Fitch expects continued MLP growth as UHCs take advantage of high market valuations and investors' desire for yield. MLPs provide greater financial flexibility as UHCs can monetize natural gas oriented assets while retaining control, utilize relatively lower cost of capital that MLPs enjoy and reduce liquidity needs. However, MLPs often create multilayer debt and equity subordination, complicating the corporate structure, incentivize the pursuit of high risk/high reward expansion opportunities, and could increase cash and earnings volatility for the UHC.
Rating implications for a UHC relate to the strength of its link to the MLP. Fitch gauges these linkages based on the degree of the UHC's control of the MLP's operational and financial decisions, the strategic importance of the MLP to the overall corporate strategy of the UHC, the ownership percentage of the GP and LP by the UHC, the relationship between the GP and LP unit holders, and the severity of structural subordination. The linkages could change with the evolution of the MLP. Consequently, Fitch's analytical approach may adjust over time to capture the shifting risk implications.
The full report 'MLP Formation Has Rating Implications for Utility Sponsors' is available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Julie Jiang, +1 212-908-0708
Source: Fitch Ratings
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