MLPs 'will still' thrive in US, says agency

The recent revamp at Kinder Morgan is an isolated case, and does not indicate that the MLP structure may be obsolete, S&P said in a note.

The tax benefits of a limited partnership and the liquidity aspect of a public traded company will see the Master Limited Partnership (MLP) structure continue to be an attractive and efficient way for energy companies to raise capital, Standard & Poor’s Ratings Services said in a recent note.

Analysts from the ratings agency also said they expect the size and the number of MLPs to grow in the coming years.

They made the comment after the recent corporate restructuring of Kinder Morgan, a large US diversified energy company and pioneer in using the MLP financing structure, which raised concerns over the future of the MLP.

Kinder Morgan said in August it was pursuing a more traditional corporate structure, where it planned to merge its general partner, Kinder Morgan Inc. (KMI), with its two large MLPs, Kinder Morgan Energy Partners L.P. (KMP) and El Paso Pipeline Partners L.P (EPB).

S&P considered the Kinder Morgan situation “somewhat rare,” as its decision to convert its structure relates to the company's massive size, individual tax circumstances, and the increase in the cost of capital relative to other MLPs resulting from the incentive distribution rights (IDRs) flowing from KMP to KMI.

Nonetheless, “the announcement does illustrate the inherent cost-of-capital challenges that a very large MLP may face when its growth prospects become more muted and IDRs are deep into the ‘high splits’ (when the limited partner's distribution rate reaches the highest tier),” it said in the note.

Whether the KMI transaction provides the impetus for other large, more mature MLPs to go down the same path remains to be seen, it added.

Therefore, the ratings agency said it believes the MLP structure still appears to be the most efficient way to address the significant midstream energy infrastructure need in the US, and that it expects MLPs to keep thriving over the next several years.

Indeed, Infrastructure Capital Advisors this week launched its first actively-managed ETF offering pure MLP exposure, InfraCap MLP ETF, according to the company.

The ETF product consists of high-quality, midstream energy master limited partnerships (MLPs) and related general partners and expects to establish an initial annualised distribution yield of 8.0 percent, the New York-based investment advisor specialising in energy, MLPs, and other key infrastructure sectors, said.

It will invest in midstream MLPs that are principally involved in the gathering, processing, transportation, and storage of crude oil, natural gas, natural gas liquids, and refined products.

These volume-based businesses typically generate and distribute substantial cash flow to their owners and represent a largely commodity-insensitive investment in the domestic energy revolution, it added.