UMI - Midstream MLPs And Corps: Differences Beyond Tax Treatment
- AMCC includes midstream companies based in the US and Canada that are taxed as corporations.
- AMZ and AMCC index-level data is useful for making generalizations about MLPs and corporations as a group.
- AMZ and AMCC also differ in their subsector exposure, with the MLP index providing greater exposure to companies focused on petroleum pipelines (43.8% of AMZ) and the C-Corp index biased towards natural gas pipelines (33.4% of AMCC).
The North American energy infrastructure universe consists of Master Limited Partnerships (MLPs) and US and Canadian corporations, which transport, store, and process hydrocarbons. Business activities are similar, but tax treatment differs, with MLPs receiving special advantages as pass-through entities in the US. Beyond the obvious tax differences, how do midstream MLPs and C-Corps compare when it comes to performance, yields, credit quality, and other metrics? Today’s note compares energy infrastructure MLPs and corporations using the Alerian MLP Index (AMZ) and the Alerian Midstream Energy Corporation Index ((AMCC)).
Introducing AMCC – the midstream C-Corp benchmark.
As the number of midstream corporations increased and their share of the universe market capitalization grew over time, it was clear that an energy infrastructure C-Corp benchmark was needed. AMCC includes midstream companies based in the US and Canada that are taxed as corporations. At the end of June, AMCC was 36.2% Canadian corporations. AMCC’s methodology is similar to the AMZ in that constituents are weighted based on float-adjusted market capitalization and the largest constituents are capped at 10%. These similarities help facilitate comparisons between these two indexes as proxies for MLPs and corporations in aggregate. The AMCC Index began live calculation in December 2019.
AMZ vs. AMCC: Comparing MLPs and corporations with index data.
AMZ and AMCC index-level data is useful for making generalizations about MLPs and corporations as a group. (Investors weighing an investment in an individual MLP against an individual corporation should clearly perform a more focused comparison.) As shown in the table below, corporations are larger by market capitalization and have better credit profiles as evidenced by a higher investment-grade weighting for AMCC. MLPs tend to offer more generous income, with the yield on AMZ sitting 270 basis points above that of AMCC at the end of June. MLP income is not only higher but tends to be largely tax-deferred, which is a key benefit of the MLP structure ( read more ).
AMZ and AMCC also differ in their subsector exposure, with the MLP index providing greater exposure to companies focused on petroleum pipelines (43.8% of AMZ) and the C-Corp index biased towards natural gas pipelines (33.4% of AMCC). Both offer similar exposure to gathering & processing (G&P) companies at ~30% of the index by weighting. However, the G&P names in AMZ are smaller (i.e. market cap below $10 billion) and higher beta compared to some of the G&P corporations in AMCC, such as Williams ( WMB ), which had a market cap near $40 billion at the end of June and is a component of the S&P 500. Liquefaction accounts for 12.3% of AMCC, which is three times the weighting of liquefaction in AMZ. Cheniere Energy Partners ( CQP ) is the lone liquefaction name in AMZ.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Midstream MLPs And Corps: Differences Beyond Tax Treatment