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TransCanada's US MLP soars after predicting smaller hit from new US tax policy


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Essential Energy Insights - November 2021


European Energy Insights October 2021

TransCanada's US MLP soars after predicting smaller hit from new US tax policy

TC PipeLines LP's stock price skyrocketed after the struggling TransCanada Corp. master limited partnership reduced the estimated negative financial impact from a new U.S. tax policy.

The partnership, which TransCanada uses to house U.S. pipeline assets, announced Oct. 17 that it expects to take a $20 million to $30 million annualized hit beginning in 2019 due to the Federal Energy Regulatory Commission's decision to eliminate income tax allowance recovery on cost-of-service rates for oil and gas MLPs.

TC PipeLines' stock was up nearly 10% just before noon ET on Oct. 18, trading at $32.30.

"We estimate that the revised FERC tax policy guidance ... is ~7% accretive relative to our 2019 [estimated distributable cash flow per] unit of $4.69," midstream energy analysts at Barclays wrote in an Oct. 18 note to clients. "While uncertainties still exist around the partnership's remaining pipeline assets, we believe that the range of possible outcomes has improved when compared to the estimated outcomes expressed in our announcement of second quarter 2018 results. The impact in 2018 is expected to be limited, while subsequent periods will be more significantly affected."

After FERC released a proposed tax policy change March 15, TC PipeLines disclosed that its exposure to those rates amounted to a $40 million to $60 million impact, which sent the stock price into a tailspin and spurred a 35% distribution cut. TransCanada also stated that it no longer saw TC PipeLines as a viable vehicle for dropping down U.S. assets due to the projected financial impact.

Shares recovered after the agency softened its stance in a July final ruling stipulating that partnerships will have a chance to argue that they should recover an income tax allowance, but TC PipeLines' units had plummeted nearly 40% from the close March 14 to settle at $29.42 on Oct. 17.