Pipeline MLPs (Master Limited Partnerships) and related ETFs slumped on Thursday following news from the Federal Energy Regulatory Commission that these companies will no longer be able to recover an income-tax allowance.
“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,” according to a FERC statement.
The Alerian MLP ETF (AMLP), the largest MLP related ETF, was the most traded ETF on Thursday. AMLP rebounded Friday to trading at $9.92 as of 1:30 pm Eastern Time.
Alerian released a statement Thursday, saying “we don’t believe the impact of today’s policy revision from the Federal Energy Regulatory Commission (FERC) regarding cost-of-service rates charged by pipelines is as extreme as the initial market reaction indicated.”
“To be clear, this only relates to interstate long-haul pipelines, so it has no bearing on revenues from gathering & processing (fractionation plants, processing plants), storage, or intrastate (within one state) pipelines,” Alerian said. “Interstate natural gas pipelines can charge cost-of-service rates, market rates, or negotiated rates.”
According to Barrons, “It’s not surprising that MLPs sold off on the news, but BMO Capital Markets’ Danilo Juvane calls any weakness a buying opportunity. He writes that while the tax changes are negative at the margin, he believes that most MLPs will only be minimally affected by the new ruling. Even for those that are adversely impacted, Juvane writes that the decision to simplify the General Partner (GP)/MLP structure could be accelerated to offset a potential drag in cash flow.”
After the fall, the market did rebound. MLPs may be thought of as appropriately levered and not taking on too much risk in terms of debt. According to Simply Wallet, “MLP is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for MLP, and the company also has the ability and headroom to increase debt if needed going forward.”
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