While Hess Midstream Partners LP's reorganization sets a solid example for other pipeline companies under pressure to eliminate required payments to their general partners, some midstream analysts said the structure does not completely resolve the corporate governance issues that deter investors from buying into master limited partnerships.
Hess Midstream on Oct. 4 announced that it will acquire the ownership interests of Hess Corp. and Global Infrastructure Partners in Hess Infrastructure Partners LP for $6.2 billion, including the outstanding economic general partner interest in Hess Midstream and the associated incentive distribution rights, or IDRs. The new publicly traded entity, Hess Midstream LP, will follow several former and retooled MLPs in removing IDR obligations and will be taxed as a corporation while holding an interest in Hess Midstream Operations LP, which will be taxed as a partnership.
"This is a compromise template transaction for other partnerships that need to eliminate IDRs, including DCP Midstream LP, CNX Midstream Partners LP, BP Midstream Partners LP and Sunoco LP," Robert W. Baird & Co.'s Ethan Bellamy said in an email.
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The transaction will be "immediately accretive" for public unit holders when it closes in the fourth quarter, according to an Oct. 4 investor presentation, which Bellamy added is "the bogey we have been advocating for years now for these type of transactions."
Shareholders were lukewarm to the restructuring announcement, with Hess Midstream stock gaining over 4% to trade at $20.37 per unit as of 12:45 p.m. ET.
John Hess, chairman and CEO of Hess Midstream's general partner, pointed to "visible EBITDA growth and increasing free cash flow generation" as key benefits of ditching the existing business model during an Oct. 4 conference call. Hess Midstream began trading in 2017, but Hess acknowledged that "the midstream sector has seen significant change since we launched."
That change includes the sectorwide shift away from the cash-leaking MLP structure in an effort to retain more liquidity for capital spending, which Hess Midstream undertook even though executives said in October 2018 that IDR payments accounted for less than 3% of distributable cash flow.
Still, Hess Midstream LP's hybrid Up-C organization may not be enough to materially attract generalist investors. Both Robert W. Baird's Bellamy and BMO Capital Markets analyst Danilo Juvane pointed to the structure's governance flaws, namely that the partnership unit holders' voting power in the corporation can be limited.
"It doesn't do much to sort of move the needle in terms of attracting the incremental generalist investor to the space," Juvane said in an interview. "You kind of have to go all the way and really make a full commitment to change before investors outside the space … are ready to digest it."
Bellamy said that without the IDRs, Hess Midstream LP "will be far more investable in our view."

