Northeast Utilities' Northern Pass: The Neverending Story [NU]
by Rob Rains [202-756-4431] and Tim VandenBerg [202-756-7714] -- We caution investors that Northeast Utilities' (NU-$42) Northern Pass transmission project, which would transport 1,200 megawatts (MW) of hydro power supplied by Hydro-Québec from Canada into New England, likely faces significant delays and cost increases. The New England Independent System Operator (ISO-NE) forecasts that, due to the retirement of more than 8,000 MW of generation, including Entergy's (ETR-$63) Vermont Yankee, the region will need 6,000 MW of generation by 2020 to replace it. Coal consumption is rapidly decreasing in the region, with only six plants remaining, and if replacement power is not supplied by hydro then it will likely come from natural gas.
Regulatory hurdles and substantial political headwinds will likely prevent the project from going into service before 2018, at the earliest with delays until 2019-2020 very possible as well. We simply disagree with Northeast Utilities' past statement that it expects Northern Pass to be in service in 2017 and that it will receive state siting approval in 2015.
We also expect the firm to succumb to overwhelming political pressure from Gov. Maggie Hassan (D), Sen. Kelly Ayotte (R), and state lawmakers calling for them to bury more of the project underground in the northernmost portion of the state, beginning in Pittsburg and traveling through Coos County. This will significantly increase the already $1.4 billion price tag of the project and the time to completion. We note that Northeast Utilities' revised proposal, which called for burying just 7.5 miles of the 187-mile project underground, raised costs by more than 16%. Although 147 miles of Northern Pass will be built on existing rights of way, the most contested portion of the project is a stretch beginning in Pittsburg near the Canadian border and making its way through Coos County and further south. Residents are upset because an above ground transmission line would necessitate 100-150-foot towers that would obstruct residents' scenic views. Political opposition is strong and bipartisan and we think the company will ultimately need to bury this stretch of the line in order to appease residents and move the project forward.
Delays and continued uncertainty should be viewed as a positive for natural gas fuel usage in the region, which already supplies 53% of the electricity to New England, even though transportation constraints during winter months remain an issue. Hydro generation accounts for about 8% of net electricity generation in New England, but transmission remains a huge concern and natural gas pipelines could fill this need in lieu of this resource. We note that from 2013-2016, New England will be bringing 1,193 MW of capacity online, and 50% of it will be natural gas, with 35% from wind.
In addition to a lengthy review time for a presidential permit, approval from the New Hampshire Site Evaluation Committee (NHSEC) is also needed. Northeast Utilities expects this process to take one year to complete, but we think it will take at least two years from the time of submission.
Additional points for investors to consider include the following:
· After more than two years, last week the DOE closed its comment period on the scope of an eventual draft Environmental Impact Statement (EIS) that is unlikely to be published before late Q2 2014. While the DOE received just ~5,600 comments, it has demonstrated a heightened sensitivity to the politics of this proposal, as evidenced by leaving the scoping comment period open for more than two years.
· After the draft EIS is published, DOE will commence a 60-90 day comment period, and will likely hold at least one hearing (possibly more) within the state. Earlier scoping hearings were very well attended, and the prevailing feedback was negative, increasing the uncertainty over the project's future.
· A final EIS is unlikely before Q1 2015 and triggers an up-to 90-day interagency review process among federal agencies. At this point, Secretary Ernest Moniz could make a decision sometime in 2H 2015, or else Q1 2016. Given opposition to the project, this decision will likely be appealed in federal court, further increasing the uncertainty about the project's federal permits.
· At the state level, Northeast Utilities may submit its application for NHSEC review with only the draft EIS. This will be equal in importance to the DOE review, but it is less certain due to its structure.
· The NHSEC is a 15-member body of officials that work for other state agencies and convene for specific proposals. Its statutory underpinning calls for decisions on projects within nine months, but this has routinely been surpassed for far smaller projects within the state with much less political headwind. We believe that it will most likely be at least two years before the NHSEC approves Northern Pass from the date the application is submitted, which we expect by Q3 2014. In light of landowner and stakeholder opposition, an NHSEC decision is almost certain to be followed by requests for rehearing and then by appeals to the New Hampshire Supreme Court, which could easily take more than a year.
· Although NHSEC approves the project itself, it has no authority to exercise eminent domain. We view this as material because there is a persistent legal question about whether or not Northeast Utilities must purchase any additional rights of way to fully complete construction. We note that the Society for the Protection of New Hampshire Forests is likely to challenge this assertion in state court, fueling uncertainty about the completion of this project.
· Unlike interstate natural gas pipelines that NHSEC has reviewed in the past, which carry federal eminent domain authority, this is not an option for Northern Pass. The New Hampshire legislature closed that option in 2012 specifically for non-reliability projects like this.
· New Hampshire politicians, including Gov. Maggie Hassan (D) and Sen. Ayotte (R), oppose the project in its current state and have called for additional miles of the line to be buried underground. We view the political pressure in the state as likely to force the company to bury more of the project to secure approval by the NHSEC. The recent announcement of the 150-mile 1,000 MW TDI Blackstone (BX-$27) transmission line that will be buried under Lake Champlain has fueled the belief by many within the Granite state that Northeast Utilities can and should bury Northern Pass.
· Once completed, the project will transport 1,200 MW, or more than 8% of New England's current electricity supply, of predominantly hydroelectric power, under a 40-year agreement with Hydro-Québec.
· Recent plant shutdowns totaling more than 8,000 MW and the need for 6,000 MW of replacement power should drive additional natural gas consumption within the region. We note that closures like Dominion's (D-$66) Salem Harbor-coal (740 MW), Brayton Point (1,500 MW), and Entergy's Vermont Yankee (640 MW) are all in the works.
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