MLP Association Conference Highlights

Annual conference held his past week.

William's discloses that merger synergies have disappeared even if higher
energy prices return.
NGSA forecasts electric demand for natural gas to break records.
The benchmark index advanced 2.90% while Crude fell 1.4% for the week
after Baker Hughes reported the rig count increased by 4, perhaps as a
result of higher prices. The Master Limited Partnership Association
(NYSEARCA:MLPA) held their annual investor conference in Orlando, where
attendance appeared 15% lighter than previous years, yet well attended
by Investment Bankers, Legal and Tax Advisors, and Institutional investors.
The tone of the conference was certainly focused on risk management and
adjusting to uncertain volume expansion as a result of weak prices and still
questionable capital market access and investor interest. While energy
prices are on the rebound, the pain and suffering inflicted on individual
investors who owned upstream units, frac sand units and even some
midstream units, will have an enduring impact towards enticing new capital
and investors to the asset class. Although the mood was more upbeat from
last year, the benchmark index has lost 30% since last year's conference,
while gaining 7.14% since the beginning of the year. At the September
midpoint between the two conferences. In our view, MLP investor seek
stability where distribution cuts are not a quarterly concern and investment
goals are aligned with steady income rather than highly leveraged 15-20%
annual total returns. At the moment, risk headlines still dominate the sector
which will not subside until a few situations play out, including the Plains
All American plan for simplification and of course the Dr Jekyll and Mr Hyde
Merger between Energy Transfer and Williams, which is affecting 3 of the
top 6 MLP units by market capitalization. The industry is in need of some
self-help along with more favorable market conditions to reposition the MLP
structure and attract new investors. Latham and Watkin's recognized the
need for change with their Make MLPS Great Again hats, although the

conference was attended by some participants who conceived, structured

and sold many of the units which have caused investor damage and stained
the MLP structure. Great slogan and a sought after item in Orlando, so
props to the marketing team.
With over 66 units participating, including several which have suspended
distributions, the Conference provided an opportunity to consolidate
Management feedback on several themes which have been the source of
investor speculation:
How Will the MLP Model Evolve: While some have suggested the MLP
model will no longer be a viable structure to attract capital, the conference
participants and audience offered a constructive framework to evolve the
model to reduce the level of risk, which had increased as a result of the
shale boom buildout over the past three years. Higher DCF Coverage, lower
leverage, IDR rebates and further asset development by Sponsors were a
few of the suggestions noted by a panel of fund sponsors. Of course, these
suggestions will come at the expense of current distributions for some
units, and lower growth for others. It is worth noting that as of Q1, only 4
units have maintained or increased both their per unit DCF coverage and
Cash Flow from Operations year over year.
Midstream Contract Renegotiation's Inspired by Sabine Ruling:
Surprisingly, we did not hear much concern on this topic as most midstream
units focused instead on counter-party credits and their relative health. As
we have been reporting in our Weekly Bankruptcy Watch, forward MVC
cash flow exposure from Chapter 11 filings has been rather insignificant, as
most midstream units have protected themselves from receivables
exposure by modifying payment and credit terms prior to filings. While
there are certainly weaker suppliers using the Sabine judgment to pressure
their midstream suppliers, the exposure from such situations appears to be
baked into forward guidance, given the visibility of producer duress over
the past year.
Slower Growth and Consolidation: Midstream capacity has clearly
exceeded demand, limiting the interest and need for new infrastructure.
Excess capacity was noted by several speakers (not just Plains All American

(NYSE:PAA), raising suggestions that desperate operators may start tariff

wars to market underutilized capacity. While MLP's have been building out
new assets, it has been less transparent to understand how existing assets
have been performing. As further organic projects either take a pause, or
enter a hiatus, some units will not be able to offset weakening cash flows
from certain assets, and will need to consolidate to achieve more diversified
and synergistic mix of business.
The Role of Incentive Distribution Rights: While those who have IDR's
defended their role, some investors voiced concern that IDR's were not
conceived to have uncapped eternal life, particularly when the GP is no
longer incubating and financing the development of new assets. The circle
of life for public GPs and IDR's will be quite different if the need for new
projects continues to decline.
Volume Reductions Impacting Midstream Cash Flows: Each month,
US production and rig counts have been in decline, but the reductions have
not yet been evident in the quarterly cash flows for many units. Capex
reduction must also lead to lower volumes, although production efficiencies
may reduce and delay the impact. Most management teams do expect a
sharp decline in volumes over the back half of the year.
In other news, the Natural Gas Supply Association (NGSA) released their
16th annual Summer Outlook assessment, which should give midstream
investors some confidence that power generation trends are clearly
impacting demand. Below is an excerpt from their release
Jekyll and Hyde Merger
Friday seems to be the preferred date for disclosures related to one of the
most

bizarre

mergers

investors

have

likely

experienced.

Williams

(NYSE:WMB) started the day with the new disclosure below related to their
merger with Energy Transfer (NYSE:ETE), which says that irrespective of
whether energy prices return to levels prevailing when the merger was
announced in September 2015, the synergy number is still only 25% of
what was used to justify and sell the deal initially. Apart from what this
says about the methods and motivations related to the original number, it

is shocking that both parties agreed to such a statement, without any

further explanation.
And if the above disclosure was not enough to motivate Williams
shareholders to vote No, they also added the below paragraph, essentially
putting shareholders on notice that the new securities will likely fall in value
after the distributions are cut
Later in the day, Williams released a revised Schedule A, which updated
the Summary Deck outlining the merger. It is a lengthy effort to summarize
how this deck has transformed since the Merger was announced on
September 28th, 2015, but the changes are substantial with each party
seeking a different outcome. It must have been a painful process to reach
consensus between companies on how to portray a merger which can no
longer be justified, but we look forward to hearing the real story once the
agreement is completed one way or the other.
Fund Flows and Lower Volumes
A favorable trend of increasing fund flows picked up pace this pace week
as$189MM of new capital flowed into MLP packaged products, with over
$1B added over the past twelve months. Total Fund AUM is roughly $55B,
or 9.5% of the total market cap of the MLPData universe
While flows have been increasing moderately, unit turnover has been
waning, suggesting that existing investors believe higher energy prices
have reduced some of the fundamental risks associated with lower
production volumes.