Which MLP Giant Has the Highest Leverage?



Plains All American’s leverage

Plains All American Pipeline (PAA) had a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 6.8x at the end of 3Q16. This is much higher than the 4x–4.5x that MLPs (master limited partnerships) usually target. PAA’s ratio is also higher than Enterprise Products Partners’ (EPD) 4.8x and Magellan Midstream Partners’ (MMP) 3.8x.

Plains All American Pipeline expects to reduce its leverage over time through “increasing cash flow from project completions and step-up in fee-based contractual commitments, asset sales, and prudent equity issuances.” PAA expects the ratio to improve due to its recent distribution cut (see Part 2), and it also expects its cash flows to improve meaningfully over time with an “industry recovery.”

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The above graph compares the net-debt-to-EBITDA ratios of EPD, PAA, MMP, and Williams Partners (WPZ) over six years. As the graph shows, the leverages for all four companies increased significantly in 2015 and 2016. Despite these increases, MMP’s leverage is well below 4x. EPD’s ratio at the end of 3Q16 is somewhat on the higher side, thanks to the EFS Midstream acquisition.

Williams Partners’ leverage

Williams Partners’ net debt-to-EBITDA ratio is 6.1x. The ratio increased significantly in 2015 and 2016, though the company has not increased distributions for the past seven quarters.

We should note that debt-to-EBITDA ratios are commonly used by credit rating agencies to determine a company’s credit rating. Remember, a lower ratio is considered better.

Now let’s discuss the trends in capital spending and key capital projects of all four of our select MLPs.


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