Project Pennmoor — Midstream Buy-In & Yield Capitalization
A 2-hour Energy / Midstream MLP Buy-In case study with a complete model answer
Modeled After
Barclays
Buy-side materials for a midstream partnership buy-in: has/gets analysis computed as expected distribution divided by an assumed yield, three parallel sources and uses, a four-methodology purchase-price comparison including cash flow parity and LP-attributable value, and unitholder after-tax premium net of ordinary income gain and adjusted tax basis
Structure and exhibit set are modeled after Barclays. The company, the financials and every figure in this case are entirely our own.
The Situation
P. (NYSE: PNMR) is a midstream partnership with two segments that do not share a risk.
Pennmoor Midstream Partners, L.P.
- Sector
- Energy — midstream natural gas transportation, storage, gathering and processing, held in a publicly traded master limited partnership with a corporate general partner
- Size
- Geography
- United States — interstate and intrastate pipeline, storage, gathering and processing assets, with a US-listed partnership unit and a US-dollar funding stack
- Ownership
- Situation
The Prompt
You are staffed on an Energy / Midstream MLP Buy-In engagement for Pennmoor Midstream Partners, L.P. You have 120 minutes to work through the materials and produce an answer deck and an Excel model.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
Distributable cash flow, defined before it is built
PART 2
Coverage, on every basis it is quoted on
PART 3
The incentive distribution ladder
PART 4
Maintenance versus growth capital, and what growth costs
PART 5
The forecast
PART 6
Yield capitalization — the primary methodology
PART 7
Discounted distributions — the check, not a second answer
PART 8
Has / gets, the general partner interest and the cross-check
PART 9
The market, the consideration and the recommendation
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck and Excel model are in the solution set below.
- 01
Decide what security you are valuing before you value it
- 02
Fix the acronym before anybody reads your work
- 03
Work out which coverage ratio actually governs
- 04
Price the structure, not just the assets
- 05
Separate the income argument from the valuation argument
- 06
Print the buyer's argument and answer it
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Distributable cash flow, and the abbreviation collision
Distributable cash flow is Adjusted EBITDA less cash interest, less maintenance capital expenditure, less cash taxes: the cash a partnership has available in a period to pay its partners. It is a non-GAAP measure, it is a single-period flow rather than a present value, and in this sector it is universally abbreviated DCF. That collides with the abbreviation for discounted cash flow, and the collision confuses readers because both quantities are quoted per unit and both are denominated in dollars. Every document in a midstream case should spell the phrase out on first use and should never abbreviate it where a reader could take it the other way.
Coverage ratio, and which basis governs
Coverage is distributable cash flow over distributions, and everything turns on whose distributions and whose cash. The most commonly published version divides all of the partnership's distributable cash flow by the distributions paid to the limited partners alone, which credits the common units with cash that is contractually the general partner's. A consolidated version divides all of the cash by all of the distributions. A limited partner version deducts the general partner's distributions from the numerator first, on the reasoning that they are a prior claim on the same cash. And a fourth version restates the maintenance capital line. They are all defensible arithmetic and they are not all answering the question a common unitholder asked.
Incentive distribution rights and the high splits
Incentive distribution rights entitle the general partner to a rising share of distributions as the quarterly distribution per unit crosses fixed thresholds — typically 2%, then 15%, then 25%, then 50% in the top tier known as the high splits. The percentages are shares of the total distribution, so the top tier means the general partner receives one dollar for every dollar the limited partners receive at the margin. A partnership distributing above the top threshold therefore has a marginal cost of equity capital equal to twice its own distribution yield, which is the structural reason mature partnerships stop being able to fund growth through the equity market and why the buy-in transaction exists at all.
Yield capitalization
The primary valuation method for an income security: the forward distribution divided by the yield the market demands, giving a value per unit directly. It replaces the multiple-based valuation stack rather than supplementing it, because the security is quoted in yield and its holders think in cash per unit. The whole exercise is deciding what yield to use — which means identifying the cohort the partnership actually belongs to, showing what separates that cohort from the next one, and being explicit that a yield is a judgment rather than an observation. A grid of values across a range of yields is the honest way to present it.
Discounted distributions analysis
The present-value check on the capitalization, and not a discounted cash flow of the enterprise. The stream discounted is the distribution a limited partner actually receives; the rate is a cost of equity rather than a blended cost of capital, because nothing here is an enterprise cash flow; and the terminal value is struck on a terminal yield rather than on an exit multiple, because a yield is the unit this security is quoted in. Striking the terminal value on an EBITDA multiple would import the enterprise comparison the archetype treats as a cross-check, and it would do so in the largest single cell of the analysis.
Take-or-pay contracts, fee-based margin and counterparty credit
The sector's headline disclosure is the percentage of gross margin that is fee-based rather than commodity-linked, and it is the easiest number in midstream to flatter. Fee-based measures PRICE risk: it says the margin does not move with the commodity. It says nothing about whether the counterparty can pay. A take-or-pay contract with a minimum volume commitment is only as good as the producer that signed it, and a commitment from a counterparty in distress is an unsecured claim rather than a contracted cash flow. The percentage belongs on the page with the counterparty concentrations and their ratings beside it, or it is a statement about one risk being read as a statement about another.
Maintenance versus growth capital expenditure
Only maintenance capital expenditure is deducted in distributable cash flow, so the split between maintenance and growth sets the headline cash figure directly — and it is a management judgment rather than a determination under generally accepted accounting principles. That makes it one of the easiest lines in the sector to flatter. The first test is against depreciation: a maintenance figure far below the depreciation charge is not proof of anything on its own, but it is the first thing a reader should check. The second is to look for spending that maintains existing cash flow rather than creating new cash flow — compressor overhauls, integrity management — sitting inside the growth line.
Why an EBITDA multiple is a cross-check here and never the answer
Enterprise value treats the whole enterprise as one claim, and in a partnership deep in the high splits it is not one claim. A meaningful share of every distributed dollar never reaches a common unitholder, and half of every incremental dollar never will. A multiple cannot see that, which is why a partnership can sit exactly at the peer median on EV / Adjusted EBITDA while the security a committee is actually pricing is materially undervalued. The multiple earns a place as a cross-check on an enterprise value that has been built up from the units, the general partner interest and net debt — and nowhere else.
Special Approval, and why this is not entire fairness
Delaware law permits a limited partnership agreement to restrict or eliminate the fiduciary duties that would otherwise be owed, and most midstream partnership agreements do exactly that. What replaces them is contractual: a transaction approved by a conflicts committee of independent directors receives Special Approval, and the standard the committee is held to is whatever the agreement writes down — commonly a good faith belief that the transaction is in the best interests of the partnership. Describing the committee's task as entire fairness, or as a Delaware corporate-law fairness review, is a legal error rather than a stylistic one, and it changes what the committee thinks its job is.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Distributable cash flow per unit and coverage ratio
- —Discounted distributions analysis
- —Yield capitalization in place of a football field
- —Has/gets analysis
- —General partner and IDR elimination
- —Unitholder after-tax premium
Answer Deck
Full model answer, banker-formatted
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Pennmoor — Midstream Buy-In & Yield Capitalization
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a midstream MLP buy-in case study in an investment banking interview?
It is a sector case in which a general partner, or its corporate parent, proposes to acquire the publicly held common units of its own affiliated partnership — usually in stock, and usually extinguishing the incentive distribution rights in the process. You advise the conflicts committee. The valuation is not the generalist stack: a partnership unit is a claim on a distribution, so it is valued by capitalizing the forward distribution at a yield and checked with a present value of the distribution stream. It appears in energy and natural resources coverage groups, and it tests whether you can value an income security on its own terms rather than importing a corporate valuation framework into it.
Does DCF mean discounted cash flow in a midstream case?
No — in midstream, DCF means distributable cash flow, and the collision is one of the things the case tests. Distributable cash flow is Adjusted EBITDA less cash interest, less maintenance capital expenditure, less cash taxes: a single-period cash measure, usually quoted per unit, and the denominator of the coverage ratio. Discounted cash flow is a present value. Because both are quoted in dollars per unit, a document that abbreviates carelessly can leave a reader quoting a cash figure as a valuation. The convention that avoids it is simple: spell the phrase out on first use in every document, and name any present-value exercise for what it discounts — here, a discounted distributions analysis.
How is the coverage ratio calculated, and which basis is right?
Coverage is distributable cash flow divided by distributions declared, and the disagreements are all about whose cash and whose distributions. The most commonly published version puts the whole partnership's distributable cash flow over the limited partners' distributions alone, which mixes bases: it credits the common units with cash that is contractually the general partner's. A consolidated version puts all the cash over all the distributions. The version that answers a common unitholder's question deducts the general partner's distributions from the numerator first, because they are a prior claim on the same cash — so what is available to cover a common unit's distribution is what remains after they are paid. Whichever you use, state which one governs and why, and be careful about the direction the alternatives move in.
Why do incentive distribution rights make growth expensive for a partnership?
Because in the top tier — the high splits — the general partner receives half of every incremental dollar distributed, which means a dollar to the limited partners costs the partnership two. A unit issued at the market price has to be paid its distribution, and at the top split the general partner has to be paid the same amount again, so a project funded with that unit must produce roughly twice the unit's own distribution yield simply to leave the limited partners no worse off. Mature partnerships in the high splits routinely find that nothing in their growth program clears that hurdle. That is the structural reason general partners buy in their partnerships and simplify the structure, and it is usually a stronger explanation of the transaction than any premium discussion.
Why is there no football field in a yield capitalization case?
Because a football field gives equal visual weight to methodologies this analysis does not weight equally. Here there is one primary methodology — capitalizing the forward distribution at a yield — and the others are checks on it: a present value of the distribution stream, a set of trading yields, a set of precedent yields paid, and an enterprise multiple used once as a cross-check. Laying five bars side by side implies a synthesis across evidence of very different quality and invites the reader to take a midpoint of things that are not commensurable. Presenting the capitalization as the answer, with each check reported as a check, is both more honest and more useful to a committee that has to decide on a price.
How should the unitholder tax consequences affect the price a committee demands?
They should not, and saying so clearly is part of the answer. An exchange of units for corporate shares is a taxable transaction, and because a limited partner's adjusted basis is usually far below the unit price — distributions are largely a return of capital and the partnership allocates depreciation — the gain is large and part of it is ordinary income under section 751 rather than capital gain. That makes after-tax proceeds look poor against the pre-tax market price, but the comparison is wrong: a holder who sold in the market would pay substantially the same tax. Against the after-tax proceeds of a market sale the premium is essentially unchanged. What the transaction takes away is the option to hold and defer, which has value that no exhibit in the book prices — a disclosure, not a negotiating point.
How should you allocate 120 minutes across this case?
A working budget that sums to 120: about 20 minutes reading the prompt and the raw extract and deciding which partnerships and which transactions survive your screens before you type anything; about 75 minutes at the keyboard, split roughly across the distributable cash flow build and the four coverage ratios, the incentive ladder and the forecast, the two capitalization bookends and the yield grid, the discounted distributions analysis and its sensitivity, and then has/gets, the general partner interest and the consideration pages; and about 25 minutes on the deck, which is the second deliverable. The template measures 481 cells to fill, which collapse to 161 distinct formulas once the fill-right and fill-down repetitions are counted properly — most of the workbook is one formula copied across six forecast years or four incentive tiers. That arithmetic only works because two of the twelve tabs are handed over complete.
About This Energy / Midstream MLP Buy-In Case Study
Energy / Midstream MLP Buy-In case study for investment banking interviews. 120-minute format covering distributable cash flow per unit and coverage ratio, discounted distributions analysis, yield capitalization in place of a football field. Includes the full prompt, a model answer deck, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Energy, Power & Natural Resources. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
120-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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