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There's a Big Pipeline Growth Opportunity in the Northeast

By Reuben Gregg Brewer – Feb 11, 2014 at 10:04AM

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Kinder Morgan Energy Partners sees a big opportunity to supply natural gas to the U.S. Northeast, it isn't the only one that could benefit from this gas constrained market.

The Northeast has made a huge switch toward natural gas for its electricity needs. Gas has gone from supplying about 15% of the region's power at the turn of the century to over 50% today. The Northeast grid operator believes that's a systemic risk, an issue that has been on full display with the recent winter weather. Kinder Morgan (KMI 1.27%) sees that as an opportunity.

Filling the backlog
Midstream companies like Kinder Morgan generally focus on toll-taker businesses, which means they need to build or acquire new assets to grow. That's why it's important to keep an eye on the backlogs of such companies. At the start of this year, Kinder Morgan's backlog, including both Kinder Morgan Energy Partners (NYSE: KMP) and El Paso Pipeline Partners (EPB), stood at around $14.8 billion, up from $14.4 billion at the start of the fourth quarter.

Not bad, but Kinder Morgan is working on some projects not yet in the backlog, too. COO Steven Kean made a specific point of highlighting one growth opportunity during the company's fourth quarter earnings call. During the recent cold spell "...there was a lot of gas generation that was offline in the U.S. Northeast and was being replaced by more expensive and less environmentally benign fuel sources. What that tells us is that the U.S. Northeast needs a lot more firm transport, and we are actively dealing with customers to try to put something together in the way of an expansion. We think it's going to drive additional investment opportunities for us, but we're not yet putting it in our backlog."

Building right now
So Kinder Morgan has its eyes on building new pipelines into the Northeast, which is increasingly reliant on natural gas. That's something to keep an eye on, but Kinder Morgan isn't the only company that can take advantage of the region's tight supply.

Spectra Energy Partners (SEP) owns a number of pipelines in the region and is actively expanding its reach. For example, in 2013 it built the first new pipeline into Manhattan in 40 years. And it has plans for continued expansion in 2014, with longer-term projects planned all the way out to 2019. While Kinder Morgan is in the planning stages, Spectra Energy Partners already has plans on the drawing board and shovels in the ground.

Benefiting from key assets
National Fuel Gas (NFG 2.11%) is another company that owns gas distribution in the northeast. It's Empire Pipeline provides gas through Buffalo, Rochester, and Syracuse in New York. The utility customers this pipeline serves provide power to over one million people. That will remain a core asset for the company for years to come but also highlights the importance of our northern neighbor -- Canada.

The U.S. natural gas boom has made big headlines, but National Fuel Gas' pipeline connects to a TransCanada (TRP -1.42%) pipeline. After all, Buffalo is right on the boarder. And while there's plenty of growth opportunity in bringing U.S. natural gas into the Northeast, that doesn't diminish the value of bringing the fuel down from Canada.

TransCanada is an industry giant in Canada, best known for its Keystone XL pipeline which remains mired in political red tape in Washington D.C. However, the company has over 42,000 miles of natural gas pipelines that are online and serving multiple U.S. markets, including the Northeast. That said, it doesn't have any major natural gas projects on tap right now in the region. Most of it's projects are on the west coast of Canada and in Central America.

Now, soon, and later
Supplying the Northeast with natural gas is increasingly important as the region's reliance on the fuel grows. That's a big benefit right now to TransCanada, National Fuel Gas, and Spectra Energy Partners, which already tap into that demand. That said, Spectra Energy Partners is currently working on new ways to supply the market and midstream giant Kinder Morgan is readying plans to grow its business in the region, too. You can hate the cold winter, but don't ignore the opportunity that is likely just heating up.

Create a pipeline of dividends in your portfolio

Reuben Brewer has a position in Kinder Morgan Energy Partners. The Motley Fool recommends El Paso Pipeline Partners LP and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

TC Energy Stock Quote
TC Energy
$44.48 (-1.42%) $0.64
Kinder Morgan Stock Quote
Kinder Morgan
$19.12 (1.27%) $0.24
Spectra Energy Partners Stock Quote
Spectra Energy Partners
El Paso Pipeline Partners, L.P. Stock Quote
El Paso Pipeline Partners, L.P.
National Fuel Gas Stock Quote
National Fuel Gas
$66.23 (2.11%) $1.37

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