Q2 2023 ONE Gas Inc Earnings Call

Good day and welcome to the one gas 2023 second quarter earnings Conference call Today's conference call is being recorded.

This time I would like to turn the conference I bet you Erinn Davy. Please go ahead Ms. David.

Good morning, and thank you for joining us on our second quarter 2023 earnings Conference call.

This call is being webcast live and.

And a replay will be available later today.

After our prepared remarks, we will 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 provision at the private Securities Litigation Reform Act of 1995, The Securities Act of $19 33, and the <unk>.

Securities and Exchange Act of 1934.

Each has 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 Laughlin 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 Ted.

Thanks, Erin and good morning, everyone.

We're happy to be with you today to share our second quarter results and discuss our performance through the first half of the year.

We continued our commitment to safely operating our growing system, while cultivating long term value.

Our second quarter activities and financial results reflect focused management of both our business and external economic forces through diligent plan execution by our entire team.

On last quarter's call, we shared our efforts to meet the needs of our expanding customer base, while prioritizing safety reliability and environmental responsibility.

On June 30, we published our 2023, ESG report, which highlights our focus on supporting our co workers and communities employing sound governance practices and reducing our emissions.

In addition to reporting scope two emissions for the first time, we are pleased to report that we have reduced our scope one emissions due to leaks on mains and services by 48% since 2005, keeping us on track to meet our 2035 goal.

As we manage the impact of macroeconomic conditions. We're also building work processes that increase efficiency and develop our workforce.

Curtis will speak to our long term strategy of reducing costs and improving outcomes. When he describes our modified approach to damage prevention and line locating.

This strategy is one example of how we are reacting to the current economic environment, while also building our capacity for the future.

Our service territory continues to experience robust growth as a favorable business environment and a more focused economic development effort bring new investment to our region.

A recent example is the announcement by Enel North America to locate one of the United States largest solar panel manufacturing facilities, and I know, Oklahoma about 25 miles east of Tulsa.

We remain well positioned to continue our support for the ongoing regional economic expansion across our service territory.

I'll turn it over to Karen to discuss financial details for the quarter and then to Curtis for to review, our regulatory operations and commercial activities before returning to offer a final perspective Karen.

Thanks, Ed and good morning, everyone.

Before I get into the details a reminder, that revenues depreciation and amortization and interest expense include the impact of the Kansas securitization, we provided tables in yesterdays earnings release that disclosed the balance sheet and income statement impact there is no impact on net income.

Net income for the second quarter was $32 7 million or <unk> 58 per diluted share compared with $32 1 million or <unk> 59 cents per diluted share in the same period 2022.

Second quarter operating income increased $5 $4 million over the same period last year, reflecting an increase of $14 $1 million from new rate, primarily due to interim regulatory filings completed in the second half of last year and the Texas gas service West North rate case, which was approved in January .

Continued growth in our residential and commercial customer base, primarily in Oklahoma and Texas also contributed $1 1 million to operating income year over year.

Although weather across our service territories for the second quarter was 7% warmer than the prior year and 11% warmer than normal the impact on earnings was mitigated by our weather normalization mechanisms.

Every quarter, we experienced a $1 $7 million reduction in operating income due to lower sales volumes.

Our operations and maintenance expenses increased $8 million over the second quarter 2022, due primarily to increases in employee related costs of $6 7 million.

As a reminder, we expected increase in employee related expenses due to market conditions and proactive workforce investments that we've made to enhance our capacity and in source certain functions previously performed by contract labor.

<unk> also modified our training programs to increase workforce flexibility amid these in sourcing efforts, which are now beginning to yield benefits.

Excluding the impact of the Kansas securitization, depreciation and amortization expense was $5 $3 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.

Other income net increased $6 $2 million compared with the same period last year, primarily due to a $5 $9 million increase in the market value of investments associated with our nonqualified employee benefit plans.

Interest expense in the quarter was $11 $2 million higher than the same period in 2022 and includes $4 7 million.

Fuel expense associated with the Kansas securitization.

The remainder of the increase is predominantly attributable to two items.

One is the issuance of $300 million.

4.25% senior notes in August of last year.

The second is interest on our commercial paper.

While our average commercial paper balance was down 6% when compared to last year, our weighted average CP interest rate was approximately five 5%, which is more than four times higher than the one 3% rate we incurred in the second quarter of 2022.

Relative to our initial 2023 financial expectations lower natural gas prices are positively impacting our investment in gas storage as we execute our traditional summertime storage refill. However, elevated short term interest rates continued to present a headwind.

Our capital expenditures and asset removal costs for the second quarter were approximately $190 million compared to $149 million in 2022.

Our capital investments for the full year remain on track with our $675 million forecast.

Authorized rate base was $4 $84 billion as of June 30, and we estimate our average rate base for 2023 will be approximately 515 billion.

Turning to our liquidity, we ended the quarter with $783 million of capacity under our $1 billion commercial paper program and no borrowings under our credit facility.

Our next maturities of long term debt or in the first quarter of 2024, when we have $300 million of three 6% notes and $473 million of one 1% notes coming due.

By continuing to issue equity with forward settlement, we have addressed our 2023 equity needs and greatly derisked, our anticipated 2024 market exposure and.

In March we executed a forward sales agreement for 2 million shares of our common stock with settlement by December 29 2023.

For one 4 million shares by the end of 2024 for the remaining shares.

And in the second quarter, we utilized our $300 million at the market equity program, which we put in place in February to execute forward sale agreements for an additional 926000 shares to be settled by the end of 2024.

Had all forward share since settled at June 30, we would have received net proceeds of approximately $249 million.

On July 17th the one gas board of directors declared a dividend of <unk> 65 per share unchanged from the previous quarter.

And lastly, we reaffirm our 2023 financial guidance, including net income of $224 million to $238 million and earnings per diluted share of $4 <unk> to $4 26.

As always we remain focused on prudent expense management and as Curtis who will discuss our outlook for rate base and customer growth remains steady.

Curtis I'll turn it over to you.

Thank you Karen and good morning, everyone I'll start with a brief update on our regulatory activities.

On March one we filed our annual performance based rate change application and Oklahoma, reflecting a 2022 test year and seeking a $27 $6 million rate increase to recover $243 million in capital investments and other cost increases.

In July 2023, the Oklahoma Corporation Commission issued an order approving a settlement with a revenue increase of $26 $3 million.

New rates went into effect on June 29.

In Texas, we filed the gas reliability infrastructure program for the consolidated West North region on March 10th seeking seven $4 million to recover cost associated with $54 million in capital investments.

Paso and two other municipalities denied the requested increase.

While all other municipalities and the Railroad Commission approved an increase of $7 $3 million or allowed it to take effect with no action.

Texas gas service appeal.

I would request and implemented the new rates in all municipalities in June 2023.

Subject to the outcome of the appeal.

The central Gulf grip that was filed on February 9th went into effect during the first billing cycle for June with a rate increase of 11 $5 million.

In June 2023, Texas gas service filed a rate case for all customers in the Rio Grande Valley Service area.

Requesting a $9 $8 million increase.

New rates are expected to take effect in late 2023 early 2024.

Also in Texas Governor Abbott signed legislation, establishing statewide energy efficiency program for gas utilities that will be overseen by the Railroad Commission.

This legislation will allow Texas gas service to expand its energy efficiency programs throughout our service territory in Texas.

Turning to commercial and operating activities capital execution remains a focus as we work to serve and expanding customer base.

And the internal process improvements permitted us to deploy a record amount of capital in the first half of the year.

As we had expected amid rising an elevated interest rates the pace of new meter sets for the second quarter decelerated slightly compared to 2022.

However in the 12 months ended June 32023, we said approximately 25800, new customer connections with just 2% higher year over year.

We continue to see strong demand for natural gas and a robust backlog of future projects.

As a reminder, COVID-19 related moratoria have fully lifted across our territories, allowing us to resume traditional disconnection activities that affect our reported customer counts.

We had noted at the outset of Covid that such Moratoria in place would inflate our average customer count.

And the resumption of normal operating practices now serving to unwind those impacts.

We had expected bad debt expense to be elevated this year and saw an additional $2 4 million dollar impact in the first half of the year compared with the same period in 2022.

In line with our expectations.

While we continue to see inflation affecting material supply and labor cost across our industry.

Addressing these impacts through disciplined resource management and prudent operating practices.

One example, we've discussed previously was our decision to begin in sourcing certain field activities such as line locating.

While Karen as noted the upfront investment costs related to this decision we are beginning to see the anticipated benefits of improved efficiency and enhanced workforce flexibility.

In addition, these in sourcing efforts have reintroduced important entry level field positions reestablishing a meaningful workforce pipeline for the company.

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

Thank you Karen and Curtis.

Good governance is essential to maintaining our high performance and we're pleased to share that we have a recent addition to our board of directors. Deborah Hersman was appointed to the board on June 29, and brings deep safety related experience that includes service is the former chair of the National Transportation Safety Board and Chief Executive Officer.

The National Safety Council.

We look forward to all that we will gain from this hersman insight and expertise.

Safety and service are two of our core values and our coworkers exemplified those values as we faced and recovered from storms in Shawnee and Tulsa, Oklahoma during the quarter.

While we did not experience significant service interruptions. The April tornado in Shawnee and near Hurricane Force winds on father's day weekend in Tulsa caused widespread property damage.

Our teams were quick to respond to the disruption. These storms caused ensuring that our customers were safe and had reliable gas service for their homes businesses and backup generators.

I want to thank each of my co workers for their dedication to living our core values as we work everyday to keep people safe and enjoying the benefits that natural gas provides.

You all for joining us this morning, operator, we're now ready for questions.

Thank you if you would like to ask your questions. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again star one to ask a question, we will pause for a moment to allow everyone an opportunity to take over for questions.

Yes.

And our first question today comes from.

Your line of Sharia.

<unk>.

From Guggenheim Partners. Your line is now live. Please go ahead.

Hi, guys. Its Jameson award on for Shar, how are you.

Really well James and good to hear from you. This morning.

Terrific.

Macro question for you first as we continue to see inflation pressures cool with national level could you touch on how that compares to what Youre seeing in your service territories and as a follow up are you still expecting roughly 2% inflation by 2026 or could we see that timeline move up.

So let me ask Curtis to speak to the impacts that we're seeing from the commercial side and then Karen just speak to the inflation forecast Curtis.

So a lot of our contracts price based off of what's happening with national CPI. So I would say we're in line with what you are looking at it nationally.

So it's in.

In our territories, it's not abnormality from again that national average.

With respect to inflation.

<unk> continues to be sticky. The news is encouraging that we've seen is coming down a bit I think Tom.

Timeline, maybe a bit elongated.

Im optimistic about being able to manage the impact to us in our O&M expenses going into 'twenty, four and 'twenty five.

Gotcha.

Just on.

On that note do you have much ability to pull forward O&M or wood continued lower than expected cost pressures. This year, mostly fall to the bottom line.

We don't really have a huge opportunity and we are highly compliant business you've got a lot of work that's got to get done every year.

And so our approach is to have a steady stable.

Workflow for our employees easier to manage efficiencies from doing that so we don't try to really manipulate it and we don't have a lot of opportunity to do that either.

Got it.

Thank you and our final question.

If inflation were to let's say normalized by next year.

All else equal where would that put you in your current 4% to 6% EPS growth range versus what you had been expecting back in November when CPI.

For your slides was eight 2%.

So James and Youll recall that we were.

Speaking to the fact that short term dislocation.

Rates would impact us because of our capital structure and so we've tested that and really looked at this as the most appropriate structure for us and we continue to believe that if you go back to 2014 since the spin from <unk> you see that that our approach has served our stakeholders well and we think that will be true going forward.

We will continue to have exposure to short term rates, but as rates normalize and we have the opportunity to continue to take advantage of the inflow of people into our service territory and the economic development opportunities that Youre aware of we really like our positioning. So you can you can expect us.

To continue to manage the short term, but really focus on long term value creation.

Thank you very much.

Thank you.

As a reminder, if you'd like to ask your question. Please dial star one on your telephone keypad now.

And our next question today is from the line of Christopher Jeffrey of Mizuho. Christopher Your line is open.

Hi, Thanks for taking my question.

Maybe just quickly on the energy efficient T program that Curtis mentioned in his remarks.

Just kind of wondering.

So that four.

Oil and gas in Texas.

So we're currently working with the commission and others in the industry are working with the commission as to.

How to apply the statute and how that will rollout.

But I expect that in the near term that will have more clarity around that part of it. We currently have programs in our central Texas service territory and in the Rio Grande Rio.

Rio Grande Valley, they're not the same programs because they are tailored to each of those service areas and we would envision doing that same type of thing where.

Program, that's appropriate for a specific service area.

That's tailored to that area and similar to what we've already done and again, that's what we're working through and expect to have.

We have more on that in the fairly near term.

Great. Thanks, and then maybe just the addition of the 900000 shares through the ATM program.

From last quarter, and just kind of wondering how youre thinking about that.

Compared with the forward agreements and how youre thinking about maybe cadence of future financing.

And.

How much we can expect more for 2024.

So as I said on the in my remarks, we feel good about what we've done for 2023 and are well into our 2024.

As always we just tried to seek to be opportunistic when we when we like the price we feel like we have the need ATM gives us the flexibility and the forwards are.

This added flexibility on top of that so I don't have any specific update we will just continue to monitor as market conditions warrant.

Laurent.

Great. Thanks, and then maybe just an update on.

Timing for any general rate cases in the jurisdictions that we should expect.

Just as far as Truing up some of those cost pressures are rate increases that we've seen.

Yes.

Okay.

Yes, nothing other than the rate case, we just filed in the Rio Grande Valley service area to highlight at this time.

Great. Thank you Rob.

Thank you and we have no further questions in the queue. At this time, so would be my pleasure to hand back to Sarah Davis for any closing remarks.

Thank you all again for your interest in one gas.

Our quiet period for the third quarter starts when we close our books in early October and extends until we release earnings in late October .

We'll provide details on the conference call at a later date have a great day.

This concludes the one gas 2023 second quarter earnings conference call and webcast you may now disconnect.

Great day.

This concludes.