Optimizing system capacity with new offerings
Maximizing customer flexibility and system reliability
Our interstate pipelines business felt the effects of falling natural gas prices and an oversupply of pipeline capacity, delivering reduced margins and lower operating income than the prior year. In 2011, operating income was $248 million, compared to $270 million in 2010. In addition, we earned equity income of $21 million from our 50 percent interest in the Southeast Supply Header, compared to $19 million the previous year.
Earnings were adversely affected by the expiration of a three-year backhaul agreement that was entered into when gas demand and locational price spreads were much higher. However, we successfully renewed contracts with several key customers including BP and U. S. Steel, and extended contracts with several others to reduce the year-to-year price risk associated with contract renewals. We also entered into a new five-year agreement with EOG Resources and added 40 new industrial customers.
We began offering a new premium service to natural gas-fired power plants that provides swing-load service during high-demand periods. Given the number of plants already served by our system and the possibility of nearby coal-fired plants converting to natural gas, we are optimistic about the long-term potential growth of this service.
Upgrades, such as adding state-of-the-art system control technology, will allow us to optimize our real-time operations and capture new business opportunities.
In conjunction with the Interstate Natural Gas Association of America, we took a leadership role in the development of pipeline safety legislation, which was signed into law in early 2012. The new law updates and improves policy in several areas including integrity management and damage prevention. During 2012, we will complete our multi-year project to perform baseline integrity assessments of our pipelines located in high-consequence areas.
Looking ahead, we face a challenging short-term environment in which overcapacity, reduced demand and low natural gas prices will continue to pressure profit margins. However, we remain optimistic about the long term. Demand will improve as the economy recovers, and the continued growth of shale gas should lead to increased transportation opportunities. This may be especially true in the power generation sector, where clean-burning natural gas is increasingly displacing coal as a fuel source.
- $248 million in operating income
- $21 million in earned equity income from our 50 percent interest in the Southeast Supply Header
- Added 40 new industrial customers, and renewed contracts with several key customers
- Began offering a new premium service to natural gas-fired power plants that provides swing-load service during high-demand periods
- Made upgrades, such as adding state-of-the-art system control technology to optimize real-time operations
This American Electric Power natural gas-fired power plant is one of many we serve on our system. We expect this number to grow as more power plants convert to natural gas.
- Secure power generation business through existing service upgrades and new power generation load contracts
- Continue rate and cost recovery strategy to improve long-term earnings potential while pursuing contract extensions