Bye, Bye, Bye (MLPs) Part 2: Who Could Be Saying Bye?
By Stacey Morris
Management teams of several MLPs (or GPs) have made comments indicating the potential for a restructuring or simplification but have not yet formally announced a transaction. In this post, we look at potential reorganization candidates. Specifically, we discuss MLPs that have made comments about simplification, structure, or addressing incentive distribution rights (IDRs) and provide relevant commentary from the company. To be clear, a restructuring or simplification does not necessarily imply that an MLP will be going away. Several MLPs have eliminated IDRs without restructuring, and even restructurings can result in the MLP being the surviving entity. As we mentioned last week, structural decisions will depend on the company's circumstances.
Who could be next?
Since commentary around transactions is particularly sensitive, we have stuck to direct quotes from transcripts, press releases, SEC filings and investor presentations (instead of speculating). We acknowledge that the table below includes brief snippets from lengthier documents. We have tried to avoid taking quotes out of context but would note that the complete document may be helpful to reference. It's also worth noting that things can change (think of the additional clarity around FERC policy or changes in market sentiment), so the perspectives provided below are also subject to change. As the saying goes, actions are louder than words, and despite the commentary below, there could ultimately be no changes to structure. We've provided the date of each comment for context. Keep in mind that we are in the middle of earnings season for the midstream space, and companies may provide an updated discussion of structure on their 2Q earnings calls in the coming days.
Why the potential transactions?
The rationale for potential transactions or structural changes varies, but in many of the cases above, reorganizations or simplification transactions are discussed in the context of the GP/LP structure or IDRs needing to be addressed. As we have discussed in the past, IDRs can become a burden to the cost of equity over time. A company doesn't have to undergo a reorganization to eliminate IDRs, though a reorganization may be more common if the GP is a publicly traded pure play. Even in that case, the MLP could be the surviving entity, as we saw with NuStar's (NS) merger with NuStar GP Holdings (former ticker: NSH). Alternatively, both entities could continue to trade as we saw in the simplification transaction between Plains All American (PAA) and Plains GP Holdings (PAGP) that eliminated PAA's IDRs in 2016. Clearly, there is optionality when it comes to addressing IDRs or pursuing simplification, and eliminating IDRs is not the only possibility. At the end of June, Dominion Energy Midstream (DM) (discussed more below) issued 26.7 million units to its GP in an IDR reset1, which helps reduce the cost of equity.
If history is any guide, an acquisition of the MLP's parent by another company with an MLP tends to result in a merger of the MLPs owned by the acquirer and the target. A recent example includes EQT Midstream's (EQM) merger with Rice Midstream Partners (former ticker: RMP) following EQT Corporation's (EQT) acquisition of Rice Energy. In February 2018, EQT announced that it would pursue the merger of EQM and RMP along with its plans to create a new corporation focused on midstream. Of the MLPs listed in the table above, Andeavor Logistics (ANDX) is the only company whose parent is in the process of being acquired by another MLP parent.
Both DM and TC PipeLines (TCP) discuss the FERC policy revision2 from March 15th (Alerian commentary) in the context of reviewing options. Both equities had suffered following the announcement, with DM discussing the potential negative impact on its ability to raise equity and TCP noting the impairment of dropdowns. From March 14th through July 18th, both MLPs had seen their prices fall by more than 40%. DM and TCP gained 23.4% and 27.3%, respectively, on July 19th after FERC's final ruling (Alerian commentary) was viewed to be more favorable than the initial policy revision from March. It will be interesting to see what each company says on its 2Q earnings calls in light of the latest FERC announcement and any bearing the final ruling may have on how management views structure going forward. DM will hold its 2Q call today morning, August 1st, and TCP will hold its 2Q earnings call Thursday afternoon, August 2nd.
In the case of the Antero family, Antero Resources (AR) announced in late January that it was evaluating measures to address the discount in AR's stock relative to peers. In February, special committees were announced at AM and AMGP to consider any potential transactions related to AR's strategic evaluation. A transaction involving AM and AMGP may or may not occur. Turning to the Cheniere complex, management has discussed simplification for some time and has taken the first step in announcing Cheniere Energy's (LNG) acquisition of Cheniere Energy Partners LP Holdings (CQH), with the announcement following the 1Q18 call referenced above.
Bottom Line
While several MLPs have discussed restructuring, addressing IDRs, consolidation, and/or simplification, questions around timing, the structure of any transaction, and the direct implications for unitholders are difficult to answer until a transaction is announced. Our intention has been to avoid speculating on the answers to these questions, and we would note that transactions may not materialize. Instead, we have tried to identify those companies that are potential candidates for reorganization based on public statements. As a reminder, last week, we discussed some of the repercussions for direct MLP investors for transactions that have been announced, and that could provide helpful context. Looking forward, next week we'll address what this all means for MLP investors and the ways MLP investors choose to gain exposure to energy infrastructure. Please stay tuned!
1 - The minimum quarterly distribution (MQD) has been reset from $0.1750 to $0.3340. For more on how IDRs work, please see here.
2- FERC announced on March 15, 2018, that MLPs would no longer be able to include an income tax allowance in their cost of service pipeline rates.
Disclosure: © Alerian 2018. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.
Stacey Morris is the Director of Energy Research at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Morris engages with the investment community to increase awareness of the Alerian Index Series and support broader understanding of the role that midstream assets play in North American energy markets. Ms. Morris was previously the Investor Relations Manager for Alon USA Energy, overseeing investor communications for the corporation and its variable distribution MLP, Alon USA Partners. Prior to Alon, she covered the integrated majors and refiners at Raymond James as a Senior Associate in the firm’s Equity Research Division. Ms. Morris graduated summa cum laude with a Bachelor of Science in Business Administration from Stetson University, and is a CFA charterholder.
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