MVP is Not Alone in Suffering Regulatory Delays That Impact Project Economics

In conjunction with its quarterly earnings announcement, the primary owner of the Mountain Valley Pipeline (MVP), Equitrans Midstream, announced that, after evaluating its legal options regarding reinstating needed permits, it would pursue new permits from the agencies. In addition, it announced that it had moved the targeted in-service date to the second half of 2023 and had revised the total project cost to approximately $6.6 billion. While MVP is certainly the poster child for the adverse impact on a project from regulatory delays, it is not alone given the delays that FERC itself has caused for a number of projects. These delays cause uncertainty as Commissioner Danly regularly notes in his concurrences and dissents. As reflected in the MVP case, delays can cause increases in cost, but they also can delay the receipt of the expected revenue, which also impacts a company’s view of the overall advisability of a project.

A delay in the regulatory processing of a project may cause changes in the overall cost of a project, but any delay in the expected in-service date for a project also reduces the value of the expected revenue stream from the project. This deferral of the revenue stream can impact a pipeline’s assessment of the economics of a project and can result in projects that would be economically viable not being pursued. It is this uncertainty and the chilling effect on investment that it creates that Commissioner Danly regularly laments.

Mountain Valley Pipeline

MVP certainly wins the award for most mentions in these twice-a-week articles, with seventy-two appearances since it was pre-filed at FERC in October 2014. That doesn’t include the almost innumerable alerts we have sent to customers with a particularized interest in the project. It is certainly not a record any pipeline project covets because it is mainly a reflection of the trailblazing path it has led by being under review and then under construction for almost eight years now, with at least another year to go. Even if it were to be placed into service by the end of 2023, which we view as essentially a best-case scenario, that would mean it will have been over nine years since it was formally proposed and that doesn’t count the months and maybe years of internal development before being filed at FERC. If you want to catch up on the hurdles still facing it, our most recent review of the project was in Surprise MVP Decision May Indicate Formation of a Pragmatic Core at FERC.

Therefore, it probably comes as no surprise that on its quarterly earnings call, Equitrans Midstream announced yet a further delay in the projected in-service date to the second half of 2023 and an increase in the overall budget to $6.6 billion. Looking back to MVP’s initial application on October 23, 2015, it had already spent one year in the FERC pre-filing process and so reasonably requested that FERC issue an approval of the project by October 15, 2016 to allow it to construct and place the project into service by December 1, 2018. Talk about expectations being dashed. FERC didn’t get around to issuing the certificate until one full year later, on October 13, 2017, and here the project sits almost five years later and is not even close to being in-service. Similar expectations about the cost have not proven out, because at the time it filed for the certificate, MVP estimated that the project would cost $3.7 billion, about 44% less than the current estimate.

Time is Money

Project sponsors will only build a project if it is perceived as being economically beneficial for the owners. Most owners have internal “hurdle rates” that require the present value of the expected revenues to exceed the present value of the expected costs by a certain percentage. While the hurdle rate will be different from company to company and perhaps from project to project, the basic concept is the same — a comparison of the present value of the revenues to the budgeted costs.

This is why the increase in costs and the substantial delays in the revenues is a double whammy for MVP. Whatever that hurdle rate was at the time the project was approved, an increase in costs and a delay in the commencement of the revenues has greatly shrunk and perhaps eliminated any positive difference between the two. While MVP has announced the impact on the costs, assessing the impact on the revenues is usually not discussed, but in cases like this one they can be almost as significant.

While the anticipated costs have greatly increased, it is fairly typical for there to be some sort of sharing mechanism in the pipeline’s contracts with its shippers that increases the rate paid if costs increase above a certain threshold. While the entire budget overrun is not likely absorbed by the shipper, a pipeline’s expectations can be buffered somewhat by the increase in the expected revenues, as at least part of the cost increases are passed through to the shippers. This is not typically true, however, for delays in the expected in-service date. Most shippers are not willing to begin paying for a service before it is rendered and may, in fact, demand some concessions for substantial delays in the commencement of the service. For instance, it is not uncommon for there to be penalties against the pipeline for a delay in the in-service date, including an opportunity for the shipper to outright cancel the contract if the delay goes on too long, or to shorten the term of the contract by the length of the delay. All of those would impact the present value of the expected revenues and reduce the cushion between that value and the costs incurred, thus impacting the hurdle rate expectations. As Commissioner Danly noted in a recent concurrence: “Developing projects and preparing certificate applications are not inexpensive endeavors . . . One simply does not risk such capital under an uncertain regulatory regime. If pipeline companies determine that the risk is too great to develop otherwise needed infrastructure, that infrastructure will not be built and the inevitable consequence will be that customer demand for natural gas service will go unmet.”

Real Impact

To try and put the impact of delay into real dollar terms, we looked at the delays for MVP and for two cases that were recently subjected to inordinate delays at FERC, Iroquois Pipeline’s ExC project and Tennessee Gas Pipeline’s East 300 Upgrade project. In his concurrence for both projects, Commissioner Danly highlighted “the unnecessary delay” both projects encountered at FERC. In particular, he correctly asserted that there was no need for the Commission to issue supplemental draft and final Environmental Impact Statements for the projects. Instead, he asserted that “the Commission delayed action on this and other certificates in order to issue the Updated Certificate Policy Statement and Interim GHG Policy Statement first. My colleagues have claimed that those policy statements were necessary to provide a legally durable framework for certificate orders going forward. And yet those policy statements are now in draft form, they are no longer in effect, but here we are acting on certificate orders.”

For each of the projects we considered the date indicated in their applications as the expected in-service date as the date on which they fully expected to begin receiving revenue from the project and calculated a present value of that revenue stream using the company’s most recent cost of debt reflected in their annual Form 2 filed at FERC. The actual revenue stream is likely to be different for ExC and MVP because we don’t know the negotiated rates the shippers in those cases have agreed to pay, and instead used the tariff rate that was filed as part of the application. For MVP, we then assumed that they would be able to place that project into service on December 31, 2023, and for the other two projects, we assumed that their in-service dates would be delayed by the full delay they experienced from their requested FERC approval date to the date they actually got that approval. They may, of course, be able to reduce that delay, but as MVP will attest, that may be an optimistic assumption as well. Finally, we assumed that all of the contracts would continue for their original term of 20 years even though the projects will likely not go into service on time. As we discuss above, this may be optimistic as well, because a shipper may have demanded that the term be reduced by the length of the delay.

As seen above, the anticipated delay for MVP results in a diminution in the anticipated return of over $2 billion, even assuming that the contracts all continue for their original 20-year term. The reduction in value is caused by the deferral in time for when that revenue would have been anticipated to when it is now expected to start. For MVP, this is likely a fairly accurate picture since it has expended most of the money it had intended to spend already and is now simply having to wait for the revenues to start flowing. For the other two projects, the deferred revenue is not as extreme because their delays are not nearly as long as MVP’s. But even a reduction of 5% in the expected return can have a meaningful impact if a project’s expected return was just barely above a company’s internal hurdle rate.

It is this delay in the anticipated return and the uncertainty associated with it that will continue to cast a pall over project development as long as FERC continues to impose delays on a project’s approval cycle and as long as every aspect of a project remains open to challenge in the courts.

If you would like a similar assessment of a particular project, please contact us.