Wholesale Changes: The Surge in Downstream MLP IPOs

Master limited partnerships (MLP) have been around for almost three decades–Apache Oil Company, the first such partnership, launched in 1981–but these forbearers differed greatly from the modern-day incarnation. Though intended to facilitate investment in the energy industry, early MLPs gravitated toward exploration and production but also engaged in a wide range of other businesses.

By the end of 1986, 34 MLPs operated outside the oil and gas industry, including offerings involved in hotels, restaurants, nursing homes, cable television, amusement parks and mortgage banking. Even professional sports teams got in on the action, with the Boston Celtics LP going public after the basketball team won the 1985-86 NBA championship.

The appeal of the MLP structure to sponsors and investors is simple. Unlike corporations, publicly traded partnerships don’t pay federal income taxes; instead, MLPs pass through income to public unitholders who are taxed at their individual rate. This structure effectively avoids the double taxation–at both the entity level and individual level–to which investors in traditional corporations are subject.

Because these calculations also factor in any losses, deductions or tax credits accruing to the partnership that year, unitholders are temporarily shielded from bearing the full brunt of the income tax burden. In many cases, these considerations are sizable enough to greatly reduce the amount of immediately taxable income. Once investors decide to sell their position in an MLP, however, they incur these deferred income taxes at the regular tax rate.

To prevent a wave of disincorporation that would lower than corporate tax base, Congress in the mid-1980s passed legislation imposing limits on the kinds of businesses in which publicly traded partnerships can engage.

The modern MLP traces its roots back to the Tax Reform Act of 1986 and the Revenue Act of 1987, which required publicly traded partnerships to generate at least 90 percent of their income from “qualified” sources–many of which were related to natural resources. Although MLPs that failed to meet this new standard were exempt from the new rule, the majority of these firms went private, were acquired or converted to traditional corporations. Cedar Fair LP (NYSE: FUN), which operates Cedar Point and 10 other amusement parks, is one of the last remaining vestiges of this era.

However, as we pointed out in A Robust Pipeline of MLP IPOs, the universe of publicly traded partnerships continues to expand and diversify. Mid-1980s legislation may have restricted the range of businesses that MLPs can pursue, but the scope of energy- and resource-related assets suitable for this structure is quite broad, and sponsors of recent and prospective initial public offerings continue to push the boundaries.

Of late, a number of wholesale fuel distributors have announced plans to launch publicly traded partnerships. Susser Holdings Corp (NSDQ: SUSS), which also operates more than 540 Stripes convenience stores in Texas, Oklahoma and New Mexico, on June 21 disclosed that the firm would spin off its legacy fuel distribution assets (51.3 percent of 2011 revenue) as an MLP and on June 22 filed an S-1 registration statement with the US Securities and Exchange Commission (SEC).

Management indicated that Susser Holdings would use the proceeds from the IPO of Susser Petroleum Partners LP to pay off debt and fund the construction or acquisition of the new convenience stores. The market reacted favorably to the announcement, with the stock gaining almost 6 percent in the past week.

In 2011 Susser Holdings’ wholesale fuel distribution operations generated about 60 percent of their sales from Stripes Convenience store; the MLP’s distributable cash flow should increase incrementally whenever its sponsor adds retail locations to its portfolio. To that end, Susser Holdings plans to open between 25 and 30 new stores in 2012 and 28 to 35 retail locations in 2013.

Besides fuel distribution, Susser Petroleum Partners will also receive qualified retail income from 54 Stripes stores, most of which are in Texas, that the firm leases to third parties. This business line represents another opportunity for the MLP to grow its distributable cash flow, while providing Susser Holdings with a new avenue to raise capital. Over the next three years, Susser Petroleum Partners will have the option to purchase up to 75 Stripes location from its sponsor, which the MLP will lease back to its general partner.

This prospective IPO marks the fifth downstream offering announced over the past 12 months.

  • Sprague Resources LP (NYSE: SRLP), which filed its S-1 registration statement with the SEC on July 27, 2011, purchases, stores, distributes and sells natural gas and refined products, primarily in New York, Connecticut and the Mid-Atlantic states. Refined products account for about 66 percent of the firm’s overall sales.

  • Maxum Energy Logistics Partners LP (NYSE: MXLP) filed its S-1 registration statement with the SEC on May 4, 2012. The firm markets and distributes refined products such as diesel and specialized lubricants to oil, gas and coal producers. Management intends to use the proceeds from the IPO to fund acquisitions and other growth projects.

  • Lehigh Gas Partners LP (NYSE: LGP), which filed its S-1 registration statement on May 11, 2012, distributes gasoline and diesel fuel to about 570 retail sites, about half of which are owned or leased by the prospective MLP’s sponsor, Lehigh Gas–Ohio LLC. Lehigh Gas Partners will also generate income by leasing retail fuel locations to third parties. Management intends to use the proceeds from the IPO to fund the acquisition of retail and wholesale operations.
  • Northern Tier Energy LP (NYSE: NTI) owns a refinery in Minnesota with a nameplate capacity of 74,000 barrels per day and operates 166 convenience stores and 67 franchised outlets.

What’s driving the sudden surge in downstream MLP IPOs, especially those that own and operate wholesale fuel distribution assets? For one, investor appetite for MLPs remains robust, particularly in the current low-yield environment. Moreover, these assets tend to enjoy a higher valuation multiple as a publicly traded partnership than in as a traditional corporation.

As usual, MLP Profits will feature in-depth analysis of these publicly traded partnerships after their IPOs.

In the meantime, this trend should have positive implications for Energy Transfer Partners LP (NYSE: ETP), one of the largest publicly traded partnerships by market capitalization. The MLP on April 30 announced the acquisition of Sunoco (NYSE: SUN) in a cash and stock deal worth about $5.3 billion.

Energy Transfer Partners purchased Sunoco for its extensive portfolio of midstream assets, which includes 2,500 miles of refined-product pipelines, 5,400 miles of oil pipelines and terminals capable of holding 42 million barrels.

The MLP currently owns 21,500 miles of natural gas pipelines, 1,500 miles pipes that transport natural gas liquids (NGL) and significant gas processing and treating capacity. After the acquisition closes, Energy Transfer Partners’ throughput mix would shift from 86 percent natural gas to 55 percent natural gas, 10 percent NGLs, 27 percent crude oil and 8 percent refined products.

Energy Transfer Partners also receive Sunoco’s 4,900 retail marketing outlets, an asset that could command a higher valuation if divested or fit within an MLP structure if these locations were leased two third parties under agreements similar to the ones pursued by Susser Petroleum Partners and Lehigh Gas Partners.