Evaluating the Credit Impact of Low-Carbon Alternatives on Pipeline and Midstream Energy Companies

Energy, Natural Resources, Utilities & Independent Power

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The move by North American pipeline and midstream energy (P&M) companies to invest in low-carbon businesses and activities represents a strategic response to increasing environmental scrutiny and a concerted effort to reduce green house gas (GHG) emissions. While P&M companies continue to invest in maintaining and growing their existing assets, the challenges in obtaining approvals for new conventional pipelines are also influencing their foray into low-carbon businesses. Moreover, the recognition that fossil fuel consumption, especially in North America where most of the P&M companies rated by DBRS Morningstar are currently located, will decline at some point over the next couple of decades is another contributing factor. The commentary provides an overview of the new low-carbon businesses that P&M companies are evaluating/investing in and outline the possible credit considerations of these investments.

Key points discussed in the commentary:
-- Despite continued investments in conventional pipelines business, challenges in obtaining new approvals influence the foray into low-carbon businesses.
-- Government regulations related to GHG emissions and incentives in the forms of grants and tax credits could potentially increase the low-carbon investments.
-- The potential avenues of investments for P&M energy companies with high synergies to their core business.
-- The impact of low-carbon investments on credit ratings of the issuers will depend on their stable cash flow generation, operational risk management, and may necessitate the use of additional rating methodologies.