MarkWest Energy Partners (MWE) gathers, processes, and transports natural gas, NGLs (natural gas liquids), and crude oil. It also fractionates, stores, and markets NGLs. The company typically has three types of revenue arrangements stemming from these activities—fee-based, percent-of-proceeds, and keep-whole.
Previously, we learned about keep-whole contracts. Fee-based arrangements are generally based on the volume of gas or oil gathered, processed, transmitted, fractionated, or stored. Such contracts don’t depend directly on the prices of these commodities.
Under percent-of-proceeds contracts, MarkWest gathers and processes natural gas on behalf of producer customers. The residue gas and NGLs produced from the processing are sold on the market. MarkWest then remits a pre-agreed percentage of these proceeds to the producer.
In place of cash, the company may also provide a percentage of residue gas and NGL to the producer. In cases where MarkWest retains a fixed dollar amount of the product, it doesn’t run inventory price risk. The company might have arrangements that combine more than one kind of contract. The above graph shows growth in the company’s revenues and income from operations over five years.
Fee-based contracts account for ~70% of operating income
Fee-based contracts account for nearly 73% of MarkWest’s net operating income. As revenues from fee-based contracts don’t depend on fluctuations in commodity prices, such contracts typically provide more stable revenues.
Revenues have grown at a CAGR (compound annual growth rate) of 16.7% since 2010. Income from operations grew at a CAGR of 20% during the same period. The above graph shows growth in quarterly distributions per unit starting in 2010.
Distribution coverage is the ratio of distributable cash flow to total distributions. The company’s distribution coverage ratio was 1.12 in 2014 and 0.99 in 2013.
Generally, MLPs with stable earnings target a distribution coverage ratio in the range of 1 to 1.1 times the distributable cash flow. Meanwhile, MLPs whose operations are more sensitive to seasonal factors target a higher coverage ratio.