March 15, 2018 / 7:04 PM / 2 years ago

Energy MLP shares plunge on revised U.S. pipeline tax rules

(Reuters) - Shares of U.S. energy master limited partnerships (MLPs) plunged on Thursday, after regulators said they will no longer allow certain tax benefits for interstate oil and gas pipeline operators structured as MLPs.

MLPs are tax-exempt corporate structures that pay out profit to investors in dividend-style distributions. In 2016, a U.S. Appeals Court ruled that energy regulators were allowing these companies to benefit from a “double recovery” of taxes.

On Thursday, the U.S. Federal Energy Regulatory Commission (FERC) said the companies, largely oil and natural gas pipeline firms, will no longer be allowed to recover an income tax allowance as part of the fees they charge to shippers under a “cost of service” rate structure.

This could affect MLP earnings, and as a result shares stumbled. The Alerian MLP index, which tracks a number of pipeline firms, fell as much as 9.4 percent on Thursday to its lowest since February 2016.

Among the worst performers at the close of trading on Thursday were Energy Transfer Partners LP, which lost 6.3 percent, Spectra Energy Partners, down 10.8 percent, and Plains All American Pipeline LP (PAA.N), which fell 5.5 percent.

“We are disappointed with FERC’s decision to reverse its long-held policy of allowing an income tax allowance in the calculation of cost-of-service rates for MLPs,” said Lori Ziebart, executive director of the Master Limited Partnership Association in Washington, an industry trade group.

The case, United Airlines Inc vs. FERC, was decided by the U.S. Court of Appeals for the District of Columbia Circuit in July 2016. The court agreed with shippers using SFPP LP, an MLP interstate products pipeline, that FERC failed to demonstrate the tax benefit would not result in the pipeline partnership owners essentially recovering their income taxes twice.

“We do not expect the revisions to the FERC’s policy on the recovery of income taxes to materially impact our earnings and cash flow,” said A.J. ‘Jim’ Teague, chief executive of Enterprise Products Partners LP’s general partner.

Enterprise Products’ shares lost almost 2.7 percent on Thursday.

Reporting by Scott DiSavino and Devika Krishna Kumar in New York; Editing by Marguerita Choy, Cynthia Osterman and Susan Thomas

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