The Federal Energy Regulatory Commission regulates the maximum rates that natural gas pipelines can charge to customers. The rate regulation essentially allows the pipeline company to recover its “cost of service,” that is, its operating costs plus a reasonable return on its invested capital. In 2005, FERC decided that pipelines organized as partnerships, which do not pay corporate taxes, could act as though they had to pay corporate taxes in calculating their costs. This allowed partnership pipelines to charge higher rates than they otherwise would, and led to a boom of publicly traded pipeline partnerships, often called “master limited partnerships” or “MLPs.”
Loews Corp., a big conglomerate, formed an MLP called Boardwalk Pipeline Partners LP, put some pipeline assets into Boardwalk, and took it public in 2005. Because the FERC rules were new and controversial at the time, it included a provision in the Boardwalk partnership agreement that allowed Loews to take it private again if the rules changed. The idea was that if the FERC rules changed such that MLPs could no longer include hypothetical taxes in their rate calculations, then it would be bad for Boardwalk to be a public partnership, and so Loews would be able to force all the Boardwalk shareholders (technically, unitholders — holders of limited partnership interests) to sell their shares and take it private. (Then it would be a corporate pipeline and get to charge for taxes again.) This “call right” was written to say that if Boardwalk got an opinion of counsel saying that Boardwalk’s status as an MLP “has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers,” then Loews can buy back all the Boardwalk shares at a price equal to the average closing prices over the six months before it exercises the call.
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