The Daley Note: September 20, 2023
Mountain Valley Pipeline (MVP) has filed with regulators to increase maximum tariff rates by 80% or more. The request comes in response to massive cost increases absorbed by the project to battle legal and permitting issues.
In a September 12 filing with the Federal Energy Regulatory Commission (FERC), MVP proposes to raise the daily capacity reservation charge to $1.76/Dth from a current rate of $0.97/Dth for the maximum tariff, along with other rate increases (see table). The request comes as project costs for the pipeline have ballooned from $3.7B to $6.7B, according to the filing. The revised rates would bring ROI to 12.35%, MVP said.
East Daley Analytics view these proposed recourse shipping rates, even if accepted by FERC, as more symbolic than material for MVP and operator Equitrans Midstream (ETRN). As reflected in the ETRN Financial Blueprint, the 2 Bcf/d MVP is fully subscribed under negotiated contracts with 20-year terms; any change to the maximum tariff would not apply to these negotiated rates. These contracts also insulate ETRN from downside if MVP runs under capacity, as EDA expects is likely when the pipeline starts up.
These negotiated contracts do include a cost overrun sharing mechanism, however, and the cap in these contracts has already been hit. This conclusion was backed by our friends and regulatory experts at ARBO, as well as ETRN Investor Relations.
The proposed rate changes can still provide some minor upside to ETRN, allowing the company to charge higher fees for interruptible shippers. MVP under optimal operating conditions can transport more than its contracted capacity, and the pipeline could contract this extra space to other shippers. The revised tariffs also create a unique scenario where a counterparty default may actually provide upside and allow MVP to recontract that space at higher rates.
From a broader view, the filing with FERC highlights the exorbitant cost to build a greenfield pipeline out of Appalachia and earn a reasonable return. MVP has fought adverse legal rulings since 2018 and racked up $3B in additional costs, according to the filing. A rate of ~$1.80/Dth would be prohibitive for Marcellus and Utica shale gas producers, equal to 150% of current commodity prices in the basin. The high bar shows why another big pipeline project out of the Northeast is unlikely. – Alex Gafford Tickers: ETRN.
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