was capped at $21.75 per operating horsepower per quarter, under which EXLP saved $12.4 million during the year. SG&A costs in 2013 were capped at $12.5 million per quarter in 2013, which saved the company $12.8 million during the year.
In 2014, EXLP’s cost of sales will be capped at $22.50 per operating horsepower per quarter, and will be capped at $17.7 million per quarter in 2014 (recently increased from $15 million per quarter, in conjunction with the acquisition of compression assets from CHK).
The cost caps allow EXLP to benefit from more distributable cash flow, which implicitly helps the company’s valuation. EXLP states that without the benefit of the cost caps, its distributable cash flow coverage (DCF divided by distributions paid out to unitholders) would have been 1.13x in 2013, as compared to 1.36x without the cost caps. In 2012, actual DCF coverage was 1.29x, but without the cost caps, it would have been 1.02x. In 2011, actual DCF coverage was 1.22x, but without the cost caps, it would have been 0.78x. EXLP notes that without the benefit of the cost caps, insufficient available cash would have been generated to pay out the amount of distributions that had been actually paid out that year. The cost caps expire on December 31, 2014, and there’s no guarantee or obligation from EXH to extend them.
Exterran Partners represents a pure-play natural gas compression name that provides contract natural gas compression services and is the largest independent provider of compression in the U.S. Several other midstream companies, such as Access Midstream (ACMP) and Regency Energy (RGP), perform natural gas compression among a suite of other services. Several other midstream companies, such as Access Midstream (ACMP) and Regency Energy (RGP), perform natural gas compression among a suite of other services. Exterran’s closest comp is USA Compression Partners (USAC), another pure-play natural gas compression company. These companies affect the Oppenheimer SteelPath MLP Funds Trust (AMLP).