Standard & Poor’s (S&P) Ratings Services said Tuesday it was downgrading the credit rating of Northern Border Pipeline Co. (NBPL) from “A-” to “BBB+,” citing an oversupply of natural gas in the Midwest and concerns over expiring transportation contracts.

“In our view, the pipeline’s competitive position is weakening because of tight basis spreads between supply markets in the Western Canadian Sedimentary Basin [WCSB] and demand markets in the Midwest U.S.,” S&P analyst Mark Habib said. “This risk is exacerbated by short remaining contract lives on the pipeline’s firm transportation agreements.”

NBPL’s Northern Border Pipeline runs 1,249 miles from Port of Morgan, MT, on the U.S.-Canada border to the Chicago area. The line has 18 compressor stations and traverses six states — Montana, North Dakota, South Dakota, Minnesota, Iowa and Illinois — before terminating at North Hayden, IN.

The pipeline transports natural gas from the WCSB and the Williston and Powder River basins in the United States and synthetic natural gas — produced through coal gasification — made by the Dakota Gasification Co. at its Great Plains Synfuels Plant near Beulah, ND. The pipeline’s total capacity is 2.4 Bcf/d.

Lee Evans, investor relations manager for TC PipeLines LP (TCP), told NGI the downgrade was not a surprise.

“NBPL’s credit rating with S&P has been on negative watch for the last year or so,” Evans said Tuesday. “NBPL’s credit is still considered investment-grade status with a stable outlook. This move aligns NBPL’s ratings with other major pipeline entities.”

S&P said NBPL had several strengths making it worthy of the “BBB+” rating, namely that the company is one of the largest shippers of WCSB natural gas to the Chicago market and has strong credit metrics. The pipeline’s interconnection with the Bison Pipeline was also marked as a plus because “it enhances NBPL’s competitive position [by providing] flexibility to Midcontinent shippers that want to diversify their sources of gas.”

But S&P said those strengths were offset by refinancing risks. It said NBPL’s transportation contracts had an average remaining life of three years, well before the company’s debt begins to mature in 2016.

“The markets served by NBPL are highly competitive due to multiple supply sources, which pressures transportation rates,” S&P said. “Supply is dependent on gas production in the WCSB, which has been in decline over the past several years and could fall further, depending on drilling activity.”

Houston-based NBPL is a general partnership owned by TCP and ONEOK Partners LP (OKS), with each company owning 50%. TransCanada Pipelines Ltd. has a 33.3% interest in TCP. Another TransCanada affiliate, TransCanada Northern Border Inc., serves as operator of the pipeline. S&P said it views the ratings for NBPL to be on a standalone basis due to the 50/50 ownership. Tulsa-based ONEOK Inc. owns 42.8% of OKS.

“The credit rating downgrade is not expected to have a material impact on TCP,” Evans said.

Shares of TCP were down 59 cents (1.23%) to $47.54/share in late trading on the NASDAQ on Tuesday. Meanwhile, shares of OKS were down 44 cents (1%) to $43.79/share in late trading on the NYSE.

TCP is scheduled to issue its 2Q2011 financial results at 12 p.m. EDT Wednesday. ONEOK and OKS will release their 2Q2011 earnings after the markets close on Aug. 2, and have scheduled a joint conference call at 11 a.m. EDT on Aug. 3.

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