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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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U.S. Pipeline Companies Face Hefty Overcharge Payback

Pipeline

While the U.S. tax overhaul is seen as a boon to businesses, including the energy industry, one segment of the oil and gas sector may face up to a US$18.5 billion payout in the form of refunds for overcharging drillers and utilities at the previous tax rate.

While the tax is not retroactive to 2017, natural gas pipeline owners, such as Enbridge and Williams Cos, include the cost of future tax payments in their customer fees. A future tax that no doubt was based on a higher 2017 tax rate.

U.S. regulators are still considering how to handle the issue, and options range from zero to full refunds, creating uncertainties for the natural gas pipeline owners and especially for master limited partnerships (MLPs) over how much and how long they could potentially refund the ‘overcharges’, analysts say.

The gas pipeline operators collect the so-called accumulated deferred income taxes (ADIT) from customers in anticipation of paying federal taxes. With the federal corporate income tax rate reduced from 35 percent to 21 percent effective January 1, 2018, the pipelines’ ADIT accounts are likely overfunded because they had collected the fees at the former 35-percent corporate tax rate, according to Barbara S. Jost at law firm Davis Wright Tremaine LLP. 

The Federal Energy Regulatory Commission (FERC) is currently considering if natural gas pipelines may be collecting “unjust and unreasonable rates in light of the recent reduction in the corporate income tax rate” and in light of last month’s change in MLP legislation under which MLPs will no longer be allowed to recover an income tax allowance typically included in the cost of service rates.

Related: Can Japan Dodge Trump’s Trade War?

Currently, FERC is reviewing policy regarding natural gas pipelines only—oil pipelines are off the hook at least until 2020, when the commission will address tax changes for the oil pipelines it regulates in the 2020 five-year review of the oil pipeline index level.

It is currently unclear what FERC’s new policy on gas pipeline owners’ tax rates will be, or what the timing on possible refunding would be. This leaves MLPs and pipeline owners guessing about how the refunds—if any—would impact their financials.

“FERC has left pretty much every option open: You don’t have to pay back any or you have to pay it all back,” or something in between, Matthew Lewis, director of financial analysis at Colorado-based East Daley, told Bloomberg.

According to Lewis, the biggest losers in case of refunding would be Enbridge and Williams Cos. Enbridge may have to refund part of US$3.5 billion, and Williams—some portion of US$2.3 billion in overcharges.

Overcharges at the 40 pipelines with the highest ADIT liabilities according to the most recent data as of 2016 would amount to US$18.5 billion, East Daley analysts have calculated. As much as 78 percent of that sum ended up into eight pipeline parent companies.

The timing of the possible refunds would be crucial to the impact they would have on the pipelines’ financials. If refunds are spread over decades, the blow would be smaller. However, the best option for some pipelines could be an outright one-off reimbursement, which will settle the tax issue once and for all, Jay Rhame, portfolio manager at W.H. Reaves & Co, told Bloomberg.

Rhame doesn’t expect the tax refunds to affect the earnings of companies, but they could limit their cash flows. Also, pipeline owners may buy out their MLPs to reduce the potential liabilities.

“Right now we are really reassessing how much long-term impairment is really happening here,” Rhame told Bloomberg, referring to pipeline owners.

By Tsvetana Paraskova for Oilprice.com

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  • John Brown on April 28 2018 said:
    I’m puzzled as to why this would be anything but an accounting problem? Surely if they were collection advanced taxes to be paid to the Government they deferred the revenue from their P&Ls since it wasn’t operating revenue but revenue to pay future tax obligations. And surely they would have set aside the funds/cash to pay their tax obligations. So what difference would it make to their cash flow if they refund the cash rather than pay it to the Government? Unless of course they played games w the revenues they should have set aside for the purpose for which they collected it. (Taxes)?
  • Jay on May 08 2018 said:
    Cusumer actually paid it for them so hopefully the customer will see a break in the price?

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