Houston (Platts)--1Jun2012/222 pm EDT/1822 GMT

With North American natural gas prices remaining low for the foreseeable future and companies not having fully utilized gas-fired generation capacity, coal-to-gas fuel switching should continue to accelerate through 2013, a Standard & Poor's Ratings Services team said Friday.

In the regulated electric utility industry, a desire for a diverse fuel supply is an obstacle to a massive switch to natural gas. Still, "unless a regulatory commission provides incentive to diversify, the lowest-cost alternative will prevail," said Dimitri Nikas, director of corporate and government ratings at S&P. S&P, like Platts, is a unit of the McGraw-Hill Companies.

Resource diversity can provide insulation when prices for a particular fuel source rise, but the abundance of natural gas for the foreseeable future resulting from North American shale plays means diversity may not become a focal point of regulators.

Also working in gas' favor is that the reduction of the fuel component in customer bills could be replaced by recovery of new capital spending, allowing companies to place new assets in the rate base while keeping bills stable, Nikas said.

It is the best of times for gas-fired generation and the worst of times for coal-fired generation, said Aneesh Prabhu, director of corporate and government ratings at S&P.

He said US gas usage in electric generation was 7 Bcf/d greater in summer 2011 compared with summer 2001, an increase of nearly 40%.

Coal accounts for about 40% of US electricity generation currently, compared with 50% in 2005. Conversely, natural gas fuels about 27% of electricity generation, up from 19% in 2005, the group said.

On top of that, the group said there are close to 25,000 MW worth of coal-fired generation capacity retirements scheduled through 2021.

Meanwhile, the group said that looking forward, it expect gas prices to strengthen somewhat, but it will not be a drastic jump and it will take some time. In the meantime, gas-oriented companies will be under some credit pressure.

Tudor, Pickering, Holt & Co., an energy investment and merchant bank, also touched on coal-to-gas switching in a Friday note.

The firm said gas prices need to be nearer to the bottom of a $2-$2.75/MMBtu range to clear max gas storage. Gas needs an incremental 2 Bcf/d of coal-gas switching but at new higher base switching level. However, as summer heat drives up power demand, maintaining an incremental 2 Bcf/d of gas demand will become increasingly difficult.

"As temperature rises and power demand increases, there is less idle coal/gas generation available to swap market share and thus less coal/gas switching to be had," the note said.

The group said incremental power generation gas demand is biased toward the off-season, as big gas market share gains occur off-peak.

It added that gas storage will likely hit peak capacity well before the historic fall peak, given current levels and an average injection season. The market needs to maintain at least 2 Bcf/d under-supplied to clear storage capacity, the group said.

US gas storage levels are currently 2.8 Tcf, well above the five- and 10-year averages. Injections need to run below historic levels to keep storage below max, an "objective that becomes increasingly difficult as coal- and gas-fired generation battle each other to supply summer's incremental power demand."

For the first quarter of 2012, electric generation gas demand was up 30%, or 5 Bcf/d year over year, Tudor Pickering said.

Pipeline trends were another area the Standard & Poor's group addressed.

"We see the pipeline sector as entering a new paradigm," said Nora Pickens, associate director of corporate and government ratings at S&P.

She said the sector is shifting away from long-haul pipes and that instead the greatest value is trending to pipes that can clear bottlenecks, offer greater flexibility and provide access to the grid.

Pickens said an asset's contract profile and competitive position are key to S&P's view of its credit worthiness.

"Demand pull" assets are credit positive as regulated utilities pull gas to fire power plants or serve winter heating needs. Contracts on those pipes are often of longer duration, allowing for more stable credit fundamentals, Pickens said. She added that shippers are mainly regulated utilities with investment-grade ratings.

On the other hand, "supply push" assets are credit negative as shippers are gas producers that mainly have speculative ratings. On those assets, gas production is pushed out of a basin to an interstate natural gas pipeline for transportation to an end-market. The throughput is more susceptible to gas prices and basin specific production levels, Pickens said.

--Patrick Badgley, patrick_badgley@platts.com --Edited by Lisa Miller, lisa_miller@platts.com

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