MLPs May Be Losing Midstream Favor
In what appears to be an emerging trend, Williams Companies is the latest midstream major to announce plans to absorb its master limited partnership (MLP) in favor of a more streamlined corporation structure.
Williams intends to spend about $13.8 billion to buy out Williams Partners LP. The move eliminates the incentive distributions rights (IDR) that often hit a company’s cost of capital, as well as the regular distribution payments that can burden a company during times of instability. Both are key assets to investors who like the model. Williams’ executives said in a statement the deal was designed to lower their cost of capital and free up cash for mergers and acquisitions (M&A).
Incentive distribution rights and their impact on the cost of capital drove Kinder Morgan Inc. last year to roll-up its MLPs into a traditional C-Corp structure. Long a part of the MLP story, IDRs represent a percentage of returns an MLP pays to its parent company, the general partner. The rate ranges between 2 and 50 percent of all cash distributed, and it can increase over time.
Leadership at Houston-based Crestwood Equity Partners said in May the corporation will buy its MLP, Crestwood Midstream Partners, to eliminate IDRs. And, Energy Transfer Partners is expected to spend $11 billion to buy its affiliated Regency Energy Partners LP.
As analysts at Tudor, Pickering and Holt said in a recent note to investors, “One deal is an incident, two a coincidence and three a pattern.”
TPH said OneOK and Energy Transfer Partners LP are among the potential roll-ups on the horizon, but neither is a sure thing. For Energy Transfer, a roll-up may make sense for technical and public currency reasons, not necessarily just to eliminate its MLPs.
“While [Energy Transfer] is a large, complex creature with three public MLPs, all three are growth vehicles and allow for more capital markets’ flexibility than Williams or Kinder,” TPH said.
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