Fitch: MLP Penchant for Capital Finds Taker in US Utilities

The master limited partnership (MLP) penchant for capital has found a ready taker in US utilities, according to Fitch Ratings. Many of the MLPs are looking to significantly increase their investments in the natural gas infrastructure sector. Yesterday's announcement of Southern Company's joint venture with a subsidiary of Kinder Morgan, Inc., which comes on the heels of Consolidated Edison's JV announcement with Crestwood Energy Partners, epitomizes this trend.

As commodity prices have rallied from their February lows and counterparty exposure risks have abated somewhat, the equity and debt investor sentiment for MLPs has improved. However, capital market access for most MLPs remains constrained and, with balance sheet management a key focus, many have been willing to explore asset monetization in addition to equity issuances and distribution cuts.

To the extent the sell down proceeds are accretive to leverage metrics, Fitch considers such monetization as credit positive. Additionally, utilities as partners on natural gas pipeline systems should provide strategic benefits for pipeline systems in terms of offering growth opportunities and helping minimize recontracting risks associated with any capacity that the utility owner may hold on the pipeline.

Attracted by the growth opportunities in both the downstream and the midstream segments, utility companies have been keen to diversify in the natural gas sector. So far, utility companies have shown a preference for natural gas pipeline assets that strategically fit with their service territories and where their distribution utilities can benefit from being a shipper on the pipeline.

The announced transactions by both Southern Company and Consolidated Edison are relatively modest in size and, given the balanced funding mix, will have no bearing on their credit profile. In general, Fitch views natural gas pipeline investments that generate revenues primarily based on volume-insensitive, fixed-capacity payments via long-term contracts with creditworthy offtakers, typically utilities, as relatively low-risk investments.

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.

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