Image Source: EnLink transaction presentation
A number of master limited partnerships continue to transition to more simplified structures as they attempt to become increasingly nimble organizations.
By Kris Rosemann
The ongoing trend of master limited partnership simplification transactions continued October 22 as proppant and logistics solutions provider Hi-Crush Partners (HCLP) acquired its general partner and slash its quarterly distribution to $0.225 per unit from $0.75 per unit. The now C-Corp used 11 million newly issued units to acquire Hi-Crush Proppants LLC for a total consideration of $96.25 million and eliminated its incentive distribution rights in doing so. Rationale cited for making the change is very similar to other similar transactions, including a lower cost of capital, wider appeal to a range of investors, enhanced financial flexibility, and improved corporate governance, among other factors. A soft frac sand market also played a role in Hi-Crush’s decision, and the significant decrease in its quarterly payout reflects a renewed commitment to maintaining a reasonable balance sheet.
EnLink Midstream (ENLC) and its limited partner EnLink Midstream Partners (ENLK) announced a simplification transaction in which unitholders of EnLink Midstream Partners will receive 1.15 common units of EnLink Midstream for each unit owned and EnLink Midstream’s incentive distribution rights in its limited partner will be eliminated. A simplified corportate structure, lower cost of capital, increased public float, and enhanced trading liquidity were all noted as positive benefits of the deal, and an increase in financial flexibility is projected to aid management’s ability to execute its growth plan.
Sustainable distribution growth of 5%+ annually for at least three years following the closing of the transaction (expected in the first quarter of 2019), but current holders of EnLink Midstream Partners will see their current annual dividend per unit reduced to ~$1.23 (1.15 x $1.07) from $1.56 as a result of the deal. EnLink will continue to operate under the ticker ‘ENLC,’ and management expects significant improvement in distribution coverage and material support for its plans to self-fund the equity portion of a majority of growth capital expenditures. Reliance on external financing is expected to be reduced, not eliminated, and management expects all three ratings agencies to affirm its current credit ratings (BBB-/BB+/Ba1).
For more examples of similar transactions and our thoughts on the MLP model, see some of our archives below:
“MLP Speak: A Critique of Distributable Cash Flow” (July 2017)
“Nearly 60 Distribution Cuts Later, We Maintain Our View on the Hazards of the MLP Business Model” (March 2018)
“Master Limited Partnership Simplifications on the Rise” (May 2018)
“The Days of the MLP Model Are Numbered” (August 2018)
“Midstreams Going C-Corp, Should SEC Disallow the Measure Distributable Cash Flow?” (September 2018)
Related: AMLP
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.