Key Takeaways
- We see environmental risks as above average and increasing for midstream companies because of heightened public awareness of or opposition to large-scale transportation projects, reflecting their indirect exposure to oil and gas production and the role of hydrocarbons in the global debate about climate change.
- For U.S.-based midstream entities focused primarily on natural gas transportation and storage, credit risks are somewhat less, in our opinion, because we expect natural gas will continue to displace higher-emission hydrocarbons such as coal and fuel oil for power generation and heating.
- We see social exposure as average, albeit higher for new pipeline construction projects, exposed to increasing public and regulatory resistance also imply significant and increasing credit risk for entities with new pipeline construction activities.
- More stringent environmental regulation and permitting have delayed projects but have yet to harm ratings, mainly because of a project's limited financial impact relative to companies' scale and diversification.
Analytic Approach
Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).
Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.
In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.
Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.
The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.
Environmental Exposure
We assess environmental credit risks as above-average for the midstream energy sector, reflecting its status as operating infrastructure assets but taking into account its indirect exposure to other highly exposed sectors such as oil and gas production companies and downstream refining and gas-fired power generation. The midstream sector's inherent direct exposure primarily relates to pipeline spills, GHG emissions, contamination, and land use.
Pollution is a material risk for companies transporting hydrocarbons. Midstream companies must secure environmental permits to build their infrastructure, which has become increasingly difficult to obtain from state and federal regulatory bodies. For example, Enbridge Inc.'s 2010 pipeline oil spill in Michigan's Kalamazoo River cost it $1.2 billion for the clean-up and a $177 million settlement to resolve claims related to the spill. The company has had some difficulty obtaining all the necessary permits for its Line 3 replacement project in the same area.
Land use is another key risk, especially for new pipeline construction, for which environmental protests or legal challenges have at times led to substantial delays and higher costs. The most notable examples include challenges to Dominion Energy's Atlantic Coast Pipeline, EQM Midstream Partners L.P.'s Mountain Valley Pipeline, the Dakota Access Pipeline (DAPL), and Kinder Morgan Canada's (KML) Trans Mountain Pipeline. While operator Energy Transfer L.P. was able to start operating Dakota Access in 2017, the pipeline prompted a legal challenge from the Standing Rock Sioux reservation and caused significant delays and costs. Before Trans Mountain was sold to the Canadian government, construction delays and legislation from British Columbia impeded progress, which weighed on KML's credit profile. The U.S. Supreme Court will decide on Atlantic Coast Pipeline's fate in June 2020. This decision will have implications for EQM's MVP project, too.
Social Exposure
We see social credit risks as average for existing operators, mainly stemming from safety and long-term (beyond 2040) demand because of changing consumer environmental behavior (influencing demand for oil and natural gas).
Safety management is key given the construction of sophisticated infrastructure like pipelines, storage terminals, and processing and fractionation assets, which handle volatile and toxic hydrocarbons that have important environmental considerations. Companies in the sector typically track, manage, and report incidents (to the Occupational Safety and Health Administration) and have specific programs to educate their work forces.
Increased environmental risks and growing concern about climate change and the use of hydrocarbons are social factors for the sector. Consequently, we see increased risks for new pipeline expansions or construction. Regulators are increasingly resistant to granting permits for construction on rights-of-way for river crossings or through protected areas such as national parks and coastal waterways. This permitting risk is becoming more of a credit issue given the land use and disruptions that pipeline routes can create for local communities. For example, we revised our outlook on EQM Midstream Partners to negative due to significant delays in the in-service date for its Mountain Valley Pipeline project and the project's substantial cost increases. As a result, the partnership will have to spend more capital on the project and its share of EBITDA was delayed by more than a year, which weakened credit measures more than we initially forecast.
ESG Risks In Midstream
Table 1
| Company/Rating/Comments | Analyst | |
|---|---|---|
| U.S. midstream energy | ||
| Cheniere Energy Inc.(BB/Stable/--) | ||
| Cheniere's profitability and competitive position are not currently disadvantaged by environmental and social factors compared with peers. However, the liquefied natural gas industry continues to operate against a backdrop of environmental risk factors that affect the domestic natural gas market, including the environmental impact of hydraulic fracturing and the ability to build new infrastructure to transport the commodity to its facility. In addition, all of Cheniere’s assets are located in the U.S. Gulf Coast, which can experience extreme weather events, and thus more exposed to physical climate risk, in our view, than global peers. While social factors are less of an impetus for the company at this time, Cheniere will have some exposure to Chinese customers in the next few years and is thus exposed to broader political implications from the on-going trade dispute with the U.S. | Steven Goltz | |
| Enbridge Inc.(BBB+/Stable/A-2) | ||
| We see Enbridge as having somewhat higher exposure to environmental risk than peers because it faces strict global and domestic environmental policies that make it increasingly challenging for it to construct new pipeline projects on time and within budget and manage operations. These challenges are heightened for Enbridge given its large pipeline network. Our credit analysis recognizes Enbridge's longer-term sustainability plans to address these risks by diversifying the product mix it transports (by preferentially expanding its natural gas pipelines) and new investments in renewables such as wind, solar, biomass, and biofuel. Perhaps the most notable environmental incident in the company's history was the oil spill in Michigan's Kalamazoo River in 2010. The company spent $1.2 billion on the clean-up and reached a settlement of $177 million to resolve claims related to the spill. Enbridge’s diverse asset base mitigated the financial impact on its credit metrics. The company is also facing more social backlash from environmental and certain indigenous groups on the replacement and construction of natural gas and liquids pipelines. A handful of incidents, including a fatality due to a pipeline explosion, could result in litigation and affect credit ratios. Enbridge is currently replacing over 1,030 miles of liquid pipeline across three Canadian provinces and three states related to its multibillion dollar Line 3 Replacement project. Replacing Line 3 allows the company to maintain the structural integrity of its infrastructure, which could prevent future environmental issues. | Mike Llanos | |
| Energy Transfer L.P.(BBB-/Stable/--) | ||
| The impact of environmental and social factors on Energy Transfer's credit profile is more prominent than its peers because of ongoing litigation related to DAPL and construction issues at its Mariner East pipeline (ME1) and expansion project, Mariner East 2 (ME2). We believe the partnership's ability to manage several large-scale projects in different geographic areas was weak. That said, it will have fewer large-scale projects in the future that will be in progress simultaneously. We also expect better execution of organic projects and will have lower tolerance for poor implementation in our credit analysis. DAPL was placed into service and, in our view, an outstanding legal challenge to the pipeline's operations seems remote. | Michael Grande | |
| Enterprise Products Partners L.P.(BBB+/Stable/A-2) | ||
| We currently consider Enterprise Products's governance and operational oversight as strong, and among the best in the sector. The company has demonstrated a focus on strategic planning, timely execution, and depth of leadership. The company’s governance committee has board-level oversight of environmental, transportation compliance, health and safety policies and other environmental and social initiatives. Enterprise Products abides by a "Goal-Zero" policy for safety, evidenced by its lower-than-average lost time and recordable incident rate for the industry. The company's large capital program could face execution and construction risks if environmental or social concerns resulted in delays or cost overruns, especially if the partnership faced opposition to the replacement and construction of natural gas and liquids pipelines. | Stephen Scovotti | |
| Enviva Partners L.P.(BB-/Stable/--) | ||
| We believe Enviva’s management of environmental risk is stronger than its peers. Enviva continues to benefit from countries in Europe and Asia switching to biomass electricity generation to reach their renewable energy production targets. Enviva’s advantageous geographic position in the southeastern U.S. allows the partnership to sustainably produce wood pellets without contributing to deforestation due to the oversupply of wood fiber and growth rate of trees in the area. The increased demand globally is driven by sovereign renewable targets and allows Enviva to expand and diversify its customer base, improving the contract profile. | Jacqueline Banks | |
| EQM Midstream Partners L.P. (BB+/Negative/--) | ||
| EQM has more exposure to social risk factors than its peers due to permitting issues with its large pipeline project, Mountain Valley Pipeline (MVP). MVP has faced numerous delays due to regulatory issues and currently cannot complete construction without receiving approval to cross the Appalachian trail (currently subject to the U.S. Supreme Court decision in 2020). MVP’s budget has subsequently increased by approximately $1 billion, of which EQM is responsible for 45%. The delay of the in-service date and increased budget have pressured EQM’s leverage metrics above 4.5x for an extended period. The elevated leverage and uncertainty around the in-service date have resulted in a negative outlook on EQM. | Jacqueline Banks | |
| Ferrellgas Partners L.P.(CCC-/Negative/--) | ||
| We consider Ferrellgas’ governance factors as fair only and less supportive than industry peers. We believe Ferrellgas’ current business strategy lacks proactive measures to address key challenges in the propane market, including significant competition, customer commodity switching, and warmer winters. Our assessment also reflects a weak financial planning process, which resulted in a debt-to-EBITDA ratio of 8x-10x over the past 18 months and $1.3 billion in debt maturities during the next two years. | Alexander Shvetsov | |
| Inter Pipeline Ltd.(BBB+/Negative/--) | ||
| We currently view Inter Pipeline's exposure to environmental, social, and governance factors as in line with peers. However, Inter Pipeline is in the process of constructing the Heartland Petrochemical Complex (HPC), which will be the first of its kind in Canada and designed to convert locally sourced, low-cost propane into polypropylene. The complex will also have a propane dehydrogenation facility that will convert propane into polymer-grade propylene and is expected to secure jobs and support environmentally cleaner production of plastic products. Although we consider this project to be environmentally positive, we have a negative outlook on the company because of its construction and execution risk given the long construction period, large size, and complexity. | Luqman Ali | |
| Kinder Morgan Inc.(BBB/Stable/A-2) | ||
| Kinder Morgan's (KMI)’s expansive natural gas, crude oil, and refined products infrastructure network exposes it to environmental and social challenges similar to those of its large, diversified peers. Given its focus on natural gas, the company is somewhat less exposed to leaks and spills, compared with peers with a higher proportion of oil pipelines. KMI’s Trans Mountain Pipeline (TMX) sale from its Kinder Morgan Canada subsidiary to the Canadian government was a credit positive since the pipeline construction project faced significant environmental and regulatory opposition. The sale resulted in a material reduction in debt and traded the company’s crude oil exposure for natural gas exposure since capital was reallocated to constructing natural gas pipelines in the Permian basin, which we view as having less execution risk than TMX. We assess KMI’s governance as fair only, which is weaker than similar-size peers, because a large percentage of board members have had previous ties to the company. At the same time, we recognize KMI's management and board’s proactive engagement in ESG risk mitigation policies and standards. In its October 2018 ESG report, KMI detailed GHG reduction efforts with a goal to reduce companywide global GHG emissions by 2021. | Mike Llanos | |
| Midwest Connector Capital Co. LLC(A-/Stable/--) | ||
| We consider Midwest Connector’s exposure to environmental and social risk to be higher than the industry. The ongoing environmental litigation against DAPL, while we do not believe it will materially harm Bakken Pipeline’s operations, challenges the U.S. Army Corp of Engineers issuance of construction permits to DAPL to cross the Missouri River at Lake Oahe. We expect a final court decision in the first quarter of 2020. Ultimately, we view the ongoing litigation as having limited influence on the pipeline's operations. We believe the sponsors have substantially mitigated the risk of a possible unfavorable court ruling on DAPL by entering into a contingent equity contribution agreement in connection with the outstanding notes. | Thomas Cavazuti | |
| Pembina Pipeline Corp.(BBB/Stable/--) | ||
| We see Pembina’s operations as increasingly exposed to environmental risks, given extensive federal and provincial regulatory evolutions. The Canadian federal government imposed a carbon tax and the Greenhouse Gas Polluting Pricing Act (GGPA) as a regulatory backstop for carbon pricing if the provinces fail to impose it themselves, which could affect how GHG emissions are regulated in Canada. Most of Pembina's business operations in Alberta are exempt from the tax, which will limit its exposure until the exemptions expire in 2023. Pembina is committed to continuing to work with Alberta's government as the exemptions expire and regulations evolve. Pembina is also investing in projects that include significant capital commitments, including a greenfield propane dehydration plant and polypropylene upgrading facility with joint venture partner Kuwait Petrochemical Corp. and the Jordan Cove LNG terminal. Environmental and social issues that cause regulatory delays and cost overruns on these projects could weigh on the credit profile and rating. Pembina's social risk awareness is good, and the company has a history of working with First Nations and building relationships with Canada's Aboriginal communities. | Stephen Goltz | |
| TC Energy Corp.(BBB+/Stable/--) | ||
| We see TC Energy's environmental and social risks as comparable to the industry. Social and environmental activism are an ongoing moderate risk for the company, similar to the industry, mainly related to high-profile pipeline projects such as Keystone XL, which in our opinion has significant execution risk during construction. (Keystone XL has not yet reached financial investment decision.) We believe these risks could increase total project costs and extend timelines for the full in-service date. TC Energy also has an important regulated and unregulated North American power segment, but with no exposure to coal-fired generation: its total generation capacity of about 4,200 megawatts--pro forma for its recent sale of its interest in three natural gas-fired power plants--is derived mostly from nuclear (74%) and natural gas (26%). We believe TC Energy, with its 48.3% ownership interest in nuclear generator Bruce Power, has a good operating track record and we don't expect this segment to be a cause of any environmental or social issues for the company. The company, in our view, has a strong safety record: it spent C$1.3 billion, or about 12% of its 2018 capital budget, on asset integrity and safety, which is generally in line with industry peers. We see the company’s management and governance as satisfactory. Its high corporate governance standards are better than most peers. These include an independent, nonexecutive chair; effective board size; director share-ownership requirements; and annual assessments of board, committee, and individual director effectiveness. The company has also been recognized by climate groups for its disclosure of carbon emissions and the long-term sustainability of its business. | Michael Grande | |
| The Williams Cos. Inc.(BBB/Stable/A-2) | ||
| We believe the company manages its environmental, social, and governance factors in line with midstream peers. Williams has been facing resistance from state regulators and local communities for certain expansion projects such as the Northeast Supply Enhancement and Constitution Pipeline. Both projects continue to face hurdles in obtaining water quality certification permits from New York. That said, Williams hasn't made any significant capital outlay for these projects that would harm our view of its credit quality. The company handles about 30% of U.S. natural gas volumes and its decisions to pursue projects supporting LNG exports and other natural gas demand-pull projects support our view that the management team and its board are aligned and will continue to pursue growth projects that are more environmentally benign in terms of emissions. | Michael Grande | |
| Global midstream energy | ||
| Grupo Energia Bogota S.A.E.S.P.(BBB-/Stable/--) | ||
| Despite the political influence of the city of Bogota, its controlling shareholder, the company has been gradually improving its governance standards. Currently, at least four out of the nine members of its board of directors are independent, and Bogota's mayor is no longer a board member. We believe this is positive for governance and shows the company's willingness to shield its strategy from political interference, usually related to changes in the city's administration. We believe that the company plays an important role in lowering CO2 emissions by guaranteeing the gas supply and increasing the reliability of the gas-fired electricity systems in the countries in which it operates. | Vinicius Ferreira | |
| Transneft PJSC(BBB-/Stable/--) | ||
| We assess Transneft’s management and governance as fair only. A key controversy stemmed from the Druzhba pipeline accident in April to June 2019, which involved the contamination of large quantities of oil in the Druzhba pipeline with organic chlorides and, in our view, pointed to potential limitations in Transneft’s operational controls. We believe that the government's active participation in the negotiations regarding the accident helped restore exports relatively quickly, by July 2019; strengthen Transneft's bargaining power vis-à-vis its shippers on compensation; and keep contingency liabilities broadly in line with the Russian ruble (RUB) 23 billion contingency reserve. The contingency reserve was created in the company's IFRS 9m2019 report, corresponding to a $15 per barrel maximum discount approved by Transneft's board in July 2019 and only 5.5% of Transneft’s 2018 EBITDA. However, the room for litigation remains, because the shippers are yet to agree to the proposed compensation or to present a documented confirmation of damages. Other than that, Transneft's governance system is typical for a Russian state-controlled entity, with independent professional management but close oversight by various government bodies. Transneft is in line with peers on environmental factors: it has never faced any material environmental fines and focuses on limiting the frequency of pipeline accidents to below 0.086 per 1,000 kilometers per year (which is low by global standards), consistently reducing polluting emissions, and in compliance with the ISO 14001 standard. | Elena Anankina | |
| Ratings as of Feb. 10, 2020. Source: S&P Global Ratings. | ||
This report does not constitute a rating action.
| Primary Credit Analysts: | Michael V Grande, New York (1) 212-438-2242; michael.grande@spglobal.com |
| Vinicius Ferreira, Sao Paulo + 55 11 3039 9763; vinicius.ferreira@spglobal.com | |
| Stephen R Goltz, Toronto + 1 (416) 507 2592; stephen.goltz@spglobal.com | |
| Mike Llanos, New York (1) 212-438-4849; mike.llanos@spglobal.com | |
| Stephen Scovotti, New York (1) 212-438-5882; stephen.scovotti@spglobal.com | |
| Kimberly E Yarborough, New York (1) 212-438-1089; kimberly.yarborough@spglobal.com | |
| Secondary Contacts: | Luqman Ali, CFA, Toronto (1) 416-507-2589; luqman.ali@spglobal.com |
| Elena Anankina, CFA, Moscow (7) 495-783-4130; elena.anankina@spglobal.com | |
| Jacqueline R Banks, New York + (212) 438-3409; Jacqueline.Banks@spglobal.com | |
| Thomas S Cavazuti, New York + 1 (212) 438 1148; thomas.cavazuti@spglobal.com | |
| Alexander Shvetsov, New York + 1 212-438-1339; alexander.shvetsov@spglobal.com |
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