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Fitch Says Utilities Embracing MLPs For Natural Gas Infrastructure

Utilities in the United States are trending toward using master limited partnerships (MLP) as a vehicle to increase investment in natural gas infrastructure, according to Fitch Ratings Inc.

In non-rating action commentary issued Monday, Fitch said MLPs have become more attractive to equity and debt investors since February, with a slight increase in commodity prices and lower counterparty exposure risks. But the ratings service warned that capital market access for most MLPs "remains constrained," adding that many MLPs have been focused on their balance sheet. According to Fitch, several MLPs have been interested in monetizing their assets while also looking into equity issuances and distribution cuts.

"To the extent the sell down proceeds are accretive to leverage metrics, Fitch considers such monetization as credit positive," Fitch said. "Additionally, utilities as partners on natural gas pipeline systems should provide strategic benefits for pipeline systems in terms of offering growth opportunities and helping minimize re-contracting risks associated with any capacity that the utility owner may hold on the pipeline."

Fitch said two recent developments -- last month's agreement between Consolidated Edison Inc. and Crestwood Equity Partners LP to form a joint venture (JV) to own and develop Crestwood's existing natural gas pipeline and storage business (see Daily GPIJune 6April 22), and Sunday's announcement that Southern Co. is acquiring a 50% equity interest in the Southern Natural Gas pipeline system from Kinder Morgan Inc. (KMI) (see Daily GPIJuly 11) -- illustrate the recent trend.

"The announced transactions by both Southern and Consolidated Edison are relatively modest in size and, given the balanced funding mix, will have no bearing on their credit profile," Fitch said. "In general, Fitch views natural gas pipeline investments that generate revenues primarily based on volume-insensitive, fixed-capacity payments via long-term contracts with creditworthy off-takers, typically utilities, as relatively low-risk investments."

In a separate action Monday, Fitch said it expects Southern's JV with KMI will have no impact on its credit ratings. Southern is currently rated "A-" and KMI is "BBB-." Both have stable outlooks.

"Attracted by the growth opportunities in both the downstream and the midstream segments, utility companies have been keen to diversify in the natural gas sector," Fitch said in Monday's commentary. "So far, utility companies have shown a preference for natural gas pipeline assets that strategically fit with their service territories and where their distribution utilities can benefit from being a shipper on the pipeline."

Last October, in the wake of the commodity price downturn, investors had trended away from MLPs in the midstream (see Daily GPIOct. 22, 2015).

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