Fitch: IRS Ruling Aids Pace of Growth of US Chemical MLPs
NEW YORK -- May 7, 2014
A 2012 IRS ruling has fueled the growth of non-traditional master limited
partnership (MLP) investments among chemicals entities, Fitch says.
Considerations in assessing the creditworthiness of these transactions include
asset quality, cash flow, offtaker credit quality and other factors.
The IRS's Private Letter Ruling on Oct. 12, 2012 allowed olefins manufacturers
which crack natural gas liquids (NGLs) ethane and propane into derivative
streams (ethylene and propylene) to qualify for MLP structures. Firms with
assets that generate qualifying income under the new structure may seek to
take advantage of the ruling, given the tax advantaged status of MLPs and
differences in valuations between MLPs and comparable C-corporations.
The domestic chemical industry is in a period of growth with a significant
increase in the number of new ethane crackers planned to be built on the gulf
coast and elsewhere over the next several years. The lower cost of capital
associated with MLPs creates a competitive advantage in acquiring and building
qualifying assets and makes the structure a financially attractive option for
chemical producers to expand operations.
Several recent announcements underscore the MLP trend. Westlake Chemical Corp.
('BBB-'/positive) filed SEC documents related to the initial public offering
of an MLP formed to acquire and develop ethylene production facilities and
related assets. This follows the drop down to Williams Partners ('BBB'/Stable)
of an 83% interest in the 1.44 billion pound/year Geismar, LA olefins
production plant from parent The Williams Co. for $2.36 billion in November
2012, as well as recent public comments by Methanex Corp. ('BBB-'/Stable) that
it is reviewing a possible MLP structure for two of its methanol plants in
Numerous considerations go into assessing credit quality of any sponsored MLP.
These include underlying asset quality, stability of cash flows, credit
quality of offtakers, recontracting risk, commodity price exposure, scale and
capex needs, as well as the legal, operational and financial ties between a
sponsor and its LP.
Fitch expects MLPs should be able to operate throughout business cycles while
generating stable cash flow and maintaining level or increasing partnership
unit distributions. MLPs with limited commodity price exposure, manageable
ongoing capital expenditure requirements, good organic growth prospects, and
modest leverage typically exhibit the strongest credit profiles.
By contrast, entities with volatile commodity-linked earnings streams and/or
more capex pressure may need to make offsetting adjustments, such as higher
distribution coverage, to achieve similar credit quality. Fitch generally
views chemicals assets as being in the latter camp given the periodic boom and
bust nature of the chemicals space. However, North American chemicals also
have a strong longer-term competitive advantage over producers in other
regions due to their access to cheap shale-based feedstocks, especially
relative to producers which rely on more expensive oil-based feedstocks.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
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opinions expressed are those of Fitch Ratings.
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Mark C. Sadeghian, CFA, +1 312 368-2090
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Christopher M. Collins, CFA, +1 312-368-3196
Kellie Geressy-Nilsen, +1 212 908-9123
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