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S&P: Gas Utility Growth Slows, Finances Strong

While customer growth has slowed with the economic downturn during the past 18 months, credit and finances for natural gas distribution companies look strong, according to a report by Standard & Poor's Ratings Services (S&P) released earlier in January. The rating agency expects supportive regulatory decisions and continued access to capital market for the gas utility industry, the report said.

Framed as the "Top 10 Investor Questions: U.S. Natural Gas Distribution Companies," the S&P report said rate case filings are likely to continue on a two- to four-year schedule to offset declining per-customer gas use, pay for replacing aging infrastructure and meet rising operating costs. Even utilities with advanced regulatory mechanisms, such as decoupling of sales volumes and line item expense trackers, will face the need for rate increases, S&P said.

"The consistency with which [gas] local distribution companies [LDC] were able to issue debt during 2009 demonstrates the well-above-average financial flexibility that these companies enjoy," a S&P spokesperson said. "We do not see the utility sector facing much reluctance from lenders to provide financing under revolving credit facilities despite the generally weakened condition of the financial institutions."

Nevertheless, the S&P report issued Jan. 13 acknowledged that there are no gas LDCs with "positive" outlooks from the credit rating agency, and there are five with negative outlooks currently. Cited as examples are Portland, OR-based Northwest Natural Gas Co. and the Integrys Energy Group Inc.'s Chicago-area gas LDCs because of Northwest's added risks associated with its development of the Gill Ranch underground storage project in California and Integrys's risks regarding the disposal of its unregulated businesses.

Regarding how regulation and increased emphasis on renewables and conservation are likely to impact the gas utility sector, the S&P report is essentially positive. It notes that the gas industry has for many years been dealing with the impacts of effective conservation and energy efficiency programs, and most LDCs have decoupling mechanisms to keep throughput requirements separate from total revenue requirements.

S&P said that to determine regulatory processes are supportive of credit quality, it looks to the level of uncertainty surrounding utility investments, and in this case it finds no cause for major concerns about the gas LDCs. The S&P report said it expects few changes (up or down) in ratings and outlooks of the utilities with outstanding rate cases that will be decided this year.

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