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Recent Tax Ruling Sparks Selloff in Energy Master Limited Partnerships

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As recently reported, on March 15, 2018, the Federal Energy Regulatory Commission (“FERC”) indicated that it would no longer allow oil and gas pipelines structured as Master Limited Partnerships (“MLPs”) to recover an income tax allowance for cost-of-service rates.  The cost-of-service model particularly impacts those MLPs which operate interstate pipelines in the sector’s midstream.  These MLPs charge customers a regulated price, a portion of which is to cover corporate tax charges.  However, MLPs don’t pay corporate taxes in the first instance, because they are pass-through entities which distribute their pre-tax income to unit holders, who then pay taxes on it according to their own individual situation.

FERC has announced — in the wake of recent tax cuts and a D.C. Circuit Court decision in United Airlines vs. FERC – that for more than a decade MLPs have been able “to recover an income tax allowance in their cost of service.”  In effect, this has served to boost the amount of pre-tax income to be pass through to investors.

While it is unclear as to when any rule issued by FERC will go into effect, perhaps no sooner than 2020, MLPs were adversely impacted in trading.  At one point during trading on March 15, the Alerian MLP ETF (NYSE: AMLP) — which serves to track the MLP sector — was down as much as 10%.  This ETF has lost approx. 18% in the past year.

Among the hardest-hit MLPs following FERC’s announcement were:

  • Plains All American Pipeline, L.P. (NYSE: PAA)
  • Energy Transfer Partners, L.P. (NYSE: ETP)
  • Enbridge Energy Partners, L.P. (NYSE: EEP)
  • TC PipeLines, LP (NYSE: TCP)
  • Spectra Energy Partners, LP (NYSE: SEP)
  • Williams Partners L.P. (NYSE: WPZ)
  • Enable Midstream Partners, LP (NYSE: ENBL)
  • CrossAmerica Partners LP (NYSE: CAPL)

If your financial advisor has recommended an investment in an MLP, you may be able to recover losses through arbitration before the Financial Industry Regulatory Authority (“FINRA”) if the recommendation lacked a reasonable basis or if there was a misleading sales presentation.  When a broker recommends an investment to a customer, the financial advisor must first conduct due diligence on that investment.  In addition, the broker and by extension his or her employer, must conduct a suitability analysis in order to determine if that investment is suitable in light of the customer’s stated investment objectives and associated criteria, including the investor’s age, net worth and income, risk tolerance and prior experience with investing.  Further, the broker has an affirmative duty to disclose the risks associated with an investment to their customer.

The attorneys at Law Office of Christopher J. Gray, P.C. have experience in representing investors in oil and gas investments, including investors in futures and options, oil and gas private placements, drilling funds, and other energy-related investment products.  Investors may contact a securities arbitration lawyer at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

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