Spectra Energy Signs Agreement for Pipeline Expansion, a Credit Positive

Spectra Energy Signs Agreement for Pipeline Expansion, a Credit Positive

Last Tuesday, Texas Eastern Transmission LP (Baa1 stable) announced that it had signed binding agreements with two anchor shippers for its proposed new pipeline expansion, the Texas Eastern Appalachia-to-Market 2014 (TEAM 2014). The move is credit positive for Texas Eastern because the project will bolster its competitive position as an transporter of natural gas from the emerging Marcellus and Utica shales, while promoting the utilization of the more mature segments of the pipeline’s system.

Texas Eastern Transmission is a wholly owned subsidiary of Spectra Energy Corp. (unrated), whose guaranteed finance vehicle is Spectra Energy Capital LLC (Baa2 stable). TEAM 2014 is the latest in a series of expansions that Spectra has undertaken in the Northeast, originally to move gas from the Rockies, and later from the Marcellus and now the Utica shales in the Appalachian Basin, to markets along the Eastern Seaboard. This project seeks to expand the market for Appalachian shale gas beyond the Northeast to the Midwest and the Southeast.

TEAM 2014, which Texas Eastern expects will be completed in the fourth quarter of 2014, reflects a capacity expansion of up to 1.4 billion cubic feet per day, including the contracted volumes of the two anchor shippers, whose names were not disclosed. The expansion project is scalable, and can be sized to meet the needs of other shippers interested in reserving capacity. Texas Eastern plans to hold a binding open season, a process in which interested shippers indicate the amount of new pipeline capacity to which they would be willing to commit under long-term contracts.
Spectra Energy currently expects to invest around $500 million initially to expand the pipeline, but the size of the project, and its costs, could increase if shippers demand more capacity during the open season. Interstate pipelines draw most of their revenues from fixed reservation charges that are regulated by the Federal Energy Regulatory Commission (FERC) and result in stable and predictable cash flows.

Developing the pipeline infrastructure to bring the vast shale gas supplies to market is having material strategic implications across the interstate pipeline sector, and is changing how natural gas flows across North America. Over the next few years, the interstate pipeline sector will experience a mild down-cycle as it adjusts to burgeoning shale gas supply and increased competition from newly built pipelines. We do not expect incremental demand from power generation to materially affect the industry’s financial performance until after 2015. Abundant supply has also decimated arbitrage opportunities that are based on spreads between gas prices at certain points along a pipeline or certain times of the year. These market conditions have reduced revenues that pipelines used to earn from providing those services to energy trading companies. These market conditions are likely to persist for a few years, and could affect pipelines, such as Texas Gas Transmission LLC (Baa1 stable) and NGPL PipeCo. LLC (Ba2 review for downgrade).