ONE Gas, Inc.

Hey, and welcome to the One Gas first quarter earnings conference call. Today's conference is being recorded. And now at this time, I'd like to turn the conference over to Mr. Brennan Losey. Please go ahead, sir.

Good morning, and thank you for joining us on our first quarter 2021 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 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 discussion of 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, Karen Lawhorn, Senior Vice President and Chief Financial Officer, Curtis Dinan, Senior Vice President and Chief Commercial Officer, and Sid McAnally, Senior Vice President and Chief Operating Officer. And now, I'll turn the call over to Karen.

Thanks, Brandon, and good morning, everyone. Before discussing our quarterly financial results, I wanted to start by providing an update on the aftermath of Winter Storm Uri. As we shared during our previous conference call, we estimated that aggregated natural gas purchases for the month of February could approach $2.2 billion. The final amount ended up being closer to $2.1 billion, and of that amount, approximately $107 million was allocated to normal gas costs and flowed through our purchase gas mechanisms as usual. As it relates to the extraordinary costs associated with the storm, which includes gas costs as well as related financing and other operational costs, Our regulators have given us the authority to defer these costs as a regulatory asset. As of March 31st, we have deferred approximately $2 billion, including deferrals of approximately $1.3 billion in Oklahoma, $381 million in Kansas, and $295 million in Texas. Our purchase gas costs are recoverable through tariffs in each state where we operate. The period over which we will recover these deferred costs will be determined in future regulatory proceedings. In February, we entered into a $2.5 billion two-year unsecured term loan to provide us with additional liquidity to meet our gas purchase obligations. On March the 11th, we issued $2.5 billion of senior notes consisting of $1.7 billion of two- and three-year fixed-rate notes and $800 million of two-year floating-rate notes. The proceeds from these senior notes were used for general corporate purposes, including payment of gas costs. The net proceeds reduced the commitments under the term loan, which was terminated concurrently with closing of the offering. These notes are redeemable in whole or in part on or after September the 11th, 2021. As you'll hear from Curtis, legislation has been passed in Kansas and Oklahoma and is being considered by the legislature in Texas that allows us to file with our regulators for permission for either One Gas or a state agency to issue securitized bonds to permanently finance the cost of the winter storm at a lower cost than we would otherwise be able to achieve. Accordingly, the redemption feature associated with the bonds we issued in March provides us the flexibility to take advantage of securitization in each state, with each having a different timetable for execution. As the details around securitization get finalized, we will be working with the rating agencies to gain clarity around impacts to our credit metrics but we expect it to be viewed positively. Moving on to our financial results and highlights for the first quarter, net income was $95.6 million, or $1.79 per diluted share, compared with $91.7 million, or $1.72 per diluted share, in the first quarter of 2020. Our first quarter results reflect an increase in net margin of $9.1 million over the same period last year due in part to new rates and customer growth primarily in Texas and Oklahoma. Net margin was $3.1 million lower as a result of weather normalization, net of the impact from increased sales volume. Our weather normalization adjustments are based on the difference between actual and normal weather measured by heating degree days. For the most part, these adjustments are not impacted by actual volumes delivered to our sales customers. When weather is colder than normal, we generally see a pickup in net margin associated with actual volumes, with weather normalization resulting in a reduction in net margin to bring us back towards normal. During the first quarter, despite an increase in heating degree days of 12 to 25 percent across our three states compared to first quarter last year, sales volumes were up less than 14 percent. This contributed to the negative adjustment we experienced from weather normalization exceeding the positive impact from higher volumes. We believe this is due in part to customer behavior during winter storm URI. During the storm, we asked our customers to conserve their natural gas usage to the extent possible, both to ensure we could maintain service and to minimize the impact of higher usage and natural gas prices on their bills. In addition, there were electrical outages that prevented customers in certain areas from running their furnaces at all. Operating costs were 6% or $7.2 million higher compared with the same period last year due primarily to an increase in employee-related costs, which includes the cost of our non-qualified employee benefit plans and expenses related to the COVID-19 pandemic. When we normalize the first quarter 2021 and 2020 for the impact of the pandemic, including bad debt expense, COVID-related direct expenses, net of savings from travel and training, and the change in the value of the liability associated with our non-qualified employee benefit plans, the increase in operating costs is closer to 2.5%, which is consistent with our five-year guidance. Our non-qualified employee benefit plans also impacted other expense net, which decreased $5.4 million compared with the same period last year due primarily to a $4.9 million reduction in expense resulting from the change in the value of investments associated with non-qualified employee benefit plans. This reduction in expense is largely offset by an increase in the associated liability for the plans which, as already mentioned, is included in employee-related costs. Our capital expenditures and asset removal costs decreased this quarter compared with the first quarter last year simply due to timing. Authorized rate base, reflecting our recent regulatory activity, is approximately $3.8 billion as of March 31st. Authorized rate base is defined as the rate base reflected in completed regulatory proceedings, including full rate cases and interim rate filings. We project that for 2021, our estimated average rate base, which is defined as authorized rate base plus additional investments in our system and other changes in the components of our rate base that are not yet reflected in approved regulatory filings, will be approximately $4.23 billion with 42% in Oklahoma, 29% in Kansas, and 29% in Texas. Also in March, unrelated to the winter storm, We amended and restated our previous $700 million revolving unsecured credit facility with a $1 billion facility that now expires in March 2026. In connection with the execution of that agreement, all commitments under our 364-day, $215 million credit agreement were terminated. Yesterday, the one-guest Board of Directors declared a dividend of 58 cents per share unchanged from the previous quarter. Finally, We are reaffirming our 2021 financial guidance, including net income of $198 million to $210 million, earnings per diluted share of $3.68 to $3.92, and capital investments of $540 million. We reiterate that despite the weather events, the fundamentals of our business haven't changed. Now I'll turn it over to Curtis to update you on the latest developments on the regulatory and commercial sides of our business.