Energy

Thu Jun 19, 2008 3:36pm BST

June 19 - Fitch Ratings has affirmed the 'A' Issuer Default Rating (IDR) and 'A' senior unsecured rating of Northern Natural Gas Co (NNG). The Rating Outlook is Stable. Approximately $952 million of debt is affected.

The ratings reflect the strong standalone credit profile of NNG, which benefits from solid credit protection measures, favorable operating characteristics and low regulatory risk. NNG also has a solid competitive position, with flexible access to five major supply basins and a customer base that is primarily composed of local distribution companies (LDCs). Favorably, approximately 90% of market area capacity is contracted beyond 2009, 45% beyond 2015. Fitch notes that NNG has been generally successful in renegotiating contracts with its customers over the past several years, albeit with moderate rate discounting.

NNG's credit metrics are consistent with the 'A' rating category. Fitch forecasts the ratio of EBITDA-to-interest and the funds flow coverage to be consistently above 6 times (x) over the next five years. Additionally, leverage, as measured by the ratio of debt-to-EBITDA, is projected to remain at or below 2.6x over the same time period.

Rating concerns facing the company relate primarily to the competitive conditions in the Midwest pipeline sector. However, Fitch believes that NNG's market position is relatively secure, given its customer base and geographical location. The Kinder Morgan-sponsored Rockies Express Pipeline ([REX] IDR rated 'BBB', Stable Outlook by Fitch) which transports natural gas from the Rocky Mountains to the Eastern markets, began to intersect with NNG in early 2008. As a result, there may be a modest drop off from NNG's field area services; however, the company's more significant market area should be minimally affected. NNG's capital expenditures has been at elevated levels for the past few years, and will continue to remain lofty through 2009 as NNG works on its Northern Lights expansion projects and storage expansion. Capital spending is forecasted to decline starting in 2010. Financing for capital projects is expected to be met through a mix of internally generated cash flows and debt issuances.

The Stable Rating Outlook for the company reflects Fitch's expectation that NNG will continue to post strong financial results, maintain a moderate leverage position, and will not require a rate case over the next several years. If the emergence of other pipelines in the Midwest market results in a decline in NNG's competitive position and a commensurate deterioration in credit fundamentals, the ratings of the pipeline could be negatively affected.

NNG, a subsidiary of MidAmerican Energy Holdings Co., is an interstate gas pipeline system that runs 15,900 miles and transports natural gas from the Permian Basin in Texas to the upper Midwest. (New York Ratings Team)

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