Q4 2021 ONE Gas Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the one gas fourth quarter year end earnings Conference call. Today's conference is being recorded at this time I'll turn the conference over to Brandon Lucy. Please go ahead.
Good morning, and thank you for joining us on our year end 2021 earnings conference call. This call is being webcast live and a replay will be made available later today. After our prepared remarks, we'll be happy to take your questions.
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 Reform Act of 1995 Securities Act of 19, thirty-three Securities and Exchange Act of 1930 for Egypt.
Actual results could differ materially from those projected in any forward looking statements for a discussion of factors that could cause actual results to differ please refer to our SEC filings.
Joining us on the call. This morning are Sid Mcannally, President and Chief Executive Officer, Carol Longhorn Senior Vice President and Chief Financial Officer, and Curtis Dinan, Senior Vice President and Chief operating Officer, and now I'll turn the call over to Karen.
Thanks, Brandon good morning, everyone.
Net income for the fourth quarter 2021 was $65 million or $1 12 per diluted share compared with $58 $3 million or $1.09 per diluted share in the same period 2020.
Our fourth quarter results include an increase in revenues of $10 million over the same period last year, which is primarily due to $9 $5 million from new rates at $1.8 million in sales from net residential customer growth.
Operating costs for the quarter were $7 $1 million higher compared to the same period last year.
We experienced a $13 $3 million increase in employee labor and benefits and outside services. However, our bad debt expense was $5 $6 million lower than last year for the quarter and $6 $4 million lower for the full year.
One of the key drivers for the improvement was a significant increase in energy assistance payments, we received from social service agencies and the government on behalf of our customers.
Throughout the year, our customer service team work diligently to inform our customers of assistance that may be available and we implemented an online energy assistance portal to streamline the process with the agencies.
These efforts were instrumental to us receiving approximately $30 million for our customers in 2020 , one compared with about $19 million in 2020 with nearly half of the payments in 2021 and collected in the fourth quarter.
For the full year 2021, net income was $206 $4 million or $3.85 per diluted share versus $196 $4 million or $3.68 per diluted share in 2020.
Revenues less the cost of natural gas were up $47 million, which includes $32 million from new rates and $8 $5 million from residential customer growth.
Operating costs for the year were $21 $6 million higher than 2020, primarily as a result of increases in outside services and employee labor and benefit.
Depreciation expense was $10 $6 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.
Our capital expenditures and asset removal costs for the fourth quarter were $161 million, bringing our total for the year to $544 million compared to $512 million in 2020.
The increase is primarily attributable to system integrity projects and extension of service to new areas.
Average rate base for the year was four point to $5 billion with 41% of that in Oklahoma, 29% in Kansas and 30% in Texas.
Authorized rate base, which is rate base reflected in completed regulatory proceedings, including full rate cases, and interim rate filings was approximately $4.16 billion.
Looking at our liquidity, we ended the year with $504 million of capacity in our commercial paper program no borrowings under our credit facility and $215 million available under our at the market equity program.
We have $2 $1 billion of outstanding debt associated with the winter storms and as Curtis will describe in a moment, we are on track to get our winter storm costs securitized.
Aside from the winter storm bonds. Our next long term debt maturity is in 'twenty 'twenty four.
I'm also pleased to mention that Moody's recently revised its outlook moving us from negative to stable and affirmed our credit ratings.
Going forward Moody's will exclude the cash flow and debt associated with securitization from its analysis of our credit metrics.
Last month, we released our financial guidance for 2022 with earnings per diluted share expected to fall in the range of $3.96 to $4 20.
Our capital investments for the year are expected to be $650 million, which is at $106 million or 20% increase in capital spending over 2021 .
Investments in system integrity, a key part of our strategy to improve the safety reliability and emissions profile of our system continue to anchor our capital plan, representing about half of the increase in spending expected in 2022.
The other half of the increase is for growth as we continued to execute on opportunities to expand our system to reach new customers.
Total capital spending for the next five years is anticipated to be $3 $5 billion, that's $500 million higher than our previous plan.
We also expect higher rate base growth at 8% to 9%, which is up from 7% to 8%.
Our forecasted five year annual growth rate for net income is expected to be 8% to 10%.
From 6% to 8% with E. P S growing from 6% to 8%, which is up from 5% to 7%.
We anticipate net financing needs through 2026 at $1.6 billion with about 25% of that in the form of equity.
We expect average annual dividend growth between 6% to 8% through 2026 with a target payout ratio of 55% to 65% subject to board approval.
In January the one gas board of directors declared a dividend of 62 cents per share an increase of four cents or six 9% from the previous quarter.
Now I'll turn it over to Curtis for an update on the latest from regulatory and commercial.
Uh huh.
Thank you Karen and good morning, everyone I'll start with a brief update on securitization is meaningful progress continues across all three states.
On January 25th the Oklahoma Corporation Commission approved the terms of the settlement agreement regarding the extraordinary costs incurred by Oklahoma natural gas during winter storm Yuri.
Aimed recovery of all such costs prudent.
At that time of financing order was issued which request the Oklahoma development Finance authority issues securitized bonds.
Provide the net proceeds to Oklahoma natural gas as soon as feasible, but no later than December 31 2022.
In Kansas, We received an order from the Kansas Corporation Commission on February eight approving the terms of the settlement agreement, including recovery of all gas related costs incurred by Kansas gas service during Uri.
Our next step is to file an application requesting a financing order, which we expect to do in early March the K C. C. Will then have 180 days from the date of the filing to issue a financing order.
Which if approved would allow the company to begin the process of issuing securitized bonds.
Also on February eight the Railroad Commission of Texas issued a single financing order authorizing Texas gas service.
And other natural gas utilities participating in the securitization process.
To recover all extraordinary storm related gas purchase costs incurring costs.
Over a period not to exceed 30 years.
The Texas Public Finance authority has begun the process to issue the securitized bonds.
And pursuant to the unanimous settlement agreement approved by the Railroad Commission for the West Texas Service area.
Texas gas service began a three year process of collecting the extraordinary costs, including carrying costs from those customers in January of this year.
Turning to other regulatory matters.
In November the Oklahoma General rate case was approved authorizing the continuation of the performance based rate change mechanism.
Oklahoma natural gas will make an interim PBR filing by March 15th.
This represents a change from previous years when there was no interim filing in the year. Following the conclusion of a rate case.
On February 10th, Texas Gas service made a gas reliability infrastructure program finally.
All customers in the central Gulf service areas requesting an increase of $9 $1 million with rates expected to take effect in June 2022.
Also we expect to make our next gas reliability infrastructure program filing and the West Texas service area sometime in March as well as a cost of service adjustment filing in the Rio Grande Valley service area in April .
Moving onto our commercial activities, we continue to maintain momentum expanding service to new customers with approximately 25000, new customers connected during 2021 .
As Karen mentioned, our updated five year guidance for capital expenditures is now expected to be $3 $5 billion through 2026.
Which includes $1 $1 billion for system expansion.
We've discussed on previous calls the strong housing markets and demand for natural gas, we're seeing in Texas, and Oklahoma spurred by economic development activity in those states.
On average, we expect to see approximately 1.2% annual annual customer growth across our entire service territory over the five year period, noting that in our Texas footprint, we expect it to approach to approach 2% by 2026.
The growth capital, we plan to spend in 2022 and 'twenty twenty-three includes several mainline extensions to build out additional infrastructure that supports several new master planned communities that will be developed over the next few years.
As a result, we expect an increasing rate and the number of meter connections to follow those investments.
Updating our renewable natural gas efforts, we have three projects in final negotiations of interconnect design.
Seven and the <unk>.
Design process and another 12 in advanced stages of evaluation, a total of 22 active projects.
Many of these projects originate from approximately 175 Bcf of potential RMG feedstock that was identified across our territories through our work with Vanguard renewables last year.
As authorized in the Oklahoma General rate case, we are also in the process of developing a voluntary or N. G tariff program for Oklahoma customers to purchase up to $5 million of our N G from our annual gas supply portfolio.
We expect the momentum and demand for RMG to continue as many of our customers, including residential commercial and industrial transport customers look to reduce their emissions.
Now I'll turn it over to Sid for closing remarks.
Thank you Karen and Curtis.
We recently observed the anniversary of winter storm Yuri.
And took the opportunity to thank our team for the outstanding performance that maintain service to our $2 2 million customers.
Hearing that experience as well as our work together in a prolonged COVID-19 environment has provided our company with sharper focus and a deeper dedication to our mission.
Despite all the challenges we faced last year, our core values remain the same.
Our culture that begins with safe operations continues to be our primary focus we closed out the year with the lowest incident rates for lost work days and total recordable incidents in our company's history.
We also executed our largest capital budget to date.
As we look ahead to 2022, our geographic footprint continues to provide a competitive advantage natural gas continues to be available affordable and in demand in the areas we serve.
You heard Karen and Curtis talk about the significant step up in capital spending this year driven by continued investments in system integrity reliability and new levels of customer growth.
When combined these opportunities support meaningful increases in our five year growth rates for rate base net income and earnings per share.
Over the past year, we've also been clear about our intentional and transparent approach to setting climate related goals, we recently announced a goal to achieve a 55% reduction in emissions due to leaks from distribution pipeline by.
By 2035 from a 2005 baseline a goal that includes projected future growth of our assets.
These efforts coupled with the opportunities presented by renewable natural gas, including the significant amount of feedstock proximate to our system provide the backbone of our transition to a cleaner energy future.
In closing I'd like to recognize our over 3600 employees.
Facing last year's challenges with a focus on service delivering results and continuing to execute our strategy their commitment to our core values keeps us anchored each and every day as we work to deliver a high level of service for our customers and exceptional value for our stakeholders. Thank.
Thank you all for joining us this morning, operator, we're now ready for questions.
Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment.
Star one for questions, we'll pause a moment to assemble the phone queue.
We'll take our first question from Julien Dumoulin Smith from Bank of America. Please go ahead.
Hey, This is Cody Clark on for Julian Thanks for taking my questions.
You bet so.
So first just touching on some of the drivers of the increased capex in CAGR and I know a number of moving pieces customer and volume growth being robust continued safety and reliability spending and constructive regulatory outcomes, particularly in Oklahoma with the most recent rate case, but just curious if you could characterize.
Is what is the main driver behind the increased capex and and a CAGR year possible.
Cody This is Curtis and thanks for the question, there's really not a single driver because there are several different categories of capital is the way we think about it. So in my in my prepared remarks, and then some of the other comments that the group made we talked about the increased and the continuing.
The increase of capital spending related to our system integrity work. If you look at our history over the last eight years, that's been a continual process as we scale up.
More and more in our company to continuing to update our system and look at it those types of investments.
We've also in our Texas and Oklahoma as I commented on earlier continue to see very strong growth from a lot of economic development activity in those two states.
And that population growth is being led by really large companies moving into those service territories. So theres a lot of the headlines around Tesla and Apple and Samsung and others like that that have moved into the Austin area, but our other metro areas are having similar economic wins and with that or.
Bringing the workers necessary to support those businesses.
So the housing growth that we're reacting to and spending a lot more of our of gross capital orders in response to those in migrations and the development in those communities. So in my comments I talked about several mainline extensions that we're going to be doing over the next couple of years, that's reaching out to new very.
Large master planned communities that might hold a 15 to 20000 homes over time compared to maybe 200 to 1000 homes in those neighborhoods are those small communities today. So it's really rapid growth in and around our service territories driven by economic activity.
And then the third category that we don't talk as much about relates to government required relocations of our system. So with additional infrastructure spending on highways and bridges and activities like that if we were in those right of ways than we have to move or our assets out of out of those right of ways into new Rai.
[noise] of ways and that's part of our capital spending also.
It's very broad brush, that's the three primary categories driving those increases.
Got it thanks for that Curtis and then can you give a little bit more color on how youre thinking about inflationary impacts to the business you know labor and outside services costs were much higher year over year. So wondering how you're seeing O&M trending kind of in the near term and if theres any potential offsets available and also kind of thinking about.
This in terms of bill inflation paired with recovery of your cost.
Yeah sure Cody.
As you know we've been focused for some time on managing O&M expenses.
Tried to include in our estimates the impact of inflation impacts on wage growth.
But we also feel like we're well positioned to be able to execute this plan.
As laid out by Kiran and Curtis in terms of things like supply chain.
You may recall conversations that before the Covid era, we looked at our supply chain with a pretty critical eye and and went back to consider how can we position ourselves in a way that allowed us to avoid disruptions in that planning has really paid dividends.
As we've gone through some of the supply chain issues that we've seen across the industry. So we've been able to continue to supply both our maintenance programs and our growth programs without interruption. So far. So we will continue to be focused on it in terms of opportunities to mitigate we're constantly looking at the balance.
Between outside services and what we do inside the company, where there is an opportunity for us to bring in service because we think we can execute it at a lower cost.
We're more than willing to do that and have executed some of those programs successfully with positive impact on O&M.
And your last question, we are very focused on impacts to our customers and are constantly thinking about our internal practices to be sure that all of our employees are focused on the fact that part of our customer service is being responsible in the way that we execute our business to minimize the impact on customer bills.
Okay I'll leave it there really appreciate the time.
Yeah. Thank you Cody.
Dara one for questions, we'll pause for a moment.
Well the phone queue.
We'll take our next question from Selman <unk>.
With Stifel. Please go ahead.
Thank you very much good morning.
Could you maybe expand a little bit on RMG and how you think about it in terms of responsibly sourced gas going forward.
Do you see any expansion to that.
And maybe other considered other considerations outside of just you know are in cheap, but how you think about the whole value chain. When you think about our S. G.
Sure and thank you for the question. We are very excited as you could hear and Curtis as report about the opportunities that are presented to us because of the location of our infrastructure and its proximity to the feedstock that supplies RMG. We are we were fortunate to be in a territory.
Where we really don't have to go outside our footprint to look for supply it's readily available, but we have a number of entities looking for projects and contacting us. In addition to the partnerships that we've pursued so we think it's going to be a rich environment for us going forward.
Before I ask Curtis to speak a little bit more about the <unk> opportunity. Let me just share with you how we think about it.
We do it back and looked at our assets and really ask the question what what can we do with the assets that we have and the opportunities provided by our service territory to have the most positive impact on the environment.
And what we saw was we should continue to consider hydrogen blending to look at the opportunities that present permit provides to us in the mid and longer term.
But the the RMG opportunity is one that is near term.
It makes sense for us and one that we believe allows us to participate in a meaningful and short term way in the energy transition to cleaner fuels. So Curtis if you would add a little bit more color to the opportunities that we see.
Good morning, Selman as I mentioned in my comments, we've identified about 175 Bcf of RMG potential within our service territories and so that that is not.
It's something that will come in the future that is something that exists today, but the development around those sources has to continue so after completing that inventory study that I mentioned, we began high grading those potential projects and working with our partners to determine which of those had the most potential.
And which of those were most proximate to our system.
The benefit of that being these RMG facilities are not really large producers as you would think of in a hydrocarbon well, they're much smaller than that and they don't come at a lot of at a high pressure and so the advantage that L. D. CS path is having lots of miles of pipe operating at lower.
<unk>, so being able to bring in those RMG supplies without a lot of compression required gives us that advantage and so that's what we continue to focus on I mentioned there are 22 projects are in various stages that have made it through that screening process at this point and we're continuing to.
Pursue those because of the environmental benefit that capturing those fugitive emissions that are occurring today, the benefit of capturing those and putting those into our system for direct use has a very positive environmental impact and that will continue to be a big focus of our commercial team.
Alright, Thank you very much.
One for questions we'll go.
Excuse me, we will go next to Brian Russo with Sidoti. Please go ahead.
Hi, good morning.
Yes.
It was just curious.
In terms of your <unk> trends as it relates to future rate cases seem like it's a little bit of ROE degradation. In 2021, just given the time of a new base rates in Oklahoma and it looks like you know your 'twenty two guidance probably isn't the.
To the mid to high eight.
8% range and I was just curious where you see those are always trending.
And you know maybe overlay at the timing of your.
Our next general rate cases, which might.
And finally, you know some of your annual tracker.
Tracking mechanisms.
Good morning, Brian This is curtis several items to address their we've over the past.
A few years, the achieved or the allowed ROE coming out of our rate cases have been in that 90 495 ballpark.
So and it seems to have been fairly stable in that area.
We're getting into an inflationary environment and you see interest rates climbing. So I don't know that there's the same downward pressure going forward necessarily that we've seen here in the past when interest rates were declining so much that's not a call that we're going to see roe's suddenly reversed course in and start climbing but.
We do think we've come to a period, where there those are a little bit more stable.
As to the impact that it has on our other filings are we Havent announced any other general rate cases in any of our service territories. At this time, but we are continuing to pursue our interim filings, whether that's the grip filings and coastal filings in Texas.
In March we'll have a PBR filing in Oklahoma.
And then in Kansas, We will have our G. S. R. S filing that we do each year in August so we remain.
On schedule to pursue each of those filings this year.
Okay. Thank you very much.
Thank you.
We will take our next question from Julien Dumoulin Smith with Bank of America.
Hey, sorry. This is Cody again, just one follow up for you all it's OK Jody.
So curious if you have any updated thoughts on M&A clearly saw another very constructive price marker for L. D. C. This morning, I'm wondering if you have a view on the disconnect between valuations in the public and the private markets.
<unk>. Thanks for the question we saw the same news that you did.
And you know our focus remains on the opportunities that are in front of us.
We do.
Note.
The dislocation that you referenced.
But given the opportunities that we have going forward on both the growth and the system integrity slash maintenance side, we feel like we're really well positioned to execute this plan. We're excited about it we think the step up in the metrics that we covered earlier in the call signal what our forward plan is.
We plan to keep our heads down and execute.
With a continued focus on.
The core values that we've had since the company was founded and and really taking advantage of these opportunities that we think are unique to our service territory.
Okay. Thanks again for the time really appreciate it.
You bet. Thank you Cody.
Our one for questions, we'll pause a moment.
We have no further questions in the queue at this time.
Thank you all again for your interest in one gas our quiet period for the first quarter starts when we close our books in early April and extends until we release earnings in May we will provide details on the conference call at a later date have a great day. Thank you.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
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