Peter Staas on
Mar. 12, 2013
Thirteen energy-focused master limited partnerships (MLP) completed initial public offerings (IPO) in 2012–three shy of the annual record set in 2006.
The pipeline of prospective publicly traded partnerships should remain robust, as companies seek to take advantage of the security class’ growing popularity among individual investors–a trend we analyzed at length in The Appeal of Investing in MLPs.
Why else have companies and private-equity firms gravitated toward the MLP structure as a means of monetizing their energy-related assets?
For one, these pass-through entities don’t pay taxes at the corporate level, giving them a lower cost of capital in the early years of their existence. MLPs are also an efficient means for strategically monetizing assets to unlock unrealized value; the sponsor retains control and enjoys exposure to any upside from distribution growth via their incentive distribution rights.
Meanwhile, the range of assets held by MLPs has grown dramatically over the past two years. In part, this expansion stems from the recent upsurge in private letter rulings issued by the Internal Revenue Service (IRS) that respond to requests for clarification regarding which assets and activities generate qualifying income that’s suitable for this structure.
The Tax Reform Act of 1986 and the Revenue Act of 1987 require publicly traded partnerships to generate at least 90 percent of their gross income from “qualifying” sources, the majority of which relate to the production, processing and transportation of oil, gas and other natural resources.
Last year’s IPO class brought the debut of the first publicly traded partnership to own interests in offshore drilling rigs and the first MLP to manufacture and supply sand used in hydraulic fracturing. Expect this year’s debutants to include a number of nontraditional MLPs.
At the end of each quarterly earnings season, we review our database of conference call transcripts to identify companies that have publicly discussed spinning off assets in an MLP.
- In a conference call to discuss fourth-quarter results, Calgon Carbon Corp’s (NYSE: CCC) management team indicated that although the company had investigated spinning off aspects of its activated-carbon business, tax considerations made it clear “that there probably would not be any value added at this time to forming an MLP.”
- CenterPoint Energy’s (NYSE: CNP) CFO Gary Whitlock reaffirmed that the utility and natural-gas distributor still “see[s] the formation of an MLP as an effective financing vehicle.” Whitlock also indicated that this spin-off of the firm’s transportation, gathering and processing assets would occur once the company can no longer fund the build-out of these midstream assets internally.
- Power utility Dominion Resources (NYSE: D) in late 2012 announced a joint venture with Caiman Energy II LLC that will provide pipelines and processing to natural-gas producers in the Utica Shale. Blue Racer Midstream LLC will be a 50-50 joint venture, with Dominion Resources contributing midstream assets and Caiman Energy II contributing capital. Williams Partners LP (NYSE: WPZ), which owns a 48 percent interest in Caiman Energy II, plans to spend $380 million on growth projects related to the joint venture. At Dominion Resources’ annual Investor and Analyst Meeting, CFO Mark McGettrick acknowledged that the joint venture eventually could be transformed into an MLP: “The other thing that we really like about this venture, it gives us optimal optionality [over the] long term. It’s a perfect MLP….We could IPO it.”
- Norway-based marine transport company Hoegh LNG Holdings (Oslo: HLNG) confirmed that the company will progress with its plan to form a US-listed partnership that will hold interests in vessels that operate under long-term contracts. Management expects this IPO to take place at some point in 2014.
- Cellulosic-fuel producer KiOR (NSDQ: KIOR) disclosed to attendees of the Raymond James Institutional Investors Conference that the firm had requested a public letter ruling from the IRS regarding whether its business generates “qualifying income” suitable for the MLP structure. Questions about whether the company could create the first MLP that specializes in biofuels are besides the point; generating a quarterly profit should be the first concern.
- Small-cap exploration and production company Magnum Hunter Resources Corp (NYSE: MHR) once again highlighted plans to spin off its midstream business, which includes gas-treatment assets in Texas and the Eureka Hunter pipeline system in West Virginia and Ohio. At the EnerCom Oil & Gas Services Conference, CEO Gary Evans reiterated to analysts, “We plan to take the company public, in an MLP sometime either later this year or early next year.”
- In a conference call to discuss fourth-quarter results, Ocean Rig UDW (NSDQ: ORIG), which owns a fleet of six ultra-deepwater drilling units and has three additional vessels on order, disclosed that the firm plans to follow the lead of SeaDrill (NYSE: SDRL) and spin off some of its assets as an MLP. Management indicated that the IPO would likely occur at some point this year and that the firm is working to amend its credit covenants to clear the way for this move.
- Refinery owner PBF Energy (NYSE: PBF) disclosed that the board had authorized management to explore the formation of an MLP that would hold pipeline and terminal assets that generate about $100 million worth of EBITDA per year. In a subsequent conference call, CEO Thomas Nimbley indicated that additional details about this plan would be forthcoming in the firm’s first-quarter earnings release.
- Downstream operator Phillips 66 (NYSE: PSX) plans to spin off some of its midstream assets in an IPO that will likely take place in the back half of 2013.
- Exploration and production company QEP Resources (NYSE: QEP) in early January issued a press release announcing that the company will spin off its gathering pipelines in Wyoming and North Dakota as an MLP. Management expects this transaction to net the parent between $300 and $400 million in capital, which the upstream operator would use to pay down debt.
- Glenn Darden, CEO of Quicksilver Resources (NYSE: KWK), indicated that the exploration and production company had opted against spinning off its operations in the Barnett Shale as an MLP. Instead, the company will pursue the sale of a minority position in these assets.
- Whenever Valero Energy Corp’s (NYSE: VLO) CEO William Klesse fields questions from analysts and investors, you can bet that he’ll receive at least one query about when the refiner plans to launch an MLP. At last week’s Bank of America Merrill Lynch Refining Conference, Klesse reaffirmed that the company would explore this option after completing the spin-off of its retail operation, CST Brands. Klesse told attendees that after this transaction, “We’re going to look at the MLP very seriously.” By his estimation, Valero Energy has “somewhere between $50 million and $100 million of EBITDA [earnings before income, taxes, depreciation and amortization] that we can readily identify to put into an MLP, and that’s really pipeline and terminal, nothing else.”
- In July 2012, the IRS issued a public letter ruling indicating that the removal, treatment, and recycling of fluid used in hydraulic fracturing, as well as the harvesting and resale of reclaimed fuels from oil waste constitute qualifying income. Waste Connections’ (NYSE: WCN) CEO Ronald Mittelstaedt noted that the IRS ruling “might make a portion of our business attractive for an MLP structure” and that the company would “look into this possibility as the year progresses.”
- Western Refining (NYSE: WNR) on March 5 issued a press release indicating that its board authorized and directed management to explore the formation of an MLP. Last year brought an upsurge in downstream operators launching publicly traded partnerships including names such as MPLX LP (NYSE: MPLX), which owns pipelines and storage assets integrated with its parent’s refineries. Northern Tier Energy LP (NYSE: NTI) and ALON USA Partners LP (NYSE: ALDW), both of which pay a variable-rate distribution, own refineries. Western Refining’s proposed spin-off would include the parent’s midstream and logistics assets.