Moody's Investors Service Thursday downgraded the senior unsecured debt ratings of NGPL PipeCo LLC, parent of Natural Gas Pipeline Co. of America (NGPL), to junk status (Ba1) from the lowest investment grade (Baa3) following FERC's approval of a settlement of allegations that NGPL over-recovered its cost of service.
"As a result of this settlement, NGPL's cash flows will step down, resulting in a significant reduction in debt coverage and financial flexibility over the next five years," said Moody's Vice President Mihoko Manabe.
Moody's said that despite the challenges of the rate settlement, higher leverage and less financial flexibility, material upcoming contracting and refinancing risks, NGPL is still a substantial asset, and a critical piece of natural gas infrastructure in the Midwest.
The Federal Energy Regulatory Commission cleared the "uncontested settlement" of NGPL, saying it "appears to be fair and reasonable and in the public interest." The settlements of the two other pipelines accused of over-recovery -- Great Lakes Gas Transmission LP and Northern Natural Gas -- were approved by FERC earlier, but an appeal of the Northern Natural decision is pending (see Daily GPI, July 29).
Last November FERC opened formal Section 5 investigations into the three pipelines (see Daily GPI, Nov. 20, 2009). FERC staff's preliminary investigation indicated that NGPL may have achieved a return on equity (ROE) of 24.5% based on an over-recovery of $149 million and Great Lakes may have achieved an ROE of 20.83% with an over-recovery of $56 million, while Northern Natural Gas had an estimated ROE of 24.36% with an over-recovery of $167 million.
Under NGPL's settlement, the pipeline's maximum recourse reservation rates for all firm transportation rate schedules would be cut by a total of 8% for the period between Nov. 1 of this year and June 30, 2011. The maximum recourse one-part FTS-G rate also would be reduced by 8% during the same period, according to the settlement.
In addition, the maximum recourse reservation rates for all firm storage rate schedules that were in effect April 1 would be reduced by 3% effective Nov. 1. And for the period of July 1 through June 30, 2011, the fuel retention factors that were in effect April 1, 2010 would be reduced by 30%. Effective July 1, 2011, the fuel retention factors that were in effect April 1, 2010 will be reduced by 45%.
Moody's said the rate changes will only affect contracts under maximum allowed tariff rates. Contracts that are discounted from the new maximum rate as well as those that are negotiated (about a third of existing contracts) will not be affected by the settlement, but as those contracts roll over, they could also reflect lower rates, it noted.
Moody's further noted that NGPL faces some large contract expirations in 2013, including those with Nicor, its largest shipper. It said NGPL's contract terms have gotten shorter over the last few years, with the average transportation contract term of approximately two years and average storage contract term of about four years, in part reflecting the relatively short time left on the Nicor contract.
Certain marketing oriented shippers with NGPL appear to be shortening their contracts while they await better basis spreads and weigh their growing gas supply options, according to Moody's. NGPL's average contract life is much shorter than the current eight-year average for Moody's peer group of pipelines. Also, around year-end 2012, the company faces substantial refinancing risk as $1.25 billion of its current $3 billion of debt comes due. This will come at a time when the company's future pre-interest, after-tax cash flow is expected to decline by approximately $25 million to $70 million as a result of the settlement, Moody's said.
FERC approved Great Lakes' settlement earlier this month and Northern Natural's in June. However, industrial natural gas users have since asked FERC to reconsider its decision to terminate the Section 5 complaint proceeding against Northern, saying customers and the agency yielded to the pipeline's threat of filing higher transportation rates if the case was not closed quickly.
The Process Gas Consumers Group, the American Forest & Paper Association and the United States Gypsum Co. urged the Commission to reopen the Section 5 investigation into Northern's rates, and direct the presiding administrative law judge to order an expedited procedural schedule designed to issue a ruling at the "earliest possible date and...prior to the date that a new Section 4 rate filing could be made effective, subject to refund." Their request still is pending before FERC.
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