ONE Gas (OGS) Q1 2025 earnings call transcript

06-May-2025 ONE Gas, Inc. (OGS) Q1 2025 Earnings Call ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 CORPORATE PARTICIPANTS Erin Bender Dailey Director-Investor Relations & Sustainability, ONE Gas, Inc. Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. Christopher P. Sighinolfi Chief Financial Officer & Senior Vice President, ONE Gas, Inc. Curtis L. Dinan Senior Vice President & Chief Operating Officer, ONE Gas, Inc. OTHER PARTICIPANTS Julien Patrick Dumoulin-Smith Analyst, Jefferies LLC William James Appicelli Analyst, UBS Securities LLC Christopher Jeffrey Analyst, Mizuho Securities USA LLC Paul Fremont Analyst, Ladenburg Thalmann & Co. , Inc. MANAGEMENT DISCUSSION SECTION Operator: Good day and welcome to the ONE Gas First Quarter Earnings Conference Call and Webcast.

At this time, I would like to turn the conference over to Erin Dailey. Please go ahead, Ms. Dailey. Erin Bender DaileyDirector-Investor Relations & Sustainability, ONE Gas, Inc. Thank you, Cole.

Good morning, everyone, and thank you for joining us on our first quarter 2025 earnings conference call. This call is being webcast live and a replay will be available later today. After our prepared remarks, we're happy to take your questions. 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 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; Chris Sighinolfi, 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 Sid.

Robert Sid McAnnallyPresident, Chief Executive Officer & Director, ONE Gas, Inc. ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 Thanks, Erin, and good morning, everyone. We're happy to be with you this morning to discuss our first quarter performance. We reported strong financial results yesterday, including net income of $119 million or $1.98 per diluted share. We achieved these results by executing our regulatory plan, managing O&M expenses, and continuing to add new customers. New rates that took effect at the end of last year allow us to recover investments in our system. These investments supported ongoing customer growth and enhanced system reliability. The value of those system investments was shown earlier this year as our system faced five named winter storms in January and February without any significant outages.

Last quarter, we discussed how company-wide initiatives resulted in a faster pace of O&M expense moderation than we had expected. This quarter, our teams continued to focus on expense management, contributing to our positive financial results. We've taken the same disciplined approach to our procurement activities. Direct relationships with our suppliers and careful planning have strengthened our supply chain, and we expect to be largely insulated from material tariff impacts through 2025. In December, we shared our decision to de-risk our five-year financial plan. Our plan includes an earnings per share CAGR of approximately 6% through 2029, matched with reduced capital intensity and related funding needs. This approach limits our financial risks while further strengthening our already robust credit profile.

All of us at ONE Gas remain committed to our core mission - to safely and reliably deliver natural gas to our customers. We support that commitment through programs that engage our employees and support our safety culture. For the eighth year in a row, our annual employee survey showed a higher level of engagement across our workforce. A highly engaged workforce drives performance and reinforces a culture of safety. We are honored to have recently received the American Gas Association safety award for having the lowest rate of significant injuries among our peers for the eighth consecutive year. This achievement is a testament to our coworkers' daily commitment to safety and excellence in serving our 2.3 million customers, and we are deeply grateful for their dedication.

Now, I'll ask Chris to discuss the details of our financial performance for the quarter. Chris?

Christopher P. SighinolfiChief Financial Officer & Senior Vice President, ONE Gas, Inc. Thanks, Sid, and good morning, everyone. As Sid noted, we had strong financial performance this quarter due to new rates taking effect late last year, cold weather underpinning strong customer demand and our teams’ consistent management of expenses. We now expect to achieve the upper half of our stated guidance ranges, which include net income of $254 million to $261 million and earnings per diluted share of $4.20 to $4.32. Net income for the first quarter was $119.4 million or $1.98 per diluted share compared with $99.3 million or $1.75 in the same period last year. Weather across our service territories for the first quarter was 5% colder than normal and 16% colder than the first quarter last year.

First quarter revenues reflect an increase of approximately $52 million from new rates and $2 million from continued customer growth. First quarter O&M expenses were approximately 2% higher than the first quarter last year. We still project a 4% CAGR in O&M expenses across the five-year plan. Our teams have done an excellent job of managing these expenses. ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 Other income net decreased by just under $3 million compared with the same period last year, primarily due to decreases in the market value of investments associated with our non-qualified employee benefit plan. Excluding amounts related to KGSS-I, interest expense in the first quarter was $4.7 million higher than the same period in 2024, which reflects the maturity of lower coupon notes in February and March 2024, the reopening of our 5.10% senior notes last August to issue an additional $250 million, and higher average commercial paper balances.

We have forward sale agreements for 403,000 shares of our common stock with settlement by the end of 2025 at an average price of nearly $75 per share; had all forward shares been settled at quarter-end, we would have received net proceeds of approximately $30 million. We also have approximately $225 million of equity available for issuance under our at-the-market equity program. We continue to be opportunistic about issuing equity as we meet our remaining needs. Yesterday, the ONE Gas board of directors declared a dividend of $0.67 per share, unchanged from the previous quarter. And now, Curtis, I'll turn things over to you.

Curtis L. DinanSenior Vice President & Chief Operating Officer, ONE Gas, Inc. Thank you, Chris, and good morning, everyone. I'll start with an update on our regulatory activities. Oklahoma Natural Gas filed its annual Performance-Based Rate Change Application in February seeking a $41.5 million adjustment with rates expected to go into effect in late June. In all Texas service areas, we completed our annual capital recovery filings. For the Central Gulf region, we are requesting a $15.4 million revenue increase and for the West-North region, we are seeking an $8.2 million increase, both to be effective in June. In the Rio Grande Valley service area, we are requesting a $3.2 million increase to be effective in September.

Finally, Kansas Gas Service requested an increase of $7.2 million pursuant to the Gas System Reliability Surcharge statute. The GSRS allows for the recovery of, and a return on, safety and system integrity-related investments between general rate cases. As Chris noted, it was quite cold this January and February with five named winter storms hitting our region. Our system performed well throughout the storms, thanks to careful planning and the dedication of our coworkers. Despite the cold weather, we completed $178 million worth of capital projects this quarter, relatively in line with the same period last year. Progress continues on the Austin system reinforcement project we discussed on last quarter's call. We've installed almost 24,000 feet of pipe and are on track to have the project in service during the fourth quarter of this year.

We are also pleased to share news of an innovative new project with one of our customers in Austin. Texas Gas Service will supply natural gas for onsite power generation and construct an interconnection to receive renewable natural gas from the customer's facility. This project demonstrates the importance of natural gas and ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 how the versatility of the natural gas system can support a customer's environmental and business goals. We have made progress on our own emissions goal, achieving a 51% reduction in leak-related emissions. Our safety-driven pipeline replacement plan has kept us on track to reach our 2035 goal of reducing emissions associated with mains and services by 55% even as we grow our system.

As Chris noted, our teams have done a great job managing O&M expenses. We continue to insource line locating and completed that process in the outlying areas of Oklahoma during the first quarter. ONE Gas employees now perform about 40% of line locating services across our territories. Focusing on growth, we've installed nearly 8,000 new meters through April as new housing developments take shape. The major metropolitan areas in Texas and Oklahoma are leading this expansion. We are also setting new meters in Kansas, especially in the Wichita area. As we've noted in previous discussions, an influx of new residents has resulted in a shortage of available housing across our three states. We anticipate builders and developers will respond to the ongoing demand for new housing, and we are well positioned to provide natural gas service.

We also continue to explore opportunities to serve power generation needs across our footprint. We are thoughtful in our approach to such opportunities and are particularly interested in projects that support our strategic initiatives, including system reinforcement and extending service to growing areas. Our active projects include generation at large, advanced manufacturing facilities in lower power capacity areas, data centers, and serving grid-connected utility generation. Operator, we're now ready for questions.

Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. A Good morning, Julien.

ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 Christopher P. Sighinolfi Chief Financial Officer & Senior Vice President, ONE Gas, Inc. A Well, good morning, Julien. Thank you for that. If you revisit where we started in our efforts around insourcing of activities, primarily in Curtis' vertical, a couple of years ago, we had at that time a 5% CAGR in O&M expenses planned over the five-year period. And based on the success of that – and we had communicated at that time, it would be more front-end loaded as we did those activities and we had to incubate the inefficiencies of bringing people in whilst still paying contractors as we trained our internal staffing. We were able to migrate that down to a 4% number.

We've, as you pointed out, achieved a number better than that but we're still cautious about the opportunities that Curtis and his team continue to probe - new areas to continue to insource where it's appropriate to do so, both in terms of the type of work and the area of the work. And so, you may look to us, Julien, to continue to push that opportunity. We still would say it's more front-end loaded as we do that work. And then I'd just remind you that about 60% of our O&M is labor and benefits related, and so, we're still subjected to what the labor market dictates as a competitive wage growth number going forward.

Curtis L. Dinan Senior Vice President & Chief Operating Officer, ONE Gas, Inc. A Yeah, Julien. Thanks for the question. That is one that would be a benefit to us just as the 8.209 that you referenced is a benefit to us today on the types of investments that qualify under that one. So, extending that out would help with overall recoveries that we receive and earlier returns on those projects than we experienced today. So, we – that bill still has quite a ways to go, but we would see that as a positive. Some of the other bills that we're watching closely have to do with utility worker protections, strengthening the penalties if there's any incidents involving them during their work and some other similar type eminent domain legislation and things like that.

But I would say more optomistic in the way we're viewing these rather than something we're as concerned about.

Curtis L. Dinan Senior Vice President & Chief Operating Officer, ONE Gas, Inc. A I wouldn't say that. We look at several factors when we're setting our capital plans. First, what are the needs of our system as it relates to integrity spending, what are the opportunities with our customer development, and then thinking about what are the resources that are needed, whether those are financial resources or the physical resources to complete the work, and what's the impact on the customer bills. So, that's kind of the filter we run our capital through. And while this would have a positive impact on the returns of it, it wouldn't be of such a magnitude ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 that it would change the answer to those first four filters.

Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. A Thank you, Julien. You bet.

Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. A Good morning, Bill.

Christopher P. Sighinolfi Chief Financial Officer & Senior Vice President, ONE Gas, Inc. A Yeah. Hey, Bill. This is Chris. It's a combination of things. If you were to look at first quarter, we had very strong margin predicated on strong customer demand given the weather profile. We've continued to see strong growth in the customer base. And then as you pointed out, we've performed better on the cost side of things than was originally embedded.

Curtis L. Dinan Senior Vice President & Chief Operating Officer, ONE Gas, Inc. A Yeah. This is Curtis, Bill. In terms of investment dollars, it's not a significant investment. This project really highlights our approach to trying to tie strategic initiatives together. So, a few years ago, we started working in this particular area of Austin, expanding our loop around the city because we saw growth happening and we needed to be able to get supply to different parts of that community. Building that trunk line put us near where we would have the opportunity to serve this customer. So, while the customer wasn't on the map a few years ago, tying all of those things together and our commercial people continuing to stay active in the area has created that opportunity to serve it.

ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 So, if you're just looking at the setting and a little bit of pipe that's related to directly serving this customer, it's not a lot of capital but it's because of tying all these other projects together that enabled it. So, that's really the strategy behind how we approach these types of projects. And we'll be able to say a little bit more about the project later as the customer is ready to do that.

Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. A Yeah, Bill. This is Sid. We were fortunate in that – let's go back to before COVID, we found that there was an economic advantage to having a more direct relationship with our suppliers and buying up in the production chain. There were some savings there. And so, we put that into place, and it really served us well during COVID. We've continued to follow that, and we believe it's going to give us some protection in 2025 as we wait to see what the actual tariff environment is going forward. But we think we are fairly well insulated in terms of this year, and so no impact on performance is built into our guide.

Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. A You bet. Thank you.

Christopher P. Sighinolfi Chief Financial Officer & Senior Vice President, ONE Gas, Inc. A Hey, Chris. This is Chris. I'll maybe start in reverse order. Yes, the CP rate came down given the Federal Reserve's last cut was in early December, and it takes a little bit of time for that to get fully profiled in. So, there was a modest benefit. Certainly, on a quarter-over-quarter basis, there was a benefit in the average rate dynamic for commercial paper. You're right that with strong demand meant significant amount of volume sold to customers, certainly a step change from the 16% weather dynamic improvement year-over-year in the quarter. And that does result in a bit more of working capital needs to service.

We're starting to get, obviously as we moved out of winter and into April and early part of May, paid off on those ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 amounts. And so, we see some reprieve from that. But you're right to note that the weather dynamic is supportive of a lot of the sort of cornerstone elements of what we do, but it also entails more in the way of working capital financing needs to do to support it.

As far as like the insourcing program, do you see kind of a timing that that program will be sunset? You kind of mentioned front-loaded O&M or do you see that more as kind of a recurring continuous program for the foreseeable future? Curtis L. Dinan Senior Vice President & Chief Operating Officer, ONE Gas, Inc. A Chris, this is Curtis. And we do still have ongoing activities we're doing in the line locating area. The difference between today and two years ago when we really had to step into it in mass to get to a critical point is we can be more measured in the process. So, in terms of the number of jobs that we create and the number of locates that we insource, we can do it a little more slowly.

So, as we incur those front-end costs in advance of gaining the benefit of those efficiencies, it won't be as significant to us. But that program, we still have quite a way to go just in that function. I mentioned, we are at 40% company-wide. I don't know that our goal would be to get to 100% company-wide but there's a balance related to it, but we still have plenty of opportunity to do that. The other thing I would mention is there are some other areas of activities that we do that we're continuing to evaluate. Are those functions that we should insource? How would we go about it? What would be the pace of that and what's the upside to doing that?

So, I don't look for an early sunset to the different activities because I think our teams are pretty innovative in what they're looking at and finding new ways to bring things in-house, and that helps us from an efficiency standpoint and to manage our workforce and our compliance efforts better.

Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. A Paul, this is Sid. Thank you for the comment. We like the 4% number because to Chris' point, when you think about the impact of employee costs, we know that we're going to bear those costs through the year. We also anticipate that we'll have other opportunities as Curtis just spoke to. And I'd add to Curtis' answer about those efficiency opportunities. It's not just about reducing the cost of compliance activities, it's also giving us the flexibility to deploy our workforce in a more efficient way so that when we have downtime in one area, we can shift the focus of our employee base to other compliance activities.

So, it really is an efficiency gain. ONE Gas, Inc. (OGS) Q1 2025 Earnings Call 06-May-2025 We are not assuming numbers – specific numbers that would cause us to guide below the 4%. So, the 4% is there because we believe that it is – it competently speaks to employee costs that we know are coming and additional efficiency investments that we think we'll have the opportunity to make. But as Chris said, we will always seek to be below that number, we'll always seek to be more efficient. So, that's our goal at the end of the day.

Robert Sid McAnnally President, Chief Executive Officer & Director, ONE Gas, Inc. A Thank you.

Erin Bender DaileyDirector-Investor Relations & Sustainability, ONE Gas, Inc. Thank you all again for your interest in ONE Gas. We look forward to seeing many of you at the AGA Financial Forum in a couple of weeks. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings on August 5. We'll provide details about the conference call at a later date. Have a great day.