ONE Gas Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the ONE Gas 20 24 Second Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Daley.

Operator

Please go ahead, Ms. Daley.

Speaker 1

Good morning, and thank you for joining us on our Q2 2024 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. 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 Chris Cignolfi, Senior Vice President and Chief Financial Officer and Curtis Steinen, 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. We're happy to be with you today to share our 2nd quarter results. Our performance through the first half of the year is consistent with our financial plans and the expectations we shared when we issued guidance last November. We entered the second half of the year with positive momentum and constructive regulatory activity in all of our jurisdictions. Curtis will speak to the latest activity, a unanimous settlement agreement in the Kansas Gas Service full rate case.

Speaker 2

We continue to fulfill our commitment to deliver affordable and reliable natural gas to our customers while effectively managing the business. One example of our focus on execution is our line locating project. When we updated our 5 year outlook in November 2022, we projected an average O and M increase of 5% over the 5 year guidance period, due primarily to wage increases and investments we were making to bring certain services like line locating in house in those locations where there was an opportunity for efficiencies. In that guidance, we noted that we expected the increase in O and M expenses to be front end loaded as we hired new employees and trained them to perform line locating and other skills and then expected to see expenses decrease as those employees not only replaced contractors in certain areas, but also could be deployed to do other work as needed. That is exactly what we've seen as outside service costs related to line locating have been reduced by an amount greater than the cost related to in sourcing.

Speaker 2

While we saw a 7% year over year total O and M increase in the Q2, this year those same expenses increased to just 3% year over year as we begin to realize the benefit of line locating and other investments. Now I'll turn it over to Chris to discuss financial details for the quarter. Chris?

Speaker 3

Thanks, Sid, and good morning, everyone. Net income for the Q2 was $27,000,000 or $0.48 per diluted share compared with $33,000,000 or $0.58 per diluted share in the same period 2023. Revenue from new rates contributed $14,700,000 to operating income year over year, while continued growth in our residential and commercial customer base, primarily in Oklahoma and Texas, contributed $1,600,000 Although weather across our service territories for the 2nd quarter was 40% warmer than normal, our weather normalization mechanisms again mitigated the impact on earnings. As Sid noted, our operations and maintenance expenses increased 3% over the Q2 2023 due primarily to expected increases in employee related costs, which we have mitigated in part through our in sourcing efforts. Excluding the impact of the Kansas securitization, depreciation and amortization expenses were approximately $5,000,000 higher than the prior year, reflecting an increase in net property, plant and equipment due to our higher level of capital investment.

Speaker 3

Excluding the impact of Kansas securitization, interest expenses in the quarter were approximately $10,000,000 higher than the same period in 2023, which primarily reflects the issuance of $300,000,000 of 5.1 percent senior notes in December and the maturity of lower coupon notes in February March, which we repaid with commercial paper. Our capital expenditures and asset removal costs for the Q2 were approximately $195,000,000 compared to $190,000,000 in 2023. Expected capital investments for the full year remain on track with our $750,000,000 forecast. As planned, we have satisfied our 2024 equity needs through the forward settlement agreements that we issued last year. Those agreements cover approximately 3,600,000 shares of our common stock with settlement by year end at an average price of approximately $77 per share.

Speaker 3

Had all forward shares been settled at quarter end, we would have received net proceeds of approximately $275,000,000 On July 15, the ONE Gas Board of Directors declared a dividend of $0.66 per share, unchanged from the prior quarter. And lastly, we reaffirm our 2024 financial guidance, including net income of $214,000,000 to $231,000,000 and earnings per diluted share of $3.70 to $4 Curtis, I'll now turn it to you.

Speaker 4

Thank you, Chris, and good morning, everyone. I'll start with a brief update on our regulatory activities. As we discussed last quarter, Kansas Gas Service filed a general rate case in March. A unanimous settlement agreement was reached with all parties and filed with the Kansas Corporation Commission last week. It is a black box settlement, meaning that the agreement does not contain a stated ROE, capital structure or rate base.

Speaker 4

The settlement agreement does include an approved total increase of $70,000,000 and a net increase of $35,000,000 after considering what is already being recovered through the gas system reliability surcharge mechanism. The final order in the case is due to be issued by October 25. In February, we filed our annual performance based rate change application in Oklahoma, reflecting a 2023 test year and seeking a $31,800,000 rate increase. We reached a settlement with the commission staff reflecting a $31,400,000 increase, which the administrative law judge supported. New rates were implemented on July 1, subject to refund until the commission enters a final order.

Speaker 4

In Texas, the Central Gulf Gas Reliability Infrastructure Program or GRIP that was filed in February went into effect in June with a rate increase of $12,200,000 Also in June, Texas Gas Service filed a rate case for all customers in the Central Gulf service area requesting a $25,800,000 increase. This filing is based on a 10.25 percent return on equity and a 59.6 percent common equity ratio. New rates are expected to take effect toward the end of this year. The West North Grip filed in March was also approved by the Railroad Commission and went into effect in July, reflecting a rate increase of $8,500,000 2 of the cities denied Texas Gas Services' request, and we have appealed the denial to the Railroad Commission. In May, Texas Gas Service filed a grip in the Rio Grande Valley service area requesting a $3,700,000 increase.

Speaker 4

New rates are expected to take effect in September. Turning to commercial and operating activities. Our capital execution remains on target to complete our 2024 plan and meet the needs of an expanding customer base. We expect to complete during the Q3 the final phase of a major system extension west of Austin. These projects are bringing natural gas service to underserved communities and will support the build out of several large master plan developments.

Speaker 4

We continue to see steady growth not only in Austin, but also across our service territory with Oklahoma City and El Paso in particular experiencing robust demand for new meters. And now I'll turn it over to Sid for closing remarks.

Speaker 2

Thanks, Curtis and Chris. We recently published our 2024 Sustainability Report, which highlights our focus on supporting our coworkers and communities, reducing emissions and employing sound governance practices. Our robust disclosures have resulted in achieving AAA ESG rating from MSCI due to our management of safety and climate risks and a prime corporate rating from ISS. Regarding governance, we're pleased to share that we welcomed 2 new board members to our Board of Directors in July. Sanjay Meshri is the former Chairperson of Advanced Research Chemicals, the owner and Chairperson of Thompson Chemical Corporation and Chairperson of Meshri Holdings.

Speaker 2

He will support our continued focus on business execution and operational and safety excellence. Yves Siegel has over 35 years of experience managing significant energy portfolios and launching new investment strategies in energy infrastructure. He brings additional financial acumen to our board as well as perspective gained from decades of experience as an energy analyst. In closing, I want to thank each of my coworkers for working every day to keep our customers safe and enjoying the many benefits that natural gas provides. Operator, we're now ready for questions.

Operator

Thank The first question comes from Julien Dumoulin Smith with Jefferies. You may proceed.

Speaker 3

Hey, good morning team. Thank you

Speaker 5

guys very much for the time. Appreciate it.

Speaker 2

Good morning, Julian.

Speaker 6

Hey, excellent. Look, I wanted to come back to the O and M increases that you guys just described. I mean, clearly, obviously, something of a step function as you bring in house. I mean, just relative to that percent you guys articulated earlier this year and as you think about it on a multiyear basis, I mean, is this kind of that realizing that step function here in the quarter with that 7%? And do you think it normalizes through the course of the year and especially into next year?

Speaker 6

So I want to understand sort of the cadence as you think about how that's realized into your numbers given the sort of outsized increase? And maybe related just adjacent, the interest expense saw kind of a meaningful uptick here in the quarter as well. If you can just speak to that a little bit ex securitization?

Speaker 2

Sure. Julien, let me give you an overview and then ask Curtis to speak specifically to some O and M issues that operations is seeing in terms of the strategies that have been implemented to try to control O and M and then Chris can speak to your question around interest. As you know in meetings past, we've spoken specifically to our strategy of preparing for the future rather than contracting as we saw the challenge being shorter term. And if we had contracted in that short term, we would not be prepared to pursue the growth that we knew was coming in our service territory in the longer term. So we in our guidance, we provided some vision around the fact that we believed staffing up where it made sense from an efficiency standpoint would serve us well not only in the short term improving service levels to customers and improving our compliance activities, but also preparing for the growth that we knew was coming in the future given the dislocation between housing availability and the number of people wanting housing in our service territory.

Speaker 2

So to illustrate that, if you look at our quarterly performance around O and M in the Q1 of 2023, we posted a 10.1% increase. Every quarter since then has gone down. In the Q1 of 2024 was 4.8% and we just reported on the Q2 around 3%. So we think that we've demonstrated that the strategy has paid dividends for us in terms of O and M expense, but it's done that in a way that has supported our vision for pursuing growth in the future and serving those communities in Kansas and Oklahoma and Texas that continue to grow and we know will provide opportunities for us to provide service to them. Curtis, let me ask you to add any color you care to.

Speaker 4

Yes. Sid, I guess the thing I would say is some of the bets that we were making in in sourcing those functions, we're realizing some of those benefits a little bit quicker than we might otherwise have thought when we did our initial analysis. We're getting really good performance out of those teams. And one of the things we really like about it for the long term is these will be additional coworkers that we have that have other OQs or qualifications that enable them to do other tasks. So line locating, just as an example, isn't a function that happens at the same level 5 days a week.

Speaker 4

It has peaks and valleys through the week. And so by having a workforce that is able to flex in and out of those types of roles, that creates other efficiencies for other work that we need to do in those valleys. So we gain not only the efficiencies with the line locating efforts, we gain efficiencies with those other compliance tasks that have to be completed. So I think it's been a really good story, from an operational standpoint. And then from just the line locating requirements in each of our states, we have worked with the legislatures and the One Call boards around different changes that have improved how line locates and second or follow-up locates are done subsequently that has also changed the level of activity required.

Speaker 4

So we've actually eliminated some of those line, locate tickets that has allowed us to also gain some efficiency. So a couple of really good stories in there both from an operational standpoint as well as what our public advocacy teams have been working on.

Speaker 3

And Julien, to follow-up on your question regarding interest expense, this is Chris. One thing to note, everything was consistent with how we had planned it to be for the year, but I'm not sure everybody picked up on the nuances of the timing. And so if you think about the Q1, we had a $300,000,000 3.6 percent 10 year note that matured in mid February. And that was prefunded by the issuance we had done in December. But effectively, you're talking about $300,000,000 moving from 3.6% to 5.1%.

Speaker 3

So you're picking up 150 basis points of exposure there. But you were shielded on part of that for half the quarter. And then we had the 4 73,000,000 dollars 1.1 percent note that didn't mature until March 11. And that was replaced with CP at 5.6%. So you're picking up 400 plus basis points of impact there.

Speaker 3

So 1st quarter, while the maturities occurred in that quarter, had some shielding effects from the total impact of the interest headwind. The Q2, warehoused all of those impacts. And then if you think about Curtis' regulatory review, the back half of the year with rates starting to go into effect on filings that took place in the spring, you start to have some pickup in regulatory revenue in the back half. And then as you know, we had previously discussed terming out some of the commercial paper in the back half of the year and we have the equity forwards, which we intend to settle by the end of the year. So I think when you look at the Q2, you're looking at the sort of full bore impact of the maturities we talked about in the winter.

Speaker 6

Right, exactly. Thank you for the detail, Chris. I appreciate it. And Curtis, maybe just go back to the comments briefly what you said. Clearly, there's a timing element.

Speaker 6

You remain overall on track against that 5 year number on the O and M CAGR, correct?

Speaker 4

That's correct, Julien.

Speaker 6

Excellent. All right, guys. Thank you very much. Appreciate it.

Speaker 2

Yes. Thank you, Julien.

Operator

Thank you. The next question comes from Paul Friedman with Ladenburg. You may proceed.

Speaker 5

Thank you very much. I guess first question is like a point of clarification on the Kansas settlement. Will the commitment in its final order make public the rate base, the ROE and the equity ratio? Or is it your expectation that that will they'll remain silent on that?

Speaker 4

Paul, this is Curtis. And in past rate cases when we've reached a black box settlement even in the final order those items you identified do not get listed or detailed in it. It's just a revenue requirement change and doesn't go into the detail of how the calculation is done.

Speaker 5

Great. And then I guess the other question I have is sort of given some of the progress that you've made on a go forward basis, I think you've identified sort of a longer term expectation of growth in O and M of 5%. Do you see a possibility of coming in better than that sort of over the course of the future?

Speaker 2

We'll always strive to come in better than that, Paul. We are focused always on how can we be more efficient and still provide the safe and reliable service that we think our customers are entitled to. So it's possible that we'd come in lower. We wanted to disclose the performance for the quarter and give some color around that to give you a sense of the kinds of projects that we think lead to that level of performance. But right now, we're not updating the 5% number, but we'll continue to work toward lowering that number and we'll provide updates as appropriate.

Speaker 5

Okay. And Brandon, I guess the last question I have is sort of on interest rates, with interest rates sort of lower than they were at the end of the year. I mean, are you seeing sort of any potential benefit on that front?

Speaker 3

Hey, Paul, this is Chris. Yes, the short answer is yes. There's a lot of speculation obviously about what may happen with the Fed funds rate. Obviously, our commercial paper rate is tethered pretty specifically to Fed funds rate. So should the Federal Reserve lower its policy rate, we would expect that commercial paper borrowing costs would decline in sympathy with that.

Speaker 3

A reminder that our forecast was that we would not see that happen this year. But obviously, there's been a change in market view on that front. And then on long term issuances or intermediate long term issuances, we've seen both treasury rates come in and corporate credit spreads come in. And so that's been favorable versus where things stood at the beginning of the year to your point.

Speaker 5

Great. Thank you so much.

Speaker 2

Thank you, Paul.

Operator

Thank you. The following comes from David Arcara with Morgan Stanley. You may

Speaker 7

proceed. Hey, good morning. Thanks for taking my questions.

Speaker 2

Good morning, David.

Speaker 7

Hey, could you remind me the cadence for financing? You mentioned terming out some of the commercial paper in the second half. Do you see a window where you could potentially accelerate that? How are you thinking about it just with the pullback in yields in the market?

Speaker 3

Yes. Hey, David, this is Chris. We enter an open window here in a couple of days that will remain until we close the books for the quarter. So that's one window we've targeted for potential terming out of that credit. And then as you look at the equity forwards, our expectation as you've seen us do in the past is to settle those closer to year end.

Speaker 7

Okay, got it. Thanks. That's helpful. And just a higher level question, I guess, on the Kansas settlement here. Are the parameters around the settlement consistent with your current earnings expectations and the outlook there?

Speaker 7

Any major changes versus what you would have assumed?

Speaker 4

David, the short answer is no major changes to what we had assumed in our guidance. There's many items that we factor into that and this fits within the profile that we had provided.

Speaker 7

Okay. Got it. Great. Thanks so much.

Speaker 2

Thank you, David.

Operator

That concludes the question and answer session. I would now like to hand it back to the ONE Gas team for closing remarks.

Speaker 1

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

Operator

This concludes the ONE Gas 20 24 Second Quarter Earnings Conference Call and Webcast. You may now disconnect.

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