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Thursday, March 15, 2018

Master Limited Partnerships (MLPs) tumble on FERC’s revised income tax policy

Master Limited Partnerships (AMLP, AMJ) fall to 52 week low after the Federal Energy Regulatory Commission announces it no longer will allow MLPs to recover an income tax allowance in the cost of service 
  • MLP weaknessEEP -14.66% TCP -11.46% BPL -8.42% ETE -8.11% ETP -7.05% SNMP -7.37% NGL -6.19% SEP -6.28% NS -5.61% MMP -6.33% DM -6.69% PAGP -6.15% WPZ -5.55% VLP -6.04% BWP -4.96% SHLX -5.50% ANDX -5.28% DCP -4.58%
  • By descending market capEPD -4.02% WPZ -5.51% MPLX -3.08%ETP -6.60% SEP -6.16% PAA -4.70% ETE -7.82% MMP-6.31% CQP-2.78% ANDX-5.19% WGP-1.38% WES-2.42% APO-1.40% BPL-8.63% EQGP-3.88% PSXP-4.70% ENBL-4.26% BEP-0.72% SHLX-5.46% 
  • This is weighing on the Energy sector (XLE-0.6%)


In an unprecedented move, FERC (the Federal Energy Regulatory Commission) revised its income tax policy for MLPs. MLPs, which aren’t taxed at the corporate level and which operate as pass-through entities, allocate their income to investors. Investors are taxed on their share of the net income. To compensate investors for the income tax burden, MLPs have been receiving an income tax allowance from customers on FERC-regulated pipelines.

Who's Protected from FERC's Revised Income Tax Policy?

No harm to C-corps
Midstream companies such as Kinder Morgan (KMI), Targa Resource (TRGP), and ONEOK (OKE) are taxed as C-corps, so the revised policy doesn’t apply to them. C-corps reacted negatively to the news, but they recovered by the end of the trading session. Williams Companies (WMB) and Enbridge Inc. (ENB), which are also C-corps, were an exception due to their GP-LP model and dependence on limited partnerships for their distribution income.

Non-regulated pipelines
Non-regulated pipelines—such as gathering pipelines and other intrastate pipelines—aren’t regulated by FERC, so they wouldn’t see much impact from the revised tax policy. The gathering MLPs include Antero Midstream Partners (AM), Cone Midstream Partners (CNNX), and EQT Midstream Partners (EQM).

Other midstream activities
Other midstream activities—such as natural gas processing, NGLs fractionation, and fuel terminaling and storage—shouldn’t have any impact on the revised policy, as prices in these cases aren’t regulated by FERC. They include MPLX LP (MPLX), Western Gas Partners (WES), and DCP Midstream (DCP).

However, most midstream MLPs have some exposure to interstate transportation and the sell-off across the sector.

Other value chain
MLPs that aren’t involved in midstream activities—such as upstream MLPs, downstream MLPs, frac-sand producers, catalytic conversion, and midstream services—should see no impact from the revised policy. They include Legacy Reserves (LGCY), Hi-Crush Partners (HCLP), CSI Compressco LP (CCLP), and CVR Refining (CVRR).

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