Q4 2022 ONE Gas Inc Earnings Call
Good day and welcome to the one gas 2022 fourth quarter and year end earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Brandon Lucy. Please go ahead Sir.
Okay.
Good morning, and thank you for joining us on our fourth quarter and year end 2022 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 I remind you 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, The 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.
Joining us on the call. This morning are Sid Mcannally, President and Chief Executive Officer, Karen Longhorn Senior Vice President and Chief Financial Officer.
And Curtis Dinan, Senior Vice President and Chief operating Officer, and now I will turn the call over to sit.
Thanks, Brendan and good morning, everyone.
Our fourth quarter and full year results reflect consistent performance against the guidance, we communicated at the beginning of last year.
Despite a range of geopolitical and monetary policy factors, which sharply altered the macroeconomic landscape during the year, our teams delivered earnings and capital execution squarely in line with our original plans to put this achievement in context in 2014, our first year as a standalone entity, we deployed a total of two <unk>.
Wondered $62 million in core capital with just $47 million to support growth initiatives last year, we spent $657 million approximately two five times, our first year total with $197 million dedicated to expansion initiatives, a quadrupling of our growth invest.
But compared to that initial year.
We began 2023.
With our approach unchanged being prudent in managing the present and remaining consistent and our commitment to the long term execution of our core businesses and growth strategies.
Leveraging lessons, we learned from winter storm jewelry and the system enhancements, we made in its wake I'm pleased to report our business performed well during winter storm Elliott in December and Winter Storm Maura last month.
<unk> execution during these formidable weather events underscores the value of natural gas distribution networks, such as ours, particularly reliably as we look at reliable service on winter heating loads. It also underscores the logic behind the all of the above energy policies in the states we serve.
On the regulatory front the recent approval of our West North, Texas rate case represents a constructive outcome and recognition by our regulators of the need for ongoing investments to enhance system integrity and respond to regional economic development opportunities as with legislate as legislative sessions are underway.
In all three of our states, it's worth noting that each will be working with the sizable budget surplus capable of supporting continued economic development in our service territory.
With that introduction I'll turn it over to Karen to discuss financial details for the quarter and the full year Karen. Thanks, Ed. Good morning, everyone. Net income for the fourth quarter, 2022 was $67 million or $1 23 per diluted share compared with $60 $5 million or $1 12 per diluted share in the same P.
2021.
Our fourth quarter results include an increase in operating income of $16 6 million same period last year, which reflects $13 $6 million from new rates and $1.6 million in sales from net residential customer growth.
Operating costs for the quarter were $2 $9 million higher compared to the same period.
Employee costs and outside services were relatively flat compared to the prior year for the quarter bad debt expense was $1 $1 million higher than last year, but $3 $1 million lower for the full year.
Other income net increased $4 $5 million for the quarter, which reflects a reduction of $2 1 million and non service costs for our pension plans due to the April re measurement of our obligations, which we have discussed on previous calls.
Interest expense in the quarter was $11 $5 million higher than the same period in 2021.
We issued $300 million of $4 two 5% senior notes in August and $336 million at securitize utility tariff bonds in November both of which contributed to the increase.
And as I mentioned last quarter higher natural gas prices and increased natural gas storage balances as compared to the prior year contributed to an increase in our working capital needs, which we find with commercial paper.
C P rates in the fourth quarter of 2022, or four 3% compared with 25 basis points in the fourth quarter of 2021.
Turning to securitization with the November completion of the Kgs, Kansas gas Service's securitized financing I wanted to highlight that although there was no impact on net income during the quarter revenues included approximately $5 $8 million related to securitization. This was directly offset by approximately $3 5 million.
Of amortization expense and $2 2 million of interest expense.
We provided tables in yesterday's earnings news release that disclosed the balance sheet and income statement impact from the Kansas Securitized financing.
The securitization transaction in Texas is still pending but we now expect the bonds to be issued by April .
For the full year net income was $221 7 million or $4.08 per diluted share versus $206 4 million or $3 85 per diluted share in 2021.
Operating income was up approximately 13% or $39 $7 million, which includes $58 $7 million from new rates and $7 million from residential customer growth.
Operating costs for the year were $24 $4 million higher than 2021, primarily as a result of increases in outside service costs and employee labor and benefits.
Our capital expenditures and asset removal costs for the fourth quarter were $209 $6 million, bringing our total for the year to $656 $5 million.
Compared to $544 3 million in 2021 the.
The increase is primarily attributable to system integrity projects and extension of service to new areas.
Average rate base for the year was $4 69 billion.
With 42% of that in Oklahoma, 27% in Kansas and 31% in Texas.
Authorized rate base, which is rate base reflected in completed regulatory proceedings, including the west North rate case that Curtis will discuss in a moment was approximately $4 $48 billion as of year end.
Depreciation and amortization expense was $21 $2 million higher than the prior year, reflecting an increase in net property plant and equipment as a result of a higher level of capital investment also contributing to the increase is amortization associated with the Kansas gas Service's securitization transaction I previously mentioned.
Turning to our liquidity, we ended the year with $448 million of capacity under our $1 billion commercial paper program and no borrowings under our credit facility.
During the year, we sold and issued over 400000 shares of common stock for $35 million under our at the market equity program.
We also executed forward sales agreements for nearly one 5 million shares.
On December 30th we settled approximately $1 2 million of these shares generating proceeds of about $94 million.
We expect to replace our expiring registration statement, an equity distribution agreement.
In January the one gas board of directors declared a dividend of <unk> 65 per share an increase of <unk> <unk> or approximately 5% from the previous quarter.
Now I'll turn it over to Curtis for an update on our regulatory operations and commercial fronts.
Thank you Karen and good morning, everyone.
Last March Oklahoma natural gas filed its performance based rate change application for $19 $7 million.
Pursuant to our tariff new rates went into effect in July and in November The Oklahoma Corporation Commission issued an order approving $19 $6 million and rate relief.
Oklahoma Natural gas will file its next performance based rate change application next month.
Using 2022 as the test year.
In December Oklahoma Natural gas filed a request for a renewable natural gas pilot program and voluntary tariff.
The proposed tariff will allow all residential small commercial and industrial sales customers to voluntarily purchase RMG.
If approved the tariff will be in effect for a pilot period through 2027 and order is expected no earlier than the third quarter of 2020.
Kansas Gas service filed a $7 $8 million gas system reliability surcharge last August .
And then November and order was received authorizing a $7 $7 million increase effective December one.
In January the Railroad Commission of Texas approved the proposed service area of consolidation and a rate increase of $8 $8 million for the West North Texas service area.
With an authorized return on equity of nine 6% and a common equity ratio of 59, 7%, 4% new rates took effect on the first of this month.
And finally, Texas gas service made gas reliability infrastructure program filings for all customers in the Central Gulf Service area requesting an $11 5 million dollar increase to be effective in June 2023.
Moving onto operations as Sid mentioned, both winter storm Elliot and more recently winter storm Maura brought extreme cold and snow and ice to our service territories.
As with Winter storm urea in 2021, our system processes and co workers performed well with no significant service disruptions.
The lessons, we learned from winter storm, Uri and the investments we've made to our system sense, including adding leased storage capacity and further diversifying our supply portfolio have contributed to enhance system reliability and resiliency.
While we are pleased with our performance during these extreme winter events, we continue to evaluate opportunities to further reinforce our operations.
I'll finish with a quick update on commercial activity.
The work of our commercial teams continues to bear fruit as we added over 27000, new customer connections in 2022 up nearly 12% compared to 2021 and marking a new record for annual meter sets at one gas.
Equally compelling is the broad based nature of the growth across our territories.
New customer connections in Texas grew roughly 3% from 2021, Oklahoma set nearly 13000 new meters in the year up 17% from 2021 meter sets and marking a new annual record.
New customer connections in Kansas jumped almost 22% compared with the prior year increase.
We also continued to secure new business and ended the year with a record record number of future meter sets in our backlog.
On our first quarter call last year I highlighted two large scale projects to illustrate the measured approach, we are taking and addressing new market opportunities.
One of these was in the Oklahoma City Metro a multi phased $26 million project to support the development of more than 10000 play into building lots over the next five to seven years.
At the time this project would meet the immediate needs of residential and commercial customers and position us to serve future waves of population growth to the area.
Nine months later, we have identified the opportunity to increase the size of this project by an incremental 15% to accommodate more growth that developers have now planned in the area.
This disciplined phased approach is emblematic of our growth strategy as it allows us to prudently manage our present opportunity set while also positioning for longer term system expansion.
Finally, this month, we opened the one gas education and training area.
This commercial kitchen office space for residential filming commercial foodservice cooking and equipment demonstration.
Our commercial and energy efficiency teams are already leveraging the space to showcase the latest in natural gas cooking technology and innovation through hands on demonstrations and testing. It is just another example of the creativity of our teams are bringing to support the continued growth of our business.
And now I'll turn it over to sit for closing remarks.
Thank you both.
From the COVID-19, pandemic and its supply chain and labor force impacts to winter storm urea in the securitization of extraordinary gas costs, despite inflation and the pace of monetary tightening not seen in several generations. The last three years have tested us requiring our company to be flexible and resilient in the face.
Of evolving challenges.
We've committed to meet these challenges while maintaining our focus on three targets a strong safety culture excellent customer service and building the capacity to capture organic growth in our service territory.
Our 2022 results showcase the resilience of our team and the success of our efforts as we delivered on our financial plan, despite an economic landscape, which shifted significantly throughout the year.
In November we detailed our 2023 and five year financial outlooks open handedly discussing how altered macroeconomic conditions would impact our business and the conditions and the actions of our company would take in response to those conditions.
While the magnitude volatility and direction of future changes in economic conditions are always uncertain, we remain focused on managing our business with sustainable long term value creation in mind.
That work is made possible by the commitment of each one of our 3800 co workers.
<unk> for their dedication to safety reliability and growth and I'm privileged to work alongside them every day.
Finally speaking of co workers today marks Brandon's last earnings call as our director of Investor Relations. He has been appointed Chief Financial Officer of the electric cooperatives of Arkansas, and we'll assume that position next month on behalf of the one gas family I want to thank Brandon for his service to the company and wish him all the best in his new role.
Thank you all for joining us. This morning, operator, we are now available for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure you'll meet function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question.
Also just amendment to allow everyone an opportunity to signal for questions.
Yes.
Our first question today, I guess you'd call. It <unk> of Bank of America. Please go ahead. Your line is open.
Yes.
Hi, good morning, Thank you.
And best of luck, Brian Congratulations.
Thanks, Paul I appreciate it.
Of course of course best of luck and I know you had a comprehensive guidance update it feels like a long time ago, but just a few months ago, just given the pretty significant decrease in natural gas prices does that change anything they previously contemplated around regulatory rate case strategy or just outlook for growth within the law.
Long term range.
Okay.
Good morning, Paul This is Karen now it really doesn't certainly that pullback is great news for us and for our customers.
Just to talk about the customer impact based on the current threat.
We estimate that that translates into a reduction in mice.
For money for our customers, which is which is really good that's relative to what we had anticipated when we released our guidance back in November .
Of course, it also has a positive impact on our cash flow.
Our working capital needs and our storage injections.
Well that's really good news is just one factor among many that where we have our aisle.
Okay, Great and then just to follow up on that could you quantify what the improvement for working capital and perhaps like the short term debt balance that you anticipate year end 'twenty three just given the benefits on lower gas cost.
I don't have it.
Like I said Theres, a number of moving pieces and parts gas prices are important, but just one piece of that puzzle.
Okay.
Great and then I heard you about that update on the on the.
Commercial development project, a 15% increase potential there are there any kind of similar projects that you have on the drawing board that you think could manifest over the next 12 to 18 months.
All of this is Curtis and and we do have it highlighted all the ones over the past year, but.
There are a number of projects in various phases.
Whether we're still developing them commercially and design phases are there and execution phases like the one I just highlighted sometimes when they are in the construction phase we identify more opportunities and the ability to further expand those so the economic activity in our three states continues to be very robust and we see a high demand for.
Natural gas and the service we provide.
And Paul I'll, just add that.
We also continue to see the in migration patterns that we talked about at the end of the year.
The knock on growth that we see with economic development. The reason that we mentioned the surpluses in our three states is these straight these states have become very active in engaging in pursuing economic development opportunities and we see industries pursuing the opportunities created by affordable energy. So we think the.
Future remains bright for us and we continue to prepare for that.
Okay excellent. Thank you all very much.
You bet. Thank you for the questions.
Thank you and the next question go to shop <unk> of Guggenheim Partners. Please go ahead. Your line is open.
Hi, it's actually James Ward on for Shar, how are you guys.
Well James Thank you.
Terrific.
Hi.
So Paul asked.
One of the questions that I had there.
I'll ask another that I had on the <unk>.
Backlog.
Good.
Basically as the backlog shrinks.
How do you how long are you thinking that it's going to take to to fill it and just as we've seen the change in sort of the rate of customer growth.
And obviously with the macro back drop it's sort of slowed a bit.
Key region there in Texas.
How how should we think about $185 million related to new customer connect capital. That's in the budget. This year and then what maybe next year and the year. After look like were just trying to shape kind of that portion of the capex.
Sure James one.
Macro observation.
While.
The larger economic.
Context.
It does impact the country as a whole in our region to some degree we continue to see scarcity of available housing.
We were just this morning looking at National Association of Realtors numbers that showed the inventory in our service territory.
The available inventory is about three four months, which is still historically low.
With the in migration, we think we will continue to see some build out I'll ask Curtis to speak to the specifics specific statistics.
The shorter term to speak to your question, but we continue to like the fact that we live in the most affordable region in the country. When you take the region as a whole and all of that bodes well. When you think about in migration of population affordability of existing housing housing stock that needs to be replenished at scale.
That all supports our growth theory, and we continue to have confidence in it and pursue it Curtis what would you add just one thing James I wanted to clarify one of the items from my comments and that is we ended the year with a record number of future meter sets in our backlog. So it is not declining it is growing.
And our commercial teams continue to have success at exactly what <unk> was describing that there is continued building going on in our service territories and they continue to win new projects some of them smaller some of a much larger but just like My example, in Oklahoma City developers are still active because their meeting.
<unk> demand that the marketplace has and that's all very positive for us.
Gotcha, that's helpful color I guess just do.
To get a bit more detail there just to make sure I'm understanding correctly.
Last year your average annual.
Sales customer growth.
One, 2% that you're guiding to over the five year period ending 2006.
It was led by taxes with I believe it was just under two I think it was one 9% and then in the 'twenty three guidance.
From the end of last year, it's now 1%.
90 basis points lower with Texas at 1.6, So if you could just help me understand how the backlog is still growing.
I guess were you not at a point previously of being able to kind of meet it in real time, it's a good problem to have because of the high cost problem don't get me wrong.
Just want to make sure I'm understanding correctly, why the backlog still growing if the.
Rate of customer growth is declining or.
Are you thinking that there might be an opportunity to revise that lower customer growth guidance.
From the end of last year based on what Youre seeing now and it might sort of returned to where it had been.
How should we think about it sure.
James Let me take a stab at answering all those questions and if I, if I skip that one.
Back yet.
So when we gave the guidance at the end of last year. Our 2023 initial guidance, we were looking at the economic landscape and seeing the increase in mortgage rates just as your question alluded to we thought that would perhaps slow things a little bit but by slow things thats from a torrid pace.
Just a really hot pace, so a little bit less than what we saw in 'twenty two we were anticipating.
That mortgage rates might have that impact we continue to see just a few months later the building activity continuing I think it is a positive that things have slowed down a little bit because it's allowed developers and builders to get caught up on several projects that they have so.
We talk about our backlog, we've got kind of separate the short term from the long term. So when we're talking about our backlog those might be additions just like my Oklahoma City example, that are five to seven year build out sometimes quicker, sometimes a little bit longer.
In the near term, we were trying to gauge what impact of economic activity, we would see in 2003 compared to <unk> 22, and we thought that might be a little bit less but still at a really good pace and is the increase in our backlog demonstrates there is still a lot of activity happening even with the backdrop that you were describing.
So did I skip anything in your questions or did that hit.
All the points you were now and that was.
That was terrific. Thank you very much I really appreciate the clarification and thank you for taking my questions.
Thank you for the question.
Thank you and as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The mainland.
Thank you we have no further questions on how much abandoned for any closing remarks.
Okay.
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.
He will provide details on the conference call at a later date and have a great day.
Thank you. This concludes the one gas 2000, <unk> fourth quarter and year end.
Earnings Conference call and webcast. Thank you so much for joining you may now disconnect.