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Pipeline MLPs respond to FERC tax ruling

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World Pipelines,

The Federal Energy Regulatory Commission (FERC) issued a revised policy statement last week that reversed its 2005 income tax policy that permitted master limited partnership (MLP) interstate oil and natural gas pipelines to recover an income tax allowance in cost of service rates.

Several pipeline companies have responded to the ruling.

Alan Armstrong, Williams’ President and Chief Executive Officer, made the following statement: “Given the relatively small percentage of our revenues that are affected by this ruling, we don’t expect this ruling to impact our previous guidance for WMB and WPZ cash dividends and distributions and related growth rates. Additionally, as we’ve often discussed, we are well-positioned to execute on corporate structure changes, which would restore the income tax allowance to the pipeline’s cost of service rates.”

“We are reviewing the ruling, but note that it appears to apply only to pass-through entities, not regular corporations such as MIC,” said Liam Stewart, Chief Financial Officer of Macquarie Infrastructure Corporation (MIC). “Moreover, MIC currently has only one pipeline that is subject to FERC rate regulation and the contribution to our results from that pipeline is such that the overall impact of the ruling, if any, would be immaterial.”

EQT Midstream Partners, LP (EQM) announced that it expects an immaterial impact, if any, from the revised policy statement. As of 31 December 2017, approximately 89% of EQM’s contracted transmission capacity was subscribed under negotiated rate agreements. In addition, all of the 2 billion ft3/d of capacity on the Mountain Valley Pipeline is subscribed under negotiated rate agreements. In 2017, approximately 54% of operating revenues were generated by gathering operations and 46% of operating revenues were from the transmission and storage segment.

“While we were disappointed by the FERC’s announcement that it no longer will allow interstate pipelines owned by master limited partnerships to recover an income tax allowance in the cost of service, it is important to note that the FERC’s decision is not expected to have a material impact on NuStar because the vast majority of our rates are contract-based or market-based,” said Brad Barron, President and CEO of NuStar Energy. “We believe that FERC’s action is inconsistent with the intended tax treatment of master limited partnerships, essentially negating the intent of Congress,” Barron added. “We intend to work closely with our industry colleagues on legislative clarification of income-tax recovery. MLPs continue to serve as an important mechanism to build energy infrastructure.”

NGL Energy Partners LP announced today that it does not expect a material impact from yesterday’s revised policy statement. NGL owns Grand Mesa Pipeline, LLC, a FERC regulated interstate crude oil pipeline that operates from the DJ Basin in Weld County, Colorado with deliveries to Cushing, Oklahoma. FERC’s revised policy impacts cost-of-service rates on oil pipelines. Currently, the volumes of crude oil that are transported on Grand Mesa are subject to contractual agreements. Therefore, FERC’s revised policy will not impact Grand Mesa at the present time.

Enable Midstream Partners, LP announced that it is continuing to review the potential impact of the ruling. Enable is also monitoring the notice of proposed rulemaking issued concurrently with the announcement that will address the effects of the revised policy on the rates of MLP interstate natural gas pipelines. A significant portion of Enable’s revenue and gross margin is derived from its gathering and processing segment, where the only potential impact could be on crude oil gathering lines in the Bakken Shale, which the company believes would not be material. For the year ended 31 December 2017, 77% of the company’s revenue and 62% of its gross margin was derived from the gathering and processing segment.

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