So by now it’s been widely reported that PSEG wants to sell it’s equity stake in PennEast. See some of the links below.
I think it’s worthwhile to take a look at the trajectory of the PSEG and PennEast relationship, and speculate on how things might go from here.
In the beginning….
Not everyone realizes that PennEast used to be made up of 4 companies, not 6.
In the beginning there was UGI, New Jersey Resources (owner of New Jersey Natural Gas), South Jersey Industries (owner of South Jersey Gas), and AGL Resources (owner of Elizabethtown Gas).
The word on the street was that Wall Street analysts were uncomfortable with the idea of these four smallish LDCs taking on a major interstate pipeline project like PennEast. So it was suggested they go out and find some more partners.
One of them was Spectra Energy, they were brought in because they have been building interstate pipelines for a very long time and know how it works.
The other one was PSEG.
On September 18th, 2014, UGI announced that PSEG was joining the project:
The spin was that now all of the Local Distribution Companies (LDC) in NJ were onboard with PennEast. I think a closer characterization would be that they brought a huge mover and shaker in NJ markets (PSEG) into the fold.
Happy First Steps
By all appearances PSEG was quite happy to come into the fold as a benevolent and wealthy grandfather helping the grand kids of NJR and SJI and the others to get on their feet.
They ended up with a modest 10% equity stake, and were tied as second largest shipper along with the other newcomer Spectra Energy. The press releases and FERC application in September 2015 to FERC all talked about the sparkling possibilities of this relationship between all the LDCs in NJ, plus the odd duckling UGI in PA, and Spectra Energy thrown in for good measure.
Cracks begin to show….
If we fast forward to April 2016, we see a different picture. In late April PSEG held an earnings call with equity analysts to talk about their 2016 Q1 results. Link is here:
On that call, an analyst noted that Con Edison was aggressively pursuing a strategy of getting involved with natural gas pipelines, and that PSEG seemed to be moving in that direction with their investment with PennEast. That analyst asked if PSEG was going to be doing more in that direction.
The response was very surprising (to me at least, and I suspect to many people). PSEG CEO Ralph Izzo basically indicated that they weren’t all that happy with pipelines in particular and PennEast specifically, that the Constitution pipeline project showed the difficulties with permitting, and indicated that doing pipelines was not in PSEG’s “DNA”.
PennEast pooh-pooh’d this, but rumors started flying left and right that PSEG was looking for a way out of the project. This simmered throughout the summer and fall of 2016.
Enter March 2017, and the PSEG rumors explode into reality. Early in the week PSEG holds a meeting with analysts and investors to talk about their Capital Expenditures budget for the next five years. A smart analyst noted $108 million was missing from that budget – which was just about the size of PennEast. The PSEG spokesman said “yes, that money is gone” but refused to indicate why.
Yesterday, we found out the why. As the cited articles at the top of this entry state, PSEG wants to sell its equity stake to someone else. They want to get out of the natural gas pipeline business and focus on their core businesses.
It’s worth noting though that PSEG is still a “shipper” on the project with 125,000 dekatherms/day – they are more or less locked into that via long term precedent agreements.
So what does all this mean?!
So where do we go from here? What does this mean?
Here’s my take on some of it.
- The buyer hasn’t been identified yet, although I suspect PSEG has someone in mind and likely has already done some negotiation. The fact that they yanked this out of their budget shows they have some confidence that they will in fact sell their stake.
- The PennEast LLC agreement prohibits anyone from pulling out of the project until the project has been in service for some time (I believe from memory it’s 18 months, but don’t quote me on it!). This doesn’t mean that PSEG can’t pull out. What it means is that in order to pull out, they’ll need unanimous agreement from all the other PennEast partners to do this, and they have veto over who PSEG deals with. Presumably if they went ahead they would simply rewrite those LLC agreements.
- Who the buyer is is going to be really, really important. It could be Spectra upping their 10% stake to 20%. It’s plausible, given that they were bought out by Enbridge who seems to be more aggressive in these kinds of deals. It could be Cabot Oil & Gas, who is in a bit of bad shape after the Constitution Pipeline denial. Or it could be another player. Who it is will give us powerful clues in what might happen.
- In losing PSEG, PennEast is losing a powerful advocate in NJ. What this means I don’t know, but it could mean PennEast is contemplating lessening their presence in NJ. Or some other major change in the project’s character.
- If any major changes happen as a result of this, it could seriously kink the FERC process. Look for more major delays as a possible minimal result of this.
Remember at the beginning of this piece, I pointed out that PSEG was not originally part of PennEast, and that they were brought onboard largely to bring some adult supervision (and clout) to the project. Now that PSEG is withdrawing, that means that clout and supervision is disappearing too. So forget the PennEast spin on this, this is a very serious blow to the project.