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North American pipeline operators restructure after tax change

May 17, 201811:33 AM Reuters

(Reuters) – Pipeline operators Enbridge Inc (ENB.TO), Williams Cos (WMB.N) and Cheniere Energy Inc (LNG.A) said on Thursday they would restructure after a U.S. rule change removed a key tax benefit for publicly traded partnerships controlled by those companies.

Williams said it would buy all common units of its master limited partnership (MLP) Williams Partners (WPZ.N) in a deal valued at $10.5 billion.

Enbridge said it would buy its independent units including Spectra Energy Partners (SEP.N) and Enbridge Energy Partners (EEP.N) as well as its pipeline assets and bring then under a single listed entity for C$11.4 billion ($8.94 billion).

Cheniere said it will buy out shares it does not already hold in Cheniere Partners Holdings (CQH.N) for about $6.54 billion.

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.

In March, 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.

“I would expect more of them to be rolled up in a similar fashion. If the reaction to Enbridge is stronger you might see TransCanada do the same thing but it’s not nearly as material to them,” said Ryan Bushell, president and portfolio manager at Newhaven Asset Management.

The transaction will not hurt Enbridge’s three-year financial outlook, the company said.

“Under the newly changed FERC tax policy, holding certain interstate pipelines in MLP structures is highly unfavorable to unitholders and is no longer advantageous,” Enbridge said.

The Calgary-based company, which has been trying to recast itself as a pipeline utility, has been under pressure to sell non-core assets and reduce its debt of more than $60 billion as of Dec. 31.

“This is the first step of the board taking control and taking steps to put the company in good standing,” Bushell said.

The company has been saddled with debt following its $28 billion takeover of U.S.-based Spectra Energy last year. Earlier this month, it sold some assets worth $2.5 billion.

Rolling up Spectra will allow Enbridge to mitigate impact from the tax related changes by 21 percent, compared with a zero percent benefit if long-haul assets are held in a MLP structure, analysts at Tudor Pickering and Holt said.

Enbridge LNG Spectra Energy TransCanada

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