|Our intention to covert from a master limited partnership (“MLP”) to a C-Corporation (“C-Corp”) is driven by three main factors, including improvements in our cost of capital, liquidity through a broader base of potential investors, and tax alignment, all of which we believe provide immediate and long-term benefits to investors.|
- What do you mean by improved cost of capital?
Conversion to a C-Corp should result in a lower cost of capital for Hi-Crush. The MLP structure comes with the expectation of paying out a significant portion of cash flows to unitholders through quarterly distributions, and to the holders of incentive distribution rights (“IDRs”), driving a higher cost of capital. In addition, MLPs typically have funded growth externally through equity offerings and debt issuances. These expectations can result in reduced financial flexibility and limitations on our ability to grow. As part of our path towards conversion, we recently eliminated the IDRs previously owned by our sponsor. Under the C-Corp structure, we’d benefit from a more flexible set of capital return expectations, and the ability to fund growth through internally generated cash flow rather than reliance on external sources.
- What do you mean by improved liquidity through a broader base of potential investors?As a C-Corp, we expect to broaden our potential base of investors by making it easier to invest in our equity. Our current status as an MLP precludes certain investors from investing in our units, and may limit other pools of potential investors due to a more involved tax reporting process, including K-1’s. We expect that conversion to a C-Corp will improve the trading liquidity for our equity.
- What do you mean by improved tax alignment?
Since third quarter of 2017, we have laid out our long-term strategy of pivoting our business to focus more heavily on logistics and the movement and management of sand. As part of this evolution in our business and its strategy, the conversion to a C-Corp makes sense from several standpoints, including governance and cost of capital. This is a tactical move to position the business for long-term strategic success.