Earlier this week Energy Transfer, the company that built the Rover Pipeline in Ohio, the Revolution Pipeline in southwestern Pennsylvania, and the Mariner East pipelines that run from eastern OH clear across PA to Philadelphia, issued its fourth quarter and full year 2018 update. The thing that caught our attention is an admission by ET’s CEO Kelcy Warren that the company has made “mistakes” with its pipeline projects in PA, and has learned from those mistakes.
Two weeks ago Pennsylvania Gov. Tom Wolf declared full-on war with Energy Transfer and its Sunoco Logistics subsidiary by directing the state Dept. of Environmental Protection (DEP) to suspend all reviews of clean water permit applications and other pending approvals for all of ET/Sunoco’s pipeline projects in the state, including Mariner East 2 (ME2) and the Revolution pipeline project (see PA Gov Wolf Declares War on ET/Sunoco – No New Pipeline Permits).
The stated reason for the no-new-permits action is lack of progress in fixing eroding, sliding hillsides for the Revolution pipeline project, a 24-inch gathering pipeline in Beaver County, PA (Pittsburgh area) which shifted and exploded last September (see Revolution Pipeline Near Pittsburgh Explodes – Home & Barn Destroyed).
Warren says ET has learned from their “mistakes” with Revolution and Mariner East. You might reasonable ask the question, “So what is ET doing to correct those mistakes?”
From a transcript of the quarterly earnings call earlier this week, jumping into the middle of a Q&A exchange:
Kelcy Warren
But to follow back up on kind of the genesis of your question on those two discussions there, we’ve grown so much. We made some mistakes, and specifically now we’d like to talk about Pennsylvania and we’re going to take our medicine and fix those mistakes and complete good projects from this point forward. Not insinuated that everything we’ve done has been bad. It’s just we’ve made some mistakes we’re not proud of. So you’ll see that improve and when we don’t make those mistakes again, that our costs are going to improve and the predictability of those cost are likewise going to improve.
Shneur Gershuni
Kelcy, have you expanded the management team at all in terms of project execution.
Kelcy Warren
We have – we’ve done a reorganization, the Engineering and Construction now reports directly to me. Operations, which is we’re so big and just got to be overwhelming here. We had so much growth, but Engineering and Operations under Matt Ramsey who reports to me. Kevin Smith runs Engineering and Operations. And Kevin has assembled pretty much a new team, pretty much and some new faces and some just moved over. But it’s – I’m really pleased with organization and I’m really pleased with the approach that I’m seeing at this stage and it will continue to show improvement.*
So the solution to correcting the “mistakes” and earning back the trust of PA, according to Warren, is: (1) Engineering & Construction now reports directly to Warren, the CEO. (2) They cleaned house and there’s a new team in place to oversee construction.
Will it be enough to win back approval from the DEP to restart now stalled projects to complete Mariner East 2 and 2X? Time will tell.
We also found some interesting back and forth in the Q&A about specific projects, like Mariner East 2. Would ET ever consider selling ME2?
Michael Blum
Just wanted to talk about Mariner East II for a minute. Do you have any update on additional contracting of the pipeline now that it’s up into, at least interim service? And then related to that, what’s your latest thoughts in terms of how open are you to sell a stake in that – in ME2 either as a way to attract incremental volume commitments or to accelerate that the deleveraging process?
Mackie McCrea
Hey Mike, this is Mackie. In regards to contracting, what we’ve sold already, it will be fully utilized on ME2 in this space. When we bring on 2X, we sold a significant portion of that. We continue to look and talk to other potential shippers. We also work with more downstream markets to develop more chilling and storage capacity at Marcus Hook. So we’re fully subscribed on what we’re able to move today. When we bring 2X on, it will give us more capacity and we expect to continue to sign up additional customers.
As we said all along, once it’s finally built, then we believe a lot of volumes will find a way it’s the best option price wise, net back price wise producer have the Marcellus and Utica. And so we expect to see continued commitments from shippers. As far as selling a stake in Mariner, I think – I mean, what Kelcy’s always said is that we’d be open to selling a stake in something like that if somebody was willing to pay a promote and brought a significant amount of volume to that – to the asset. Other than that, I don’t think we’d be interest in divesting.*
We learn that 99% of ME2X (the second Mariner East 2 pipeline laid next to the first) is now 99% in the ground:
Keith Stanley
Okay. And on ME2X, I think I heard correctly Tom, that you said 99% of the mainline construction is now done. Can you just give a little more color on what’s left to be built on ME2X, if this includes some of the tougher geological areas and what permits you need from the DEP still for ME2X?
Tom Long
Sure. That is correct. 99% of the pipeline itself is installed. It’s a matter now of completing the HDDs and some open cut. There are roughly 20 permit modifications required to convert from HDDs to open cut. We’re processing those – submitting in processing those with pay debt. And I think that we have adequate time in our schedule for the return of those to be able to execute this. And as I say, we’re still committed to completing 2X by the end of 2019.*
Finally, when will ET return to working on the Revolution Pipeline system, the project that ostensibly got them booted from doing any more pipeline work in PA for the moment? ET says somewhere around March 25th:
Keith Stanley
Hi, good morning. Couple more questions on Pennsylvania. First is for the Pennsylvania DEP is restoration at the revolution site the only thing they’re asking of you guys right now to get the permits again. And just any sense at all on when you’d have permit authorization again?
Kevin Smith
Sure. This is Kevin Smith. We have four documents that are due to pay debt on Monday 25, which is the date mutually agreed. We expect that they’ll review and approve those documents within 30 days, which would allow us to commence the restoration effort. And yes, that is the only thing that’s prohibiting us.*
*Seeking Alpha (Feb 21, 2019) – Energy Transfer’s (ET) CEO Kelcy Warren on Q4 2018 Results – Earnings Call Transcript
The full 4Q18 and full year 2018 ET update, with financials:
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