The Federal Energy Regulatory Commission responded to a plea from Energy Transfer LP's ETC Tiger Pipeline LLC to remove some of the uncertainty surrounding firm natural gas transportation agreements with a marketing affiliate of Chesapeake Energy Corp. ahead of an anticipated bankruptcy filing by the troubled driller.
The Energy Transfer unit is one of a slew of interstate gas pipeline companies that could face legal showdowns with producer customers in the coming months amid a wave of bankruptcies in the upstream sector. Credit analysts have said contract rejection attempts will not necessarily prompt midstream rating downgrades. But some midstream companies are looking to undergird their contracted capacity as Chapter 11 filings loom for some drillers like Chesapeake.
About 23% of ETC Tiger's contracted capacity is reserved for Chesapeake. The pipeline company on May 19 petitioned FERC to assert its jurisdiction alongside federal bankruptcy courts and to declare that Chesapeake must seek commission approval to annul or modify its regulatory obligations under the transportation agreements.
FERC issued the declaratory order the company sought on June 22. The regulator said a shipper can move to reject a contract in bankruptcy court without commission approval, but this rejection of contracts in bankruptcy does not alter regulatory obligations under FERC jurisdiction. (FERC docket RP20-881)
"In order to give effect to both the [Natural Gas Act] and the Bankruptcy Code, Chesapeake may not modify the rates, terms, or conditions of its transportation agreements with ETC Tiger by rejecting those contracts in bankruptcy," FERC said in the order. "Chesapeake must obtain approval from the commission to do so."
Firm gas transportation agreements for long-haul pipelines are similar to executory contracts, obligating the debtor or another party to fulfill its terms at a later date. Most include fixed reservation charges that are paid monthly regardless of the actual gas volumes moved or stored, plus a tariff component based on volume to pay pipelines for their variable costs.
ETC Tiger, which operates a 197-mile bidirectional system connected to the Haynesville Shale that connects to other pipelines near Delhi, La., said it had been providing service to Chesapeake since 2016 under two transportation agreements. One is a firm transportation agreement with a term through December 2030 that provides for a maximum daily quantity of 500,000 Dth/d at a fixed negotiated monthly reservation rate of $9.5813 per Dth. The other is an interruptible transportation agreement with a term lasting through December 2025, which provides for a maximum daily quantity of 500,000 Dth/d at a discounted rate.
Chesapeake in May took an $8.5 billion impairment charge against its oil assets and warned in an SEC report that it was looking at options that could include restructuring its debt or filing for Chapter 11 bankruptcy protection.
Another pipeline company with exposure to Chesapeake, Stagecoach Pipeline and Storage Co. LLC, submitted a separate petition to FERC for a similar declaratory order on June 9. That request is pending.
Stagecoach and ETC Tiger paid filing fees of over $30,000 to submit their petitions for declaratory orders, motions for shortened comment periods and requests for expedited action because of the expected Chesapeake bankruptcy.
"Given the current economic environment and a potential rash of producer-related bankruptcy filings, it is important for the commission to address this critical issue with substantive certainty," ETC Tiger had said in its May request.
