Death of MLPs exaggerated

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 number of MLPs to grow in the coming years.

S&P 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 huge 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.