As moratoria on new natural gas hook-ups are passed in municipalities across the US, Enbridge is betting big that gas utilities in places that are friendlier to the fuel source will continue to book profits for the foreseeable future.
The Canadian midstream company has agreed to buy three gas distribution companies from Dominion Energy in a transaction worth $14bn. Upon closing, Enbridge's total delivery capacity to customers in the US and Canada would total 9.3 Bcf/d (263mn m3/d), making its gas utility business the largest by volume in North America.
With some analysts expecting increased regulatory risk in the traditionally low-risk, low-yield gas utility business, the location of the three companies to be acquired by Enbridge may signal a new fault line in the industry: between areas looking to phase out gas, and everywhere else.
All three companies — East Ohio Gas, Questar Gas and the Public Service Company of North Carolina — fall firmly into the "everywhere else" category, serving a total of 3mn customers in Ohio, Utah, Wyoming, Idaho and North Carolina. Each of those five states, along with about 20 others, have passed so-called "preemptive" bans on gas bans, preventing local governments from restricting gas use in buildings.
"They're in jurisdictions that do exactly the opposite" what municipalities looking to phase out gas use in buildings are doing, Enbridge chief executive Greg Ebel said on a televised interview on CNBC. "These are red and purple states."
Municipalities trying to phase out gas include the state of New York, Massachusetts, and other jurisdictions across the country that have pushed legislation prohibiting new gas connections in newly constructed buildings. While not exactly "bans" on gas altogether, the moratoria being passed could limit growth in the gas utility business, which has been a pillar of the industry's investment thesis.
The "doom loop" scenario now being discussed by some investors occurs when a utility's depreciation costs begin to exceed what it spends on growth and maintenance, said James Kahler, head of utility research at FactSet, an analytics company. When this occurs, its "rate base," or net assets — which determines what state regulators allow it to charge customers — shrinks, depressing its operating income. In the worst case, gas utilities' ability to service debt could be impaired, or they could even become stranded assets.
"There are questions now [as to] whether there's terminal value risk to owning gas utilities," Kahler said. "That's kind of new … in the gas world."
Even if the moratoria do little to legally restrict gas consumption, some in the industry fear the specter of a hostile regulatory environment could scare away potential growth opportunities. For example, a manufacturer shopping different areas to site a new factory might choose a state with a preemptive ban on gas restrictions over one pushing regulation to phase out gas consumption.
Unlike scenarios in which existing gas use is actually banned, the concern that moratoria could deter prospective customers is a live worry for many in the utility business in jurisdictions pushing the restrictions, said Tim Sherwood, vice president of gas supply operations at Southern, a gas and power utility.
"It's more the uncertainty than the practical impact of bans today," Sherwood said.
The deal follows Dominion's sale of its gas storage and transmission assets to Berkshire Hathaway in 2020 and its sale of a 50pc stake in the Cove Point LNG terminal in Maryland in July, also to Berkshire. Questar Gas, which Enbridge is now buying, was originally part of Dominion's 2020 sale to Berkshire, though that transaction was called off because of uncertainty over antitrust issues.
The sale was part of Dominion's "strategic business review" aimed at reducing debt and boosting its stock price. The company has been selling off assets unrelated to its state-regulated utility operations.
