Pipeline Operators Eliminating MLPs: Victims Of FERC Ruling?
Zacks Investment Research | May 17, 2018 09:34PM ET
The May 17, 2018 date is marked important on the calendar for energy infrastructure master limited partnerships (MLPs). This is because major energy companies made headlines on this day as they consolidated their respective pipeline assets. A flurry of merger and acquisition deals hit the energy MLP industry yesterday, mainly in response to the Federal Energy Regulatory Commission (FERC) tax overhaul, announced a couple of months ago to reduce certain benefits for the MLPs.
FERC Tax Overhaul: A Deadly Blow to the MLPs
MLPs have long been attractive investment vehicles for energy investors, courtesy of the high yields and tax advantages for being structured as pass-through entities. As a result, MLPs used to allocate their pre-tax income to unitholders on a proportionate basis. The unitholders were responsible for paying their own share of the partnership's tax obligation.
While FERC is not a tax-setting regulator, it does influence the rates a pipeline company can charge its customers to seek a proper balance between the pipeline companies’ profits and demands of the ratepayers.
Therefore, the FERC felt that its 2005 policy on income tax allowance provided the partnerships an unfair benefit, possibly resulting in double recovery of costs and boosting their distributable cash flows.
Thus, on Mar 15, the FERC barred the pipelines owned by MLPs from including their investors’ income tax allowance in their cost of service fees. The regulatory body ruled that the interstate oil and natural gas pipelines owned by MLPs will no longer be able to avail a credit for income taxes that they do not pay.
The FERC ruling has definitely been negative for MLPs as the tariff rates will fall for certain pipelines. The partnerships charging cost-based rates for interstate transportation service would now have to lower customer tariffs to transport oil, gas and refined products around the country by the amount of their income tax allowances, substantial in certain cases. A reduction in cost recovery would likely cut into their cash flows. Under the new FERC ruling, holding interstate pipelines in MLP structures will no longer prove beneficial to the unitholders.
Consolidation Trend Picks up on FERC Tax Ruling
In a bid to simplify their corporate structure amid concerns emerging from the tax policy change, three leading energy companies, namely Williams Companies Inc. (NYSE:WMB) , Enbridge Inc. (NYSE:ENB) and Cheniere Energy, Inc. (NYSE:LNG) announced merger deals yesterday, to snap up the remaining stake of their midstream subsidiaries. While Cheniere Energy holds a Zacks Rank #2 (Buy), Williams Companies and Enbridge carry a Zacks Rank #3 (Buy). You can see Original post
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