Both Atlantic Coast Pipeline (ACP) and Mountain Valley Pipeline (MVP) are facing an existential threat from the clown judges of the U.S. Court of Appeals for the Fourth Circus.
In December, the judges of the Fourth Circuit vacated a permit issued by the U.S. Forest Service (USFS) that allows ACP to cross beneath the Appalachian Trail and 21 miles of national forest land in Virginia and West Virginia (see 4th Circus Pulls Forest Service Permit for Atlantic Coast Pipe). Dominion asked for all of the Fourth Circuit judges to rehear the decision (called en banc). In late February the court refused the request, so Dominion is appealing directly to the U.S. Supreme Court (see Dominion Appealing Atlantic Coast Pipe Case to U.S. Supreme Court).
Here’s what we didn’t know until now. Not only did the clown judges reject U.S. Forest Service permits for the ACP to cross the Appalachian Trail, they ruled the Forest Service lacks the authority to permit any pipeline crossing the Appalachian Trail, without an act of Congress! No wonder Dominion has appealed directly to the Supreme Court. This is a five alarm emergency!
If the ruling is allowed to stand, stripping the Forest Service’s right to issue permits to cross the Trail, not only is ACP in trouble, so too is MVP, which will also cross under the Trial.
The following article from the Forbes website explores this existential threat to both pipeline projects, written by Roger S. Conrad, Founder and Chief Analyst of Conrad’s Utility Investor:
Two proposed long-haul natural gas transportation projects—the Atlantic Coast Pipeline (ACP) and the Mountain Valley Pipeline (MVP)—are now in peril. That’s the result of a decision by the U.S. Court of Appeals for the Fourth Circuit in Richmond, Virginia in late February.
The court didn’t just reject U.S. Forest Service permits for the ACP to cross the Appalachian Trail. They ruled the Forest Service lacks the authority to permit any pipeline crossing the A.T., without an act of Congress. If that stands, it invites a fresh challenge to the MVP project, which is also attempting to transport gas from Appalachia to the Southeast US.
The ACP’s lead developer and 48 percent owner Dominion Energy (D) will file an appeal with the US Supreme Court “in the next 90 days.” If that fails, management will have to decide whether to seek an unlikely exemption from Congress, substantially re-route the pipeline or cancel the project entirely.
Prior to its defeat at the Fourth Circuit, Dominion had announced a plan to separately construct the “Supply Header” portion of the ACP, a pipeline system stretching from central to southeastern Virginia and then to southeastern North Carolina. That portion now has a projected commercial in-service date of end-year 2020 at a cost of $650 to $700 million and could conceivably be filled with gas from other sources.
The rest of ACP is now projected to enter service in “early 2021.” That’s a timetable management believes will allow for a court or legislative remedy, though probably not substantive re-routing. The total project cost including Supply Header is now $7.25 to $7.75 billion, up from an estimate of $6 to $6.5 billion in early November.
MVP’s proposed route is considerably shorter, bringing gas from the Marcellus Shale of West Virginia into southern and western Virginia. According to lead developer EQM Midstream (EQM), the project is 70 percent complete, but work has been suspended, boosting expected cost to $4.6 billion. The company has filed an amicus brief at the Fourth Circuit in support of the ACP partners.
That leaves two big questions for investors. First, is it still likely these pipelines will eventually enter service? Second, how exposed are the owners to further cost overruns, and to the worst case that these projects are abandoned and written off?
There’s no disputing that natural gas produced in the Marcellus and Utica shales of Appalachia is among the lowest cost in the world. Nor is there any question these pipelines if built will be kept full, supplying a fast-growing heating market and power utilities’ ongoing switch to gas from coal.
ACP is also advantaged by the fact that major partners Dominion and 47 percent owner Duke Energy DUK +0.32% (DUK) would be its major customers, with regulators in full support. Southern Company SO +0.1% (SO) at 5 percent ownership will also benefit from additional gas flowing south.
MVP partners Consolidated Edison ED (ED) at 12.5 percent and NextEra Energy NEE (NEE) at 31 percent are purely investors and not customers. But Altagas Ltd (ALA, ATGFF) at 10 percent and RGC Resources (RGCO) at 1 percent will benefit from increased gas flow. And 45.5 percent owner and lead developer EQM Midstream’s (EQM) entire midstream business would get a lift, as would its primary customer and former parent EQT EQT -0.69% Resources (EQT).
That’s a lot of incentive to keep going in the face of current adversity. And the partners are mostly large utilities and therefore deep pocketed enough to fund the overruns so far, especially given support of regulators and major customers. The challenge rather is finding a path forward with so many opponents attempting to litigate these projects to death.
The great irony of the Trump era so far as the energy industry is concerned is how much more difficult it’s become to build anything than it was during the Obama Administration. The troubles started with the loss of a quorum on the five-member Federal Energy Regulatory Commission in early 2017. That was the result of the then Republican-controlled Congress blocking Obama appointees, followed by the new administration’s inability to find its own nominees.
The president has also proven to be the ultimate fundraiser for pipeline opponents. And the result is groups like the Sierra Club now have the resources to issue challenges to projects in multiple arenas simultaneously.
I continue to think the developers of ACP and MVP will find a way forward, even if they fail at the Supreme Court. But investors can no longer be entirely sanguine about the possibility that one or both of these projects could be abandoned.
For ACP developers, financial exposure appears limited. Even at the upper end of project cost, Southern Company’s share is only $388 million, or 1.3 percent of shareholders’ equity. And actual exposure is a great deal lower, since most projected ACP costs have yet to be spent. That’s why delays have had such a big impact on estimates.
Building the Supply Header portion first should further limit the partners’ financial risk. Using the same math as with Southern, Dominion and Duke’s roughly $3.64 billion share of current estimates for a completed ACP is a manageable 13 percent and 8.3 percent of their shareholders’ equity, respectively. But with actual spending to date far less, the biggest risk from cancelling ACP is opportunity cost, which is largely incorporated already in their most recent guidance.
I would still expect declines in both stocks near-term if ACP is shelved. But the companies have multiple drivers to meet management’s long-term earnings and dividend growth targets. Dominion and Duke remain as buys up to $80 and $77 respectively.
MVP partners are a different story. There’s no problem for NextEra Energy, which assuming 70 percent of the estimated $4.6 billion cost is spent would be on the hook for less than $1 billion, or around 2 percent of its shareholders equity.
It would appear the same for RGC, which owns just 1 percent of the project, but that’s deceiving. Mainly, the company has been booking its MVC costs as equity earnings, and now has “Investment in Unconsolidated Affiliates” that’s roughly equal to 40 percent of shareholders’ equity and potentially at risk to write-off. That risk is not reflected in the lofty valuation of 27.6 times trailing 12 months earnings. Conservative investors should sell RGC.
Altagas inherited its MVP stake by merging with the former WGL Holdings. A worst-case write-off of 70 percent of its share of current project estimates is $322 million or 7 percent of shareholders equity. That’s enough to delay but not derail recovery, and risk is priced in below our buy target of USD12.
EQM on the other hand is massively leveraged to MVP’s success or failure. If the project sticks to the target late 2019 startup date, shares should have no problem reclaiming a trading range in the upper 50s or low 60s. Conversely, failure raises risk of a big write down, possible distribution cut and a drop in the shares to at least the low 30s.
I still believe odds favor success. But given the high stakes, EQM is a suitable holding for aggressive investors only until there’s greater clarity on MVP. (1)
The Richmond Times-Dispatch picks up on a similar theme, that Wall Street is getting nervous about investments in ACP because of the flaky clown judges at the Fourth Circus:
A decision by the 4th U.S. Circuit Court of Appeals has cast a lengthening shadow over the creditworthiness of the Atlantic Coast Pipeline.
Moody’s Investors Service, a national bond rating agency, said Monday that the planned 600-mile natural gas pipeline is “credit negative” for Dominion Energy and Duke Energy, the primary partners in a project now projected to cost up to $7.5 billion.
Moody’s already had rated the project “credit negative” because of mounting costs and uncertainty after a three-judge panel’s decision in December to overturn a U.S. Forest Service permit for the pipeline to cross beneath the Appalachian Trail.
But the rating agency’s concern intensified after the 4th Circuit’s dismissal last week of Dominion’s request for the full court to reconsider the panel’s decision and the company’s immediate announcement that it would appeal to the U.S. Supreme Court within 90 days.
“The appeals court’s decision and the subsequent appeal mean that a longer legal process will ensue, adding costs and uncertainty to when and how the project will be completed,” Moody’s said.
The two-page report also raised concerns about cash flow from the project for the two companies and another Dominion natural gas subsidiary.
The opinion does not change the credit ratings or outlook for Dominion, based in Richmond, or Duke, based in Charlotte, N.C., but instead “is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer,” the agency said.
Dominion spokesman Karl Neddenien said Monday: “Like other large companies, there are many factors that are considered in the company’s ultimate credit rating — an update on ACP is one small piece of a much larger evaluation.
“Dominion Energy maintains frequent dialogue with the credit rating agencies and is committed to its credit ratings and has demonstrated over the last many months that it is prepared to take steps to support its credit profile.”
Dominion also reiterated that it remains committed to the project, even though the cost has increased by more than $3 billion and the schedule has slipped by more than a year since the company announced the project with then-Gov. Terry McAuliffe in September 2014.
“Regardless of temporary delays, we remain committed to the Atlantic Coast Pipeline and are confident it will be completed,” Neddenien said. “This project is essential to meeting the basic energy needs of millions of Virginians and North Carolinians.”
Dominion now plans to break the project into two phases, with the first extending from a hotly disputed natural gas compressor station in Buckingham County to Lumberton, N.C., with a 70-mile spur to Hampton Roads from Southside Virginia.
The second phase would run from a supply pipeline under construction in West Virginia through two national forests in the Allegheny and Blue Ridge Mountains, where the pipeline would cross beneath the Appalachian Trail and the Blue Ridge Parkway on its way to Buckingham.
Dominion needs the Forest Service permit to build the second phase, but the appeal to the Supreme Court would delay completion of construction until early 2021. The company said it also is working on unspecified legislative and administrative decisions to allow the Forest Service to permit the pipeline crossing of the national scenic trail.
However, the company also cannot begin construction of the first phase until the Army Corps of Engineers reinstates suspended water quality permits for the project and the 4th Circuit decides an appeal of the permit issued by the U.S. Fish and Wildlife Service to ensure protection of endangered or threatened species.
The 4th Circuit threw out the first “incidental take” statement, part of the biological opinion issued by the federal agency, which had concluded the project would not pose an existential threat to four species in its path. The agency issued a new permit, which environmental organizations quickly challenged.
The appeals court issued a stay of the biological opinion for the entire length of the pipeline, not just the 100-mile stretch that Dominion says is at issue, so construction cannot begin until the case is resolved. A hearing is scheduled in early May.
“Resolution of this matter could allow construction of phase one to resume in the fall,” Moody’s said.
In the meantime, the additional delay for the Supreme Court appeal “will increase the negative pressure on both companies’ already weak cash flow ratios compared with peers,” the rating agency said. (2)
(1) Forbes/Roger S. Conrad (Mar 7, 2019) – The Fight For The Atlantic Coast & Mountain Valley Pipelines
(2) Richmond (VA) Times-Dispatch (Mar 4, 2019) – 4th Circuit decision prompts Wall Street concern over pipeline
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