Market Overview

A Fantastic FERC Gift For MLP ETFs

A Fantastic FERC Gift For MLP ETFs

Master limited partnerships and the relevant exchange traded funds rallied Thursday after the Federal Energy Regulatory Commission took steps it said ensure that natural gas pipeline rates remain fair.

FERC announced the decision after the close of U.S. markets Wednesday. On Thursday, the Alerian MLP ETF (NYSE: AMLP), the largest MLP ETF trading in the U.S., jumped 2.32 percent on volume that was about 2 1/2 times the daily average.

What Happened

FERC “took final action to facilitate the pass through of the tax reductions provided by the Tax Cuts and Jobs Act signed into law on Dec. 22, 2017, and ensure natural gas pipeline rates remain just and reasonable,” the agency said in a statement.

The final rule from FERC modifies a controversial March ruling that sparked a sell-off in the MLP arena. Following a federal appeals court's ruling in the United Airlines, Inc. v. FERC case in March, FERC stated “it no longer will allow master limited partnership interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates.”

Why It's Important

AMLP, which tracks the Alerian MLP Infrastructure Index, is home to over $10.11 billion in assets, underscoring the point that, in recent years, many income-hungry investors have embraced MLPs. Oil pipeline and transportation firms account for over 41 percent of the Alerian MLP Infrastructure Index's weight, while natural gas pipeline operators represent 29.3 percent of the benchmark's weight.

AMLP has a trailing 12-month dividend yield of 7.92 percent.

FERC's “final rule makes adjustments to the proposed form, including automatically eliminating the accumulated deferred income tax from a pipeline’s cost of service when the form enters a federal and state income tax of zero for pipelines that are non-taxpaying entities,” according to the commission.

What's Next

With U.S. oil output soaring and FERC's March ruling a thing of the past, income investors may be compelled to revisit MLPs and related ETFs. Immediately following FERC's March decision to disallow the income tax allowance, scores of MLPs, including some AMLP holdings, said the decision would have minimal impact on their bottom lines.

Those comments made investors more comfortable with the asset class following the controversial decision, as highlighted by nearly $912 million in second-quarter inflows of AMLP.

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