Midstream master limited partnerships, cash hungry given theprolonged slump in commodities prices, have become a coveted investmentdestination for electric utilities adjusting to surging natural gas demand andunabated coal plant retirements.
Southern Co.'sdecision to become aco-owner of Kinder Morgan Inc.'sSouthern Natural Gas Co. LLCpipeline system is the latest in the trend, joining 's with andDominion Resources Inc.'sQuestar Corp.,purchase. Whenjustifying the outlay, executives from each acquirer referred to the nation'sgrowing appetite for gas.
"Utility managements believe that natural gas willcontinue to gain market share as a fuel of choice. And that requires pipelineinfrastructure to support [the rising demand for gas]. So, the utilities seegrowth in that," Ali Agha, analyst at SunTrust Robinson Humphrey, said inan interview.
Agha noted that the strong utility stock performancecombined with low interest rates has armed companies with capital. Given theirneed to continue to demonstrate earnings per share growth, growing natural gasassets whose values are depressed by low prices appear to be a perfect match.Kinder Morgan is selling the 50% stake in Southern Natural Gas to Southern Co.for a 10.4x EBITDA multiple, low enough that executives that they would not have donethe deal for that price alone. KMI CEO Steve Kean said the growth projects thecompany will do with Southern will help boost that multiple down the road.
Fitch Ratings noted the MLP/utility trend in a July 11 noteand reiterated that the partnerships offer midstream operators cash tode-lever, future capital for growth opportunities and security from somere-contracting risks associated with capacity that a utility owner may hold.
"Utilities tend to be higher-rated than midstreamoperators," Peter Molica, MLP analyst and senior director at Fitch, saidin an interview. "When you have higher-rated utilities coming into the[natural gas pipeline] space as strategic owners, it's a positive development."
As for the utility, the pipelines worth acquiring tend tofit into their service territories, Molica said.
Guggenheim Securities LLC Analyst Shahriar Pourrezaanticipates that utilities will continue to look for opportunities to co-ownpipeline systems rather than assume full ownership. Utilitiesmay believe that the partial ownership strategy will insulate them from theriskier profiles of pipeline businesses that are capital-intensive, Pourrezasaid in an interview.
He identified the Midwest and Southeast as regions thatwould support partnerships between the midstream and electric-utilityindustries. "Those locations have been seeing massive coal retirements,"he said. Guggenheim analysts, in a June research note, forecast cumulative U.S.coal retirements of about 85 GW, compared to a previous estimate of 71 GW. Thatforecast reflects potential of up to about 2.9 Bcf/d of additional gas demand.
"Utilities are thinking, 'we're in a period of slowergrowth, we have right-of-way, we're great off-takers of natural gas, so why notget into that business,'" Pourreza said.
Beyond the market implications, Pourreza also estimated thepartnerships will benefit midstream companies in more subtle ways, as well. "Theseutilities … have leverage with various state regulators, including governors,public utility commissions and Republican Attorneys general," he said.