ONE Gas, Inc. (OGS) Earnings Call Transcript & Summary

Good day, and welcome to the ONE Gas 2025 Financial Guidance Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Chris Sighinolfi. Please go ahead, Mr. Sighinolfi.

Thank you, Elliot. Good morning, and thank you for joining us for our 2025 financial guidance conference call. Our guidance presentation can be found on the Investor page in the Financials and Filings section at www.onegas.com. This call is being webcast live, and a replay will be 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 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 McAnnally, President and Chief Executive Officer; and Curtis Dinan, Senior Vice President and Chief Operating Officer. And now I'll turn the call to Sid.

Thanks, Chris, and good morning, everyone. The financial guidance we released yesterday reflects our commitment to long-term value creation. As we continue to grow the business and meet increasing customer demand. Our 5-year plan supports ongoing customer growth while significantly reducing external financing needs and reinforcing our affordability advantage. This strategy yields a more self-funded model and improves credit metrics over the next 5 years, while derisking our exposure to the external environment. I'll turn it back to Chris to discuss the details of our 2025 and 5-year financial outlook. Chris?

Thanks, Sid. For 2025, we project net income to range from $254 million to $261 million, with earnings per diluted share of $4.20 to $4.32, an approximate 9% increase over the projected 2024 diluted EPS. We maintain our long-term EPS CAGR of 4% to 6% based on the midpoint of our updated 2024 guidance and expect to be at the high end of this range through 2029. Similarly, our forecasted 5-year compound annual net income growth rate remains 7% to 9% and as with our EPS growth rate, we expect to be at the high end of this range through 2029. Our capital investments for the year are expected to be approximately $750 million with expenditures on system integrity continuing to anchor the capital plan. These investments are expected to produce an average estimated 2025 rate base of $5.8 billion. Total spending for the next 5 years is anticipated to be approximately $4 billion, underpinning compound annual rate base growth of 7% to 9%. We have steadily increased our capital spend over the past few years, including investing in several large projects that provide flexibility to serve new areas as housing developments are completed. Our 5-year capital plan is approximately $1 billion above our 2021 forecast. By trimming last year's 5-year capital outlook by 6%, we can continue to meet growing customer demand while reducing our projected financing needs by 35% or approximately $800 million. We expect net 2025 to 2029 financing needs of approximately $1.5 billion, down from the $2.3 billion contemplated in the last 5-year plan. We expect roughly 40% of this amount to be in the form of equity issuances, an approximate 45% reduction in projected 5-year equity need as compared to last year's plan. As a reminder, we currently have forward sale agreements covering approximately 3.6 million shares of common stock outstanding at an average price of about $77 per share. If all forward sales had settled at the end of this year, we would receive net proceeds of approximately $275 million. We plan to settle $245 million of this amount at year-end and carry approximately $30 million for settlement in 2025, meaning we have already secured a portion of the equity need encapsulated in the 2025 to 2029 plan. Regarding debt financing, we will be evaluating capital market opportunities to better tailor debt issuances to our annual needs while maintaining our regulatory capital structure at its historic ratios. As we discussed on our third quarter conference call, we have maintained a healthy balance sheet and are comfortably within the adjusted CFO to debt range for our current investment-grade credit rating. The recalibration of our 5-year plan will allow us to drive adjusted CFO to debt even higher from approximately 19% this year to roughly 21% by 2029, further enhancing our financing efficiency and flexibility. Finally, we continue to expect compound annual dividend growth rate of 1% to 2% through 2029 with a target payout ratio of 55% to 65%, subject to Board approval. Now I'll turn things to Curtis to speak further about our growth expectations, capital deployment plans and management of operating and maintenance expenses.

Thank you, Chris, and good morning, everyone. Following the post-COVID period of inflation, we have completed full rate cases in all jurisdictions except for Oklahoma, where we will file a full rate case in 2027 as required by tariff. The financial plan Chris outlined and the regulatory activity over the past 2 years allow us to rely more on interim mechanisms in all of our service territories. These mechanisms allow us to recover our capital investments in a timely and efficient manner. Turning to operations. We have reduced the O&M CAGR in our guidance to 4%, down from the 5% range expected in the prior year's forecast. Due in part to the success of our program to in-source certain positions, our teams have reduced operating expenses ahead of our expectations this year. Our new coworkers not only replace contractors in certain areas, but also could be deployed to do other work as needed, increasing efficiency and improving service for our customers. We will continue to look for similar opportunities as we enter the new year. Regarding growth, we remain confident that the economic development across our service territories will drive new housing demand and with it, increased demand for natural gas. We anticipate total meter sets for this year to be similar to what we saw last year, which represented a step change increase over the growth levels we experienced prior to COVID. There remains a disconnect between the demand for housing and current availability. Leading indicators such as developer permitting activity are rebounding as economic conditions ease. Over the past several years, we have steadily scaled the business, allowing us to complete key system integrity projects and meet growing customer demand. In January of this year, we completed the last of 19 system reinforcement projects that were identified during Winter Storm Yuri in 2021. Our performance during Winter Storm Gerri in 2024 demonstrated the reliability of the system and the value of those investments. We continue to invest the bulk of our capital in pipeline replacement, increasing the safety, reliability and environmental performance of our system. As Chris mentioned, we have also completed several large-scale projects to bring natural gas service to high-growth areas. The areas west of Austin and Oklahoma City would be 2 examples. Now that the mainline infrastructure is in place, we can meet developers' needs quickly and efficiently without the need for a onetime large outlay of capital. Our advanced planning and investment in mainline extensions provide flexibility as we continue to serve new customers in all 3 states. We believe the $750 million of capital investments made in 2024 is the right level of investment in the near-term, and we intend to invest a similar amount in 2025, scaling upwards from there as needed to meet ongoing customer growth. With that, I'll turn it back to Sid for closing remarks.

Thanks, Chris and Curtis. We approach 2025 with enthusiasm. As our 2022 guidance projected, we successfully completed regulatory filings during 2023 and 2024 in 4 of our 5 jurisdictions to account for the impact of changing economic conditions. We also made operational adjustments that have helped us control O&M expenses and increased efficiency, which supported raising our guidance for 2024. We've executed large projects that enhance the reliability of our system and give us the flexibility to capture the ongoing growth across our service territory. With our 2025 guidance, we add to this momentum by increasing the level of self-funding providing clarity over the 5-year plan and adding to our confidence as we enter the new year. We close by thanking teams from across the company who make this level of performance possible. As we execute our strategic plan and serve our customers with a focus on safety, reliability and affordability. Thank you all for joining us this morning. Operator, we're now ready for questions.

[Operator Instructions] First question comes from Paul Zimbardo with Jefferies.

I appreciate the comprehensive update. I just want to unpack a little bit and thank you, Chris, for the remarks. On the kind of the overall plan, it sounded like a priority was really to reduce that external financing needs. I noticed the CapEx went down from -- on a 5-year basis from about $4.25 billion to $4 billion. Is that kind of that desire to reduce the external financing needs? Or if you could just unpack like the CapEx side specifically?

Yes. Paul, thanks for the question. Curtis talked about, we have a deep opportunity for growth in our service territories, it's largely driven by new home construction. There's a lot of economic development going on in our territories, which is labor intensive. So we feel very confident about the durability of that growth story. The timing of it is less certain. So we've made the investments to position ourselves to be able to capitalize on it as it emerges. But to your -- now to your question, we took a look at the business and really thought about what's the efficient level, the optimal level of spend? And is there a way to produce equivalent or better financial performance while derisking and so the derisking node that Sid talked about are in part capital market related. So net financing needs are down $800 million. Equity is down more than $0.5 billion. And that significantly curtails the external environment impacts to us. As it relates, Paul, you'll note that the range for 2025, the EPS guidance range is $0.12. It's less than 3% from top to bottom. Last year's range was 8%. The year before that was 6%. It's the tightest range we've offered. And it speaks to the fact that we are more those external impacts are -- have been reduced and have been mitigated by the strategy we've employed.

Okay. Great. Understood. And to follow up on that, the EPS CAGR, I know you draw a straight line on the slide. Should we think about that as kind of linear at the high end of the range roughly?

Well, we definitely want to convey that we're at the high end of the range as you think about 2029 compared to 2024. Linearity is always one of those things that's a bit of a challenge. As you know, we don't adjust numbers. So GAAP results are what you get. So there is some impact from that. And the timing of regulatory action and the pace of growth are the 2 other factors. You've asked previously about the cadence of interest rate impact. So that's another component to it. We do continue to have a consistent moderation in the interest rate environment that we projected to you last year. And so that's also part of it.

Okay. Great. And then one small and if I can sneak one in. Just on the Kansas rate base, I noticed that it's coming down on an average basis, '25 versus kind of where you're at as well as the '24 average. Any dynamics to be aware of there?

Paul, this is Curtis. Just one thing I might point out, and that is that we completed a multiyear large replacement project in that state. It actually just completed this month. So that's having a little bit of an impact on it, but really not any other -- anything special to highlight beyond that.

Paul, this is Sid. One thing to add there. Your first question speaks to CapEx. And you think about the trajectory of the company's CapEx spend since 2021, we've really made some significant investment since then. Curtis spoke to that in his prepared remarks. And the same is true for Kansas, where we've seen more growth than we've seen historically. But as you know, from past conversations, the decisions that we make around system integrity are driven by a review of the entire system, not just 1 state in isolation. And so when you see those kind of variations. It just means that, that system is working to address our replacement needs in an efficient way.

[Operator Instructions] We now turn to Christopher Jeffrey with Mizuho Securities.

Thanks for the update. Maybe just honing in on the assumptions around interest rates. You had the slide in the past about your long-term term assumptions. Just curious if there are any changes to that? And then maybe more specifically in 2025 for the guidance outlook, Chris, you mentioned the tight band there. Do you kind of how are you like making that baseline assumption? And is there a lot of sensitivity to short-term rates within '25.

There is -- there remains with the use -- with our use of commercial paper and the fact that it is a floating rate instrument, there always will be some sensitivity to the rate structure there. We have made no changes to the outlook that we provided in the slide you referenced from last year. We believe we will be at a normalized level consistent with Fed projection by 2027. We had assumed, as you remember, no rate cuts in '24, and we spoke about it on the third quarter call that we had formerly expected 100 basis points of rate reduction in 2025. We have effectively already gotten 75 basis points of that 100. We've only -- we only expect the same 100 basis point reduction in aggregate by the end of next year. So in effect, there's 25 basis points of reduction modeled in for 2025.

Got it. And then maybe just on the EPS CAGR. Paul mentioned on the slide that you're using 6%. Just kind of curious the decision as far as not raising the CAGR and going with the high end? Just kind of any color there.

Yes. Thanks for that. We added a new slide to the deck. I'm sure that's the one you're referencing Slide #7. And really in thinking about it, we've never talked about where in the range we've expected to be. We've moved that range around from time to time based on the reference here and the outlook, but we've not talked about in a nuance fashion where we would be within it. That slide is meant to convey a couple of things. One, long-term historical track record. The interesting thing about 2024 is it's the 11th year of full year results post the separation from ONEOK. So it's the first time you can look at a 10-year CAGR. 2025 will be the second year, you can look at a 10-year CAGR. Doing so indicates that we've been able to perform above that 6% level, 4% to 6% mind you, Chris, was the initial range long-term range put out when the company separated from ONEOK 11 years ago. We wanted to point your attention towards the fact that we expect to be at that high end through 2029. And also illustrate that if we do that and you do a 15-year look back, you're also above the high end of that 4% to 6% range. So we think 4% to 6% is a core growth rate for the business, and we will always try and optimize where possible to perform as best as we can. In terms of not moving the range, that was really the focus. We wanted to make sure that we spoke to the core, articulated where we thought this 5-year period would fall within it and illustrate the evidence that supports historical outperformance.

We now turn to Selman Akyol with Stifel.

As you guys think about -- talk about derisking the model. Can you say how much of your CapEx will be recovered through the interim mechanisms across the footprint?

Selman, this is Curtis. And it's still -- the last several years, it's been above 90% or right at 90%, and we would expect that to continue roughly in that range.

Got it. And then you talked about the O&M improvement, 4% down from 5%. And I'm just curious, is there any more to go there that you guys are pursuing?

Yes. What we've been doing over the past few years, we see the similar opportunities to continue doing that. We've talked often about the in-sourcing of line-locating functions. There's still a lot of opportunities left in that area should we choose to do that. It does a couple of things. One, from an efficiency standpoint, we're able to use those roles to not only do line locating, but when those needs less and we can deploy those folks to do other functions that are necessary to be completed. The efficiency comes because when we were paying contractors to do that work, all they could do was the line locating and so having the opportunity to flex into other responsibilities with those roles, greatly improves our flexibility and efficiency. And I see more opportunities to continue doing that. It is also, as a secondary point, allowed us to have a better understanding of the actual cost in the marketplace to do those functions. So as we look to bid those contracts where we still use external resources we have a much better idea of what our alternative is internally, and that helps keep pressure on those outside services as well.

Understood. And then last one for me. you have a -- you have $30 million left to go on the forward settlement for equity in 1Q. Can you just talk about any additional equity issuance you need in terms of your guidance?

Selman, it's Chris. Well, we did outline the 40% of our 5-year financing need of $1.5 billion is contemplated to be equity. So that puts you at about $600 million, if you do the math. And what we've effectively said is we have secured $30 million of that already that will be carried into settlement for the time period 2025 to 2029. So it gives you the sense of the aggregate and the balance that remains. And we've also given you the anticipated average diluted share count for 2025 that underpins the EPS guidance.

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

Thank you, Elliot. Thank you all again for your interest in ONE Gas. We will be attending the Jefferies Virtual Gas Utilities Conference, the Mizuho Power Energy and Infrastructure Conference and the Wells Fargo Midstream Energy and Utilities Symposium next week in New York City and look forward to seeing many of you well in town. As a reminder, our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in late February. We'll provide details about that conference call at a later date. Have a great day.

This concludes the ONE Gas 2025 Financial Guidance Conference Call and Webcast. You may now disconnect.