EIP Response: ISS Recommends Magellan Midstream Holders Vote 'For' with CAUTION.

WESTPORT, Conn., Sept. 12, 2023 /PRNewswire/ -- Because of issues raised by EIP, ISS released a qualified "with caution" opinion of the proposed ONEOK-Magellan merger. Specifically, ISS notes that "certain unitholders may prefer to continue holding MMP on a standalone basis given their tax considerations and investment preferences" and should vote accordingly. 

By ISS's own assessment, it is neither an expert in partnership tax nor an expert in the midstream subsector of the energy industry, and as such, EIP's decades long energy industry and capital markets experience lends itself to be an independent investor voice on these issues. 

ISS is, however, an expert in the M&A process by virtue of their wide view of so many other corporate transactions. In this area, ISS gives its most damning critique: "The board's decision to forgo an auction process is a cause for concern, since investors lack market-based evidence that the deal presented in fact represents the best value alternative." EIP shares this concern and finds that without such a sales process, the board's belief that "it negotiated from a position of strength" is laughable. 

On the strategic rationale for the merger, ISS agrees with EIP that there may be no existential need for this transaction. They highlight the tax benefit to ONEOK as the biggest strategic rationale - "most clear and significant financial benefit for OKE is expected from the tax basis step-up." This ONEOK tax benefit is a direct transfer paid by Magellan unitholders. While ISS makes note of EIP's observation that management has completely flipped its view on the industry's prospects, it doesn't seem to bother ISS as much as it bothers long term holders like us. At the same time that Magellan was telling unitholders the future was bright, it sought a transaction which it says was necessitated by secular risks to the business. Not being experts in the energy industry or the midstream subsector it is expected that ISS would defer to management on the industry outlook. However, through our 20-year energy infrastructure investing experience and extensive work, EIP comes to a different conclusion based on the facts - this is a flawed deal that came out of a flawed process with weak strategic rationale based on shaky long-range assumptions about future petroleum product demand.

On valuation, the analysis continues to be muddied with two flaws. The first is the use of enterprise value-to-EBITDA, and the second is using recent valuations as a benchmark. Since equity holders do not hold the debt and receive earnings AFTER Interest, Taxes, Depreciation and Amortization, the metric is nonsense. Moreover, ISS thinks that the transaction price valuation on earnings (P/E) of 12.9x is sufficient because that is a "27.5 percent improvement over the post-pandemic" multiple.¹ This ignores the fact that ,in our view, Magellan is a better investment than the S&P 500 which trades at a higher P/E 20x, has experienced lower growth, less stable earnings, has a lower ROIC and a 1.6% yield vs Magellan's 6.3% yield.²

EIP encourages all unitholders, especially institutions, to examine our analysis presented on our website votemmp.com. None of our primary conclusions that this merger is worse than a stand-alone Magellan are disproved by Magellan management or ISS.

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 July 31, 2023 EIP has $5.2 billion in assets under management. www.eipinvestments.com

Disclosures:

This is not a solicitation of authority to vote your proxy. Please DO NOT send us your proxy card. Energy Income Partners, LLC is not able to vote your proxies, nor does this communication contemplate such an event. EIP urges shareholders to vote against the proposed merger or not vote which will have the same effect as voting no.

The views expressed are those of Energy Income Partners, LLC as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. These views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. This piece is for informational purposes and should not be construed as a research report.

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.

¹ Source: ISS – Magellan Midstream Partners, L.P. September 7, 2023
² Source: Bloomberg as of September 11, 2023

SOURCE Energy Income Partners, LLC

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