The aftermath of a year’s worth of major natural gas pipeline safety incidents and heightened regulatory/legislative concerns are raising points of caution and reflection from regulators and a credit ratings agency.

Last Wednesday Standard & Poor’s Ratings Service (S&P) noted that the U.S. gas pipeline industry faces increased costs from expected stiffer safety regulations now unfolding, but the credit standing of the major pipeline operators should not suffer.

Earlier in August, Southwest Gas Corp. CEO Jeffrey Shaw said that in the aftermath of a continuing string of natural gas pipeline/infrastructure failures, the pressure from federal and state regulators will grow and so too will the capital expenditures (capex) among utilities and large transmission pipeline operators. He made the observations earlier in response to questions from financial analysts on a second quarter earnings conference call.

Several catastrophic events, including last year’s fatal pipeline rupture and explosion in San Bruno, CA, prompted S&P to publish a brief ratings analysis on what the reaction to these recent energy tragedies is likely to mean for respective industries. S&P comes to three initial conclusions:

S&P is sure there will be higher costs, but it leaves as very uncertain how much higher that turns out to be. Therein lies a challenge for the pipeline and nuclear power plant sectors. For pipelines, this uncertainty will be centered on the midstream operators, according to S&P. New pipeline integrity management guidelines are going to surely cost more to carry out, the rating agency said.

“Maintenance capital spending will undoubtedly increase, which will weigh on companies’ cash flows,” S&P said. “But we don’t know the magnitude and timing of such spending, or whether regulators will allow these companies to pass along these higher costs to customers.”

Shaw’s Las Vegas, NV-based gas-only utility distribution company has attempted a modest diversification program offering distribution pipeline construction services to other utilities in about 18 different markets under its NPL Construction Co., a full service gas pipeline distribution system contractor. And the business is taking off in these times of heightened concerns about pipeline safety and maintenance, Shaw said.

“I think as long as we continue to see the current movement for more gas pipeline safety regulations in this nation — and that appears to be the case — I think NPL is going to be very busy bidding on new work.”

Working mostly under competitive contracts bid on from year to year, NPL does not go into a market “until they have scale that makes sense,” Shaw said. “They are very selective about where they go, and then they are very aggressive and competitive. When they get into a market, they will generally work very hard to nurture a relationship with the utility they serve, and generally it is a very long-term relationship.”

NPL still has to compete for new contracts on a frequent basis, Shaw said. “Once in awhile they get a longer-term contract, but I expect the trend we see to continue for some time, just because of all the replacement and maintenance work that needs to be done throughout the country.”

In S&P’s analysis, a particular stumbling block for pipelines that was cited is the fact that many them have portions that predate 1970, and there are very poor records on any of the major interstate pipelines before 1970. Poor record-keeping already has been identified in the still-unfolding federal and state regulatory investigations of Pacific Gas and Electric Co.’s pipeline system operations prior to its Line 132 failing in San Bruno.

S&P emphasized that the federal Pipeline Hazardous Materials and Safety Administration earlier this month issued a new Distribution Integrity Management Final Rule, which effectively extends the traditional integrity maintenance programs on high-pressure transmission pipelines to local utility distribution pipeline systems (see related story). This raises the ante by adding tens of thousands of miles of gas and hazardous liquid pipelines that will need to be tested and maintained much more closely.

“This [new distribution pipeline] regulation requires local gas distribution companies to evaluate the risks on their pipeline systems to determine their fitness for service, and to take action to address those risks,” said the S&P report, pointing out that distribution systems are a vast mix for materials — from plastic to cast iron pipelines dating back to the 1940s — and can include uncoated bare steel.

Interstate high-pressure transmission pipelines — all steel — in highly populated “high consequence areas” (HCA) should all be tested and assessed by the end of next year, according to the Interstate Natural Gas Association of America (INGAA). About 87% of the national pipeline grid network in HCA locations has been checked, according to INGAA.

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