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Mature MLPs seen lining up to modify structure after Plains' consolidation

Atleast three large midstream master limited partnerships could be in position tofollow Plains All AmericanPipeline LP's well-receivedmove to simplify itsownership structure.

A "handfulof MLPs" are in discussions to evaluate modifying or removing theirincentive distribution rights, or IDRs, as they scramble for an edge over theirpeers on stock valuations and distributions, sources said.

Marketparticipants tagged ONEOKPartners LP, EnergyTransfer Partners LP and WilliamsPartners LP as the most likely candidates for IDR removals oralterations, with ONEOK Partners on top of the list.

IDRsallow general partners to claim a portion of their associated ' distributable cash flows,with the portion rising in three or four tiers tied to the size of thequarterly distribution. As the MLP matures and distributions hit the highesttier, limited partnerships and their general partnerships generally split incrementaldistributable cash flow on a roughly 50/50 basis. Thereis no cap on the general partner share, so any further distribution increasesafter hitting the top tier are shared with the general partner at the maximumlevel.

"Youwould be looking at mature MLPs of significant size in the high splits. It issomething in the tool kit for other mature MLPs to consider," EY'sHouston-based U.S. MLP leader, Greg Matlock, said of established partnershipssimplifying to avoid paying a higher share of distributable cash flow to theirgeneral partners.

Matlocklisted three factors that come into play when an MLP considers discarding orrestructuring its IDRs: the partnership's unit performance, the impact of IDRson its ability to raise equity or debt, and how the proceeds of anycapital-markets issuance will be used.

"Weestimate the combination of dividends and growth capital spending [at ETP] tocomprise 126% of operating cash flow in 2016. By comparison, [ONEOK Partners]looks to spend just 87% of its operating cash flows on either dividends orgrowth capex, which we think puts them in a stronger financial position,"S&P Global Market Intelligence industry analyst Stewart Glickman said in aJuly 20 note.

Hedetermined that ETP and ONEOK Partners, the top picks for IDR alterations inhis coverage universe, are 61% and 41% above the threshold for the top tiers oftheir IDR schedules, respectively.

Glickmanlikened their situation to that of Plains, whose second-quarter distributablecash flow of 70 cents per share was 52% higher than the trigger point for thetop tier of its IDR schedule.

"Plainsis more garden-variety [than KinderMorgan Inc.]. Plains could be a harbinger of more [simplifications]coming on the pike," Glickman said in an interview.

In2014, Kinder Morgan, with encouragementfrom unit holders and shareholders, rolledup its complex of partnerships into a single "C corporation"structure.

"WhenKMI did it, by virtue of distributable cash flow getting better every year,IDRs became increasingly a problem. … They had an older hand at the time.Whereas Plains is not in the same situation," Glickman said in theinterview, explaining why he believes more "garden-variety" MLPs willsimplify their structures following Plains' consolidation.

LongbowAsset Management financial analyst Jake Dollarhide absorbing Williams Partners intoits corporate structure will be the next task for roster after thedemise of its courtship with EnergyTransfer Equity LP. In making its pitch for the merger, ETE Williams' attempt tocompress its structure as a C-corp through a merger with Williams Partners,which has existed since 2005.

FitchRatings analyst Peter Molica pointed to yield and cost of capital as catalystsfor ownership simplification. "When you have a higher equity yield, itbecomes harder to fund growth projects," he said in an interview.

Yieldsremain blown out in the midstream space. The average yield on the Alerian MLPindex is 7.1%, compared to 3.5% for S&P 500 REITs, 3.3% on the S&P 500Utilities Index and 2.2% on the S&P 500 as of June 30, according to anAlerian MLP fact sheet.

AlerianMLP data reflect that ONEOK Partners' yield is 7.6% while Williams Partners andETP offer yields of about 9% and 10.7%, respectively. Plains' yield is peggedat 9.6%.

Themove to terminate IDRs picked up steam after the 2008-09 financial meltdown. Citingimpediments to growth, EnterpriseProducts Partners LP, BuckeyePartners LP, MagellanMidstream Partners LP, GenesisEnergy LP and MarkWestEnergy Partners LP merged their general partnership and limitedpartnership structures between 2009 and 2013.

Spokespeoplefor ONEOK Partners, ETP and Williams Partners did not respond to attempts toreach them for comment.