United States: Over Objections, FERC Approves Sale-Leaseback Transaction To Transform Income Stream Into Lease Payments For REIT Purposes

On June 1, 2016, FERC granted the request by MoGas Pipeline LLC ("MoGas") for abandonment authority to transfer by sale its jurisdictional natural gas pipeline facilities to an affiliate, CorEnergy Pipeline Company, LLC ("CorEnergy"), and certificate authority to lease the facilities back for continued operation by MoGas. MoGas stated that if its parent, Corridor MoGas, Inc. ("Corridor MoGas"), sells a majority stake in MoGas to an unaffiliated third party, the income from MoGas's lease payments will qualify as non-taxable Real Estate Investment Trust ("REIT") rental income.

On November 30, 2015, MoGas filed the application for abandonment authority and certificate authority to transfer ownership of its 263 miles of pipeline by sale to CorEnergy and immediately lease the facilities back for continued operation by MoGas. MoGas stated that MoGas and CorEnergy both are 100 percent owned by Corridor MoGas, which in turn is 100 percent owned by CorEnergy Infrastructure Trust, a publicly traded REIT. MoGas stated that it will maintain its rights, obligations, and responsibilities under its FERC Gas Tariff and will continue to operate the facilities, such that CorEnergy's ownership will be passive. Further, MoGas explained that it will pay CorEnergy monthly rent for the use of the facilities, but did not provide specific dollar amounts or percentages for the rent. MoGas also requested approval to consolidate its accounts with CorEnergy's accounts. MoGas argued that because CorEnergy will passively own the jurisdictional facilities while MoGas incurs the costs, the lease cost for MoGas will offset the lease revenue for CorEnergy. In support of the transaction, MoGas argued that income to Corridor MoGas from lease payments will qualify as non-taxable REIT rental income if Corridor MoGas sells a majority stake in MoGas stock to an unaffiliated third party. Moreover, MoGas asserted that the sale-leaseback will provide it with access to a new source of investment, resulting in greater financial flexibility. Thus, MoGas argued that the transaction will help MoGas maintain reliable service to existing customers and develop additional infrastructure in the future.

In response, one protester filed a request for technical conference, arguing that the current record was insufficient for FERC to determine whether MoGas's proposed transaction would benefit or harm existing customers. The protester also stated that, because MoGas did not provide specific dollar amounts or percentages for the monthly rent, there is no evidence that the lease satisfies FERC's policy for approving leases between affiliates. Protesters also argued that FERC should condition any authorization on MoGas filing a rate case or a cost and revenue study or by prohibiting MoGas from recovering any costs associated with the lease in a future rate case.

In its order, FERC denied the request for technical conference and found that MoGas will continue to provide customers the same service under its tariff and will not be able to include its lease payments or any other costs associated with the lease in its rates unless authorized by FERC in a future rate proceeding. Thus, FERC found that the proposal satisfies the Certificate Policy Statement's threshold requirement that the applicant be prepared to financially support the project without relying on subsidization from existing shippers. FERC also found that the transaction will not result in any degradation in service to existing MoGas customers or have any adverse impacts. Similarly, FERC found that no service, facilities, or rates will be affected by MoGas's abandonment of the facilities because MoGas will continue to operate the facilities with CorEnergy as a passive owner, and because lease payments to CorEnergy will be offset by CorEnergy's lease revenue. Accordingly, FERC found that MoGas's requests for authorization to abandon its facilities by sale and certificate authority to leaseback and continue operating the facilities are permitted and required by the public convenience and necessity.

Regarding MoGas's accounting request, FERC approved MoGas's request to consolidate accounting entries but required MoGas to file procedures to track those accounts carried over from CorEnergy's books and ensure that such amounts are related only to the operation of the facilities by MoGas. In addition, FERC required MoGas (1) to include in the footnote disclosures in its annual FERC Form 2-A and quarterly FERC Form 3-Q the balances carried over from CorEnergy's books. Finally, FERC rejected MoGas's pro forma accounting entries and required MoGas to account for the transfer of the pipeline facilities in accordance with Gas Plant Instruction No. 5 and Account 102 (Gas Plant Purchased and Sold) of the Uniform System of Accounts.

Responding to protests, FERC stated that it has previously approved similar sale-leasebacks of jurisdictional facilities. FERC found that, as a result of the transaction, MoGas expects to gain financial flexibility and a stronger financial position. FERC also stated that it declines to substitute its business judgment as to corporate structure so long as proposed abandonments and acquisitions do not impact existing facilities, services, rates, or tariff provisions. In response to protestors' arguments requesting FERC to condition approval of the transaction, FERC emphasized that MoGas will not be able to include any costs related to the lease arrangement, including lease payments, in its cost of service unless authorized in a future rate proceeding.

A copy of the order is available here.

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