For the second winter in a row, natural gas prices in the New England area have seen significant increases. Extremely cold weather coupled with supply constraints have created huge price fluctuations. This problem highlights the importance of natural gas pipeline delivery systems in this region.
Building new pipelines to meet the demand would seem like a logical solution if it wasn't for the capital-intensive nature of expansion, difficulty obtaining new rights of way, and regulatory hurdles. Therefore, owners of existing supply lines who are able to expand their current footprint stand to benefit for years to come.
The majority of natural gas supplied to New England, according to the EIA, comes from the south via the Tennessee Gas Pipeline (TGP) and Algonquin Gas Transmission pipeline (AGT). These two pipelines enjoy the highly enviable position of being providers of an inelastic good to an area with increasing demand, while competitors are kept at bay through numerous and varied barriers to entry. While there are no sure things in the stock market, this sure sounds like a good recipe for success. So who owns these assets?
The Algonquin Gas Transmission pipeline is owned and operated by Spectra Energy Partners (NYSE:SEP), a master limited partnership formed by Spectra Energy (NYSE:SE). It can transport up to 2.6 Bcf/d through its 1,127 miles of pipeline.
Seeing the need for expansion Spectra announced on Feb. 5 2014 the Atlantic Bridge Project, which seeks to expand the Algonquin Gas Transmission pipeline among other Northeastern assets.
Speaking on the project, Bill Yardley, Spectra Energy's president of U. S. Transmission and Storage, stated: "We are able to expand our existing facilities, mostly within their current footprint, and be operational by 2017. The additional supply will keep prices lower overall, while also dampening future gas and electricity price volatility, generating savings for homeowners, manufacturers and businesses."
That's all good news for consumers as well as surrounding communities since the expansion will take place on an already existing footprint, minimizing the impact on landowners and the environment while delivering approximately 20% more supply to the region.
The Tennessee Gas Pipeline is the other major supply line to the Northeast and was recently purchased in August 2012 by my top pick in the sector (run by my favorite CEO in the energy business). Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) purchased the Tennessee Gas Pipeline in August of 2012. Kinder Morgan Energy Partners is owned and operated by Kinder Morgan (NYSE:KMI).
These companies are run by Richard D. Kinder, who is as shareholder-friendly a CEO as one can ask for. Through Kinder Morgan Energy Partners, Mr. Kinder appears intent on increasing midstream value through acquisitions followed by expansions, all while maintaining one of the best yields in the industry, currently over 7%.
The 13,900 mile Tennessee Gas Pipeline transports natural gas from Louisiana, the Gulf of Mexico, and south Texas to the northeastern United States, including New York City and Boston. A key element to this pipeline is its placement, running directly through Marcellus shale. As a result, the Tennessee Gas Pipeline is the top recipient of natural gas extracted from this prolific find.
Long-term supply contracts with Cabot Oil & Gas and Anadarko Energy Services, among others, will keep these pipelines fed for 15 years to come, all while reaping the rewards of increasing demand through consumer use and electricity generation as coal plants are phased out in favor of natural gas.
While natural gas in the U.S. may be abundant, the pipelines to efficiently transport it to key areas are not. With significant barriers to entry and demand outpacing supply, current midstream owners in these key areas will see their assets valued at a premium, as well as the tolls they collect.