Impact of Tax Changes - The Necessary Data and Methodology
 
The tax issues that FERC addressed at its meeting last Thursday has had a substantial reaction from the public markets, especially for Master Limited Partnerships. On Friday's conference call, we cautioned customers to account for the complexities associated with quantifying the impact of the event across gas and liquids pipelines with multiple asset classes. A one-size fits all calculator may work for some but certainly not for all impacted pipelines.
 
For interstate gas pipelines, FERC expects all 133 pipelines with cost-based rates to submit a report on the rate effect of the tax changes. FERC has also, tellingly, made the following assumptions regarding how the gas pipelines will respond:
  1. 64 pipelines will explain that they should not take any action because: (i) the pipe is underearning, or (ii) the pipe has a settlement moratorium;
  2. 53 pipelines will do nothing and risk that FERC commences a Section 5 rate investigation;
  3. 15 pipelines will agree to file a limited Natural Gas Act, Section 4 rate case adjusting rates across the board; and,
  4. One pipeline will file a full Section 4 rate case.
Based on FERC's assumptions, understanding settlement provisions, such as moratorium and comeback provisions, is critical. In addition, when analyzing the impact on future cash flows, analysts should take into account pending growth projects, including rate agreements, as well as the timing of projected in-service dates. 
For interstate liquids pipelines, many commentators have assumed that the rates for the majority of such pipelines, whose rates are subject to an annual index-based increase, will not be subject to a reduction from the tax changes until 2021. As discussed below, the issue is more nuanced and individual pipelines do face a risk that FERC will launch a rate investigation prior to that date.  

Of additional significance is the importance of how the FERC responds to comments, due within 60 days, related to accumulated deferred income taxes (ADIT) -- the dollar amounts of taxes that public utilities and interstate gas and liquids pipelines collected from customers in anticipation of paying the Internal Revenue Service. Because of the tax cut, the current balance of ADIT does not, according to FERC, accurately reflect the current income tax liability and must be returned to customers

Upcoming LawIQ Analysis
 
LawIQ's data and analytics team can provide you the most timely bottoms-up analysis for each pipeline and, on a rolled-up basis, the public companies that own them. The combination of our data, analytics, and intelligence will provide you insights into how the tax changes may impact revenues over the next five years. Here is a summary of the regulatory timelines and the leading indicators we will be providing you over the coming months.
 
Oil/Liquids Pipelines
 
Oil Pipelines are required to file Form 6s for 2017 reflecting either a federal tax rate of 21% for non-MLPs or 0% for MLPs.
 
By using our platform, you can analyze companies that may be at risk of a rate case by comparing the total cost of service line and the total interstate operating revenues line on the Complete Financials Summary tab (Page 700) in each pipeline's Financials section. So, before mid-April, when new Form 6s are filed, you can easily recalculate the 2016 Form 6 data using either 21% for non-MLPs or 0% for MLPs to determine the companies that may be at risk for a rate challenge by shippers based on the reduction in costs. Following the pipeline's actual filings, LawIQ will provide an analysis based on 2017 figures. (Note: we've covered this topic in our analyses of the pending Colonial Pipeline Rate, including Allegations that Colonial Pipeline is Over Recovering.
 
Natural Gas Pipelines
 
Pipelines will file Form 2 annual reports for 2017 - Mid-April 2018.
 
In LawIQ's Tax Cut White Paper, we calculated the revenue resilience score for each of 62 pipelines owned by 11 publicly traded companies, taking into account four key characteristics:

  1. Rate Case Settlement Moratorium Dates
  2. Rate Case Settlement Comeback Requirements
  3. ROE pre and post-tax based on around 60 unique fields, including state tax data
  4. Percentage of Revenue from Negotiated Rate contracts
We will be updating that analysis to take into account the impact from the FERC decision to deny any tax allowance for pipeline companies that are wholly-owned by an MLP. We will also be expanding that analysis for all pipelines owned by publicly traded companies that were included in FERC's list of companies required to file a new Form 501G.
 
133 pipeline companies will file Form 501G - September through December 2018.
 
Before the rule requiring the filing of Form 501G becomes final (anticipated to be in late summer), LawIQ will use the same data (FERC Form 2 for 2017) that the pipelines will be using to provide this form to FERC, to allow our customers to have advance knowledge of which pipelines owned by publicly traded companies may likely take a hit to their top-line revenue from this process.
 
Our analysis will be based on the same type of information we used in our whitepaper, expanded to include:
  1. Data on the roll-off of negotiated rate agreements, and
  2. Data on revenue from projects not yet in-service based on LawIQ's proprietary prediction of each project's in-service dates
In addition to this important data, we will be providing our view about the various regulatory proceedings concerning both oil and natural gas pipelines and where we see those proceedings going, along with the time frame for when the proceedings may impact the revenue of the pipelines.
This communication has been prepared by LawIQ, LLC. The information contained in this communication has been obtained from publicly available data, but we do not represent or warrant that it is accurate or complete. This communication is for informational purposes only and not for the purpose of providing legal advice. Your receipt or use of this communication is not provided in the course of and does not create or constitute an attorney-client relationship. LawIQ, LLC, its affiliates, and their respective officers, directors, partners, and employees do not accept any liability for any direct or consequential loss arising from any use of this communication or its contents.

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