The Long and Short
Midstream opportunity in Northern Natural Gas
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Northern Natural Gas Co (NNG) operates the largest interstate natural gas pipeline in the US. It also benefits from ownership by Berkshire Hathaway Energy (BRKHEC), a privately-owned subsidiary of Berkshire Hathaway (BRK: Aa2/AA/A+). While much of the debt issued by BRKHEC is categorized as utility sector bonds, debt outstanding at the NNG subsidiary is categorized as energy-midstream for index purposes. Bondholders appear well compensated for the credit at current valuation, given its steady cash flows and highly regulated customer base. Much of NNG’s cash flows are insulated from swings in natural gas prices and variations in volume demands from customers.
NNG’s ‘A’ rating is underpinned by its ultimate ownership by BRK. NNG contributes about 8% of BRKHEC’s annual net income, making it a core operating subsidiary to the parent. BRKHEC does not pay dividends to the ultimate parent company BRK, which sets BRKHEC and NNG apart from other ownership arrangements, such as master limited partnerships, that funnel the majority of cash flows upward in the structure. This leaves more capital available to fund expansion projects along with upgrades and repairs, which is an important factor as NNG is in the midst of a multi-year modernization project. Bonds issued by NNG in the long-end of the curve offer the most spread available relative to other ‘A’ names in the midstream segment, including lower-rated EPD notes (Exhibit 1).
Exhibit 1: ‘A’ midstream credits
Source: Santander US Capital Markets LLC, Bloomberg/TRACE g-spread indications
NNG’s more than 14,000 mile natural gas pipeline—5,800 mainline and 8,400 transmission pipelines—runs from the West Texas Permian region as far north as the northeast peninsula of Minnesota and northwest of Michigan. The system has well over 2,000 access points, and pumps well over a trillion cubic feet of natural gas annually. The majority of revenue is generated in the northern states in the pipeline (MN, MI, IA, IL, OH, NE, WISC, SD and so on), which is known as the Market Area (6.4 billion cubic feet per day), and benefits from longer-term contracts. The remainder is generated in the significantly more competitive southern region of the pipeline (TX, OK, KS, NM and so on) known as the Field Area (1.5 billion cubic feet per day). NNG’s primary business lines are transportation and storage.
NNG benefits from long-term contract stability, as the majority of revenue is from fixed-fee or take-or-pay contracts with regulated utility customers, which reduces volume risk. The Market Area in particular is comprised of mostly firm transportation contracts where customers reserve capacity in the pipe system that is not dependent on volumes. As of year-end 2024, over 80% of NNG’s customers in the Market Area have terms beyond 2026 and roughly 39% beyond 2028. The weighted average remaining contract term for Northern Natural Gas’ Market Area firm transportation contracts is five years.
Leverage remains commensurate with NNG’s ‘A’ rating even as it takes on additional costs for modernization efforts. Debt to total capitalization for F2024 was 40%. NNG is in the midst of a $4.5 billion asset modernization program to enhance the integrity and reliability of the pipeline, with $2.9 billion still remaining from the current year through 2034. NNG’s next bond maturity is not until 2037. Pipelines do not typically have their own credit facilities, with consistent cash flows making them self-funded, and in NNG’s case they can further lean on support from the parent company in times of liquidity needs through intercompany lending.
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