TC Pipelines LP slashes distributions after U.S. move to eliminate tax break

CALGARY _ A U.S. pipeline partnership 25 per cent owned by TransCanada Corp. is slashing distributions to unitholders over fears of a cash flow crunch due to a U.S. government move to eliminate a tax break for certain interstate pipelines

TC PipeLines LP said Wednesday it will pay a first-quarter distribution of 65 cents per unit, down from its earlier payouts of $1.

The company is continuing to look at alternatives but is making the cut because the proposal by the U.S. Federal Energy Regulatory Commission will have a “profound impact” if adopted, said Nathan Brown, president of TC PipeLines’ general partner.

“The ultimate result is not precisely known but, if implemented as expected, will result in a material decrease in cash flows from our pipelines,” he said in a statement.

The FERC is expected to issue final orders on its proposal in late summer or early fall.

Calgary-based TransCanada filed a request about two weeks ago for clarification and, potentially, a re-hearing on how the FERC’s proposed changes will affect entities that don’t have typical master limited partnership (MLP) ownership structures, CEO Russ Girling said on a conference call to discuss first-quarter results last Friday.

“As our ownership interest in TC PipeLines is approximately 25 per cent, the impact of the FERC actions related to our MLP is not expected to be significant to our consolidated earnings or cash flow,” he said on the call.

An MLP is a publicly traded limited partnership that combines the tax benefits of a partnership _ where profits are taxed only when investors receive distributions _ with the liquidity of a public company.

He added “dropdowns” of assets to the partnership, a method of swapping assets for cash needed to build new projects, has been halted but that TransCanada can still fund its growth from other sources.

The decision by FERC to no longer allow MLPs to recover an income tax allowance from cost-of-service tariffs came in response to a 2016 court ruling that found its long-standing tax policy could result in double recovery of costs.

The FERC move is also expected to affect Calgary-based Enbridge Inc., which has two U.S. MLPs, Enbridge Energy Partners and Spectra Energy Partners.

Last week, Enbridge Energy announced a quarterly distribution of 35 cents per unit, unchanged from the previous quarter.

In February, Spectra declared a quarterly cash distribution of 73.875 per unit, an increase of 1.25 cents _ it is expected to declare its second-quarter distribution later this month.

Enbridge Inc. said in March that Enbridge Energy is expected to experience an $80-million decrease in annual distributable cash flow, but that will be somewhat offset by a revenue increase on the Canadian Mainline system held by Enbridge Income Fund Holdings Inc.

It added about 40 per cent of Spectra’s natural gas pipeline revenue is from cost of service-based tariffs which could be subject to the tax recovery disallowance.

Spokespersons for Enbridge and TransCanada said Wednesday the companies had no further comment or updates on the matter.

In a report in March, analysts at CIBC said the FERC move puts the long-term viability of MLPs in question.

It added MLPs held by corporations will likely consider converting to corporations if no consideration is given to the fact they are held by taxable U.S. entities.