Protected Revenue of Gas Pipeline Public Companies
In Twenty-one Natural Gas Pipelines With $4 Billion of Revenue at Risk in Rate Cases Through 2020 , we discussed the downside risk to a pipeline of having agreed in a previous rate proceeding to “comeback” at a date certain and prove once again that its rates are just and reasonable. An even more common term than “comeback” in rate settlements is the agreed “moratorium” -- a period of time during which both the pipeline and its shippers agree to stand down with regard to rate changes. Not every settlement includes such a moratorium, but most do. A settlement without a moratorium could result from shippers that will not relinquish their rights, but may also result from a pipeline that anticipates an increase in its costs that will require a rate increase in the near term.
While the comeback can be viewed as a downside risk, the moratorium is generally viewed as a positive for the pipeline because its revenue is protected during the agreed period. Today, we look at the value of the existing moratoriums at the pipeline company level, and then roll that value up to the five largest public companies that hold those pipelines. As shown below, the financial benefit of these moratoriums can be high -- when measured by the total expected revenue being protected -- with Kinder Morgan currently holding the most protected revenue.
Existing Moratoriums
There are currently 38 natural gas companies that have a moratorium in place. Some end as soon as this October, but one will remain in place until 2027. These 38 companies had annual revenue in 2018 that totaled almost $10 billion. There are another ten companies that are currently in settlement discussions with their shippers that account for nearly another $5 billion in 2018 annual revenue. Together, these 48 companies make up more than two-thirds of the entire industry’s revenue.
The value of a moratorium can be measured by how much revenue is being protected by the agreement and by how long that protection lasts. For example, a moratorium for a company that makes $100 million annually and which lasts for three years would shelter the same amount of revenue as a moratorium that lasts only one year but benefits a company with $300 million in annual revenue. Using this as our measure, the following chart shows the top ten most valuable currently existing moratoriums.
Total Expected Revenue Protected by Moratoriums
Based on this measure, Kinder Morgan’s Tennessee Gas Pipeline is leading the pack. That is because Tennessee, one of the largest pipelines by revenue, just recently entered into a rate settlement with its shippers that includes a moratorium through November 2022. By looking at the top ten companies, one can quickly identify a number of other Kinder Morgan pipelines and several pipelines owned by TC Energy and its affiliated master limited partnership that have a large amount of protected revenue. The next obvious question then is what public company has the most revenue protected through current moratoriums?
The Top Five Public Company Owners
In the chart below, we identify the value to five large public companies, Kinder Morgan, TC Energy, Dominion, Energy Transfer and Enbridge, from the moratoriums in place for their pipeline companies.
Public Company Revenue Subject to Moratoriums
Kinder Morgan is again the leader by total value of its protected revenue. To show how impressive this accumulated protected revenue is, one can look at how long a moratorium would need to be put in place in some major pending cases for Enbridge and Williams for them to pass Kinder Morgan on this measure.
No Williams pipeline is currently benefiting from a moratorium. But, its largest pipeline, Transcontinental Gas Pipe Line Company, is in settlement discussions with its shippers. To make the value of that one moratorium exceed the total Kinder Morgan revenue currently being protected, the moratorium that Transco would need to extract from its shippers would need to last for almost five years.
Similarly, while Enbridge is currently benefiting from moratoriums for a number of its smaller pipeline companies, it is also in settlement discussions with shippers on two of its larger pipelines, Algonquin Gas Transmission and Texas Eastern. Even if the revenue of those two companies is combined, the moratoriums in both of the potential settlements would also have to extend for almost five years for Enbridge to obtain a moratorium value comparable to Kinder Morgan’s.
If you are trying to understand the rate risk of a pipeline or the revenue risk of a public company, it is essential to understand the terms of any existing rate settlements. We can help any customer quickly assess those risks at either the pipeline or public company level. Also, let us know if you’d like the data used in this or any other analyses.
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