In the first application of its final rule on income tax allowances, FERC rejected an allowance sought by Enable Mississippi River Transmission LLC (MRT), deeming the pipeline’s ownership by a master limited partnership (MLP) put it on the wrong side of the line the Commission drew on what entities will qualify for a tax allowance.
The final rule (RM18-11) modified a proposed rule to permit MLP pipelines opting to make a limited Section 4 Natural Gas Act rate filings to either eliminate their tax allowance and their accumulated deferred income tax from their cost of service or reflect only the tax reductions in the Tax Cuts and Jobs Act. It imposed conditions for what type of entities would be allowed to retain a tax allowance, and the July 31 order (RP18-923) on MRT provided guidance on how the rule will be carried out.
MRT is wholly owned by the MLP Enable Midstream Partners. It filed its rate case at the end of June, before the final rule was issued. A spokesman for MRT said the company will seek rehearing of the order.
After the proposed rule was issued in March, several MLP entities sought to move to corporate ownership, and the MRT ruling might lead more down that path. The determination appears to hinge on the use of the MLP structure and it does not address other pass-through structures, noted Christine Tezak, managing director at Clear View Energy Partners LLC.
“We read today’s order on MRT as indicating other MLPs are unlikely to qualify for a tax allowance,” Tezak said.
That view was echoed by Gary Kruse, director of research for LawIQ, who said the MRT order dashed any hope of pipelines owned 100% by MLPs, even if the MLPs have corporate owners.
“The contours of what FERC did” in the final rule and related policy statement “are slowly coming into focus,” through the MRT order and an order on a tax allowance sought by Trailblazer Pipeline Co. LLC, said Kruse.
The final rule made adjustments to the Form 501-G on financial information pipelines are to submit to FERC later this year, and it was issued along with a revised policy statement (PL17-1) in response to a remand from the U.S. Court of Appeals for the District of Columbia Circuit in an oil pipeline case involving SFPP L.P. The Commission denied an income tax allowance for SFPP based on the notion that granting a tax allowance and its use of the discounted cash flow methodology in setting a return on equity – which includes tax expenses – amounts to a double recovery of income tax costs.
“Like SFPP, MRT is a wholly owned subsidiary of an MLP. Thus, it would be inconsistent with Commission precedent to permit MRT to recover an income tax allowance,” FERC said in the MRT ruling.
MRT sought to include income tax expenses in its cost of service reflective of the corporate ownership parents of Enable Midstream Partners, which hold about 86% of the tradeable LP units in Enable Midstream Partners. The pipeline asserted in the rate case that Enable’s corporate owners pay income taxes on MRT’s earnings before issuing dividends to investors, so there is no double recovery concern compared with the issues raised in the SFPP case. MRT argued that the corporate owners of the MLP, like corporate owners of a pass-through pipeline, incur both a corporate income tax liability and a shareholder dividend tax liability.
“These arguments lack merit” and fail to address the double recovery concerns based on the DCF methodology as listed by the D.C. Circuit, FERC said.
MRT also missed a critical distinction between a pipeline set up as a pass-through entity owned by an MLP that has corporate unitholders and a pipeline set up as a pass-through entity that is a wholly owned subsidiary of a corporation, the Commission explained.
“An MLP incurs no tax liability prior to making the distribution to its unitholders that is reflected in the DCF model’s determination of the MLP’s ROE. Thus, the MLP’s distribution includes funds that the corporate and individual unitholders may use to pay taxes on their share of the MLP’s income. In contrast, a corporation that wholly owns a pass-through pipeline pays the corporate income tax prior to the investor-level dividend reflected in the DCF model’s calculation of the pipeline’s ROE,” FERC said.
The elimination of a tax allowance for pipelines owned by MLPs in the proposed rule was a major sticking point for the pipeline sector when the proposed rule was issued, and the final rule altered that stance somewhat. The MRT order provides some clarity, with Tezak commenting that before the decision, Clear View thought MRT’s situation could include a partial tax allowance based on corporate ownership when MLP income contributes to the overall corporate tax obligation. That is no longer the case, with FERC explaining why a 100% corporate owned pass-through entity is eligible for tax recovery but an MLP is not.
While several companies have moved away from the MLP structure, Tezak said Clear View does not believe the decision will result in a mass exodus because of the change in the final rule and policy statement allowing ADIT to be eliminated may offset the cost-of-service calculations associated with a corporate change.
Kruse had a similar response to the question of whether more companies will move out of MLP ownership. The calculations of any savings on the elimination of ADIT could be the determining factor for pipelines, and for some pipelines, even those within the same MLP ownership, the answers could be different, he said. Some pipelines within the same MLP entity could be “rolled up” into a corporate structure – since the formation of MLPs are referred to as ‘drop down’ transactions – while others may not, depending on the ADIT savings calculation. “Every company is crunching those numbers,” Kruse said.
The list of companies that have moved or are moving away from the MLP structure following FERC’s proposed rule includes Tallgrass Energy, NuStar Energy, Enbridge Inc., Boardwalk Pipeline Partners and Williams Companies. The trend towards MLPs in the energy sector began many years ago as a way for entities to gain tax advantages compared with corporations, and FERC’s rulings following the court remand have turned some in the sector in the other direction. Under the new policy “holding certain interstate pipelines in MLP structures is highly unfavorable to unitholders and is no longer advantageous for Enbridge or the U.S. MLPs,” Enbridge said a in statement before the final rule was issued.
During an August 2 earnings call with financial analysts, officials with Williams said the corporate acquisition of Williams Partners, which was announced in May, will be the subject of a stockholder meeting August 9.
That transaction is on track and expected to close shortly after the stockholder vote, assuming it is approved, said Alan Armstrong, president and CEO of Williams. The deal “will deliver significant advantages to shareholders” and position the company as an attractive investment opportunity, Armstrong said.
Williams subsidiary Transcontinental Gas Pipe Line is planning to file its NGA Section 4 rate case by August 31, and the changes in tax treatment will be addressed, said Michael Dunn, executive vice president and chief operating officer of Williams. The company is looking forward to getting the rate case filed at FERC to recover costs, including recent maintenance and outage costs associated with pressure testing and construction work tied to Transco’s Atlantic Sunrise expansion, Dunn said.
A simplified business structure and deal to end an MLP were also touched on by officials with Energy Transfer Equity LP, which is buying the MLP Energy Transfer Partners LP that owns midstream pipeline assets. That just-announced transaction provides a premium to ETP unitholders, simplifies the structure of the company, eliminates ETE’s incentive distribution rights in ETP and will allow the combined entity to reduce debt with a strengthened balance sheet, officials said during an August 2 call with analysts. The combination has ETE acquiring ETP for $27 billion in ETE stock.
Under the terms of the deal, ETP unitholders would receive 1.28 common units of ETE for each common unit of ETP they own, and the price of $23.59/unit for ETP unitholders represents an 11% premium to the closing price the day before the deal was announced, officials said. ETE expects to maintain investment-grade credit ratings for the combined partnership, they said.
Kruse of LawIQ noted that among midstream companies with pipeline assets, Dominion Energy Midstream Partners LP is one of the few that have not announced a departure from the MLP structure. During an August 1 earnings call, Dominion Energy Inc. officials addressed the MRT order and a corporate review of the MLP structure or possible change.
Dominion Midstream is a drop-down MLP and that structure is being reviewed in light of the MRT decision, said Mark McGettrick, executive vice president and CFO at Dominion Energy. “Our structure is a little bit different than Enable, but it is of a concern to us and it’s something we will be watching closely” and speaking with the boards of Dominion Energy and Dominion Midstream, McGettrick said.
The review by the respective boards is not expected to last long. “Certainly no longer than three to six months, and I would say it’s probably going to be more on the short side of that,” McGettrick said.
Unlike in the Trailblazer order, which set the tax allowance issues for a paper hearing, MRT was directed to refile its rate case without an allowance, and the determination “looks very ominous for MLPs,” said Tezak. She added that Clear View expects MRT’s compliance filing to reflect the elimination of ADIT balances, consistent with FERC’s policy statement and final rule that came out after the rate case was filed.
The order on MRT accepted and suspended the rate filing, directing MRT to refile the rate plan without a tax allowance and to include local distribution company Spire Missouri in a revised cost of service. At the time of the rate filing, Spire Missouri had not made a decision on its upstream supplies as it has been trying to gain approval for a new pipeline, Spire STL Pipeline, to serve the St. Louis market.
Spire Missouri signed a contract in late June to remain an MRT customer for an additional year, and several pipeline customers asked FERC to either reject MRT’s rate proposal – which involved a substantial rate hike as the LDC is a large customer — or make it file a new rate plan that includes Spire Missouri’s billing determinants in the cost of service.
Given that Spire Missouri has signed the contract for a substantial amount of capacity on MRT, “the Commission directs MRT to revise its rate filing to incorporate Spire Missouri’s billing determinants,” it said.
The order also made acceptance of various rate issues subject to the outcome of a technical conference and a hearing before an administrative law judge.
FERC Chairman Kevin McIntyre did not participate in the order.
By Tom Tiernan TTiernan@fosterreport.com
 For past stories, see, Enable Mississippi Responds to Protests of Tariff Filing, FR No. 3209, pp. 14-15 and Several Protestors Say MRT’s Tariff Doesn’t Reflect Current Spire Service, FR No. 3207, pp. 10-11.