How Can Miller/Howard Be an ESG Manager in the Energy Sector?

Monday, November 18, 2019

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  • Miller/Howard’s goal is to serve the interests of our clients and to work with energy companies, pushing them to be better corporate citizens and sustainable businesses.
  • Engagement moves industry to better practices, increased disclosure, and heightened transparency.

Miller/Howard welcomes this conversation, buoyed by conviction and decades of experience in the engagement space. We focus on engagement, an effective mechanism of change through which we encourage companies to be better corporate citizens.

We speak from the perspective of realists who understand that, at such a critical time in our economy and world, we need all hands on deck. Though we are certainly asset managers in the energy sector, our ESG scope of action sweeps from Capitol Hill to the boardroom.

We effect change now by engaging companies on difficult questions—moving the industry to better practices, increasing disclosure, and heightening transparency faster than regulators can. That happens with engagement.

Miller/Howard has learned that investor voices are powerful in dialogues with companies and in dialogues with regulators.

We ask companies to adhere to identified best practices, look at the long-term picture, utilize resources appropriately (including energy, water, and people), and be efficient and innovative. We work to foster working—not adversarial—relationships with company management, having found through experience and research that such an approach is best, even if the conversations can be difficult and the asks, tough.

In the unique case of Master Limited Partnerships, where traditional avenues for shareholder engagement and proxy voting are unavailable, we’ve gotten creative. Our Open Letter to MLP/Midstream Management Teams calls for management teams to address key issues to become better aligned with investors. Norms are changing in the midstream energy industry as expectations are changing among investors; laggards will fall further behind unless they take action. And our midstream/MLP engagements have had notable impacts (see below).

Miller/Howard has supported the MLP Parity Act/Financing our Energy Future Act since its first introduction in 2012 by issuing statements and talking to lawmakers. The Act supports innovation and seeks to level the playing field by allowing renewable energy companies access to the MLP structure.

Miller/Howard’s goal is to serve the interests of our clients and to work with companies, pushing them to be better corporate citizens and sustainable businesses. We see it less as a question of “How can we be an ESG manager in the energy sector?” and more a question of “How can we not be?”

 

Shareholder Advocacy & Engagements: Analysis Becomes Action in the Energy Sector

By means of letters, conversations, comparisons to peers, and submitting and/or supporting shareholder proposals, our work over the last year encompassed a variety of environmental, social, and governance issues.

We pushed for more disclosure of environmental management, including policies, practices, and metrics, at a variety of companies, including:

  • Atmos Energy
  • Cabot
  • Energen/Diamondback
  • Energy Transfer Partners
  • EnLink
  • Enterprise Products Partners
  • EQM
  • EQT GP & Midstream Partners
  • Kinder Morgan
  • Magellan Midstream Partners
  • MPLX
  • ONEOK
  • Pembina Pipeline
  • Phillips 66 Partners
  • Plains All American
  • Shell Midstream Partners
  • Tallgrass Energy
  • Western Midstream Partners
  • Williams Energy

Examples of results:

  • As a result of our pushing for increased disclosure, Enterprise Products, Magellan Midstream Partners, and Plains All American released inaugural and/or enhanced ESG disclosure on their websites, or committed to doing so in the near term.
  • In response to our calls for more granular and material methane-related performance data, ONEOK provided a supplemental update to its sustainability report.
  • In 2017, we began pushing Pembina Pipeline to increase its ESG disclosure and in December 2018, the company published its inaugural sustainability report.
  • Miller/Howard began filing shareholder proposals and dialoguing with Kinder Morgan in 2015, requesting ESG disclosure and other related performance metrics (e.g., methane emissions). Kinder Morgan released its inaugural sustainability report in October 2018, and a 2ºC scenario report in 2019.

Read more about Miller/Howard’s engagements with energy companies.

The portfolio management team was a driving partner in our MLP/Midstream Energy engagement, and talks about it in the May 2019 edition of the Open Letter to MLP Management Teams, which can be found on our website. All stocks mentioned above were held in a Miller/Howard strategy as of March 31, 2019. There is no assurance that the securities have remained or will remain in the portfolio.

Nicole Lee provides ESG research and support to the investment team and operational leadership within the ESG team. She also writes the firm's biannual Shareholder Advocacy News. Nicole worked for several years as a clinic coordinator and educator for a nonprofit health organization, during which time she also developed and conducted training programs at two local universities. She received her BS in Sociology from Southern Utah University, and studied Public Health at Westminster College.


John R. Cusick, CFA, brings deep knowledge of the MLP sector to the firm's portfolio management team. He was previously senior vice president and research analyst at Wunderlich Securities Inc. in New York, covering energy in North America, including partnerships focused on natural gas, liquids, and exploration & production. Prior to that, John spent more than a decade at Oppenheimer & Co. in New York, where he started his career as a junior analyst working on the energy team, and then as a senior research analyst specializing in the midstream sector. He earned his BA in Finance and Marketing from Temple University, and his MBA in Finance from Fordham University School of Business in New York City.

© 2019 Miller/Howard Investments, Inc.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)

  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)

  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.

Past performance does not guarantee future results.