Move will simplify corporate architecture

Tallgrass Energy GP (ticker: TEGP) is simplifying its structure, acquiring its subsidiary Tallgrass Energy Partners (ticker: TEP).

TEP unitholders will receive two shares of TEGP for each TEP common unit, which is almost exactly even with yesterday’s closing prices. Upon completion of the transaction, TEGP will change its name to Tallgrass Energy, LP, and will trade under the ticker TGE.

The overall effect of this transaction will be to convert Tallgrass from a parent company holding an MLP to a standard corporation. The company will no longer be taxed as a partnership. TGEP reports the transaction will not be dilutive to shareholders, and TEP unitholders will not see any decrease in distributions. Restructuring as a C-Corp, instead of a partnership, will also open the company to additional investors, as some funds will only invest in corporations rather than partnerships.

Tallgrass Energy Eliminates MLP Structure

Source: Tallgrass Energy

Tallgrass President and CEO David G. Dehaemers Jr commented, “Eliminating TEP’s incentive distribution rights will immediately improve our cost of capital and will enhance our ability to compete for, and the returns generated by, acquisitions and organic growth projects. In addition, our single public entity will be more streamlined, simplified and closely align all of our equity holders’ future financial incentives. We expect the combined company, which will be taxed as a corporation, will appeal to an even wider set of potential investors. We are looking forward to closing this transaction and focusing on the next chapter of value creation at Tallgrass Energy.”

Sentiment is shifting away from MLPs

The transaction will have significant tax benefits, as TGEP estimates the company will see no cash federal income taxes for an estimated 10 years. This also comes in the wake of FERC’s ruling on March 15, when the commission decided MLPs could not receive a credit for income taxes in rates charged. This reduced the advantages of MLPs, causing stocks in such companies to decline.

While MLPs were once the darling of investors, with seemingly reliable payouts and favorable tax structure, the landscape has shifted in recent years in light of the downturn’s effect on volumes of oil and natural gas shipped through pipelines, and more recently with the tax revision. According to Bloomberg analysts, one of the hallmarks of MLPs, incentive distribution rights, have become less favored as it has become clear that these payments can rise faster than cash flows.

Some analysts have predicted that other Master Limited Partnerships will make moves like that of Tallgrass, simplifying corporate structure and becoming standard corporations. However, the oil price recovery has thrown a lifeline to MLPs, according to the Wall Street Journal. More MLPs can now live within their means without looking to equity markets for cash.

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