MLP Index Constituent Changes: Alerian, You Got Some ’Splainin to Do

The Biebs is sorry, and so are we. We thought that the methodology revisions announced earlier this year would clarify misunderstandings among stakeholders. Instead, our inbox has been flooded with variants of “what do you mean?” So we’ve decided, just this one time, to publicly walk through the math for one index from the June 17th quarterly rebalancing to try and clear things up.

Alerian MLP Infrastructure Index (AMZI)

Why the AMZI? More linked assets = more stakeholder inquiries. As of May 31st, we counted 65 midstream energy partnerships using the Energy MLP Classification Standard (EMCS^SM). The companies that comprise this universe are engaged in Gathering & Processing, Liquefaction, Midstream Services, Pipeline Transportation, Rail Terminaling, and Storage. At the LP level, there were 58 such companies—57 K-1 issuers and VTTI Energy Partners (VTTI), a Form 1099 issuer. At the GP level, there were seven securities—four K-1 issuers and three Form 1099 issuers. Notable exclusions:

• Cheniere Energy Partners LP Holdings (CQH) and Enbridge Energy Management (EEQ), because they are parallel securities to Cheniere Energy Partners (CQP) and Enbridge Energy Partners (EEP), respectively; and



• any company that is legally structured as a corporation, including the reincorporated Kinder Morgan (KMI) and Targa Resources (TRGP).

The total float-adjusted market capitalization (AMC) of these 65 companies on May 31st was $194,260,629,183.32, and 90% of this number is $174,834,566,264.99. When ranking these 65 companies by AMC in descending order, the security that crosses the 90% threshold is NGL Energy Partners (NGL), which had an AMC of $1,427,804,624.56; 80% of this number is $1,142,243,699.65.

Now, maybe you’re wondering why the seven GPs are included in the calculation of total AMC even though the constituent criteria render them structurally ineligible. It’s a good question. The line has to be drawn somewhere, and we’ve chosen to drawn the line according to legal definitions, which are unambiguous. Along similar lines, Enterprise Products Partners (EPD) is among the largest US publicly traded companies and is included in any calculation of US equity market capitalization, but isn’t eligible for the S&P 500.

Twenty-three constituents met all criteria. One constituent, CQP, had an AMC of $1,304,461,119.50, which is less than NGL’s but greater than the 80% buffer. CQP consequently remained in the AMZI. Among non-constituents, two companies—NGL and Tallgrass Energy Partners (TEP)—met all criteria and were subsequently added to the AMZI after market close on June 17th. The other 39 non-constituent midstream energy partnerships failed at least one criterion.

What about the other indices?

As of May 31st, the universe for the Alerian MLP Index (AMZ), Alerian MLP Equal Weight Index (AMZE), Alerian Large Cap MLP Index (AMLI), Alerian Mid Cap MLP Index (AMMI), and Alerian Small Cap MLP Index (AMSI) consisted of 113 energy partnerships. At the LP level, there were 104 companies—93 K-1 issuers, including 9 variable distribution MLPs; and 11 Form 1099 issuers. At the GP level, there were nine securities—the seven mentioned above plus Alliance Holdings GP (AHGP) and Atlas Energy Group (ATLS).

The universe for the Alerian Energy Infrastructure Index (AMEI) consisted of 88 North American midstream energy companies:

• the 65 from the AMZI,
• the 10 Canadians,
• the 7 C corporation energy infrastructure GPs,
• the 3 US Utilities—CenterPoint Energy (CNP), Dominion Resources (D), and OGE Energy (OGE)—with subsidiary energy infrastructure MLPs, and
• the 3 standalone energy infrastructure corporations—KMI, TRGP, and Macquarie Infrastructure (MIC).

And finally, the universe for the Alerian Natural Gas MLP Index (ANGI) consisted of 35 midstream natural gas partnerships. Using the EMCS^SM, the companies that comprise this universe are engaged in Gas Storage, Gathering & Processing, Liquefaction, Midstream Services, and Natural Gas Pipeline Transportation.

You forgot about the Alerian MLP Closed End Fund Index (AMCI).

Ah, so I did. The AMCI should rarely see constituent changes. As a total market index of MLP closed-end funds making a corporate tax election, deletions and additions generally come from mergers and IPOs alone, respectively. We haven’t seen the former since Tortoise Energy Infrastructure (TYG) acquired Tortoise North American Energy (former ticker: TYN) and Tortoise Energy Capital (former ticker: TYY) in June 2014, and we haven’t seen the latter since the Goldman Sachs MLP & Energy Renaissance Fund (GER) went public in September 2014. But we were treated to two exceptions this time around.

Cohen & Steers MLP Income & Energy Opportunity Fund (MIE), which was taken public as a pass-through entity in March 2013, made a corporate tax election on December 1, 2015. However, the dissolution of its taxable subsidiary, which occurred on January 31, 2016, was not publicly confirmed until four days later. Accordingly, MIE became eligible for and was added to the AMCI at the June quarterly rebalancing.

Cushing Energy Income Fund (SRF) was taken public in February 2012. Though the fund has not publicly confirmed any change in tax status, SRF’s latest Form N-Q—a quarterly schedule of portfolio holdings—reveals exposure to K-1 issuers of less than 25% of total investments for the first time. Since this is the threshold for RIC compliance, the fund was removed from the AMCI.