Sandell Asset Management sent a letter Monday to the TransCanada Corporation (NYSE:TRP) (TSE:TRP) urging the oil giant, and the company at the center of the Keystone XL pipeline debate, to take advantage of a low tax-paying affiliate.

The activist hedge fund wants the oil giant to use the Master Limited Partnership affiliate, like the other leading pipeline operators.

TransCanada

Sandell’s letter to TransCanada

New York-based Sandell Asset Management made public today its letter to TransCanada Corporation (NYSE:TRP) (TSE:TRP)’s board. The activist hedge fund urged in the letter: “A spinoff of the energy segment is the best long-term course for this asset to attract a world-class, dedicated management team to deal with upcoming opportunities and challenges within the sector and to highlight the premium value of the pipeline business”.

According to a data compiled by Bloomberg, the activist hedge fund owned 0.13% of TransCanada shares as of September 30.

Advantages of MLP

In its letter, Sandell argues that TransCanada Corporation (NYSE:TRP) (TSE:TRP) is not taking full advantage of its master limited partnership (MLP) affiliate, which holds a number of its assets. The hedge fund points out that a number of other pipeline operators, including Enbridge, SpectraEnergy and Williams Companies, regularly deposit assets into their so-called M.L.P.s. The hedge fund highlights that such a structure facilitates those companies in passing on profits to investors without paying taxes.

The activist hedge fund further argues that TransCanada Corporation (NYSE:TRP) (TSE:TRP)’s strategy of only putting select assets in its M.L.P., described as a “cash A.T.M.” plan, would limit both the company’s and the affiliate’s potential profits. The hedge fund urged that the energy company should either put all of its oil and natural gas assets into the partnership, or at least set a schedule of “drop-downs” of assets into the M.L.P.

According to people familiar with the developments, the activist hedge fund first reached out to the energy giant about three months ago, highlighting its corporate strategy. However, the energy giant’s executives said they were largely content with the current layout of the business.

In his letter unveiled Monday, the hedge fund’s CEO Tom Sandell said: “Although we are excited about the recent positive developments at TransCanada, we are disappointed that the Company has neither fully embraced the Master Limited Partnership structure nor emphasized cash flow metrics such as Adjusted Funds From Operations to highlight the Company’s ample tax assets, low maintenance capital requirements and capacity for dividend payment”.

Sandell indicates TransCanada’s energy segment spinoff is best

Exhorting TransCanada to evaluate a spinoff of its power business, the activist hedge fund also indicated that a spinoff of the energy segment is the best long term course for this asset to attract a world-class, dedicated management team to deal with upcoming opportunities and challenges within the sector and to highlight the premium value of the pipeline business.

The hedge fund also unveiled a white paper on its strategy wherein Sandell highlighted that currently TransCanada Corporation (NYSE:TRP) (TSE:TRP) views TCP as a “financing vehicle” for its Capital Program, which it terms as a misguided strategic thinking. The hedge fund emphasized that a broad change of view is required immediately at TransCanada to re-set its view of TCP as a partner, not exclusively a “financing vehicle”.

Sandell’s latest move highlights the boldness of activist investors as they seek to take on bigger targets. Earlier this year, Sandell stepped up its demand for FirstGroup plc (LON:FGP) (OTCMKTS:FGROY), one of the leading transport operators in the UK and the U.S., to breakup its business and sell its American long-distance coach operator Greyhound.