An MLP Overpaid
An MLP overpaid for an interest in an LNG terminal.
The Delaware Chancery Court said a master limited partnership called El Paso Pipeline Partners, L.P. paid at least $171 million too much for 49% interest in an LNG terminal on Elba Island, Georgia in November 2010. The MLP bought the interest from El Paso Corporation, which had organized and retained control over the MLP. The MLP paid at least $931 million.
A master limited partnership is a large partnership with ownership units that are listed on a stock exchange.
The decision, in a case called In Re: El Paso Pipeline Partners, L.P. Derivative Litigation in late April, is a warning to MLPs and yield cos to be careful about the prices paid for “drop-down” assets from affiliates.
The El Paso MLP partnership agreement required that any asset purchases from El Paso be approved by a special conflicts committee composed of qualified members of the board of the MLP general partner, an El Paso subsidiary.
The committee could approve purchases that meet one of four standards: either the board had to believe in good faith that the transaction was in the best interests of the MLP, or the purchase had to be approved by common unit holders who were unaffiliated with the general partner, or the purchase had to be on terms that were no less favorable to the MLP than those available from unrelated third parties, or the terms had to be fair and reasonable to the MLP. The committee used the first approach.
All the assets the MLP acquired over time came solely from El Paso.
The conflicts committee had an outside law firm and financial adviser advising it from one transaction to the next.
The committee decided that the Elba purchase made sense after concluding it was accretive to the limited partners when, the judge said, the committee should have focused on whether a fair price was paid. “An accretion analysis says nothing about whether the buyer is paying a fair price,” the judge said. “Accretion depends on how the acquisition is financed, and ‘anyone can make a deal look accretive just by playing with the consideration used.’”
The MLP had bought a 51% interest in the same LNG terminal in the spring the same year for a lower price than it paid for the remaining 49% interest. After the earlier deal was announced, the MLP units dropped 3.6% in market value. One key committee member told the others in an email after the first purchase, “Next time we will have to negotiate harder.” When El Paso came back with the proposed sale of the remaining 49% interest, a committee member told others by email that it is “really not in the best interests of [El Paso MLP] to have too much of its assets tied up in the LNG trade,” to which another committee member responded, “It is as though you were reading my mind.” In the end, the MLP paid a higher price than before. The judge said the picture that emerged was one of committee members going through the motions.
He had harsh words for the financial adviser. The adviser had a conflict of interest: it was paid a flat fee of $500,000 per transaction for a fairness opinion, but on a contingency basis where it was paid only if the deal closed. It was briefed about each transaction by El Paso executives before the transactions were presented to the MLP and the conflicts committee. The adviser appeared to fiddle in its analyses with discount rates and other metrics to try to show the proposed price for each transaction was down the fairway, even at the expense of using inconsistent approaches to analyze the initial purchase of a 51% interest compared to the later purchase of the remaining 49% interest, and gave no apparent consideration to a softening of the LNG market between the two transactions.
The adviser made “a minimal effort” and did little more than try to “justify [El Paso’s] asking price and collect its fee” rather than help the committee do a real analysis, identify arguments and negotiate, the judge said.
The committee members appeared misinformed about the scope of guarantees by oil majors of the offtake contracts and could offer few specific recollections of their thinking at trial. They never learned enough about the facts to determine that the price was fair, the judge said.
Keith Martin in Washington