Enterprise Says Dumping Partnership Model May Be Inevitable

(Bloomberg) -- Enterprise Products Partners LP, the biggest master limited partnership by market value, said it could be forced to convert to a corporation if many of its peers in the pipeline industry leave the model behind.

While the company defended its structure, it was the most direct acknowledgment from Enterprise that the MLP model may not be sustainable. Analysts and investors have questioned the company over the past year about a possible conversion.

“There may be an element of inevitability,” Enterprise Chief Financial Officer Randy Fowler said at Wells Fargo’s Midstream and Utility Symposium in New York. “K-1 island is becoming very exotic,” he added, referring to the tax forms required for MLP investors.

The MLP model was once seen as a smart way for oil and gas pipeline operators to raise fresh capital while appealing to retail investors. Instead of paying corporate taxes, MLPs pass their cash to stockholders who pay tax on the quarterly payouts.

But pipeline partnerships began to lose their allure after the slump in oil prices that began in 2014 triggered cuts to cash distributions. The exodus of investors accelerated in 2018 after a series of changes in U.S. tax policy.

Enterprise rose 2% to $27.71 a share at 12:36 p.m. in New York after earlier climbing as much as 3.3%.

“The idea is that at some point, if they are the only ones left, they would prefer not to be” an MLP, said Hinds Howard, a portfolio manager at CBRE Clarion Securities LLC and an expert on the sector. “But general speculation is that they would wait to see how the election goes before making the permanent change to their tax status.”

In the past, Enterprise and its MLP peers have argued that there wasn’t a clear advantage to converting to a C-corp. Just over a year ago, Fowler said the valuations of the two groups were “on top of each other.”

“I don’t know if checking the box necessarily results in a higher value or valuation,” he said in October.

Recently, however, the gap has widened. Pipeline corporations have continued to outperform those standing by the MLP model -- a trend Fowler acknowledged on Wednesday.

But, he said, it’s not clear whether C-corp investors are taking into account the fact that at some point those companies will no longer get the tax deferrals they were granted when they initially converted.

“The tax-free holiday that the C-corps are enjoying right now, it is a temporary holiday,” he said. “There was a price that was paid for the C-corps to be where they are today.”

If Enterprise does elect to become a corporation, it could take two to three months for the company to complete the transition, subject to approval from its unitholders, Fowler said.

“We take a look at this every month,” he said.

To contact the reporter on this story: Rachel Adams-Heard in Houston at radamsheard@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Christine Buurma, Reg Gale

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