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Ratings Outlook for NGPL Downgraded in Wake of FERC Probe

December 7, 2009
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Standard & Poor's Ratings Services (S&P) last Monday said it has revised its outlook for Natural Gas Pipeline Co. of America (NGPL) to "negative" from "stable" in the wake of FERC's initiation of a Section 5 investigation to determine whether the pipeline may be overrecovering its costs, making rates to customers no longer just and reasonable.

S&P also affirmed its issuer credit rating of "BBB" for the Kinder Morgan Inc. pipeline, but it warned that lower gas prices and an unfavorable outcome to the Federal Energy Regulatory Commission (FERC) investigation could change its current credit ratings.

"The company faces near-term cash flow risk from lower natural gas prices and the FERC's investigation into the company's level of return on equity," the ratings firm said.

"The outlook revision and affirmation incorporate risk that lower gas prices may reduce funds from operations to adjusted debt below 9.5% and our belief that the FERC investigation has the potential to translate into lower future earnings at NGPL, although recognizing that any resolution will likely take more than a year to resolve. The combined effects of these two factors could result in weaker financial performance. With marginal current financial metrics, current ratings may prove unsustainable."

In late November FERC opened formal Natural Gas Act Section 5 investigations of NGPL, Northern Natural Gas and Great Lakes Gas Transmission Ltd. Partners, citing returns on equity (ROE) for the three of between 20% and 25% in 2008, well above the 12% ROE that FERC usually finds acceptable (see NGI, Nov. 23). The Commission used the more extensive data it started receiving last year from the pipelines in its revised Form 2 to conduct its preliminary review.

Analysts had mixed opinions as to whether FERC's initiation of the pipelines investigations was the start of a campaign to punish "over-earning" pipelines.

"We do not believe that the Commission is on a 'witch hunt' or has suddenly taken a drastically different attitude toward the nation's national gas pipeline infrastructure companies. With new [Form 2] data in hand -- specifically when it was tailored to address this concern -- we believe that the FERC was obligated to look at these rates closer and sincerely," said energy analyst Christine Tezak of Robert W. Baird & Co.

"One instance does not a trend make," said a pipeline official who did not want to be named. "I do not anticipate this [is] the first of a wave" of Section 5 proceedings to be brought by FERC, "but I have no way to tell for certain," he added.

However, William Hederman, a senior vice president at Concept Capital's Washington Research Group, believes interstate pipelines should be on guard. Last month he said the FERC action "does appear...likely to increase regulatory risks for interstate natural gas pipelines," especially those with an "actual pipeline rate of return" of 14% or more for a five-year average ending in 2007.

The pipeline official pointed out that FERC had excluded a number of pipelines from further review, including pipelines operating under settlement agreements with their customers that involved moratoriums on rate filings; pipelines that are scheduled to file new proposed rates under Natural Gas Act Section 4 in the near future; pipelines that had added infrastructure in 2008; or pipelines with infrastructure investments that would have clouded their revenue figures. It also excluded pipelines with negotiated rates, which the pipeline official said includes the bulk of the new pipelines.

"The rates on these pipelines are old, even if they have not increased in real or nominal terms for years. We believe that a 'refresh' of the data in the cost and revenue studies may demonstrate -- as the pipelines maintain -- that the 'over-earning' implied by the FERC is not what it seems at first blush," Tezak said.

"It may well be the pipeline had a great year in 2008, but not in 2009," the pipeline official said. "A lot of times earnings of a pipeline in a particular year can be contingent on conditions in the market, basis differentials." It was noted that pipeline rate cases tend to be resolved in settlements.

NGPL is 20% owned and operated by Kinder Morgan Inc., a private company separate from publicly held Kinder Morgan Energy Partners, a spokesperson said, with the other 80% ownership held by an investment group.

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