Sunday, September 23, 2018

North American Pipeline Operators Fold in Assets After New FERC Rules

Posted by May 17, 2018

© cec72/ Photo: Adobe Stock

Three large North American pipeline operators said on Thursday they would absorb their midstream assets after a U.S. energy regulator removed some tax benefits for master limited partnerships (MLP) in March.

Enbridge Inc, Williams Cos and Cheniere Energy Inc all said they would buy out their MLP pipeline or storage assets in multi-billion dollar deals.

An MLP is a limited partnership that is publicly traded and, as such, enjoys the benefits of paying no tax at the company level as well as the liquidity that comes with being traded on a major stock exchange.

But changes made by the U.S. Federal Energy Regulatory Commission's (FERC) in March affect the ability of MLPs to recover an income tax allowance, making them less profitable for oil and gas companies.

"I would expect more of them to be rolled up in a similar fashion. If the reaction to Enbridge is stronger you might see TransCanada (TRP) do the same thing but it's not nearly as material to them," said Ryan Bushell, president and portfolio manager at Newhaven Asset Management.

Enbridge said it would buy its independent units including Spectra Energy Partners and Enbridge Energy Partners as well as its pipeline assets and bring then under a single listed entity.

"Under the newly changed FERC tax policy, holding certain interstate pipelines in MLP structures is highly unfavorable to unitholders and is no longer advantageous," Enbridge said in a statement.

Williams Cos is buying out its MLP William Partners LP in a $10.5 billion all-stock deal, while LNG company Cheniere Energy Inc will fold in its independent unit Cheniere Energy Partners LP Holdings for about $6.54 billion.

For Enbridge, the transaction will not hurt its three-year financial outlook, the company said.

The Calgary-based company, which has been trying to recast itself as a pipeline utility, has been under pressure to sell non-core assets and reduce its debt pile of more than $60 billion as of Dec. 31.

"This is the first step of the board taking control and taking steps to put the company in good standing," Bushell said.

The company has been saddled with debt following its $28 billion takeover of U.S.-based Spectra Energy last year. Earlier this month, it sold some assets worth $2.5 billion.

Rolling up Spectra will allow mitigate impact from the tax related changes by 21 percent, compared with a zero percent benefit if long-haul assets are held in a MLP structure, analysts at Tudor Pickering and Holt said.

Reporting by Anirban Paul and Akshara P in Bengaluru

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