Enbridge to buy and absorb separately traded subsidiaries
Canadian pipeline giant Enbridge said Thursday that it plans to buy back its Houston subsidiaries and absorb them into the larger Enbridge corporation in a roughly $9 billion deal.
The deal would continue the trend of pipeline companies moving away from the taxfriendly master-limited partnership structures, or MLPs, that distribute most of their income to investors. These types of companies tend to do well
when oil and gas prices are high, and operations throw off cash, but typically struggle when prices head south.
Enbridge, headquartered in Calgary, Alberta, cited the new U.S. tax law and recent rule changes with the Federal Energy Regulatory Commission as making the tax advantages of master limited partnerships less valuable.
Many MLPs have suffered on Wall Street of late because they failed to generate sufficient cash flow and deliver returns to their investors.
As a result, their parent companies are simplifying the corporate structures and reducing their payouts to shareholders, said Ethan Bellamy, an energy analyst at Robert W. Baird & Co.
On Thursday, Oklahoma pipeline company Williams Cos. said it has an agreement to absorb its MLP subsidiary, Williams Partners, while Cheniere Energy of Houston said it is proposing a deal to fully absorb its Cheniere Energy Partners LP Holdings business, another MLP.
Bellamy predicted that Dallas pipeline giant Energy Transfer, which also owns Sunoco, will soon follow suit and shift away from the MLP model.
Not all MLPs are vanishing, however, as the industry hits the reset button after the oil bust, Bellamy said. Still thriving MLPs include Houston pipeline and export terminal firm Enterprise Products Partners.
Enbridge plans to buy all its businesses that are separately traded — Enbridge Energy Partners, Spectra Energy Partners, Enbridge Energy Management and Enbridge Income Fund Holdings. Enbridge acquired Houston's Spectra Energy for about $28 billion just more than a year ago, but the MLP called Spectra Energy Partners continued to trade separately.
Enbridge has cut about 200 jobs in Houston since the Spectra deal closed, bringing its local employment to about 1,500.
This new consolidation will mean some additional job cuts in Houston, but Enbridge said it expects them to be limited.
The MLP investors, called unit holders, must still approve the consolidation plan.