Fitch Ratings warned Thursday that several domestic interstate natural gas pipelines could face rating downgrades if they lose their competitive advantage or face recontracting pressures as they try to adjust to shifting forces of supply and demand.
Fitch also characterized the Federal Energy Regulatory Commission’s (FERC) recent handling of several Section 5 challenges to pipelines perceived as over-earning as “reasonable” and predicted that there would fewer actions in the future.
Only two of the 15 domestic pipelines rated by Fitch received an adverse outlook. NGPL PipeCo LLC (NGPL) was given a “BB+” rating with a negative outlook, while Panhandle Eastern Pipe Line Co. LP was given a “BBB-” rating with a watch negative outlook.
Comparatively, the two highest-rated pipelines were Northern Natural Gas Co. with an “A” rating and a stable outlook, and Kern River Funding Group with an “A-” rating and a stable outlook.
Fitch said it expected supply-driven pipelines would be at increased risk for recontracting. “Shale production will reach markets currently served from different production basins,” the credit ratings service said. “However, several factors will help existing pipelines maintain their competitive positions and provide growth opportunities.”
Those opportunities include increased demand for natural gas in electrical power generation; pipeline flow reversal and laterals to serve new markets; exports to Canada; the export of liquefied natural gas; and logistical and regulatory obstacles to building and expanding shale production infrastructure.
Fitch said two domestic pipelines — NGPL and El Paso Natural Gas Co. — had noteworthy shipper patterns over a long period of time. According to Fitch, both companies posted revenue and third party transportation volume reductions in excess of 10% for the 2009-2010 period, citing FERC filings.
Fitch added that newer pipelines — such as Rockies Express Pipeline, Midcontinent Express Pipeline and Ruby Pipeline — have a competitive advantage in the marketplace because of extensive integrity testing, an area of concern in the wake of the San Bruno, CA, natural gas transmission pipeline rupture in September 2010 (see Daily GPI, Sept. 13, 2010).
“The extent of ongoing pipeline rules and regulations remains uncertain, but [we] expect mandated costs to improve safety and limit environmental damage will be manageable for interstate pipelines,” Fitch said, adding that the National Transportation Safety Board’s investigation into the San Bruno explosion could result in mandatory testing of pipe manufactured before 1970, requiring automated or remote controlled shutoff valves and increased testing outside high consequence areas.
“Higher fines for infractions are almost assured,” Fitch said.
Fitch reported that FERC had pursued five domestic pipelines with Section 5 rate cases since November 2009 on accusations that the companies’ claimed return on equity had exceeded 20% over a specific timeframe. The pipelines in questions are NGPL, Northern Natural, Great Lakes Transmission Co., Ozark Gas Transmission LLC and Kinder Morgan Interstate Transmission LLC.
“Settlements [with FERC that resulted] in the largest decline in future revenues involve pipelines whose tariff structures include fuel retention allowances to compensate them for the cost of fuel,” Fitch said, adding that it lowered NGPL’s rating from a “BBB-” rating with a stable outlook because of its requirement to reduce is fuel retention factor by 45%, which significantly lowered its gas revenues.
Fitch added that Gulf South Pipeline Co. LP has not been challenged by FERC under Section 5, and Tennessee Gas Pipeline Co. was currently in a rate proceeding.
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