Report Finds North American Gas Pipes 'Solidly' Investment Grade

Despite the turmoil in the energy and power industry, the North American natural gas transportation business remains "solidly investment grade," according to a report by Standard & Poor's Ratings Services (S&P).

In an analysis issued Thursday, S&P's Aneesh Prabhu stated that while the creditworthiness of many of the pipes' sponsors has declined in the past year, S&P has maintained investment-grade ratings on several pipelines because their transactions are structured to be separate from the creditworthiness of their owners.

"Pipelines with access to large basins and diversity of supply have flexibility during potential supply disruptions, viewed positively from a credit perspective," said Prabhu. "As examples, Standard & Poor's views the Rockies and the Western Canadian Sedimentary Basin (WCSB) as large and low-cost supply regions. Pipelines such as Alliance Pipeline LP, Kern River Gas Transmission Co., Southern Star Central (which directly tap these regions), Portland Natural Gas Transmission, and Iroquois Gas Transmission System LP (which have direct pipeline connects) are viewed to have low supply risks."

With U.S gas consumption still growing at more than 1.5% to 2% per year, and competing pipelines operating at "reasonably high load factors," S&P noted that a "surplus of capacity is not likely to develop soon."

The weighted average "basket" of shipper credit quality is an important driver of pipeline credit ratings, but S&P added that "of primary importance in assessing the shippers is the significance of the pipeline to the shippers or the ultimate end users. A higher amount of stability is accorded to pipelines, such as Florida Gas Transmission and Northern Natural Gas, which mainly serve highly rated distribution utilities. However, recontracting risk as large contracts expire is present for all customer types."

From a credit standpoint, S&P said that firm transportation contracts generally provide stronger credit strength than interruptible contracts or contracts that have "outs" built into them. For most credits rated relatively high by S&P, the proportion of pipeline contracted is usually high, as is the case for Alliance Pipeline (100%) and Kern River (100%).

"From a credit perspective, the underlying fundamentals of the gas pipeline transmission business remain investment grade. Moreover, regulators have traditionally offered some protection to bondholders by giving the companies stability and shielding them against competitive forces. However, as competitive forces are increasingly driving the gas industry, the influence of regulators, while still important, will decline. "

S&P warned that while "gas pipelines are somewhat insulated from counterparty exposure due to posting of transportation charges by subinvestment-grade shippers to protect capacity positions, if shipper credit quality continues to deteriorate, ratings for some pipelines could be lowered."

To view the full report, visit S&P's RatingsDirect at www.standardandpoors.com/ratingsdirect.

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