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Tax Considerations for Magellan Unitholders

Read report by renowned tax expert, Robert Willens

The Magellan board and leadership team considered the tax implications of the transaction before determining to approve the transaction. The board and leadership team are confident the transaction delivers greater value to Magellan unitholders than could be achieved by continuing to execute the partnership's standalone plan, including after considering taxes.

Robert Willens Report

Robert Willens is an independent expert and specialist in interpreting tax and accounting issues. Mr. Willens’ report supports Magellan’s view that the benefits of the pending transaction with ONEOK far outweigh the tax costs, maximizing value for Magellan unitholders. Mr. Willens’ reports are used by hedge fund managers, lawyers, accountants, arbitrageurs, corporate tax directors, university professors and others to assess the complex tax impacts of transactions. The report, which was commissioned by Magellan, reflects Mr. Willens’ personal views and is based solely on publicly available information.
Read report by renowned tax expert, Robert Willens
Excerpts from Robert Willens report:
“In the final analysis, this transaction has, when viewed as an integrated whole, a remarkably favorable tax profile. When a valid comparison is made of the tax benefits of the transaction to the relatively modest tax cost the deal engenders, it is abundantly clear that such benefits greatly outweigh such costs.
“… this transaction does not create tax liabilities for MMP’s unitholders. Those liabilities were always present. Instead, this transaction simply accelerates their payment; and [ONEOK] has provided the unitholders with the means, through the Cash Consideration… to meet those obligations.”
“The Cash Consideration manifests an unusual sensitivity and solicitude, on [ONEOK]'s part, to the tax consequences of the transaction to [Magellan]'s unit holders by providing them with the liquidity they will need to defray their tax liabilities.
“As is typically the case, acquirers whose acquisitions are structured to achieve a basis step up, share that largesse with the owners of the acquired entity in the form of an increased purchase price for the acquired entity. In fact, here, an unquantifiable, but undoubtedly substantial, portion of the "premium" [ONEOK] is offering in the transaction is directly attributable to the tax savings [ONEOK] will reap from the basis step up…it would become readily apparent that the benefits of the ‘step up’ substantially outweigh the true ‘cost’ borne by the unit holders from accelerating a tax liability that would, inevitably, have to be shouldered.”

Key tax considerations for unitholders

Returns on an investment in an MLP are tax deferred, not tax free.
When you sell your units, you will owe taxes on the appreciation in value of your units and on the income that you have deferred from the moment you bought your units.
Even if you don’t sell your units, there is a point in time when you will no longer be able to defer your tax liability.
The current taxes owed each year will increase, as your allocated income is expected to exceed your distributions and these distributions will effectively become largely taxable as ordinary income.
We estimate that long-tenured unitholders will soon owe taxes each year that are ~60% of the distributions they receive.
Over time, as the distributions you receive from Magellan are higher than your allocated share of income, your tax basis declines. The amount of depreciation you are allocated also declines, ultimately leading to a lower tax basis and an increasing share of taxable income being allocated to you.
New capital investment made by the partnership can extend or increase the amount of depreciation that is allocated to you, and thus offset or “shield” taxable income.
The inverse is also true: when capital spending declines, less depreciation is created for unitholders, and as a result, allocated income and related taxes increase.
The execution of our buyback strategy will exacerbate these underlying impacts.
By reducing the number of units outstanding, we will allocate more income to our remaining unitholders, resulting in higher annual taxes owed. Buybacks are increasing because we believe our shares are undervalued and because of the increasingly limited organic growth opportunities available to us.
Given that we forecast a more limited capital investment environment for our business going forward, along with the underlying mechanics of income allocation, we generally expect that we will generate more taxable income and less depreciation to allocate to our limited partners going forward, which will result in higher annual taxes owed by our unitholders.
Transaction does not create new taxes except those resulting from the premium.

Gain/Loss Calculator Estimate

The tax implications of the proposed merger will be unique to each investor depending on when they purchased their MMP investment. The gain/loss calculator available at can be used to determine a preliminary estimate of the potential gain as of 12/31/22 (including the allocation between ordinary income and capital gains) as a result of the merger, utilizing the total consideration of $25 cash + the value of 0.667 shares of OKE for each MMP unit held.

However, please keep in mind this tool will not show the increasing estimated taxes investors are expected to owe over time from continuing to hold MMP units on a standalone basis as described on page 12 of the supplemental slides regarding tax considerations, which is available here.