ONE Gas Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 7 speakers on the call.

Operator

And welcome to the 1 Gas 2023 Second Quarter Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Erin Daly. Please go ahead, Ms. Daly.

Speaker 1

Good morning, and thank you for joining us on our Q2 2023 earnings conference call. This call is being webcast live 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 provisions of the Private Securities Litigation Reform Act of 1995, The Securities Act of 1933 and the Securities and Exchange Act of 1934, each as amended. Actual results could differ materially from those projected in any forward looking statements.

Speaker 1

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, Aaron, and good morning, everyone. We're happy to be with you today to share our 2nd quarter results and discuss our performance through the first half of the year. We continue our commitment to safely operating a growing system while cultivating long term value. Our Q2 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.

Speaker 2

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 2 emissions for the first time, We are pleased to report that we have reduced our Scope 1 emissions due to leaks on mains and services by 48% since 2,005, Keeping us on track to meet our 2,035 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.

Speaker 2

Our service territory continues to experience robust As a favorable business environment and a more focused economic development effort bring new investment to our region. A recent example is the May announcement by Enel North America to locate 1 of the United States' largest Solar panel manufacturing facilities in Inola, 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 to review our regulatory, operations and commercial activities Before returning to offer a final perspective. Karen?

Speaker 3

Thanks, Sid, 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 yesterday's earnings release that disclosed the balance sheet and income statement impacts. There is no impact on net income. Net income for the Q2 was $32,700,000 or $0.58 per diluted share compared with $32,100,000 or $0.59 per diluted share in the same period 2022.

Speaker 3

2nd quarter operating income increased $5,400,000 over the same period last year, Reflecting an increase of $14,100,000 from new rates, 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 $1,100,000 to operating income year over year. Although weather across our service territories for the Q2 was 7% warmer than the prior year and 11% warmer than normal, The impact on earnings was mitigated by our weather normalization mechanisms. Quarter over quarter, we experienced a $1,700,000 reduction in operating income due To lower sales volumes. Our operations and maintenance expenses increased $8,000,000 over the Q2 2022, Due primarily to increases in employee related costs of $6,700,000 As a reminder, we expected increased 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 be formed by contract labor.

Speaker 3

We have 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 This was $5,300,000 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 $6,200,000 compared with the same period last year, primarily due to a $5,900,000 increase in the market value of investments Associated with our non qualified employee benefit plans. Interest expense in the quarter was $11,200,000 higher than the same period in 2022 And includes $4,700,000 of additional expense associated with the Kansas securitization. The remainder of the increase is predominantly attributable to 2 items.

Speaker 3

One is the issuance of $300,000,000 of 4.25 percent senior notes in August of last year. The second is interest on our commercial paper. While our average commercial paper balance was down 50% when compared to last year, our weighted average CP interest rate was approximately 5.5%, Which is more than 4 times higher than the 1.3% rate we incurred in the Q2 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 continue to present a headwind.

Speaker 3

Our capital expenditures and asset removal costs for the Q2 were approximately $190,000,000 compared to $149,000,000 in 2022. Our capital investments for the full year remain on track with our $675,000,000 forecast. Authorized rate base was $4,840,000,000 as of June 30, And we estimate our average rate base for 2023 will be approximately $5,150,000,000 Turning to our liquidity. We ended the quarter with $783,000,000 of capacity under our $1,000,000,000 commercial paper program and no borrowings under our credit facility. Our next maturities of long term debt are in the Q1 of 2024, and we have $300,000,000 of 3.6 percent notes And $473,000,000 of 1.1 percent notes coming due.

Speaker 3

By continuing to issue equity with forward settlements, We have addressed our 2023 equity needs and greatly derisked our anticipated 2024 market exposure. In March, We executed a forward sales agreement for 2,000,000 shares of our common stock with settlement by December 29, 2023 For 1,400,000 shares and by the end of 2024 for the remaining shares. And in the Q2, we utilized our $300,000,000 at the market Equity program, which we put in place in February, to execute forward sale agreements for an additional 926,000 shares to be settled by the end of 2024. Had all forward shares been settled at June 30, we would have received net proceeds of approximately $249,000,000 On July 17, the ONE Gas Board of Directors declared a dividend of $0.55 per share, unchanged from the previous quarter. And lastly, we reaffirm our 2023 financial guidance, including net income of $224,000,000 to $238,000,000 And earnings per diluted share of $4.02 to $4.26 As always, we remain focused on prudent expense management.

Speaker 3

And as Curtis will discuss, our outlook for rate base and customer growth remains steady. Curtis, I'll turn it over to you.

Speaker 4

Thank you, Karen, and good morning, everyone. I'll start with a brief update on our regulatory activities. On March 1, we filed our annual performance based rate change application in Oklahoma, reflecting a 2022 test year And seeking a $27,600,000 rate increase to recover $243,000,000 In capital investments and other cost increases, in July 2023, the Oklahoma Corporation Commission issued an order Proving a settlement with a revenue increase of $26,300,000 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 10, Seeking $7,400,000 to recover costs associated with $54,000,000 in capital investments. El Paso and 2 other municipalities denied the requested increase, while all other municipalities and the Railroad Commission Approved an increase of $7,300,000 or allowed it to take effect with no action.

Speaker 4

Texas Gas Service appealed denied 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 9 went into effect during the 1st billing cycle for June With a rate increase of $11,500,000 In June 2023, Texas Gas Service Filed a rate case for all customers in the Rio Grande Valley service area, requesting a $9,800,000 increase. New rates are expected to take effect in late 2023 or early 2024. Also in Texas, Governor Abbott signed legislation establishing a 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.

Speaker 4

Turning to commercial and operating activities. Capital execution remains a focus As we work to serve an expanding customer base and 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 and elevated interest rates, the pace of new meter sets for the 2nd quarter Decelerated slightly compared to 2022. However, in the 12 months ended June 30, 2023, We set approximately 25,800 new customer connections, which is 2% higher year over year. We continue to see a strong demand for natural gas and a robust backlog of future projects.

Speaker 4

As a reminder, COVID 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, while in place, Would inflate our average customer count and the resumption of normal operating practices is now serving to unwind those impacts. We had expected bad debt expense to be elevated this year and saw an additional $2,400,000 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 costs across our industry, We are 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.

Speaker 4

While Karen has 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.

Speaker 2

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 Hurstmann was appointed to the Board on June 29 and brings deep safety related experience that includes service As the former Chair of the National Transportation Safety Board and Chief Executive Officer of the National Safety Council, We look forward to all that we will gain from Ms. Hirschman's insight and expertise. Safety and service are 2 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.

Speaker 2

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 have reliable gas service for their homes, businesses and backup generators. I want to thank each of my co workers Thank you for their dedication to living our core values as we work every day to keep people safe and enjoying the benefits that natural gas provides. Thank you all for joining us this morning. Operator, we're now ready for questions.

Operator

Thank We will pause for a moment to allow everyone an opportunity to signal for questions. And our first question today comes from the line of Shariah Purreza from Guggenheim Partners. Your line is now open. Please go ahead.

Speaker 5

Hi, guys. It's Jameson Ward on for Shar. How are you?

Speaker 2

Really well, Jameson. Good to hear from you this morning.

Speaker 5

Terrific. Macro question for you first. As we continue to see inflation pressures cool at a national level, Could you touch on how that compares to what you're 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?

Speaker 2

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

Speaker 4

Yes. So a lot of our contracts price based off of what's happening with National CPI. So I would say we're We're in line with if you're looking at it nationally. So in our territories, it's not an abnormality from, again, that national average.

Speaker 3

With respect to inflation, it continues to be sticky. The news is encouraging that we've seen it's coming down A bit. I think the time line may be a bit elongated, but I'm optimistic about being able to manage the impact To us in our O and M expenses going into 2024 and 2025.

Speaker 5

Got you. So Just on that note, do you have much ability to pull forward O and M or would continued lower than expected cost pressures this year mostly Follow to the bottom

Speaker 3

line. We don't really have a huge opportunity. We're a highly compliant business. We've got a lot of work that That gets done every year. And so our approach is to have a steady, stable workflow for our employees, easier to manage, It's 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.

Speaker 5

Got it. Thank you. And final question. If inflation were to, let's say, normalize by next year, All else equal, where would that put you in your current 4% to 6% EPS growth range versus what you'd been expecting back in November When CPI, as per your slides, was 8.2%.

Speaker 2

So Jameson, you'll recall that We were speaking to the fact that short term dislocation of rates would Impact us because of our capital structure. And so we've tested that and really looked at is this the most appropriate structure for us. And we continue to believe that You go back to 2014 since the spin from ONEOK, you see that our approach has served our stakeholders well and we think that will be true going forward. We'll 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 you're aware of, we really like our positioning. So you can expect us to continue to manage the short term, but really focus on long term value creation.

Speaker 5

Thank you very much.

Speaker 2

Thank

Operator

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

Speaker 6

Hi, thanks for taking my question. Maybe just quickly on the Energy efficiency program that Curtis mentioned in his remarks, just kind of wondering the puts and takes of that for One guest in Texas.

Speaker 4

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 roll out. But I expect that in the near term that we'll have more clarity around that part of it. We currently have programs In our Central Texas service territory and in the Rio Grande, Rio Grande Valley, they're not the same programs because they're tailored to each of those service areas. And we would envision doing that same type of thing where a program that's appropriate for a specific service area It gets tailored to that area and similar to what we've already done. And again, that's what we're working through and expect to I have more on that in the fairly near term.

Speaker 6

Great. Thanks. And then maybe just the addition of the 900,000 Shares through the ATM program from last quarter. Just kind of wondering how you're thinking about that compared with the forward agreements and how you're thinking about Maybe cadence of future financing and how much we can expect more for 2024?

Speaker 3

So as I said on the in my remarks, we feel good about what we've done for 2023 and are well into 2024. As always, we just try to seek to be opportunistic when we like the price. We feel like we have the need. The ATM gives us the flexibility and the forwards are Just added flexibility on top of that. So I don't have any specific update.

Speaker 3

We'll just continue to monitor as market conditions warrant.

Speaker 6

Great. Thanks. And then maybe just an update on timing for any full general rate cases in the jurisdictions that we should expect Just as far as truing up some of those cost pressures or rate increases that we've seen, anything in that vein?

Speaker 4

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

Speaker 6

Great. Thanks, everyone.

Operator

Thank We have no further questions in the queue at this time. So it will be my pleasure to hand back to Ms. Erin Daly for any closing remarks.

Speaker 1

Thank you all again for your interest in ONE Gap. Our quiet period for the Q3 starts when we close our books in early October And extend until we release earnings in late October. We'll provide details on the conference call at a later date. Have a great day.

Operator

This concludes the Oil Gas 2023 Second Quarter Earnings Conference Call and Webcast. You may now

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