Industry reassures Wall Street: Gas utilities are part of clean energy future

During an annual meeting with the investment community in New York City in 2020, natural gas industry leaders found themselves quelling concerns over the sudden rise of bans on gas hookups in new buildings. Two years later, the American Gas Association's top brass projected confidence during its latest presentation to the CFA Society New York.

"I'm here to tell you that those two ideas, affordable energy and a cleaner planet, are not in conflict," Southern Co. Gas Chair, President and CEO Kimberly Greene said during a March 4 virtual address. "We can achieve an equitable and sustainable energy future while maintaining resiliency and reliability. We will do that by harnessing the potential of America's natural gas utilities and the infrastructure that we operate."

As the electrification movement continues to expand, the American Gas Association, or AGA, has highlighted customer growth among the U.S. gas distributors that it represents. The trade group recently said the industry can grow its customer count by 25% through 2050, even as the industry and broader U.S. economy advance toward net-zero greenhouse gas emissions.

"I want you to remember that natural gas utilities nationwide are adding customers at a record pace," said Greene, who chairs AGA's board. "More than 876,000 residential end users were added in the United States from 2019 to 2020. That is more than one customer per minute."

Emissions reduction pathways, pipeline headwinds

AGA President and CEO Karen Harbert noted that the gas ban movement sparked a countermovement, with at least 20 states passing laws to prohibit restrictions on gas hookups. Additionally, at least 15 states have passed laws that support the uptake of renewable natural gas, or RNG, among gas utilities, Harbert said.

RNG is a fossil gas alternative processed from methane waste at farms, landfills and other sources. Gas utilities aim to decarbonize their distribution systems by blending RNG and low- or zero-carbon hydrogen into their gas stream. Greene said these pathways are essential to meeting environmental goals.

Harbert acknowledged that it is getting harder to build large intrastate gas transmission pipelines capable of increasing capacity to regions with growing gas consumption. Legal challenges have bogged down infrastructure like the Mountain Valley Pipeline LLC, Harbert said. Meanwhile, a new climate-focused permitting process at the Federal Energy Regulatory Commission has drawn congressional scrutiny because it stands to add time and expense to gas pipeline projects, Harbert said.

M&A valuations bolster industry's image

AGA entered the meeting with the wind at its back. In the previous month alone, two private infrastructure investment funds purchased local gas distribution companies at premium valuations. Following the $8.1 billion buyout of South Jersey Industries Inc., shares of gas utilities zoomed higher, led by pure-play local gas distribution companies identified as potential acquisition targets by Guggenheim Securities.

Greene noted that gas distributor stocks have traded at discounts to shares of electric utilities in recent years. Greene said the valuations in recent dealmaking underscored the criticality of gas utilities.

"This is a growing business," Greene said. "And I think it's interesting to see that there is a gap right now between what some private investors feel and public investors. I think that's going to settle out over time."

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