Currently, one of the most significant areas of investor concern centers on gas-pipeline risk, and the pipeline asset class is undergoing "unprecedented change," according to a new study by U.S. Capital Advisors. The firm began the study after it launched coverage of the midstream sector in July 2011.

"Changing gas flows, a much more proactive FERC and the likelihood of higher maintenance- cap requirements have increased the risk profile in an asset class that has historically been viewed as one of the safest," reports Becca Followill, managing director and head of equity research. "In response, we analyzed 25 FERC-regulated, long-haul pipelines in an effort to determine those pipelines most subject to industry and market conditions."

To quantify the risk, U.S. Capital evaluated three key metrics: throughput trends, contract expiration schedules and earned return on equity (ROE). Although other variables factor into assessing risk, such as location, pipeline age, and customer makeup, among others, U.S. Capital focused on what it considered to be the most important metrics. Its methodology involved using the pipeline companies' most recent FERC filings for throughput and contract expirations. For ROE calculations, it used FERC data and followed the same methodology FERC uses when announcing rate reviews.

"We also passed our detailed calculations by the publicly traded companies (except Berkshire) for their review, and a couple suggested some relatively minor tweaks," she reports.

Also, the report reveals that long-haul pipelines have "truly become a case of haves and have nots," states Followill.

"While total throughput for all pipelines has remained flat over the past four years, the top five pipelines have increased throughput by an average 26%, while the bottom five have seen throughput decrease by an average 21%," she concludes.

Findings show a similar dichotomy when looking at contract expirations and earned ROEs. According to the report, the top five and bottom five pipes have weighted average contract expirations of 10 years and two years, respectively. Similarly, 2010 earned ROEs ranged from 3% to 41% among the 25 pipelines.

Another trend revealed by the study is the growing number of rate cases (both company and FERC-initiated) and required rate-case reviews and cost-revenue studies. Over 60% of the pipelines U.S. Capital analyzed will undergo a rate-case review during the next few years, she predicts.

"As a whole, this is still an attractive asset class, but it is undergoing unprecedented change. As pipelines become more differentiated, we think this report provides investors with an important tool to better understand the underlying assets of these companies."

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