Freak Out!

Two months ago, the Federal Energy Regulatory Commission shook up master limited partnerships (MLPs) and their investors by deciding that income taxes would no longer be factored into the cost-based tariff rates of MLP-owned pipelines. We said then that there was no need to panic — that all this will take time to play out, and that the end results may not be as widespread or dire as some feared. Today, we provide an update, dig into FERC’s other actions on changes in income taxes, and discuss the phenomenon known as “FERC Time.”

The aftershocks are still being felt from last Thursday’s decision by the Federal Energy Regulatory Commission (FERC) that interstate gas and liquids pipelines’ cost-based tariff rates can’t include anything for income taxes if the pipelines are owned by master limited partnerships (MLPs) — and most are. Many investors did freak out — no other phrase sums it up better — when they heard that news. Share prices for midstream companies plummeted in midday trading, and we imagine that many angry calls were made by investors to their financial advisers. “Why didn’t we know about this?!” In fact, although this proceeding had been simmering for a while, FERC’s action was harsher than expected by most experts. But the impact of the change is likely to be less far-reaching than the Wall Street frenzy would have you believe, at least for most MLPs. And, by the way, the issue at hand — whether and how to factor in taxes in calculating MLPs’ cost-of-service-based rates for interstate pipelines –– has been around for decades. Today, we discuss FERC’s new policy statement on the treatment of income taxes and what it means for natural gas, crude oil, natural gas liquid (NGL) and refined product pipeline rates; and for investors in MLPs that own and operate the systems.