Yesterday the Federal Energy Regulatory Committee (FERC) announced that it would no longer permit master limited partnerships (MLP) to recover an income tax allowance in the cost-of-service rates on interstate pipelines. This disclosure came as a surprise and sent the Alerian MLP Index, spiraling as much as 11 percent lower intraday. This basket of 40 prominent MLPs finished the trading session down 4.5 percent.
The brief Alert we issued yesterday identified the names that could face the biggest headwind from this change and highlighted the massive buying opportunity in our favorite names.
Under this proposed rule, each interstate gas pipeline could comply with the order by adjusting rates to eliminate the tax allowance or committing to file a rate case in the near future.
FERC-regulated crude-oil pipelines generally set their rates via an indexing method whereby tariffs adjust annually and must remain below a specified ceiling. The regulator will reassess the indexing methodology in 2020.
This surprise development naturally leads to questions whether Kinder Morgan (NYSE: KMI) and other MLPs that converted to c-corporations did so to reduce their risk. In our view, this line of speculation overlooks the near-term pressures that prompted most of those moves: Excessive leverage, significant near-term debt maturities, pressures on cash flow and the threat of a credit-rating downgrade.
A number of MLPs issued press releases yesterday and this morning discussing their exposure to this headwind. Here’s a quick rundown:
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Elliott and Roger on Mar. 26, 2019
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