ONE Gas, Inc. Price & Performance (OGS)

Thank you, Adam. Good morning ONE thank you for joining us to discuss our fourth quarter and year end twenty twenty four financial results. 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 X 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. Joining me on the call this morning are Sid McAnally ONE, President and Chief Executive Officer Chris Signalty, Senior Vice President and Chief Financial Officer Senior Vice President and Chief Operating Officer. And now, I'll turn the call over to Sid. Thanks, Aaron, and good morning, everyone. I'd like to start this morning by acknowledging and thanking our coworkers who have been working in heavy snow ice and wind chills as low as 25 degrees below zero to keep our customers safe and warm.

As always, our team in the field is rising to the challenge and remain committed to our primary objectives providing natural gas service, and prioritizing the safety and well-being of our customers and communities They have our support, and our respect. We're pleased to report that 2024 marked another successful year for ONE Gas ONE once again we've once again delivered earnings and capital execution. As projected in our guidance thanks to fiscal conservatism and planning our strong execution has allowed us to perform at expected levels. Last quarter, we raised the midpoint of our EPS guide from $3.85 to $3.9 as company wide initiatives produced faster pace of O and M expense moderation than we had expected and short term interest rates dropped faster than our plan had forecast. We exceeded the midpoint of this elevated guidance achieving full year earnings per diluted share of $3.91 We've met or exceeded the midpoint of our year ahead EPS guidance for the eleventh consecutive year, Every year since our company separated from ONE Oak, in 2014 ONE.

Alongside strong financial performance, we We completed our cast iron replacement plan in 2019 ONE, eliminating the most leak prone pipe from our system. 2024 marked another milestone. As we finished our bare steel service line replacement program in Kansas. These projects have made our system safer, and helped us reduce leak related emissions by over 50% in 02/2005 ONE. Robust customer growth continues. In 2024 ONE, we set 23,000 new meters across our service territory. With growth occurring in every major metro area across our three states. Is still a need for new housing in Kansas, Oklahoma and Texas ONE.

Which together with focused economic development is driving increased demand for natural gas across our region a demand we are well positioned We are also exploring opportunities to supply natural gas for power generation addressing the needs of data centers, industrial applications and electric providers seeking a reliable power source. Now I'll turn it over to Chris to discuss financial details for the quarter, and the year. [indiscernible] Thanks, Sid, and good morning, everyone. As Sid noted, with solid fourth quarter results, we surpassed the full year EPS guidance midpoint revised higher last quarter, GAAP net income for the fourth quarter was $77,000,000 or $1.34 per diluted share, compared with $71,000,000 and $1.27 ONE the same period in 2023 ONE.

For the full year, GAAP net income was $223,000,000 or $3.91 diluted share compared with $3.02 $31,000,000 and $4.14 in 2023 ONE. Although weather across our service territory in the fourth quarter was approximately 24% warmer than normal, the impact on earnings was not material. Due to the effective weather normalization mechanisms, we have in each of our three states.

Fourth quarter revenues reflect an increase of $24,600,000 from new rates. O and M expenses for the year were up approximately 4%. Highlighted by just a 2.4% year over year increase in the fourth quarter. Our teams have done a great job managing O and M, and the investments we're making support our growth and system modernization strategy. Excluding amounts related to KGSS1 ONE, depreciation and amortization expense, was $4,700,000 higher year over year reflecting an increase in net property, plant and equipment, due to our elevated level of capital investment. Other income net decreased $4,600,000 compared with the same quarter primarily due to a $1,100,000 unrealized decrease in the market value of investments associated with our nonqualified employee benefit plans. Comparatively, in the fourth quarter last year, these investments experienced a $3,200,000 increase in value. Excluding amounts related to KGSS1 ONE, interest expense in the quarter was $10,400,000 higher year over year, primarily reflecting higher rates on long term debt issuances, over the past year and higher commercial paper balances We benefited from the rate cuts in We benefited from the rate cuts instituted by the Federal Reserve last fall as we had not factored in any rate cuts in ONE.

As a reminder, while the market continues to debate the pace [indiscernible] [indiscernible] and magnitude of additional rate action from the Federal Reserve Our 2025 guidance does not assume any additional rate cuts occur. While we would be pleased to see interest rates decrease even further this year our forecasts do not assume this will happen. In December, we settled approximately 3,160,000.00 shares of our common stock under our at the market equity program and forward contracts for net proceeds of $246,000,000 As planned, we also amended our forward sale agreements to extend the maturity date on the remaining shares to 12/31/2025 ONE. We utilized the proceeds to pay down short term debt. Which is how we fund construction work in progress and gas storage purchases, and for other general corporate purposes. As of December 31, we had $914,600,000.0 of commercial paper outstanding, a weighted average interest rate of 4.77% ONE. And $45,400,000 of short term investments stemming from our equity settlements. Which were used to pay down additional CP in the first days of the New Year. Our balance sheet remains strong. In December, S and P affirmed its A- credit rating and stable outlook. And earlier this month, Moody's affirmed its A-three rating and stable outlook. 2024 cash flow metrics were several hundred basis points above our respective downgrade threshold.

At both agencies. Going forward. Our capital expenditures ONE asset removal costs for the fourth quarter were $190,000,000 bringing our total for the year to $762,000,000 Compared with $729,000,000 in 2023.

The increase is primarily attributable to system integrity projects and the extension of service to new areas to further customer growth. As of year end, the authorized rate base was approximately $5,400,000,000 and we estimate our average rate base for 2025 will be approximately $5,800,000,000 In January, the ONE Gas Board of Directors declared a dividend of $0.67 per share, an increase of $0.01 from the prior quarter. Lastly, we reiterate our 2025 financial guidance. Including net income of $254,000,000 to $21,000,000 earnings per diluted share of $4.2 to $4.32 and capital expenditures and asset removal costs of approximately $750,000,000 I'll turn it over to you.

Thank you, Chris, and good morning, everyone. I'll begin with an update on regulatory activity.

As a reminder, our regulatory efforts over the past two years enable us to leverage interim mechanisms as we work to recoup our system investments and other cost increases. Texas Gas Service made gas reliability infrastructure program filings for all customers in the Central Gulf and West North service areas in February. [indiscernible] point $4,000,000 revenue increase And for the West North region, we are seeking an $8,200,000 increase both to be effective in June.

The Texas Grip filings allow us to annually seek recovery of the capital investments we are making in our system. In Oklahoma, we are required to file our performance based rate adjustment by March 15 ONE. The PBR mechanism allows us to seek recovery of both capital investments we are making in the system and O and M increases without having to file a full rate case. Switching to an update on commercial activity. We installed just over 23,000 new meters in 2024 continuing to add customers We also continued to secure new business and entered this year with a solid pipeline of future meter sets. As we have discussed on the past several calls, the growth is occurring in step with economic development in all three states. We anticipate seeing a similar pace of residential growth in the coming year and our capital plan is designed to meet that demand while continuing to invest in the safety and reliability of our system. Are experiencing a significant increase in requests from businesses seeking natural gas for baseload and backup power generation for data centers, and industrial load. These applications have a need for a reliable ONE economic energy source and natural gas fits that need.

The generation opportunities are in addition to the manufacturing growth we are experiencing along the I-thirty 5 corridor. Moving on to operations. 2024 capital execution finished strong.

We completed over $750,000,000 worth of capital investment projects over the year, with approximately $180,000,000 dedicated to As Sid stated, our coworkers have once again provided excellent customer service to our customers in the face of extreme weather conditions. In addition to the storm blanketing Kansas, Oklahoma and Texas this week, winter storms brought extreme cold, ice and record snowfalls service territory this January. The dedication ONE our teams has kept our I want to sincerely thank each of them for their commitment to safety, and ensuring that our customers are taken care of during these winter events. The investments we've made since winter storm ONE and continue to make including increasing our storage capacity to over 60 Bcf implementing system reinforcements, and diversifying our gas supply portfolio have enhanced our system reliability and allowed us to mitigate the impact of price fluctuations on our customers. An example of the investments we're making is the Austin System Reinforcement Project where we broke ground this month. This project will bring a new source of supply and further leverage our storage contracts to support increased natural gas demand in the Austin market for decades. Our available winter peak capacity will increase by approximately 25% ONE.

A new interconnection will provide increased access to natural gas index priced at the Waha Hub which typically trades at a discount to our current sources of supply for the Austin Metro. The Austin System Reinforcement Project was contemplated in our $750,000,000 capital guidance for 2025 and is expected to be in service during the fourth quarter of this year.

And now I'll turn it over to Sid for closing remarks.

In December, we detailed our 2025 and five year financial outlooks highlighting the stability of our growth, and the de risking of our financial plan. We will continue to strategically manage O and M while maintaining safe operations and delivering excellent customer service. Our financial plan also fosters the ongoing customer growth that Curtis mentioned while maintaining the reliability and affordability our customers enjoy. As we begin 2025 ONE, we renew our commitment to create long term value for all of our stakeholders We're fortunate to operate in a region where natural gas is highly valued and in demand. And as the Austin System Reinforcement Project demonstrates, we're building the infrastructure and providing the energy to meet that growing demand. The dedication of our 3,900 coworkers drives our success and I'm privileged to work alongside them every day. Thank you all for joining us this morning. Operator, we're now ready for questions.

Our first question comes from Julien Dumoulin Smith from Jefferies.

Julien, your line is open. Please go ahead.

Hi, guys. It's James Ford on for Julian.

How are you? Good morning, Jim. Good, thank you. Good to hear from you this morning.

Good morning. Likewise, it's another one of those busy Thursdays.

Think there's about nine companies that had to get in the mix today. So I wanted to make sure that we had a presence here ONE [indiscernible] Thank you for that. [indiscernible] We had some questions. You mentioned in the prepared remarks around Potential upside around an opportunity set akin to data centers. I guess I'm using that tangentially because it's not the direct capacity that you'd be building, but it's obviously integral to their functioning and to them choosing to locate in the area. What we're trying to understand is the three year rule.

So we've been told by several management teams at several utilities that when they sign a deal, and announce it's going to be about three years until the data center is finished and that's where they would look to line up when they would have generation on lines, transmission lined up, etcetera. Are you hearing similar for the opportunities that you're looking at? Or how should we think about if something were to come to fruition, when it might fit into your capital plan? Thank you.

Yes.

James, thank you for the question. Before asking Curtis to speak specifically to data centers. I want to just highlight the fact that we ONE fortunate to be in states particularly Oklahoma and Texas that have robust economic development opportunities and are well funded to pursue those opportunities. So one of the things that's interesting about our service territory is the diversity that we see. That's why we mentioned not only data center opportunities, but also industrials, electric generation, we're just seeing a broad range of opportunities presented to us ONE it gives us the opportunity to be selective in what we choose to pursue. Curtis?

James, what I would say about those is the opportunity set, the timeframe of the opportunity set varies. There are some that are a little bit quicker than what you described ONE then there are some in the situation closer to what you described. And I think the difference is and it fits with the type of opportunities we're pursuing those that are in and around our system where we can leverage the system that we already have as well as future plans we have around other growth opportunities or investments we're making in the system. So for us, it's it's more of an opportunity to get the investments that line up several of our objectives, not just the single opportunity to serve a data center, industrial load or something of that nature.

Got it.

Thank you very much. I'll hop back in the queue here.

The next question comes from Christopher Jeffrey from Mizuho. Christopher, your line is open. Please go ahead.

ONE just shifting more towards first quarter and twenty twenty five. We had some warm weather in 4Q The weather has gotten significantly colder in 1Q ONE.

Just kind of curious the impact on your working capital as far as monetizing storage and potentially lowering that or addressing the commercial paper balance, and kind of maybe where the commercial paper balance compares to your expectations originally with the '25 guide. Yes. Thanks, Chris.

You'll note, as I detailed in the prepared remarks, we were little bit elevated at the end of the year relative to what we had discussed last fall and A primary component of that is the dynamic you spoke about 24% warmer than normal weather dynamic in the fourth quarter meant we did not liquidate as quickly the storage inventories that we had contemplated. In addition, you'll know we are a little bit higher than the $750,000,000 capital budget at $7.62 ONE then I didn't denote, hopefully, picked up on it, the short term investments that were used to settle CP in the early days of January. If you think about storage inventory, began this year about 500 basis points wide of our plan But with the cold weather, it was very cold in January. It's been very cold so far, colder than normal in January and in February. We are now in line with our plans in terms of storage. So we'll see that as that gets build out and paid off we'll see that come in. It should be a very strong cash flow quarter here in the first quarter.

Great. Thank you, Chris. ONE then maybe just touching on O and M, kind of came in pretty solid for 4Q at about 2%, 2.5% Just kind of curious any updated thoughts on 25% ONE of versus that 4% number you've thrown out for the longer term plan? Chris, this is Curtis. And what I would say is we came in better in the fourth quarter. We just achieved some of the goals that we had for some of the initiatives that we've talked about on the past several calls. And so we were a little bit ahead of schedule and that helped us in the fourth quarter. At this point, our guidance for 2025 and what's included in the five year, we don't have a change to any of either of those numbers.

Great. Thanks, Chris. Have a great day everyone. The next question comes from Paul Fremont from Ladenburg ONE.

Paul, your line is open. Please go ahead. Great. Congratulations on a good fourth quarter.

Can you give us a sense of where you would expect end this year within the guidance range that you've given out. I know that you had originally talked about sort of wanting to be at at the high end of your ForteFX Does that apply to the range that you've given for this year as well? Hi, Paul. This is Chris. No, not specifically. I do think to take note of what Sid mentioned in his prepared remarks around the historical performance of the company would be worthwhile. Sid had noted have been eleven years of independent financial results since we separated in 2014 ONE in all 11, we've achieved at least the midpoint of our year ahead guidance. That's I think as much as I would point you to in terms of specificity around the range. You're right to highlight that over the five year plan, we were pretty explicit about The plan calling for the absolute high end of that range over the twenty five to twenty nine period.

And then the other question for me is, I guess there are two transmission systems that are being considered by taxes, a seven sixty five ONE versus a three forty five. Does that impact at all the prospects for data center development areas or in the opportunities that you're saying?

Paul, this is Curtis ONE it does not these are end to The inquiries that we're getting are really around providing gas to run baseload generation initially and maybe over the long term transmission lines get built but that's not not the initial focus of these projects and what the requests are for service.

Right. No, my question is more, do you see a significant difference in your opportunities to provide gas to new generation based on which transmission decision ERCOT makes in May.

The opportunities we're responding to are not contingent upon that. They're in developed areas where it's not waiting on it, the decision you're referencing?

Great. Thank you. For the question, Paul ONE. This concludes the question and answer session. I would now like to hand back to the ONE Gas team for closing remarks.

We look forward to seeing many of you in New York in March. Our quiet period for the first quarter starts when we close our books in early April and extends until we release earnings in May. We'll provide details on the conference call at a later date. Have a great day. This concludes the ONE Fourth Quarter and Year End twenty twenty four Earnings Conference Call and Webcast. You may now disconnect.