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Investors Embrace ETP’s $1.57B Rover Deal, But Project Still Under Scrutiny

Energy Transfer Partners LP's (ETP) plans to sell a 32.44% stake in its Rover Pipeline to private equity for $1.57 billion met with generally positive reactions from investors Tuesday, but the project still faces uncertainty amid scrutiny from regulators and from Congress.

ETP late Monday said subsidiaries agreed to sell to Blackstone Energy Partners and Blackstone Capital Partners a 49.9% stake in ET Rover Pipeline LLC, a holding company that owns a 65% stake in the Rover project.

Dallas-based ETP said Blackstone would reimburse the master limited partnership (MLP) for its pro rata share of Rover construction costs incurred through the closing date, now set for late this year, which is also when Rover is scheduled to begin service. Through its investment, Blackstone also would cover "specified amounts of future construction costs" and make "certain additional payments to ETP."

The MLP plans to use the proceeds to pay down debt and help fund growth projects, reducing equity issuances in the process.

Analysts with Tudor, Pickering, Holt & Co. viewed the deal as "slightly positive" for the MLP, noting that it would "generate slight accretion versus its previous equity funding approach."

Meanwhile, Monday's report from J.D. Hair & Associates Inc., which examined a roughly 2 million gallon horizontal directional drilling (HDD) fluids spill that occurred during Rover's drill beneath the Tuscarawas River in Ohio, offered few easy answers as to when the Federal Energy Regulatory Commission may lifts its moratorium on HDD activities for the project.

Analysts with ClearView Energy Partners LLC in Washington, DC, said Tuesday the report "fails to condemn or clear" the project's handling of the inadvertent return at the Tuscarawas HDD. The report, in finding that records were insufficient to evaluate whether Rover and HDD contractor Pretec Directional Drilling (PDD) followed best practices at the Tuscarawas site, could raise new issues for ETP/Rover, according to ClearView.

"We believe that the identified shortcomings in the drilling report documentation may result in another referral to FERC's Office of Enforcement. We do not currently know how serious the lack of operational information" identified in the report is in terms of meeting FERC's requirements, the analysts said.

"Not only does Rover have a responsibility to oversee its contractor, but FERC must defend its oversight of project sponsors building pipelines under its certificate authority. We continue to believe that, given this pressure -- from the public, and now from Congress -- fanned by media focus on Rover's problems," FERC's Office of Energy Projects (OEP) "may not reauthorize restart of HDD activities until it is confident it can defend its decision to do so."

The J.D. Hair report suggested the inadvertent return at Tuscarawas "could have been prevented by the subcontractor following more prudent practices, and no documentation appears to exist to prove otherwise," ClearView observed. "Given that finding, and the fact that the investigation into the presence of diesel in the released mud in contravention to certificate requirements remains outstanding, we do not expect an HDD restart for at least several more weeks."

ClearView also noted that FERC may hold a public comment period once plans are submitted for the remaining HDD beneath the Tuscarawas River, which is necessary for Rover's Mainline B crossing, and which could further draw out the process.

The embattled 3.25 Bcf/d, 710-mile Rover has drawn significant market interest given its potential to uncork the Appalachian bottleneck and deliver new volumes of Marcellus and Utica shale natural gas to markets in the Midwest, Gulf Coast and Canada.

But the Tuscarawas HDD spill, along with a series of other environmental violations alleged by state and federal regulators, has led to delays for ETP's highly anticipated project. Rep. Frank Pallone (D-NJ) and Sen. Maria Cantwell (D-WA), the top Democrats from the House and Senate energy committees, wrote to FERC asking the Commission to investigate all of ETP's holdings within the agency's jurisdiction.

ETP CEO Kelcy Warren in turn wrote letter Monday responding to Cantwell and Pallone, saying the investigation would be "unprecedented" and "extrajudicial."

"I believe that when you know the facts, which we would happily have shared, you will conclude that your request is unnecessary," Warren wrote. The lawmakers, he said, overstated the scope of the spill, echoing previous company statements. As for alleged violations "regarding the deconstruction of a potentially historic structure" in Ohio, Warren argued that the home was only eligible for historic preservation and wasn't on the National Register for Historic Places.

"The structure was not on the pipeline right of way, nor was it in the footprint of the project," Warren said. "Indeed, it was Energy Transfer that brought this matter to the attention of the Commission, which leaves us baffled as to how it can be alleged that we provided false or misleading information. That notwithstanding, we have settled the issue" with Ohio preservation officials "and we remain actively engaged with the Commission in efforts to resolve its concerns."

FERC could see additional political pressure from the issues with Rover, according to ClearView.

"We expect Democrats to raise the Rover-related oversight issues in yet-to-be-scheduled confirmation hearings for" presumed FERC nominees Richard Glick and Kevin McIntyre. "It may not just be Democrats on the panel who have concerns relating to oversight, in our view," ClearView said. "We think that increased Congressional scrutiny on this project is likely to make OEP more careful in ensuring that decisions to reauthorize HDD and to place Mainline A into service are strongly supported by an oversight record (an exercise which takes time, even if FERC is motivated to get the issues resolved)."

Rover is scheduled to begin entering service later this summer, with the full project coming online by November. That would involve completing a number of HDDs affected by FERC's moratorium.

"Any progress that will allow HDD activities to resume is important," BTU Analytics analyst Marissa Anderson told NGI, noting a number of supply laterals affected by the stoppage. "What may push out the timeline is an incremental review process by FERC, as the project must file a proposed plan to incorporate the recommended measures for review and approval. Producers subscribed to the project have started to increase drilling activity beginning earlier this year, and continued delay of the startup of the project will impact the production growth outlook in the region through the end of the year."

ETP/Rover has provided FERC with technical analysis and recommendations for a number of remaining HDDs, prepared by GeoEngineers, a specialist the company hired independently of the Commission to review its HDD designs following the Tuscarawas incident. GeoEngineers, in a series of documents posted to Rover’s project docket Tuesday, generally concluded that the remaining project HDDs can be completed successfully following industry best practices [CP15-93].

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