ONE Gas, Inc.

And we're about to begin. Good day and welcome to the One Gas First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brandon Losey. Please go ahead.

Good morning and thank you for joining us on our First Quarter 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. Reminder that statements made during this call that might include one gasp expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor Provision and Security Act of 1933 and 34. Actual results could differ materially from those projected in any forward-looking statements and include, among others, statements about the length and severity of a pandemic or other health crisis, such as the recent outbreak of COVID-19. For discussion of other factors that could cause actual results to differ, please refer to our SEC filings. Joining us on the call this morning are Pierce Norton, President and Chief Executive Officer, Aaron Laughlin, Senior Vice President and Chief Financial Officer, Sid McAnally, Senior Vice President Operations, and Curtis Dinan, Senior Vice President Commercial. And now I'll turn the call over to Pierce.

Thanks, Brandon. Good morning, everyone, and thank you for joining us on the call today. For the first time in our lifetime, we're faced with an event that has impacted our economy, our businesses, and our daily lives. It has impacted every person in some way. There's a good chance many of us on this call have lost a family member or friend to the COVID-19 virus. To those people, the One Gas family extends our deepest condolences and heartfelt sympathies. We are sorry for your loss. Because of the COVID-19 pandemic, the call today will be different. We will spend most of our time talking about how the virus and the government reactions to COVID-19 have affected our business, and more importantly, give you insight into our organization's thought processes for dealing with uncertainty. Karen Lawhorn will begin with a brief update of our first quarter results. Sid McAnally will cover the operational details. Curtis Dinan will update you on the commercial environment we're seeing and our regulatory activity. And then Karen will summarize how we view the financial impacts. Our business continuity plan, which provides a framework during a crisis, is based on three principles, anticipation, awareness, and agility. We support our decisions around these principles with our core values of safety, ethics, Inclusion and Diversity, Service, and Value. As Sid, Curtis, and Karen give you examples of our current business environment, you will have a better understanding of the culture that is OneGAS, a culture based on collaborating around two questions. What if things are not as they seem? And what else can we do to solve challenges and create opportunities? I will return later with my closing remarks, but now here's Karen with our first quarter results. Karen?

Thanks, Terrence. Good morning, everyone. As Chris noted, COVID-19 has had a significant impact around the world, in this country, and in our service territories. Despite that, our business performed well in the first quarter, and we experienced no material financial impact in the pandemic. Net income was $91.7 million, or $1.72 per diluted share, compare with $93.7 million, or $1.76 per diluted share, in the first quarter of 2019. Our first quarter results reflect an increase in net margin at $6.2 million over the same period last year, which includes new rates in Kansas and Texas and residential customer growth. We experienced warmer weather in 2020 compared with 2019, which contributed to a $5 million decrease in net margin from lower volumes net of weather normalizations. Operating costs for the first quarter were $3.1 million lower than the same period last year, which includes a $4.3 million decrease in the expense associated with the change in the value of liabilities for our non-qualified employee benefit plans relative to the prior year. Other expense net increased $6.2 million in the first quarter of 2020 compared with first quarter 2019. which includes a $6.7 million decrease in the value of investments associated with nonqualified employee benefit plans. Combined, the net impact of a nonqualified employee benefit plan was a decrease to pre-tax income of $2.4 million in first quarter 2020 versus 2019. Our capital expenditures and asset removal costs increased $29 million this quarter compared with the first quarter last year. Our strong start to the year sets us up well as we continue to execute our capital plan during these challenging times. We still expect capital spending will be about $475 million for the full year. Yesterday, the One Gas Board of Directors declared a dividend of $0.54 per share unchanged from the previous quarter. This dividend is consistent with our guidance for 2020. And now I'll turn it over to Sid McAnnally to begin an update on our operations related to COVID-19.

Thank you, Karen, and good morning. Our business continuity plan allowed us to quickly establish a cross-functional pandemic task force representative of the entire organization and to initiate daily task force and senior leadership meetings. Collectively, we developed a multi-tiered response plan that adjusts how we work based on the risk level of virus-related activity in our operating areas. This framework focused on the most critical areas of the crisis, the health of our employees and customers, tracking critical data, deploying employees to work remotely where possible, adjusting field operating protocols, and monitoring our supply chain. I'll provide more context around each of these five critical areas. First, safety continues to be our top priority. which is why we established employee COVID-19 protocols. At the onset of the COVID-19 outbreak in our service territories, we began directing employees with potential exposure or flu-like symptoms to an independent medical advisor for a screening process that determined if the employees should self-quarantine, consult with a physician, or could safely return to work. This screening process has made a significant impact on the ongoing health and safety of our workforce. We initially quarantined 7% of our workforce based on this process, and today that number is less than 1.5%. Approximately 20% of our workforce has used this screening service. As of April 23rd, we've had a total of 26 employees who have tested for the virus, with four employees testing positive. We are pleased to report at this time We have no hospitalizations or fatalities from COVID-19. Second, we've been tracking critical data every day. We've provided daily reports to the organization summarizing COVID-19 related cases on the national and state levels, as well as One Gas employee data as we watch trends in our own operating areas. We also established a special account code to capture COVID-19 related expenses Such as personal protective equipment, the cost of sanitizing high-use workspaces and vehicles, and medical advisory services. We're also seeing decreases in other expenses, such as travel. Third, we quickly deployed employees who could work remotely over a three-day period. We currently have approximately 50% of our 3,600 employees working from home. Prior to the pandemic, We were in the process of deploying the always-on virtual private network to company-owned devices as part of a cyber initiative to further protect our assets. This allows our employees to easily and securely access all of their systems and resources as if they were physically sitting in our offices. All of our systems, including Internet bandwidth, are operating normally. For employees who continue to work in our facilities, We have reconfigured workspaces to allow for appropriate social distancing. Fourth, we have made operating adjustments for our field employees. We have two goals in mind. Adjust to avoid customer contact who are feasible and, if not feasible, protect our employees and the customer. We have suspended elective work that results in planned customer outages, which would have required us to enter customer homes. Our call center personnel are screening all customer service orders to determine possible COVID-19 exposure in the premises, and we perform further screening when our service technicians arrive onsite before deciding to enter the premises. We've adopted additional personal protective equipment practices based on recommendations from the Centers for Disease Control and the Occupational Safety and Health Administration, primarily focused around the use of respirators and cloth masks. Employees are not allowed to enter a customer's home where there is a known possibility of illness or exposure to COVID-19 unless responding to an emergency or an outage. In those cases, additional personal protective protocols go into place, including a disposable full-body suit and the presence of one of our safety trainers. At all other customer appointments, our employees are practicing social distancing and wearing the appropriate PPE. including respirators. We currently have an adequate supply of respirators and N95 masks and continue to monitor our PPE supply closely. We are also screening for elevated temperatures at our large service centers, and we are in the process of installing automated thermal image temperature screening stations to be deployed at certain locations to allow entry only to those employees who do not have an elevated fever. We are closely monitoring our supply chain. To date, we have not experienced procurement issues, and we have adequate inventory on site for all operations and related activities. Pricing has not been impacted to date, but certainly could be in the future, so it is one of the factors we continue to monitor. Our supply chain group has longstanding contacts with significant manufacturers in our sector and has been in close contact with them to review their operations Thank you, Sid, and good morning, everyone.

My first comments will address the impact of COVID-19 on our commercial activities, followed by a regulatory update. Across all three of our states, orders issued by the governors related to COVID-19 declared construction an essential business. Construction activity with our builders and developers has remained robust through the first four months of 2020, including single and multifamily construction, as well as commercial developments. We have anticipated a slowdown as city permitting offices were closed, but the backlog of permitted projects has allowed construction activity to continue, and we are not seeing any significant impact from the pandemic. As is typical in all years, we have seen some project delays, but these have been offset by new projects that are moving forward. Accordingly, we are maintaining our expectations for growth capital project spending. Continuing the trend we experienced in 2019, our customer growth rates for sales customers remain strong. The moratoriums on disconnects had a slight impact on our first quarter totals, but we have not typically had a large number of disconnects during the first quarter. With the disconnect moratoriums extending to May 15th, we will see higher customer counts in the second quarter that are not necessarily reflective of higher growth rates in our business. We have approximately 12,000 transport customers on our system that represented $114 million or 12% of our net margin in 2019. Our 40 largest transport customers account for $28 million or 25% of our 2019 transport revenues. To date, Two of these customers, one in the automotive industry and one in the residential shingle business, have temporarily suspended operations. Outside of our 40 largest transport customers, we have also had 19 other businesses that have reduced operations or temporarily or permanently suspended operations. Collectively, we anticipate a negative impact to revenues of approximately $100,000 per month from these transport customers based on their current level of business activity. Although we have suspended disconnections for delinquent accounts until May 15th, we continue to contact our customers that have past due accounts to offer flexible payment arrangements and have waived late payment fees in an effort to help our customers affected by the pandemic bring their accounts current. We have also been working with our regulators to issue accounting orders to allow for the establishment of regulatory assets for the impact of COVID-19 on our business. These orders generally allow for the deferral of pandemic-related expenses, including increased costs for bad debts, personal protective equipment, facility sanitization costs, medical advisory services, Costs for testing and treating employees that have potentially been exposed to COVID-19 and other necessary costs to address the impact of the pandemic, as well as certain lost revenues. The Railroad Commission of Texas has issued an order, and we are working with our regulators in Kansas and Oklahoma to obtain similar orders. Moving on to our other regulatory activity. In Oklahoma, Oklahoma Natural Gas filed a performance-based rate change filing in February requesting an increase in base rates of $11.8 million. If approved, it will be the first increase in Oklahoma since early 2016. New rates are expected to be effective in August 2020. As required by our tariff, we will file a full rate case in 2021. In Texas, Texas Gas Service filed a rate case in December 2019 for all customers in the Central Texas and Gulf Coast service areas, requesting to consolidate the Gulf Coast service area with Central Texas and increase rates by $15.6 million. If approved, new rates are expected to become effective in the third quarter 2020, and our number of jurisdictions in Texas will decrease to five from six. Our filing is based on a return on equity of 10% and a capital structure with equity of approximately 62%. We estimate that a 25 basis point change in ROE would change the revenue requirement by approximately $950,000 and a 1% change in equity by approximately $350,000. Texas Gas Service also made a Gas Reliability Infrastructure Program, or GRIP, filing for all customers in the West Texas service area for a $4.7 million increase. We anticipate that new rates will be effective in the third quarter of 2020. And now I'll turn it back to Karen. Thanks, Curtis.

As you heard from Sid and Curtis, COVID-19 has not impeded our work in the field, including our capital spending on both system integrity and growth projects. To summarize what you heard regarding how our earnings are being impacted by COVID-19, We expect a reduction in revenues from customers temporarily or permanently impacted by the pandemic. We expect higher bed debts as a result of the moratoriums on disconnects, and we expect to incur incremental expenses for other COVID-19-related costs. We also expect reductions in expenses in some areas, such as expenses for travel. With respect to our sales customers, which accounted for over 86% of our net margin for the first quarter of 2020, Curtis spoke to the customer growth, which has continued to remain strong. With over 70% of our net margin coming from fixed charges, our exposure to volumetric risk is limited. We believe the accounting orders that we have or expect to receive in each state will allow us to seek recovery in future proceedings of incremental expenses and certain lost revenues associated with COVID-19. These accounting orders are expected to mitigate the impact of lost revenues and net increases in expenses on earnings, however, Amounts expected to be deferred for later regulatory recovery under the accounting orders must be probable of recovery in order to be recorded under generally accepted accounting principles. As a result, there could be a delay in the recognition for financial reporting purposes of amounts that may ultimately be approved for recovery until the conclusion of future regulatory proceedings. Based on what we know currently, we are affirming our guidance range With net income expected to be in the range of $186 million to $198 million, or $3.44 to $3.58 per diluted share. However, downside risk to 2020 earnings associated with the impact of COVID-19 exists and could result in net income and earnings per share below the midpoint of the range. From a liquidity perspective, We expect lower cash flows resulting primarily from the effects of the moratorium on disconnect. At March 31, 2020, we had short-term liquidity available through our commercial paper program and cash on hand totaling $235.2 million. We have a $700 million credit facility to support our commercial paper program and a $250 million at-the-market program for the issuance of equity. And earlier this month, we entered into a second revolving credit agreement, which provides an additional $250 million of liquidity over the next year. Further, our investment-grade credit ratings and strong balance sheet provide us access to the financial markets for the issuance of long-term debt and equity. We believe our sources of liquidity are adequate to support our current and planned level of operations. Now, I'll turn it back over to Pierre for some closing comments.

Thank you, Karen, Curtis, and Sid. In closing today, I'd like to thank all the medical staff in our service territories for the heroic work they do, especially during this pandemic. I also want to send our appreciation to the first responders on the front line, firefighters, law enforcement, paramedics, and utility workers. They too deserve recognition for the critical life services they provide every day. Thanks to the diligence of each One Gas employee to the pandemic protocols and our focus on our core values, we've been able to continue running our business with minimal disruptions. I'm extremely proud of our employees and want to give a special thanks to each of them for their continued professionalism under stress, resolve when there's no clear end, poise in the face of uncertainty, and moral courage to do the right thing. We are fortunate to work in an industry that strives to make every natural gas utility better through collaboration. Once again, our trade organization, the American Gas Association, organized calls with subject matter experts that are proving to be beneficial to navigating this crisis in real time. Thank you, AGA, for what you do. As a natural gas utility, we have an important role in serving our communities and our customers. And that includes taking the necessary precautions to protect ourselves and the people around us. We will get through this pandemic by relying on the same values we use to address any challenge we face in our business. Thank you all again for joining us this morning. Operator, we're now ready for questions.

Yes, if you'd like to ask a question on today's call, that is star 1 on your telephone keypad. And we'll go first to Char Pizzori with Guggenheim.

Hi, good morning. It's actually Constantine here for Char. That was a very thorough review, so thank you very much. And I understand the challenging times that we're all in. So one of the questions that we had was understanding that this first quarter results kind of represented a lot of weather headwinds and there's some potential slowdowns related to COVID. How are you guys thinking about under a return to normal weather scenario going forward on your sales forecast and growth numbers in terms of customer counts and general throughput? And does that require any kind of regulatory rethinking or regulatory outcomes to realign Thanks, Scott. So a couple of things.

As we've been in the moratorium with the disconnects, that The normal activity that we would be starting this time of the year, we haven't at this point, and that's suspended until at least May 15th. So even if we get to that point and those moratoriums end on that date, it will still take a period of time before we would ramp up to our normal operations in our customer service groups as well as in field operations to deal with those. So my comments earlier about Seeing perhaps some elevated numbers in our customer accounts, that's really what I was trying to address with that. And yet a couple of other comments on there, I believe one related to how we're thinking about weather. And as you know, we have weather norm in all of our service territories, and you saw that in the results that while we had much warmer weather in the first quarter, And it did impact our sales volumes. That was partially offset due to the impacts of weather norm, and that's really what those mechanisms are designed to achieve. So when we give guidance, whether it's as we think about it for the balance of a year or we're giving it at the beginning of the year, we always assume normal weather in that guidance. And then you'll see some pluses and minuses from that as we go through the year as weather does vary. Was that all the items in your question?

Yeah, that answers that one. And I guess just shifting a little bit more to a long-term view on regulatory outcomes and ROEs as you're consolidating jurisdictions and filing for the rate cases, where do you see ROEs trending and specifically understanding that there's some systematic ROE gap with kind of having capital deployed and just not getting the recovery of every single cost. Is that kind of standing to improve with kind of this next round of rate cases through 2020-21?

Yes, so a couple of points there. The first one, as I mentioned in my prepared comments, The rate case or the PBR filing that we have in Oklahoma right now, this will be the first rate increase in Oklahoma since the beginning of 2016. So that's been a number of periods since we've had an increase there. And the intent of whether it's a grip filing or a GSRS or a COSR or these different mechanisms that we have, What those represent are smaller filings that are meant to get more timely recovery of the capital dollars that we're spending. So we do continue to see those helping to close that gap and to get more timely recovery. So as an example of that, again, pointing to Kansas where we have the new GSRS mechanism that we filed under for the first time last year. You might remember that was only a partial period. This year will be the first year that it covers a full 12-month period, and there's more capital that's eligible in that mechanism today than there used to be. And so we've talked about how much of our capital is subject to annual filings. In the past, that's been about 80%, but now what we're giving guidance to is that about 90% of our capital is recovered through or addressed through annual filings. So all of those things are helping to continue to progress as we have been over the past six years.

Okay. Yeah, that's very helpful. Thank you, guys. I'll jump back in queue.

We'll go next to Aga Demogodowska with UBS.

Good morning. Hope you're all safe and healthy. My first question is, OGS has roughly 72% of revenues from fixed charges. Could you discuss how it fluctuates throughout the year? What percent of fixed charges do you expect in 2Q versus 1Q?

Hey, Aga, this is Curtis. You know, we never have broken out our guidance by quarter like that to separate out those pieces. I think you could probably do a top level because we do report our volumes each quarter by the different types of customers that we have, as well as we provide what the fixed charges are for our sales customers. On the back of an envelope, I don't have that data here with me, but if you're trying to get a An estimate of that, that would probably be the best way to do it. But just if you broadly think about it, net margin as you go into those lower volumetric months is going to be higher. So your second quarter and third quarter, your volumetric charges are going to be less. The fixed charges are going to be a higher percent of the total net margin. But if you look at our past history, Whether it's quarterly or annually, you don't see a lot of fluctuation due to those volumetric differences.

And then have you experienced any impact from social distancing on the progress of your pending red cases for both red cases and trackers? Is there also a risk that commissions will delay decisions to avoid customer bill increases during the pandemic?

In one instance, we have in our Central Texas Gulf Coast consolidation case, the hearing date before the ALJ was extended until May 20th, and that was due to the Texas RRC basically moving to a working remotely situation and a desire not to have that hearing as a virtual hearing. And so the anticipation is that there was a new procedural schedule that was approved, and that extended all of those dates by about a month. So we have seen a small impact, but that's the only one I can really point to right now.

My last question is on the ATM program that you initiated in February. When does OGS plan to issue equity under the program, and what is the target equity issuance this year?

Good morning, Aga. This is Karen. Our guidance indicates that we've been issuing some equity this year. We've not been more specific about the amount or the exact timing of that. With the additional liquidity that we got through our $250 million revolving credit agreement earlier this month, we have the luxury, if you will, of being opportunistic in how we access the market, and so we are still evaluating what's the best approach for us to take.

Thank you for taking my question.

Thank you, Aga. Help your site as well.

We'll go next to Chris Signamolfi with Jefferies.

Hey, team, good morning. Thanks very much for the update. I think detailing all the ways you've responded and budgeted for COVID is exactly what our team was hoping to review this morning, so I do appreciate it. I do have a couple of follow-ups, I think probably two for Sid and maybe two for Karen. Sid, I know you historically rely on some non-employee contract labor in the normal course of operations. I may have missed this in your prepared comments. I apologize if I did, but can you just touch on that element of the operations and if you've suspended those folks, what the pathway you're thinking about for returning them to working for you?

Yeah, sure, Chris. Good morning. Thank you for the question. You're right. We do rely on external contract labor, but we were able to coordinate pretty closely with our contractors as this risk emerged, not only to check on their health from an execution standpoint, but also to look at their safety practices, to look at their PPE practices. And we were able to execute, as you heard from Karen, on the capital plan year-to-date in a way that suggests that that process was a success. We don't anticipate constraints going forward. We make room for that. We plan for that. But right now, we don't anticipate that being an issue for us going forward.

Okay. And I know everybody's talked this morning, and Karen talked and Curtis talked about, as you mentioned, the maintenance of the capital plan for the full year. So it seems like while some projects may be Thank you very much. There are a number of things that we've seen, Chris. Kind of an over-the-top has been increased communications.

Because we're working remotely in many environments, the communications required to be sure that we were aligned from a management standpoint we found to be really effective. And I would anticipate that I always felt like we were an organization that communicated very efficiently and often, but we've learned that the additional communication has been even more helpful. I think we'll continue that. To speak specifically to some practices, we have We have begun to do some training remotely using cameras. That has been effective and efficient. I think we'll continue to do that where it's appropriate. We have learned some things about how to best utilize PPE and how to train around that. We stepped up our training considerably to be sure that our employees had the knowledge that they needed We felt like it was adequate before, but we wanted to go above and beyond in this environment. I think we've found ways to be more effective doing that training. We've also made some improvements in our supply chain as we were trying to manage that risk. So we've been in touch with our suppliers, as I mentioned in the prepared remarks, but to be a bit more specific, one of the things that we've done is not only looked for redundancies, but also probed our contracting partners a bit on their own supply chains to make sure that we didn't have level two suppliers that were feeding them with some critical element that might be a shortage that they had not thought of or they had not seen. And I want to thank our supply chain group. They have really done outstanding work not only identifying additional PPE resources And we have seen no lack of PPE. We haven't had to throttle our work due to an unavailability of PPE. But they've also worked with our suppliers who keep our normal work channels flowing. And we have not seen constraints, nor do we anticipate any at this point.

Okay. That's really great. Thank you for those additional comments. I guess switching gears a little bit, I do have two finance-related questions. Ken, if you could just remind me, I've asked you about this in the past, and I simply forgot about it this past quarter, but the non-qualified benefit plan performance and how that affects your other income line, can you just maybe remind me what you had incorporated for that in the initial financial guidance for the year, just to have a sense of maybe the magnitude of initial quarter delta?

Can you turn my microphone on? Similar to how we assess weather in our guidance, we assume normal weather for our guidance. We also assume kind of a normal level of year performance for our non-qualified plans. Just to give you a little bit of perspective, if you go back to the history of time for one gap, if you look at, I mentioned that we have the cost of the liabilities is in operating costs, and then the assets against those liabilities are in other income and expense.

On an annual basis,

That net income or expense has fluctuated from an expense of $2 million to income of $1.3 million. So over time, the fluctuations are not significant, but you can see these swings from quarter to quarter for year to year like we saw in the first quarter. Obviously, the markets have improved post-March 31st, so we expect that we will get some of that back. We basically assume more of a flat-ish performance from those plans.

Okay, okay. That's helpful. And when you record those, I know there's some of your peers that also flag this because it's a more regular or larger ticket item relative to the size of their company. And when they quote it, they quote it, it's the same number pre- and post-tax. Is that true for you as well, or is that when you quote another income impact, Thank you very much. Outcomes may be improved subsequently. Did I understand that correctly?

You did. For example, there could be some gray. First of all, we only have an accounting order in one state. We're still waiting on the other two. But there could be some gray in determining what can be deferred under those accounting orders. And I think bad debt expense is a simple example. It may be difficult to determine specifically what is COVID-related versus what is normal bad debt expense. So there's a little bit of gray in that. And then, as you said, for accounting purposes, we've got to be able to determine that any regulatory asset we establish is probable of recovery. And, again, there may be some interpretations of those orders that ultimately we may prevail, but from an accounting standpoint, we haven't met the hurdle to be able to record it. So we could get that mismatched.

Okay. Okay, you actually hit on something that I was more curious about, which is that So you have service territories that overlap with production regions, crude and natural gas and natural gas production regions. And, you know, we're seeing a fallout there is certainly in activity levels and employment levels. It's COVID related, but it's not maybe exclusively COVID related. And so I'm just curious maybe how you guys think about, you know, the the The programs, I guess, as structured and conceived by you today, I know that two of the states haven't yet approved them, but how that demarcation line might be treated. It's a tricky question, but I just think it would be helpful.

Chris, let me kind of attempt to answer your question. I'm not sure I'm going to do it justice here, but as it relates to the supply and the price and those kind of things, We clearly benefit, the customers clearly benefit from lower price environment, but it can actually become too low that it's not beneficial to the E&P community and the midstream community. And it's definitely approaching some of those areas, especially as it relates to crude oil. Having us be in those areas and be in net exporters of natural gas from our states, primarily the main ones, Texas and Oklahoma, You're always going to kind of take care of your needs first in the state, so I would see if there's any reductions. It's probably going to be the reductions that go to other areas of the country, not necessarily in the areas that we consume. We're also going into that time of the year for us that the gas comes down, but it also goes up for the electrics during this time of the year. We've all been through, at least most of us who've been in the midstream side of the business before, been through these downturns. And as it gets too low, they do definitely take the rigs down. The supply then starts to get a little bit restrained, and then the price then comes back. Just having lived through something like this in West Texas when I was there back in 1986, I think price oil got down to $10 a barrel. So Those of us who are old enough on this call have seen this movie before. COVID might complicate it a little bit, but probably it's more basic supply and demand on that side of the business. I'm not sure I answered your question, but I'll give you a little bit.

My question was more related, I guess, Pierce, to the bad debt side of it, the fact that you have customers in your service territory that have hardships because of COVID, because of You know, stay-at-home practices and what that did to their business, non-energy business. You know, Curtis mentioned some of your transport customers that had either temporarily or indeterminate period of time suspended operations. But you also have a lot of customers who are employed by the oil and gas industry, which is suffering its own issues right now, which are partially related to COVID, but partially not. And so that's, I guess, what I was trying to get to. Karen was mentioning that, you know, if it stems to COVID or it doesn't stem to COVID, I just Some of these issues, it seems like in your service territory, are a little bit more tricky.

I'll let Curtis answer that question, and in particular, let him talk a little bit about how the bed debt on the side of the gas cost flows through to our PGA, and then he can answer the other question as well.

Yes, really, to Pierce's point, two pieces of that, Chris. Anytime we have bad debt, the In all three of our states, the portion that's attributed to the gas cost doesn't actually get expensed. That becomes part of our purchase gas cost adjustments. And so that then gets rebuilt through the normal gas pass-through mechanism that's in place. So what we're talking about with these accounting orders is the ability to defer the non-gas cost portion of the bad debts. And so each of our rate... Thank you. Thank you. Thank you. With our regulators and as we're thinking about what that means and what can be attributed to the impacts of COVID, whether it's directly to one of our customers that's affected or it's indirectly because of what's happening in their business being shut down due to COVID-19 or other factors. I think that really gets to Karen's comment earlier about it's a little bit of a gray area and we'll just have to work through that with our regulators and We are visiting with them frequently both on what's happening from an operations standpoint in Sid's group as well as what we're seeing with our customers and what's happening from a customer service standpoint.

Chris, it's also a good chance to remind everybody that in Texas,

Two-thirds of our customer base and rate base is in El Paso and in Austin. And those are two areas that are probably the least impacted by the downturn in oil and gas as related to loss of jobs.

Gotcha. Well, thanks a lot for the time, guys. It took a lot this morning, and I appreciate all the comments.

Thank you.

We'll go next to Richard Ciccarelli with Bank of America.

Hey, good morning. Thanks for taking my question. Hope everyone's staying safe out there. Just following up on the last kind of question around bad debt, bad debt expense increased $0.8 million in one Q versus 2019. It looks like in 2019 it was up $1.5 million altogether. Just curious how much bad debt expense you currently have in rates and what kind of parameters are you looking at for the full year for the incremental bad debt given the COVID pressures?

So this is Curtis Richard, and I'll attempt to answer that. First off, we didn't have the accounting order in Texas yet. as of the end of the first quarter. So everything that happened in 2019 or in the first quarter of this year is obviously pre any impact of that accounting order. And you're really getting at the heart of the point that we'll have to work with our regulators as we look to record amounts into those deferred assets, the theoretical approach as to how we would do that, But again, you can look at kind of our normal year-to-year levels of bad debt expenses to give you a sense of what would be built into our cost of service. It's not always the same way quantified in every jurisdiction. So for example, it might be the bad debt expense that was in your test year in one situation, and in another cost of service, it might be a three-year average. So there's different ways that those get established So, again, we'll just have to work through our regulators to come to what's the right amounts to defer as we work through that.

Got it. Thank you. That's very helpful. And then just in terms of the O&M side, even with the increase in bad debt expense, you had the non-qualified pensions, I guess, taking some of those costs down. Just curious if there's any ability to manage your O&N profile relative to the 2% to 3% inflationary increases that you're expecting to kind of offset some of these COVID-related pressures, whether it be on the revenue or cost side.

So, Richard, this is Pierce. We actually will manage through this the same way that we always do. We have our internal labor, which is defined by the headcount. We have outside service labor. We have a certain percentage of our internal labor and external labor that's actually charged to the capital piece, and then overtime. So all, big picture, all four of those Thank you. Thank you. Thank you. All right, got it. That's very helpful. Best of luck out there. That's all I had. Thanks, Richard.

As a reminder to ask a question on today's call, that is star one on your telephone keypad. At this time, there's no response. I'll turn the call back to Brandon Listie.

Thank you all again for your interest in OneGas. As noted in our earnings news release, an updated investor presentation is available in the investor relations section of our website. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings late July. We'll provide details on the conference call at a later date.

Have a great day and stay safe. Thank you.