Gas Pipeline Contract Volume Turnover - What to Learn From Q1 and Q2?

Competing pipelines, gas marketers, commodity traders and equity investors should be aware of the contract turnover rates of the pipelines with which they compete, from which they buy capacity, or in which they own an interest. Natural gas pipelines receive the vast majority of their revenue from firm contract reservation charges that their shippers pay, whether or not they ship gas on the pipeline. This is why the revenue stream of a pipeline is usually considered very stable. However, by looking at the contract data in our platform from one quarter to the next, it is possible to assess the stability of a particular pipeline's revenue stream and to better assess broader market developments.

An analysis of the first and second quarters of 2018 shows that pipeline contracted volumes can vary widely; some pipelines, including some owned by TC Pipelines, experienced increased contracted volumes, while others such as Cheyenne Plains, experienced decreased contracted volumes. As shown below, some pipelines lost more than 30% of their contracted capacity between the first and second quarters. Having to replace 30 to 45% of contracts on an annual, or perhaps quarterly, basis could provide stakeholders with an early warning sign that the pipeline's capacity is losing value in the marketplace due to shifting supply dynamics, reduced demand or competing pipelines.

Why Look at the First and Second Quarters?

Comparisons between the first quarter and second quarter can be revealing because the heating season ends on March 31. Therefore, to the extent a pipeline has sold a substantial portion of its capacity for the winter period, there can be substantial de-contracting in the second quarter. However, further research may be needed to determine the exact cause of the de-contracting, as the decrease could also stem from a pipeline's loss of a long-term contract that was not replaced. In any event, a major change between the first and second quarter may signal that the pipeline's revenue is not as stable as its peers.

An increase in contracting can also be revealing. It is usually a positive sign for the value of a pipeline's capacity if it increases its contracted volumes from the first to second quarters, especially if that pipeline is in the northern part of the country, where demand for gas is driven by the cold weather. Of course, such increases could also result from project expansions that were placed into service in the first quarter.

Increased Contracted Volumes

A review of our data shows that a number of pipelines increased the amount of contracted volumes between the first and second quarters.

All of Portland's new contracts were for less than one year, with all of the longest ending on October 31, 2018. Northern Border and Gulf South each had four new contracts with terms longer than one year. Northern Border had two contracts that were for five years and two others with terms over 20 years. The two contracts of over 20 years were with Hammerhead Resources Inc., and Tourmaline Oil Marketing Corp., both Canadian-based upstream companies. Gulf South's four long term contracts were for terms between two and seven years; the longest were with Aethon United BR LP and Indigo Minerals, LLC, for seven and five years, respectively. None of the named agreements for either pipeline were negotiated rate contracts.

Decreased Contracted Volumes

While the second quarter was positive for some, it was not positive for all. The following pipelines recorded substantial reductions in contracted volumes.

The fact that Equitrans was unable to recontract the volumes for three short term contracts that expired could mean that this capacity only has value in the winter. Vector's contract renewal risk appears to have been improved substantially during the quarter after it signed 30-year contracts, some negotiated, some not, with Wisconsin Electric Power Company, Wisconsin Gas LLC, and Wisconsin Public Service Corporation.

Similarly, Transwestern Pipeline had a 10% reduction in total contracted volumes despite signing new contracts for 23% of its capacity, which means that without the new contracts, it would have had a 33% reduction in overall contracted capacity. However, Transwestern signed one contract for a purported 80-year term with Enduring Resources, IV, LLC, and another one for a five-year term with EOG Resources, Inc. Trailblazer was also able to sign some longer term contracts including three of over five years in length with Cima Energy, LP, MIECO, Inc. and Green Plains Trade Group. The biggest turnover occurred on Cheyenne Plains Pipeline and all of the new contracts it signed this quarter were for a term of less than one year.