On the worst stock-market day for U.S. pipeline operators in two years, Wall Street analysts and pipeline insiders saw reason to smile. A Federal Energy Regulatory Commission’s ruling that master-limited partnerships should no longer receive credit for income taxes they don’t actually pay is a lot more narrowly focused than Thursday’s selloff suggested, they said. That’s because the ruling is targeted at large interstate pipelines that are, generally speaking, old. They often hail from an era when there was little competition in shipping America’s oil and natural gas, and government oversight of shipping rates was essential. In the shale age, that’s often not the case.
“There’s been an overreaction in the market,” said Rob Thummel, managing partner at Tortoise Capital Advisors. “The reality is the majority of pipelines in the U.S. are not FERC-regulated. They’re regulated by the market, and the market will determine the rates.”
Then there’s the fact that many interstate pipelines, especially ones built in recent years, charge rates that are determined through negotiations or by market forces.Several pipeline operators downplayed the impact of FERC’s ruling.
Enterprise Products Partners LP said four times in a three-paragraph statement that it won’t have any “material” impact on earnings and cash flow. Andeavor Logistics LP said the ruling would probably only hurt the $9.7 billion company’s earnings by $10 million or less. “We do not expect the change in tax rate to impact the current revenue levels,” said Vicki Granado, a spokeswoman for Energy Transfer Partners LP, the pipeline giant controlled by billionaire Kelcy Warren. The company said in statement that many of its rates aren’t subject to the changes. Williams Partners LP suggested it may be able to mitigate the impact because it’s about 75 percent owned by parent entity Williams Cos., an income-tax paying corporation.
Tallgrass Energy Partners LP said that its two top pipelines, REX and Pony Express, have negotiated rate contracts and the company expects the ruling would have little to no impact on these revenues. Analysts also threw cold water on the idea that the new tax treatment could kill the master-limited partnership model, in which partnerships pass their tax duties on to individual investors, lowering the overall rate.
“It’s a model that makes sense for these infrastructure assets,” Matt Schmid, an analyst with Stephens Inc., said in a phone interview. “There is still a large set of investors that appreciate the pass-through entity and having those advantages.”
Not everyone’s convinced Thursday’s selloff was an overreaction, though. There are still plenty of unanswered questions, including a worst-case scenario in which MLPs are liable for back tax allowances, Matthew Phillips, an analyst at Guggenheim Securities LLC, said in a note.
In recent years, America’s been on a pipeline-building binge aimed at shipping the country’s vast reservoirs of shale oil and gas to customers. That’s created a lot of competition when it comes to transporting fossil fuel, and many new projects — including the Rover gas pipeline and Mountain Valley Pipeline — are using negotiated or market rates, according to Thummel. “All of the new pipelines coming out of the Marcellus that haven’t been in place for decades, they are negotiated pipelines and they’re not going into the FERC,” Thummel said.
Even the old guard is reinforcing that trend. Transco, the crown jewel of America’s gas pipelines, runs from Texas’s Gulf Coast up the eastern seaboard to New York City. It was built during World War II to ship oil and bypass German U-boats sinking tankers. Even after converting to gas, it had little competition for many years. It’s among the pipelines regulated by FERC. Today, it’s owned by Williams Partners LP, an MLP that’s benefited from the old policy on taxes. In recent years, while experiencing more competition, it’s expanded its shipping capacity — and increasingly relied on negotiated rates. By year’s end, fully half the gas flowing through it will be governed by negotiated rates — thus not subject to FERC’s oversight, Williams said.
Sources and photo-credits: Bloomberg