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MLP Weekly: Passive Surprise

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Over the past few weeks, passive unitholders have been startled by the dwindling set of MLP's they own as Simplification becomes effective.  Williams Partners, Rice Midstream Partners, Tallgrass Energy Partners, Broadway Partners are the most recent midstream transactions which have mostly converted from tax deferred income vehicles to C-Corp's taxable dividends.   While some continue to benefit from the tax shield now at the corporate level, the impact to investors is nonetheless a lower after tax cash distribution.    The following is a list of Sponsors/MLP's which have recently announced a transaction, intend to complete a transaction, or at risk of announcing a transaction to eliminate their MLP.


Antero Midstream - 2/26/18 - Announced formation of special committees to explore, review and evaluate potential measures related to its valuation may include transactions involving Antero Midstream.


TC Pipelines - 5/2/18 - Commented in their Q1 Results that they " no longer view the Partnership as a viable financing alternative at this time".  On August 2nd, the partnership updated their views post FERC Actions "To respond to new information or changes in strategies in the future, the Partnership may consider further distribution level changes, either as a standalone action or in combination with other strategies."


Spectra Energy Partners - 8/24/18 - Sponsor Enbridge enhanced their  offer to purchase all outstanding units in exchange for 1.11 shares of Enbridge (ENB), expected to close in late 2018


Enbridge Energy Partners - 5/18/18 - Sponsor Enbridge  announced offer to purchase all outstanding units in exchange for .3083 shares of Enbridge (ENB)


TransMontaigne Partners - 7/11/18 - Received buyout offer from ArcLight Energy Partners for $38.00 cash


Energy Transfer Equity - 8/1/18 - Announced Simplification plan which includes the acquisition of Energy Transfer Partners for 1.28 shares of Energy Transfer Equity and the elimination of the Incentive Distribution Right payments.  



So after all of these conversions, what choices will investors have to continue to receive tax deferred income while maintaining a comfortable distributable cash flow ratio?  Below is a list of Midstream LP units without IDR's by descending market capitalization.








The alternative to the above list are units which are focused on Distribution growth while paying their Sponsors Incentive Distribution Rights.  While only one of the units below, Dominion Midstream, has noted the potential FERC impact, a few have a relatively high yield, when compared to their Sponsor' divided yield and  IPO target yield, with limited options to raise capital in the public markets, implying an increasing risk of Sponsor Buy In.  




Top Distribution Growth MLPS




Shell Midstream's historical performance illustrates such risk.  Shell launched their MLP in October 2014, raising nearly $2B of capital while paying less than a 2% yield and reaping IDR benefits.  At present, their cost of capital is nearly 7.50% when including the IDR payments along with a declining DCF ratio.  Not a very attractive equity financing alternative for Shell to drop down assets.  




Shell Midstream




As the investible universe of Master Limited Partnerships dwindle, MLP focused funds have seen nearly $300MM of outflows over the past month.  Funds, which previously soaked up new unit issuance, are now often sellers either due to redemptions or C-Corp conversions.  MLP priority on self funding, and lower distribution growth, is not an option but rather a necessity, and likely for the long term.




MLP Fund Flows






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