Q1 2024 Hess Midstream LP Earnings Call

Operator: To withdraw your question, please press Star 11 again. Please be advised that today's conference is being recorded for replay purposes. I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations. Please continue.

Draw. Your question. Please press star one one again.

Jennifer Gordon: Thank you, Gigi. Good afternoon, everyone, and thank you for participating in our first quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hessmidstream.com. Today's conference call also includes projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the risk factor section of Hess Midstream's filings with the SEC.

Jennifer Gordon: Thank you Gigi good afternoon, everyone and thank you for participating in our first quarter earnings Conference call. Our earnings release was issued this morning and appears on our website Www Dot Hudson Midstream dotcom.

Jennifer Gordon: Today's conference call contains projections and other forward looking statements within the meaning of the federal Securities laws.

Jennifer Gordon: These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements.

Jennifer Gordon: These risks include those set forth in the risk factors section of Hess midstream filings with the SEC.

Jennifer Gordon: Also on today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the earnings release. With me today are John Gatling, President and Chief Operating Officer, and Jonathan Stein, Chief Financial Officer. I'll now turn the call over to John Gatling.

Jennifer Gordon: Also on today's conference call, we may discuss certain non-GAAP financial measures a reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the earnings release.

Jennifer Gordon: With me today are John Gatling, President and Chief operating Officer, and Jonathan Stein, Chief Financial Officer, I'll now turn the call over to John Gatling.

John A. Gatling: Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's first quarter 2024 conference call. Today, I'll discuss our first quarter performance, which demonstrates a continued focus on the safe delivery of our strategy. I'll also review Hess Corporation's results and outlook for the Bakken. Jonathan will then review our financial results and guidance.

John A. Gatling: Yeah.

John A. Gatling: Today, I'll discuss our first quarter performance, which demonstrates a continued focus on the safe delivery of our strategy.

John A. Gatling: I'll also review Hess Corporation's results and outlook for the Bakken.

John A. Gatling: Jonathan will then review our financial results and guidance.

John A. Gatling: In the first quarter, we continue to progress our 2024 business objectives in a safe and efficient manner. Throughput volumes averaged 393 million cubic feet per day for gas processing, 117,000 barrels of oil per day for crew terminaling, and 116,000 barrels of water per day for water gathering. In line with our guidance, overall volumes were broadly flat compared to the fourth quarter, reflecting severe winter weather experienced in January, resulting in slightly lower oil volumes offset by strong gas capture performance.

John A. Gatling: In the first quarter, we continued to progress our 2020 for business objectives in a safe and efficient manner.

John A. Gatling: Volumes averaged 393 million cubic feet per day for gas processing 117000 barrels of oil per day for crude terminalling and 116000 barrels of water per day for water gathering.

John A. Gatling: Reflecting severe winter weather experienced in January resulting in slightly lower oil volumes offset by strong gas capture performance.

John A. Gatling: We continue to support HESS's commitment to achieving zero routine flaring by the end of 2025. Now, turning to Hess upstream highlights. Earlier today, Hess reported Bakken net production for the first quarter averaged 190,000 barrels of oil equipment per day, which included 19,000 barrels per day of volumes received from a percent of proceeds contract, which do not impact Hess Midstream's throughput. First quarter net production was broadly flat compared to the fourth quarter of 2023, again reflecting the severe winter weather experience in January, followed by a strong recovery in February and March

John A. Gatling: We continue to support Hess is commitment to achieving zero routine flaring by the end of 2025.

John A. Gatling: Now turning to Hess upstream highlights earlier today has reported Bakken net production for the first quarter averaged 190000 barrels of oil equipment per day, which included 19000 barrels per day of volumes or see from percent of proceeds contracts, which do not impact Hess midstream throughput.

John A. Gatling: First quarter net production was broadly flat compared to the fourth quarter 2023.

John A. Gatling: Again, reflecting the severe winter weather experienced in January followed by a strong recovery in February and March.

John A. Gatling: Hess also reiterated its plans to continue running a four-rig drilling program in 2024 and expects Bakken net production to average between 195 and 200,000 barrels of oil equivalent per day in the second quarter. Turning to Hess Midstream Guidance, we're reaffirming our previously announced 2024 throughput guidance, which was included in our earnings release. For full year 2024, we're forecasting gas processing volumes to average between 395 and 405 million cubic feet per day, crude Terminaline volumes to average between 120,000 and 130,000 barrels of oil per day, and water-gathering volumes to average between 105 and 115,000 barrels of water per day.

John A. Gatling: Hess also reiterated their plans to continue running a four rig drilling program in 2024 and expects Bakken net production to average between 195 and 200000 barrels oil equivalent per day in the second quarter.

John A. Gatling: Crude terminalling volumes to average between 120 and 130000 barrels of oil per day.

John A. Gatling: And water gathering volumes to average between 105 and 115000 barrels of water per day.

John A. Gatling: This represents an approximate 10% increase across our oil and gas systems compared to 2023, primarily driven by HES's development activity. Now focusing on the second quarter, we expect volume growth from the first quarter across our oil and gas systems, mainly driven by HESA's planned production growth and continued focus on gas capture. In the second quarter, we're planning to conduct routine maintenance at the Tioga gas plant, which is in addition to our normally higher seasonal maintenance activity. Now, we turn to Hess Midstream's 2024 capital program.

John A. Gatling: This represents an approximate 10% increase across our oil and gas systems compared to 2023, primarily driven by Hess is development activity.

John A. Gatling: Now focusing on the second quarter, we expect volume growth from the first quarter across our oil and gas systems, mainly driven by Hess as planned production growth and continued focus on gas capture.

John A. Gatling: In the second quarter, we're planning to conduct routine maintenance at the Toyota gas plant, which is in addition to our normally higher seasonal maintenance activity.

John A. Gatling: Now turning to Hess midstream 'twenty 'twenty four capital program.

John A. Gatling: We continue to make excellent progress on our 2024 capital plans and are focused on supporting Hess and third-party development in the basin. The multi-year projects we announced in January are progressing on schedule. They include the construction of green-filled, high-pressure gas-gathering pipelines and two compressor stations, which are expected to initially provide, in aggregate, an additional 85 million cubic feet per day of gas compression capacity when brought online in 2025, and are expandable to 140 million cubic feet per day.

John A. Gatling: We continue to make excellent progress on our 2024 capital plans and are focused on supporting Hess and third party development in the basin.

John A. Gatling: The multi year projects, we announced in January are progressing to schedule.

John A. Gatling: They include the construction of Greenfield high pressure gas gathering pipelines and two compressor stations, which are expected to lead to initially provide in aggregate an additional 85 million cubic feet per day of gas compression capacity when brought online in 2025.

John A. Gatling: And our expandable to 140 million cubic foot per day.

John A. Gatling: Full year 2024 capital expenditures remain unchanged and are expected to total between $250 and $275 million. In summary, we remain focused on executing our operational priorities and safely delivering our growth strategy, which will continue to drive sustainable cash flow generation and the potential to return additional capital to our shareholders. I'll now turn the call over to Jonathan to review our financial results and guidance.

John A. Gatling: Full year 2020 for capital expenditures remain unchanged and are expected to total between 250 and $275 million.

Jonathan: In summary, we remain focused on executing our operational priorities and safely delivering our growth strategy, which will continue to drive sustainable cash flow generation and the potential to return additional capital to our shareholders.

Jonathan: I'll now turn the call over to Johnson to review, our financial results and guidance.

Jonathan C. Stein: Thanks, John, and good afternoon, everyone. We continue to execute a financial strategy that prioritizes the return of capital to shareholders with a demonstrated track record of differentiated shareholder returns. Since the beginning of 2021, we have returned $1.65 billion to shareholders through accretive repurchases that have reduced our total unit count by over 20%. Additionally, in addition to the combination of our 5% targeted annual distribution growth and 7 distribution level increases following each repurchase, we have increased our distribution per class A share by approximately 45% over this period. As a result, our total shareholder return yield is one of the highest of our midstream peers.

Jonathan: Thanks, John and good afternoon, everyone. We continued to execute our financial strategy that prioritizes return of capital to shareholders with a demonstrated track record of differentiated shareholder returns.

Jonathan C. Stein: Since the beginning of 2021 we have returned $1 $65 billion to shareholders through accretive repurchases that have reduced our total unit count by over 20%.

Jonathan C. Stein: In addition to the combination of our 5% targeted annual distribution growth and seven distribution level increases falling each repurchase we have increased our distribution per class a share by approximately 45% over this period.

Jonathan C. Stein: As a result, our total shareholder return yield is one of the highest of our midstream peers. Furthermore, our leverage of approximately 3.2 times adjusted EBITDA is one of the lowest among our peers highlighting our differentiated ability to deliver significant shareholder returns, while also maintaining balance sheet strength.

Jonathan C. Stein: Furthermore, our leverage of approximately 3.2 times adjusted EBITDA is one of the lowest among our peers, highlighting our differentiated ability to deliver significant shareholder returns while also maintaining balance sheet strength. In January, we announced that we expect to generate greater than $1.25 billion of financial flexibility through 2026 for incremental shareholder returns, including potential unit repurchase. Utilizing this capacity, in March, we completed our first repurchase transaction in 2024 for $100 million that was accretive on both a distributable cash flow per class A share basis and an earnings per class A share basis.

Jonathan C. Stein: In January we announced that we expect to generate greater than one point to $5 billion of financial flexibility through 2020 six for incremental shareholder returns including potential repurchases.

Jonathan C. Stein: Utilizing this capacity in March we completed our first repurchase transaction in 2024 of $100 million that was accretive on both a distributable cash flow per class a share basis and an earnings.

Jonathan C. Stein: Earnings per class a share basis.

Jonathan C. Stein: Supported by this repurchase, we recently announced a further return of capital to our shareholders through an immediate 1.5% increase in our quarterly distribution level, in addition to our targeted 5% annual distribution per Class A share increase. As we have done in the past, with the reduced share count following the repurchase, this distribution level increase maintains our distributed cash flow at approximately the same amount as before the repurchase. Following the unit repurchase, we expect to continue to have more than $1.25 billion of financial flexibility through 2026 that can be used for continued execution of a return of capital framework, including potential ongoing unit repurchases. Turning to our results,

Jonathan C. Stein: As we have done in the past with the reduced share count following the repurchase this distribution level increase maintains our distributed cash flow at approximately the same amount as before the repurchase.

Jonathan C. Stein: Following the unit repurchase we expect to continue to have more than one point to $5 billion of financial flexibility through 2026 that can be used for continued execution of a return of capital framework, including potential ongoing unit repurchases.

Jonathan C. Stein: For the first quarter of 2024, net income was $162 million, compared to $153 million for the fourth quarter of 2023. Adjusted EBITDA for the first quarter of 2024 was $276 million, compared to $264 million for the fourth quarter of 2023. Adjusted EBITDA for the first quarter increased relative to the fourth quarter of 2023, primarily driven by a significant reduction in operating costs, as follows. Total revenues, excluding pass-through revenues, decreased by approximately $3 million, primarily driven by slightly lower oil volumes due to the severe winter weather in January, offset by continued strength in gas capture, as well as slightly higher TAF rates that were reset in January, as we had described at the time. As a result, segment revenue changes were as follows: gathering revenues decreased by approximately $8 million. Selling revenues decreased by approximately $3 million.

Jonathan C. Stein: Turning to our results for the first quarter of 2024, net income was $162 million compared to $153 million for the fourth quarter of 2023 adjust.

Jonathan C. Stein: Adjusted EBITDA for the first quarter of 2024 with $276 million compared to $264 million for the fourth quarter of 2023.

Jonathan C. Stein: Adjusted EBITDA for the first quarter increased relative to the fourth quarter of 2023.

Jonathan C. Stein: Primarily driven by a significant reduction in operating costs as follows.

Jonathan C. Stein: Total revenues excluding pass through revenues decreased by approximately $3 million, primarily driven by slightly lower oil volumes due to the severe winter weather in January offset by continued strength in gas capture as well as slightly higher tariff rates that were reset in January as we had described at the time.

Jonathan C. Stein: And processing revenues increased by approximately $8 million. With physical volumes growing as more wells come online, we expect continued growth in revenues for the rest of 2024. Total cost and expenses, excluding depreciation and amortization, pass-through costs, and net of our proportional share of LM4 earnings decreased by approximately $15 million, primarily due to lower operating and maintenance expenses compared with the fourth quarter, where we had accelerated maintenance activity due to seasonably, unseasonably favorable weather, as well as lower general and administrative expenses due to seasonally high allocations in the fourth quarter, resulting in adjusted EBITDA for the first quarter of 2024 of $276 million above the $270 million high end of our guidance.

Jonathan C. Stein: Assessing revenues increased by approximately $8 million with physical volumes growing as more wells come online. We expect continued growth in revenues for the rest of 2024.

Jonathan C. Stein: Total costs and expenses, excluding depreciation and amortization pass through costs and net of our proportional share of Alan for earnings decreased by approximately $15 million.

Jonathan C. Stein: Primarily due to lower operating and maintenance expenses compared with the fourth quarter, where we had accelerated maintenance activity due to seasonably unseasonably favorable weather as well as lower general and administrative expenses due to seasonally high allocations in the fourth quarter.

Jonathan C. Stein: And adjusted EBITDA for the first quarter of 2024 of $276 million above the $270 million high end of our guidance range.

Jonathan C. Stein: Our gross adjusted EBITDA margin for the first quarter was maintained at approximately 80 percent, highlighting our continued strong operating leverage. First quarter capital expenditures were approximately $35 million, and net interest excluding amortization of deferred finance costs was approximately $47 million, resulting in adjusted free cash flow of approximately $194 million. We had a drawn balance of $455 million on our revolving credit facility at Quarter End, which included funding for our recent $100 million unit repurchase transaction. Turning to guidance.

Jonathan C. Stein: Alright, gross adjusted EBITDA margin for the first quarter was maintained at approximately 80% highlighting our continued strong operating leverage.

Jonathan C. Stein: First quarter capital expenditures was approximately $35 million and net interest excluding amortization of deferred finance costs was approximately $47 million, resulting in adjusted free cash flow of approximately $194 million.

Jonathan C. Stein: We had a drawn balance of $455 million on our revolving credit facility at quarter end, which includes funding of our recent $100 million.

Jonathan C. Stein: Purchase transaction.

Jonathan C. Stein: For the second quarter of 2024, we expect net income to be approximately $155 to $165 million and adjusted EBITDA to be approximately $270 to $280 million, reflecting higher volumes and revenues offset by seasonally higher operating costs. This includes higher OPEX from the planned maintenance work scheduled in Q2, including routine maintenance at the Toga Gas Plant, as John mentioned. We also expect CAPEX to increase in the second and third quarters, consistent with seasonalally higher activity levels.

Jonathan C. Stein: Turning to guidance for.

Jonathan C. Stein: For the second quarter of 'twenty 'twenty four we expect net income to approximately $155 million to $165 million and adjusted EBITDA to be approximately $270 million to $280 million, reflecting higher volumes and revenues.

Jonathan C. Stein: It's higher Opex from the planned maintenance work scheduled in Q2, including routine maintenance at the tailgate gas plant as John mentioned we.

Jonathan C. Stein: We also expect Capex to increase in the second and third quarters, consistent with seasonally higher activity levels.

Jonathan C. Stein: For the full year 2024, we are reaffirming all previously announced guidance and expecting net income of $670 to $720 million and adjusted EBITDA of $1,125,000,000 to $1,175,000,000. With total expected capital expenditures of $250 to $275 million, we expect to generate adjusted free cash flow of $685 million to $735 million. With distributions per class A share targeted to grow at least 5% annually from the new higher distribution level, we expect excess adjusted free cash flow of approximately $115 million after fully funding our targeted growing distribution.

Jonathan C. Stein: For the full year 'twenty 'twenty four we are reaffirming our previously announced guidance and expect net income of $670 million to $720 million and adjusted EBITDA of $1 billion $125 million to $1 billion $175 million.

Jonathan C. Stein: Total expected capital expenditures of $250 million to $275 million, we expect to generate adjusted free cash flow of 685 million to $735 million.

Jonathan C. Stein: With distributions per class a share are targeted to grow at least 5% annually from the new higher distribution level, we expect excess adjusted free cash flow of approximately $115 million after fully funding our targeted growing distributions.

Jonathan C. Stein: We expect increasing volumes and revenues in each quarter through 2024 across oil, gas, and water systems with seasonally higher operating costs in the second and third quarters of the year, resulting in expected growing adjusted EBITDA through the rest of the year. As implied by the midpoints in our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 9% higher relative to the first half. In summary, we are very pleased to have delivered additional incremental return of capital to Hess Midstream shareholders and look forward to a visible trajectory of growth in our operational and financial metrics that underpin our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital to our shareholders. This concludes my remarks. We'll be happy to answer any questions. I will now turn the call over to the operator. Thank you.

Jonathan C. Stein: We expect increasing volumes and revenues each quarter through 2024 across oil gas and water systems with seasonally higher operating costs in the second and third quarters of the year, resulting in expected growing adjusted EBITDA through the rest of the year.

Jonathan C. Stein: As implied by the midpoint of our guidance, we anticipate adjusted EBITDA in the second half of the year to be approximately 9% higher relative to the first half.

Jonathan C. Stein: In summary, we are very pleased to have delivered additional incremental return of capital to Hess midstream shareholders and look forward to a visible trajectory of growth and operational and financial metrics that underpin our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital to our shareholders. This concludes.

Jonathan C. Stein: My remarks, we'll be happy to answer any questions I will now turn the call over to the operator.

Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A list. Our first question comes from the line of Doug Irwin from Citi.

Speaker Change: Thank you, ladies and gentlemen, as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.

Operator: Please standby, while we compile the Q&A roster.

Operator: Our first question comes from the line of Doug Irwin from Citi.

Douglas Baker Irwin: Hey, thanks for the question. I'm just trying to start with the second half growth expectations. You just talked about kind of the 9% relative to the first half of the year. I was just wondering if you could talk about some of the main drivers there to kind of bridge that growth into the second half of the year. I'm just wondering how much of that is driven just by the absence of some of the one-time turnarounds and weather impacts versus kind of organic growth on top of that. And then maybe you could just talk about some of the puts and takes that could drive the high end to sort of slow into the range here for the rest of the year.

Douglas Baker Irwin: Alright. Thanks for the question just wanted to start with the second half growth expectations, you just talked about kind of a 9% relative to the first half of the year I'm. Just wondering if you can talk about some of the main drivers there to kind of bridge that growth into the second half of the year.

Douglas Baker Irwin: Just wondering how much of that is driven just by the absence of some of the onetime turnarounds and weather impacts versus kind of organic growth on top of that.

Douglas Baker Irwin: And then maybe if you could just talk about some of the puts and takes that could drive the high end first of all I wanted the range here for the rest of the year.

John A. Gatling: Sure, maybe I'll take the volume, then I'll hand it over to Jonathan to talk a little bit about the financial side. So on the volumes, obviously, you know, we had challenging weather in January. But I would say that the recovery from the January weather was very strong in February and March, as I mentioned in my script. As we grow into Q2, Q3 and through the end of the year, you know, we do expect the volumes to have a strong trajectory.

Speaker Change: Sure maybe I'll take the volume then I'll hand, it over to Jonathan talk a little bit about the financial side.

Jonathan: So on the volumes, obviously, we had the challenging weather in January.

John A. Gatling: But I would say that the recovery from the January where there was very strong in February and March as I mentioned in my in my script.

Jonathan: As we grow into the into Q2 Q3 and through the end of the year. We do expect the volumes to to have a strong trajectory I mean, when you. When you look at the growth that we had from our from our guidance.

John A. Gatling: I mean, when you look at the growth that we had from our guidance, from 23 to 24, you know, we're expecting some strong growth there. We would anticipate that growth to be relatively stable through the rest of the year. So, from our perspective, we feel like there's a lot of opportunity to continue to support the growth; Hess's performance has been very good, as you probably saw in the release earlier this morning from them as well.

John A. Gatling: From 'twenty three to 'twenty four we're expecting some strong some strong growth there we would anticipate that growth to be relatively stable through the through the rest of the year. So from our perspective, we feel like there's a lot of opportunity to continue to support the growth.

John A. Gatling: <unk> performance has been has been very good as you probably saw on the release earlier. This morning from them as well. So again, we're just translating that into into higher throughput volumes.

John A. Gatling: So, again, we're just translating that into higher throughput volumes. As far as the kind of puts and takes, I mean, you know, weather is always unpredictable. We're kind of coming out of the winter weather now. We had a very good winter with the exception of that very cold snap we had in January. And I would say that we're seeing overall delivery and throughputs remaining very strong. So I don't know, Jonathan, if there's anything else you want to add.

Jonathan: As far as the kind of the puts and takes I mean, you know where weather is always unpredictable, where we're kind of coming out of the winter weather now we've had a very good winter with the exception of that of that a very cold snap we had in January.

John A. Gatling: And I would say that we're seeing our overall delivery and throughput is remaining very strong. So I don't know Jonathan if theres anything else you wanted to add.

Jonathan C. Stein: Yeah, no, I think that was good. And let me just kind of walk you through the trend that we expect for the rest of the year. So, as we look into Q2, as John said, we continue to expect, you know, continued volume growth, so that will drive revenue growth. As we go into Q2, we have seasonally higher OPEX, and then on top of that, we expect some incremental costs associated with routine maintenance at the total gas plant, as we discussed. So, that's, if you will, baked into our EBITDA guidance for Q2. And then, as we move into Q3, we expect, again, continued volume growth and, therefore, revenue growth. OPEX would already be at a higher level.

Jonathan: Yeah, No I think that was good and let me just kind of walk through that trend that we expect for the rest of the year.

Jonathan C. Stein: So as we look into Q2.

Jonathan C. Stein: As John said, we continue to expect continued volume growth. So that will drive revenue growth as we go into Q2, we have seasonally higher opex and then on top of that we expect some incremental costs associated with routine maintenance at the <unk> gas plant as we discussed so that's if at all baked into our EBITDA guidance for Q2.

Jonathan C. Stein: As we move into Q3, we expect again continued.

Jonathan C. Stein: Volume growth and therefore, our revenue growth.

Jonathan C. Stein: So, really, we expect growth in EBITDA in Q3 primarily driven by volume. And then, as we move into Q4, we expect accelerated EBITDA growth again. There again, we'll have volume growth continuing, but we'll also have the benefit of seasonally lower OPEX that we typically have in Q4. So that really gives you the trend, you know, continuing revenues growing each quarter through the year, and then in Q2 and Q3, higher OPEX, and then expecting lower OPEX again in Q4.

Jonathan C. Stein: Opex would already be at a higher level. So really we expect growth in EBITDA in Q3, primarily driven by volumes and that as we move into Q4, we expect accelerated EBITDA growth again, there again, we'll have volume growth continuing but we'll also have the benefit of seasonally lower opex that we typically have in Q4 so that.

Jonathan C. Stein: It gives you the trend continuing revenues are growing each quarter through the year, and then Q2 and Q3 higher Opex and then expecting lower Opex again in Q4.

Douglas Baker Irwin: Okay, I got it. That's really helpful.

Speaker Change: Okay got it that's really helpful.

Jonathan C. Stein: And then just wanted to touch on the contract structure here, giving us the first quarter kind of under the new seed mechanism. Can you maybe just help quantify or even just directionally kind of frame up what kind of impacts the rate reset had this quarter relative to last quarter? And then as we think about just the rest of the year, are those rates stable for the rest of the year now? Or do some of those inflation escalators kind of maybe phase in throughout the year?

Speaker Change: Then just wanted to touch on the contract structure here, just given that the first quarter kind of under the new feed mechanism.

Jonathan C. Stein: Can you, maybe just help quantify or even just directionally kind of frame up what kind of impacts the rate reset had this quarter relative to last quarter and then as we think about just the rest of the year are those rates stable for the rest of the year now or does some of those inflation escalators and I may be phased in throughout the year.

Jonathan C. Stein: Sure. So, just as a reminder, the way we got to the fixed fee for this year was that we took the average for 2021 through 2023, that was inflated, those rates were inflated to a 2023 basis, and then inflated again to get you to a 2024 rate. That design was designed to create a smooth transition from our cost of service period, and therefore, you know, as we moved into this period, we're comparing the 2023 rate to that average.

Speaker Change: Sure. So just as a reminder, the way we got to the fixed fee for this year was that we took the average 2021 through 2020 three that was inflated those rates were inflated two or 23 basis, and then inflated again to get it to a 2024 right.

Jonathan C. Stein: That design was designed to create a smooth transition from our cost of service period.

Jonathan C. Stein: And therefore, as we moved into this period when comparing the 2023 rate to the average so you can have a little bit of noise.

Jonathan C. Stein: So you can have a little bit of noise, you know, as you do that comparison, but overall, as we described, rates were up across all of our systems on average, and particularly, as we mentioned in gas, you saw that rates were higher there, and you can see that in the results. Now, going forward, with the rate now set, 85% of our fees are on a fixed fee basis, and therefore, they will really just be set each year, increasing with inflation based on CPI at the end of the year, and then that will therefore create a steadily increasing fee structure as we go all the way through 2033, really supporting continued growth in EBITDA over that period.

Jonathan C. Stein: As you do that comparison, but overall as we described bill rates were up across all of our systems on average, particularly as we mentioned in gas you saw that rates were higher there you can see that as a result that going forward with the right now said, 85% of our fixed our fees are on a fixed fee basis.

Jonathan C. Stein: And therefore, they will really just be set each year, increasing with inflation based on CPI at the end of the year and then that will therefore create a steadily increasing fee structure as we go all the way through 2033 really supporting continued growth in EBITDA over that period.

Douglas Baker Irwin: Got it. That's helpful. Thanks for the time.

Speaker Change: Got it that's helpful. Thanks Todd.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Jackie Colettus from Goldman Sachs.

Jackie Colettus: Our next question comes from the line of Jackie co, let us from Goldman Sachs.

Jackie Colettus: Hi, good morning. Thank you for taking my question. So you mentioned that costs were lower this quarter after the higher fourth quarter levels. And there is some seasonality there throughout the year. But should we think that this level can kind of hold here? Or how should we think about it? Should we think about continued change in the business going forward?

Jackie Colettus: Hi, Good morning. Thank you for taking my question. So you mentioned that costs are lower this quarter after that higher fourth quarter levels.

Jackie Colettus: And there is some seasonality there throughout the year, but should we think that this level can kind of hold here or how should we think about it.

Jackie Colettus: We can think about continued change in the business going forward.

John A. Gatling: Yeah, maybe I'll take the first shot at this and then hand it over to Jonathan. As Jonathan mentioned, and we talked a little bit about, the fourth quarter was higher from, again, a favorable weather perspective. We were able to get more maintenance done in the fourth quarter. January was a difficult month, and it caused us, as we normally expect in the first quarter, to see seasonally lower spend on the OPEX side.

Speaker Change: Yeah, maybe maybe I'll take the first shot at this and then hand it over to Jonathan.

John A. Gatling: As Jonathan mentioned, and we talked a little bit about fourth quarter was higher from a again from a favorable.

John A. Gatling: Whether perspective, we were able to get more maintenance done in the fourth quarter.

John A. Gatling: And then, as I mentioned in my script and Jonathan reiterated, we are planning to do some additional maintenance activities in Q2 beyond our normal seasonal increase in maintenance activities in Q2 and Q3. So, we do expect to see OPEX higher in Q2, and then also relative to our normal seasonal impact in Q2 and Q3. So I don't know, Jonathan, if there's anything you wanted to add to that.

Jonathan: A seasonal increase in maintenance activities in Q2 and Q3. So we do expect to see Opex higher in Q2, and then also relative to our normal seasonal impact in Q2 and Q3.

Jonathan C. Stein: Yeah, the only thing I would add is, you know, we talked about seasonality, Q2 and Q3, they're higher than typically, Q1 and Q4 are lower. I think it's important to highlight that if you look at our operating costs and admin G&A, excluding path through costs for this year, for 2024, you know, really their forecast to be flat relative to 2023, and I think that really highlights the operating leverage that we have as our ability to keep operating costs stable while our expanding, you know, system footprint continues to grow.

Jonathan C. Stein: To be flat relative to 2023, and I think that really highlights the operating leverage that we have is our ability to keep operating costs stable, while our expanding our system footprint continues to grow.

Jonathan C. Stein: We continue to target our 75% EBITDA margin target for 2024. Already, in the first quarter, we've already exceeded that, but certainly, you know, given the seasonality, we certainly continue to expect to meet or exceed that, so, you know, really in a good spot in terms of that. Obviously, I think the ability to be able to have kind of flat OPEX costs year on year really highlights, again, that operating leverage.

Jonathan C. Stein: We continue to target our 75% EBIT margin target for 2024 are already in the first quarter, we've already exceeded that but certainly you know given the seasonality that we felt like continue to expect to meet or exceed that so you.

Jonathan C. Stein: You know really in a good spot in terms of that obviously I think the ability to be able to have kind of flat opex costs year on year really highlights again that operating leverage.

Jackie Colettus: Got it. Thank you. That's it for me. Thank you so much.

Speaker Change: Got it thank you.

Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Jackie Colettus: Is it for me. Thank you so much.

Speaker Change: Thank you.

Speaker Change: Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Operator: Yeah.

Operator: Okay.

Operator: [music].

Operator: Okay.

Operator: Yeah.

Operator: [music].

Operator: Okay.

Operator: [music].

Speaker Change: Uh huh.

Operator: [music].

Operator: Okay.

Operator: Yeah.

Operator: Yeah.

Operator: Okay.

Operator: Yes.

Operator: Okay.

Operator: [music].

Operator: No.

Operator: Hum.

Operator: [music].

Operator: Okay.

Operator: [music].