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FERC rate investigation a credit negative for Kinder Morgan's NGPL, Moody's says

FERC's rate investigation into Natural Gas Pipeline Co. of America LLC's NGPL PipeCo LLC on allegations of overcharging is a credit negative for the pipeline that could result in a $70 million revenue cut, Moody's said in a Jan. 26 note.

The federal regulator on Jan. 19 asked NGPL and Wyoming Interstate Co. LLC to file a cost and revenue study so it can evaluate whether the two Kinder Morgan Inc. gas pipeline companies are over-recovering costs "resulting in unjust and unreasonable rates." Moody's expects the investigation to add "regulatory and future rate uncertainty", on top of lower revenues compared to the $590 million garnered through the 12 months ended Sept. 30, 2016, the note said.

FERC's investigation came as a surprise to Kinder Morgan and showed "serious errors made in the analysis," President and CEO Steven Kean said in a Jan. 25 analyst day presentation.

"There were some serious mistakes made on how they counted the fuel. They counted the fuel revenue that we received but didn't count the cost of fuel consumed. They used a hypothetical capital structure rather than the actual capital structure," Kean said. "There are a number of things that we think will mitigate that impact. But now we've got to work on that stuff, and we will."

Kean noted that FERC simply follows its own process and calculations and then decides which companies' results would warrant an investigation. "They don't do it by checking with the company so that some of ... the errors could be cleared up in advance," Kean said. "They just start the process and made it very clear [that] this is the first step in the process and all things are going to be taken into account and it's not prejudged."

NGPL filed a motion with FERC that provides an alternative calculation removing revenues associated with gas recoveries and fuel expenses, which yields a return on equity of 17.7% in 2014 and 15.7% in 2015. FERC's calculation put NGPL's return on equity at 28.5% in 2014 and 20.8% in 2015.