FERC is seeking industry comments by Dec. 14 solely on the issue of how a master limited partnership’s (MLP) growth should be projected for the purposes of the discounted cash flow (DCF) analysis.
The Federal Energy Regulatory Commission (FERC) also plans to hold a technical conference on Jan. 8, 2008 to focus exclusively on this one issue. Post-technical conference comments will be due at the agency on Jan. 25.
FERC said it has received sufficient comments to address most issues with respect to MLPs, including whether the agency should permit MLPs to be included in the proxy group for both natural gas and oil pipelines; the agency’s proposed earnings cap on MLPs’ distributions; and whether FERC should explore other means for determining the equity cost of capital at this time.
But the Commission noted that its current record is lacking on deciding how an MLP’s growth should be projected for purposes of the DCF analysis. It currently projects growth in dividends based on an average of short- and long-term growth projections, with two-thirds weight given to the short-term growth forecast and one-third weight given to the long-term growth forecast.
The Commission uses the five-year growth forecasts published by the Institutional Brokers Estimate System for the short-term growth forecast, and long-term growth is based on forecasts of the growth of the economy as a whole, as reflected in Gross Domestic Product. It is generally believed that MLPs will have lower growth potential than corporations because of their distributions in excess of earnings.
“The existing record is insufficient for the Commission to determine 1) whether its current method of projecting growth adequately reflects the lower growth potential of MLPs, particularly over the long term, and 2) if not, what alternative method should be used to project the growth of MLPs,” FERC said in its notice seeking further comments, which was issued earlier this month [PL07-2].
The request for the additional comments on the issue comes four months after FERC issued a draft policy statement that would allow the use of MLPs in proxy groups to determine oil and natural gas pipelines’ return on equity (ROE) for ratemaking purposes (see NGI, July 23). The policy shift stems from the decline in publicly traded companies with substantial pipeline assets and the rise of MLPs in the pipe sector.
In the proposed policy statement, FERC seeks to cap the cash distributions used to determine an MLP’s return under the DCF methodology at the MLP’s reported earnings. This would render MLP cash distributions comparable to corporate dividends for the purpose of a DCF analysis, according to the agency. In addition, FERC would require a showing that an MLP has had stable earnings over multiple years in order to justify a finding that it will be able to maintain the current level of cash distributions in future years.
Interstate gas pipelines repeatedly have called on FERC to recognize the growing role of MLPs in the pipeline industry, and the need to include them in proxy groups to determine pipe ROEs. The exclusion of MLPs from proxy groups triggers wide shifts in ROEs that can affect the profits pipelines make each year and their ability to attract investors for projects, they said.
The issue of MLPs in proxy groups came to the forefront last year in a rate case involving Kern River Gas Transmission. A FERC judge recommended a 9.34% ROE for the Wyoming-to-California pipeline, significantly below what it had requested, based largely on the exclusion of MLPs from its proxy group. In October 2006, FERC voted to increase Kern River’s ROE to 11.2%, but it ruled that the pipeline had not met the burden to support its proposal to include MLPs in its proxy group (see NGI, Oct. 23, 2006).
Kern River’s proposed proxy group included Enterprise Products Partners, GulfTerra Energy Partners LP, Kinder Morgan Energy Partners, Kinder Morgan Inc. and Northern Border Partners. But the proxy group ultimately adopted by FERC was composed of companies with a relatively low proportion of pipeline businesses and substantial distribution operations.
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