Natural Gas LDCs Lead Growth for Utilities Sector
New York, Jan. 11, 2016—Natural gas local distribution companies (LDCs) have become the strong and steady growth vehicle in the broader utilities sector, according to a new report by Fitch Ratings. The need for replacement of aging pipe and a heightened concern for safety following several high-profile pipeline accidents in recent years have created a large backlog of organic growth opportunities for LDCs.
Capex has increased significantly over the past five years, and Fitch expects capex growth to continue over the long-term as LDCs accelerate their replacement of aging pipe. The focus has been on pipe made out of cast iron, wrought iron, and bare steel, materials that are more susceptible to corrosion and degradation over time. These pipes were installed more than 50 years ago and in some instances date back to the late 19th century.
Many state regulatory commissions have helped LDCs with their safety and reliability goals by implementing infrastructure replacement riders that allow utilities to add certain pipeline replacement costs to rate base without the need to go through a general rate case. These riders enable LDCs to minimize regulatory lag and start earning a return on approved capital investments in a timelier manner. These LDCs are thus better able to maintain their generally strong financial profiles.
LDCs have maintained strong credit quality over the past decade, with an average Issuer Default Rating (IDR) between ‘BBB+’ and ‘A-‘ for the pure-play natural gas distribution utilities that Fitch rates. This average IDR for LDCs is expected to remain stable at least through 2018, supported by constructive regulation and solid financial metrics. The median FFO adjusted leverage and adjusted debt to EBITDAR metrics have both remained under 3.35x since 2009. Fitch expects these median leverage metrics to increase above 3.5x through 2018 as LDCs continue to ramp up their capex for further pipe replacement but to remain supportive of credit quality.