Why Growth-Hungry U.S. Utilities Won't Touch MLPs for Pipes

  • Utilities are buying gas companies in search of more growth
  • Power suppliers averse to volatility of pipeline partnerships

Power utilities hungry for growth are offering top dollar to buy natural gas pipeline networks across the U.S. But they’re drawing the line at the master limited partnerships that have lost almost 40 percent of their value in the past year.

Duke Energy Corp. is the latest electric company to avoid once-prized MLPs as it leaps into the natural-gas transportation business with this week’s $4.9 billion deal to snap up Piedmont Natural Gas Co.

“What we’re buying with Piedmont is a lower-risk business that’s more consistent with the regulated profile of Duke Energy and the strong dividend that we pay,” Duke Chief Executive Officer Lynn Good said Monday in a phone interview. “An MLP typically has greater commodity and volumetric risk that does not exist with Piedmont. ”

Utilities like to stick with what they know best. Duke followed in the footsteps of Southern Co., WEC Energy Group Inc. and Emera Inc., in buying a gas business that relies mostly on transportation fees paid by consumers rather than on long-haul shipments arranged by producers.

“MLPs have a much more complex capital structure,” Kit Konolige, senior
utility analyst for Bloomberg Intelligence, said Wednesday by phone. “They’re typically controlled by a parent. It might not be easy for a utility to go out and buy one.”

Southern, based in Atlanta, agreed in August to buy gas distributor AGL Resources Inc. for $8 billion to capitalize on growing demand for the heating and power-plant fuel. The AGL purchase comes with guaranteed profit growth in Georgia and Illinois, where regulators have authorized replacement of aging lines, Southern CEO Tom Fanning said Wednesday in an interview.

Fanning said there are people invested in MLPs and yieldcos, companies formed to own and operate power plants by renewable developers, who “wish today they weren’t.”

“We have assiduously avoided those kind of things,” he said. “They really reduce your business and financial flexibility.”

The 13-member S&P Supercomposite Gas Utilities Index, which includes both Piedmont and AGL Resources, has outperformed the Alerian MLP Infrastructure Index in the past year, rising 6.7 percent compared with a 36 percent slide for the MLP benchmark.

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