ONE Gas, Inc. (NYSE:OGS) Q3 2023 Earnings Call Transcript

ONE Gas, Inc. (NYSE:OGS) Q3 2023 Earnings Call Transcript October 31, 2023

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 Dailey. Please go ahead, Ms. Dailey.

Erin Dailey: Thank you, Elliot. Good morning, everyone, and thank you for joining us on our third quarter 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. 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.

A wide shot of a sprawling natural gas pipeline system, representing the company's energy infrastructure.

Joining us on the call this morning are Sid McAnnally, President and Chief Executive Officer; Caron 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.

Sid McAnnally: Thanks, Erin, and good morning, everyone. Thank you for joining us as we discuss our third quarter 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. 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 cost 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. 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 see 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 Caron to discuss our financial performance for the quarter. Caron?

Caron Lawhorn: 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 now expected to be in the range of $4.06 to $4.22. We've also seen good execution on our capital projects. We expect to invest approximately $725 million of capital in 2023, up from the $675 million reflected in our original guidance. As Curtis will discuss in a moment, the increase is primarily attributable to system maintenance and reinforcement projects. Net income for the third quarter was $25.2 million or $0.45 per diluted share compared with $23.7 million or $0.44 per diluted share in 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 first three quarters of 2023 is up 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 million of 4.25% senior notes in August 2022. A reminder that in the first quarter of 2024, we have $300 million of 3.6% notes and $473 million of 1.1% notes coming due. 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 third quarter last year due to planned investments in our workforce with operations and maintenance expenses due to labor and benefit costs increasing $7.5 million.

However, we saw a decrease of $2.3 million due to lower outside services costs as we continue to in-source work previously supported by contractors. We anticipate O&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 1.38 million shares of our common stock with the required settlement by December 31, 2024. In total, we now have forward sale agreements covering approximately 1.69 million shares of common stock, which must be settled by the end of this year, and approximately 2.9 million shares, which must be settled by the end of 2024.

Had all forward shares been settled at September 30, we would have received net proceeds of approximately $351 million, 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 20th, we expanded our credit facility to $1.2 billion from $1 billion. Yesterday, the ONE Gas Board of Directors declared a dividend of $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.

Curtis Dinan: Thank you, Caron, 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. 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 three, approved a $7.3 million increase or allowed it to take effect with no action.

Texas Gas Service appealed the three municipalities denial and implemented the new rates in June, subject to the outcome of the appeal. 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 million 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. Turning to commercial and operating activities. As Caron 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 first 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 Uri. The diligence of our operations, engineering, and project management teams to execute our work plan puts us in an even stronger position as we head into the winter heating season. 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 second quarter 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.

Sid McAnnally: Thank you, both. A high-performing workforce is the foundation of the essential work that we do. Over the last three years, we've come through a global pandemic and multiple winter storms, event 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 and 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 reinforce the value of culture and connection. At the end of September, we welcomed Angela Kouplen 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 coworkers for their commitment and dedication to delivering safe and reliable natural gas to our 2.3 million customers. Thank you all for joining us this morning. Operator, we're now ready for questions.

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