Portland, OR-based Northwest Natural Gas Co. and its regulated local distribution company (LDC) had their credit rating dropped from double-A to single-A (“A+”) Monday by Standard & Poor’s Ratings Services (S&P) because of added risk from nonutility ventures, such as the Gill Ranch underground gas storage facility in Northern California. Nevertheless, S&P described the company’s outlook as “stable.”

S&P views the LDC as having lower financial risks than the company’s planned investments in nonregulated assets, which can have construction risks, less stable cash flow generation, and/or recontracting risks, according to the ratings agency.

S&P said the stable outlook reflected its “expectation that consolidated financial performance will be appropriate for the rating with funds-from-operations (FFO) to total debt of 20% to 25%, and total debt to capital of 50% to 55%.” The outlook also reflects the company’s “supportive regulatory framework,” along with what S&P called above-average service territories in Oregon and Washington, favorable customer mix and operational strengths.

The rating agency, however, said the downgrade from “AA-” recognizes expectations for increased business and financial risks associated with nonregulated investments that S&P views as not “sufficiently supported” by improved cash flow generation at the the double-A rating level. Although Northwest Natural generates about 80% of consolidated cash flow from low-risk gas utility operations in Oregon and Washington, the company’s consolidated financial performance has been what the raters consider as “somewhat weaker” than its peers in the “AA”‘ category. At the same time, S&P affirmed its “AA-” senior secured debt rating and “1+” recovery rating on Northwest Natural’s first mortgage bonds.

As of Sept. 30, 2009, the company had total debt, including adjustments for operating leases and tax-affected pension and post-retirement obligations, of $726 million.

Even with the downgrade, Northwest Natural’s ratings reflect an excellent business risk profile and intermediate financial risk profile. Supportive regulation, a high-growth service area with a mostly residential customer base, reliable gas supplies provided by significant storage capacity, access to three major gas supply basins, and low operating risks characterize the utility’s business profile, S&P said. However, the utility’s interconnection with only one major pipeline “somewhat moderates these strengths.”

“The stable outlook reflects Standard & Poor’s expectation of solid consolidated financial performance, the projected mix of regulated and nonregulated activities, and steady operating performance and regulatory support,” said S&P credit analyst Kenneth L. Farer.

“A ratings upgrade could result from a sustained improvement in financial ratios, specifically FFO to debt above 25% and total debt to total capital below 55%. Ratings pressure could occur if the company makes significant acquisitions or investments that mostly use debt or if credit metrics deteriorate on a sustained basis, specifically FFO to debt to below 20% on a sustained basis or total debt to capital to above 55%. A downgrade could also occur if growth in the nonregulated businesses is greater than currently anticipated, unless coupled with stronger financial metrics.”

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