Q1 2022 ONE Gas Inc Earnings Call
Brandon Lohse: A reminder that statements made during this call that might include One Gas expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provisions of the Private Securities Litigation Act of 1995, the Securities Act of 1933, and the Securities and Exchange Act of 1934 each as amended.
Brandon Lohse: Actual results could differ materially from those projected in any forward-looking statements.
Brandon Lohse: Actual results could differ materially from those projected in any forward-looking statements.
Brandon Lohse: For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.
Brandon Lohse: Joining us on the call this morning are Sid McAnnally, President and Chief Executive Officer, Caron Lawhorn, Senior Vice President and Chief Financial Officer, and Curtis Dinan, Senior Vice President, and Chief Operating Officer. Now, I'll turn the call over to Sid.
Brandon Lohse: Joining us on the call this morning are Sid McAnnally, President and Chief Executive Officer, Caron Lawhorn, Senior Vice President and Chief Financial Officer, and Curtis Dinan, Senior Vice President, and Chief Operating Officer. Now, I'll turn the call over to Sid.
Brandon Lohse: Joining us on the call this morning are Sid McAnnally, President and Chief Executive Officer, Caron Lawhorn, Senior Vice President and Chief Financial Officer, and Curtis Dinan, Senior Vice President, and Chief Operating Officer. Now, I'll turn the call over to Sid.
Robert S. McAnnally: Thanks Brandon, and good morning everyone. There are many issues calling for attention in today's dynamic environment. At One Gas, we are focused on positioning the company to address the emerging business environment while continuing to execute our strategic plan.
Robert S. McAnnally: Thanks Brandon, and good morning everyone. There are many issues calling for attention in today's dynamic environment. At One Gas, we are focused on positioning the company to address the emerging business environment while continuing to execute our strategic plan.
Speaker 2: At One Gas, we are focused on positioning the company to address the emerging business environment while continuing to execute our strategic plan.
Robert S. McAnnally: A review of the current landscape suggests that we're on the right path, as our team maintains focus on safe and reliable delivery of natural gas to our customers, building additional capacity to respond to the significant organic growth in our service territory and making progress toward our renewable natural gas goals. I'll turn it over to Caron and then Curtis to discuss the details that lead us to these conclusions. Caron?
Caron A. Lawhorn: Thanks, Sid, and good morning everyone. Net income for the first quarter was $98.9 million, or $1.83 per diluted share, compared with $95.6 million, or $1.79 per diluted share, in the same period of 2021.
Caron A. Lawhorn: Our first quarter 2022 results were impacted by $3.6 million of expenses related to a decrease in the unrealized mark-to-market value of assets and liabilities associated with our non-qualified employee benefit plans.
Caron A. Lawhorn: These non-cash items, which are not included in our guidance, impacted EPS by five cents for the first quarter of 2022. By comparison, in the first quarter of 2021, we recognize income of $100,000.
Caron A. Lawhorn: Turning our attention to the operational performance of the business, our first quarter results include an increase in operating income of $10.5 million or 8% over the same period last year.
Caron A. Lawhorn: Operating income reflects an increase of $15.1 million from new rates, primarily due to regulatory filings completed in the second half of last year, including the Oklahoma natural rate case and interim filings in Kansas and Texas.
Caron A. Lawhorn: In addition, natural gas sales from residential customers increased $2.6 million due to the growth in our customer base that we continue to experience, primarily in Oklahoma and Texas.
Caron A. Lawhorn: Our operations and maintenance expenses increased $4.2 million over the first quarter of 2021 due to increases in outside services at $3.7 million and employee-related costs of $2.2 million. Partially offsetting those increases is a decrease in our bad debt expense of $2.4 million.
Caron A. Lawhorn: Our operations and maintenance expenses increased $4.2 million over the first quarter of 2021 due to increases in outside services at $3.7 million and employee-related costs of $2.2 million. Partially offsetting those increases is a decrease in our bad debt expense of $2.4 million.
Speaker 3: Partially offsetting those increases is a decrease in our bad debt expense of $2.4 million.
Caron A. Lawhorn: The profile of our customer receivables has improved since year-end, with fewer of our receivables at a past due status. Further, we continue to see an increase in energy assistance payments from social service agencies on behalf of our customers.
Caron A. Lawhorn: In the first quarter we received $3.5 million more in energy assistance payments than this time last year. We appreciate the efforts of our customer service team and their work on behalf of our customers.
Caron A. Lawhorn: In the first quarter we received $3.5 million more in energy assistance payments than this time last year. We appreciate the efforts of our customer service team and their work on behalf of our customers.
Speaker 3: We appreciate the efforts of our customer service team and their work on behalf of our customers.
Caron A. Lawhorn: That said, we are very mindful of the impact of higher natural gas prices on our customers' bills. We will keep a close eye on our receivables and continue to work with our customers who need payment arrangements or other assistance.
Caron A. Lawhorn: That said, we are very mindful of the impact of higher natural gas prices on our customers' bills. We will keep a close eye on our receivables and continue to work with our customers who need payment arrangements or other assistance.
Caron A. Lawhorn: Depreciation expense was $4.8 million higher than the prior year, reflecting an increase in net property, plant, and equipment as a result of our higher level of capital investment.
Caron A. Lawhorn: Our capital expenditures and asset removal costs for the first quarter were $123 million, compared to $109 million in 2021. The increase is consistent with our expectation that capital investment will be $650 million for the full year, an increase of about 20% over the $544 million we invested in 2021.
Speaker 3: The increase is consistent with our expectation that capital investment will be $65 million for the full year, an increase of about 20% over the $544 million we invested in 2021.
Caron A. Lawhorn: Authorized rate base was approximately $4.16 billion as of March 31st, and we estimate our average rate base for 2022 will be approximately $4.32 billion.
Caron A. Lawhorn: Securitization continues to progress in all three states as Curtis will describe momentarily. We anticipate that we will receive the proceeds in Texas and Oklahoma before the end of the year. We expect to use the proceeds to call a portion of the notes related to Winter Storm Uri, $1.4 billion of which is due in March 2023.
Caron A. Lawhorn: Looking at our liquidity, we ended the quarter with $494 million of capacity in our commercial paper program and no borrowings under our credit facility.
Caron A. Lawhorn: With the issuance of $35 million of equity under our asset market equity program during the quarter, we have issued the amount of equity we had contemplated in our guidance for 2022.
Caron A. Lawhorn: Yesterday, the One Gas Board of Directors declared a dividend of 62 cents per share, unchanged from the previous quarter.
Caron A. Lawhorn: And lastly, we have affirmed our 2022 financial guidance, including a net income range of $215 million to $227 million, earnings per diluted share of $3.96 to $4.20, and capital investments of $65 million. As Cutis will discuss, our outlook for growth of our customer base and rate base remains strong in 2022 and beyond. Curtis, I will turn it over to you.
Curtis L. Dinan: Thank you, Caron, and good morning everyone. I'll start with a brief update on our commercial activities.
Curtis L. Dinan: Over the next several years, a portion of our growth capital is focused on expanding into new areas to support several new developments.
Curtis L. Dinan: As we capture significant projects, we are designing and building our system capacity not just for the current opportunity, but also for the next major expansion.
Curtis L. Dinan: Our new customer connections are strong today and these expansion projects will continue to provide additional growth opportunities for many years to come.
Curtis L. Dinan: I'd like to take a moment and highlight two large projects.
Curtis L. Dinan: In the Oklahoma City Metro, we completed the first phase of a two-year $26 million expansion project that will support the development of over $10,000 planned building lots over the next five to seven years.
Curtis L. Dinan: While meeting the immediate needs of residential and commercial customers, this project also positions us for the next wave of population growth in this area. and in Austin, which is one of the fastest-growing housing markets in the US, we have several significant expansion projects underway. Approximately five years ago, we completed a mainline extension to an area of Austin that felt a little remote at the time.
Curtis L. Dinan: While meeting the immediate needs of residential and commercial customers, this project also positions us for the next wave of population growth in this area. and in Austin, which is one of the fastest-growing housing markets in the US, we have several significant expansion projects underway. Approximately five years ago, we completed a mainline extension to an area of Austin that felt a little remote at the time.
Curtis L. Dinan: While meeting the immediate needs of residential and commercial customers, this project also positions us for the next wave of population growth in this area. and in Austin, which is one of the fastest-growing housing markets in the US, we have several significant expansion projects underway. Approximately five years ago, we completed a mainline extension to an area of Austin that felt a little remote at the time.
Speaker 4: and in Austin, which is one of the fastest-growing housing markets in the US, we have several significant expansion projects underway.
Speaker 4: Approximately five years ago, we completed a mainline extension to an area of Austin that felt a little remote at the time.
Curtis L. Dinan: In the first quarter of this year, we began construction from that initial expansion of a 23-mile multi-phased mainline extension, where we will invest an additional $50 to $55 million to reach several other developments that are expected to have approximately 20,000 residential and commercial lots completed over the next five to seven years.
Curtis L. Dinan: Like the Oklahoma example, these projects position us for further opportunities over the coming decade.
Curtis L. Dinan: These two projects are good examples of the type of repeat business we are earning with our builder and developer partners. It also demonstrates how we use market data and internal system information to align system enhancements and market opportunities.
Speaker 4: It also demonstrates how we use market data and internal system information to align system enhancements and market opportunities.
Curtis L. Dinan: Our expansion strategy focuses on long-term projects that enhance our system resiliency and position our service areas to capture future growth opportunities.
Curtis L. Dinan: Turning to renewable natural gas, RNG is a key part of our efforts to reduce our emissions profile.
Speaker 4: Rng is a key part of our efforts to reduce our emissions profile.
Curtis L. Dinan: On the RNG front, we are uniquely situated in a service region that has over 175 Bcf of annual RNG production potential and are encouraged with the increasing engagement of RNG developers in our markets.
Curtis L. Dinan: We have completed 10 projects through the preliminary interconnect design and the developers are completing their evaluation of the projects.
Curtis L. Dinan: We expect to have gas supply options from several projects across our footprint that will support our Oklahoma RNG optim tariff that will be filed later this year.
Curtis L. Dinan: Moving on to securitization. In Oklahoma, the Oklahoma Development Finance Authority received a hearing before the Oklahoma Supreme Court on April 13th seeking validation of the bond issuance as required by statute. If the court issues a ruling that validates the bond issuance, the ODFA will then be able to issue the securitized bonds associated with the Oklahoma natural gas financing order.
Curtis L. Dinan: Moving on to securitization. In Oklahoma, the Oklahoma Development Finance Authority received a hearing before the Oklahoma Supreme Court on April 13th seeking validation of the bond issuance as required by statute. If the court issues a ruling that validates the bond issuance, the ODFA will then be able to issue the securitized bonds associated with the Oklahoma natural gas financing order.
Speaker 4: seeaking validation of the bond issuance as required by statute.
Speaker 4: If the court issues a ruling that validates the bond issuance, the ODFA will then be able to issue the securitized bonds associated with the Oklahoma natural gas financing order.
Curtis L. Dinan: Pending a ruling, the financing order requests the ODFA to issue bonds and provide the net proceeds to Oklahoma natural gas this year.
Curtis L. Dinan: On March 31st, Kansas gas service submitted its application for a financing order to the Kansas Corporation Commission, as contemplated by the unanimous settlement agreement, requesting flexibility to recover Winter Storm Uri costs over five to 12 years.
Speaker 4: Requesting flexibility to recover winter storm. yearit costs over five to 12 years.
Curtis L. Dinan: The KCC has until September 27th to review the application and issue a financing order. If the financing order is approved, One Gas will proceed with the bond issuance. And in Texas, the process to issue securitized bonds is being led by the Texas Public Finance Authority.
Speaker 4: If the financing order is approved, one gas will proceed with the bonds issuance.
Speaker 4: And in Texas the process to issue securitizeded bonds is being led by the Texas public finance authority.
Curtis L. Dinan: The Railroad Commission issued a financing order on February 8th and under the statute, the finance authority must issue the securitized bonds by August 7th.
Curtis L. Dinan: Turning to other regulatory matters, on March 15th Oklahoma natural gas filed its required PBRC application for a $19.7 million increase in base rates, as well as an offsetting ebit credit of approximately $9.1 million. As filed, the net impact would be a $1 per month increase in the average residential customer bill.
Curtis L. Dinan: Turning to other regulatory matters, on March 15th Oklahoma natural gas filed its required PBRC application for a $19.7 million increase in base rates, as well as an offsetting ebit credit of approximately $9.1 million. As filed, the net impact would be a $1 per month increase in the average residential customer bill.
Speaker 4: On March fifteenth Oklahoma natural gas filed that's required pbrc application for a $19.7 million increase in base rates.
Speaker 4: As well as an offsetting edbit credit of approximately $9.1 million.
Speaker: As filed, the net impact would be a $1 per month increase in the average residential customer bill.
Curtis L. Dinan: During the first quarter, Texas' gas service made gas reliability infrastructure program filings for all customers in the Central Gulf and West Texas service areas, requesting an increase of $9.1 million and $5 million, with new rates expected to take effect in June and July.
Speaker 4: Requesting an increase of $9.1 million and $5 million, with new rates expected to take effect in June and July .
Curtis L. Dinan: Last week we filed a cost of service adjustment in the Rio Grand Valley requesting an increase of $2.9 million. If approved, new rates would become effective in August of this year.
Curtis L. Dinan: And finally, I'll wrap up with a quick comment on the state of our operations.
Curtis L. Dinan: Industry-wide inflation has affected material and supply costs and lead times for certain items have increased. We have been able to mitigate the impacts through a diverse supplier network, our previous buildup of key materials and supplies, and our advanced purchasing strategy to commit to future production slots for key materials and supplies, sometimes up to two years in advance.
Speaker 4: And lead times for certain items have increased.
Speaker 4: We have been able to mitigate the impacts through a diverse supplier network.
Speaker 4: Our previous buildup of key materials and supplies.
Speaker 4: And our advanced purchasing strategy to commit to future production slots for key materials and supplies, sometimes up to two years in advance.
Curtis L. Dinan: These practices have allowed us to maintain our inventory of critical parts and avoid disruptions to our planned capital and maintenance work. We continue to monitor the ongoing situation, but we remain confident in our capital investment forecast and our ability to execute. And now, I'll turn it over to Sid for closing remarks.
Speaker 4: We continue to monitor the ongoing situation, but we remain confident in our capital investment forecast and our ability to execute.
Speaker 4: And I'll turn it over to Sid for closing remarks. Thank you both.
Robert S. McAnnally: Thank you both. After more than two years, our employees who have been working remotely are back in the office with a hybrid schedule.
Robert S. McAnnally: The importance of our culture, with its emphasis on safety and value creation, came into focus as we welcomed employees back and offered our gratitude to teams in the field who worked successfully through the pandemic.
Robert S. McAnnally: We also recently received the results of our annual employee engagement survey from Gallop and we're pleased to learn that our employee engagement scores improved. This improvement at One Gas compares to the average national engagement score, which declined for the first time in more than a decade.
Robert S. McAnnally: We also recently received the results of our annual employee engagement survey from Gallop and we're pleased to learn that our employee engagement scores improved. This improvement at One Gas compares to the average national engagement score, which declined for the first time in more than a decade.
Speaker 2: This improvement at One Gas compares to the average national engagement score, which declined for the first time in more than a decade.
Robert S. McAnnally: An increased level of employee engagement is a testament to the work of our leaders and employees in maintaining our company culture and demonstrating our core values through challenging times.
Robert S. McAnnally: We also received notice from the American Gas Association that for the fifth consecutive year, One Gas had the lowest rate of significant injuries among our peers.
Speaker 2: That for the fifth consecutive year, one gas had the lowest rate of significant injuries among our peers.
Robert S. McAnnally: Our company would not be able to achieve our safety, reliability, and growth goals without the dedication of our more than 3600 employees. I want to thank each of them for their contributions and for working hard every day to serve our 2.3 million customers.
Robert S. McAnnally: Thank you all for joining us this morning. Operator, we're now ready for questions.
Operator: Yes, thank you. And if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Operator: Once again, that is star one if you would like to ask a question. And we'll take our first question from Julian Molian Smith with Bank of America.
Multiple speakers: Hey, good morning everyone. It's Cody Clark on for Julian, thanks for taking my questions. Good morning.
Cody Clark: So first, I'm wondering if you can clarify the commentary around pension not being included in the guidance, specifically, due to mark-to-market on a quarterly basis. What's the split of debt and equity and what impact are you assuming for the year? I mean, should we be assuming that you're coming in five cents below mid-point, given the drag in the first quarter, or are there some offsets that would put you back at the mid-point?
Caron A. Lawhorn: The mark-to-market fluctuates from quarter-to-quarter, and over time it's not a material number and it's easily absorbed in our range of guidance. So we don't try to estimate a specific income or expense number associated with that when we think about our guidance for the year.
Caron A. Lawhorn: As I mentioned, we had $3.6 million of expenses this quarter and last year it was only $100,000 and it was actually income. So we get these big swings from quarter to quarter, but over time not a big impact.
Cody Clark: Okay, understood. And then just second, we've seen some very constructive price markers for LDCs of late and, given some of the recent strong performance of shares and gas utilities in general, I'm wondering if you all have any updated thoughts on M&A. There seems to still be a disconnect between valuations in the public and private markets, despite gas utilities re-rating relative to electrics.
Robert S. McAnnally: Yes Cody, we've noted that dislocation in pricing, but our position remains the same. As Curtis lined out, we are very pleased with the inventory of organic opportunities that we have. We think the strategic plan is on target, so we are heads down and all about execution and believe that we've got the right strategy in place for the current environment.
Cody Clark: Okay, thanks to the team, and I'll pass it off here and jump back in the queue.
Operator: Once again, that is star one if you would like to ask a question. And we'll now take a question from Gabe Moreen with [inaudible].
Gabriel Philip Moreen: Hey, morning everyone, a couple of housekeeping ones. One is on the equity issuance, I think Caron mentioned that you're done for the year. Can you just speak to whether you issued anything after the first quarter was finished to date?
Multiple speakers: Good morning, Gabe. We did not. Okay, so first quarter that $35 million was [inaudible] Caron, if I'm reading that right. That's correct.
Multiple speakers: Okay, great. And then can I ask about this review in front of the Oklahoma Supreme Court on the securitizations? I'm not as familiar, can you talk about, is that what the challenge is about, what the issues are being debated? Obviously, I think it it might be a novel thing in Oklahoma- can you just maybe speak to that a little bit and timing as to when you expect an outcome there? Hey, Gabe, this is Curtis. The hearing before the Supreme Court was required under the statute. So the process is going just through the normal course as we expected. And if you have seen our other industry peers in the state on both the gas and electric side, we're all going through the same process where the commissions have issued the financing order that then moves the process to the Supreme Court to review those, at which point, when they issue an order then it would go back to the Oklahoma Development Finance Authority to go through the bond issuance process. We don't have a timeline for when the Supreme Court would issue a ruling. There's nothing contemplated or required in the statute, so that's completely up to the timing of the Supreme Court's action.
Speaker 5: What the challenges, about what the issues are being debated. Obviously it might be anovel in oklaa- can you just maybe speak to that a little bit- and timing is when you expect an outcome there. Gave this is Curtis and the hearing before the Supreme Court was required under the statute. So the process is going just through the normal cour as we expected, And if you have seen our other industry peers in the state on both the gas and electric side, we're all going through the same process where the commissions have issued the financing order. That then moves the process to the Supreme Court to review those which point. When they issue an order. Then it would go back to the Oklahoma development finance authority to go through the bond issue its process. We don't have a timeline for when the Supreme Court would issue a ruling. There's nothing contemplated or required in the statute, So that that's completely up to the timing of the Supreme Court's action.
Gabriel Philip Moreen: Thanks, Curtis. And then maybe just a bigger picture sort of on the--Well, I guess it will remain to be seen whether it's a step-change in gas costs or not in the medium to long term, but for now that step-change in gas costs, whether it changes anything about how you're thinking about kind of the business capital allocation and then also within guidance, is there anything for increased working capital costs or bad debt?
Multiple speakers: So Gabe, I'll take the first part of that- and we're obviously very mindful of the impact that it has on our customers. But in terms of our capital spending program, there are a couple of things to think about. 1: on the growth side, we're responding to what the market demand is. Housing inventories are low in that market- continues to move very quickly, so there's a high demand for our product. The builders and developers that are putting in these new neighborhoods want to be able to offer natural gas service in those neighborhoods, so that's driving a big portion of our capital. And then, as we've talked about several times before, the spending that we do on system integrity, were agnostic to those other factors. We have to spend the capital on the system that's needed to maintain system integrity and reliability and, just as we have since day 1, we continue to stay focused on the spending for those items, as well. And Gabe as it relates to guidance, of course, we issued our guidance in January prior to this recent kind of ramp-up in inflation and increase interest cost. So no there's nothing specific and the plan related to that other than the general inflation that we would normally expect in a year. That said, we have certainly evaluated and continue to evaluate the impact on our plan. And for now, we've affirmed guidance and believe that those impacts are manageable for 2022.
Multiple speakers: So Gabe, I'll take the first part of that- and we're obviously very mindful of the impact that it has on our customers. But in terms of our capital spending program, there are a couple of things to think about. 1: on the growth side, we're responding to what the market demand is. Housing inventories are low in that market- continues to move very quickly, so there's a high demand for our product. The builders and developers that are putting in these new neighborhoods want to be able to offer natural gas service in those neighborhoods, so that's driving a big portion of our capital. And then, as we've talked about several times before, the spending that we do on system integrity, were agnostic to those other factors. We have to spend the capital on the system that's needed to maintain system integrity and reliability and, just as we have since day 1, we continue to stay focused on the spending for those items, as well. And Gabe as it relates to guidance, of course, we issued our guidance in January prior to this recent kind of ramp-up in inflation and increase interest cost. So no there's nothing specific and the plan related to that other than the general inflation that we would normally expect in a year. That said, we have certainly evaluated and continue to evaluate the impact on our plan. And for now, we've affirmed guidance and believe that those impacts are manageable for 2022.
Speaker 4: Housing inventories are low in that market- continues to move very quickly, So there's a high demand for our product. The builders and developers that are putting in these new neighborhoods want to be able to offer natural gas service in those neighborhoods, So that's driving a big portion of our capital. And then, as as we've talked about several times before, the the spending that we do on system integrity. We're agnostic to those other factors. We have to spend the capital on the system that's needed to maintain system integrity and reliability and, just as we have since day 1, we continue to stay focused on the spending for those items, as welland gave. As it relates to guidance, of course, we issued our guidance in January , prior to this recent kind of ramp up in inflation and increase interest cost, So now there's nothing specific and the plan related to that other than the general inflation that we would normally expect in a year. That said, we have certainly evaluated and continue to evaluate the impact on our plan.
Multiple speakers: Got it. Thanks, Caron, thanks, Curtis. Thanks for the question, Gabe. Once again, that is star one if you would like to ask a question. We'll now take a follow-up from the line of Julian Molian Smith with Bank of America.
Cody Clark: Hey, everyone, Cody again. Just one quick follow-up housekeeping item. Just looking at residential volumes- down 4% year-over-year while residential customer growth continued and keeping degree days were higher, it looks like a mix in Texas might be a factor here, but wondering if you can give a little bit more color on what's driving this dynamic?
Multiple speakers: Cody, this is Curtis again. That's purely related to Winter Storm Uri and the impacts that we saw in the first quarter last year versus what the weather patterns were like this year is the concentration of the cold weather in February, but then also it's difficult to compare as well because some of our customers around the territories were also dealing with electric outages and so while their volumes may have been even higher last year, not having electricity, that had an impact as well. So it's really an apples and oranges comparison. Yup, understood. Got it. Thanks the much for the time again.
Multiple speakers: Yes sure, Cody. Thank you for the question. As a reminder, that it's star one if you would like to ask a question. And we'll pause for just a moment. And it appears there no further telephone questions, I'd like to turn the conference back over to our presenters for any additional or closing remarks.
Multiple speakers: Thank you all again for your interest in One Gas. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings in August. We'll provide details on the conference call at a later date. Have a great day. Thank you. Once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.