Historically, exploration and production and refining companies formed master limited partnerships (MLPs) from their associated midstream assets. On the E&P side, Anadarko Petroleum formed Western Gas Partners and Williams formed three MLPs—Williams Energy Partners (now Magellan Midstream Partners), Williams Partners and Williams Pipeline Partners, the former of which acquired the latter.

Refining companies with midstream assets, such as Marathon Petroleum and Tesoro Corp., formed MPLX and Tesoro Logistics, respectively. Additionally, midstream corporations also formed MLP subsidiaries as Spectra Energy Corp. did with Spectra Energy Partners. Now, there may be a growing trend of utility companies forming MLPs as well.

Last September, Dominion announced its intentions to form an MLP in 2014. The intended midstream assets could generate as much as $2 billion in annual EBITDA. As a frame of reference, Enterprise Products Partners— one of the largest MLPs—generates more than $4 billion in annual EBITDA. Dominion’s potential MLP assets could include the Cove Point liquefied natural gas terminal in Maryland, a percentage ownership in the Blue Racer Midstream joint venture serving the Utica shale and Dominion’s extensive network of natural gas pipelines.

Earlier in March, CenterPoint Energy and OGE Energy, both utility corporations, joined with private equity firm ArcLight Capital Partners to announce plans to form an MLP. CenterPoint contributed an interstate pipeline and field services business, OGE contributed its midstream business (Enogex), and ArcLight contributed financing to form Enable Midstream.

With $11 billion of assets, Enable Midstream will be one of the larger MLPs. Altogether, the assets include 10,700 miles of interstate and intrastate pipelines, 11,000 miles of gathering lines, 90 billion cubic feet of gas storage and 11 processing plants.

MLP benefits

As other energy industries have discovered, being the parent of an MLP provides unique and positive benefits. The most direct impact is the tax exemption, as MLPs are not subject to taxation at the partnership level. Perhaps the most enticing advantage for a utility to form an MLP is from a financing and asset-growth perspective. When a utility company wants to add capital improvements or expand its utility assets, it must receive approval from either a local or state regulatory agency. These agencies typically represent the interests of the end consumer so that unnecessary rate hikes are not imposed.

As a result, utility companies have less excess cash flow to invest in their midstream assets, which fall under a different regulatory regime.

While it would not be difficult for a utility company to secure funds from other sources, the MLP structure could make it easier to raise capital—and larger amounts of it—from the markets on a more consistent basis. MLP investors prefer to invest in these sorts of hard assets, which generate stable cash flows and pay consistent (and growing) distributions. In addition, as an exemption from entity-level taxes lowers a company’s cost of capital, the MLP structure could open the door for more growth expansions that were previously too expensive to pursue.

NiSource, another utility company with sizable midstream assets, filed to form an MLP, NiSource Energy Partners, in December 2007 but later withdrew its request in 2009. While neither has announced any MLP plans, both New Jersey Resources and Atmos Energy have assets that could easily fit into the MLP structure.

Midstream assets, such as gas pipelines and gathering lines within a utility company, represent the traditional gold standard infrastructure that MLP investors desire. These assets benefit from inelastic energy demand, generate consistent and growing distributions and reach a wide customer base. Expect more utility dropdown assets to enter the MLP structure sooner rather than later.

Comments