US Pipeline Operators Buying Out MLPs

Three major US pipeline operators – Enbridge, Williams Companies and Cheniere Energy – have said they will restructure their holdings after a rule change removed tax benefits for master limited partnerships (MLPs).

Enbridge said it would buy its pipeline assets and its Spectra Energy Partners and Enbridge Energy Partners units and combine them all in a single listed entity in a transaction valued at C$11.4bn ($8.8bn).

Williams will buy all the common units of its MLP, Williams Partners, for $10.5bn, while Cheniere said it will buy all the shares in Cheniere Partner Holdings it doesn’t already own for about $6.5bn.

MLPs are tax-exempt structures that flow through a portion of their tax obligations to ratepayers and a portion of their profits to investors in dividend-style distributions. In March, the US Federal Energy Regulatory Commission (Ferc) implemented a new rule preventing pipeline companies from recovering a portion of their tax allowance in their cost of service rate structures.

“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 May 17. “The combination of this changed policy and the negative capital markets reaction has impaired the MLP structure for Enbridge’s interstate pipelines.”

Without the restructuring, Enbridge said, Spectra Energy Partners and Enbridge Energy Partners would see distribution growth end as early as 2019, while the cost of capital for its other pipeline operations would become uncompetitive and hinder future dividend growth.