Dominion Energy Wins A Battle, But Pipeline Wars Continue

Pipeline, Trunkline, Tailwater

Roger Conrad – Forbes – The whole thing took almost a year and a half from start to finish. But Atlantic Coast Pipeline developers Dominion Energy (D) and Duke Energy (DUK) have won their appeal at the U.S. Supreme Court.

On a 7-2 vote, SCOTUS overturned the lower court ruling that had rejected U.S. Forest Service authority to allow the ACP to cross the Appalachian Trail. Their decision affirms that jurisdiction, which in turn allows the partners to re-file the needed permits.

Final USFS approval for the ACP is now expected in the next couple of months. Completing the 600-mile project to link natural gas from Appalachia to demand in the Carolinas and Virginia, however, is not a done deal.

One reason why: In late May, the U.S. Court of Appeals for the Ninth Circuit refused TC Energy’s (TRP) “emergency motion” to stay a lower court ruling, which rejected U.S. Army Corps of Engineers water crossing permits for Keystone XL Pipeline. The judges stated the Corps had failed to consider endangered species in approving the pipeline route.

That wording could be used to contest almost any proposed pipeline. And it will almost certainly extend reviews of water crossing permits for the ACP as well the Mountain Valley Pipeline, the other major ongoing project to bring Appalachian natural gas to Mid-Atlantic markets.

Contrary to popular belief, the Obama Administration approved nearly every proposed natural gas pipeline to come its way, reaching a peak of 38 projects over 1,111.1 miles in 2016. And despite delaying Dakota Access and denying Keystone XL, it permitted the equivalent of 10 Keystones between 2010 and 2015.

In contrast, pipeline opponents have enjoyed record funding the past three years, enabling multiple court challenges and intensive lobbying at the state and local government levels. And the result is unprecedented delays and cancellations of projects, even in pro-oil and gas states like Texas.

If a Biden administration succeeded in lowering the nation’s political temperature, it could ease the gridlock. But opposition to pipelines won’t vanish overnight. And if President Trump is re-elected, it’s a safe bet well-funded court challenges will continue.

ACP, MVP and Keystone XL are long-term contracted to creditworthy customers. For ACP and MVP, that’s regulated electric and gas utilities paying for capacity. For Keystone, it’s Alberta oil producers whose output routinely sells for 20 percent less than the benchmark North American price, due to acute transportation constraints.

That means all three projects would face minimal risk once they’re in operation. And that’s a powerful incentive for developers to push them over the finish line, especially with the energy midstream business overall mired in a sector depression where and safe profitable projects are increasingly scarce.

If ACP is able to hold to the partners’ current guidance, it will enter service in early 2022. Keystone XL projects startup sometime in 2023. And the 90 percent complete MVP could begin shipping gas in “early 2021,” a pushback from the previous guidance of late 2020 blamed on “complex judicial decisions.”

Unfortunately, if pipeline politics has taught us anything recently it’s that all three projects are almost certain to face more challenges and very likely delays winning needed permits and approvals. That means the developers will have to increase projected costs, as lead MVP developer EQM Midstream Partners (NYSE: EQM) did earlier this month bumping up the price tag of that project by another 5 percent.

At this point, Keystone XL appears most risk to being abandoned entirely, followed by ACP and then MVP. But for investors, what’s important is not the odds of success at the pipelines. Rather, it’s how future project delays, higher costs and potential cancellations will affect the earnings, balance sheets and dividends of the individual developers.

In February 28, 2019 Income Insights “Two Pipelines are in Peril, Who’s At Risk,” I highlighted risk for companies attached to the ACP and MVP. Since then, the danger has risen for some but not others.

Each share of the EQM, which owns 45.7 percent of MVP, will swap for 2.44 shares of general partner Equitrans (ETRN) on June 17. That ratio includes a tacit dividend cut of about 68 percent from what EQM paid in February, due to pressure on cash flow from production cutbacks at lead customer EQT (EQT).

The resulting cash savings, however, would provide little cushion if EQM/Equitrans is eventually forced to write off the $2.1 billion it’s already spent and booked for MVP, an amount roughly equivalent to 17.8 percent of its total assets. The likely result: An even deeper cut in once investment-grade EQM’s BB- credit rating, as well as the elimination of the remaining dividend.

Also at elevated risk to MVP’s potential cancellation is gas utility RGC Resources (NSDQ: RGCO). Though it owns just 1 percent of the pipeline, a write off of the investment it’s already made in the project and booked as assets would wipe out more than half of its shareholders’ equity.

In contrast, Altagas Ltd’s (ALA, ATGFF) 10 percent investment that it acquired with the former WGL is less than 3 percent of assets. That figure is only about 1 percent for 30 percent owner NextEra Energy (NEE) 12.5 percent owner Consolidated Edison’s (ED).

As large and solidly investment-grade utilities, these MVP owners have the financial power to see the project through. But unlike EQM and RGC, they’d still be whole even in a worst-case for the project. The same is true of the lone Keystone developer TC Energy and ACP partners Dominion (53 percent) and Duke (47 percent).

These companies also have alternatives for investing capital to fire up earnings and dividend growth longer term. For example, last month Dominion boosted its five-year spending plan for rate-based offshore wind and solar energy by 71 percent.

Bottom line: Dominion is a long-term winner whether ACP opens or not. That’s the smart way to play the uncertain pipeline wars.

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