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Contract disputes may not spur negative pipeline ratings actions, analysts say

Interstate natural gas pipeline companies could face legal showdowns with producer customers in coming months as bankruptcies surge in the upstream sector, but credit analysts said contract rejection attempts will not necessarily be enough to cause midstream rating downgrades.

At least 11 pipelines are exposed to producer shippers that have either filed for Chapter 11 bankruptcy protection or are expected to in the near future, according to an analysis of S&P Global Market Intelligence data. Some of these pipeline operators have already lost their investment-grade credit ratings or are at high risk.

For example, S&P Global Ratings downgraded Rockies Express Pipeline LLC from one notch above junk territory at BBB- to BB+. The pipeline company risks missing out on revenues tied to 4% of its contracted capacity as shipper Ultra Petroleum Corp. tries to nullify $27 million of annual pipeline obligations. Firm gas transportation agreements for long-haul pipelines are similar to executory contracts, obligating the debtor or another party to fulfill its terms at a later date.

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These agreements can also be thrown out in bankruptcy courts, which is why Rockies Express, a joint venture between Tallgrass Energy LP and Phillips 66, as well as Crestwood Equity Partners LP's Stagecoach Pipeline and Storage Co. LLC have already asked the Federal Energy Regulatory Commission to exercise its Natural Gas Act authority to review any such attempts. Anticipating that troubled driller Chesapeake Energy Corp. will file for Chapter 11 soon, Stagecoach requested "expedited action so that the commission's authority is clarified prior to, or as soon as possible after the filing of, any bankruptcy proceeding" to protect 15% of its contracted capacity.

Moody's recently downgraded the global pipeline sector's outlook to negative from stable, in part because of an expectation that drillers will more aggressively target their midstream contracts than they did in previous oil price crises. However, senior analyst John Thieroff said in an interview that, on its own, a motion filed to void a contract "wouldn't impact anything, because we'd operate under assumption the contract will hold."

At the same time, Thieroff acknowledged that as more cases emerge and decisions are handed down, there could be a more "granular approach to contracts in bankruptcy which we just haven't really seen in the past, and it does maybe elevate the risk a little bit more."

S&P Global Ratings analyst Michael Grande said contract rejections are "top of mind" for credit analysts, and rating agencies have several levers they can pull before downgrading pipelines and parent companies.

"If it's an investment-grade pipe and that contract was a significant portion [of its contracted capacity] … we'd probably have it on credit watch negative," Grande said in an interview.

Other pipelines at risk in the current downturn include MPLX LP's Rendezvous Pipeline Co. LLC and Energy Transfer LP's ETC Tiger Pipeline LLC. An Ultra Petroleum subsidiary represents nearly 30% of the volumes contracted on Rendezvous, while 23% of ETC Tiger's contracted capacity is reserved for Chesapeake. MPLX declined to comment on concerns that Ultra Petroleum might reject agreements during bankruptcy proceedings.

At the other end of the spectrum, Colorado Interstate Gas Co. LLC's revenues from contracts with Extraction Oil & Gas Inc., which filed Chapter 11 earlier in June, account for under 5% of the Kinder Morgan Inc. pipeline's reserved capacity. The pipeline has a BBB rating from S&P Global Ratings. Still, Kinder Morgan CEO and director Steven Kean said counterparty credit defaults are concerns for the parent company.

"In our Monday meetings, it's the second topic we cover," Kean said during an April 22 conference call. "Now there's no good analogy to the current year … but if we look at something that was similar in terms of impact on the producer segment and we go back to 2016, our bankruptcy defaults in 2016 amounted to about $10 million. It's also a little bit difficult to call your shots on who you think is going to tip over or not tip over."

S&P Global Market Intelligence's analysis, which used an index of customers and tariff data, covered estimated reservation charges if available.

Pipelines provide gas transportation service to shippers such as producers, utilities, industrial customers, power generators and energy marketers, often under firm contracts. Most of these agreements feature fixed reservation charges that are paid monthly regardless of the actual gas volumes moved or stored, plus a tariff component based on volume to compensate pipelines for their variable costs. S&P Global Market Intelligence's estimates of monthly reservation revenue used the maximum revenue because negotiated rates are often not disclosed.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.