Last month, the Federal Energy Regulatory Commission announced plans to stop oil and gas pipelines from being able to structure themselves as Master Limited Partnerships (MLPs) in order to get an income tax allowance for rates that are cost-of-service. Under the existing model, MLP customers pay a price that is regulated, part of which takes care of corporate tax charges.
Master Limited Partnerships aren’t required to pay corporate taxes since they pass through entities that distribute pre-tax earnings to unitholders. The latter are the ones that pay the taxes.
Any new rule related to this matter would likely not go into effect until 2020. Still, the government agency’s news affected trading on a number of MLPs, including the Alerian MLP ETF (exchange-traded fund), Energy Transfer Partners, TC PipeLines, Williams Partners, Crossamerica Partners, and several others.
Regardless of when any ruling would go into effect, MLPs are not for every investor, even now. These are complex investments that have attracted a lot of attention because of low-interest rates, as well as that a huge percentage of their income goes to shareholders as distributions. This is why so many institutional investors and individual investors have found MLPs so attractive.
Unfortunately, not all investors of Master Limited Partnerships understand the risks that they are taking on. Often, MLPs are touted as high yield securities that come with low risks even though that is far from true. For example, the majority of MLPs are invested in the natural resources infrastructure, which is inherently a risky arena in light of fluctuations in commodity and energy prices. Because MLPs must distribute the majority of their income to investors, they often have to borrow money to make these payments. This can be risky especially when the market is down. Commodity price exposure, capital markets volatility, acts of God, and manmade damages also bring added risks.
If your MLP investment was recommended to you by a financial adviser and you have reason to believe that misrepresentations or omissions were made when you were sold the investments—or that MLPs were never suitable investments for you to begin with—you may have reasons to file an investor fraud case.
FERC Won’t Let Pipeline MLPs Recoup Tax Allowances, Law360, March 15, 2018
Federal Energy Regulatory Commission
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