The Color of Money - Contract Trends for Kinder, Williams, and TC Energy

Firm contracted transportation volumes can fluctuate from quarter to quarter, especially as winter-only contracts expire. To minimize the impact of these quarterly variations, it is helpful to analyze year-over-year trends, excluding the winter anomalies and shorter term contracts. In particular, the second quarter is helpful to assess the health of a pipeline because the parties contracting for capacity in the spring shoulder season are usually long-term, i.e., greater than twelve months, customers.

If you are a pipeline company looking for new shippers, a shipper looking for capacity that may soon be available, or an investor anticipating pipeline renewal risks, a macro view of contractual changes is critical. Today, we compare contracted capacity for Q2 2019 to Q2 2018, when approximately 70% of interstate pipeline companies experienced a neutral or positive change in transportation volumes. A number of pipelines, though, saw substantial increases, including Williams’ Transco and TC Energy’s (formerly TransCanada) Columbia Gas, while some pipelines saw net losses. What drove and bucked the trends?

A subset of the largest gaining pipelines (10%+ increase in contracted capacity year-over-year), ranked by pipeline size shows the major expansion systems, as well as two Kinder Morgan pipelines, Tennessee Gas and El Paso Natural Gas, which were not in project expansion mode this year.

Some gainers require analysis: Let’s look under the hood

For pipeline systems not undergoing major expansions, a closer look at year-over-year activity brings clarity to the progress and long-term stability of marketing and business development activity (or lack thereof). More specifically, annual comparisons of a pipeline’s contract portfolio can be helpful to determine whether current revenues can be counted on into the near-term or longer-term future. Individual contracts may not make or break financial performance, but broader trends can be instructive in assessing pipeline health. The analysis allows answers to questions like:

What is the accretive impact of new contracts? Are they > 12-month terms? Longer?
Were lost contracts simply rolled-off or canceled prematurely, and how do they impact near-term/mid-term financials?
Which shipper types are most active? Can they be counted on to fulfill commitments?

For the two top gainers that did not benefit from major project development -- Kinder’s Tennessee Gas Pipeline (TGP ) and El Paso Natural Gas Pipeline (EPNG) -- a look inside the contract-level details highlights the drivers of those contracted volume increases.

Tennessee Gas Pipeline

Tennessee Gas Pipeline (11% year-over-year increase), located in the natural gas producing regions of Louisiana, the Gulf of Mexico, and South Texas; and extending to the Northeastern United States, including the New York City and Boston metropolitan areas, benefitted from “pull” demand trends from LNG and end-user utilities.

Eighty-three percent of TGP’s added capacity comes from long-term contracts over one year in term, with 17% added via short-term annual commitments. That compares favorably to contracted commitment losses that split 66% and 34%, respectively. The TGP shippers adding the most long-term capacity (>50,000 MMcf/d) included:

Antero (15 year term @ 200,000 MMcf/d)
Central Lomas de Real, a Mexican company, (10 yrs @ 95,000)
Corpus Christi Liquefaction (20 yrs @ 300,000)
Encino Acquisition Partners Ohio (10 yrs @ 232,500)
GDF Suez, now Engie (5 yrs @ 100,000)
Lackawanna Energy Center, the natural gas generator (20 yrs @ 180,000)
MCGlobal Gas Corp., a Mitsubishi affiliate for Cameron LNG (10 yrs @ 600,000)

TGP lost a contract from Chesapeake Energy (235,000 early cancellation), which was likely due to EAP Ohio’s acquisition of Chesapeake Energy Utica’s oil and gas assets in Ohio, and absorbed roll-offs from El Paso Marketing (95,000) and Nicor Gas Company (101,010). Thus, TGP was able to add overall contracted volumes while obtaining longer-term commitments on balance.

El Paso Natural Gas

El Paso Natural Gas Company (18% annual increase), is a major conduit west out of Texas into Arizona, California, and Mexico. Market forces have continued to benefit Permian takeaway relief in addition to Mexican demand, which helps explain, in part, EPNG's increased volumes, despite the roll-off a major long-term contract.

Seventy-eight percent of EPNG’s 2018 contract gains came from long-term contracts over one year in term, with 22% added via short-term commitments. That compares favorably to contracted commitment losses that split 64% and 36%, respectively. The EPNG shippers adding the most long-term capacity (>50,000 MMcf/d), which included:

Apache Corporation (2-year contract for 200,000 MMcf/d)
BP Energy Company (3 yrs @ 68,119)
Saavi Energía (12 yrs @ 160,000)

Conversely, EPNG lost a long-term contract from Sempra Generation for 135,000 MMcf/d via a scheduled roll-off. Thus, EPNG was also able to add overall contracted volumes while obtaining longer-term commitments on balance. Based on company filings, 43% of EPNG’s total revenue is derived from negotiated rate contracts and negotiated rate disclosures indicate approximately $28 million in new revenue from Apache ($3.3 million) and Saavi ($24.2 million) alone.

Some are more obvious: In the ground...show me the money.

The rationale behind Transco and Columbia Gas’s 13% and 23% respective increases in firm contracted volumes is easy to understand given their recent addition of major new expansion projects. Transco’s Atlantic Sunrise project was originally slated for a November 2017 ISD but ultimately started operation a year later. Columbia Gas’s Mountaineer Xpress (MXP) was originally targeted to be fully in service by November 2018, but ended up in service early this year. With delayed projects, completion pressures overshadow the original benefit of the project. Both Atlantic Sunrise and MXP provided substantial new capacity to their pipeline systems (1.7 Bcf/day and 2.7 Bcf/day, respectively), accounting for almost the entirety of each company’s contract volume increase on a year-over-year basis.

Impact of Expansion Projects Relative to Base Volumes (Bcf/d)

While the above analysis is limited in scope to the pipelines described, LawIQ regularly performs similar analyses for our customers to assess performance or development opportunities for pipeline systems, their shippers, or asset owners.

Insights Coming Soon

Review of pending rate case
Update on oil and gas policy matters in Colorado and Texas