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

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 Dirty
Little Secrets 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.”

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

Dirty
Little Secrets 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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