Last week Igor Greenwald and I held the monthly joint web chat for subscribers of The Energy Strategist and MLP Profits. We addressed 43 questions during the chat, but as always there were questions remaining at the end. A number of questions concerned the crude oil storage picture. Readers wanted to know who might benefit from rapidly rising crude oil inventories. I addressed that question in this week’s Energy Letter, but it may be of interest to readers here because most of the potential beneficiaries of the bottleneck at the Cushing crude storage hub are MLPs.

The chat question I’ll address here concerns upcoming MLP IPOs. So far this year there has been only one, no surprise given the poor conditions in the energy markets.

In the first week of February Columbia Pipeline Partners (NYSE: CPPL) raised $1.1 billion in the second largest MLP IPO ever. Despite a modest projected yield of 3.4%, demand was extremely strong, with units opening well above their projected price range — and with the projected yield subsequently dropping to the current 2.5%.

There have been no new filings on the limited partner (LP) side since then, but there have now been two IPO filings for general partners (GP) in the interim. The question that was asked in the chat was about the prospects for the Tallgrass GP IPO. I want to cover that, as well as the EQT GP IPO filing posted the week after Columbia went public.

EQT (NYSE: EQT) is a natural gas producer in the Marcellus and the sponsor of the fast growing EQT Midstream Partners (NYSE: EQM) gathering and shipping MLP. EQM has a transmission and storage system that includes 700 miles of interstate pipes charging rates regulated by the Federal Energy Regulatory Commission (FERC). The system is supported by 14 associated natural gas storage reservoirs with approximately 400 million cubic feet (MMcf) per day of peak withdrawal capacity and 32 billion cubic feet (Bcf) of working gas capacity. The transmission assets have a total throughput capacity of approximately 3 billion cubic feet (Bcf) per day, as of Dec. 31.

The partnership also operates the Allegheny Valley Connector (AVC), an approximately 200-mile FERC-regulated interstate pipeline that interconnects with the Marcellus Shale region. Including the AVC and expected future capacity, approximately 3.7 Bcf per day of transmission capacity and 31.9 Bcf of storage capacity were subscribed under firm transmission and storage contracts as of Dec. 31. These contracts had a weighted average remaining term of approximately 17 years, based on total projected contracted revenues, as of year end.

The partnership also owns a gathering system consisting of 45 miles of high-pressure gathering lines and 1,500 miles of FERC-regulated, low-pressure gathering lines that have multiple delivery interconnects with EQM’s transmission and storage system. Revenues associated with the gathering system accounted for approximately 35% of the total last year.

EQM increased its distribution by three cents per unit each quarter last year. The annualized yield stands at 3.1% based on the most recent payout, but the trailing 12- month distribution coverage was a healthy 1.92x.

EQT GP Holdings (which is expected to trade as EQGP on the NYSE) was formed in January to own EQT’s interests in EQT Midstream Partners. Its assets will consist of EQT’s 34.4% limited partner interest in EQM, its 2% general partner interest in EQM, and all of EQM’s incentive distribution rights (IDRs).

The IDRs kicked in at $0.35/unit and entitle EQGP to receive up to 48% of all incremental cash distributed in a quarter after $0.5250/unit has been distributed (for a total of 50% including the 2% GP stake.) This threshold was exceeded in Q3 and Q4 2014, which respectively had distributions of $0.55/unit and $0.58/unit.

Meanwhile, Tallgrass Energy GP intends to trade on the NYSE under the symbol TEGP. The MLP it manages, Tallgrass Energy Partners (NYSE: TEP), went public in May 2013. TEP provides natural gas transportation and storage services in the Rocky Mountain and Midwest regions of the U.S. Unlike most midstream MLP offerings, TEP traded pretty flat following its IPO and notched only a modest gain in 2013. But the unit price soared in 2014, and TEP’s total return of 76% for the year placed it in the top five performances among MLPs in 2014.

Above: Tallgrass Energy Partners 2014 unit price vs. the S&P 500

Tallgrass Energy Partners’ assets include:

• Tallgrass Interstate Gas Transmission (TIGT) Pipeline, a FERC-regulated natural gas transportation and storage system with 4,645 miles of gas transportation pipelines serving Wyoming, Colorado, Kansas, Missouri and Nebraska with natural gas primarily coming from the Denver-Julesburg Basin and the Niobrara and Mississippi Lime shale formations. The TIGT System also includes the Huntsman natural gas storage facility in Nebraska;

• Trailblazer Pipeline system, a 439-mile interstate pipeline with a capacity of up to 862 million cubic feet per day (MMcf/d) that transports natural gas from southeastern Wyoming to interconnections with the Natural Gas Pipeline Company of America and Northern Natural Gas Company pipeline systems in Nebraska;

• Natural gas processing plants in Casper and Douglas, Wyoming, with a combined processing capacity of approximately 190 MMcf/d;

• A natural gas treating plant in West Frenchie Draw, Wyoming.

Like EQM, TEP increased its distribution every quarter last year, from $0.325/unit in Q1 to $0.485/unit for Q4. The general partner is owed IDRs that begin at $0.2875/unit, and rise to a maximum of 50% above $0.431/unit.

Above: quarterly distribution growth for TEP. Source: SEC filings

At the close of the offering, TEGP will own all of TEP’s IDRs, an approximately 1.39% general partner interest in TEP, and a yet-to-be-determined number of Tallgrass Energy Partners common units.

There is one noteworthy distinction between the IPOs of EQGP and TEGP. While EQGP is structured as a master limited partnership and will be taxed accordingly, TEGP is structured as a partnership but has elected to be treated as a corporation for U.S. federal income tax purposes. Thus, holders of EQGP will receive a Form K-1 from the partnership, while TEGP investors will receive a Form 1099.

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Portfolio Update

The Luck of Kelcy Warren

The past six months have been traumatic for energy equities, but one big midstream operator is none the worse for wear. In fact, Energy Transfer Equity (NYSE: ETE) is up 1% over that span, and only 3% shy of the record high set in November.

The reasons are not hard to divine. As the general partner for the most diversified and recently one of the fastest growing families of master limited partnerships, ETE is a unique asset. It’s an MLP with an enterprise value of $64 billion currently flashing 30% annual distribution growth.

It can do that because distributions from affiliated MLPs are set to increase 47% this year. Which is what happens when you get to harvest as much as half the cash flow from investments financed largely by others, thanks to incentive distribution rights.

It’s also what happens when your CEO turns out to have made a lot of shrewd deals over the last decade. The acquisitions of Sunoco and Southern Union look like huge hits now, though that wasn’t always the case.

Not quite a year ago, Energy Transfer nabbed the Susser filling stations chain; starting last fall the value of such businesses soared as crude crashed.

Most recently, CEO Kelcy Warren has shown a knack for buying his own partnership’s equity near lows. In mid-October, he shelled out some $62 million at the height of that month’s brief panic to buy units that have since appreciated 21%. Then, in mid-January, he spent another $19 million to buy more equity in a private transaction with his chief operating officer at $48 per unit, 23% below the price just two months later.

Those purchases don’t amount to very much in the context of Warren’s 17% personal stake in ETE, worth some $5.7 billion. Cynics might claim he was merely front-running the recently announced $2 billion buyback. But even cynics would acknowledge that situations with buybacks and insider buying beat the alternative of equity offerings and insider selling.     

With a current yield of 2.9%, plenty of near-term income protection in the form of fixed contracts and leverage to an eventual recovery rooted in generous incentive distribution rights, Energy Transfer Equity checks a lot of boxes. And it doesn’t hurt to have Kelcy Warren in charge. ETE is the #3 Best Buy below $66.

— Igor Greenwald