ONE Gas, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good day, and welcome to the ONE Gas fourth quarter year-end earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brandon Lohse. Please go ahead.

[Brandon Lohse:]

Good morning, and thank you for joining us on our fourth quarter and year-end 2020 earnings conference call. This call is being webcast live, and a replay will be made 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 provision of the securities acts of 1933 and 1934. 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.

[Pierce Norton:]

Thanks, Brandon. Good morning, and thank you all for joining us today. I'd like to begin the call by acknowledging that our employees and our customers recently endured some of the coldest and most extreme weather ever seen in our service areas. Due to the intensity and the duration of this winter storm, we experienced unforeseeable and unprecedented circumstances in our Kansas, Oklahoma and Texas jurisdictions. We saw the coldest day recorded in over a century in Oklahoma City. Some of our largest cities experienced rolling electric brownouts and countless water main breaks. In Texas, grocery store shelves were bare and long lines formed at gas stations. For 7 long days, our employees worked through these adverse conditions, some experiencing their own personal challenges, and collectively, with our customers' help, we kept the gas flowing to meet the most basic needs of our customers, keeping them warm. I'd like to take this opportunity to express my gratitude for our employees' teamwork, resiliency and responsiveness as we dealt with this historic winter storm. On today's call, we will cover some of the challenges that we faced and how we're managing the recovery and impact to our customers. We will also discuss our 2020 results and 2021 guidance. You will hear how our culture and our core values led us through this recent event. So Sid, I'll turn the call over to you.

[Robert McAnnally:]

Thank you, Pierce. As you just heard, last week, our team faced an unprecedented weather event. On the coldest day, February 16, we experienced low temperatures between 6 and minus 16 degrees Fahrenheit in our largest metro areas, with employees working in wind chills as low as 25 degrees below 0. In Oklahoma, we experienced the coldest day since 1899. For context, average February lows normally range between 25 and 45 degrees in our largest metro areas. Our more than 3,600 employees responded to the challenge, remaining focused on our primary goals, providing natural gas service and prioritizing human needs and safety, commitments that were supported by orders from our regulators in all 3 states. Since ONE Gas was founded in 2014, the company is focused on improving the resilience of our system. We have successfully completed 19 projects that provided new transmission supply points and 81 projects that provided interconnects to reinforce our system, all focused on improving reliability and in anticipation of events that might challenge our ability to serve our customers.

[Caron Lawhorn:]

Thanks, Sid, and good morning, everyone. Before I discuss the financial impact of the winter weather event, let's close the loop on 2020. Yesterday, we announced diluted earnings per share of $1.09 for the fourth quarter of 2020 and $3.68 for the full year. These results also were in line with our revised 2020 guidance range, which was EPS of $3.66 to $3.70. Our capital expenditures and asset removal costs for the year were $512 million, also in line with our expectations. In January, the ONE Gas Board of Directors declared a dividend of $0.58 per share, an increase of $0.04 or 7.4% compared with the previous dividend of $0.54 per share. We're happy to address any questions you may for 2020 but given the number of questions we've already received about the winter weather event, let's turn to that.

[Curtis Dinan:]

Thank you, Caron, and good morning, everyone. I'll start by providing a brief overview of current storm-related regulatory and legislative activity and then give an update on our commercial and other regulatory activities. As Caron described, both the Kansas Corporation Commission and the Railroad Commission of Texas issued emergency orders authorizing all state utilities to defer costs incurred as a result of the winter storm. This includes the costs related to procuring and transporting natural gas supplies, all other costs necessary to ensure stability and reliability of our gas system and related financing costs. We have also filed a motion with the Oklahoma Corporation Commission to seek comparable regulatory accounting deferrals. The hearing before an administrative law judge occurred yesterday and at the conclusion of the hearing, the ALJ recommended approval of an interim order that was supported by the company, commission staff and the Attorney General's office. The recommendation will next be considered by the Oklahoma Corporation Commission. As Caron mentioned earlier, our government relations and rates and regulatory staff have been working with our state governments and regulatory commissions to develop legislation related to securitization of the regulatory assets to help lessen the impact to our customers. While early in the process, we are hopeful of finding a legislative solution whereby utilities affected by the winter storm will be able to issue securitized bonds to finance the cost of responding to the winter storm. Rate payers will benefit from the lower cost of securitized debt and the utilities will benefit from a credit positive financing vehicle, which will also benefit rate payers in the long run.

[Pierce Norton:]

Sid, Caron and Curtis, I want to thank you for the leadership that you've shown and how we've navigated this extraordinary event. As I reflect on this winter storm, 2 words come to my mind about our company

[Operator:]

. Our first question comes from Richard Ciciarelli with Bank of America.

[Richard Ciciarelli:]

Appreciate all the opening remarks here, but I was just curious if you can provide a little bit more detail on your discussions with regulators and policymakers on the time line for recovery of fuel costs and financing costs. Any early expectations on what the amortization period could look like? And what's your confidence level that these costs will be fully replaced in light of the customer billing impact?

[Curtis Dinan:]

So Richard, this is Curtis. We're very early in that process. As you heard in my remarks, the commissions in Kansas and in Texas have issued their orders and we're working through the process in Oklahoma to get a similar order to address exactly the questions you're asking. In each case, the first step will be actually filing the final gas costs once those are known. And until we complete balancing and final pricing and invoicing in March, we won't even have those numbers yet to begin that process. So once all that's complete, we'll file with the commissions as well as a recommendation as to how to approach collection of those costs and the time frame in which to do so. So it'd really be premature to comment or try to speculate on what those periods may be.

[Richard Ciciarelli:]

Okay. Yes, that makes a sense. I recognize it's early here. And then just separately on the legislative front, you mentioned securitization. I guess, can you provide a breakdown or, at least, broadly on the fuel cost per jurisdiction? And what bill need to be passed in each state? And what's the kind of time frame for that?

[Curtis Dinan:]

So there's not any actual statutes in place today, and there have just been, since the storm, preliminary discussions about opportunities to look at legislation like that. Historically, you've seen that in different parts of the country, primarily related to electric utilities as they've dealt with different storm costs. There hasn't been that I'm aware of situations that would apply to gas utility similar to that until this most recent event. So, I guess, I would characterize it as early in the process but those conversations have been very positive to date. And we just have to let those processes continue to work through the normal systems.

[Richard Ciciarelli:]

Got it. That's helpful. And then just last one for me. Can you remind us if short-term debt is excluded from your regulatory cap structure in each of your jurisdictions? And could that be a potential solution to just roll forward that term loan once it comes due in each...

[Curtis Dinan:]

So Richard, in our current rate making, it is our long-term debt and equity that is our cap structure. In each of these orders, the 2 that are in place and the one in Oklahoma that I mentioned, the carrying cost directly related to those gas costs and other related costs to ensure supply are contemplated. So it's not just the cost, but it's also the direct carrying costs related to those. So I think that's a really good way to isolate the actual cost of the event to record that through our normal gas cost or a regulatory asset longer term. And then the financing to do that is all part of that same recovery. And so I think that's a pretty good approach to doing that. It will work well in each of the states. If there is the opportunity to have securitized securities issued later, I think that makes it even more clear as to how those would be recovered, and that's a really good solution. In that way, from a long-term perspective, it doesn't necessarily change how you're capitalizing the company because the point Caron made, our core business is intact and there's not a lot of drastic changes that would need to be made. So it wouldn't really be appropriate to totally change that in the longer term.

[Operator:]

Our next question comes from Sarah Akers with Wells Fargo.

[Sarah Akers:]

Can you talk a little bit about your hedging program for gas, whether hedging practices are approved by the commissions and whether hedges were even effective during the cold spike?

[Caron Lawhorn:]

This is Caron. So yes, our hedging programs are part of our gas supply plans that we present to the commissions every year. The call options that we use for our hedges are settled on first of month index. So they were not effective in providing much mitigation for this weather event because most of the prices that we experienced is a result of gas daily pricing and prices in the spot market.

[Sarah Akers:]

Okay. And then shifting to the rating agencies. Given the credit rating outlooks are negative, can you just share how some of the conversations with the rating agencies are going and what they need to see to gain confidence in the regulatory contacts here?

[Caron Lawhorn:]

Well, I really can't talk about the conversations we have with the agencies. But what I will tell you is I think it's quite apparent that the extent -- the dollar value of these deferred costs are -- is meaningful. And it would be reasonable for someone who's evaluating our creditworthiness to want to understand how those costs are going to be financed in the long-term before making any final decisions.

[Sarah Akers:]

And given the sense that the commissions are cognizant of that, is there some urgency there to provide clarity and then maintain the financial integrity of the utilities?

[Curtis Dinan:]

Sarah, this is Curtis. And what I would say is that the reactions that we've seen from the commissions, Texas and Kansas very quickly issuing emergency orders for how to deal with these and very quickly, going through the normal process, but on an expedited basis in Oklahoma, shows you that their willingness to work with the utilities to address the impact that this could have long term -- longer-term on customers. So I think we'll be able to work through in each state a reasonable approach to collecting these costs in over an appropriate time frame considering all the parties involved.

[Operator:]

. Our next question comes from Aga Zmigrodzka with UBS.

[Aga Zmigrodzka:]

Thank you for the comprehensive overview in the prepared remarks. My first question is really, you mentioned asset securitization. I know people ask the question a different way. But when you talk to credit agency and mention that scenario, is that part of their evaluations that maybe could change their view versus what happened last year -- last week with the downgrade?

[Caron Lawhorn:]

It's Caron. I'm not going to speak for the agencies, but I would tell you, just as Curtis described, we think securitization would be a very positive development and a good way to finance this long-term obligation that would benefit our customers. So I would assume that it would be a positive development, but that will be up to them.

[Aga Zmigrodzka:]

Do you have any sense what percent of that $2.2 billion could be actually recovered immediately with the bills in March? I know you said that you still are trying to get the numbers from meters, but can you provide any sense, is it 10%, 15%, actually, you can recover immediately or any sense on that?

[Curtis Dinan:]

Aga, this is Curtis again. And the way gas costs get set, they get set in advance of the month based upon the prior month's actual gas purchases, updating for our total unrecovered gas costs to that point in time. So the gas costs in February would be our previously unrecovered gas cost, plus January purchases, and that sets an average rate that gets applied to February bills. And you can keep rolling that forward. So the earliest that this would impact any customer, assuming that there was no regulatory action would be the filing that we would do at the end of March that would incorporate unrecovered gas costs through February, plus February purchases. And that new rate would be applied to April bills. So that would be the earliest that you would see any of these costs start to affect the average gas cost that we bill to customers. But again, we've already got the orders to defer these extraordinary costs in Kansas and in Texas, and we're expecting to get that in Oklahoma as well. And then following up once we have the actual numbers, we'll work through with the commissions to determine the appropriate recovery periods.

[Aga Zmigrodzka:]

And how do you think the attitude towards natural gas could change post these extreme winter weather events, like do you think we'll see more energy choice legislation passed sooner? Or have you heard any change in attitude toward natural gas towards the peak heating days?

[Pierce Norton:]

So Aga, this is Pierce. I think what you're going to see is everyone taking a step back and looking at this extraordinary event and just doing a post incident analysis, just like we do on just any other extraordinary event. So I think that's going to be done by the regulators. I think it's going to be done by our state officials. It's certainly going to be done by the company. And I think it's a little too early to tell, but I would say what I've seen out of this is just the importance of natural gas because the magnitude of the energy that was needed was certainly bore out when you look at the amount of energy that was supplied through the natural gas distribution companies. As far as what happened on the electric side, I think you're just going to have to go back and look at all the different energy sources and see what exactly happened on that side of the business. But I do think there's going to be some discussion about it and some analysis and I'm sure through that, there's going to be improvements.

[Operator:]

Our next question comes from Gabe Moreen with Mizuho Securities.

[Gabe Moreen:]

I know a lot of my questions have been asked at this point, but I just wanted to ask whether in your conversations thus far with regulators, if there's any chatter or talk about, I guess, investigating what happened on the gas spot market and justifying the prudence of the gas cost or investigating some of the players upstream to see sort of what happened here. So I'm just wondering if those conversations kind of are extending to those topics?

[Curtis Dinan:]

So Gabe, when you say our regulators, I assume you're meaning the commissions, and there's not been conversations with the commissions about that. And just as a reminder, as you know, that we are -- we purchase gas on behalf of our customers and whatever the cost is that we pay for the gas, that passes straight through to the customer. There's no markup on that. And when we're securing our supply, we're doing that with third parties, and we're going out into the market to try to find multiple sources from which to secure that supply so that we can get -- make sure that we're getting a market price for that supply. If you're talking about other regulators, we haven't had direct conversations about the topic you're highlighting. It wouldn't be a surprise for that to come out of as a normal course that they would look at that because it was such an extraordinary change in the prices in a very quick amount of time. And as you also say, we have to go through our normal prudency review, which we do every year on the gas cost. So that process will run in its normal course as well.

[Pierce Norton:]

And Gabe, this is Pierce. The only thing that I would add to that is I'm pretty certain that there will be an analysis on what was the true shortage on the supply side, what was the freeze-offs from the wellheads that didn't get into the system. And then a look on the other end, which is based on these temperatures, what was the true demand. And comparing that delta, I think is going to be very important to understanding why prices went to the levels that they did in comparison to past events and past spreads that were -- the difference between the supply and the demand. So I'm relatively certain that there will be many companies and many people that are interested in doing that analysis.

[Gabe Moreen:]

Understood. And just maybe as a follow-up, I mean, having access to more gas storage have helped significantly here, I'm just wondering if that's sort of part of the future conversation. I know there was a question earlier about hedging, but whether contracting or trying to rate base or build your own gas storage?

[Robert McAnnally:]

Gabe, it's Sid McAnally. That kind of follows what Pierce's point was earlier. We'll definitely be looking at the gas supply plan. As you heard earlier, our gas supply plans are presented to our regulators for review and the work that was done to execute that plan went on unabated, although the price curve was volatile. So we'll look at, does it make sense to change our storage profile as we look at any other opportunities that we have to better respond to events like this.

[Operator:]

. Our next question comes from Stephen D'Ambrisi with Granite Lane.

[Stephen D'Ambrisi:]

I just wanted to follow-up on one of the things that was in the prepared remarks. You mentioned higher variability around the long-term CAGR, but I was just wondering if you're able to defer financing costs into a regulatory asset. I guess, what is driving that potential greater variability. Is it bill pressure crowding out CapEx? Or can you just talk about what you're, I guess, potentially concerned about?

[Caron Lawhorn:]

This is Caron. So I wouldn't say that we're concerned. It's just the magnitude of the dollars in question in terms of over what period it will be recovered and how we ultimately finance it. And if we get to securitization, that is a great result. But if we don't, we'll just have to determine how it gets financed. And so we're just trying to be thoughtful and be transparent about how we're thinking about that liability and how it gets financed.

[Operator:]

. There are currently no additional questions at this time. I'd like to now turn it back to Mr. Brandon Lohse for closing remarks.

[Brandon Lohse:]

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

[Operator:]

Thank you, ladies and gentlemen, this concludes today's presentation. You may now disconnect.