Credit Profiles of Midstream Energy Companies in a High Energy Price and Inflationary Environment

Though the economic recovery from the Coronavirus Disease (COVID-19) pandemic is driving global demand for energy, the supply response has been limited given the underinvestment in the energy sector in the past several years, resulting in higher prices for energy. High energy prices, supply chain challenges, and worker shortages are contributing to inflationary pressures around the world. DBRS Morningstar has considered how companies are able to limit the negative impact of higher costs and has concluded that contractual arrangements and rate regulations provide stable revenue support and allow for the flow-through of costs through tolls charged to customers. Therefore, earnings are protected during periods of volatile commodity prices and inflationary conditions and consequently the impact on the credit profiles and credit ratings of DBRS Morningstar-rated midstream energy companies is likely to be limited.

Key highlights of this commentary:

(1) Contractual arrangements and rate regulation provide earnings stability for midstream energy companies.
(2) Cash-flows of midstream energy companies are generally supported by fixed-term, regulated cost-of-service or fee-based contracts with customers.
(3) The regulatory regimes in both the U.S. and Canada generally allow for cost flow-through and flexibility to adjust rates under inflationary conditions.

“Although no one has a crystal ball to predict what the future will look like, or when demand-supply conditions will be in equilibrium, the current high price environment could negatively affect the credit profiles of midstream energy companies to the extent that higher costs cannot be passed through to customers and persistent high energy costs affect the demand for energy.” said Ram Vadali, Senior Vice President of the Natural Resources & Pipelines Group at DBRS Morningstar. “Most DBRS Morningstar-rated entities have contract profiles that are largely supported by take-or-pay and fee based contracts with contractual escalators and regulatory mechanisms that protect earnings from rising costs.”