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Pipeline Owners Await a Cash Flow Gusher

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The Daley Note: June 2, 2023

Many pipelines will see a record tariff increase of up to 13.3% starting as early as July 1, setting the stage for higher sustained asset cash flows in East Daley Analytics’ Financial Blueprints.

On May 16, the Federal Energy Regulatory Commission (FERC) released its updated tariff adjustment for liquids pipelines (Oil, NGLs, Refined Products) that use indexed rates. The tariff structure allows pipelines to adjust their shipping rates once a year, based on price changes as measured by the Producer Price Index for Finished Goods (PPI-FG).

Sustained inflationary pressures in 2022 resulted in a tariff ceiling value of 1.133194, FERC determined, the highest increase ever for the tariff structure. Pipeline owners can raise rates up to the tariff ceiling beginning July 1, 2023.

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The record ceiling index will eclipse the prior high of 1.087107 posted last year, setting the stage for another year of strong gains for select pipeline systems. East Daley tracks asset ownership, rates and performance for pipelines in our company Financial Blueprints. DCP Midstream (DCP), Enterprise Products (EPD), Energy Transfer (ET), Magellan Midstream (MMP), NuStar (NU) and Plains All American (PAA) are some of the owners of pipelines that use indexed tariffs.

Inflation began to pick up after Covid lockdowns ended in 2021, the result of pent-up consumer demand, snarled supply chains and government stimulus. Commodity prices then jumped in 2022 following Russia’s attack on Ukraine, kicking inflationary pressures up to 40-year highs. The Y-o-Y growth rate in PPI-FG reached a peak of 18.3% in June 2022. Over the past year, the PPI-FG index has continued to increase, but at a more modest rate (see figure).

Most pipeline owners were able to pass along the full 8.7% rate increase last year in uncommitted (recourse) rates, a good sign of the potential gains ahead. In some cases, committed rates also received the full rate increase, but there is significant variance in the contracts behind committed rates between pipelines and shippers. Pipeline owners that pass along the full rate increase should see gains in cash flow starting in 3Q23. – Zach Krause Tickers: DCP, EPD, ET, MMP, NU, PAA.


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