Q3 2024 ONE Gas Inc Earnings Call
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Speaker Change: Good day and welcome to the one-cast third quarter earnings conference call and webcast. Today's conference is being recorded. Now this time I'll let you turn the conference over to Erin Dailey. Please go ahead and miss Dailey.
Erin Dailey: Thank you, Elliott. Good morning, everyone and thank you for joining us on our third quarter, 2024, earning conference call.
Erin Dailey: This call is being left cast-live and a replay will be available later today. After our prepared remarks, we're happy to take your questions.
Erin Dailey: Statements may during this call that might include one gas expectations or predictions, should be considered forward-looking statements.
Erin Dailey: 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 has amended.
Erin Dailey: 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 filing.
Speaker Change: Joining us on the call this morning, or said Macanally, President and Chief Executive Officer, Chris McNalfi, 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 said.
Sid Macanally: Thanks, Erin and good morning everyone. Thank you for joining us and for your interest in one gas.
Sid Macanally: We again delivered quarterly results in line with our expectations. Thanks to company-wide efforts and constructive regulatory outcomes.
Speaker Change: Operational Execution and Unimproved Interest Rate Environment have given us the opportunity to both raise and narrow our financial guidance for 2024, all while preserving the strong balance sheet.
Speaker Change: We now expect EPS to be in the range of $3.85 to $3.95, 5 cents higher at the midpoint than our original guidance.
Speaker Change: We still anticipate capital expenditures of $750 million this year.
Speaker Change: We've also completed a year of significant regulatory activity, including the conclusion of our Kansas rate case and the settlement of our central Gulf rate case in Texas, which Curtis will speak to in a few moments.
Speaker Change: Both cases resulted in constructive settlements, which allow us to recoup investments we've made in our system and earn a fair rate of return on the equity embedded in our capital structure. Now I'll turn it over to Chris to discuss our financial performance for the quarter. Chris?
Chris McNalfi: Thanks, Ed, and good morning, everyone. As said noted, we are narrowing our earnings forecast and raising the earnings per share guidance midpoint by five cents. With the Luty DPS now expected to be in the range of three dollars and eighty five cents to three dollars and ninety five cents.
Speaker Change: There are several key factors at play in our guide's race.
Speaker Change: First is the Fed Rate Cut in September, and it's tethered effect on commercial paper rates. As I've noted previously, we did not assume any rate cuts this year, and the Fed's 50 basis point rate reduction in September quickly reduced our CP rates by an equivalent amount.
Speaker Change: So, well concerns about the U.S. election, the U.S. deficit, and Treasury Market Dynamics, have caused longer term rates to rise in the wake of the Fed's action.
Speaker Change: Our Utilization of Commercial Paper had yielded a benefit.
Speaker Change: Second, we captured some uplift from the constructive regulatory outcomes that said noted.
Speaker Change: In part due to the timing of rate implementations being earlier than we had embedded in our financial plan for this year.
Speaker Change: A major credit goes to our teams for their ability to efficiently file our cases and interim mechanisms, shepherd each smoothly through the regulatory process, and to conclusions acceptable to all parties.
Speaker Change: Third, we're benefiting from our multi-year focus on O&M expense management.
Speaker Change: In our guidance last year, we noted an expectation for annual increases in O&M expenses to average 5% over the five-year period, with higher increases in the early years and moderation in the out years.
Speaker Change: Through some of the initiatives Sid and Curtis have spoken about on prior calls, we've been able to achieve a faster pace of cost moderation, with O&M up just 5% year-to-date.
Speaker Change: Our program to insource line locating across much of our service territory has saved dollars, helped hold down contractor costs, and produced workforce flexibility, generating efficiencies and enhancing our productivity.
Speaker Change: Finally, bad debt expense has proven favorable to plan. When COVID-related moratoria fully lifted across our territories last year, we actively resumed traditional disconnection activities and effectively addressed past due accounts.
Speaker Change: Those efforts combined with lower gas prices and favorable winter weather dynamics this year have resulted in lower bad debt expense than we originally planned.
Speaker Change: Turning to our third quarter results, net income was $19.3 million or $0.34 per diluted share, compared with $25.2 million or $0.45 in the same period last year.
Speaker Change: Third quarter net income included $17.5 million in revenue from new rates, which was partially offset by an $11.5 million increase in interest expense.
Speaker Change: excluding KGSS1, primarily due to the impact of refinancings we experienced in the first quarter.
Speaker Change: As expected, operations and maintenance expenses were higher as compared to the third quarter last year, primarily related to an increase in labor-related costs.
Speaker Change: As I noted previously, our O&M expenses year to date have been about 5% higher compared to 2023, consistent with our long-term guidance, but slightly favorable to our 2024 plan.
Speaker Change: As I mentioned on last quarter's call, we have satisfied our 2024 equity needs through the forward settlement agreements we issued last year. Those agreements cover approximately 3.6 million shares of our common stock at an average price of approximately $77 per share.
Speaker Change: Had all shares been settled at quarter end, we would have received net proceeds of approximately $275 million.
Speaker Change: In August, the company reopened its 5.1% senior notes of $300 million to issue an additional $250 million at an effective rate of 4.87%.
Speaker Change: Aggregating its senior notes due April 2029 to 550 million dollars.
Speaker Change: The re-opener met our long-term, our need for long-term financing for this year.
Speaker Change: As Sid noted, our balance sheet remains strong, with our adjusted CFO-to-debt ratio projected to end the year above 19%, comfortably within the guidelines for our current credit rating.
Speaker Change: Yesterday, the OneGas Board of Directors declared a dividend of 66 cents per share unchanged from the prior quarter.
Speaker Change: As we close out the year, we look forward to continuing to execute our financial plan in line with our updated guidance.
Speaker Change: Curtis, I'll turn things to you.
Curtis Dinan: Thank you, Chris, and good morning, everyone. I'll start with an update on our regulatory activities.
Curtis Dinan: As Sid noted, the Kansas Corporation Commission formally approved the settlement of our rate case.
Speaker Change: with a net increase of $35 million.
Speaker Change: We also reached a settlement of the Central Gulf Rate case for Texas Gas Service pending final commission approval.
Speaker Change: That settlement includes a $19.3 million rate increase, a 9.7% rate of return on equity, and a 59.6% equity layer.
Speaker Change: Last month, the Administrative Law Judge recommended approval of the settlement.
Speaker Change: Upon final commission approval, we expect new rates to go into effect the first billing cycle of December.
Speaker Change: Turning to commercial and operating activities, we expect to finish 2024 within our planned capital budget of $750 million.
Speaker Change: And now I'll turn it over to Sid for closing remarks.
Sid Macanally: Thank you, Chris and Curtis.
Sid Macanally: We look forward to a strong finish to the year as we continue to serve our customers and prepare for the opportunities that await us in 2025. In closing, I thank each of our co-workers for their dedication as we safely deliver reliable and affordable natural gas to our 2.3 million customers.
Sid Macanally: Thank you all for joining us this morning. Operator, we're now ready for questions.
Speaker Change: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Again press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
Speaker Change: First question comes from Julian Dumoulin-Smith with Jeffreys. Your line is open, please go ahead.
Speaker Change: Julian, your line is open.
Speaker Change: We move on to Paul Fremont with Leidenberg. Your line is open, please go ahead.
Speaker Change: Unknown Speaker
Paul Fremont: Thank you very much and congratulations on a good quarter. I guess my first question has to do with the timing of your 2025 guidance. Should we expect that to happen in December?
Speaker Change: Good morning, Paul. We changed our guidance cadence a few years ago to allow us to issue guidance before the December Utility Week meetings, so we could
Speaker Change: Speak freely about our guidance and our plan forward and we think that's worked well It serves us well, and we feel like it serves the investment community well So we plan to follow that same cadence as we go into the year ahead
Paul Fremont: Great and then you you've talked about sort of progress that you've made so far on O&M and you also I think talked about an expectation that O&M would be higher earlier and then the you know as you go out in time
Speaker Change: declining. Should we still sort of expect a declining trajectory in O&M on a go-forward basis or not?
Speaker Change: Hey Paul, this is Chris. Yeah, I think that's a safe expectation. Again, we've
Speaker Change: What I was trying to say this morning is that we've been successful on the front end, not experiencing as robust an inflationary pressure as we anticipated, but we still see the opportunity for a moderation in the cadence as we move forward.
Speaker Change: Great.
Speaker Change: Unknown Speaker .
Speaker Change: Is there any plan filing in Oklahoma and should we expect sort of Kansas to be like every two years?
Curtis Dinan: Paul, this is Curtis, and under our Oklahoma tariff.
Curtis Dinan: We're required to file a full rate case there by June 30th of 27. So we remain on course to do that with the interim PBR filings each year until we get to that point.
Speaker Change: In Kansas, we just completed that rate case and haven't declared any other plans into the future except for we'll continue with our annual GSRS filing, which captures a large portion of the capital we spend each year in that state.
Speaker Change: Got it.
Speaker Change: Thank you very much.
Speaker Change: Thank you, Paul.
Speaker Change: We now turn to Christopher Jeffery with Mizuho Securities. Your line is open, please go ahead.
Christopher Jeffery: Hi, everyone. Thanks for taking my question. Maybe just looking at the customer growth for the quarter, kind of has followed this accelerating pattern and is in line with the longer growth, longer term target that you guys have put out.
Christopher Jeffery: Chris, this is Curtis, and you're right that we saw a little bit of affirming in that activity here, the latter part of 2024. I think we're still seeing the effects of higher mortgage rates and the impact that has not only on.
Speaker Change: homebuyers, but also on those that are already in homes that have lower mortgages. And so you see a bit of a reluctance of folks.
Speaker Change: to want to move unless they necessarily have to move. And so that slowed activity a little bit. And then on the builder side, the same thing, they're very cognizant of carrying cost. And so there hasn't been quite the level of inventory and thus the need for new meter sets as quickly.
Speaker Change: What we've seen in the positive front is a pickup in housing permits. And so we think that's a positive sign that we're starting to see some thawing in that market.
Speaker Change: And depending upon what happens with interest rates, we should expect to see that continuing to recover. But I don't know that it's a rapid acceleration, just a strengthening of what we've seen the past couple of years.
Speaker Change: Thank you.
Speaker Change: Got it. Thanks. And then, just as far as interest expense, could you kind of remind us
Speaker Change: You know, after you did the 250 add on, could you remind us kind of where you stand on balance between commercial paper and how much you want to kind of turn that out into long term debt and, you know, kind of, again, trajectory?
Speaker Change: thereabouts.
Speaker Change: Yeah, sure, Chris. This is Chris. Nice to hear from you.
Speaker Change: On that, you know, I did mention the equity forwards. That would be the next.
Speaker Change: financing settlement that you could expect. If you looked at our historical cadence, we do that in and around the end of the year. At least that's been the last several years' experience.
Speaker Change: So you can look for the forwards to settle at year-end, that would reduce the commercial paper balance. And between the re-opener we did in August and the settlements at year-end, that would satisfy.
Speaker Change: and the retained earnings of the company over the course of this year that would satisfy the long-term financing needs. As you recall, we use commercial paper.
Speaker Change: to finance investments in rate bays that are not yet in authorized rate bays, gas and storage and other similar types of investments. So we're always going to have some level of commercial paper balance.
Speaker Change: and then we will match long-term financing needs both debt and equity similar to how we have done this year and in years prior.
Speaker Change: Thanks, Chris. And maybe just one quick follow up. You had mentioned kind of the, you know, lifting of the moratorium on the COVID restrictions and
Speaker Change: Seeing some progress on the bad debt expense. Just kind of how much more of that do you see to go or is that You know kind of those opportunities have been fully played out
Speaker Change: Chris, this is Curtis again. And at this point, it's really normalized for us in our normal activity, if you will. We're caught up from the effects of the moratorium, it just really creates a little bit of a year over year comparison when you look at some of the numbers.
Speaker Change: But again, in terms of where we are, it's back to normal functioning and not really any big changes expected from here.
Speaker Change: Okay, great. Thanks, everyone.
Speaker Change: Thank you, Chris.
Speaker Change: As a reminder, if you'd like to ask a question, please press star one on your telephone keypad now.
Speaker Change: We now turn to Jameson Ward with Jeffreys. Your line is open, please go ahead.
Jameson Ward: Good morning. How are you guys? Hey, good morning, Jameson.
Jameson Ward: As we're looking at another potentially 25 basis point rate cut on Thursday, I don't think that's
Jameson Ward: This year, which I don't think you had, but please correct me if that's not the case. And then
Jameson Ward: I think 3% by 2027 was sort of the path that you were looking towards and we're potentially looking at maybe four cuts into 2025. So a lot of.
Speaker Change: hypotheticals there, but it seems like you might be getting a bit more headroom in your guidance relative to prior expectations.
Speaker Change: would just like to hear your thoughts there as you're preparing that new guidance package.
Speaker Change: you know just remind us what's baked in today. Thank you.
Speaker Change: Sure, Jameson, good to hear from you. This is Chris.
Speaker Change: So, when we had established the guidance last year, we had assumed no cuts in 2024. We had assumed 100 basis points of reduction in 2025.
Speaker Change: So we already, as you pointed out, got 50 basis points of reduction from the Fed last month, or in September, I should say. We have not changed our expectation through year-end 25.
Speaker Change: So that would leave 50 to go. You're right. Market consensus calls for 25 basis points later this week. We have not assumed that.
Speaker Change: And then in terms of the normalization down to three, if you look at what the Federal Reserve speaks about in terms of its neutral policy rate, what they call R-star, it's at 2.9%. And if you look at the delta between Fed funds rate and our commercial paper rates, that's what would put us in that 3% territory.
Speaker Change: What shaped the timeline for our plan to get down to three was really an examination of the Federal Reserve's balance sheet and the normalization process.
Speaker Change: and getting back to sort of a sub 20% of GDP level, which is where it was prior to COVID.
Speaker Change: Terrific. Thank you very much, Chris. Look forward to seeing all of you in December.
Speaker Change: Yeah, thank you. Same here, Jameson. Thanks.
Speaker Change: That concludes the question and answer session. I would now like to hand back to the OneGAS team for closing remarks.
Speaker Change: Thank you all again for your interest in OneGap. We look forward to seeing many of you at conferences in New York the second week of December.
Speaker Change: Our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in late February. We'll provide details on the conference call at a later date. Have a great day.
Speaker Change: This concludes the OneGast third quarter earnings conference call and webcast. You may now disconnect.
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