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Price Drops Not Warranted For Gas Pipelines

|Includes: ENB, ETP, Kinder Morgan, Inc. (KMI), WMB

The severe price changes in the major gas pipelines are not warranted, as rules for Gas Pipelines have not changed much... for past many years...let us say 1950's. Oil and Product Pipes are much less regulated, as the customers are other oil distribution companies.

These gas pipelines are tollways for gas consumers... Local Heating Companies as well as Utilities and some Electric Utilities... Since late forties, the natural gas supply was considered a desired goal for all the regulators... FERC was created and controls the tolls/ transporation rates that Gas Pipelines can charge to utilities as well as heating companies...

There are FT/firm transportatoin rates and IT/interruptable transportation rates... Local heating companies pay for higher/ FT rates and nominate the max. possible fuel rate that may need over a 24 hour period... Gaspipes had responsibility for providing this service to local companies...

Move forward 50 years, the rates for FT are determined by FERC based on Gas Pipelines expansion as well as maintenance expenses... IT rates are market driven... and the amount of IT revenues are shared with FT customers...

The point is that rates are blessed by FERC every so many years and the rate increases are based on the increases in maintenance capital as well as cost of capital...

Gaspipelines strive to overestimate these needs and get a guaranteed rate of return... FT customers like local heating companies as well as utilities have a contract with gas pipes whether they use the rates or not....

Important takewaway is that revenues are relatively guaranteed irrespective of the price of gas... And, customers pay for gas based on heating value of gas...

Companies like KMI, SE, TGPL/ part of WMB/WPZ now ETP have almost fixed revenues... SE..spectra energy has been punished erroneously by the markets. KMI is building a pipeline from Marcellous Gas Fields in Pennsylvania to markets in the North East like NYC, Washington DC. Huge investment...but, a very bright future as well as cashflows.

The current suppliers to the NorthEast corridor will lose this FT contracts after this KMI project is on line...

So, hang on for the rough ride... and buy some more SE as well as KMI. ETP is a minnow eating a whale called WMB. I do not know how well this minnow will digest the whale...

Disclosure: I am/we are long SE KMI.

Additional disclosure: No, my KMI holdings are less than 10% of my networth.