Midcoast Energy Partners, LP (ticker MEP) is currently out on its IPO roadshow and looking to raise $370 million by selling 18.5 million common units (before the over-allotment) at a mid-point price of $20 with an indicated mid-point yield of 6.25%. They expect to price the deal Tuesday November 5.
MEP is a growth-oriented Delaware limited partnership recently formed by Enbridge Energy Partners, LP (EEP), to serve as EEP’s primary vehicle for owning and growing its natural gas and natural gas liquids, or NGL, midstream business in the United States. As a pure-play U.S. natural gas and NGL midstream business, MEP will be able to pursue a more focused and flexible strategy, have direct access to the equity and debt capital markets, and have the opportunity to grow through organic growth opportunities and acquisitions, including drop-down transactions from EEP.
MEP’s initial assets consist of a 39% controlling interest in Midcoast Operating, a Delaware limited partnership that owns a network of natural gas and NGL gathering and transportation systems, natural gas processing and treating facilities and NGL fractionation facilities primarily located in Texas and Oklahoma. Midcoast Operating also owns and operates natural gas, condensate and NGL logistics and marketing assets that primarily support its gathering, processing and transportation business. Through its ownership of Midcoast Operating’s general partner, MEP controls, manages and operates these systems. EEP has retained a 61% non-controlling interest in Midcoast Operating.
- Here is the full roadshow presentation (click to open and/or download): MEP Roadshow Slides Nov 2013
- Here is a link to the roadshow video (it will be removed the night the IPO prices): IPO Roadshow Video
- Here is a link to their SEC filings: MEP SEC Filings
IMPORTANT: MEP will provide investors with a K-1 (instead of a 1099-DIV), which makes MEP appropriate for taxable accounts. Here is the key language from the “Tax Risks” section of the Prospectus (page 54) telling you that it does not really belong in an IRA (or any tax advantaged account):
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income, or UBTI, and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.
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They are trying to separate the natural gas focused operations from the liquids operations (see page 4 in the roadshow presentation for their reasons). It’s not the first time a larger MLP has created smaller MLP for specific purposes, i.e. PNG separating the gas storage assets from crude focused PAA (although PAA is now buying back PNG, but still just as an example).
EEP also retains long term upside in the assets via the full IDR structure while being able to drop-down assets at an arm’s length fair value (i.e. cash to EEP day one plus retained interest via the IDR structure).
I don’t understand why an MLP needs to create another MLP. Didn’t ENB establish EEP for that purpose? Shouldn’t EEP already be able to unlock the value of the proposed dropdown assets? What am I missing? Is this the first time an MLP IPO’d another MLP?