Pipeline Stocks Sink as FERC Kills Key Income-Tax Allowance
(Bloomberg) -- Pipeline stocks plunged after federal regulators ruled that master-limited partnerships can no longer receive a credit for income taxes they don’t pay.
Williams Cos. was the biggest decliner in the S&P 500 Index, dropping as much as 12 percent, while the Alerian MLP Index, which tracks 40 partnerships, had its worst day in more than two years.
The Federal Energy Regulatory Commission decision on Thursday came in response to an earlier court ruling that found the agency’s longstanding tax policy could result in double recovery of costs for master-limited partnerships, or MLPs. Because MLPs are pass-through entities that pay no federal taxes, investors in them can get a better after-tax return than by investing in conventional corporations.
"The court did not mince its words," FERC Chairman Kevin McIntyre said during a commission meeting. "Granting an income tax allowance to master-limited partnerships results in ‘inequitable returns.’ This very clear language amounts to very clear marching orders for us."
Wells Fargo & Co. analyst Michael Blum said the broad selling was an overreaction, because the effects would be felt only on partnerships with a large amount of interstate pipelines.
"It’s definitely a negative, but it’s not Armageddon for MLPs," Jay Hatfield, a New York-based portfolio manager at the InfraCap MLP exchange-traded fund, said by telephone. "And it’s not as if it affects every asset in every single MLP."
Even among interstate pipelines, it’s unclear how much the ruling will impact different assets, Selman Akyol, an analyst at Stifel Nicolaus & Co. wrote in a note Thursday. That’s because these pipelines can charge rates based on a different agreements -- there are "cost of service" rates, which will be affected, as well as market-based rates or negotiated ones, which won’t be impacted. What’s more, "cost of service" rates are partly built on aspects that have nothing to do with taxes -- including maintenance and depreciation costs for the pipeline.
"This adds a layer of uncertainty to the group, and we do not expect it to be cleared soon," Akyol said in the note. “We anticipate companies will provide disclosures around cost of service exposure and potential impact to cash flow.”
The decision could further the trend of MLPs converting into corporations -- or simply selling interstate pipelines affected by this change in policy to existing corporations such as Kinder Morgan Inc., Hatfield said.
Energy Transfer Partners LP, an owner of FERC-regulated pipelines, fell as much as 15 percent to $15.06, the lowest intraday price in more than seven years. The company did not immediately respond to a request for comment.
Dominion Energy Midstream Partners LP dropped as much as 11 percent to $22.70, the most in more than two years, while Dominion Energy Inc., parent of the publicly traded partnership, dropped as much as 3.5 percent. Company spokesman Ryan Frazier declined comment on the FERC announcement.
Williams Cos. did not immediately respond to a request for comment.
The policy change could go into effect for natural gas pipes by late summer, according to Bloomberg Intelligence analyst Brandon Barnes. Oil pipelines are off the hook until 2020, when the commission updates oil rates to reflect cost-of-service changes from 2014 to 2019.
The energy commission is 3-2 majority Republican and four of the members were nominated by President Donald Trump.
With assistance from Michael Bellusci, Joshua Fineman, Catherine Traywick and Rebecca Kern. To contact the reporters on this story: Stephen Cunningham in Washington at firstname.lastname@example.org; Tim Loh in New York at email@example.com; Jim Polson in New York at firstname.lastname@example.org. To contact the editors responsible for this story: David Marino at email@example.com Catherine Traywick, Joe Carroll.
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