Fitch: Interstate Gas Pipeline Industry on the Threshold of Change
Posted on: Monday, 9 July 2007, 12:21 CDT
The U.S. pipeline industry has entered a period of increasing change and uncertainty, as market fundamentals drive significant investments in new energy projects, as discussed in a Fitch Ratings' report.
The competitive environment for the pipeline sector is undergoing a period of significant evolution, defined by robust commodity prices, changing supply dynamics and modest growth in demand for natural gas. Billions of dollars are being invested in new pipeline and midstream infrastructure to support the growth in unconventional resource plays. In many cases, these projects are competing for the same volumes. Also, barriers to entry remain high with rising capital costs and various regulatory challenges.
Fitch generally views the current development cycle as largely credit neutral, as the underlying industry fundamentals are expected to remain positive for the sector. Key credit concerns during this growth period, however, are the risks of speculative building and overbuilding, the potential for displaced capacity on existing pipelines and the effect of inflated construction costs on expansion economics.
'The increasing pace and degree of transformation to pipeline infrastructure elevates competitive risks,' said Bryan Caviness, Senior Director, Fitch Ratings.' 'The longer-term implications on existing pipelines are uncertain.'
Fitch notes that the risks associated with overbuilding have thus far been mitigated by the desire, and success, of financial sponsors to lock in a significant portion of new capacity through long-term contracts prior to beginning construction.
Recent leveraged buyout (LBO) announcements in the energy industry have illustrated that owners of regulated assets are not immune to restructuring strategies that reward equity holders to the detriment of bondholders. Fitch believes the potential credit risk to pipelines is higher for corporate owners of these assets than MLP owners.
Fitch's report includes a case study of the Rockies Express Pipeline system which provides the most significant example of the dynamics facing pipeline operators during this growth period.
The full report 'Interstate Natural Gas Pipelines: On the Threshold of Change' can be found on Fitch's web site www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Source: Business Wire
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