- DAILY GPI
- MEXICO GPI
- SHALE DAILY
Local distribution companies' (LDC) rusty old steel pipes have a silver lining: they offer organic growth opportunities that can often be easily financed through the rate base, according to Fitch Ratings. This is helping make LDCs the growth play in the broader utilities sector.
"Natural gas local distribution companies (LDCs) have become the strong and steady growth vehicle in the broader utilities sector, according to a new report by Fitch Ratings. The need for replacement of aging pipe and a heightened concern for safety following several high-profile pipeline accidents in recent years have created a large backlog of organic growth opportunities for LDCs," the ratings agency said.
States have been lending a hand to LDCs in infrastructure replacement programs. Many allow infrastructure replacement riders to finance new pipe and other infrastructure with rate base dollars without going through a general rate case. "These riders enable LDCs to minimize regulatory lag and start earning a return on approved capital investments in a timelier manner. These LDCs are thus better able to maintain their generally strong financial profiles," Fitch said.
The ratings agency said it expects capital spending by LDCs to continue growing over the long term as utilities replace more aging pipe. "The pipeline systems in the Northeast are particularly old and in some instances contain pipe dating back to the late 19th century," Fitch said. "Even pipe from the 1950s may be considered old, so utilities have plenty of pipe that is ripe for replacement."
For the 12-month period ending Sept. 30, 2015, the 17 Fitch-rated LDCs analyzed in the report had their median capital spending grow to $265 million from only $125 million seen during fiscal 2010. "That is a compound annual growth rate of more than 16%, after having decreased slightly in 2006-2010," Fitch said.
"Although capex growth may not be as robust going forward, Fitch expects it to continue over the long term as LDCs increase their replacement of aging pipe and maintain their pursuit of expansion opportunities where available, such as propane to natural gas conversions in rural areas."
The Fitch note says that LDCs have "become the growth utilities," and notes that other companies in the utility sector have noticed.
Southern Company is in the process of acquiring AGL Resources Inc., and Duke Energy is acquiring Piedmont Natural Gas Co. Inc. (see Daily GPI, Dec. 24, 2015). "Black Hills Corp.'s pending acquisition of SourceGas Holdings LLC and its operating subsidiary Source Gas LLC is aimed at business diversification and growth [see Daily GPI, July 13, 2015]," Fitch said.