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Moody's: Gas Sector Insulated From Economy's Woes

April 7, 2008
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The North American natural gas sector remains solid, and the economic problems cutting across the United States are unlikely to have much of an effect on the sector in the near term, according to Moody's Investors Service.

"The natural gas industry has so far been largely insulated from the economic slowdown in the U.S.," said senior credit officer Mihoko Manabe. "However, 2008 is expected to be a peak year for capital spending by gas companies. Some will have to bridge wide funding gaps while maintaining adequate liquidity in a turbulent capital market."

Most gas companies carry investment-grade credit ratings, which allows them to continue to access capital markets, Moody's noted in its industry outlook. However, the market for initial public offerings of master limited partnerships, a source of equity capital for the industry, has weakened. Still, the industry is benefiting from strong fundamental conditions that are supporting aggressive infrastructure expansions, said the credit ratings agency.

"As long as commodity prices remain high, cash flows should remain strong for diversified gas companies," said Manabe.

A note of caution: gas companies have a record number of rate cases before their respective state regulators, which translates into heightened regulatory risk, Moody's noted.

"Many of these are from gas distribution companies that are trying to get rates decoupled from volumes of gas delivered, which is important to counter declining usage from customer conservation and energy-efficient homes and appliances," said Manabe.

For the most part, however, gas companies' ratings are stable; mergers and acquisitions continue as a primary catalyst for rating actions, according to Moody's.

Moody's has taken rating actions on 13 out of 78 rated companies in its natural gas universe since Sept. 2007. The rating actions overall have been balanced between negative and positive actions.

The report, "North American Natural Gas Transmission & Distribution: Six-Month Industry Update," is available at www.moodys.com.

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