During President Joe Biden’s first days in office, he signed executive orders returning the United States to the Paris Agreement and establishing the fight against climate change as a pillar of foreign policy and national security.
Will investors take that as a signal to back away from natural gas utilities?
They shouldn’t—given the key role of natural gas as well as utilities in driving sustainability and energy efficiency, say industry leaders and analysts.
The administration’s interest in clean energy and renewables “can be supportive of some of the strategies that a lot of companies are taking to explore the increased use of renewable natural gas, hydrogen, efficiency, carbon-capture technologies and other strategies,” said John P. Hester, president and CEO of Southwest Gas Holdings and Southwest Gas Corporation.
“If we are interested in those options as an industry—and we are—I think that we will find a lot of support from the new administration.”
Even before Biden moved into the White House, there had been talk in certain pockets of the country around moving toward a wholly renewable energy future. But natural gas remains the crux of reaching that cleaner-energy future, said Ryan C. Kelley, chief investment officer and portfolio manager for the Hennessy Funds Gas Utility Fund.
“We can’t get to a fully renewable, completely electrified complex in the United States easily or over many, many decades,” he said. “There are issues with scalability, with reliability, with resilience in a purely electrified, purely renewable future, which means you have to have natural gas in there.”
For Con Edison, the United States’ return to the Paris Agreement marks a renewed focus on the economic benefits of decarbonization. “Building energy infrastructure for cleaner sources will create good-paying green jobs,” said Allan Drury, public affairs manager. “[However] natural gas remains important for the value it delivers. As we bridge into a future of renewables, natural gas offers customers an essential choice for its efficiency, safety and reliability.”
As the United States returns to the Paris Agreement, investors are “trying to understand where all of this ultimately goes and the long-term impact on energy choices, as well as the energy profile and cost to U.S. industry and consumers,” said Beth Cooper, executive vice president and chief financial officer of Chesapeake Utilities Corporation. In this atmosphere, Chesapeake Utilities anticipates that administration policies will emerge in a “thoughtful and holistic way” that considers the abundance and affordability of natural gas resources, reliability of facilities and deployment of increasing amounts of RNG and hydrogen, she added.
“Many of our investors hold the view that natural gas utilities are here to stay, especially those that operate in colder climates and/or have significant power generation load,” said Cooper. “These same investors view technologies such as RNG and green hydrogen as becoming more likely, as opposed to converting millions of households to electric heating.”
Often, energy utilities are more likely to follow state and municipal goals as their clean-energy guideposts than they are federal regulations, noted Kelley. Con Edison, whose Clean Energy Commitment pledges a $1.5 billion investment by 2025, supports the environmental goals of New York City and New York state, “including the development of the mix of energy sources and technologies necessary to enable them,” said Drury.
That kind of diversification may come with risk, said Julien Dumoulin-Smith, analyst with Bank of America, but also gains. Dumoulin-Smith expects that the list of utilities delving into RNG will grow, especially as the industry matures and a deflating price helps drive adoption.
In addition, he added, the “blue energy” of hydrogen created from fossil stocks can be an entry point for gas-based utilities transitioning into the clean-energy future sought by investors: “In its simplest form, one does not need to move immediately from oil derivatives to renewable energy outright in manufacturing the hydrogen that is presumed to be the working fluid or liquid fuel of the future.”
While shareholder return remains the key evaluation criteria for investors deciding where to put their money, environmental, social and governance, or ESG, factors are “a developing requirement,” said Cooper. Today’s investors interpret the presence of clean energy such as RNG in a portfolio as one avenue to underscore the way utilities have always supported their communities and been “sensitive to the environment and the community we serve and where we live.”
“Driving this increased interest in RNG are energy funds seeking to add alternative energy or infrastructure investments to their mandate,” she said. “In short, investors embrace RNG as an ESG-friendly growth initiative. As a result, some members of the financial community have gone so far [as] to suggest that investments in RNG may warrant a higher multiple.”
Southwest Gas is deploying a strategy of reducing its own emissions in fleets and facilities, increasing RNG use, pilot-testing hydrogen projects, promoting energy efficiency among customers and buying from suppliers that have carbon offsets.
“Investors are very interested in sustainability, and their interests are very much aligned with our corporate interests,” Hester said.
The bans on gas hookups popping up around the nation have also been on the minds of investors. Those moratoriums may seem palatable in certain municipalities, but broadscale expansion seems less likely, said L. Joshua Wein, portfolio manager, Hennessy Funds. As the economy recovers from the COVID-19 pandemic, residential and commercial customers—including hard-hit restaurants—will demand the affordability, reliability and convenience of natural gas.
Plus, in a world where some utilities still have coal plants, the idea of leaping suddenly to systems fueled entirely by renewables is unrealistic.
“You can always say it’s not the time, but it’s fair to say this really might not be the time for that,” Wein said. “The administration is highly aware of job creation and infrastructure. There’s a ton of opportunity in renewables, but there’s also a ton of opportunity in spending money to weatherize the infrastructure needed to deliver natural gas.”
Atmos Energy reports that it operates amid “very constructive rate jurisdictions” where no bans have been proposed or imposed. The company is also monitoring state-level “all fuels” or “energy choice” bills that prohibit local bans.
“We stay in close contact through our stakeholder engagement strategy, our local public affairs and operating teams with our city jurisdictions, and our state legislators as well, keeping them informed of what value natural gas brings and what Atmos Energy is doing in their communities,” President and CEO Kevin Akers said on a February 2021 earnings call.
As the Biden administration’s policies become clear, utilities will win “a certain element of confidence” from investors simply by rolling forward their outlooks and clearly presenting the upgrades and investments they plan in response, said Dumoulin-Smith.
“Opacity on that front is what these companies need to address,” he said. “I think they will. I think that’s going to de-risk some of the immediate perception of natural gas for investors.”
In another pushback against moratoriums, customer growth impresses investors for its ability to assure steady revenue. In 2020, Southwest Gas added 37,000 new customers—the highest number in 15 years. These new customers emerged from a steady stream of people seeking sunnier climes for homes and businesses, plus customers who reinvested in their homes or bought newly built homes during the pandemic.
The vast majority of those new homes “have natural gas associated with them,” said Hester. “When we are adding new customers, that means we’re adding new facilities. We have to invest new capital, and ultimately, with new customers, that translates into additional revenue—the rate base that investors are very interested in.”
In evaluating the drivers of natural gas utilities’ performance, the Hennessy Funds Gas Utility Fund—which holds shares of publicly traded American Gas Association members—has expanded its outlook to include electric utilities. Natural gas utilities “led the pack” from 2007 until about 2018, driven by infrastructure upgrades and an expanding rate base, said Kelley. That need for capital expenditures continues if the United States is to meet its decarbonization goals while also shoring up necessary redundancy and resiliency needed to meet the needs and desires of customers.
“On the flip side, you can’t do it alone,” Kelley said. “Natural gas fills in very well where renewables can’t make it. Some of the advantages of natural gas are so compelling, I don’t see how you can take it out of the system.”
These infrastructure investments both support and attract new customers, which in turn bolsters the confidence of investors. For example, a new Nevada law that incentivized natural gas utilities to invest in unserved or underserved areas inspired Southwest Gas to expand into new municipalities, where one mayor enthused about the economic growth potential now that he could inform businesses that natural gas is available. Another previously unserved town will be able to decrease its carbon footprint as it moves away from propane and firewood.
Similarly, Chesapeake Utilities’ push into one Maryland county, among several expansion projects, will displace fuel oil, kerosene and wood chips for residential and commercial customers. In multiple Chesapeake-territory areas where new residential communities are going up, demand is high for natural gas.
New customer growth has been a significant margin driver for more than 10 years, “and members of the financial community have been very supportive about the corresponding financial impact,” said Cooper. “They are equally excited about the opportunities within our existing service areas for continued expansions into new areas where gas infrastructure is absent.”
Pandemic-related restrictions may have put their bite on natural gas utilities as bad debts rose, collections were suspended and commercial load declined. However, operational costs fell, and in the markets, natural gas utilities typically met their guidance, with stable and predictable earnings, all while delivering the reliable energy Americans want and need—need being the operative word during a pandemic where more people are spending more, if not all, time at home.
Predicted earnings growth of 6% to 8% over the next five to six years outpaces the normal long-term average of 3% to 5%, due to continued investment in infrastructure and rate-base growth, Kelley said. Plus, growth in earnings per share is steady, and dividend yields are attractive.
In fact, the post-COVID-19 emergence has created a situation where “utilities in general and natural gas utilities are some of the most compelling valuations we’ve seen in many, many, many years,” said Kelley.
Telling the story of clean-energy initiatives will continue to resound with policymakers and investors, said Hester. So will customer demand for natural gas, as seen in Southwest Gas polls showing that more than 90% of customers prefer to have natural gas in their homes.
“Ultimately, elected officials are going to be held accountable by the people who put them in office,” said Hester, “and as long as we continue to pivot as an industry, to be responsive to climate change concerns with the use of these new technologies, I think customers will be demanding our service for decades to come.”
