The North American gas transmission and distribution (T&D) industry looks healthy for the rest of this year and into 2008, but the credit crunch threatens to slow down capital spending and the acquisition market, according to Moody's Investors Service.
Moody's analysts noted that gas demand is rising faster than supply growth, supporting historically high gas prices and a strong long-term price outlook. Most of the demand growth has come from gas-fired power plants that account for most new electric capacity built during this decade. Availability of power is tight in several regions, and "it is unlikely that enough fossil fuel or alternative energy power plants will be built in the near term to reduce the gas demand coming from gas-fired plants," the Moody's report said.
There are some pockets of gas supply growth in North America, but overall growth is stagnant, said the analysts. "North American gas reserves are mature, and finding new reserves is increasingly difficult and costly. Gas imports from Canada have come down as Canada uses more domestically, in particular for oilsands development. LNG [liquefied natural gas] is still a marginal source that will not be a significant part of North American gas supply in this decade."
The higher gas prices made it economic to develop resource plays in parts of the Rocky Mountains, in several Texas shale plays and in the Midcontinent, Moody's said. However, these new plays lack adequate pipeline takeaway capacity, resulting in basis differentials that have widened as stranded supplies have accumulated. Still, said analysts, major new pipe are on the way, which should hep reduce disparities in regional gas prices.
"Longer term, it is possible that pipeline companies' ratings could be affected as the impact of their new capacity on gas supply and the competitive landscape becomes clear," said analysts. "The ratings effect could be positive if a pipeline project results in greater access to large markets and supply areas, and if contract terms are lengthened. On the other hand, the effect could be negative if regional overcapacity develops, or competition between new and old pipelines intensifies, causing discounting of rates and increasing recontracting risk."
For local distribution companies (LDC), high gas prices hold negative implications, according to Moody's.
"While high gas prices are generally good for the industry, they are a challenge for LDCs, Rising prices cause customers to conserve energy, reducing demand. This reduction comes on top of a long, secular decline in customer usage -- and margin erosion -- from energy-efficient housing and appliances. Higher prices also increase bad debt expense when customers struggle to pay higher bills."
Moody's analysts said in the near term, they will be monitoring state regulators' actions on decoupling rate mechanisms. Midterm, three issues will be watched: changes in gas supply flows and basis differentials in North America resulting from new gas transmission infrastructure and the relative competitiveness of pipelines; drilling activity and well performance in emerging gas resource plays; and how the master limited partnership (MLP) sector fares with increasing competition among the players. Longer term, Moody's will review whether possible changes to interest rates or the tax code impact the MLP market.
Moody's North American T&D universe is made up of 75 rated entities, including 22 diversified companies, 21 pipelines and 32 LDCs, with total outstanding debt of roughly $125 billion. The peer group is predominantly U.S. companies, with the exception of TransCanada and its subsidiaries, Enbridge Inc., and Terasen Inc. and its largest subsidiary, Terasen Gas.
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