Gas utilities work toward climate goals as Q3 earnings approach

US gas utilities are developing projects that help them achieve their climate goals as the sector prepares to report third-quarter earnings

Washington Gas Light Co. revamped a proposal for the next leg of its accelerated pipeline replacement program, responding to an order from Washington, DC, regulators to align the safety initiative with the district's climate goals and policies that encourage building electrification.

Under the new plan, Washington Gas would use risk modeling to prioritize the most leak-prone pipe, a substantial change from past phases of the decade-old initiative. The AltaGas Ltd. subsidiary would also launch a pilot program to identify customers who intend to cancel gas service in favor of electrification or other energy alternatives (Case No. 1179).

Accelerated pipeline replacement programs have faced increased scrutiny in some states during the energy transition. Investors value the programs, and AltaGas leaders have touted Washington Gas' vintage pipe replacement opportunity to analysts and shareholders.

The company's new plan — rebranded as District Strategic Accelerated Facility Enhancement (District SAFE) — would invest about $215 million over three years, according to a Sept. 27 filing. The average annual investment of nearly $72 million marked a 43% uptick from ProjectPipes phase two but was down nearly 47% from Washington Gas' initial proposal for phase three.

Washington Gas would accelerate investment in the final year of District SAFE, but the company said the plan did not reflect the needed pace of investment.

"The company will need to continue further accelerating its investment in system replacement activities to manage the risk to safety and reliability in its district operations," Jessica Rogers, vice president of regulatory and climate strategy at Washington Gas, said in written testimony.

In California, Pacific Gas and Electric Co.'s first interconnection to a landfill renewable natural gas facility will see the Oakland, Calif.-based multi-utility move a lot of the alternative fuel, known as RNG, to market. The PG&E Corp. subsidiary on Oct. 2 joined renewable energy developer Ameresco Inc. and waste management giant Republic Services Inc. in opening California's largest landfill gas-to-RNG facility to date.

The Keller Canyon RNG Plant in Pittsburg, Calif., has the capacity to inject about 1 Bcf of RNG into PG&E's pipeline system per year. The startup will "exponentially increase the volume of clean, California-produced RNG flowing through PG&E's pipeline system," PG&E Gas Engineering Vice President Austin Hastings said in an Oct. 2 news release.

PG&E transported 3 Bcf of RNG between December 2021, when the first producer began flowing the fuel, and August 2024, the company told S&P Global Commodity Insights. The company expected annual RNG pipeline flows to hit 2 Bcf per year in 2024 and 4 Bcf per year in 2025.

Separately, PG&E has a 2030 target of procuring 15% of its gas supply as RNG for bundled residential and small commercial customers. The California Public Utilities Commission in 2022 established a renewable gas standard for investor-owned gas utilities, which requires RNG to account for about 12.2% of annual gas supply to core customers by 2030.

In 2023, PG&E released solicitations to procure RNG to meet its 2030 target and proposed a woody biomass RNG pilot project to the PUC.

Ahead of quarterly earnings calls, select gas utility stocks rallied sharply in the third quarter as market trends bolstered the subsector, putting the group in a strong position heading into a supportive period of easing interest rates.

A group of eight gas utility stocks selected by S&P Global Commodity Insights posted a 13.4% gain during the quarter, outperforming the broader stock market. From mid-July to early August, the basket of gas distributors also outperformed the wider utilities sector, which later pulled ahead to end the quarter up nearly 18%.

Inflows from institutional and individual investors alike have strengthened lately. This reversed a prolonged trend of money flowing away from the subsector because investors could capture easy, safe yields elsewhere, according to Hennessy Funds Chief Investment Officer Ryan Kelley.

Following the US Federal Reserve's half-percentage point interest rate cut in September, and with more cuts ahead, all of that money sitting in banks and money market funds will have a harder time earning a competitive yield, Kelley told Commodity Insights.

"For sure, people who are looking for yield and looking for basic cash flow — fixed income-type investors — utilities, especially gas utilities, their dividends are much more attractive as rates are falling than when they were rising," he said.