Every quarter, every publicly-traded company must hold a public briefing for shareholders and Wall Street analysts, to provide updates on the company’s financial situation. These days, this is done via conference calls, and anyone can listen in.
Energy Transfer (ET, Sunoco’s parent company) held its third-quarter call on November 7 and, although there wasn’t a lot of news about the Dragonpipe (Mariner East pipeline system), there were a few morsels. Much of the call was devoted to other topics: the recently-announced acquisition of SemGroup (a smaller pipeline company); new processing capabilities, pipelines, and port facilities in Texas; and ET’s joint venture with the Chinese firm Satellite Petrochemical.
The Dragonpipe is a relatively small part of ET’s business, but it has been a prominent topic in these calls for the past couple of years. On this call, however, not much was made of it. Perhaps that’s because there was not a great deal of good news to share.
ME2x completion delayed again. From my perspective, the most important news was that the company finally admitted there was another delay in the completion of ME2x. As recently as three months ago, ET was still insisting it would be completed before the end of 2019. Now, the company says that “due to the permit bar ME2X is now expected to be completed in mid-2020.”
There are a couple of ideas embedded in that statement that are worth teasing out. The “permit bar” is the DEP’s decision on February 8 of this year that no new permits would be issued on any Sunoco pipeline until Energy Transfer cleaned up the mess it created when it built the Revolution pipeline in western Pennsylvania. That’s the one that blew up in September of 2018 after only a week in operation. The subsequent investigation showed that Sunoco had violated its environmental permits in dozens of locations.
The permit bar is still in place, and it is not only keeping the Revolution pipeline from going back into operation, but it is also holding up work on the Dragonpipe in locations in which new DEP permits are required. There are many of those.
In response to an analyst’s question, Tom Long (ET’s Chief Financial Officer) said, “It appears that we’re getting really close to reaching agreement and I’m hopeful that we’ll see the permit bar lifted in the reasonably near future.”
It’s clear from this statement and from the completion delay that the DEP is taking Sunoco’s violations seriously. Many streams and wetlands were illegally filled in or modified in the construction of the Revolution pipeline, and Sunoco is being asked to restore them. It must also take steps to make sure the reconstruction of the Revolution pipeline guards against the kind of damage from unstable soil that caused the previous failure. I don’t think Sunoco understood how much work this would entail; or perhaps they thought the DEP would just look the other way instead of enforcing the terms of the permit bar.
A subtler point: the phrase “due to the permit bar” was never explained on this call. That suggests that ET is assuming that investors and analysts are already aware of the “permit bar” and its role in slowing pipeline construction in Pennsylvania. It has obviously become an important topic for investors, something that was not previously the case.
And although ET management may think that getting the permit bar lifted will solve all their problems, there are sections of the pipeline that are held up by drilling difficulties, and new problems with frac-outs and sinkholes continue to occur. Removing the permit bar won’t help with those.
No mention of ME2 completion. The pipeline that ET currently calls “ME2” is the cobbled-together pipeline that we often call the Frankenpipe. It consists of sections of new 16-inch pipe, new 20-inch pipe, and 12-inch pipe from the 1930s. It was thrown together and christened “ME2” at the end of 2018 to satisfy shipping contracts.
There was no mention on this call of a completion date for the “real” ME2: a continuous 20-inch pipe all the way across the state. It may be that ET top management has just lost sight of the fact that the pipeline they refer to as ME2 is actually a temporary hodge-podge of sections that will eventually need to be sorted out. None of the analysts on the call asked about it either.
It remains to be seen when or if ME2x and ME2, as they were originally designed, will actually be completed.
ME1 was off-line in October. There was tacit acknowledgement that ME1 had been out of service for several weeks in October. Long stated that “in October we completed modifications to ME1 and Marcus Hook to enhance the reliability of the system and allow for improved flows through the facility.” We knew of that outage from customer statements, from trade journal reports, and from a gap in the schedule of visits by ethane carrier ships, but this is the first time (to my knowledge) that ET has mentioned it in public. We don’t know exactly what work was done.
Expansion work at Marcus Hook. In his prepared remarks, Long said that “our further expansion efforts at Marcus Hook are underway and progressing nicely with increased facility capacity expected for fall 2020.” Later, in answering a question, Marshall McCrea (Chief Commercial Officer) said, “Once we complete some expansions of our chillers and tanks for propane and butane by the middle of next year it will be perfect timing as we bring on more capacity on 2X which will be a huge shot in the arm for us from a revenue standpoint.”
These Marcus Hook projects are part of the work that was found last year to be based on illegal emissions permits. Sunoco has continued the work, however, while it fights a court battle to try to prove that its permits are in fact legal. This is vintage Sunoco behavior: build it first, and ask permission later.