Fitch: Gas LDCs Well Positioned But Not Without Challenges

NEW YORK--(BUSINESS WIRE)-- U.S. natural gas distribution utilities are well-positioned from a credit perspective, despite challenges including muted consumption, rising fixed costs, and declining allowed return on equity (ROEs), according to a Fitch Ratings special report.

Gas local distribution companies (LDCs) have typically enjoyed high investment-grade ratings, primarily driven by low operational risks, supportive regulatory treatment, favorable capital market conditions, and low commodity prices that alleviate pressure on customer bills and accommodate robust capex and rate base growth.

Gas utilities are usually allowed adequate ROEs relative to their business risks and they have often been early beneficiaries of revenue decoupling or stabilization mechanisms. Although authorized ROEs have continued to inch downwards, Fitch's study shows that gas LDCs typically fare better than their electric peers. Additionally, 38 states now have rate mechanisms that allow partial recovery of preapproved pipe upgrade and replacement costs between rate cases, according to the American Gas Association.

The divergence of residential gas customer growth and gas consumption will continue to be a challenge for the sector. Natural gas consumption has largely lagged behind customer growth primarily as a result of energy conservation and efficiency over the past decade. However, many states have rate stabilization mechanisms such as decoupling or weather normalization, which partially insulates LDCs from volume declines.

Fitch expects mergers and acquisitions activity to continue in the sector as gas utilities seek scale and diversity to offset muted consumption patterns and drive earnings growth. Aggressive valuations and increased use of debt in acquisition financing are credit concerns. Since 2010, the enterprise value/earnings before interest, tax, depreciation and amortization (EV/EBITDA) multiples for gas LDC acquisitions have often exceeded 10.0x. In comparison, electric utility transactions generally reflect 7.0x-8.0x EV/EBITDA multiples.

LDCs' capex growth will continue to be robust. Fitch's data indicates that aggregate capex will grow by 17% in 2015 following a 13% growth in 2014. Although current data suggests capex will decline in 2016, a likely scenario is that forecasts will be revised upwards for 2016 and beyond. Pipeline safety programs and aging infrastructure replacement are primary drivers of growth, supported by widely adopted infrastructure cost recovery mechanisms.

For more information, please see Fitch's special report titled, " Gas LDCs Well Positioned but Not Without Challenges," available on www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Gas LDCs Well Positioned but Not Without Challenges

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866853

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150608005863/en/

Fitch Ratings
Julie Jiang
Director
U.S. Corporates - Utilities, Gas and Power
Fitch Ratings
+1 212 908-0708
33 Whitehall Street
New York, NY
or
Shalini Mahajan
Managing Director
U.S. Corporates - Utilities, Gas and Power
+1 212 908-0351
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• KLA Corp posts Q4 beat, shares tumble amid underwhelming guidance
• Ashland (ASH) Tops Q3 EPS by 2c; offers guidance
• Bloom Energy jumps 8% in after hours after record revenue, raises 2026 outlook