East Daley: MLPs in Oil and Gas Lose Tax Protection by Dramatic FERC Action, Stocks Get Pounded

CENTENNIAL, Colo.–(BUSINESS WIRE)–Mar 16, 2018–East Daley Capital Advisors, Inc., an energy assets research firm redefining risk assessment for midstream energy companies, is encouraging investors in midstream oil and gas companies to look closely to evaluate the risk to companies in the wake of new FERC rulings. On Thursday, FERC ruled on two significant regulations regarding cost-of-service calculations. The first will disallow MLP interstate natural gas and oil and pipelines to recover an income tax allowance in cost of service rates, which will prevent the "double recovery" of taxes by the MLP. The second requires natural gas pipelines, weather under the MLP or C-corp structure, to file a one-time report on the rate effect of the new tax law and changes to the Commission’s income tax policies.

“These FERC rulings have rocked midstream companies and we are getting a lot of questions about how this will impact company earnings,” said Justin Carlson, VP and Managing Director, Research at East Daley Capital. “MLPs in particular, such as Enbridge Energy Partners, TC Pipelines and Spectra Energy Partners, saw a double digit drop yesterday in their unit prices as the market reconciles the impact of these new rulings. However, it’s not all doom and gloom as many midstream companies have healthy assets and strong earnings potential, even despite this FERC action.”

This first change is significant for MLP’s holding natural gas pipeline assets, as return-on-equity (ROE) calculations on these pipelines will increase significantly without the income tax allowance, which would negatively impact earnings. The first ruling will also likely affect liquids pipelines. While FERC did delay action until 2020, the elimination of the MLP tax allowance raises the chances that a pipeline will not be able to raise its tariffs with indexing methodology and increases the pipeline’s ROE making it more susceptible to a rate case. Additionally, lower tax rates put deflationary pressure on the FERC indexing calculated adjustment that they true up every five years. This will put deflationary pressure on the next true up in 2020.

“However, as noted in our report, which analyzed the risk of lower tax rates on all the natural gas pipelines analyzed by East Daley, there are mitigating factors that also must be considered,” said Carlson. “In Transco’s case, operating costs due to their integrity program have ramped up in 2017 which will cut ROE compared to 2016 numbers. Also, Transco has a significant number of contracts with negotiated rates that may be over-earning their project specific ROEs. These contracts are unlikely to be adjusted during their term as the FERC has a longstanding policy of not changing negotiated rates.”

for a copy of its official response to these changes, titled: FERC Rules On Tax Changes.

is East Daley’s most comprehensive report on the U.S. oil and gas midstream sector. This report is used by investors, institutional banks, fund managers, private equity, midstream companies and E&Ps to understand how changing energy market dynamics will impact the midstream sector in 2018 and beyond. This report is made possible by East Daley’s dedicated team of midstream analysts, leveraging the largest database of U.S. energy infrastructure that delivers unprecedented clarity into the vast network of midstream assets.

East Daley’s largest asset database of U.S. energy infrastructure and patent-pending production allocation model, combined with in-depth analysis, brings greater transparency to the midstream energy financial market by providing investors and market participants with deeper, more accurate data to inform their investment and strategy decisions.

About East Daley Capital Advisors, Inc.

East Daley Capital is an energy assets data and analysis research firm that is redefining how markets view risk for midstream and exploration and production (E&P) companies. In addition to using top-level financial data to predict a company’s performance, East Daley delivers asset-level analysis that provides comprehensive, fact-based intelligence. Supported by a team of unbiased, experienced research analysts, East Daley provides its clients unparalleled insight into how midstream and E&P companies operate and generate cash flow. East Daley uses publicly available fundamental data and intersects that data with a company’s reported financials to asset-level adjusted-EBITDA and distributable cash flow (DCF). The result allows for more informed portfolio decisions. Founded in 2014, the company is based in Centennial, Colorado. For more information, visit http://www.eastdaley.com.

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CONTACT: East Daley Capital

John Lange, 303-499-5940

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SOURCE: East Daley Capital

Copyright Business Wire 2018.

PUB: 03/16/2018 10:11 AM/DISC: 03/16/2018 10:10 AM


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