As the natural gas industry revs up for the coming winter, Fitch Ratings said three industry trends will likely affect the credit quality of the U.S. natural gas pipeline sector in the near term. The negative overhang of ongoing parent company-level credit problems and liquidity issues, increasing regulatory scrutiny, and evolving counterparty credit risk could alter the outlook for U.S. natural gas pipelines, according to an article appearing in the latest Fitch Ratings Oil & Gas Insights newsletter.

“There has been a decidedly negative tone to Fitch’s rating actions in the gas pipeline sector over the past twelve months, mostly linked to parent-company rating actions,” said Hugh Welton, senior director, Fitch Ratings. “Primarily in light of Enron’s last minute financial maneuvering, the Federal Energy Regulatory Commission has begun to explore the issue of restricting parent-subsidiary financial relations.”

Welton pointed out that FERC was also at the center of a controversial administrative law judge (ALJ) decision in September 2002, stating that El Paso Natural Gas Co., an El Paso Corp. pipeline affiliate, withheld substantial transmission capacity from California energy points.

The Fitch director said that as a result, the ALJ decision effectively shifted the focus of blame for California’s energy crisis to a regulated gas pipeline company instead of the unregulated energy merchant sector, which could add a whole new element of regulatory risk to the pipeline sector.

Fitch said despite increasing counterparty credit risk arising from the energy merchants’ weakened credit quality over the last year, the ongoing shift away from marketing and energy trading activities by several of the major energy merchants could mean small improvement in counterparty credit quality over the longer term. “The end result of this trend ultimately looks to be the re-emergence of highly rated utilities and major integrated oil companies as primary pipeline customers,” Welton added.

Earlier this week, a veteran market analyst said the current commissioners on the Federal Energy Regulatory Commission “may be planting the seeds for a massive failure of the energy infrastructure.” As proof, the analyst cited “the most unprecedented and blatantly political decision” made by FERC’s chief law judge against El Paso Corp.

“We have an ALJ decision crippling a company because, in his professional operational opinion, El Paso’s pipeline — the one which exploded just six months earlier — should have been run at or above [maximum allowable operating pressure],” Becca Followill, with Howard Weil in Houston, said in a letter to Chairman Pat Wood (see Daily GPI, Oct. 11).

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