Good day, and welcome to the ONE Gas Third Quarter 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.

Good morning, and thank you for joining us on our third quarter twenty twenty one earnings conference call. This call is being webcast live and a replay will be made available later today. After our prepared remarks, we'll 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 nineteen ninety five, Securities Act of nineteen thirty three, and the Securities and Exchange Act of nineteen thirty four, 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 us on the call this morning are Sid McAnnally, President, and Chief Executive Officer; Caron Lawhorn, Senior Vice President and Chief Financial Officer; and Curtis Dinan, Senior Vice President, and Chief Operating Officer. And now I'll turn the call over to Caron.

Thanks, Brandon. Good morning, everyone. Yesterday, we announced that we updated our twenty twenty one financial guidance. Net income is now expected to be in the range of two hundred and four million dollars to two hundred and nine million dollars and earnings per diluted share is expected to be in the range of three point eight zero dollars to three point nine zero dollars. Our guidance for capital expenditures and asset removal costs remains five forty million dollars for the year. Our actual results for the third quarter include net income of twenty point three million dollars or zero point three eight dollars per diluted share compared with twenty one point one million dollars or zero point three nine dollars per diluted share in the same period in twenty twenty. Our third quarter results reflect an increase in net margin of ten point four million dollars over the same period last year which is primarily due to seven million dollars from new rates and two point one million dollars in sales from net residential customer growth. Operating costs for the third quarter were six point one million dollars higher compared to the same period last year, driven primarily by increases in outside services, employee related costs and bad debt expense. It appeared in the second quarter that our bad debt expense was beginning to moderate, but our third quarter expense has ticked back up and we are currently at eight point one million dollars of expense year to date compared to eight point eight million dollars last year. We continue to execute well on our procedures for managing past due accounts, including connecting customers with payment assistance. In fact, we have currently received over eleven million dollars or eighty eight percent more in energy assistance payments for our customers than at this time last year. Our capital expenditures and asset removal costs were twenty point six million dollars higher quarter over quarter and we remain on track to achieve our capital plans for the year. Authorized rate base, which is rate based reflected in completed regulatory proceedings including full rate cases and interim rate filings is approximately four billion dollars as of September thirtieth. We project that for twenty twenty one our estimated average rate base, which is 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 four point three four billion dollars with forty one percent in Oklahoma, twenty nine percent in Kansas and thirty percent in Texas. We ended the quarter with three hundred and thirty six million dollars of commercial paper outstanding and no borrowings under our credit facility. If you recall, in March, we issued two point five billion dollars of fixed and floating rate notes to cover costs related to Winter Storm Uri. Actual costs deferred ended up being closer to two point one billion dollars. These notes became callable in September and we’ve redeemed four hundred million dollars of the two year floating rate notes in order to line up our financing with the final cost estimate. Year to date, we sold twenty one point four million dollars of common stock under the two fifty million dollars at the market equity program we put in place in twenty twenty and we have no additional sales planned for the balance of the year. As a result, at the significant costs incurred due to the winter storm, which will be deductible for tax purposes in twenty twenty one, we expect to generate a net operating loss carry forward, which will also reduce taxable income in future years. Our current estimate of cash taxes for twenty twenty two is twenty one million dollars. Yesterday, the ONE Gas Board of Directors declared a dividend of zero point five eight dollars per share, unchanged from the previous quarter. Now, I'll turn it over to Curtis for an update on the latest for regulatory, commercial and operations.

Thank you, Caron, and good morning, everyone. I'll start with a brief update on securitization. The securitization process continues to progress across all three states. The Public Utility Division of the Oklahoma Corporation Commission filed responsive testimony recommending to the OCC that all actual costs incurred be found prudent, reasonable and recoverable, and that a financing order for securitization be approved. A hearing before the administrative law judge has been scheduled for November twenty-two. The OCC has until January twenty-two, twenty twenty-two to issue a financing order. Once a financing order is issued, the Oklahoma Development Finance Authority has up to twenty-four months to issue the securitized bonds. In Kansas, a procedural schedule is in the process of being finalized and hearings are proposed for mid-December. Under the proposed schedule, a financing order would be issued in the first quarter of twenty twenty-two allowing the company to begin the process of issuing securitized bonds. On October twenty-nine, a unanimous joint stipulation was filed in Texas recommending that Texas Gas Service be allowed to recover its costs from Winter Storm Uri. Approximately two hundred million dollars of Winter Storm Uri costs would be included in the proposed financing order and approximately sixty million dollars of our cost for our West Texas service area would be recovered over three years through a separate rider for those customers. A hearing before the administrative law judge occurred this morning. Staff made an opening statement in support of the settlement and the utilities submitted their testimony and exhibits also in support of the settlement. The parties further waived a proposal for decision; a proposed order in support of the joint stipulation will be filed tomorrow and considered by the commission at their next open meeting on November tenth. The RRC has until December twenty-seventh to issue an order and an additional ninety days to issue one financing order for all participating utilities. Turning to other regulatory matters. A joint stipulation and settlement agreement for the Oklahoma Natural Gas general rate case was heard before an administrative law judge who recommended approval of the agreement. If the joint stipulation is approved by the OCC as filed, base rates would increase fifteen point three million dollars and go into effect later this year. The agreement also includes continuation of the performance-based rate change mechanism and ROE of nine point four percent and an equity ratio of fifty-eight point five five percent. Oklahoma Natural Gas would then be required to file another full rate case no later than June twenty twenty-seven. The agreement includes an allowance to recover up to five million dollars annually for the purchase of renewable natural gas. Oklahoma Natural Gas is required to file an application requesting approval of an opt-in tariff for customers to select all or a portion of their fuel source to be RNG. The OCC has until November twenty-eight to consider the ALJs recommendation. In August, Kansas Gas Service filed a gas system reliability surcharge that seeks an increase in rates of approximately seven point six million dollars for capital expenditures. In October, the Kansas Corporation Commission issued their report and recommendation for an increase of seven point six million dollars and order from the KCC is expected in December twenty twenty-one with new rates going into effect sometime in January. Moving on to our commercial activities, we continue to see strong economic activity across our territories and strong demand for natural gas and new construction. Continuing the positive trend from twenty twenty, we connected approximately five thousand six hundred new customers during the quarter and approximately sixteen thousand nine hundred year to date. In addition to the RNG update from the Oklahoma rate case, I mentioned earlier, the project development momentum is picking up in several of our areas. In October, we executed four letter agreements for biogas development projects, including two wastewater treatment plants, a landfill and a food waste project for which we are in active design mode for the interconnection. Together, the four projects are expected to produce up to seven hundred thousand MMBTU of RNG per year or the equivalent of serving approximately ten thousand homes. We are also in active discussions for five additional biogas development projects, including three dairies, a landfill and a wastewater treatment facility. As a response to Winter Storm Uri, we made several enhancements to our winter preparedness capabilities heading into this winter. First, we added additional storage capacity, which reduces the amount of gas we will need to purchase on the open market during the heating season. Second, we've added transportation capacity and additional interconnect to source supply from upstream providers at different delivery points to further increase system reliability. Third, we've added to our mobile CNG trailer capacity to provide additional support to maintain system pressures in the event of supply constraints. And lastly, we've updated our forecasting models that incorporate data from Winter Storm Uri, which helps improve our planning and preparedness for periods of extreme peak demand. And now, I'll turn it over to Sid for closing remarks.

Good morning. I'll start by thanking Caron and Curtis. As you've just heard, we've seen great performance from the teams that they lead on issues related to Winter Storm Uri and securitization. And that good work is coupled with solid performance in the day-to-day operations across our company. So thanks to you both and to the ONE Gas team. As you may have seen, we released our latest ESG report in October, expanding the data included and improving the transparency of our reported data. Here were just a few of the highlights from that report. Safety is our first core value and the foundation of everything we do. Our focus on employee safety has led to substantial improvements in all of our employee safety metrics. You can find the detailed data related to those improvements in our report. In October, ONE Gas was again awarded the safety achievement award for excellence in employee safety by the American Gas Association, recognizing ONE Gas for having the fewest number of lost work days due to injury for the fourth consecutive year. We are proud of this well-deserved recognition for our employees, but we don't rest on past success; every day requires a new commitment to employee safety and the safety of our system. Turning to our environmental strategy, by focusing on replacement and protection of our distribution mains and service lines, we've reduced our scope one CO2 equivalent pipeline emissions by more than twenty-six percent since twenty fourteen. Using the same process, we expect to achieve a forty-one percent reduction by twenty twenty-five. We've exceeded our methane challenge goals from the EPA each year since we joined the project as a founding member, and we continue to pursue and adopt emerging technologies that support reduced emissions. Our team is optimistic about the role that natural gas will play in a cleaner energy future for the communities that we serve. The basis for that optimism is simple: organic growth from a dynamic service territory that’s demanding our product, a proven and resilient system, and supported legislative and regulatory environments in the territories that we serve. Joining those elements with a high-performing workforce, you can see why we're excited about the future. Customer satisfaction remains high with ONE Gas achieving a ninety-three percent satisfaction score on the twenty twenty customer relationship survey, and our employee engagement scores were in the top quartile of companies that use the Gallup Employee Engagement Survey. Like safety, inclusion and diversity is one of our core values. Currently, twenty-seven percent of our workforce are women, and thirty-five percent identify as members of an underrepresented racial or ethnic group, performing above the latest EEOC U.S. utility company averages. We believe that new programs will allow us to show continued improvement. Our seven employee resource groups continue to grow in both size, and impact, with one third of our employees participating in an ERG. The engagement of these groups in the life of our business is serving to develop new leaders and to help recruit new employees who align with our culture. Together, we're excited about the work that remains ahead of us. In closing, I'd like to recognize the three thousand six hundred employees of ONE Gas and extend my personal thanks for their dedication to service and commitment to our stakeholders. Through two years of a pandemic and one of the worst winter storms in history, our fellow employees performed at a very high level and their focus on our customers never wavered. We are grateful for their commitment to the same core values that continue to anchor our company every day. Thank you all for joining us this morning. Operator, we're now ready for questions.

Thank you. We will now take our first question from Shahriar Pourreza from Guggenheim. Please go ahead, Shar, your line is open. Please ensure your mute function is turned off to allow your signal to reach our equipment.

Are you guys able to hear me now?

We can hear you, Shar. Thank you.

Apologies about that there. Headset technology. It’s James on for Shar. Congrats on raising narrowing there. We were hoping that that would be the case. And obviously, you've done that in the past. It’s nice to see a continuation there. The question I've got for you is actually on your ESG report filed last month. It's very clear to us from the level of detail that you provide in those disclosures that ESG is very important to you, you've obviously made it a priority in your interactions with the investment community. Looking at your target dates for carbon dioxide reduction, methane reduction. Twenty twenty-five seems to be the furthest that you go out in terms of target dates. While your peers seem to be pointing more towards twenty thirty, twenty forty, even two fifty and the questions that we get inbound from investors seem to be over the same two thirty, two forty, twenty fifty timeframe. Just curious to hear on how you're thinking about the timeframe that you are willing to set targets for and how we might see that evolve going forward?

Thank you for your remarks regarding our guidance and the ESG report. We invested considerable time and effort into creating the ESG report, which reflects our ongoing commitment to the principles that have guided our company since its establishment in 2014. We have previously stated that we align with our industry peers on goals related to emissions reductions and decreasing carbon intensity. Our focus is on clearly demonstrating pathways to achieve these objectives. It is crucial for us to illustrate which activities are linked to specific goals and how we plan to reach our targets. We have begun this journey and expect to share more information that will clarify our progress and extend our timeline. This is not an indication of a lack of commitment but rather a reflection of our longstanding transparency with investors and stakeholders. We aim to honor this history by ensuring that our commitments are backed by actionable plans. Caron is leading our ESG project, and I’d like to invite them to share any additional insights.

So I think that was a great summary of our commitment and what we're working towards. Importantly, we believe that we are doing all the right things, especially when you think about our pipeline replacement program, protection, our operational practices, advanced leak survey technology, and importantly, improvement or advancements in our RNG projects, as Curtis just mentioned, that's some exciting development. And we're really looking forward to understanding the full potential of what RNG can do for our emissions profile.

So Jamieson, there have been many headlines this morning regarding methane and the commitment to tightening methane systems, and we feel very validated by that. Since 2014, our company has focused on pipeline replacement programs that prioritize the condition of the pipe rather than simply distributing budgets evenly across the territory. We ensure that we concentrate on the opportunities that allow us to strengthen the system and keep gas in the pipe, and we are maintaining that approach. It’s reassuring to see many people globally discussing something our company has been committed to since 2014.

Yes, that's wonderful. I really value the additional insight you've provided. As you extend that timeline further, as you indicated, you'll discover that the questions we receive from investors often revolve around their requirements for a company to already meet specific ESG criteria to be considered for investment. There are also investors who set targets for achieving certain ESG milestones by specific deadlines. As you evolve your strong ESG disclosures and lengthen that timeframe, you'll attract a new segment of investors interested in supporting your efforts. Great job all around, and thank you for addressing the question.

Yes. Thank you, Jamieson. And we'll continue to find that right balance between forward targets and clear pathways on how to execute on those targets. We appreciate the comments. Thank you.

We’ll now take our next question from Vedula Murti from Hudson Bay Capital. Please go ahead.

Good morning.

Good morning, Vedula.

I was curious about the positive rate you've achieved in terms of both base increases and the progress made on the primary securities process. Can you provide insights over the next few years since most of the securitization costs and new revenues will take effect from 2022 onward? Could you outline the anticipated total revenue from yield securitization and explain your strategy for managing that alongside potential needs for CapEx to ensure you earn returns? Additionally, I'd like to understand how you plan to balance co-investment with managing securities savings costs.

Yes. Sure, Vedula. Thank you for the question. And I agree with you. We're very pleased with the way that the securitization path has gone because we believe it's good for all of the stakeholders that we deal with. Let me do this just to round out the context around your question. I'll ask Caron to speak to the mechanics of the way the securitization will work. And then Curtis can pick up and talk a little bit about both the impact, the way that it works from a regulatory standpoint and the impact on our forward CapEx planning. Caron?

In Oklahoma and Texas, excluding West Texas, securitization will be entirely off balance sheet. Bonds will be issued by a state agency, and we will apply a charge to customer bills to service these revenues, which will be used to pay off the bonds. In West Texas, we have a new positive development where we have carved out about sixty million dollars from the total securitization process. This amount will be recovered over a three-year period through a special rider or surcharge that will also be included in the cost of gas. We will continue to finance these costs in West Texas. In Kansas, we will issue a securitized bond that will remain on our balance sheet. We will collect through a surcharge to pay off these bonds; in this case, we believe rating agencies will assess our metrics without considering the securitized debt, including the Kansas debt that will be on the balance sheet.

As we navigate the regulatory process and its effects on customer bills, I want to provide you with the latest projections from various states regarding potential costs. In Texas, the recovery period for bonds ranges from ten to thirty years. If the recovery is set at ten years, the monthly cost for customers would be about five dollars, while a thirty-year recovery would result in a monthly charge of approximately two dollars and thirty cents. This gives you a sense of the recovery timelines and their impacts. In Oklahoma, low-income customers will not be subjected to any surcharges, meaning there will be no effects or monthly charges for them. For smaller volume customers, the anticipated impact is about five dollars per month, and for larger customers who consume more gas, it’s expected to be around eight dollars per month. In Kansas, we have outlined three recovery periods in our testimony: five, seven, and ten years. At five years, the monthly cost would be about eleven dollars, and at ten years, it would drop to around six dollars. We are aware that we don’t want to impose extra costs on customer bills, but we believe the way the commissions are managing these costs is quite reasonable. This ensures protection for the utilities while also minimizing the effect on customers. Regarding your second question about capital expenditures, it's important to remember that in our three service areas, the cost advantage of using electricity compared to gas is approximately three and a half to one. This means that utilizing gas for heating or other household needs is less than one-third the cost of electricity. While customer bills may experience the impacts we discussed, electric companies in our regions are also facing similar challenges due to recent storms. However, we do not foresee a decline in our competitive advantage, and we have no plans to alter our capital expenditure forecast as outlined in our five-year guidance. To mitigate the impact on customers, we need to focus on expanding our customer base. In our recent testimony during the Oklahoma natural gas rate case, we highlighted that our operational and maintenance costs per customer have decreased since the last rate case. This reduction is attributed to our commitment to lowering costs to sustainable levels and the growth of our customer base, which distributes costs over a larger number of customers. This acknowledgment in the rate case was significant and reinforces our strategy moving forward. I hope this offers a clearer perspective on our current considerations and future plans.

In terms of managing expenses and handling capital expenditures while avoiding regulatory scrutiny, I want to clarify that I'm considering a two billion dollar recovery across the entire system. Simplifying my calculations over a twenty-year period without carrying costs, that equates to one hundred million dollars a year. This is part of the customer bill that could have otherwise been allocated for pipeline replacement, renewable natural gas, or other initiatives. Can you break down those percentages for the customers? Additionally, what will the actual dollar amounts be, and when do you expect those figures to increase? Will your interactions with regulators and other stakeholders be recognized as separate from everything else, or will they eventually be viewed as incremental, particularly regarding perceptions?

Sure. Let me discuss the financial aspect first. As Caron mentioned, the $1.3 billion in Oklahoma and $200 million of the total $2.1 million or $1.5 million will be recovered through securitized bonds issued by the state. The company's finances will cover that part, and for the portion in Kansas, the company will issue those securitized bonds directly, so we'll have the cash for that. The only financing we are doing, over a three-year period, is $60 million related to our West Texas service areas. Once those issuances are completed, we will clearly restore the company's balance sheet. Regarding how we determine our capital spending programs each year, it’s a balanced approach. Our primary focus is on what we need to spend on system integrity and maintenance. That’s our top priority, and we don’t consider the impact it has on anything else. Our goal is to reinvest in the system to maintain safety and reliability. We also assess the resources required to execute the plan, including financial resources and non-financial resources like contractors, equipment, and our internal workforce. All these factors are taken into account. Lastly, we consider the impact on customer bills, which we've managed to keep balanced and expect to continue doing so. We invest in system integrity based on system needs, while growth in our service territory drives our growth capital expenditures. As we invest in growth capital, it expands our customer base, allowing us to distribute costs among more customers. This is crucial for keeping our costs low for both existing and future customers. For instance, with an investment of around $100 million per year and 2.2 million customers, we foresee an average impact of $5 per month. I provided the ranges for each state, but that's a general way to think about recovering those costs.

Okay. I appreciate that. Thank you very much.

Thank you for your question, Vedula.

It appears there are no further questions. I’d like to turn the conference back to Mr. Lohse for any additional or closing remarks.

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

This concludes today's call. Thank you for your participation. You may now disconnect.