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Fitch: Little Risk for Gas Utilities

Low gas prices mean residential gas bills will be lower, making them easier to pay by cash-strapped consumers, noted analysts at Fitch Ratings. This should alleviate some risk of rising bad debt expense among gas utilities.

"Gas prices were well off their mid-2008 highs by the start of the 2008-2009 heating season, and LDCs [local distribution companies] had delayed building inventory," the analysts wrote in a recent note.

However, sales growth at gas utilities "slowed significantly" as the recession and weak housing market slowed customer growth across the board, Fitch noted. "Continued weakness in the housing sector will constrain demand throughout 2010," they said. "Sales volumes have also been affected by a significant decline in industrial demand, particularly in the U.S. Midwest."

Industrial gas demand should normalize somewhat during the second half of next year on the back of "moderate economic growth," the analysts said. "As a result of slower growth and slackened demand, LDC capital expenditures are expected to be focused on system maintenance rather than expansion and should remain fairly low (averaging approximately 1.5x depreciation charges), so there is not a need for significant external funding."

Gas consumers are unlikely to experience any rate shock, which limits the exposure of LDCs to "adverse regulatory developments," the analysts concluded. "Additionally, competitive energy sources, including fuel oil and propane, are correlated to crude oil prices and thus remain priced well above natural gas, limiting the potential for fuel-switching during 2010."

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