The vanishing need for the Atlantic Coast Pipeline

The Atlantic Coast Pipeline (ACP) is a 600-mile, 42-inch natural gas pipeline currently under construction to bring natural gas from northern West Virginia to Virginia and North Carolina. The project is being built by a joint venture of Dominion (48%), Duke Energy (47%), and Southern Company (5%). Its construction was approved by the Federal Energy Regulatory Commission in October 2017.

The project was originally projected to cost $5.1 billion. Cost overruns to date have raised the cost of the project by about 30% to $6.5 to $7 billion, excluding financing costs. But cost overruns are not the only challenge faced by the project.

The biggest threat to the project’s profitability may come if and when the project is ever completed. The demand outlook for gas has changed dramatically since the project’s inception and much of the project’s original justification has evaporated. Indications are that the project’s affiliated utility customers may struggle to convince state regulators to pass the full cost of pipeline transportation agreements through to utility customers. Indeed, the project does not represent good value to the ratepayer.

This briefing discusses the considerable headwinds faced by the Atlantic Coast Pipeline. Key findings include:

• Six companies, all of whom are regulated utility affiliates of the pipeline’s sponsors, have contracted for 96% of the pipeline’s capacity.
• Atlantic Coast Pipeline, LLC will recover the costs of the pipeline through rates charged to the pipeline’s customers. Given that the vast majority are regulated utilities, these costs will have to be approved by state utility regulators in Virginia and North Carolina.
• Electric utility subsidiaries of Duke and Dominion in Virginia and North Carolina have contracted for 68% of the pipeline’s capacity. Yet, the argument by these utilities that they need new natural gas pipeline capacity has been significantly weakened since the ACP was first proposed.
• In its most recent long-term Integrated Resource Plan (IRP), four out of five of Dominion’s modelled scenarios show no increase in natural gas consumption from 2019 through 2033.
• Dominion’s 2018 IRP was rejected by Virginia state regulators, in part for overstating projections of future electricity demand. This implies that future natural gas consumption will likely be even less than forecasted in the IRP.
• The most recent IRPs of Duke Energy Progress and Duke Energy Carolinas show that previously planned natural gas plants have been delayed further into the future. We also find that Duke also has a history of overstating its forecast of electricity demand.
• Over the next decade, it is likely that the demand for natural gas in Virginia and North Carolina will be further eroded as renewable energy and storage technologies continue to rapidly decline in price.

We recommend several questions investors could be asking management in order to obtain a clearer view of the project’s value.

Press release: IEEFA report: The vanishing case for the Atlantic Coast Pipeline

Please view full report PDF for references and sources.