FERC Issues a Final Ruling for MLPs
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The Federal Energy Regulatory Commission (FERC) issued a final ruling on proposed rules released in March 2018. Here's our take on the 4 main ways the final ruling modified the proposed rules.
FERC Issues a Final Ruling for MLPs

On July 18th, the FERC issued a final ruling on proposed rules released in March 2018. As you may recall, the preliminary rules stopped MLPs’ ability to recover taxes in the rates they charge to customers on the basis that they don’t directly pay income taxes.

The final ruling modified the proposed rules in 4 main ways:

  1. MLPs will be permitted to eliminate Accumulated Deferred Income Tax balances, known as ADIT. By eliminating ADIT, which is a liability, the net rate base — MLPs accounting interest in their pipeline assets — is increased. Since MLP’s cash flow from a FERC regulated pipeline is a function of the size of both their investment and the allowed rate of return, removal of ADIT effectively increases the income MLPs can derive from their pipelines compared to the initial March ruling. The elimination of ADIT also removes some fears that the ADIT liability would have to be refunded to customers over time in the form of lower rates.
  2. MLPs do not have to immediately eliminate the tax allowance. Under 1 of 4 options provided by the FERC, pipelines are permitted to — at least temporarily — use the new tax rate in the Tax Cuts and Jobs Act.
  3. If income is consolidated on the tax return of its corporate parent, it is considered subject to taxation and therefore eligible to include a tax allowance. This is particularly relevant for MLPs that are owned by a C-corp.
  4. The capital structure allowance changed. In some cases, entities will be able to modify their capital structure to 57% equity — instead of 50% — for ratemaking. This is significant as the weighted average cost of capital is used in determining the allowable rate of return.

The ultimate impact of these changes will vary on a case-by-case basis. With that said, we believe the final ruling is a significant positive for the group as it provides clarity, mutes the impact of the preliminary proposal, and even supports higher allowed rates.

© 2018 Miller/Howard Investments, Inc.

DISCLOSURE
Common stocks do not assure distribution payments. Distributions are paid only when declared by an issuer's board of directors and the amount of any distribution may vary over time. Distribution yield is one component of performance and should not be the only consideration for investment. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. The views expressed here represent Miller/Howard Investments' views and are subject to change at any time. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Past performance does not guarantee future results.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)
  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.

DISCLOSURE
Common stocks do not assure distribution payments. Distributions are paid only when declared by an issuer's board of directors and the amount of any distribution may vary over time. Distribution yield is one component of performance and should not be the only consideration for investment. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. The views expressed here represent Miller/Howard Investments' views and are subject to change at any time. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass. It is not possible to invest directly in an index.

Past performance does not guarantee future results.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)
  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.