Standard & Poor’s Ratings Services Monday said it has revised its outlook for Natural Gas Pipeline Co. of America (NGPL) to “negative” from “stable” in the wake of the Federal Energy Regulatory Commission’s (FERC) initiation of a Section 5 investigation to determine whether the pipeline may be overrecovering its costs, making rates to customers no longer just and reasonable.

Standard & Poor’s also affirmed its issuer credit rating of “BBB” for the Kinder Morgan pipeline, but it warned that lower gas prices and an unfavorable outcome to the FERC investigation could change its current credit ratings.

“The company faces near-term cash flow risk from lower natural gas prices and the FERC’s investigation into the company’s level of return on equity,” the ratings firm said.

“The outlook revision and affirmation incorporate risk that lower gas prices may reduce funds from operations to adjusted debt below 9.5% and our belief that the FERC investigation has the potential to translate into lower future earnings at NGPL, although recognizing that any resolution will likely take more than a year to resolve.

“The combined effects of these two factors could result in weaker financial performance. With marginal current financial metrics, current ratings may prove unsustainable.”

In late November FERC opened formal Natural Gas Act Section 5 investigations of NGPL, Northern Natural Gas and Great Lakes Gas Transmission Ltd. Partners, citing returns on equity (ROE) for the three of between 20% and 25% in 2008, well above the 12% ROE that FERC usually finds acceptable (see Daily GPI, Nov. 25; Nov. 20). The Commission used the more extensive data it started receiving last year from the pipelines in its revised Form 2 to conduct its preliminary review.

That data indicates that NGPL may have achieved a ROE of 24.5% based on an overrecovery of $149 million (RP-10-147), while Northern Natural’s estimated ROE was 24.36% (RP10-148) with an overrecovery of $167 million and Great Lakes ROE was 20.83% with a FERC-estimated overrecovery of $56 million (RP10-149).

Since FERC rules do not permit retroactive refunds, Chairman Jon Wellinghoff said the order called for completion of the cases against the three companies as quickly as possible, with an initial decision by an administrative law judge within 47 weeks. The pipelines are required to file a cost and revenue study within 45 days including actual data for the latest 12-month period ending with the date of the order.

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