Investors have traditionally viewed long-haul natural gas pipelines as a relatively safe haven from risk; however, shifting trends in gas flows, “a much more proactive FERC” and the potential for higher maintenance expenses are changing that, according to an analysis by U.S. Capital Advisors.
The firm looked at 25 long-haul pipeline companies whose pipelines are regulated by the Federal Energy Regulatory Commission, examining throughput trends, contract expiration schedules and earned return on equity (ROE).
“Long-haul pipelines have truly become a case of haves and have-nots,” U.S. Capital said. “While total throughput for all pipelines has remained flat over the last four years, the top five pipelines have increased throughput by an average 26%, while the bottom five have seen throughput decrease by an average [of] 21%.”
U.S. Capital Advisors analyst Becca Followill said the pipeline analysis showed generally that western region pipelines have been experiencing declining throughputs. “The pipelines that are flowing over into the Southeast are showing up as some of the best pipes…They’ve got longer-term contracts; their throughput has been holding in there; their ROEs are good,” she told NGI.
Contract expiration timelines tell a similar story, U.S. Capital said. The top five pipelines have weighted average contract expirations of 10 years, while the bottom five have weighted average expirations of two years.
Followill said the weighted average contract expiration year for the group was 2017, which she said is a little bit shorter than she thought it would be. Pipelines’ recontracting risk is increasing because shippers see shale gas all around them and it has taken away their sense of urgency to recontract, she said.
Meanwhile, earned ROEs ranged from 3% to 41% among the 25 pipelines examined.
“Another trend we see is the growing number of rate cases (both company- and FERC-initiated) and required rate case reviews/cost and revenue studies,” the firm said. “Over 60% of the pipelines we analyzed will undergo a rate case/review over the next four years.”
A report released last march by Standard & Poor’s Ratings Services (S&P) found a similar shift in the outlook for pipelines. Pipelines’ historic recontracting risk has become a bigger issue, said S&P analyst William Ferara. His report said “changing natural gas supply dynamics” driven by the rapid run-up in shale gas production is what is adding to this risk (see Daily GPI, March 10).
“As a whole, this is still an attractive asset class,” U.S. Capital said, “but it is undergoing unprecedented change.”
The U.S. Capital Advisors report is available for purchase. For information, contact Followill at (713) 366-0557, or email@example.com.
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