Despite investor concerns over challenges posed by a rapidly changing natural gas market, a vice president for Moody's Investors Service said interstate pipeline companies continue to show "resilience."
In a Moody's report on pipeline companies, the service found that in the big picture, booming shale production will be a positive development even as it shakes up the pipeline industry, and pipelines companies will retain solid credit metrics even as they deal with medium-term challenges such as new transportation patterns and the need to coordinate pipeline and power generation operations.
"What surprised me was the resilience of the overall peer group," Moody's Vice President-Senior Credit Officer Mihoko Manabe said in a July 10 interview discussing the report. "The credit metrics were stable or even better than we had seen three years ago."
Revenues from throughput were up, Manabe said, and "if you look at the industry overall, it seems not consistent with some of the concerns that we had for certain companies that investors often call me about." These include NGPL PipeCo LLC, which experienced an unexpected decline in revenue due in part to lower rates on new contracts, and Rockies Express Pipeline LLC, which along with other west-to-east pipelines had its business model rearranged by the Marcellus Shale.
The Moody's report concluded that growing U.S. shale gas reserves are a boon for the pipeline industry as more supply is discovered and as the known reserves continue to need transport to market. "There is going to be a continuing need to adjust the pipeline grid, which means there is going to be more organic opportunities for the industry over the long term," Manabe said.
"Now what we're seeing in medium term, though, are some adjustments that some companies will need to make as the shale phenomenon causes these changes," she said. "It doesn't necessarily mean there are going to be rating changes as a result of that. These companies, in particular some west-to-east transport companies, for example, are going to have to rethink what markets they are going to serve and what other services they are going to provide as they adjust to this shifting supply picture."
Manabe pointed out that pipelines have a solid base of customers with long-term contracts, led by utilities with a large contingent of gas exploration and production companies. Just a few years ago, an average contract life might have been five years, but "it's seven years now for the pipeline peer group that Moody's follows," she said. "And that is all due to the new pipeline expansions that were put into place with 10- to 20-year contracts, and there is a lot of time left on those contracts."
"So even if a pipeline is seeing a potential change in the demand for their capacity, they have three or four years to deal with it and seek alternative sources to remain viable," Manabe said.
The Moody's report found that while pipeline credit quality was generally sound, financial strategies in the industry were becoming more aggressive, with increased leverage on new pipelines and more pipelines placed in master limited partnerships with high payout policies. Almost half the pipelines Moody's reviewed were in MLPs. Moody's said these "credit-negative trends" work against the financial flexibility that pipeline companies need to effectively respond to shifts in supply and demand.
The report also found that in facing the changes of the next few years, the pipelines that are in the best position are those with strong balance sheets; longer contracts; and diversified supply sources, markets and customers. Manabe said pipelines will file more rate cases at FERC to recover costs and modify their rate designs. "Costs that we expect to go up over the next several years are costs related to pipeline safety," she said. "We would expect that to be a major potential increase in pipeline costs that would need to be recovered."
Copyright 2012 SNL Financial LC. All Rights Reserved.
(Originally published July 11, 2012, in SNL Daily Gas Report.)