Chart 1

Chart 2

S&P Global Ratings applies its public finance retail electric and gas rating methodology to stand-alone municipal natural gas utilities and combined utilities whose net revenues from natural gas and electric sales account for at least half of funds available for debt service. We evaluate these utilities under "U.S. Municipal Retail Electric And Gas Utilities: Methodology And Assumptions," published Sept. 27, 2018. (Combined utilities that have a gas system but derive most of their net revenues from their water and/or wastewater systems are rated under "U.S. Municipal Water, Sewer, And Solid Waste Utilities: Methodology And Assumptions," published April 14, 2022, and are excluded from this report.) All data in this report is as of Oct. 26, 2023. In addition, two issuers have not yet published their 2022 audits and are excluded from all medians calculations in this report.

In serving residential customers, the onus of procuring natural gas falls on the utility. Utilities are also typically barred from shutting off gas supply to residential customers during the winter months, which presents an exposure for utilities where the interplay between commodity costs and income levels creates affordability issues for customers. Industrial customers, on the other hand, can make their own commodity supply arrangements using the gas utility's network. Industrial customers who purchase directly from a municipal utility can elect either firm or interruptible supply; during periods of extreme demand, the utility can curtail supply to "interruptible" customers, who typically receive a discounted rate for choosing this option.

Not-for-profit natural gas utilities benefit from typically serving defined service territories that are almost universally immune from competition. While some utilities extend their distribution networks outside their defined service territory, this is almost exclusively done in unincorporated areas or where other utilities do not wish to extend service. Utilities must also consider how close their planned pipes are to the larger network of interstate or intrastate pipelines and whether the existing infrastructure can bear the additional demand.

Chart 3

Price Volatility: Standard For The Gas Industry

Chart 4

Despite significant price volatility, rating and outlook changes remained minimal in 2022

Chart 5

Natural gas utilities are affected by the inherent price volatility of the natural gas industry and have historically used a variety of strategies to help them moderate market exposure (chart 5), including:

• Automatic or discretionary PGAs for timely cost recovery;
• Securing gas storage ahead of high-cost months;
• Entering into financial hedges; and
• Maintaining robust reserves.

We view favorably sophisticated and proactive management that aims to mitigate volatility for the utilities and their customers while also taking into account the potential negative impacts of their strategies, such as PGAs potentially exacerbating affordability issues.

Table 1

Chart 6

Natural gas or combined utilities tend to hold a healthy level of liquidity in order to purchase sufficient supply for high-demand winter months while simultaneously recovering less cash for low-demand summer and fall months. Therefore, they tend to have their lowest cash balances leading into winter and their highest in summer. A utility's reported available liquidity varies depending on its particular fiscal year-end (chart 6).

Chart 7

Chart 7 shows that higher-rated not-for-profit utilities hold a significantly larger amount of cash, although the amount also correlates with revenue and total customers served.

Some states continue to shield gas utilities from decarbonization efforts

The natural gas industry continues to navigate a changing regulatory environment, with initiatives from local, state, and federal levels targeting greenhouse gas emissions. However, a significant portion of the gas utilities that we rate are located in states that have shown a willingness to stave off federal decarbonization efforts, including Alabama, Florida, Louisiana, Missouri, Tennessee, and Texas. For example, 24 of our 36 rated not-for-profit stand-alone natural gas or combined utilities operate in states that legally preclude banning new natural gas connections. For more information on state preemption laws, see "State Laws Shield Many Municipal Natural Gas Utilities From Energy Transition-Related Demand Erosion," published March 14, 2023.

Key metric medians

Our ratings consider several aspects of each utility's enterprise profile, including median household incomes, concentration in top customers, qualitative assessments of operational management, and rate-raising flexibility. The quantitative financial profile assesses the utility's fixed-charge coverage (FCC), available liquidity both in absolute terms and days' cash on hand, and debt-to-capitalization ratio. We also consider any potential contingent liability.

Table 2

Median FCC remained in line or improved in 2022 from 2021 as many utilities proactively adjusted rates and planned for an extended period of elevated natural gas prices. On the other hand, days' cash on hand worsened as high gas and labor costs increased expenses and eroded the purchasing power of reserves. Higher-rated utilities were also able to maintain higher FCC through 2022.

Chart 8

Within the enterprise and financial profiles, we assign to each factor and subfactor a numeric assessment of 1 through 6 to denote extremely strong, very strong, strong, adequate, vulnerable, or highly vulnerable, respectively. (In other words, the lower the number, the higher the credit quality.)

Chart 9

Utilities serving a larger customer base tend to have a higher rating (chart 9) as they can spread their fixed capital costs over a larger number of customers, thus benefiting from economies of scale. A larger customer base also correlates with a more established and diverse local economy.

Chart 10

By contrast, high concentration in the top 10 customers exposes utilities to potential revenue volatility. Larger customers tend to also be economic drivers and regional employers, and thus the departure of a single customer not only deprives the utility of a major revenue source but also exposes a significant portion of the local working population to unemployment risk, further constraining revenue recovery.

Rating And Outlook Changes On Gas Utilities In 2022 And 2023

Downgrades and/or outlook revisions to negative

• We revised the outlook to negative on Colorado Springs Utilities in August 2022 due to exposure to energy and fuel price volatility and insufficient hedging that translated into weakened financial metrics (see report published Aug. 25, 2022). The outlook was returned to stable in August 2023 due to operational and financial resilience in the face of fuel price volatility (see report published Aug. 01, 2023).
• In March 2023, we lowered the rating on the combined utility system of Alexandria, La., to 'A' from 'A+' due to a lack of hedging to mitigate fuel price volatility, the absence of long-range financial planning, and an inadequate cost pass-through that translated into weakened financial metrics (see report published March 1, 2023).
• We lowered the rating on Fayette Gas Board of Alabama to 'BBB-' from 'BBB', with a negative outlook, in March 2023 due to untimely rate adjustments and no financial hedging practices or gas storage access in 2022, with consequent difficulty in fully recovering operating expenses (see report published March 10, 2023).

Upgrades and outlook revisions to stable

• In March 2022, we raised the rating on Westfield Gas & Electric Light Department to 'AA-' from 'A+' as a result of improvements to its FCC and liquidity. Debt related to two nuclear projects that Westfield participates in through the Massachusetts Municipal Wholesale Electric Co. amortized, lowering Westfield's energy expenses and fixed charges (see report published March 3, 2022).
• We revised the outlook on Central Florida Tourism Oversight District to stable from negative in March 2023 following legislative guidance on the future of the district's operations (see report published March 3, 2023 [note that at the time the district was known as Reedy Creek Improvement District]).
• In September 2023, we revised the outlook to stable on Grey Forest, Texas' gas system due to better than projected FCC following recovery of unbudgeted expenses incurred during winter storm Uri (see report published Sept. 7, 2023).

Table 3