Fitch Affirms Sabal Trail Transmission's Rating at BBB+ with Stable Outlook

Strategic Insights -

Fitch Ratings has reaffirmed Sabal Trail Transmission, LLC's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+', with a Stable Outlook. The stable outlook reflects Sabal's strong long-term take-or-pay contracts with high-quality demand-pull customers, supported by the U.S. Federal Energy Regulatory Commission (FERC). The ratings also consider Sabal's leverage, which is high for a long-distance natural gas transmission pipeline company.

Key Takeaways:

  • Sabal Trail Transmission, LLC has 90% of its pipeline capacity supported by take-or-pay contracts with a weighted average remaining contract life of around 18 years.
  • The strong credit quality of Sabal's customer base reduces the counterparty risk inherent in take-or-pay contracts, with all three shippers being electric utilities with credit ratings considered by Fitch to be in the 'A' category.
  • Sabal's leverage is high for a long-distance natural gas transmission pipeline company, but the company has reduced leverage through planned expansions, with a forecasted leverage of about 4.1x.
  • The ratings also reflect Sabal's ownership group, including its largest owner and operator, Enbridge Inc. (BBB+/Stable).
  • Sabal operates almost exclusively in the state of Florida, making it prone to business disruptions from storms, regulations, and natural gas demand in the region.
  • Supportive FERC regulation and a cost-of-service framework promote the use of long-term take-or-pay contracts, which provide Sabal the opportunity to earn a reasonable rate of return, if costs are managed prudently.
  • Peer analysis with Southern Natural Gas Company, L.L.C. (SNG; BBB+/Stable) shows that Sabal's stronger contractual protection and weighted average counterparty credit profile are offset by higher leverage and concentration risks.

Statistics:

  • 90% of Sabal Trail Transmission, LLC's pipeline capacity is supported by take-or-pay contracts with a weighted average remaining contract life of around 18 years.
  • Forecasted leverage of about 4.1x for Sabal.
  • EBITDA long-term leverage of 3.5x or below is considered a positive rating factor.
  • Material change in EBITDA leverage expectations above 4.5x could lead to a negative rating action.
  • Weighted average shipper credit-quality experiencing severe and sudden degradation and falling to, or below, a weak investment-grade rating could lead to a negative rating action.

Sources:

  • Fitch Ratings - "Fitch Affirms Sabal Trail at BBB- with Outlook Stable"
  • Fitch Ratings - "Southern Natural Gas Company, L.L.C. (SNG; BBB+/Stable)"