PG&E, Atmos Energy Benefit From $50 Billion Pipeline Upgrades

U.S. plans to upgrade the nation’s aging pipeline networks, which may cost an estimated $50 billion, will provide profit growth opportunities at regulated utilities such as PG&E Corp. and Sempra Energy.

Safety concerns about the energy industry’s 2.5 million- mile (4 million-kilometer) network of fuel pipelines are growing among lawmakers, regulators and consumer groups after a pipeline blast last month in a San Francisco suburb killed eight and destroyed 37 homes. Oil leaks in suburban Chicago last month and in rural Michigan in July have also focused attention on a pipeline network that in some areas was laid a century ago.

Investment may benefit utilities such as PG&E, which can pass on the costs to customers through rate increases that include an allowance for profit, Paul Franzen, an analyst at Edward Jones & Co. in St. Louis, said in an interview.

“This is a growth opportunity for companies that own pipelines in the utility industry,” said Franzen, who doesn’t own any shares of PG&E and has a “hold” on the stock. “The unfortunate and tragic incidents underscore the importance and need for an elevated level of investments in infrastructure.”

PG&E rose 22 cents to $46.91 at 9:34 a.m. in composite trading on the New York Stock Exchange. Sempra rose 61 cents, or 1.2 percent, to $53.81.

Photographer: Justin Sullivan/Getty Images

Gas, oil and water pipelines in the U.S. require about $40 billion to $50 billion in investments for repair. Close

Gas, oil and water pipelines in the U.S. require about $40 billion to $50 billion in... Read More

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Photographer: Justin Sullivan/Getty Images

Gas, oil and water pipelines in the U.S. require about $40 billion to $50 billion in investments for repair.

PG&E’s plans to replace older pipes were “constrained” by regulators, who capped spending they saw as unnecessarily driving up customer bills, said Angie Storozynski, an analyst at Macquarie Capital USA Inc. in New York, who doesn’t own shares of the company and has a “outperform” rating on the stock.

$50 Billion Bill

Gas, oil and water pipelines in the U.S. require about $40 billion to $50 billion in investments for repair and rebuilding as 80 percent of the country’s lines were built at least 40 years ago, Mohammad Najafi, director of the Center for Underground Infrastructure Research and Education for the University of Texas at Arlington, said in an interview.

The incidents in California and the Midwest may make regulators approve rate increases for upgrade projects, Gregory Phelps, who oversees $3.8 billion at MFC Global Investment Management US LLC in Boston, said.

“I have little doubt this will cause an acceleration in the replacement of older pipeline infrastructure,” Phelps said in a telephone interview.

Fixing pipelines so they are safer and easier to inspect would represent a “huge capital opportunity,” Mark Snell, chief financial officer of San Diego-based Sempra Energy, owner of the largest U.S. natural-gas utility, said during an investor conference on Sept. 16.

Reconsidering Cuts

After the Sept. 9 PG&E blast in San Bruno, California, the California Public Utilities Commission is reconsidering its decision to cut the amount of money PG&E can spend on building and replacing pipelines to $174 million a year from a proposed $235 million a year. PG&E and consumer groups said last month that additional funding for pipeline safety should be taken up as a separate matter.

The commission ordered PG&E, based in San Francisco, on Sept. 12 to inspect its entire natural-gas system and make repairs.

Michael Peevey, president of the five-member commission, said it’s “possibly true” that PG&E may need to raise prices to pay for safety improvements.

“I’m not in a position to make that call,” Peevey said in a telephone interview. “We will cross that bridge when we come to it.”

NTSB Report

The National Transportation Safety Board said a power- supply malfunction might have caused a valve to open, leading to a surge of pressure and the Sept. 9 explosion in San Bruno, according to an Oct. 13 preliminary report.

The report is, in certain respects, positive for PG&E, Hugh Wynne, an analyst at Sanford C. Bernstein & Co. in New York, wrote in an analyst note today. It “does not highlight any glaring failure in PG&E’s operating procedures.”

PG&E proposed on Oct. 12 a plan to upgrade its pipeline system including making pipe segments easier to inspect with internal probes and possibly installing hundreds of automated valves in populated areas to shut off leaking pipes remotely.

The pipeline in San Bruno took almost an hour to shutoff manually and legislation has been proposed in the U.S. House and Senate that would require installation of automatic valves in high-risk areas, Wynne wrote.

PG&E didn’t provide a cost estimate for the improvements and the source of funds will be determined after consulting with regulators and industry experts, said Katie Romans, a spokeswoman for the company.

Installation of new equipment could lead PG&E to seek rate increases to pay for the improvements, said Franzen.

No ‘Blank Check’

While customers may be forced to pay more to make old lines safer, they also will expect utilities to forgo some profit to cover the expense, according to David Ashuckian, deputy director of energy for the California commission’s Division of Ratepayer Advocates.

“Concerns about PG&E’s pipeline safety cannot and should not be addressed with a blank check,” said Mindy Spatt, spokeswoman for the Utility Reform Network, a San Francisco- based consumer advocacy group.

California regulators may penalize PG&E by reducing its gas rates or requiring the company to spend money on safety and maintenance that could not be recovered, Wynne wrote in an Oct. 6 note to clients. Wynne rates PG&E’s shares “outperform” and doesn’t own any.

PG&E, owner of California’s largest utility, charged customers almost $5 million in 2009 for scheduled repair work on a “high-risk” pipeline about two miles north of the explosion site, then delayed the work, according to documents filed with regulators.

Delayed Work

PG&E determined the money should be spent on more urgent projects, as permitted under regulations, Romans said. The company has asked for the delayed project to be funded again in its latest request to regulators.

Illinois regulators approved a $2.5 billion project in January for Integrys Energy Group Inc.’s Peoples Gas, a natural gas utility in Chicago, to replace and upgrade the city’s 100- year-old pipeline network on the condition that expenses for the 20-year project are closely tracked and audited.

“We have put in place safeguards so that every penny collected from customers will be accounted for,” Erin O’Connell-Diaz, a member of the Illinois Commerce Commission, said in a statement.

Texas regulators are considering whether to require the state’s utilities to identify and replace distribution pipelines most at risk of rupturing. The proposal comes after a “high” number of leaks in steel gas pipes were reported to the commission by Atmos Energy Corp., a Dallas-based utility, Ramona Nye, a spokeswoman for the commission, said in an e-mailed statement.

Atmos plans to replace 100,000 steel distribution lines over the next two years at a cost of 15 cents a month for each customer, said Gerald Hunter, an Atmos spokesman.

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net; Katarzyna Klimasinska in Houston at kklimasinska@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net.

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