East Daley: New U.S. Tax Laws Increase Rate Case Risk on Natural Gas Pipelines

Recent federal tax cuts have raised natural gas pipeline return on
equity (ROE), increasing the risk of significant revenue cuts via
upcoming FERC action

CENTENNIAL, Colo.–(BUSINESS WIRE)–#bakken—East
Daley Capital Advisors, Inc., an energy assets research firm
redefining how markets view risk in midstream energy companies,
announced that “Dirty Little Secrets – The Naked Truth: Uncovering
Opportunities in the Midstream Sector,” is now available. The
165-page report details the risk for 28 companies in the midstream
sector by subdividing their cash flow at an asset-level providing key
insights and EBITDA forecasts for 2018 and beyond.

“The newest risk to midstream earnings from natural gas pipelines in
2018 is undoubtedly the new federal tax cuts,” said Justin Carlson, VP
and Managing Director, Research at East Daley Capital. “The passage of
the new tax legislation was a major shoe to drop on the regulatory front
and it potentially has major direct and indirect effects on the rates
and revenues earned by regulated pipelines. The most obvious of these
effects is the massive cut to the corporate tax rate which will increase
pipeline return on equity for those with significant corporate
ownership.”

Under the new tax plan, East Daley has identified twenty natural gas
pipelines that will have ROEs well above the typically allowed range.
The FERC typically targets return on equity for interstate pipelines to
fall anywhere between 10-14%, depending on asset-specific risks. EDC
views the risk of significant rate and revenue downside as quite high
for many natural gas pipelines under these new tax laws. Investors
should have a solid grasp on pipeline specific ROEs and potential
mitigating factors for the companies they own as FERC considers next
steps for rate reductions.

“Due to the sweeping tax changes, it’s possible the FERC could take
industrywide action and investors should take notice as it could bring
down rates swiftly and significantly,” said Carlson. “Given the
precedent that the FERC has done this before in the late 80’s and given
FERC Commissioner Powelson’s recent rate reduction comments, this may be
the route the FERC ends up taking. However, the FERC could take a more
targeted approach by using Section 5 rate cases to launch investigations
on specific pipelines where ROE may be too high.”

East Daley’s analysis on the impacts of the new tax laws on the
midstream sector is detailed in a new report titled “Dirty
Little Secrets – The Naked Truth: Uncovering Opportunities in the
Midstream Sector.” The report analyzes the ROE for over
40 natural gas pipelines, indicating that half of those pipelines are at
risk to lower rates over the next few years via FERC action.

Key findings Dirty Little Secrets 2018 include:

• Tax cuts have raised return on equity for natural gas pipelines, oil,
  and NGL lines, increasing the risk of significant revenue cuts via
  rate cases or rate freezes.
• $7.2 billion (15%) in cash-flow growth from midstream companies in
  2018 will be transformational for an industry beaten down in 2017.
• 17 of 28 companies covered in this report are expected to outperform
  market consensus, highlighting East Daley’s positive outlook for
  midstream growth.
• Coverage and leverage are key metrics but they can mask insight into
  future company performance that is only uncovered from detailed
  asset-level analysis, such as the case with BWP and ETP.
• Gas and oil production is expected to surge across the country,
  boosting oil output by 1.3 MMB/d and gas extraction by 5.6 Bcf/d
  YoY…bolstering earnings across the sector.
• Supply growth has been underappreciated in basins like the Bakken,
  Powder River and Marcellus. Growth in those basins is contrary to
  market sentiment for rate and volume risk.
• The infrastructure of tomorrow could be in the ground today with old
  infrastructure finding new life in the Permian, Bakken and DJ.

Featured midstream companies: AM, BPL, BWP, CEQP, CNXM, DCP, EEP,
ENBL, ENLK, EPD, EQM, ETP, GEL, KMI, KML, MMP, MPLX, OKE, PAA, RMP,
SEMG, SEP, SXE, TCP, TEP, TRGP, WES and WPZ.

Dirty
Little Secrets 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.

Contacts

East Daley Capital
John Lange, 303-499-5940
Vice-President,
Managing Director of Sales and Marketing
[email protected]