The Federal Energy Regulatory Commission’s (FERC) tax ruling on March 15 removed certain benefits for MLPs but it is more likely that the decision merely sped up the recent consolidations of Enbridge Inc. (NYSE: ENB) and The Williams Cos. (NYSE: WMB), an analyst told Hart Energy.

Michael Underhill, chief investment officer of Pewaukee, Wis.-based Capital Innovations LLC, sees the May 17 announcements as part of a continuing trend.

“The FERC ruling accelerated the consolidations,” Underhill said. “When Kinder Morgan departed the MLP space on Aug. 10, 2014, this was viewed as an anomaly—I was quoted as stating that this was a precursor of things to come. Recently, Kinder Morgan was joined by ONEOK Inc. [NYSE: OKE] and Targa Resources Corp. [NYSE: TRGP] as they have bought in their MLPs.”

FERC based its decision on a decision by the U.S. Court of Appeals for the D.C. Circuit in July 2016. The commission said that the court had ruled that its tax policy constituted a “double recovery” of income tax costs for MLPs and eliminated that benefit.

Trade associations, including INGAA, expressed disappointment with the policy shift, but whether the ruling forced the consolidation issue did not seem to matter much to analysts. They were pleased that the companies chose to move toward simpler structures.

“Consolidation reduces the cost of capital,” said Underhill, addressing the Cheniere Corp. (NYSE American: LNG) announcement as well.

Ethan H. Bellamy, senior research analyst with Baird Equity Research, applauded the announcements with a hope that others will follow.

“We think this massive, one-day industry shift—on the back of previous moves in this cycle to simplify from peers such as Kinder Morgan [NYSE: KMI] and Plains All American [NYSE: PAA/PAGP]—will help tip the scales toward simplification transactions for laggards,” he wrote in a report.

Specifically, Baird believes the moves by the three companies may convince companies like Antero Resources Corp. (NYSE: AR) to merge its two midstream units as activist investors have demanded.

“It may also motivate Energy Transfer to act expeditiously in its combination of ETP and ETE, a deal we believe could come as early as fourth-quarter 2018 upon completion of Rover and Mariner East 2,” Bellamy wrote.

This doesn’t mean that it makes fiscal sense for all parent companies to dissolve their MLPs, but Underhill expects the announcements to force investors to question the validity of the MLP model and re-evaluate the C-corp. structure. Some introspection by the sector may be in order as well.

“The industry itself needs to remain cognizant that minimizing an MLP’s [incentive distribution rights] burden (or lowering its cost of capital in other ways) and maximizing an MLP’s investor base may be needed to extend an MLP’s lifespan beyond 15 to 20 years,” he said.

Bellamy noted the economic advantages that MLPs provide as opposed to corporations for qualifying assets outside of cost-of-service driven interstate gas pipeline.

“Will MLP general partners held in private hands, and MLP-able assets held by private equity firms abandon MLP IPOs?” he asked. “If the long arc toward free cash flow across the energy sector, not just in E&Ps, helps instill M&A discipline in midstream multiples, IPOs may still represent their best exits.”

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.

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