Spectra NJ-NY Plan Wins Approval

Spectra Energy Corp. ( SE - Analyst Report ) has won approval from the US Federal Energy Regulatory Commission (FERC) for its proposed New Jersey-New York pipeline project. This will be the first-ever major natural gas pipeline linking the two cities.

This approval will expand Spectra’s existing Texas Eastern Transmission and Algonquin Gas Transmission pipeline systems and will connect New York with the neighboring New Jersey. This 20-mile (32-km) line will emanate from prolific shale deposits in Pennsylvania and deliver approximately 800 million cubic feet of natural gas per day across the New Jersey and New York areas and will have a direct connection with Con Edison on the lower west side of Manhattan. It will also connect Public Service Electric and Gas in Bayonne and Jersey City, New Jersey.

In response to the country's increasing supply of natural gas, New York City aims to replace the polluting fuels like No. 6 by 2015 with the environmental friendly as well as economical natural gas.

The project is expected to cost around $1.2 billion and provide the much needed energy to homes and businesses across the area. Spectra aims to start construction in June and commence operations in November 2013.

The project faced opposition from local groups, including environmental and others entities, relating to the drilling method involved in the Marcellus Shale. They claimed that water supply will be contaminated by hydraulic fracturing or fracking to tap gas in shale rock formation as it involves the explosion of rock with chemical-laced water and sand under the surface. However, the New York Department for Environmental Protection has yet to decide on banning fracking in the state.

In response to this, Spectra adopted several precautionary measures that involve the usage of a 30-inch diameter pipe with thicker walls than specified by federal regulations, a 42-inch diameter pipe in other segments and the utilization of horizontal directional drilling for important water crossings. Importantly, the lines will also be placed much deeper relative to other usual pipelines.

Spectra’s growth momentum continues with both organic as well as inorganic means, and the company remains upbeat about its 2012 prospects. Spectra plans to deploy $1 billion per year through 2015 on fee-based gas infrastructure growth projects.

We see upside from diverse near- to medium-term projects, including its New Jersey-New York pipeline, an NGL pipeline in Texas, opportunities in the Gulfstream Pipeline and infrastructure to serve western Canada LNG exports.

However, Spectra’s results are vulnerable to fluctuations in natural gas markets. The proposed liquid-rich drilling activities by the energy companies clearly suggest that low natural gas prices have little ability to pick up in the near term.

Hence, we maintain our long-term Neutral recommendation for the company. Spectra, which competes with Kinder Morgan Inc. ( KMI - Analyst Report ) , retains a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.