The MLP Simplification Wave and C-Corp Conversions

Introduction

The MLP simplification wave of 2017-2022 was one of the most significant structural transformations in energy finance. Over a span of five years, the majority of large midstream companies dismantled the GP/LP/IDR structures that had defined the sector for decades, replacing them with simplified, single-entity corporate structures that eliminated the conflicts of interest, cost-of-capital disadvantages, and investor-base limitations that had accumulated in the traditional MLP model. This sweeping transformation generated billions of dollars in advisory mandates for energy bankers (fairness opinions, GP/LP merger negotiations, tax structuring advice) and fundamentally changed how the sector is valued and analyzed.

The traditional MLP model worked well during periods of steady distribution growth (the mid-2000s through 2014), when the alignment between GP incentives (grow distributions to maximize IDR income) and LP outcomes (receive higher distributions) was positive. The model broke down when several forces converged:

The cost of capital problem. At the highest IDR splits (50/50), the GP captured half of every incremental dollar of distributions, making it extraordinarily expensive for the MLP to fund growth. An MLP at the 50/50 split needed to generate $2 of incremental EBITDA to deliver $1 of incremental distributions to LPs, effectively doubling the required return on growth capital. This rising cost of capital meant that projects that would have been accretive for a C-corp (or an MLP at lower IDR splits) were dilutive for an MLP at the 50/50 split. Many MLPs responded by taking on excessive leverage to fund growth without issuing equity, which contributed to the over-leveraging of the sector heading into the 2014-2016 commodity downturn.

The 2014-2016 commodity crash. When oil prices collapsed, many MLPs could not sustain their distribution levels. Distribution cuts (which had been almost unheard of in the MLP sector) became widespread, destroying the premise that MLPs offered safe, growing income. The credibility damage was severe: investors who had owned MLPs for yield discovered that distributions were not as secure as they had believed, and many exited the sector permanently.

Institutional investor limitations. The K-1 tax form, UBTI risk for tax-exempt investors, and state income tax filing requirements in multiple jurisdictions limited the MLP investor base to primarily retail investors and a small number of MLP-focused institutional funds. Many large mutual funds and ETFs were prohibited by their prospectuses from holding more than 10-25% of assets in partnerships, creating a ceiling on institutional demand for MLP units. C-corp structures issue 1099 forms, are eligible for S&P 500 and other major index inclusion (which triggers automatic buying from passive index funds), and attract the full universe of institutional investors (mutual funds, ETFs, pension funds, sovereign wealth funds, foreign investors), creating significantly deeper liquidity and potentially higher valuation multiples.

MLP Simplification

The process of eliminating the IDR structure and consolidating the GP and LP entities into a single, simplified corporate structure. Simplification typically involves the GP acquiring the outstanding LP units it does not own (in exchange for newly issued GP shares or units), canceling the IDR rights, and merging the two entities into a single public company. The resulting entity operates with a lower cost of capital, simplified governance, and access to the broader C-corp investor base. Between 2017 and 2022, most large midstream MLPs completed simplification transactions.

The simplification process typically followed one of two paths:

GP/LP merger (IDR buyout and consolidation). The GP acquires the outstanding LP units it does not already own in an all-unit exchange, consolidating the GP and LP into a single entity. The exchange ratio compensates LP unitholders for the elimination of the IDR "tax" on their distributions. The merged entity may remain an MLP (with simplified structure and no IDRs) or convert to a C-corp.

IDR elimination with unit exchange. The GP waives its IDR rights in exchange for a negotiated number of newly issued LP units (diluting existing LP unitholders). The MLP continues as a partnership but without the IDR structure. This was a common approach for MLPs where a full GP/LP merger was not practical.

Williams Companies / Williams Partners (2018). Williams acquired the remaining stake in Williams Partners LP in a deal valued at approximately $10.5 billion, simplifying the corporate structure of one of the largest natural gas infrastructure companies. The merged entity maintained investment-grade credit and eliminated the GP/LP conflict that had been a persistent governance concern.

Targa Resources (2016). Targa Resources Corp. acquired all outstanding common units of Targa Resources Partners LP in an early simplification transaction that improved distribution coverage, reduced cost of capital, and positioned the company for aggressive growth in Permian Basin gathering and processing.

Simplification transactions generated significant advisory fee revenue for energy banks:

Many of these simplifications included or were followed by a conversion from partnership to corporate form, which addressed the investor base limitations that had constrained MLP valuations.

C-Corp Conversion

The process of converting a publicly traded partnership (MLP) into a C-corporation. The conversion triggers a taxable event for existing unitholders (who exchange partnership units for corporate shares) but provides long-term benefits: eligibility for S&P 500 and other major index inclusion, access to institutional investors who cannot hold partnerships, elimination of K-1 complexity, and removal of UBTI concerns for tax-exempt holders. The trade-off is that the entity now pays corporate income tax (which the partnership did not), reducing pre-tax distributions. However, the broader investor base and lower cost of equity capital typically more than offset the tax cost.

The following table summarizes the most significant midstream simplification transactions, which collectively generated billions in advisory fees and established the pricing precedents that energy bankers reference in current midstream M&A work.

The simplification wave improved midstream valuations in several ways. Lower cost of capital (without the IDR drag) allowed companies to pursue more accretive growth projects. Broader investor base (C-corps attract index funds, ETFs, and institutional investors that cannot own MLPs) increased demand for midstream equity. Improved governance (elimination of GP/LP conflicts) reduced the "governance discount" that many MLPs traded at. Distribution sustainability improved because companies could retain more cash flow for coverage and deleveraging rather than passing it through to the GP via IDRs.

For energy bankers today, the MLP simplification wave provides important precedent transaction data for any future midstream restructuring or GP/LP transaction. Understanding how exchange ratios were determined, how fairness opinions were structured, and how tax consequences were managed is relevant for advising clients on similar transactions.

The simplification wave was one of the most consequential structural transformations in energy finance. It changed how midstream companies are capitalized, governed, valued, and traded. For energy bankers, the wave generated billions in advisory revenue and created a body of precedent transaction data that continues to inform midstream M&A analysis, particularly for the remaining MLPs and any future GP/LP restructuring activity.