Dylan Raikes, “Evaluating the Influence of Incentive Structures in Master Limited Partnerships on Non-GAAP Reporting and Instances of Adverse Outcomes: The Relationship Between Distributable Cash Flow and Maintenance Capital Reserves”
Mentor: Laura Swenson, Business, Business (Sheldon B. Lubar School of)
Oral Presentation: 10:45am Union E250
We are looking at non-GAAP (Generally Accepted Accounting Principles) reporting of Master Limited Partnerships (MLPs) regarding their Distributable Cash Flow (DCF). MLPs are publicly traded partnerships that operate in the oil and gas industry; we are interested in those that operate midstream and downstream assets (pipelines for oil and liquified natural gas (LNG), oil refineries, and LNG storage and regassification facilities). DCF is a non-GAAP measure that most retail investors use to assess MLPs, and it describes the amount of cash available for distribution to unit holders. Our interest is in the GAAP reconciliation of income to DCF—specifically, Maintenance Capital Reserves (funds set aside to maintain assets). MLPs are incentivized to maximize DCF and minimize Maintenance Capital to both attract investors and enrich themselves through incentive distribution rights (IDRs). IDRs are distribution structures that allocate increasing proportions of cash distributions to the general partner of the MLP as the level of distributions increases. Do MLPs forego maintaining their assets to maximize DCF? Can we use non-GAAP reporting to predict the likelihood of accidents? This understanding leads us to our research questions: Does non-GAAP reporting of Master Limited Partnerships (MLPs) tell us anything about the instance of oil & gas leaks/explosions/spills, etc.? Does the incentive structure of the MLP influence this non-GAAP reporting and the instance of any adverse outcomes? We will collect a sample of 87 MLPs, analyzing their quarterly and annual financial statements with respect to DCF and Maintenance Reserves reconciled to GAAP metrics for year-end periods 2013 to 2024. This analysis will be performed through tabulating the collected data and running regression analyses to determine potential correlations. The resulting conclusions will attempt to establish a relationship between DCF and Maintenance Capital Reserves, and whether this relationship implicates incentivized distribution as a contributor to instances of adverse outcomes.