November In-Service Dates - A Diamond in the Rough

Heating season is drawing near. The impact of this period (November through March) can be felt throughout all sectors of the energy industry. Typically, a majority of interstate natural gas pipeline projects aim for an in-service date in October or November in an effort to ensure that operators are able to take advantage of the increased demand for natural gas. Since 2008, 50.8% of projects filed intended to be in-service in October or November, with 19 such projects ongoing in 2017 alone. With the lack of a quorum for much of this year, can we expect to see these projects commence operations on time or on budget? And do delays dramatically impact pipeline returns?

For pipeline owners, investors, and others tracking the future financial performance of pipeline assets, the combination of costs (estimated and final) and contract rates (specifically negotiated rates) provides visibility into expected returns. Staying up to date on the movements in these variables provides often overlooked insights regarding adjusting future revenue or cash flow projections. Rate schedules and their associated terms and conditions are not a scintillating topic, but, if known, can be a gem.

Pre-Operational Insights for Financial Performance

The need to begin service in a timely fashion while controlling costs and determining rates is interwoven with several regulatory requirements that offer leading indicators of an asset's returns. Pipelines often enter into precedent agreements - which later become transportation contracts - years before the in-service date and often before the project has been filed with the Federal Energy Regulatory Commission for review, and before the operator commits to its timeline and estimated costs.



Moving forward, operators intending to institute new tariffs or modify existing rate schedules must file for approval of the proposed rates no less than 30, but no more than 60, days prior to their intended effective dates (i.e., in-service dates). For stakeholders following a project, this event provides one of the earliest opportunities to refine estimates of financial returns previously based on cost-based or redacted precedent agreement information.

Estimated Versus Final Project Costs

In order to have its final rates be deemed just and reasonable by the FERC, a pipeline must provide the project's costs, both estimated and final, which is captured in our Platform. Pipelines must provide a summarized report of all costs - those incurred to date, plus any future costs estimated to be incurred for final completion of the project - to FERC within six months of completion of construction.



Final costs are itemized and compared to prior estimates from the certificate proceeding, and FERC requires any dramatic variations from prior estimates to be explained by the operator. One significant source of cost overruns, project delays, can result in final costs that may or may not be recovered by the pipeline through cost sharing provisions and rate adjustments. An understanding of the nuances of proposed contract terms - negotiated rates and cost-sharing provisions, for example - can provide early indicators of financial performance or otherwise hidden risks.

Estimated Project Costs (2008-2017)

Rate Filings as Insights for Project Schedules

Given the required filing cadence, rate filings themselves can also help with in-service date  timing expectations, which is especially helpful because construction notices are routinely filed by developers weeks or months later. We note that today, of the 19 projects intending to be in-service in October/November 2017, three are in-service and only six have initiated rate proceedings, leaving 10 projects that have not indicated an expectation to be within 30 days of commercial operations. (Note: our alerting service will notify you of these rate filings.)

One of the projects aiming to be in-service in November, Columbia Gas' Leach Xpress, is a timely example. Columbia Gas filed tariff and negotiated rates on October 6, seeking an effective date of November 6, suggesting the company believes it has the potential to achieve its planned milestone. Combining this information with other regulatory disclosures (e.g., construction reports) suggests that all five Leach's spreads are nearing completion. LawIQ's objective, dynamic project forecast offers customers an objective check, based on modeling of historical projects, which provides a complete perspective on project completion.