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New FERC guidance a huge win for natural gas pipeline MLPs

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World Pipelines,

East Daley Capital Advisors, Inc., an energy assets research firm redefining risk assessment for midstream energy companies, reports that newly released policy guidance from the FERC allows for complete elimination of ADIT from the cost of service equation for MLPs and pass-throughs and exempts them from refunding any ADIT to customers. Elimination of ADIT from cost of service can significantly lower calculated return on equity (ROE) for natural gas pipelines, making it beneficial for some pipelines to stay in an MLP ownership structure. The ADIT policy guidance was specifically for pipelines in MLP and pass-through entities and did not afford the same treatment for C-Corps.

“The impact of the new FERC rulings on MLPs is sure to send a shockwave through the US oil and gas midstream sector, and the market is already responding positively,” said Justin Carlson, VP and Managing Director, Research at East Daley Capital. “When the FERC originally issued ADIT guidelines in March of this year, there was concern that the new guidelines would negatively impact MLP earnings, and as a result we saw the movement of midstream companies converting from an MLP structure to a C-Corp. Now that the FERC has clarified the policy, swinging the pendulum back the other way.”

The FERC affirmed the Revised Policy Statement (originally issued 15 March 2018) on the Treatment of Income Taxes for MLPs issued in response to the United Airlines DC Circuit case and provided guidance regarding the treatment of accumulated deferred income taxes for MLPs. The affirmation on the treatment of income taxes solidifies the prior guidance that the income tax allowance for MLP-owned pipelines going forward will be zero. The clarification of the new ADIT policy guidance appears to be a huge win for natural gas pipeline MLPs, significantly offsetting the negative effects of the tax allowance elimination. This is because elimination of ADIT from cost of service can significantly lower calculated ROE for natural gas pipelines and exempts them from refunding ADIT back to customers.

“East Daley analysis indicates that in the case of some pipelines, staying in the MLP structure could be beneficial,” said Carlson. “This is a very interesting development given that some companies have already switched to a C-Corp and others are in the process of converting. How the FERC clarification impacts their plans to convert will be a fascinating development to follow.”

Given the potential for higher ROEs resulting from the FERC’s original March announcement, many MLP pipeline companies announced roll-ups or conversions to C-Corps. Becoming a C-Corp preserves the income tax allowance and, in many cases, keeps ROEs in the acceptable 10 - 14% range. What is interesting is that under the new ADIT policy guidance, some pipelines may be better off continuing as an MLP rather than converting to a C-Corp.

East Daley’s largest asset database of US 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.

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FERC pipeline news