NEW YORK--(BUSINESS WIRE)--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 Geismar, LA.
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 market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.