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Dominion agrees to buy Southern stake in Atlantic Coast Pipeline as project costs soar

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$8 billion price tag and legal setbacks in focus for investors

Infrastructure designed to move Appalachian gas to Mid-Atlantic

Houston — Southern Company is out as an equity partner in the Atlantic Coast Pipeline after majority owner Dominion Energy agreed to buy its stake, amid ballooning costs and legal challenges that have stalled the 1.5 Bcf/d US Northeast natural gas project.

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Dominion disclosed the new ownership structure Tuesday as it released financial results for the final three months of 2019. It will own 53% and Duke Energy will own 47%, with Dominion acquiring Southern's 5% stake in the pipeline and gas transmission assets, which include an interest in a small LNG project in Florida, for $175 million. Southern will remain an anchor shipper on Atlantic Coast Pipeline.

The 600-mile pipeline, which would run through West Virginia, Virginia and North Carolina, moving Appalachian Basin gas to Mid-Atlantic markets, is now expected to cost approximately $8 billion, slightly above the high end of Dominion's previous guidance range of $7.3 billion to $7.8 billion. And while Dominion expressed confidence it will eventually finish the pipeline, it isn't talking about the pipeline's growth potential in the same way it has before.

"We are confident there will be expansions over time, but right now we are focused on getting the base project completed," Diane Leopold, executive vice president and co-chief operating officer, said during a conference call with analysts.

To achieve even that, the project developers will effectively have to draw an inside straight in the courts in the coming months.

The Supreme Court is expected to decide by mid-2020 on the developers' appeal of a lower court ruling involving US Forest Service authorizations for the pipeline to cross the Appalachian Trail. The pipeline also must resolve a challenge to US Fish and Wildlife Service authorizations related to four species potentially affected by the project. And last month, the 4th US Circuit Court of Appeals vacated a state air permit for a compressor station in Buckingham County, Virginia.

Assuming everything goes as Dominion hopes, the operator is maintaining its target of completing construction by the end of 2021 and finishing commissioning in early 2022. At the time the operator filed its permit application with the Federal Energy Regulatory Commission in September 2015, it was estimated that Atlantic Coast Pipeline would enter service by November 1, 2018, at a total cost of $5.1 billion.

With the price tag having soared, talks continue with shippers to revise rates to reallocate how costs for the pipeline are shared, Dominion said. An agreement is expected to be formalized in the coming weeks, CFO James Chapman said on the investor conference call.

LNG GROWTH

For the three months ended December 31, Dominion reported a 72% increase in net income to $1.1 billion, or $1.32 a share, compared with profit of $641 million, or 97 cents a share, in the same period of 2018. Revenue in the latest quarter jumped 33% to $4.48 billion from $3.36 billion in the year-ago period.

Beyond pipeline and electric utility operations, Dominion also operates the Cove Point LNG export terminal in Maryland. It sees growth opportunities in the LNG sector, particularly around providing LNG for use as a marine fuel.

That was the impetus behind buying Southern's stake in the Jacksonville facility, and it is the reason Dominion is working with one of its offtakers at Cove Point to allow a portion of the supply under the agreement to be used to provide fuel for marine vessels, CEO Thomas Farrell said on Tuesday's conference call. Such an arrangement would not alter the terms of the 20-year offtake contract, Farrell said.