NGPL Gets a New Partner

On February 22, Kinder Morgan and Brookfield sold a 25% stake in their Chicago-to-USGC NGPL pipeline to ArcLight Capital Partners for $830 million. In this article, we discuss two key drivers behind NGPL’s current and future demand: natural gas demand in the Midwest and the USGC.

NGPL distributes gas to two key markets: the Midwest, one of the largest heating markets in the U.S. (which we’ve defined, for NGPL’s purposes, as comprising Illinois, Missouri, Iowa, Wisconsin, Michigan, and Indiana), and the USGC, the fastest growing baseload market in the U.S. due to growth in LNG exports. NGPL’s Gulf Coast Leg has developed into a large “header” with large and growing markets on both ends (only ANR is in similar position amongst MW pipes).

Let’s start with the Midwest market. About 50% of total Midwestern natural gas demand is determined by residential & commercial (R&C) consumption, 30% is attributable to industrial demand, and most of the remainder is used for power generation. NGPL is critical to meet heating demand in this market: NGPL’s last mile advantage is significant compared to its peers (ANR, Alliance, Midwestern). We expect Midwest natural gas demand to grow by about 2 Bcf/d between 2020 and 2027, largely due to higher gas-fired generation at expense of coal and nuclear retirements. Growth in intermittent wind generation could open more revenue opportunities for baseload natural gas – and NGPL.

The TX/LA natural gas market is expanding rapidly. LNG exports, exports to Mexico, and greater gas-fired power generation are all expected to increase natural gas demand from 2020’s levels of ~29 Bcf/d to nearly ~46 Bcf/d by 2027 (it’s worth noting that 2020’s levels were suppressed, in part, due to LNG’s COVID and hurricane-related troubles). If you’re interested in a more fulsome view of these trends, please drop us a line at inquiries@enkonenergy.com

Let’s take a look at NGPL’s LNG-related deliveries. Our analysis shows that NGPL will have nearly 1.8 Bcf/d of LNG feed gas deliveries by 2023. Due to NGPL’s firm gas transport contracts with Sabine Pass, Corpus Christi, and Golden Pass, the pipeline’s feed gas flows are expected to sharply rise in coming years. And most near-term risks are to the upside: LNG utilization rates are already running at nearly 100% and the forward strip shows that export netbacks remain firmly in the money for the remainder of 2021 and 2022.

Strong fundamentals provide a competitive edge

In addition to the 30,000 foot analysis above, we’ve also leveraged data from pipeline EBBs, the EIA, FERC, and the RRC to conduct a comprehensive assessment of pipeline route delivered cost comparisons for NGPL and other pipelines. We found that NGPL is one of the most competitive options for the Midwest market, the most competitive for the LA LNG market, and the lowest-cost delivery for some parts of STX. NGPL’s access to low-cost basins (i.e. Appalachia) coupled with favorable FT tariffs supports a low cost delivered cost structure for Midwest shippers. NGPL’s ability to offer systemwide storage (on a bundled/unbundled basis) provides a critical insurance policy for LNG exporters (other competing pipeline such as Columbia Gulf, Tennessee Gas and Texas Gas must rely on 3rd party storage to meet LNG feed gas market) For our pipeline route cost buildup analysis, please drop us a line: inquiries@enkonenergy.com)

While we take no view – one way or the other – on the valuation and terms of the KM/Brookfield/ArcLight deal, our analysis of NGPL shows that the asset enjoys strong fundamentals.