ONE Gas (OGS) Q2 2024 earnings call transcript

Erin Dailey Good morning and thank you for joining us on our second quarter 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 provision 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. 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 McAnnally, President and Chief Executive Officer; Chris Sighinolfi, 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.

Sid McAnnally Thanks Erin and good morning, everyone. We're happy to be with you today to share our second 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 enter 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. 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 five-year outlook in November 2022, we projected an average O&M increase of 5% over the five-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&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. While we saw a 7% year-over-year total O&M increase in the second quarter, 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.

ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 Now I'll turn it over to Chris to discuss financial details for the quarter. Chris?

Chris Sighinolfi Thanks, Sid, and good morning, everyone. Net income for the second quarter was $27 million or $0.48 per diluted share, compared with $33 million or $0.58 per diluted share in the same period of 2023. Revenue from new rates contributed $14.7 million to operating income year-over-year, while continued growth in our residential and commercial customer base, primarily in Oklahoma and Texas, contributed $1.6 million. Although weather across our service territories for the second 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 second quarter of 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 million higher than the prior year, reflecting an increase in net property, plant and equipment due to our higher level of capital investment. Excluding the impact of Kansas securitization, interest expenses in the quarter were approximately $10 million higher than the same period in 2023, which primarily reflects the issuance of $300 million of 5.1% Senior Notes in December and the maturity of lower coupon notes in February and March, which we repaid with commercial paper. Our capital expenditures and asset removal costs for the second quarter were approximately $195 million, compared to $190 million in 2023. Expected capital investments for the full year remain on track with our $750 million forecast.

As planned, we have satisfied our 2024 equity needs through the forward settlement agreements that we issued last year. Those agreements cover approximately 3.6 million shares of our common stock with settlement by year- end at an average price of approximately $77 per share. Had all of our shares been settled at quarter-end, we would have received net proceeds of approximately $275 million. 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 million to $231 million and earnings per diluted share of $3.70 to $4.00. Curtis, I'll now turn it to you.

Curtis Dinan 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. The settlement agreement does include an approved total increase of $70 million and a net increase of $35 million, 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 $31.8 million rate increase. We reached a settlement with the Commission staff, reflecting a ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 $31.4 million increase which the administrative law judge supported. New rates were implemented on July 1, subject to refund until the Commission enters a final order. 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 $12.2 million. Also in June, Texas Gas Service filed a rate case for all customers in the Central-Gulf Service area, requesting a $25.8 million increase.

This filing is based on a 10.25% return on equity and a 59.6% 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 $8.5 million. Two of the cities denied Texas Gas Service’s 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 $3.7 million increase. 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 third quarter 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 buildout of several large master planned developments. We continue to see steady growth not only in Austin, but also across our service territory – 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.

Sid McAnnally 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 a 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 two 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. 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 co-workers 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.

A Good morning, Julien. Q Hey. Excellent. Look, I wanted to come back to the O&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 that 4% you guys articulated earlier this year. And as you think about on a multi-year 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? Just 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 tax securitization.

A Sure, Julien. Let me give you an overview and then ask Curtis to speak specifically to some O&M issues that operations is seeing in terms of the strategies that have been implemented to try to control O&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.

So to illustrate that, if you look at our quarterly performance around O&M in the first quarter of 2023, we posted a 10.1% increase. Every quarter since then has gone down. In the first quarter of 2024 was 4.8% and we just reported on the second quarter around 3%. So we think that we've demonstrated that the strategy has paid dividends for us in terms of O&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.

ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 A Yes,Sid. I guess the thing I would say is the 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 co-workers that we have that have other OQ's 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 five days a week.

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 gained not only the efficiencies with the line-locating efforts, we gained efficiencies with those other compliance tasks that have to be completed. So I think that's been a really good story from a 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 our line-locates and second or our follow up locates are done subsequently.

That has also changed the level of activity required. So we've actually eliminated some of those line-locate tickets that has allowed us to also gain some efficiencies. 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.

A 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 first quarter, we had a $300 million or 3.6%, a 10 year note that matured in mid-February and that was pre-funded by the issuance we had done in December. But effectively, you're talking about $300 million moving from 3.6% to 5.1%. So you're picking up 150 basis points of exposure there. But you were shielded in part of that for half the quarter. And then we had the $473 million, 1.1% 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. So first quarter, while the maturities occurred in that quarter, had some shielding effects from the total impact of the interest headwind. The second quarter warehoused all of those impacts. And then if you think about Curtis's 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 second quarter, you're looking at the sort of full bore impact of the maturities we talked about in the winter.

A ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 That's correct. Julien.

A Yeah, thank you, Julien.

A 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.

A We'll always strive to come in better than that, Paul. We're 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 would 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. 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.

ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 ONE Gas, Inc. (OGS) Q2 2024 Earnings Call Raw Transcript 06-Aug-2024 A Hey, Paul, this is Chris. Yes, the short answer is yes. Well, 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. 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.

A Thank you, Paul.

A Good morning, David.

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.

A David, the short answer is no major changes to what we had assumed in our guidance. You know, there's a -- there's many items that we factor into that. And this fits within the profile that we had provided.

A Thank you, David.

Erin Dailey Thank you all again for your interest in ONE Gas. Our quiet period for the third quarter 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.