Throughput volumes on long-haul natural gas pipelines grew 4.1% in 2011, compared to flat growth between 2007 and 2010, but the increase was not realized in return on equity (ROE) and earnings before interest, taxes, depreciation and amortization (EBITDA), despite the significant capital spent in the sector over the last few years, according to a report ranking investment risks by Houston-based U.S. Capital Advisors.
"Long-Haul Pipelines Revisited" report, which was issued last Tuesday, ranked 24 long-haul gas pipelines from lowest risk to highest based on changing gas flows, a more proactive Federal Energy Regulatory Commission and the potential for higher maintenance capital expenditures (capex). The ranking is the second report that the company has issued on investment risk associated with long-haul pipelines.
Equity research chief Becca Followill noted in a summary of the report that "from an overall risk ranking standpoint, Northern Border Pipeline moved into the top five lowest risk pipes, knocking out Southern Natural Gas. And in the top five highest risk pipes, Northern Natural, KM (Kinder Morgan) Interstate and Southern Star Center were added, replacing ANR Pipeline, Panhandle and Columbia Gulf Transmission."
Risk was based on throughput trends, contract expiration schedules and earned ROEs, the report said. These were considered the most important factors, although other variables -- such as location, pipeline age and customer make-up -- can influence risk. The top five pipelines have increased throughput by an average of 30%, while the bottom five have seen throughput drop by an averrage of 26%, according to the report.
The average ROE of the pipelines ranked by U.S. Capital Advisors was 13.1% in 2011 versus 14.2% in 2010. The drop was largely driven by declines in ROE at Natural Gas Pipeline Co. (NGPL) and KM Interstate due to FERC Section 5 investigations into allegations that they were over-recovering their cost of service. Two-thirds of the pipelines showed a drop in ROE in 2011, the report said.
In November 2009, FERC initiated an investigation after it determined that NGPL may have achieved an ROE of 24.5% based on an over-recovery of $149 million (see NGI, Nov. 23, 2009). A year later, FERC began a probe into Kinder Morgan's estimated ROE for 2008 of 27.10% and 29.25% for 2009 -- both well above the norm for the pipeline industry (see NGI, Nov. 22, 2010). Both Section 5 investigations have since been resolved.
The aggregate EBITDA for the 24 pipelines rose by only 1.2% in 2011 from the prior year after falling 1.2% in 2010 versus 2009, despite the increase in capex spending over the past few years. The report cited a "huge delta between the haves and have nots, with EBITDA up $660 million or 23% between 2009 and 2011 for the top 10 pipelines and down $650 million or 22% for the bottom 10 pipelines."
The pipelines included in the ranking were Alliance Pipeline, ANR Pipeline, Columbia Gulf Transmission, El Paso Natural Gas, Florida Gas Transmission, Gas Transmission Northwest, Great Lakes Gas Transmission, Gulfstream Natural Gas, Kern River Gas, KM Interstate Gas, NGPL, Northern Border, Northern Natural Gas, Northwest Pipeline, Panhandle Eastern, Rockies Express, Southern Natural Gas, Southern Star Central Gas, Tennessee Gas Pipeline, Texas Eastern Transmission, Texas Gas Transmission, Transcontinental Gas Pipe Line, Transwestern Pipeline and Trunkline Gas Co.
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