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Big Changes for MLPs, but Some Values Remain

Travis Miller
Jeremy Glaser

Jeremy Glaser: Good morning. I'm Jeremy Glaser. Midstream energy companies took a beating last week after some regulatory changes. I'm here with Travis Miller. He's an equity strategist, to talk about what these changes are, and if he sees any values emerging. 

Travis, thanks for joining me.

Travis Miller: Sure. Thank you.

Glaser: Let's talk a little bit about what happened last week. FERC is probably not an agency that a lot of people are familiar with, but it's a big deal when it comes to these pipelines.

Miller: Yeah, it's huge, and pipelines have had a terrible 2018 so far, and this just piled on. What regulators did, was essentially said, "OK, MLPs, you don't pay taxes. Those are all passed down to individual investors, so you shouldn't be able to charge your customers for taxes," and essentially said "We're changing the policy, you're going to have to cut rates so that you charge your customers, and no longer collect those tax rebates."

Glaser: If they can't collect these tax rebates anymore, does this fundamentally make that MLP model unattractive? Is this really an existential threat?

Miller: Yeah, it does. It does for several of the MLPs. The ones that are going to be most affected are the ones that have to cut their tariffs. If they have to cut their tariffs because they are not collecting the tax allowance, then it makes a lot of sense for them to turn into C-Corps, as we've seen a couple of them do.

Glaser: When you look at ones that maybe are going to be a little bit better off, or this isn't going to be a big deal for them, who do you think fits into that category?

Miller: Some of the C-Corps that own pipelines. Kinder Morgan, they turned into a C-Corp a couple of years ago. They're unscathed from this, and TransCanada also is one that's a C-Corp, has a lot of pipelines, and should be unscathed from any rate changes.

Glaser: Were any of the firms that do decide to stay as MLPs well positioned? Does the sell-off create any opportunities?

Miller: Yeah, we think the sector has several good values. We look at the MLPs that don't have material exposure to the potential impact from the tax allowance going away, and those are typically MLPs that have negotiated rates or rates that are already below market. Among those, we like Energy Transfer Partners family, Energy Transfer Equity among those. Also, Plains All American. All traded 20% or more discount star fair value.

Glaser: Overall definitely a big deal, a big change but still some values there?

Miller: Yeah, and we'd encourage people to watch out for the Enbridge family. Of any of them, we think those are the most affected. This would be Enbridge Energy Partners being the most affected, and Spectra Energy Partners.

Glaser: Travis, thanks for sharing your thoughts on these changes today.

Miller: Absolutely.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.