EIP Intends to Vote Against Proposed Combination of ONEOK, Inc. and Magellan Midstream Partners, L.P.

• James Murchie, Co-Founder and CEO of Energy income Partners, LLC (EIP) issued a letter to the Board of Magellan Midstream Partners, L.P. informing of its intent to vote against the proposed combination.
• EIP believes that taxes paid by investors will exceed the premium offered by ONEOK and any other potential benefits from the merger.
• EIP wants Magellan to remain a stand-alone entity whose returns on invested capital are far superior to ONEOK.

WESTPORT, Conn., June 8, 2023 /PRNewswire/ -- Energy Income Partners, LLC the fourth largest shareholder in Magellan Midstream Partners, L.P. issued a letter to Magellan's Board stating its intention to vote against the proposed combination of ONEOK, Inc. and Magellan Midstream Partners, L.P.

June 8, 2023

Magellan GP, LLC
One Williams Center, MD-28-1
Tulsa, OK 74172
Attn: Douglas J. May
Senior Vice President and General Counsel
Magellan Midstream Partners, L.P.

RE: Proposed Combination of Magellan Midstream Partners, L.P. and ONEOK, Inc.

Dear Ladies and Gentlemen:

Energy Income Partners ("EIP") managed funds and accounts are long-term owners of Magellan Midstream Partners, L.P. units, aggregating approximately 3% of its outstanding units making EIP the fourth largest unitholder.

EIP intends to vote against the proposed combination of Magellan Midstream Partners, L.P. ("Magellan") and ONEOK, Inc. ("ONEOK") because we believe the taxes paid by our funds and investors will exceed the premium offered by ONEOK and any potential benefits from the merger.  Moreover, we want to see Magellan remain as a stand-alone entity whose returns on invested capital are far superior to ONEOK.

As a high yielding partnership, the tax cost basis of a unitholder's units can decline rapidly over time as dividends are treated for tax purposes as a return of capital. The longer the units are held, the more the tax basis declines and the higher the deferred tax liability. Most of this tax is due only when the units are sold, and this proposed transaction is a sale for tax purposes and prevents unitholders from further deferring that tax liability. 

This tax liability is a combination of recaptured income tax and capital gains tax that is difficult for most retail investors to calculate. So, with this letter we are urging the Board to direct management to include in the S-4 a full and detailed quantitative analysis of the tax consequences to Magellan unitholders of the proposed merger with ONEOK, as we believe you are required to do. This analysis also needs to feature prominently in all future communication by Magellan as it was not done in either merger press release.  

The table below shows that the length of time EIP has held its units is similar, although shorter, than management's previous estimates for all Magellan unitholders. Using the average tax cost basis for our funds, we estimate that a retail investor in Magellan would have an average tax liability of between $10 and $12 per unit depending on their marginal federal tax bracket vs. the ~$9 premium offered by ONEOK (as of 6/6/23). Our $10 estimate assumes the 25% federal tax rate while the $12 assumes the top 37% rate. Both include a 20% long-term capital gains tax, the 3.8% Affordable Care Act tax and an average state income tax rate of 5%.

Source: Magellan/ONEOK Proposed Merger Highlights Presentation, May 2023 and EIP Estimates

Since the average Magellan unitholder has held their units longer than EIP, their tax bill would be higher on average. Such a tax bill paid by all 202 million units outstanding would amount to well over $2 billion.  Compared to the purported tax benefit to the combined ONEOK/Magellan entity of $1.5 billion, only 23% of which would accrue to Magellan unitholders post-merger, this deal represents an enormous transfer of value from Magellan unitholders to the Internal Revenue Service and ONEOK shareholders.

The numbers underlying our voting decision are estimates, but they are based on our most current tax data and should be a warning to all unitholders to do these calculations for themselves.  While the tax brackets of each unitholder are unknown to Magellan, a table laying out the tax liability for each tax lot year showing the tax due for different combined tax rates would be required for unitholders to make an informed decision. EIP has the resources to do these complex tax calculations, the average retail investor may not. Our voting decision and our decision to write this letter and release it are also based on the process in which this matter is being presented to the unitholders without full disclosure.

In addition, it should be noted that this tax liability would have been mitigated enormously had Magellan chosen to convert to a C-corporation from a partnership. Two years ago, we proposed a shareholder resolution and had subsequent communications with Magellan management that we believe ultimately resulted in the Magellan C-Corp conversion analysis that was released in February of 2021.  In that analysis, management chose to prominently display a highly quantitative assessment of long-term tax costs of a conversion at the corporate level and relegated to the Appendix a qualitative reference to the tax benefits to unitholders. Magellan management's approach to its communication of this proposed merger with ONEOK follows a similar pattern.

Finally, while the S-4 will likely describe the strategic benefits and costs of this transaction, it cannot address the issue of portfolio diversification for the unitholder who would lose the ability to hold ONEOK shares and Magellan units in the proportion of their choosing. If EIP wanted to own an investment that is 77% ONEOK and 23% Magellan, which we do not, we can do that by purchasing more ONEOK on the open market without incurring this enormous tax liability.

Sincerely,

James Murchie

CEO and Co-Founder, Energy Income Partners, LLC

About Energy Income Partners, LLC

Founded in 2003, Energy Income Partners (EIP), LLC is an asset manager based in Westport, CT focusing on energy infrastructure. EIP's team has significant experience in the energy, pipeline and utility industries. As of May 31, 2023 EIP has $5 billion in assets under management. www.eipinvestments.com

Disclosures:

This communication does not in any way constitute a proxy solicitation, which may be done only pursuant to a definitive written proxy statement or an applicable exemption from the proxy statement requirements.  This communication states how we intend to vote our stock of the Company and the reasons therefor, made under Rule 14a-1(l)(2)(iv) under the Securities Exchange Act of 1934, as amended.

Energy Income Partners, LLC conducted its own analysis based upon information available to it at the time of the analysis which may change at any time without notice and does not make any warranty as to the accuracy or completeness of any analysis, data point, assumption or opinion presented herein. 

Distribution of this letter, regardless of the means or format of its delivery, does not constitute the provision of tax advice by EIP, nor should any general analysis piece be relied upon for the formulation of any targeted tax strategy.  For more information regarding specific personal or corporate tax matters, including, but not limited to, personal tax implications relating to specific portfolio transactions, please consult a qualified tax professional.

SOURCE Energy Income Partners, LLC

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