• American Gas Magazine

A few years ago, Christopher Sighinolfi’s conversations with investors had a “terminal value” tone, centered around the perception that natural gas utilities were “on their way toward nonexistence.”

“We don’t get any of those questions anymore,” said Sighinolfi, senior vice president and chief financial officer, ONE Gas. “In effect, we get the opposite. They’re talking about growth, about why people desire our product, and the competitive advantages of this product and our service.”

In a sea of market volatility, natural gas utilities deliver stability, and investors are taking notice.

“The natural gas utility industry has set itself up very well in the eyes of investors in terms of delivering predictable growth,” said Gabriel Moreen, managing director, Mizuho Securities. “Two things Wall Street likes are growth and predictability, and if you can combine both, you’ve got a winning formula.”

An Affordable Resource

The natural gas utility industry has positioned itself well to deliver earnings growth and strong market value, said Moreen.

“Gas utilities are in a regulatory framework that investors find very transparent, and management teams by and large have, with a couple of exceptions, been able to deliver on their promises to investors,” he said. “Hence, they have been rewarded by the market with fairly attractive share-price performance, as well as a good earnings multiple.”

Moreen said natural gas utilities’ investments in their base business continue driving value upward. Many utilities are experiencing population and economic growth in their service territories, while infrastructure strengthening for safety and sustainability “continues apace, and it continues like clockwork.”

Analysts’ ratings are consistently positive because “it’s hard to have a miss in this environment,” where natural gas utilities enjoy growing demand and, as an industry, “make smart investments” that are recoverable, said Michael Gaugler, managing director, utilities and infrastructure, Janney Montgomery.

Since green-energy initiatives under the Biden administration raised the price of electricity, “the best way to lower prices is to use more natural gas,” Gaugler added. “It’s clean. It’s green. There’s plenty of land to build power plants.” That transition will take time, he noted, but now, “there’s almost an infinite demand for gas.”

Natural gas’ competitive cost advantage over electricity, especially in its core function of space and water heating, usually stands at about 3 to 1 or better, said Sighinolfi. ONE Gas aims to maintain this affordability while considering the impact on household budgets.

“When we do our growth modeling and budgeting, we are mindful of how those investments cascade to individual customer bills,” he said.

Growing Territories

Since 2020, the “pandemic unlock” of families uprooting from high-cost cities in search of better quality of life and affordability has been driving a “step change” in residential and commercial growth in ONE Gas’ Texas, Oklahoma and Kansas service territories, said Sighinolfi.

Traditional pillars of economic development include the Southwest’s affordable and accessible hydrocarbon production, plus vibrant economic development in three states—Texas and Oklahoma, plus Kansas—that are driving growth and underlie the installation of 23,000 new meters in 2024, he said.

“Because of economic development being planned and coordinated at the state level and among many different stakeholders, it’s also raised the visibility that we have into that growth profile,” Sighinolfi said. “We can make capital investment decisions that are not built upon hope that one or two things happen but relative certainty that they will.”

ONE Gas proactively dovetails into growth, applying data analytics and relationships with builders to anticipate and coordinate growth spots, such as former ranch properties converting to housing developments of 15,000 homes or more. It’s a story that will continue over the next 10 to 15 years and is “not a one-shot investment,” said Sighinolfi. “From a resource planning perspective, from an economic development perspective, from a financial planning perspective, we’re aligned internally around that growth engine.”

As pressure grows on the electric grid, businesses are recognizing the reliability of natural gas for baseload and backup power generation that protects their investments in multi-generational industrial assets, said Sighinolfi.

“Although price is a significant component in the decision, those other elements are of equal influence these days, so we’re making sure that people understand the reliability of gas service generally and in ONE Gas service history, in particular, in addition to the affordability gradient that we enjoy,” he said.

NiSource has delivered consistent post-pandemic results, as diversification offers opportunities to allocate capital across six states, said Shawn Anderson, executive vice president and chief financial officer, NiSource Inc. Growth in its jurisdictions and residential fuel switching from propane to natural gas tell a compelling story to shareholders, he said.

“We can be thoughtful about the capital allocation process itself,” Anderson said. “We can flow that capital across multiple businesses, fairly efficiently and on a risk-adjusted basis. The scale of NiSource enables us to have a strong supply chain and strong buying power for the equipment and the facilities that our operators need to ensure that we can keep our system safe and reliable.”

NiSource’s natural gas utilities are driving more than 60% of its $19.4 billion five-year base capex plan. That hefty share reflects continued interest in natural gas as a low-cost and reliable commodity, said Anderson, especially as the post-COVID outmigration from cities is attracting customers to NiSource’s Midwest and Mid-Atlantic service territories.

Plus, the thriving manufacturing sector in NiSource territories needs natural gas, which is emerging “as an alternative for on-site power generation and backup power generation,” Anderson said.

As the cost of capital spiked during the Federal Reserve’s string of 2022-23 interest rate hikes, ONE Gas created a capital execution team to centralize its capital planning and deployment processes and generate efficiencies. The enhanced visibility provided by this group recently allowed ONE Gas to reduce its five-year capital expenditure guidance, de-risking its plan by optimizing its capital plan with its cash flow profile.

Since uncontrollable external market forces could impact the cost of and access to capital, ONE Gas took steps to drive efficiencies into its capital and operating processes and reduce its exposure to financing risk. Over time, these efforts—combined with territorial growth, insourcing labor and focusing on capital and operational efficiency—allow the utility to be more “in control of our own fate,” said Sighinolfi.

Regulatory Upswing

Gas utilities have seen “fairly smooth sailing” among regulators who understand their need to earn a return on investments, and investors appreciate that stability, said Moreen. Even in electrifying states perceived as less friendly to natural gas, regulators appreciate the predictable cadence and reliability of gas utilities as they invest in growing and supporting their rate bases.

In NiSource’s six states, modernized ratemaking that helps prevent financing drag also helps deliver strong, growing dividends, said Anderson.

“It’s really the lifeblood of this company for 100-plus years, where we’ve always focused on stakeholder relationships and ensuring that the communities we serve understand what we’re doing,” said Anderson. “From a debt and equity fundraising standpoint, capital markets understand the need for the investments because we have an immense amount of capital to finance long-term.”

Investors are watching upward pressures on natural gas prices fueled by rising demand for electricity and revived liquefied natural gas exports, Moreen said. Still, natural gas resources remain abundant in the U.S., and they remain “very affordable relative to many other energy sources—for example, oil,” he said. “That should accrue to the benefit of gas utility customers.”

Sustaining Sustainability

While Washington’s views on ESG and sustainability are changing, that isn’t nudging natural gas utilities off their courses set toward net zero, say most industry leaders and analysts.

The Trump administration “certainly will clear some roadblocks in terms of accessing potentially new supplies, but at the end of the day, the decision on the part of natural gas producers to drill or not to drill is going to be based on economics, not necessarily policy from Washington,” said Moreen.

Investors’ attention on the environmental aspects of natural gas utilities is slackening, he added, but the utilities are staying on their plotted courses.

“It will wax and wane over time,” Moreen said. “Many of the companies realize that even if investors aren’t quite as focused as they were once upon a time, at some point, they will be again, and companies will be well-served to continue to focus themselves on environmental issues.”

NiSource remains on track, and even “a little ahead of the game,” toward its “90 by ‘30” target—reducing greenhouse gas emissions by 90% by 2030, said Anderson. Methane elimination and advanced leak detection, conducted increasingly through sophisticated technology, maximize the use of resources, enhance reliability and, as always, uphold safety.

“The alignment there is with many of our stakeholders,” said Anderson, who adds that commitments are rooted in economics and what’s best for communities, such as retiring coal plants to reduce O&M expenditures and remove commodity costs to create more stable bills for customers.

Gaugler’s views differ, however. He believes most natural gas utilities will “do the bare minimum” in sustainability. Environmental mandates could ease as governors who back sustainability and climate-change policies potentially lose their seats to challengers prioritizing economic growth, energy independence and lower utility bills.

“There’s a sea change going on,” Gaugler said.

A Bullish Outlook

As always, strong governance attracts investors to the natural gas utility space. Transparency, independence, and engagement are the linchpins, said Anderson. NiSource is “incredibly optimistic” about continuing to deliver value and stability, with a business plan steeped in capital allocation that diversifies recovery, accesses capital markets and strengthens the NiSource credit profile.

“We couldn’t be happier with where we are, and it’s a 24/7/365 game that we play,” he said. “We take every day with that focus in mind.”

Investors will continue responding as long as natural gas utilities commit to consistency, meet their projections and implement their plans, said Moreen. “Investors in gas utilities are looking for stair-step growth function, not hockey sticks,” he said.

All the gas utilities that Gaugler follows are smart and “doing what they should be doing.”

“There’s almost an infinite demand for gas,” he added. “Any way you turn, you can’t get cheaper than gas. If that delta exists or it expands, which it’s likely to do, more and more people are going to want to get gas.”

Sighinolfi hears from investors who are confident well beyond ONE Gas’ five- and 10-year outlooks—“as are we.” Observers have a growing understanding of natural gas’ ability to provide baseload power and replace dirtier forms of energy. They see its unparalleled dispatch capability, readiness to propel economic growth, power to provide lifesaving heat during winter storms, domestic production under rigorous standards and affordability.

“The narrative around natural gas itself is a really important barometer of how bullish I am on us and this sector at large,” he said.