Dominion News: Buffett Buys Gas Infrastructure, ACP Cancelled

Summary //

• On Sunday, Dominion announced the sale of natural gas infrastructure assets to Berkshire Hathaway in a ~$10 billion deal, while also announcing the cancellation of the Atlantic Coast Pipeline project with partner Duke Energy.
• The implied EBITDA multiple of about 10x for the asset sale represents a modest premium to where broader midstream and those companies focused on natural gas pipeline transportation were trading last week.
• While the ACP cancellation is a negative headline, the announcement reinforces the value of existing pipeline capacity, and the buzz around the Berkshire Hathaway transaction likely offsets the negative project news.

While holiday weekends are normally quiet, Dominion Energy (D) made a splash on Sunday by announcing the sale of natural gas infrastructure to Berkshire Hathaway (BRK.A) in a deal valued near $10 billion and simultaneously cancelling the embattled Atlantic Coast Pipeline (ACP) with its project partner, Duke Energy (DUK). D is selling substantially all of its natural gas transmission and storage assets as well as a 25% interest in the Cove Point LNG export facility to an affiliate of Berkshire Hathaway, as the company shifts to a state-regulated, sustainability-focused utility. Alongside the asset sale announcement, D and DUK announced the cancellation of the ACP pipeline despite a significant Supreme Court win in June. Today’s note discusses these transactions and the read-through for midstream.

Asset sale reflects D’s strategy shift, highlights value of natural gas infrastructure.
Sunday’s announcement furthers initiatives by Dominion to shift away from midstream activities in favor of focusing on state-regulated utility operations. Recall, D previously sold its 50% interest in Blue Racer Midstream to First Reserve in late 2018 and sold a 25% interest in the Cove Point LNG facility to a fund managed by Brookfield Asset Management in late 2019. While D is selling substantially all of its gas transmission and storage infrastructure and a 25% interest in Cove Point, Dominion is notably retaining a 50% passive interest in Cove Point. For Berkshire Hathaway Energy, the assets being purchased expand an existing interstate natural gas pipeline portfolio that includes over 16,000 miles of pipelines. The $9.7 billion transaction includes a cash payment of $4 billion and the assumption of $5.7 billion in debt.

What are the implications for midstream? The transaction highlights the value in natural gas infrastructure and the cash flows generated by these assets. The implied EBITDA multiple of about 10x represents a modest premium to the weighted average 2021 EBITDA multiple for the Alerian Midstream Energy Index (AMNA) of 9.77x as of July 3 based on Bloomberg estimates and the average EBITDA multiple for midstream companies focused on the pipeline transportation of natural gas (see our Midstream Screener) of 9.46×. While the multiple is not rich, it is a sizable midstream purchase by a renowned investor. The deal could help serve as a catalyst for midstream broadly and particularly for those companies operating long-haul natural gas pipelines. Perhaps names with interests in US LNG export facilities may also see a boost given the notable interest in Cove Point that D is retaining. Given the interest surrounding purchases by Berkshire Hathaway, investors may take a fresh look at the energy infrastructure space.

ACP cancellation and DAPL news put litigation risk in focus.
Announced in 2014, the Atlantic Coast Pipeline has faced multiple legal challenges to its permits, resulting in escalating costs and delays. The proposed natural gas pipeline would have stretched ~600 miles, connecting West Virginia to Virginia and North Carolina and notably crossing the Appalachian Trail. The project is owned by Dominion (53%) and Duke Energy (47%). The original estimated project cost of $4.5-5 billion had swelled to $8 billion, and the pipeline would not have come online until at least 2022. Last month, the US Supreme Court voted 7-2 in favor of allowing the pipeline to cross the Appalachian Trail, validating permits that had been granted.

Despite the Supreme Court win, in announcing the project cancellation, D cited the recent decision by the US District Court for the District of Montana to vacate the Army Corps of Engineers’ Nationwide Permit 12 in a case surrounding the Keystone XL Pipeline as adding litigation risk for ACP. Without getting too far into the weeds, nationwide permits allow for a more timely review process of projects that have a minor impact on the aquatic environment. Last month, the Army Corps of Engineers appealed to the Supreme Court to stay the Montana court’s decision, noting that it would result in extraordinary delays for projects. Dominion observed that the Montana district court decision could lead to more legal challenges for ACP. In short, the litigation and execution risk created too much uncertainty to justify further capital investments in the project.

For midstream broadly, the cancellation of the ACP project is a reminder of the regulatory, litigation, and execution risk facing newbuild pipelines. However, the ACP project cancellation should be viewed in light of the circumstances specific to the project – escalating costs, delays, geography (East Coast and crossing of Appalachian Trail), ownership by utility companies, and Dominion’s divestiture of natural gas pipeline assets – in addition to the decision of the Montana court. The cancellation reinforces the value of existing pipeline assets and the benefits of having steel in the ground.  While the Montana court decision creates uncertainty for new pipeline projects, it comes at a time when there are relatively fewer new projects given the massive buildout of infrastructure in recent years (read more). One exception is Equitrans Midstream’s (ETRN) Mountain Valley Pipeline, which will extend from northwest West Virginia to southern Virginia – somewhat similar to the ACP route. The pipeline is expected to be completed in early 2021, and ETRN, which owns almost 50% of the project, is outperforming today.

Even existing pipelines are subject to litigation risk, as demonstrated by today’s news that the Dakota Access Pipeline (DAPL) has been ordered to shut down in early August due to a court ruling. While the decision may be appealed, the pipeline could be shut until the Army Corps of Engineers can complete an environmental impact statement estimated to be finished in mid-2021. DAPL is owned by Energy Transfer (ET) at 36.4%, Phillips 66 Partners (PSXP) at 25%, and MarEn at 36.8% – a joint venture of MPLX (MPLX) and Enbridge (ENB). While the diversified ownership helps mitigate the impact of a potential extended shutdown, the news surrounding DAPL is weighing particularly on ET and PSXP today.

Bottom line
While the transaction multiple is not rich, it is positive to see a large investment in midstream energy infrastructure by a renowned investor. Unfortunately, headlines surrounding the shutdown of DAPL, and to a lesser extent the cancelation of ACP, are shifting the focus in midstream today to regulatory and litigation risk.