NOTE 4 GOODWILL AND REGULATORY

In December 2016, FERC issued Docket No. PL17-1-000 which is an NOI Regarding the Commission’s Policy for Recovery of Income Tax Costs requesting initial comments regarding how to address any “double recovery” resulting from FERC’s current income tax allowance and rate of return policies that had been in effect since 2005.

Docket No. PL17-1-000 is a direct response to United Airlines, Inc., et al. v. FERC (United), a decision issued by the U.S. Court of Appeals for the District of Columbia Circuit in July 2016 in which the D.C. Circuit directed FERC to explain how a pass-through entity such as an MLP receiving a tax allowance and a return on equity derived from the discounted cash flow (DCF) methodology did not result in “double recovery” of taxes.

On December 22, 2017, the President of the United States signed into law the 2017 Tax Act. This legislation provides for major changes to U.S. corporate federal tax law including a reduction of the U.S. federal corporate income tax rate. Under the 2017 Tax Act, we continue to be a non-taxable limited partnership for U.S. federal income tax purposes, and federal income taxes owed as a result of our earnings are the responsibility of our partners, therefore no amounts have been recorded in the Partnership’s financial statements with respect to U.S. federal income taxes as a result of the 2017 Tax Act.

On March 15, 2018, FERC issued the following: (1) the Revised Policy Statement, (2) the NOPR and (3) the NOI. On July 18, 2018, FERC issued (1) an Order on Rehearing and (2) a Final Rule adopting and revising procedures from, and clarifying aspects of, the NOPR. On November 15, 2018, FERC issued the Excess ADIT Policy Statement, addressing certain issues raised in the NOI issued on March 15, 2018. Each of the 2018 FERC Actions is further described below.

FERC Revised Policy Statement on Income Tax Allowance Cost Recovery in MLP Pipeline Rates

The Revised Policy Statement changes FERC’s long-standing policy allowing income tax amounts to be included in rates subject to cost-of-service rate regulation for pipelines owned by an MLP. The Revised Policy Statement creates a presumption that entities whose earnings are not taxed through a corporation should not be permitted to recover an income tax allowance in their regulated cost-of-service rates.

On July 18, 2018, FERC dismissed requests for rehearing and provided clarification of the Revised Policy Statement. In this Order on Rehearing, FERC noted that an MLP owned pipeline is not automatically precluded in a future proceeding from arguing and providing evidentiary support that it is entitled to an income tax allowance in its cost-of-service rates. Additionally, FERC provided guidance regarding ADIT for MLP pipelines and other pass through entities. FERC found that to the extent an entity’s income tax allowance should be eliminated from rates, it must also eliminate its existing ADIT balance from its rate base. As a result, the Revised Policy Statement also precludes the recognition and subsequent amortization of any related regulatory assets or liabilities that might have otherwise impacted rates charged to customers as the refund or collection of excess or deficient deferred income tax assets or liabilities.

Final Rule on FERC Rate Changes for Interstate Natural Gas Companies

The Final Rule established a schedule by which interstate pipelines must have either (i) filed a new uncontested rate settlement or (ii) filed a one-time report, called FERC Form No. 501-G, that quantified the rate impact of the 2017 Tax Act on FERC regulated pipelines and the impact of the Revised Policy Statement on pipelines held by MLPs. Pipelines filing the one-time report had four options:

Option 1: make a limited NGA Section 4 filing to reduce its rates by the reduction in its cost of service shown in its FERC Form No. 501-G. For any pipeline electing this option, FERC guaranteed a three-year moratorium on NGA Section 5 rate investigations if the pipeline’s FERC Form 501-G showed the pipeline’s estimated ROE as being 12 percent or less. Under the Final Rule and notwithstanding the Revised Policy Statement, a pipeline organized as an MLP is not required to eliminate its income tax allowance but, instead can reduce its rates to reflect the reduction in the maximum corporate tax rate. Alternatively, the MLP pipeline can eliminate its tax allowance, along with its ADIT used for rate-making purposes. In situations where the ADIT balance is a liability, this elimination would have the effect of increasing the pipeline’s rate base used for rate-making purposes;

Option 2: commit to file either a pre-packaged uncontested rate settlement or a general Section 4 rate case if it believed that using the limited Section 4 option would not result in just and reasonable rates. If the pipeline committed to file by December 31, 2018, FERC would not initiate a Section 5 investigation of its rates prior to that date;

Option 3: file a statement explaining its rationale for why it did not believe the pipeline's rates must change; and

Option 4: take no action. FERC would then consider whether to initiate a Section 5 investigation of any pipeline that had not submitted a limited Section 4 rate filing or committed to file a general Section 4 rate case.

NOI Regarding the Effect of the 2017 Tax Act on Commission-Jurisdictional Rates

In the NOI, FERC sought comments to determine what additional action as a result of the 2017 Tax Act, if any, was required by FERC related to the ADIT that were reserved in anticipation of being paid to the IRS, but which no longer accurately reflected the future income tax liability. The NOI also sought comments on the elimination of bonus depreciation for regulated natural gas pipelines and other effects of the 2017 Tax Act on regulated rates or earnings.

As noted above, FERC's Order on Rehearing provided guidance regarding ADIT for MLP pipelines, finding that if an MLP pipeline's income tax allowance is eliminated from its cost-of-service rates, then its existing ADIT balance used for rate-making purposes should also be eliminated from its cost-of-service rates.

As noted above, on November 15, 2018, FERC issued the Excess ADIT Policy Statement addressing certain (but not all) issues raised in the NOI. The Excess ADIT Policy Statement clarified the FERC accounts in which pipelines should record amortization of excess and/or deficient ADIT for accounting and rate-making purposes.

The Excess ADIT Policy Statement also addressed how to disclose reversals of ADIT account balances in FERC’s annual financial report filings. The policy statement also stated that, for those pipelines that continue to have an income tax allowance, excess/deficient ADIT associated with an asset that is sold or retired after December 31, 2017 must continue to be amortized in rates even after the sale or retirement of the asset.

Filings required by the Final Rule

Prior to the 2018 FERC Actions, the Partnership’s pipeline systems did not have a requirement to file or adjust their rates earlier than 2022 as a result of their existing rate settlements. However, several of our pipeline systems accelerated such adjustments as a result of the 2018 FERC Actions as summarized in the table below.


	Form 501-G Filing Option	Impact on Maximum Rates	Moratorium and Mandatory Filing Requirements and Other Considerations
Great Lakes	Option 1; accepted by FERC	2.0% rate reduction effective February 1, 2019	No moratorium in effect; comeback provision with new rates to be effective by October 1, 2022
GTN	Settlement approved by FERC on November 30, 2018 eliminating the requirement to file Form 501-G	A refund of $10 million to its firm customers in 2018; 10.0% rate reduction effective January 1, 2019; additional rate reduction of 6.6% effective January 1, 2020 through December 31, 2021; These reductions will replace the 8.3% rate reduction in 2020 agreed to as part of the last settlement in 2015	Moratorium on rate changes until December 31, 2021; comeback provision with new rates to be effective by January 1, 2022
Northern Border	Option 1; accepted by FERC	2.0% rate reduction effective February 1, 2019; proposed additional 2.0% rate reduction effective January 1, 2020	No moratorium in effect; comeback provision with new rates to be effective by July 1, 2024
Bison	Option 3	No rate change proposed	No moratorium or comeback provisions
Iroquois	Option 3; subsequently reached a settlement with customers and a notice of settlement-in-principle was filed with FERC on January 9, 2019.	Expected to reduce rates by the impact of the 2017 Tax Act as shown on Form 501-G	Likely to be reaffirmed with the settlement
PNGTS	Option 3; accepted by FERC	No rate change proposed	No moratorium or comeback provisions
North Baja	Option 1; accepted by FERC	10.8% rate reduction effective December 1, 2018	No moratorium or comeback provisions; approximately 90% of North Baja's contracts are negotiated; 10.8% reduction on maximum rate contracts only
Tuscarora	Option 1; subsequently reached a settlement with customers and a notice of settlement-in-principle was filed with FERC on January 29, 2019	Expected to be finalized with the settlement	Expected to be finalized with the settlement

Rate settlements

As noted in the above table, new rate settlements were entered into by GTN, Tuscarora and Iroquois to address the issues that came out of the 2018 FERC Actions. The terms of the settlements are outlined below:

GTN

On October 16, 2018, GTN filed a rate settlement with FERC to address the changes proposed by the 2018 FERC Actions within its rates via an amendment to its prior settlement in 2015. The 2018 GTN Settlement decreased GTN’s existing maximum transportation rates by 10 percent effective January 1, 2019 until December 31, 2019. The existing maximum rates will decrease by an additional 6.6 percent for the period January 1, 2020 through December 31, 2021. GTN is required to have new rates in effect on January 1, 2022. Furthermore, GTN and its customers have agreed upon a moratorium on further rate changes until December 31, 2021. The 2018 GTN Settlement will also reflect an elimination of tax allowance previously recovered in rates along with ADIT for rate-making purposes. The uncontested settlement, which was approved by FERC on November 30, 2018, relieved GTN of its obligation to file a Form 501-G.

As part of the 2018 GTN Settlement, GTN has also agreed to issue a refund of approximately $10 million allocated amongst firm customers from January 1, 2018 to October 31, 2018 (2018 GTN Rate Refund). As a result of this, the Partnership established a $10 million provision for this revenue sharing as an offset against revenue in the income statement. The corresponding refund liability was paid by GTN before December 31, 2018.

Tuscarora

On December 6, 2018, Tuscarora elected to make a limited NGA Section 4 filing to reduce its maximum rates by approximately 1.7 percent and eliminate its deferred income tax balances previously used for rate setting (Option 1). On January 29, 2019, Tuscarora notified FERC that it had reached a settlement-in-principle with its customers to address the changes proposed by the 2018 FERC Actions. Moratorium provisions and other terms such as comeback provisions are still being finalized but Tuscarora agreed to continue reducing its existing maximum system rates by 1.7 percent effective February 1, 2019 as noted in its limited NGA Section filing.

Iroquois

On December 6, 2018, Iroquois submitted its FERC Form No. 501-G in response to the FERC Final Rule along with an explanation as to why rate changes were not required (Option 3). On January 9, 2019, Iroquois notified FERC that it had reached a settlement-in-principle with its customers to address the changes proposed by the 2018 FERC Actions. Iroquois has agreed to reduce its existing maximum system rates by the impact of the 2017 Tax Act changes as shown in Iroquois’ Form 501-G filed with FERC.

Tuscarora Goodwill Impairment

As noted above, in the fourth quarter of 2018, Tuscarora initiated its regulatory approach in response to the 2018 FERC Actions, resulting in a reduction in its maximum rates. In connection with our annual goodwill impairment analysis, we evaluated Tuscarora’s future revenues as well as changes to other valuation assumptions responsive to Tuscarora’s commercial environment, which included estimates related to discount rates and earnings multiples. In doing so, we incorporated the expected impact of Tuscarora’s regulatory approach in response to the 2018 FERC Actions, in which it elected to make a limited NGA Section 4 filing to reduce its maximum rates and eliminate its deferred income tax balances previously used for rate setting. Additionally, we have considered in our overall conclusion the outcome of the January 2019 settlement-in-principle reached by Tuscarora with its customers.

Our analysis resulted in the estimated fair value of Tuscarora not exceeding its carrying value, including goodwill. The fair value was measured using a discounted cash flow approach whereby the expected cashflows were discounted using a risk adjusted discount rate to determine fair value.

As a result, we recorded a goodwill impairment charge amounting to $59 million against Tuscarora’s goodwill balance of $82 million. The impairment charge was recorded in the Impairment of goodwill line on the Consolidated statement of operations and reduced our total consolidated goodwill balance from $130 million to $71 million. There is a risk that adverse changes in our key assumptions could result in an additional future impairment on Tuscarora’s remaining goodwill of $23 million.