Pipeline operators Williams and Enbridge said Thursday they were absorbing the entities that contain some of their biggest infrastructure assets, in a reckoning for the natural gas sector that was expected after US regulators made a significant tax policy change earlier this year.
Cheniere Energy, the first US exporter of LNG produced from shale gas, announced a similar proposal, but a spokesman said it was not related to the US Federal Energy Regulatory Commission tax decision.
The moves could be the start of a wave of operators of pipelines, gathering systems, processing plants and export facilities seeking to simplify their corporate structures by acquiring their separate master limited partnerships. Energy Transfer Partners and Dominion Energy are weighing structure changes.
"This will put time back on our calendars because managing two public companies does increase our load," Williams CEO Alan Armstrong said during a daylong presentation to analysts that was broadcast on the company's website. "The catalyst that came along for this was the FERC tax ruling on MLPs."
MLPs had flourished in the energy sector for years, in large part because profits generated are only taxed when partnership investors receive distributions. At the same time, the MLPs were allowed to recover those taxes through cost-of-service rates charged to some customers.
That benefit scheme was turned on its head March 15 when FERC said it would change its 2005 policy to disallow the recovery. The decision meant there would be a drag on revenues and profits for the MLPs and it would be more difficult financially for operators to drop down assets to their affiliated MLPs, effectively throwing a wrench in a key element of their growth strategies.
FERC's decision prompted legal challenges at the agency and in the courts, and strategic reviews in many company boardrooms.
Williams, operator of Transcontinental Gas Pipe Line, will acquire all 256 million public outstanding units of Williams Partners, in a transaction it valued at $10.5 billion that is expected to close in the fall. The transaction will be taxable to Williams Partners unitholders, while Williams will receive certain tax benefits.
Once completed, Williams Partners will become a wholly owned subsidiary of Tulsa, Oklahoma-based Williams, which will maintain a C-corp structure. As a C-corp, they would be able to add income taxes into their cost-of-service calculation as they would be paying an income tax. During its analyst presentation, Williams said its focus after the transaction will be on growing its gas portfolio, with approximately $20 billion in identified project opportunities, $5 billion of which are awaiting near-term decisions. Separately, Canada's Enbridge said it would streamline its corporate and capital structure, bringing all of its core liquids and gas pipeline assets under the umbrella of one single publicly listed entity instead of multiple entities including an MLP.
Enbridge will acquire all of the outstanding equity securities of Spectra Energy Partners, Enbridge Energy Partners, Enbridge Energy Management and Enbridge Income Fund Holdings that It doesn't already own. It valued the transactions at $8.9 billion (C$11.4 billion).
"Under the newly changed FERC tax policy, holding certain interstate pipelines in MLP structures is highly unfavorable to unitholders and is no longer advantageous for Enbridge or the US MLPs," Enbridge said in a statement. "Without this restructuring, and in light of the challenging capital markets conditions and the resulting impact on MLP cash flows, Enbridge's view is that EEP and SEP will face the cessation of distribution growth, and compromised distribution outlook to unitholders as early as 2019. Similarly, Enbridge's view is that ENF's uncompetitive cost of capital will inhibit future dividend growth."
CHENIERE MOVE SAID TO BE UNRELATED TO OTHERS
As for Cheniere, the Houston-based company said it was proposing to acquire the publicly held shares of Cheniere Energy Partners Holdings not already owned by Cheniere in a stock-for-stock exchange. It did not specify a total value for the deal. Cheniere abandoned a similar move in 2016, the year its Sabine Pass export terminal in Louisiana shipped its first cargo.
Spokesmen Eben Burnham-Snyder said Thursday's offer was not related to the FERC tax decision. Cheniere Partners Holdings is structured as a corporation, and its only business is to hold units of Cheniere's MLP entity, Cheniere Energy Partners. The transaction, if agreed upon, would not affect the Cheniere Energy Partners entity, Burnham-Snyder said.
While other midstream gas companies consider corporate structure overhauls, legal battles are pending over the FERC tax policy decision.
LEGAL BATTLES LOOM OVER TAX ACTION
Multiple companies are asking FERC to reconsider its decision, and one company, at the center of the court case that kicked off FERC's policy reversal, has just gone back to court. On May 11, in a federal appeals court in the District of Columbia, a suit was filed against FERC by SFPP, which among other things transports petroleum products on its East Line pipeline from Texas for delivery to destinations in New Mexico and Arizona.
SFPP is a limited partnership in which much of its taxable income is passed through Kinder Morgan Energy Partners, an MLP. Its suit asks that FERC's March decision be modified in whole or in part.
Addressing reporters after a meeting Thursday in Washington, FERC Chairman Kevin McIntyre could not say whether the corporate restructurings were expected when the agency announced its tax policy decision.
"Neither I, nor I'm sure any of my colleagues, would presume to suggest a particular business or corporate structure model for any particular market participant, MLP or otherwise," McIntyre said.
