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Moody's Sees LDCs, Pipelines 'Stable' Through the Downturn

While other industries founder on the economic rocks, natural gas transmission and distribution (T&D) companies are riding out the storm, according to Moody's Investor's Service, which sees the industry as "stable" for the next 12 to 18 months.

"During the financial crisis, utilities benefited as investment safe havens and have generally emerged relatively unscathed compared to other industries," Moody's said in its report on "North American Natural Gas Transmission and Distribution." Although financing costs and availability have been a problem for other industries with the economic downturn, credit is available for investment-grade utilities and the interest rate increases have been relatively mild.

The ratings service sees no immediate impact of the financial crisis on the creditworthiness of the sector, and refinancing risk is manageable for Moody's peer group of companies, which are mostly investment grade. The assessment comes with the caveat that local distribution companies (LDC) with declining revenues from hard-pressed ratepayers might not get the "regulatory support" they would need to recover increased costs in their rates.

While LDCs could lose revenue with hard-pressed consumers cutting back on their gas use, at the same time that interest costs, pension costs and bad debt expense rise, the decline in the commodity price of gas is "credit-positive" since working capital needs will be lower, and there will be less expense from bad debt.

Pipelines will keep collecting their fixed fees "and most should be little affected by any of their shippers' declines." Pipelines most likely to face some liquidity squeeze are those with major construction projects under way that must be completed and financed in the current tight debt market.

LDCs have more manageable capital requirements than those of pipelines or electric utilities. Their only real risk appears to be a renewed ratemaking cycle in which lower return on equity (ROE) levels could affect profitability and credit ratings. Moody's notes that many LDCs currently are going into rate cases for the first time in 10 years. ROEs, which in recent years have been 11% or higher, could be adjusted to less than 10%.

"A very low allowed ROE presents a credit risk; it often compels the company to go back for another base rate filing, leading to a long period of financial uncertainty that is typical of the rate case process."

Moody's LDC peer group includes 31 companies with an average rating of "A3;" only one company is rated below investment grade. Also, in its group of 28 gas pipelines with an average rating of "Baa2," only one company is rated below investment grade.

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