One Gas Inc. has long touted its customer expansion in Texas and Oklahoma along the fast-growing Interstate 35 corridor. But now the Tulsa, Okla.-based gas distributor is seeing its prospects improve in Kansas, historically a slower-growth service territory.

"Kansas has been a surprise," One Gas President and CEO Sid McAnnally said in an interview with S&P Global Commodity Insights.

State and federal incentives are helping attract new industrial projects to Kansas, according to Chris Sighinolfi, vice president for commercial development and investor relations at One Gas. At the same time, One Gas has taken steps to be more proactive in scouting economic development opportunities, executives told Commodity Insights at the American Gas Association Financial Forum in Fort Lauderdale, Fla.

In 2022, the Kansas legislature approved a package of tax credits and other incentives for companies that invest $1 billion or more to expand operations within the state or relocate their headquarters to Kansas. The incentives included in the Attracting Powerful Economic Expansion Act are geared toward bringing megaprojects within several industry sectors to the state.

To date, the Attracting Powerful Economic Expansion Act incentives have helped the state land a Panasonic Energy Co. Ltd. electric vehicle battery production facility in De Soto, as well as microchip facilities planned for the city of Bel Aire and Coffey County. The chips facilities also benefited from the federal Creating Helpful Incentives to Produce Semiconductors Act of 2022.

One Gas currently expects compound annual customer growth of 0.3% in Kansas, compared to projections for more than 1% growth in Oklahoma and Texas. But the company is now aligning to serve the new Kansas facilities, as well as residential and commercial developments that surface to accommodate workers.

One Gas aims to optimize growth opportunities

One Gas' five-year forecast for 1% compound annual customer growth across its territories is likely conservative, given its ongoing new meter installations and an expanding backlog of future meter sets, Guggenheim Securities analyst Shahriar Pourreza said in a May 23 research note.

In recent years, One Gas COO Curtis Dinan has led an initiative to more intentionally develop the company's commercial organization. Sighinolfi, a longtime gas utilities and midstream analyst, came in-house about two years ago to help One Gas analyze economic growth trends and investment opportunities.

Internally, that project has entailed One Gas' commercial, operations and capacity planning groups working together to better anticipate growth, as well as shifting to thinking in terms of decades rather than years, Dinan said. Externally, One Gas has worked alongside state commerce departments to understand how gas system capacity can attract industrial companies, he said. It has also worked with cities to develop a more coordinated growth plan for the residential and commercial sectors, Sighinolfi added.

"That visibility, it's sort of circular because we want to help support economic developers at the local and state and regional level," McAnnally said. "But the line of sight that gives us into what's trending and what's likely helps us make capital decisions that support the territories and allow us to get in front of trends."

In some cases, efforts to add system capacity to accommodate early housing market growth have led to new opportunities. During a May 2022 conference call, Dinan highlighted a system expansion project to serve projected residential growth in the Oklahoma City metro area. As developers learned about the project, the anticipated number of homes has increased by about 30% to roughly 13,000, with further upside possible, Dinan told Commodity Insights.

More recently, One Gas approved new gas supply, storage capacity and pressure enhancement projects meant to harden its system and prepare for growth in the Austin, Texas, area. In a May 2 research note, Mizuho Securities analyst Gabriel Moreen called the projects positive investments in a high-growth demand center that substantiated the company's ambitious five-year, $3.6 billion capital plan.

High price of growth in inflationary environment

The company's pursuit of growth is not without risk. One Gas' stock price plunged Dec. 1, 2022, after the company cut its five-year earnings growth outlook. Due to inflation and rising interest rates, executives warned they would shoulder higher operating costs and interest expense as they maintain a growing gas distribution network and pursue customer growth opportunities.

At the time, McAnnally said the company would not sacrifice long-term value creation on account of "relatively short-term" macroeconomic headwinds.

Since then, One Gas managed to top or roughly match year-ago earnings and Wall Street's expectations in successive quarters. Its stock price is up 6.7% in 2023, outperforming the S&P 500 Utilities index and a basket of eight gas utility stocks selected by Commodity Insights.

Many analysts have taken a neutral view on One Gas for the time being, with inflation and rising interest rates offsetting the company's robust organic growth, regulatory constructs that allow for speedy cost recovery and progress in financing higher costs and interest expense.

One Gas remains a premium gas utility with strong management and one of the best operating profiles in the space, Pourreza said in a May 2 note. However, in his view, those strengths were already baked into One Gas' stock price premium over peers, and he remained "cautious around the potential for interest rates and inflationary headwinds to either worsen again, or in [One Gas'] case, to simply persist longer than the couple of years that the company currently expects in its five-year forecast period."

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