Pipeline giant Energy Transfer (ET 0.10%) recently received the support of a key ally in its court battle with bankrupt Chesapeake Energy (CHKA.Q) after the Federal Energy Regulatory Commission (FERC) joined its side of a pipeline dispute. Chesapeake Energy had asked the U.S. bankruptcy court in Houston to allow it to break some of its pipeline contracts, including a nearly $300 million agreement with Energy Transfer. However, FERC believes that it has the final say regarding regulated pipeline contracts, which led it to side with Energy Transfer in this case.
Chesapeake wants to break its contract with Energy Transfer and a few other pipeline companies because they are too burdensome. If it can get out of these agreements, the company will save a significant amount of money each year. That would reduce its operating costs, making it more competitive in the current environment of low commodity prices.
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However, Energy Transfer believes that the company should uphold its original agreement on the FERC-regulated system. The government agrees, which already led it to reject Chesapeake's request to alter its contract with Energy Transfer and other pipeline owners.
FERC has stood up against bankrupt energy companies in the past involving contract disputes. It sided against PG&E when the utility sought bankruptcy court approval to alter some of its contracts. Elsewhere, it took the side of pipeline company Tallgrass Energy in its contract dispute with bankrupt gas producer Ultra Petroleum.
Bankruptcy court rulings in these pipeline cases could have significant ramifications for the energy sector. If they side against FERC and pipeline operators, more shippers will likely try to break contracts in bankruptcy to improve their cost structures.
