Et tu, FERC? No tax writeoffs for MLPs; pipeline stocks plummet 2018-03-15

On the Ides of March, FERC, apparently forgetting its the companies it supposedly regulates that pay its salaries, knocked pipeline company stocks down by disallowing a tax writeoff. This was one month after FERC inadvertently cleared a path for renewable sun and wind power through batteries. Look who got whacked the most, and not even FERC’s Sabal Trail rubberstamp permit reinstatement could save it:

Pipeline MLP vs. Electric Utility, Stock Charts
Stock price comparison, Wednesday, Thursday, Friday, 14, 15, 16 March 2018. The colorful candle canyon is for Spectra Energy Partners LP (SEP), which was by far the worst affected of those shown.

You may wonder as I do: what is FERC doing making tax policy? But at least, although only due to a court order, FERC just pulled the rug out from under its patrons, including Spectra Energy (now owned by Enbridge), and Williams Company, of the Transco Hillabee Expansion project, Sabal Trail’s gas supplier in the Southeast Markets Pipeline Project.

Pipeline Stocks Plunge After FERC Kills Key Income-Tax Allowance,

Pipeline stocks plunged after federal regulators ruled that master-limited partnerships can no longer receive a credit for income taxes they don’t pay.

Williams Cos. was the biggest decliner in the S&P 500 Index, dropping as much as 12 percent, while the Alerian MLP Index, which tracks 40 partnerships, had its worst day in more than two years.

Spectra Energy Partners LP (SEP) isn’t in the S&P 500, and it fell more than 15%. Even worse for poor pipeline pusher Spectra, it didn’t recover, ending up Friday still 11% below Wednesday.

Williams Companies Inc. (WMB), Williams Partners LP (WPZ), and Energy Transfer Partners LP (ETP), to whom Williams tried to sell itself a couple years ago to offload its debt, recovered somewhat, although they were still about 3-4% down on Friday.

Almost unaffected were the two utilities shown: Duke and Southern Company. They’re not MLPs, and they’re not tied to the moribund pipeline business.

The winner last week in that rising line at the top of the chart was…. NextEra Energy Partners LP (NEP). Why? Because even though NEP is a partner in Sabal Trail and NEP’s subsidiary Florida Power and Light (FPL) is nicking its customers to pay that $3 billion bill for that pipeline boondoggle, NEP mentioned Sabal Trail only once in its Q4 2017 Earnings Call while bragging about leading Florida and the world in renewable sun and wind power. Florida has a very low bar because FPL has been dragging its feet there for years, but NEP has meanwhile been deploying solar power many other places, as has Duke Energy and even Southern Company.

So who were the winners of FERC’s court-forced decision? Not the pipeline companies, that’s for sure. Any company that’s getting on with renewable solar and wind power.

FERC News Release, 15 March 2018, Docket Nos. PL17-1-000, IS08-390-008, IS08-390-009, and IS09-437-008, et al., FERC Revises Polices, Will Disallow Income Tax Allowance Cost Recovery in MLP Pipeline Rates,

The Federal Energy Regulatory Commission (FERC) today responded to a federal court remand by stating it no longer will allow master limited partnership (MLP) interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates.

The U.S. Court of Appeals for the District of Columbia Circuit in United Airlines, Inc. v. FERC, (827 F.3d 122 (D.C. Cir. 2016) held that FERC failed to demonstrate there was no double recovery of income tax costs when permitting SFPP, L.P., an MLP, to recover both an income tax allowance and a return on equity determined by the discounted cash flow methodology.

The Commission today acted in response both to the court remand and comments filed in response to an inquiry issued after the court ruling. FERC will now revise its 2005 Policy Statement for Recovery of Income Tax Costs so that it no longer will allow MLPs to recover an income tax allowance in the cost of service.

You know what investors hate even more than that decision? This, because it introduces the dreaded uncertainty:

The revised policy statement explains that, while all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the application of the United Airlines court case to non-MLP partnerships will be addressed as those issues arise in subsequent proceedings.

For sure, state PSC profit margin guarantees and federal loan guarantees fluff up utilities. And in the case of Sabal Trail, the Florida PSC let FPL apply such rents to a pipeline.

Nonetheless, pipeline companies finance through debt, now more than previously. Investopedia, unknown date, What debt to equity ratio is common for a oil and gas company?

Many oil companies shrank their D/E ratios during the mid-2000s on the back of ever-rising oil prices. Higher profit margins allowed companies to pay off debt and rely less heavily on debt for future financing. Starting around 2008-2009, oil prices dropped dramatically. There were three main reasons: fracking allowed companies to reach new oil reserves in an economical way; oil and gas shale production exploded, particularly in North America; and a global recession put downward pressure on commodity prices.

“Profit margins and cash flow fell for many oil and gas producers. Many turned to debt financing as a stop-gap; the idea was to keep production flowing through low-interest debt until prices rebounded. This, in turn, pushed up D/E ratios across the industry. Before the financial crisis of 2008, common D/E ratios among oil and gas companies fell in the 0.2 to 0.6 range. As of 2014, the range clusters within 0.4 and 0.8.”

That’s mostly about actual oil and gas drillers, but pipeline companies are similar in their debt schemes. That’s why Spectra Energy sold itself to Enbridge: to shuffle its debt over there. But that left Spectra Energy Partners LP (SEP) still trading separately, and we just saw the result.

Sure, vested executives may try to drive their companies over the cliff so they can cash out with their golden parachutes.

But if this kind of stock price divergence keeps up between failing pipeline stocks and thriving solar and wind stocks, and it will, investors will flee fossil fuels even faster than they already are.

Then all those pipelines will be stranded assets. That day will come when the stodgiest investors such as college savings fund VA529 realize investing in pipeline companies is too risky. And that day will come soon.

The Ides of March (March 15th) was an ancient Roman deadline for settling debts. On the Ides of March, 44 B.C., Julius Caesar, previously promoted to dictator by the Roman Senate, came to be considered too tyrannical by some of those same Senators, including his long-time friend Marcus Junius Brutus. William Shakespeare rendered Caesar’s response as the Roman patriots took him down:

Et tu, Brute? Then fall, Cæsar!

We all let fossil fuels get their clammy hands on our economic and political systems, and that grip has long since become tyrannical. It may have been fossil fuel friend FERC that, on the Ides of March, 2018, finally took down the fossil fuel tyrant, by pulling the debt rug out from under them.

Et tu, FERC? Then fall fossil fuels!


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