October 2, 2020 Read More →

Moody’s: Long-term credit risks are rising for natural gas infrastructure projects

S&P Global Market Intelligence ($):

Long-term credit risks to natural gas infrastructure investments are rising, as the public’s growing focus on decarbonization threatens to reduce gas use through 2050, according to Moody’s.

Pipeline permitting obstacles, local electrification efforts and state climate goals are all raising operating risks and the cost of capital requirements, Moody’s said in a Sept. 30 research note. At the same time, concerns about methane emissions at energy companies and periodic safety failures are prompting a pivot from natural gas to alternatives, Moody’s observed.

“Although natural gas transportation and distribution companies continue to provide generally safe, reliable service while reducing emissions, there are ESG reputational risks associated with any hydrocarbon-based business, including financial governance policy risks around a higher cost of capital and lower asset returns over a multi-decade time horizon,” Moody’s said. ESG is an abbreviation for environmental, social and governance issues.

Moody’s believes new pipeline projects face the steepest challenges, citing a string of successes by environmentalists to delay or derail fossil fuel infrastructure projects. Consequently, the firm typically does not consider revenue for those projects in its financial projections. Instead, it recognizes their cash contribution only after the pipeline enters operation.

The rise of state and local decarbonization goals beyond just renewable portfolio standards creates new headwinds for gas utilities, Moody’s said. Policies and laws to achieve those goals are limiting upstream supply expansion and placing restrictions on gas services in parts of the U.S. In New York, state climate policy has blocked capacity additions into service territories and focused regulators on reducing gas use and infrastructure construction, Moody’s noted.

Similarly, corporate sustainability strategies focused on net-zero carbon emissions goals could affect decisions about gas transmission and distribution operations at bellwethers like Duke Energy Corp., Southern Co., and Dominion Energy Inc., the firm said. Moody’s noted Dominion’s recent sale of its midstream business and Consolidated Edison Inc.’s commentary about divesting its transmission assets.

The emerging patchwork of state and local policies — including building gas bans and electrification codes — presents varying credit risks to companies, in Moody’s view. Gas pipelines that sell into competitive markets and lack monopoly position are most at risk, while increasing electrification would offset declining gas use at multi-utilities. Impacts on gas utilities and demand-pull pipelines will depend on local policy, Moody’s said.

[Tom DiChristopher]

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