Q3 2022 ONE Gas Inc Earnings Call

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Okay.

Good day and welcome to the one gas third quarter earnings Conference call Today's conference is being recorded.

At this time I would like to turn the conference over to Brandon Lohse. Please go ahead Sir.

Good morning, and thank you for joining us on our third quarter 2022 earnings live webcast.

A replay will be made available later today we.

We apologize for this morning's technical difficulties if.

If you have a question feel free to ask that question at any point during the course of this call.

And that number you will need to dial to ask that question is.

Is 539.

4448542.

And the pass code is three or 42084332.

Again in order to ask a question during the call feel free to dial this number at any point during the call and we will get the questions at the end of that.

A conference call again, the number is 53944485 for Q <unk>.

Pass code 34208433 Q.

I'll repeat that information at the end of our prepared remarks.

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 1933, and the Securities and Exchange Act of 1934, each as amended.

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.

Before we begin I wanted to mention that last night, we issued a corrected earnings news release. After we realized that a line item was inadvertently omitted from the financing activity section and the statements of cash flows in the appendix the.

The corrected news release is available on our website.

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 Sid.

Thanks, Brendan and good morning, everyone.

Our earnings release reflect steady performance toward the guidance, we provided in January as evidenced by the completion of winter storm Yuri securitization in Oklahoma, which carried with it a credit rating upgrade from S&P a record number of new meters set through the first nine months of the year and capital execution that remains on track.

He had approximately $650 million this year.

In today's dynamic environment, many issues by for our attention and demand are steadfast execution.

Two years ago, we face the uncertainties of the COVID-19, pandemic and the complexities inherent in managing at 3700 person three state workforce half of which remained in the field daily to serve our customers last year, we encountered winter storm Uri with sustained regional temperatures colder than at any point in our company's 116 year.

History.

Our system and coworkers performed at a very high level, keeping our customers supplied with life saving fuel during the crisis.

This year, we've confronted decades high inflation and an aggressive monetary response by the federal reserve with increasing demand and ongoing geopolitical conflicts impacting the cost of natural gas coupled with persistently elevated inflation, we remain committed to customer affordability and managing costs.

We're also focused on positioning the company to address emerging business challenges, while continuing to execute our strategic plan.

A review of our achievements suggest that we're on the right path building capacity to respond to the organic growth in our service territories, and making progress toward our clean energy goals as Karen and Curtis will describe in greater detail. Our teams have also proactively work to ensure the continued reliability of our service and prepare for future.

Challenges with that I'll turn it over to Karen to discuss financial details for the quarter Karen.

Thanks, Ed and good morning, everyone.

When we initiated our 2022 guidance earlier this year, we contemplated an increase in operating expenses as we work to build operational capacity to support our system expansions as well as higher financing costs associated with our increased capital spend however, the challenges said mentioned regarding elevated inflation and rising commodity costs have press released.

Despite.

Despite these headwinds we remain on track to achieve our 2022 financial targets as was noted in our earnings release, we are narrowing our 2022 net income guidance to a new range of $217 million to $226 million with earnings per diluted share of $4 to $4.16.

As Ted mentioned for your capital expenditures, including asset removal costs are still expected to approximate $650 million.

Actual results for the third quarter reflect net income of $23 $7 million or <unk> 44 cents per diluted share.

There was $23 million or 38 cents per diluted share in the same period last year.

These results include an increase in operating income of $5 $3 million or 13% over the same period last year.

Reflects an increase of $15 $6 million from new rates, primarily due to regulatory filings completed over the past 12 months.

$1.3 million from continued residential customer growth, primarily in Oklahoma and Texas.

Operating cost increased $9 $4 million over the third quarter of 2021, we experienced an increase in outside services of $4 $8 million and employee related costs were up $2.4 million.

Other income net increased $2.6 million for the quarter, which reflects a reduction of $2 $5 million and non service costs for our pension plans due to the remeasurement of our obligations, which we discussed last quarter, we did not experience significant mark to market gains or losses on our nonqualified benefit plan assets during the third quarter.

Interest expense was $4 $2 million higher this quarter than in the same period 2021, as I mentioned last quarter higher natural gas prices and increased natural gas storage balances as compared to the prior year have contributed to an increase in our working capital needs, which we find with commercial paper average C P rates worth $3.

5% this quarter compared to <unk>, 2% in the third quarter of last year.

In addition, we issued $300 million of 10 year for the quarter percent senior notes in August which brings our weighted average interest rate on long term debt excluding bonds related to winter storm here. The four point, 14% as of September 30th compared to 4.08% last year.

Depreciation expense for the third quarter at about $1 million higher than the prior year, and our capital expenditures and asset removal costs for $174 9 million compared to $144 $5 million in 2021.

Penetration of course, there's some replacements as well as investments to extend service to new customers.

If there is rate base was approximately $4.28 billion as of September 30th and we estimate our average rate base for 2022 will be approximately $4 $8 billion.

We continue to focus on optimizing the financing of our business during the third quarter of 2022, we executed forward sales agreements for approximately 570000 shares of our common stock at an average sales price of $80 46 per share bringing.

Bringing us to a total of approximately $1 2 million shares available for issuance as of September 30 at an average sales price at $80.84 per share.

How do we settle these shares at quarter end, we would've generated net proceeds of about $94 million.

These shares are in addition to that $35 million, we issued and sold earlier in the year.

We have $85 million of equity available for issuance under the ATM program.

We ended the quarter with $575 $4 million of capacity on our $1 billion commercial paper program and no borrowings under our credit facility, we have no maturities of long term debt in 2023.

Turning to securitization on August 25th we received approximately $1 3 billion of proceeds from the issuance of securitized bonds by the Oklahoma Development Finance authority related to winter storm Yuri.

In September we use those proceeds to repay $1 $3 billion of related senior notes due in 2023 and 'twenty 'twenty four.

As the proceeds reflect recovery of costs deferred by Oklahoma Natural gas there was no material impact to earnings.

On August 18th the Kansas Corporation Commission issued an order approving the terms of the July 14th settlement agreement and also issued a financing order.

The bonds will be issued by Kansas gas service securitization one L. L. C. A special purpose wholly owned subsidiary of one gas.

Registration statement has been filed with the SEC. Once approved we will proceed with the bond offering.

We expect the bond is supposed to be completed in the fourth quarter of this year.

At September 30th Kansas Gas service has deferred approximately $339 $6 million in extraordinary costs.

In Texas, we expect the bond issuance process, which the Texas public Finance authority is leading to be completed in the fourth quarter.

Lastly for the quarter. The one gas board of directors declared a dividend of 62 cents per share unchanged from the previous quarter.

And now I'll turn it over to Curtis for an update on our regulatory and commercial activities.

Thank you Karen and good morning, everyone recall that in March Oklahoma Natural gas filed its performance based rate change application for an increase of $19 $7 million.

In May the Oklahoma Corporation Commission staff and the Attorney General's Office filed statements supporting an increase of $19 $6 million.

In July pursuant to our tariff new rates went into effect, reflecting the $19 6 million revenue increase.

Those new rates are interim and therefore subject to refund pending final approval by the commission.

On September 29, the administrative law judge recommended approval of the joint stipulation and a final order is expected sometime in the fourth quarter.

And then Texas, Texas gas service made gas reliability infrastructure program filings for all customers in the central Gulf and West, Texas service areas in the first quarter.

In the West, Texas Service area, the city of El Paso denied the requested increase in Texas gas service subsequently appealed the city's action.

In August the Railroad Commission approved the appealed rate increase.

New rates that were implemented in El Paso during July were allowed to remain in effect.

The West North consolidated Texas rate case that was filed in June requesting an increase of $13 million.

<unk> to follow the procedural schedule and the hearing is scheduled for later this week if approved new rates are expected to take effect in early 2023.

Lastly, Kansas gas service filed a $7 $8 million gas system reliability surcharge in August with rates expected to take effect in December or early January .

Moving on to commercial activity for the nine months period ending September 30th.

We added nearly 20000, new customer connections, which is up nearly 16% compared to the same timeframe in 2021.

The month of September had the second highest number of meters said since our spin from one oak.

And Oklahoma City had the third highest monthly meter set for any of our metro service areas since spin.

Building permits have declined from historic highs, but remain resilient.

During August we saw increased building permit activity in six of our eight major metropolitan areas.

Oklahoma City, and Austin saw the most significant rise with a 24% and 8% increase respectively.

More broadly the I 35 corridor from Kansas City to San Antonio has been recognized as the fastest population and job growth region in the U S.

Rising interest rates are leading to some slowing in the national housing market and to some degree in our service territories. However, we remain optimistic given the continued population growth and economic development, we are experiencing across our service territory.

Renewable natural gas regarding renewable natural gas, we continue to be encouraged by the growth and investment we are seeing in this space.

Recent acquisitions of RMG related companies demonstrate the market value of our N G and further validates our strategy to utilize our assets to connect our LNG supply with demand for the product no different than how we transport wellhead gas for customers today.

Before year end, we expect to file a voluntary RMG tariff in Oklahoma and are exploring similar options in other jurisdictions.

As colder weather moves across our territories, our coworkers in the field continue to perform at a very high level completing several system enhancement projects and assisting our customers with light up season.

In addition to the enhancements on our system, we have added to our transport and storage positions to support our growing customer base.

Over the past 18 months, we have increased our leased storage capacity to 58 Bcf from 48 Bcf.

Additionally, we have added firm transport capacity at various delivery points and further diversified our gas supply by adding firm transport from the Gulf region.

We continue to invest in mobile CMG trailers that provide flexibility to backstop possible points of system constraints.

Those are just a few of the tangible actions, we've taken to increase reliability and system performance to support our customers.

And finally I've spoken previously about our efforts to mitigate the impacts of inflation and supply chain disruptions to our operations.

Availability of construction materials continues to improve while.

While lead times are longer than normal we've been able to adjust our timelines and have committed to future production slots of critical items.

We continue to navigate through these challenges, but do not foresee any issues completing our 2022 capital program and remain confident in our ability to execute in 2023.

And now I'll turn it over to Seth for closing remarks.

Thank you Karen and Curtis.

As we approach year end, we acknowledge the challenges in front of us heading into 2023.

However, our long track record of delivering results gives us confidence that the experience of our team the strength of our service territory and the value of our long term strategy will successfully guide us into the future.

In closing I extend my gratitude to each one of our co workers for their dedication to safety and service to our customers.

I, especially want to recognize our I T group, who in response to an external challenge. This morning have over performed in allowing us to have the call and field. Your questions. Today. So we appreciate your patience and a reminder to all of our co workers how privileged we all are to work alongside you every day. Thank you all for joining us this morning.

Brandon.

Thanks, Ed again, I want to remind everybody that the phone number for the questions be called into is 53944486 for Q. That's 5394448642 passcode 34208.

4332.

We will pause momentarily as we aggregate the questions.

Okay.

This is Curtis and a question has come in about our capital expenditures of $650 million four.

2022.

$650 million was our guidance for this year and we remain on track to complete that it is a little bit fourth quarter loaded in the sense that we have several large projects that are in flight.

<unk> spoken about several of those during the second during the first quarter and second quarter calls.

So there are some added context around those but we're expecting that to continue through the end of the year and we remain on track to hit our 650 target.

This is Karen another question has come in and Im not exactly sure what is being asked it has to do with our equity capital.

And as I commented on the call. We have raised our we have sold forward some equity that.

And that we will exercise at some point and we have not provided any update on our longer term guidance, our normal cadence is to do that.

Once a year as we released 2023 guidance.

Okay.

We've got a question from David Arcaro, David Thanks for the question.

Concerns whether or not the company has an interest in unregulated RMG.

As we've shared in the past, we really like our forward organic growth opportunities and system maintenance opportunities. We do think there is an opportunity for us as we participate in R&D projects.

As in the entity that is connecting for profit.

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With customers, who are interested and exposure to a lower carbon fuel and we've chosen that role because we believe it allows us to participate in.

On the.

The energy future that we all see without having to divert capital away from those opportunities that we see in front of us.

We are fortunate because of the growth in our service territory not to be.

Strained with projects are have too.

Really cast about four ways to spend capital we are we have robust capital.

Robust capital portfolio in front of us but.

But we do think it's important to participate and alternative fuels as those opportunities present themselves. So you can expect us to hold the line on partnering with people, who are generating RMG and looking for a partner to bring that online.

Because were a distribution system and our pressures are lower than typical mid <unk>, we have the opportunity to offer a really.

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A partnership that is.

Better in many cases that that helps those generators not have to look at compression at higher cost. So we kind of like the way it stacks up for us David.

Thanks very much for the question.

We have another question that's come in in that that asks about pressure on customer bills.

As you all know since spin we've really focused on how we can work with customers to help them moderate their usage. We're fortunate that we maintain a pretty healthy advantage over our electric competition in our service territory, but that doesn't mean that every day, we're not focused on how we can continue.

Look at managing our costs and being prudent in the way that we invest our dollars.

We of course balance that with the need to think about how we maintain a reliable and safe system and we will always look at focusing on those two things with an eye towards the longer term in our strategic plan.

Okay.

Yes.

A question has come in about the pace of housing development and do we see any signs of that slowing or do we still.

We still have a high confidence level of growth in Texas, and Oklahoma and we do still have a high confidence level as I mentioned, we set some records in the third quarter and in the month of September specifically.

With the number of connections that were made and we continue to see that one of the things that we've noticed is there's been a lot of there have been numbers that things have slowed I will just give you. An example, where you have to understand the context, so something is down 10%.

That's down 10% from having been up 100%. So some of that slowing is good because these markets, where we're frankly too hard and so a little bit of a slowdown I believe is a positive.

Briggs rationality back into the housing market and we continue to see influx of population continuing.

Economic growth with new companies announcing expansions and with that more workers needed in those areas. So we do remain very optimistic around those key markets for us into.

And to that question. We also see continued economic development in our service territory. When you look at what's happening in the three states that we serve particularly the Tulsa and Oklahoma City areas.

And the.

The entire Austin region, we continue to see significant investment.

Companies, who are playing unlike longer ball and so we like the opportunities that sit in front of us in those territories.

Okay.

Okay.

Okay.

Just one more time, if you have a question. Please dial the following number 5394448642 passcode three <unk> 084332, we will pause momentarily for any last remaining questions.

Okay.

Alright. Thank you all again for your interest in one gas our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings.

We will provide details on the conference call at a later date and have a great day.

This.

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