ONE Gas Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the ONE Gas 2023 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would now like to turn the conference over to Erin Daly. Please go ahead, Ms. Daly.

Speaker 1

Thank you, Elliot. Good morning, everyone, and thank you for joining us on our Q3 2023 earnings conference call. This call is being webcast live and a replay will be available later today. After our prepared remarks, we are happy to take your questions. 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.

Speaker 1

Actual results could differ materially from those projected in any forward 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 McAnally, President and Chief Executive Officer Karen Lawhorn, Senior Vice President and Chief Financial Officer and Curtis Dinan, Senior Vice President and Chief Operating Officer. And now I'll turn the call over to Sid.

Speaker 2

Thanks, Erin, and good morning, everyone. Thank you for joining us as we discuss our Q3 performance. Prudent management and operational execution have kept us on track to achieve the midpoint of our 2023 financial guidance, Despite strengthening macroeconomic headwinds affecting our industry. As our results show, We've met the dual challenges presented by inflation and higher interest rates this year, while also leveraging process improvements to better balance our capital deployment, putting us ahead of our capital plan for the year. We continue to effectively meet growing customer demand, while also prioritizing safety and enhancing the reliability of our system.

Speaker 2

The investments we're making position us well to support growing customer needs long into the future. I've spoken before about the economic growth we're experiencing in Texas, Oklahoma and Kansas. An effective mix of business friendly government policies, Access to affordable energy and attractive costs of living are converging to bring new manufacturing and technology based jobs to our region. With these jobs come families needing places to live and looking to become parts of our communities. Economic development of this kind is the most durable variety of growth as it rests on strong and long dated fundamentals.

Speaker 2

This type of development also presents growing demand for natural gas for homes, for businesses and for industry. While the jump in interest rates has understandably pressured homebuilding in the near term, we remain bullish about the intermediate and long term pillars of growth across our regions. As we deploy capital, we remain thoughtful about making the right investments, so our system is capable of reliably serving the growing customer base that we today and the substantial increase in growth that is to come. As always, safety remains our top priority. Now I'll turn it over to Karen to discuss our financial performance for the quarter.

Speaker 2

Karen?

Speaker 3

Thanks, Sid, and good morning, everyone. As Sid noted, we had solid financial performance this quarter despite the headwinds posed by rising interest rates and sticky, though moderating inflation. Our teams have done a great job managing the risks we can control. As a result, we are narrowing our earnings guidance with earnings per diluted share We expect to invest approximately $725,000,000 of capital in 2023, up from the $675,000,000 reflected in our original guidance. As Curtis will discuss in a moment, the increase is primarily attributable to system maintenance and reinforcement projects.

Speaker 3

Net income for the Q3 was $25,200,000 or $0.45 per diluted share compared with $23,700,000 or $0.44 per diluted And the same period 2022. As I have noted in previous quarters, rising interest rates and the inverted yield curve continue to present challenges. For perspective, excluding amounts related to the Kansas securitization, interest expense through the 1st 3 quarters of 2023 is at approximately 40% from the same period last year. The increase is primarily attributable to the rising rates on commercial paper and our issuance of $300,000,000 up 4 point to 5% senior notes in August 2022. A reminder that in the Q1 of 2024, we have $300,000,000 of 3.6 percent notes and $473,000,000 of 1.1 percent notes coming due.

Speaker 3

We are considering multiple factors such as interest rates, Yield Spreads and our debt to equity ratio as we look to refinance those notes. As expected, employee expenses were also elevated as compared to the Q3 last Due to planned investments in our workforce, with operations and maintenance expenses due to labor and benefit costs increasing $7,500,000 However, we saw a decrease of $2,300,000 due to lower outside services costs as we continue to in source work previously supported by contractors. We We anticipate O and M expense increases will continue to moderate as we realize the benefits of in sourcing work and improved internal processes And as inflation continues to ease in line with our assumptions, we have continued to enter into equity forward sale agreements, greatly derisking our anticipated market exposure. In September, we executed additional forward sale agreements for 1,380,000 shares of our common stock with required settlement by December 31, 2024. In total, we now have forward sale agreements covering approximately 1,690,000 shares of common stock, which must be settled by the end of this year And approximately 2,900,000 shares, which must be settled by the end of 2024.

Speaker 3

Had all forward shares been settled at September 30th, We would have received net proceeds of approximately $351,000,000 implying an average per share price of roughly $76.45 Amid continued geopolitical uncertainty, we have also taken steps to ensure we have adequate liquidity as we execute our capital plan. On October 20, we expanded our credit facility to $1,200,000,000 from $1,000,000,000 Yesterday, the ONE guest Board of Directors declared a dividend $0.65 per share, unchanged from the previous quarter. As we close out the year, we will remain focused on prudent expense management as we serve our customers. Curtis, I'll turn it over to you.

Speaker 4

Thank you, Karen, and good morning, everyone. I'll start with an update on our regulatory activities. Last December, we filed a request for a voluntary renewable natural gas tariff in Oklahoma, which will give customers the opportunity to Purchase the environmental attributes of RNG. A unanimous settlement agreement recommending approval of the tariff was filed and a hearing before an administrative law judge was held on October 19. An order is expected before year end, which will allow us to implement the program.

Speaker 4

In Texas, we filed a gas reliability infrastructure program for the consolidated West North Region in March. The Railroad Commission and all municipalities except for 3 approved a $7,300,000 increase Or allow it to take effect with no action. Texas Gas Service appealed the 3 municipalities' denial and implemented the new rates in June subject to In August, the Railroad Commission granted the appeal and approved the increase. Finally, in August, Kansas Gas Service submitted an application to the Kansas Corporation Commission requesting an increase of approximately $8,000,000 Pursuant to the gas system reliability surcharge statute, which allows Kansas Gas Service to file for a rate adjustment To recover and earn a return on qualifying infrastructure investments incurred between rate filings. The KCC has until late December to issue an order.

Speaker 4

Turning to commercial and operating activities. As Karen noted, we expect to surpass our planned capital deployment for the year In part due to process changes that have improved project planning and execution. Those improvements along with mild winter weather Allowed us to complete more of our planned work in the 1st quarter, and we have maintained this pace throughout the year. Of note, we are nearing completion of our MoPac Phase 2 project, the last of the major reinforcement projects To arise out of our evaluation of Winter Storm Yuri. The diligence of our operations, engineering and project management teams Our work plan puts us in an even stronger position as we head into the winter heating season.

Speaker 4

Looking at growth, we continue to see a slight deceleration in the pace of new meter sets as elevated mortgage rates impact the immediate term decisions of homebuilders and potential buyers. Year to date through September, our meter sets have matched the pace set in 2021. As we discussed on our Q2 call, our region continues to enjoy strong economic growth with new employers moving into our territories, bringing jobs, People and an ongoing need for new housing. In fact, we're on pace to post a record number of new meter sets for the month of October Despite 30 year mortgage rates cresting 8% earlier this month, I think this illustrates both the challenges in forecasting When baseline conditions remain volatile and the durability of the regional growth story Sid described earlier, We remain prepared to meet the growing demand for gas that accompanies that economic development. And now I'll turn it over to Sid for closing remarks.

Speaker 2

Thank you both. A high performing workforce is the foundation of the essential work that we do. Over the last 3 years, We've come through a global pandemic and multiple winter storms, events that ultimately strengthened our commitment to one another and to the customers we serve. The high levels of service maintained through those challenges strengthened our customers' confidence in the reliability of our service. And across the ONE Gas footprint, Our team shared the experience of providing an essential service to our customers in a way that reinforced the value of culture and connection.

Speaker 2

At the end of September, we welcomed Angela Copeland to ONE Gas as Senior Vice President and Chief Human Resources Officer To help us navigate the changing workplace and to continue our investment in our primary asset, the people that we work alongside. Angela brings deep executive experience and a passion for developing people, and we look forward to the contribution she will make to our company as we focus on ensuring that ONE Gas continues to be a place where we can all contribute, grow and thrive. In closing, I thank each of my co workers for their commitment and dedication to delivering safe and reliable natural gas to our 2 point Thank you all for joining us this morning. Operator, we're now ready for questions.

Operator

Thank Our first question comes from Gabe Moreen with Mizuho. Your line is open.

Speaker 5

Hey, good morning, everyone. Appreciating that there's a lot of moving parts that probably will go into your refreshed 5 year outlook. Can you just speak a little bit, and I don't mean to front run it, to how you're feeling about your 4% to 6% EPS Growth outlook over that the last time you issued it given the refinancing, the moderating O and M, the meter sets Customer growth. So I'm just curious kind of how you're feeling about that given all the shifts that have occurred since you issued the last 5 year plan?

Speaker 2

Well, Gabe, it's good to hear from you. And of course, we appreciate the question. As you point out, this call is really pointed at 3rd quarter and prior year Performance and so we'll not provide guidance today. But I think you look at the performance of the company and the way that we've been able to navigate A challenging environment this year. Curtis spoke to the in sourcing and Karen talked about Financial impact of the in sourcing that we've done that's looked at how we manage an increasing cost of outside services.

Speaker 2

And we've talked before about the fact that when we have the opportunity to bring work inside the company and can compete both from a performance and a cost standpoint, We'll do that. And I think that's borne fruit for us. That's a strategy that is likely to continue. Karen also spoke to the way that we are Looking at managing our financial structure and I think the way that the company has utilized the ATM and block sales demonstrates That we'll be opportunistic as we think about the rest of this year and demonstrated by the way that we performed Earlier in the year. Karen, anything you'd add?

Speaker 3

I think that's a great summary. And we look forward to talking more

Speaker 2

Gabe, the only other thing that I would mention before passing to Curtis is I spoke in the prepared remarks about the durability of our growth. And the one thing that we have confidence in As demonstrated by our recent performance with mortgage rates where they are is the longer term story. We have A significant amount of clarity into growth in our service territory going forward. And we think durability is an important The factor of that growth when we look at the underlying mechanics of economic development in our service territory and the knock on growth We've got a pretty clear picture about what we need to do as we think about preparing for that. And I think we've demonstrated that with the attention That we've paid to our capital process and why you see the over performance in our capital performance to date.

Speaker 2

Curtis, anything you'd add?

Speaker 4

So just around the growth activity that we see, we have seen again this year a little bit of acceleration in meter sets, but October was a bit of a positive turn for us. We do continue to see Developers and builders active in our territories. So while there may be a pause, I think we really view that as more Temporary than long lasting. So maybe October is starting to show the signs of that.

Speaker 2

Thank you for the question, Gabe.

Operator

Our next question comes from Jameson Ward with Guggenheim Partners. Your line is open.

Speaker 6

Good morning, guys. How are you?

Speaker 2

We're well, Jameson. How are you this morning?

Speaker 6

Doing well. Thank you. Just jumping a bit ahead first, I want to ask you what's in it, but in terms of timing, Should we expect the 2024 annual guidance slides at the end of November again like they came Last year or would you be reverting back to releasing in January, so we get a sense of when to expect?

Speaker 2

Jameson, and this ties back to our answer to Gabe's question. We believe the more clarity we can provide about the future opportunities that the company has, The better off we are in being clear about the future and the better off you are in being able to Ask us questions. We try to be as transparent as possible. I think our past behavior demonstrates that we think transparency is always a good policy, But it's particularly helpful when you have the kind of forward story that we have. So we thought the cadence worked very well last year, particularly because it gave us the opportunity In the December Investor Meetings to speak to the forward year.

Speaker 2

So right now, our plans are To continue the cadence that we started last year because we think it was helpful to everyone.

Speaker 6

Perfect. That's great. I mean, we'd always rather have information sooner rather than later. I don't think anyone will disagree. I just have one more.

Speaker 6

On the well, specific to the $50,000,000 of incremental CapEx, When should we be assuming that, that spending in particular begins earning a return?

Speaker 4

Jamieson, this is Curtis. And if you look back in 2023, the cadence of our filings, whether it was GRIP, Filings in Texas are PBR filing in Oklahoma or GSRS in Kansas. We'll be following that same cadence in the coming year as we have for each of

Speaker 6

So the spending was kind of sprinkled across all categories That it wasn't specific to any particular bucket that might have a nearer term recovery period or anything else we could model or factor in. Just to clarify there. No,

Speaker 4

all of our capital goes into the GRIP filings. All of our capital goes into the PBR filings and the majority of our capital spend in Kansas goes into the GSRS filing. And most of the increase As it relates to this year was more system maintenance type of spending. So that's what would qualify in Kansas

Operator

We now turn to Tanner James with Bank of America. Your line is open.

Speaker 6

Hi, good morning.

Speaker 2

Good morning, John.

Speaker 7

Hi. Do you guys have any visibility for plans for terming out some of the upcoming maturities versus your short term debt? And then And you kind of mentioned a little bit in the question or in the answer to Jameson. But how should we think about the cadence of your Formal rate case filings and timing on your ability to recover the portion that is recoverable through rate? Thank you.

Speaker 2

Yes. Let's go to Curtis to speak to rate cadence and then Karen can speak to your initial question, Tanner.

Speaker 4

So let me just go state by state. So the capital spending, everything we spend in Texas qualifies for a GRIP filing. And if you saw the cadence that we had here in 2023, in February, we filed Central Tax. In March, we filed Westex and then we have the rate case in RGV. Instead of the rate case next year, we would have a COSA filing.

Speaker 4

And you can look at cadence in prior years to have a sense of that. In Oklahoma, all of our capital is recovered through the PBR filing, Which we typically do at the end of February. And in Kansas, the capital that we've spent in 2023 through the end of June It was a part of the filing that we did just a couple of months ago in August. Our next filing for GSRS in Kansas Would be next August. You can do one every 3 65 days, no sooner than that.

Speaker 4

And that will pick up all capital spending through June 30 next All capital spending that qualifies for that mechanism, which is the majority of our spending in Kansas.

Speaker 3

And to address your question on the refinancing, I really don't have much more to add than what I said in the comments. We're looking at all factors with Rates and spreads, where they are, different tenors, how that impacts our maturity profile, how it impacts our capital structure, Which supports our regulatory contract, all of those things are things that we are looking at and balancing as we refinance that debt.

Speaker 2

Yes. Tanner, the only thing I would add is To speak to how we have prepared and are preparing for the challenges that we think we'll face going forward, we have Increase the capacity of our regulatory group recognizing that the cadence of rate activity will increase and that started Last year, really early last year. We've also done the same when you look at the financial side of the house. So We think we've built capacity to take on the challenges in the short term that continue to support the opportunities that we have in the long term.

Speaker 7

Understood. Thank you. And then with commodities declining here, how do you estimate the customer

Speaker 4

Jameson or Tanner, excuse me, we've seen, just on average across our territory last year, we saw an average bill Somewhere in the $81 range per month. And this year we see somewhere around maybe 8% to 10% decrease from that.

Speaker 7

Great. Thanks. And then lastly, in the press release, you called out the year to date Weather impact, net of normalization. Have you how do you quantify that on an EPS basis? And then what are the Are there any offsets built into your guidance for that?

Speaker 3

So as we plan guidance for the year, we anticipate normal weather. And we are largely protected from those big swings because of our weather normalization mechanisms. So Because of that protection, we don't see a lot of volatility associated with it. I don't I'll comment, I don't have the EPS impact of that.

Speaker 7

Great. Thank you very much.

Speaker 2

Thank you for the questions.

Operator

We have a follow-up question from Gabe Moreen with Mizuho. Your line is open. This concludes our Q and A. I'll now hand back to the management team for closing remarks.

Speaker 3

Thank you

Speaker 1

again for your interest in ONE Gas. Our quiet period for the Q4 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.

Operator

This concludes the ONE Gas 2023 Third Quarter Earnings Conference Call and Webcast. You may now disconnect.

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ONE Gas Q3 2023
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