Good day, ladies and gentlemen. Welcome to the ONE Gas Fourth Quarter Year End Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brandon Lohse. Please go ahead.

Good morning, and thank you for joining us on year end 2021 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 1995, 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 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. Net income for the fourth quarter 2021 was $60.5 million or $1.12 per diluted share, compared with $58.3 million, or $1.09 per diluted share in the same period 2020. Our fourth quarter results include an increase in revenues of $10 million over the same period last year, which is primarily due to $9.5 million from new rates and $1.8 million in sales from net residential customer growth. Operating costs for the quarter were $7.1 million higher compared to the same period last year, we experienced a $13.3 million increase in employee labor and benefits and outside services. However, our bad debt expense was $5.6 million lower than last year for the quarter and $6.4 million lower for the full year. One of the key drivers for the improvement was a significant increase in energy assistance payments we received from social service agencies and the government on behalf of our customers. Throughout the year, our customer service team worked diligently to inform our customers of assistance that may be available, and we implemented an online Energy Assistance portal to streamline the process for the agencies. These efforts were instrumental to us receiving approximately $30 million for our customers in 2021 compared with about $19 million in 2020, with nearly half of the payments in 2021 collected in the fourth quarter. For the full year 2021, net income was $206.4 million, or $3.85 per diluted share versus $196.4 million or $3.68 per diluted share in 2020. Revenues less the cost of natural gas was $40.7 million, which includes $32 million from new rates and $8.5 million from residential customer growth. Operating costs for the year were $21.6 million higher than 2020 primarily as the result of increases in outside services and employee labor and benefits. Depreciation expense…

Thank you, Caron. And good morning, everyone. I'll start with a brief update on securitization as meaningful progress continues across all three states. On January 25, the Oklahoma Corporation Commission approved the terms of the settlement agreement regarding the extraordinary costs incurred by Oklahoma Natural Gas during winter storm Yuri and deemed recovery of all such costs prudent. At that time a financing order was issued, which requests the Oklahoma Development Finance Authority issue securitize bonds, and provide the net proceeds to Oklahoma Natural Gas as soon as feasible, but no later than December 31, 2022. In Kansas, we received an order from the Kansas Corporation Commission on February 8, approving the terms of the settlement agreement, including recovery of all gas related costs incurred by Kansas Gas Service during Yuri. Our next step is to file an application requesting a financing order, which we expect to do in early March. The KCC will then have 180 days from the date of the filing to issue a financing order, which, if approved, would allow the company to begin the process of issuing securitized bonds. Also, on February 8, the Railroad Commission of Texas issued a single financing order authorizing Texas Gas Service and other natural gas utilities participating in the securitization process to recover all extraordinary storm related gas purchase costs and carrying costs over a period not to exceed 30 years. The Texas Public Finance Authority has begun the process to issue the securitized bonds, and pursuant to the unanimous settlement agreement approved by the Railroad Commission for the West Texas service area, Texas Gas Service began a three year process of collecting the extraordinary costs, including carrying costs from those customers in January of this year. Turning to other regulatory matters. In November, the Oklahoma General Rate case…

Thank you, Caron and Curtis. We recently observed the anniversary of winter storm Yuri and took the opportunity to thank our team for the outstanding performance that maintain service to our 2.2 million customers. Sharing that experience, as well as our work together in a prolonged COVID environment has provided our company with sharper focus, and a deeper dedication to our mission. Despite all the challenges we faced last year, our core values remain the same. A work culture that begins with safe operations continues to be our primary focus. We closed out the year with the lowest incident rates for lost workdays, and total recordable incidents in our company's history. We also executed our largest capital budget to date. As we look ahead to 2022, our geographic footprint continues to provide a competitive advantage. Natural gas continues to be available, affordable and in demand in the areas we serve. You heard Caron and Curtis talk about the significant step up in capital spending this year, driven by continued investments in system integrity, reliability, and new levels of customer growth. When combined, these opportunities support meaningful increases in our five year growth rates for rate base, net income and earnings per share. Over the past year, we've also been clear about our intentional and transparent approach to setting climate related goals. We recently announced a goal to achieve a 55% reduction in emissions due to leaks from distribution pipelines. By 2035 from a 2005 baseline, a goal that includes projected future growth of our assets. These efforts, coupled with the opportunities presented by Renewable Natural Gas, including the significant amount of feedstock proximate to our system, provide the backbone of our transition to a cleaner energy future. In closing, I'd like to recognize our over 3,600 employees for facing last year's challenges with a focus on service, delivering results and continuing to execute our strategy. Their commitment to our core values keeps us anchored each and every day, as we work to deliver a high level of service for our customers and exceptional value for our stakeholders. Thank you all for joining us this morning. Operator, we're now ready for questions.

[Operator Instructions] We'll take our first question from Julien Dumoulin-Smith from Bank of America.

Hey, this is Kody Clark on for Julien. Thanks for taking my questions. So first just touching on some of the drivers of the increased CapEx and CAGR. And I know a number of moving pieces customer and volume growth being robust, continued safety and reliability spending and constructive out regulatory outcomes, particularly in Oklahoma with the most recent rate case. But just curious if you could characterize what is the main driver behind the increased CapEx and CAGR here, if possible.

Kody, this is Curtis, and thanks for the question. There's really not a single driver because there are several different categories of capital as the way we think about it. So in my prepared remarks, and then some of the other comments that the group made, we talked about the increased and the continuing increase of capital spending related to our system integrity work. If you look at our history over the last eight years, that's been a continual process, as we scale up more and more in our company, to continuing to update our system and look at it those types of investments. We've also in Texas and in Oklahoma, as I commented on earlier, continue to see very strong growth from a lot of economic development activity in those two states. And that population growth is being led by really large companies moving into those service territories. So there's a lot of the headlines around Tesla, and Apple and Samsung and others like that have moved into the Austin area. But our other metro areas are having set similar economic wins and with that are bringing the workers necessary to support those businesses. So the housing growth that we're reacting to, and spending a lot more of our of growth capital on is in response to those in migrations and the development in those communities. So in my comments, I talked about several mainline extensions that we're going to be doing over the next couple of years that's reaching out to new, very large masterplan communities that might hold 15,000 to 20,000 homes over time, compared to maybe 200 to 1,000 homes in those neighborhoods or those small communities today. So it's really rapid growth in and around our service territories driven by economic activity. And then the third category that we don't talk as much about relates to government required relocations of our systems. So with additional infrastructure spending on highways and bridges, and activities like that, if we're in those right of ways, then we have to move our assets out of those right of ways in the new right of ways. And that's part of our capital spending also. So very broad brush. That's the three primary categories driving those increase.

Got it. Thanks for that, Curtis. And then can you give a little bit more color on how you're thinking about inflationary impacts to the business, labor, and outside services costs were much higher year-over-year. So wondering how you're seeing O&M trending kind of in the near term. And if there's any potential offsets available, and also kind of thinking about this in terms of bill inflation paired with recovery of Yuri costs.

Yes, sure, Cody. As you know, we've been focused for some time on managing O&M expenses. We tried to include in our estimates, the impacts of inflation, and the impacts on wage growth. But we also feel like we're well positioned to be able to execute this plan, as laid out by Caron and Curtis, in terms of things like supply chain, you may recall conversations that before the COVID era, we looked at our supply chain with a pretty critical eye and went back to consider how can we position ourselves in a way that allowed us to avoid disruptions. And that planning is really paid dividends, as we've gone through some of the supply chain issues that we've seen across the industry. So we've been able to continue to supply both our maintenance programs and our growth programs without interruption so far. So we'll continue to be focused on it in terms of opportunities to mitigate. We're constantly looking at the balance between outside services and what we do inside the company, where there's an opportunity for us to bring in a service because we think we can execute it at a lower cost. We're more than willing to do that and have executed some of those programs successfully with positive impact on O&M. In terms of your last question, we are very focused on impacts to our customers, and are constantly thinking about our internal practices, to be sure that all of our employees are focused on the fact that part of our customer service is being responsible in the way that we execute our business to minimize the impact on customer bills.

We'll take our next question from Selman Akyol with Stifel.

Thank you very much. Good morning. Could you maybe expand a little bit on RNG? And I think about it in terms of responsibly sourced gas going forward, and do you see any expansion to that? And maybe other considerations outside of just RNG. But how you think about the whole value chain, when you think about RNG?

Sure, and thank you for the question. We are very excited, as you could hear in Curtis's report about the opportunities that are presented to us because of the location of our infrastructure, and its proximity to the feedstock that supplies RNG. We are fortunate to be in a territory, where we really don't have to go outside our footprint to look for supply. It's readily available, we have a number of entities, looking for projects and contacting us in addition to the partnerships that we've pursued. So we think it's going to be a rich environment for us going forward. Before I ask Curtis to speak a little bit more about the RNG opportunity, let me just share with you how we think about it. We stood back and looked at our assets and really ask the question, what we can do with the assets that we have, and the opportunities provided by our service territory, to have the most positive impact on the environment. And what we saw was, we should continue to consider hydrogen blending to look at the opportunities that provides to us in the mid and longer term. But the RNG opportunity is one that is near term, make sense for us, and one that we believe allows us to participate in a meaningful and short term way, and the energy transition to cleaner fuels. So Curtis, if you would add a little bit more color to the opportunities that we see.

Good morning, Selman. As I mentioned in my comments, we've identified about 175 Bcf of RNG potential within our service territories. And so that is not something that will come in the future, that is something that exists today. But the development around those sources has to continue. So after completing that inventory study that I mentioned, we began high grading those potential projects and working with our partners to determine which of those had the most potential, and which of those were most proximate to our system. The benefit of that being these RNG facilities are not really large producers as you would think of in a hydrocarbon well, they're much smaller than that. And they don't come at a lot of, at a high pressure. And so the advantage that LDCs have is having lots of miles of pipe operating at lower pressures. So being able to bring in those RNG supplies without a lot of compression required gives us that advantage. And so that's what we continue to focus on. I mentioned there are 22 projects in various stages that have made it through that screening process at this point. And we're continuing to pursue those because of the environmental benefit that capturing those fugitive emissions that are occurring today, the benefit of capturing those and putting those into our system for direct use has a very positive environmental impact. And that will continue to be a big focus of our commercial team.

We'll go next to Brian Russo with Sidoti.

Hi, good morning. Hey, I was just curious in terms of your ROE trends, as it relates to future rate cases, seemed like you had a little bit of ROE degradation in 2021. Just given the time of the new base rates in Oklahoma, and it looks like your 22 guidance probably isn't the back to the mid to high 8% range, and I was just curious, where you see those ROEs trending. And maybe overlay the timing of your next gen rate cases which might prevent you from filing some of your annual tracking mechanisms.

Good morning, Brian. This is Curtis, several items to address there. We've, over the past few years, achieved or the allowed ROE coming out of our rate cases have been in that 94,95 ballpark. So it seems to have been fairly stable in that area. Now we're getting into an inflationary environment, you see interest rates climbing. So I don't know that there's the same downward pressure going forward necessarily that we've seen here in the past when interest rates were declining so much. That's not a call that we're going to see ROEs suddenly reverse course and start climbing. But we do think we've come to a period where those are a little bit more stable. As to the impact that it has on our other filings. We haven't announced any other general rate cases in any of our service territories at this time. But we are continuing to pursue our interim filings whether that's the GRIP filings and COSA filings in Texas. In March, we'll have a PBR filing in Oklahoma. And then in Kansas, we'll have our GSRS filing that we do each year in August, so we remain on schedule to pursue each of those filings this year.

We'll take our next question from Julian Smith with Bank of America.

Hey, sorry, this is Kody again, just one follow up for you all. So curious if you have any updated thoughts on M&A, clearly saw another very constructive price marker for LDC this morning. And wondering if you have a view on disconnect between valuations in the public in the private markets.

Kody, thanks for the question. We saw the same news that you did. And our focus remains on the opportunities that are in front of us. We do note the dislocation that you reference. But given the opportunities that we have going forward on both the growth and the system integrity/ maintenance side, we feel like we're really well positioned to execute this plan. We're excited about it. We think the step up in the metrics that we covered earlier in the call signal, what our forward plan is, and so we plan to keep our heads down and execute with a continued focus on the core values that we've had since the company was founded, and in really taking advantage of these opportunities that we think are unique to our service territory.

We have no further questions in the queue at this time.

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

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.