One Gas seeks to lower cost of pipeline damage prevention amid sticky inflation

As gas utilities across the nation look for ways to offset inflation and rising interest rates, Tulsa, Okla.-based One Gas Inc. has begun insourcing some pipeline safety work.

The company has begun hiring and training workers to complete pipeline damage prevention and line location work that it previously farmed out to contractors. The strategy has created upfront costs, but it is starting to yield short- and long-term benefits, One Gas executives said during a quarterly conference call Aug. 1.

One Gas has been particularly exposed to rising rates, which have increased its cost of maintaining an expanding gas distribution system and pursuing customer growth opportunities in Texas, Oklahoma and Kansas. In December 2022, the company cut its five-year earnings growth forecast to a rate of 4% to 6%, from a previous expectation of 6% to 8%.

By bringing damage prevention jobs in-house, One Gas is seeking to improve efficiencies and make its workforce more flexible, part of a broader effort to offset higher material, supply and labor costs with "disciplined resource management and prudent operating practices," said One Gas Senior Vice President and COO Curtis Dinan. But the initiative is also serving a workforce development function, the executive said.

"These insourcing efforts have reintroduced important entry-level field positions, reestablishing a meaningful workforce pipeline for the company," Dinan said.

The endeavor has required investment. One Gas' employee-related costs rose $6.7 million during its fiscal third quarter, driving an $8 million year-over-year increase in operations and maintenance expense. In addition to the insourcing effort, the expense reflected market conditions and changes to company training programs geared toward increasing workforce flexibility, One Gas Senior Vice President and CFO Caron Lawhorn said.

Inflation remains 'sticky'

Given its compliance-based business and a heavy annual schedule of system work, One Gas does not have much opportunity to shift its operations and maintenance expense, Lawhorn told analysts.

News of easing inflation is encouraging, but high costs remain "sticky" and could last for a while, Lawhorn said. The costs that One Gas is shouldering in its service territories are in line with the US Bureau of Labor Statistics' consumer price index, Dinan said. The index rose slightly less than 3% in June from a year earlier.

The company has reviewed its capital structure and determined that it remains appropriate, even though that structure creates exposure to short-term interest rate dislocations, One Gas President and CEO Sid McAnnally said. The company's interest expense has increased $25.7 million year to date in 2023, including $9.6 million related to securitization of storm-related expenses in Kansas.

"We'll continue to have exposure to short-term rates, but as rates normalize and we have the opportunity to continue to take advantage of the inflow of people into our service territory and the economic development opportunities that you're aware of, we really like our positioning," McAnnally told analysts.

Earnings results

One Gas on July 31 reported second-quarter 2023 net income of $32.7 million, or 58 cents per diluted share, compared with $32.1 million, or 59 cents per diluted share, in the year-ago period. The results were just shy of Wall Street's expectations for EPS of 59 cents per diluted share.

Operating income for the quarter increased as new rates and customer growth offset the rise in employee-related costs, lower sales volumes due to warmer-than-normal weather and an increase in bad debt expense.

One Gas reaffirmed its full-year 2023 EPS guidance for $4.02-$4.26. Shares of One Gas were roughly flat in afternoon trading.

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