After increasing only marginally for the past several years, U.S. demand for natural gas is “likely to rise sharply in the next 10 years” as a series of gas-fired power plants come on line, according to Moody’s Investors Service.

“The currently high natural gas prices suggest that supplies in the future may not be adequate to keep prices low. U.S. natural gas imports, primarily from Canada, are also likely to rise beyond their current 15% level,” according to Moody’s.

“If consumption actually grows to the 30 Tcf/year projected in 10 years or so from its current level of 18.5 Tcf, both U.S. production and imports will have to increase at greater than historic rates,” said William G. Christman, senior credit officer. Christman authored Moody’s “Diversified Gas Transmission (North America) Industry Outlook.”

Less aggressive diversification and strong regulatory protection will keep the ratings outlooks for natural gas transmission and local distribution companies (LDCs) stable, said analysts. However, the outlook for LDC’s parents is negative because of “their ongoing exposure to acquisitions and diversification.”

Regulated gas transmission lines should benefit from transporting all this gas to users, Christman said. The diversified gas transmission companies, in turn, will be channeling capital into their core transmissions businesses that might otherwise go into further diversification.

“The level of diversification has changed little over the last two years, with regulated earnings still [around] 90% as a percentage of total earnings,” said Mihoko Manabe, senior credit officer, who authored Moody’s “Local Gas Distribution Companies Industry Outlook.” Manabe said that among the LDC-based companies generally, ” we see less interest in high-risk investments.”

The strategy of the moment is asset purchases, said the analysts, and the mega-mergers of the last couple of years have “stretched the financial flexibility of the large electric and gas companies.” With debt levels at their limits and attractive investments abounding, these large companies are spinning off some assets to help pay for new investments.

Moody’s calls this the “spin-off cycle,” as smaller companies acquire these assets, and in turn spin-off their assets to help pay for it. Because of this cycle, “there may be negative rating implications if debt is used to purchase assets.”

In the third new report, an update on ratings methodology for gas transmission companies and LDCs, Moody’s analysts noted that gas transmission and distribution companies, despite having a higher debt component of capitalization than the average industrial company, are all rated investment grade, a reflection of the relatively stable cash flows from regulated operations.

For more information on the reports, visit the web site at www.moodys.com.

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