Shares of TransCanada and Enbridge rose Thursday after U.S. energy regulators blunted possible negative tax effects for the owners of U.S. pipelines.
Investors in the Canadian giants, as well as in U.S. master limited partnerships that held pipelines, had been wary of the new rules from the Federal Energy Regulatory Commission. They dealt with how pipeline companies used their tax bills as part of the rate-setting calculation for their customers.
As FERC passed its final rule, it clarified some of the finer points, including how a pipeline company owned by a corporate parent could take certain tax allowances.
TransCanada stock popped 5.4 per cent in Thursday TSX trading, while Enbridge shares gained nearly 4 per cent. U.S. ETFs that hold publicly traded master limited partnerships, structures that skip paying corporate taxes as they pass their income on to their holders, gained on heavy volume Thursday, while TC PipeLines LP was the biggest gainer on the NYSE, up 27 per cent.
“While FERC is not changing their MLP tax policy in substance, they made several important changes to the policy which we believe will offer master limited partnership structured pipeline companies a lifeline,” Height Securities analyst Katie Bays wrote in a note to clients.
CIBC World Markets analyst Robert Catellier said he’d previously cut his TransCanada price target by $1 based on the initial FERC ruling in March. Afterward, the company’s MLP, TC Pipelines, cut its distribution 35 per cent in response to the potential negative impact of the FERC ruling, he wrote.
With Wednesday’s revisions, however, “The implications are that, with the improved outlook and lower distribution level, TC Pipelines may have strengthened as a funding option.”
For Enbridge, the situation is “more complicated,” he says, given the company’s plan to simplify its corporate structure by doing a share exchange with its sponsored vehicles, including MLPs. “The improved cash-flow outlook may cause the sponsored vehicles to call for a better offer, but this must also be weighed against the [roughly] 8 per cent increase in [Enbridge’s] share prices since the offers were made and prior to the FERC's amendments.”
Cory O’Krainetz, analyst with Odlum Brown, echoed some of these views: “While the dollar value of this decision is unknown and the outcome will be different for each company, it is incrementally positive for the sector. We believe TransCanada could be one of the largest beneficiaries of the ruling,” he said in a note.
“However, we continue to favour Enbridge based on its higher-quality asset mix and more robust growth profile.”
With a file from Bloomberg News
David Milstead