ONE Gas (OGS) Q2 2025 earnings call transcript

Thank you Elliot. Good morning everyone and thank you for joining us on our second quarter 2025 earnings conference call. This call is being webcast live and a replay will be available later today. After our prepared remarks we are 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 me on the call this morning are Sid McEnally, President and Chief Executive Officer, and Curtis Dining, Senior Vice President and Chief Operating Officer.

Now I'll turn the call over to Sid.

Thanks Chris and good morning everyone. We're glad to be with you to discuss our second quarter results. Our strong performance this quarter reflects the consistent execution of our regulatory strategy, discipline to cost management, and increased customer demand. Net income for the quarter was $32 million or 53 cents per diluted share driven by new rates and an expanding customer base.

Given our results through the first half of the year, we are raising our full year 2025 financial guidance. We now expect net income between $261 and $267 million and earnings per diluted share between $4.32 and $4.42. This revised outlook reflects robust growth and the positive impact of Texas House Bill 4384, which was enacted earlier this summer and supports recovery of system investments in Texas.

Our 2025 equity needs, along with a portion of those expected in 2026, have been met through completed equity raises. Chris will elaborate more in a moment. We now have more than $226 million in expected proceeds secured under forward agreements and our well positioned to support our capital plan. We also continue to make progress on key regulatory matters during the quarter.

Curtis will speak to those in more detail. We appreciate the constructive engagement with regulators and stakeholders across our jurisdictions. Now I'll turn it back over to Chris for the financial details. Chris?

Thanks, Sid. As Sid mentioned, we have increased our 2025 financial guidance. Strong year to date performance, combined with the estimated impact of Texas House Bill 4384, which was signed by Governor Abbott on June 20, supports are updated for your outlook. We now expect net income between $261 and $267 million and diluted EPS between $4.32 and $4.42. Both two and a half percent above the respective midpoints of our initial guidance ranges.

We continue to project capital expenditures of approximately $750 million this year. Net income for the second quarter was $32 million or 53 cents per diluted share, compared with $27.2 million or 48 cents in the same period last year. Second quarter revenues reflect an increase of approximately $21.1 million from new rates and $1.5 million from continued customer growth.

Our operating and maintenance expenses increased by 7.5 percent year over year in the second quarter, broadly in line with our expectations. The increase primarily reflects higher labor-related expenses and the timing of other expenses. We continue to expect full-year O&M growth consistent with our guided 4 percent Kager. Excluding amounts related to KGSS1, interest expense in the second quarter was $1.3 million lower than the same 2024 period, primarily due to a lower weighted average interest rate on outstanding commercial paper balances.

This is the first quarter we have seen a sequential decline in interest expenses since 2021. Our conservative approach to modeling commercial paper rates amid macroeconomic uncertainty over the past few years has served as well. As a reminder, we do not have any interest rate cuts in our 2025 plan. In May, we executed a forward sale covering 2.5 million shares of common stock at a net price of approximately $78.5 per share to be settled by the end of 2026.

With this transaction, we now have forward sale agreements covering a total of 2.9 million shares. Had these been settled at quarter end, we would have received net proceeds of approximately $226 million.

As Sid noted, these transactions fully satisfy our 2025 equity needs and partially cover our anticipated 2026 requirements. In aggregate, existing forward represent roughly 40% of our articulated five-year equity needs. We'll continue to evaluate market conditions and remain opportunistic where it makes sense to support our capital plan. On Monday, the one gas board of directors declared a dividend of 67 cents per share unchanged from the previous quarter.

And now Curtis, I'll turn things to you.

Thank you, Chris, and good morning, everyone. I'll start with an update on our regulatory activities. The Oklahoma Corporation Commission recently approved a $41.1 million revenue increase pursuant to the performance-based rate change application that was filed in February with new rates effective in June.

Texas Gas Service filed a rate case in June that covers all customers across our Texas service areas. The filing requests a $41.1 million rate increase and proposes consolidating these service areas into a single jurisdiction.

The filing was submitted to the cities, including Austin and El Paso, and to the Railroad Commission for the unincorporated areas. It is based on a 10.4% return on equity and a 59.9% common equity ratio. If approved, new rates would take effect in the first quarter of 2026.

In June, we also implemented rates for gas reliability infrastructure program filings resulting in a $15.4 million increase for the central Gulf service area and an $8.2 million increase for the West North service area. We also submitted a grip filing in the Rio Grande Valley service area in April, requesting a $3.2 million increase to take effect in September.

Finally, the Kansas Corporation Commission approved a $7.2 million increase under the gas system reliability surcharge statute with new rates taking effect this month.

As we continue investing in system safety and reliability to meet the growing demand for natural gas, we remain focused on keeping customer costs manageable. Affordability is a key consideration in our planning and implementation of rate mechanisms, and we will continue working with regulators and stakeholders to balance system needs with customer impact.

Turning to operations, the second quarter broad and usually wet conditions across our service territories. Oklahoma recorded its wetest April on record, and many areas in Oklahoma and Kansas saw record rainfall. Despite persistent storms and localized flooding, our teams closely monitored flood-prone locations, and we did not experience any material service outages. The severe flooding in central Texas over the 4th of July holiday did not directly impact our service areas or any of our coworkers.

Our thoughts remain with the communities affected by this devastating event. Amid these challenging conditions, we continued to execute on our capital program, completing $190 million in capital projects this quarter, relatively in line with the same period last year. Progress continues on the Austin System Reinforcement Project, our largest capital investment since our separation from One Oak in 2014. This project will introduce a new source of supply and expand system capacity to support growing demand in the Austin area.

Today, we've installed more than 43,000 feet of pipe and remain on track to have the project in service during the fourth quarter of this year. Regarding growth, we installed nearly 11,400 new meters through the first half of the year as new housing developments continue to expand across our service areas. The second quarter sustained the momentum we saw in the first, with both quarters delivering more than a 9% year over year increase in new customer additions.

Growth remains strongest in the major metropolitan areas across our territory. We continue to field inquiries and pursue opportunities to meet the growing needs of data centers, advanced manufacturing, and utility-scale generation. Our approach is deliberate and grounded in identifying projects that enhance system resiliency, position us for additional growth, and align with customer needs. These efforts focus on scalable opportunities in growing areas where natural gas infrastructure can deliver long-term value. We are encouraged by the momentum we are seeing and look forward to building on that progress in the second half of the year.

And now I'll turn it over to Sid for closing remarks.

Thanks Curtis. We're pleased with our performance in the first half of the year. We delivered strong operational and financial results, raised our full-year guidance, advanced regulatory efforts across all jurisdictions, and strengthened our capital position. As we look to the remainder of the year, we remain focused on discipline, execution, and long-term growth across our business. I want to express my appreciation to our service and reliability, enables us to meet our mission and deliver the benefits of natural gas to the customers and communities that we serve.

Operator, we're now ready for questions.

Hi, David. It's Chris. Perhaps some background will be helpful in addressing your question. In 2011, the Railroad Commission adopted Rule 8.209 of the Texas administrative code, which allowed natural gas utilities in the state to defer depreciation and ad valorem tax and to accrue a carrying charge on qualifying safety-related capital expenditures until their next filing. As you can see in our investor materials, we are planning to spend just over $300 million in Texas this year, and roughly 25% of this amount qualified for the accounting result in roughly $4 to $5 million of annual pre-tax earnings. House Bill 4384 extends those deferrals and accruals of $8.209 to all of our capital expenditures in Texas.

It was signed into law on the 20th of June, and the RRC is now engaged in drafting procedural rules around it, a process that it has until next spring to complete.

So it's additive to the plan we communicated last December. As you think about to your point, the process is no different than simply taking the applicable capital that was covered by $8.209 and expanding the capital applicable to that treatment to all of our capital activities in Texas.

Yeah, that would be correct.

Thank you, David.

Any thoughts or initial impressions you can share on the comfort in using the increase growth rate, and I know you have the guidance of the high-end of 4 to 6 off of 24, just any initial thoughts you can share will be helpful. Hi, Paul. It's Chris again. Yeah, if you and that you followed us for a loss, you understand, our process is rather mechanical and metronomic. We just roll forward. And so we intend to use 2025. The updated midpoint of guidance should remain the same at that point as a base point for the new five-year range, consistent with how we've always done it since the separation from one of 11 years ago.

Paul, it said thanks for that question. As you know from following the company, we have an intentional process to go through both on the system integrity side and on the growth side. And so we remain committed to that. You shouldn't expect to see any change in our approach on either of those. A system integrity will respond to the needs of each state in our jurisdiction based on the needs. We've been true to that since then in 2014 and we'll remain true to that going forward.

On the commercial side, you know, we do continue to see substantial growth in our Texas jurisdictions. So you can expect that growth trajectory to follow the activity that's well known in Texas, but we won't make significant swings or changes because of that. We will respond to the opportunities that develop as we see communities continuing to develop, not just in the Austin area but across the state. So we like the plan that we have. We plan to execute it.

As you heard, our first half results have demonstrated an increase in growth beyond what we projected. So we think that all sets up really well for the second half.

Curtis, would you add anything? I would just add a little bit of color or context to that said from the growth that we've been seeing coming into the states, both Oklahoma and Texas and to some extent, Kansas have seen net positive in migration over the past few years. As an example, in Oklahoma City and Tulsa, we've seen an average of plus 7% in migration, a lot of job creation over that period and the same thing's true in Austin and El Paso. Those would be the bigger drivers that would have an impact on where capital gets spent, not on the integrity spend, which again is 70% of our capital typically each year.

Paul, the only thing I'd add in closing is that Curtis spoke to the progress that we've made on the Austin System Reinforcement Project. So when you think about system integrity, it's not just replacement programs, it's also building new infrastructure to serve these growing areas. And so that's what generated the project that Curtis referenced, that we've had some progress on the construction and we'll keep you up to date as that project comes into completion.

Chris, this is Curtis. And in the five-year guidance we had, we were contemplating a consolidation case in Texas. You'll recall from the remarks I made at the beginning, we did all of our normal grip capital filings in the early part of the year. So this filing is more about catching up O&M expenses from the inflationary periods and then a consolidation of those jurisdictions.

This has been an effort of the company since the early 2000s when we acquired Texas to consolidate the different service areas. I think we had 18 at one point. And the benefit of that happens in the process. There's less frequency of times that you need to go file rate cases. And ultimately that produces the savings for the customer because it reduces all the administrative costs of going through that process. So it's good in that respect and then it equalizes what's happening in the state across a larger customer base so it diminishes the impact of things that may happen in one service territory from time to time and reduces or mitigates how that impact may be felt by those individual customers.

So again, the biggest part is the efficiency of it. It's fewer filings, it's lower cost and we think that has been a positive that we've seen in the period as we've been going from 18 to 3 and hopefully to a statewide rate mechanism at the completion of this.

Chris, there are a number of those that we're pursuing. I would say the number of inbound calls that we're getting is quite significant and we have a fairly stringent process that we go through to strain out the ones that we think have the most potential or most fit with what our strategic objectives are. And as I said in the comments, what we're trying to do is identify projects that further help enhance our system resiliency. So like an Austin system reinforcement project that's bringing much needed supply into that area, if you have the opportunity to combine a new commercial opportunity with reinforcing your system or focusing on system integrity, focusing on other long-term growth or whatever customer needs are, we're trying to pair several of those things together to use that as a project because we think that in the long run is the best opportunity for our customers and from an affordability standpoint, that's a really good use of our capital dollars rather than doing each of those things individually and in a discrete fashion that may lead to higher capital costs.

So it's not just in Texas that we're seeing that, we're seeing it in Oklahoma and we're seeing it in Kansas also and it's data center load, it's advanced manufacturing, there's a project that I think is getting pretty close for us that's both advanced manufacturing combined with the data center and there's of course some electric scale generation that we're in various stages of discussions with. So all of those things are positive and as I said we're trying to marry those with other types of projects that we have on the drawing board and marry those so whereas efficient as we can be with the capital that gets deployed.

We'll be ready hopefully you're in the very near future to talk more about it.

You bet thanks for the questions.

Salman there's both. There's some that I think are more immediate that it's not a large capital project or a lot of capital dollars to serve those companies because one of the benefits of being involved in the economic development that our states are doing is we're much earlier in the process when these companies are going through their site selection process and so they may have an eye in a certain area but they want natural gas service. Well if it's a customer that needs to be very quick to market and that particular area that they first look at is going to be longer or a more expensive project to get to but we can serve them in this other location much quicker we can steer them in those directions and help get them in service much sooner than that other project.

So there's different types of those discussions happening sometimes again it's in an area of the system we have a lot of capacity and we can serve them very quickly. Other projects it's a little bit further away there's more assets that have to be built to serve them and so it's going to take a little bit longer. So I'm optimistic both in the near term with some of the projects that are there but I see a long runway of opportunities developing also.

Selman this is kind of just in addition to Curtis's answer and you follow the company for a long time so you know this well we've got organic opportunities across the footprint that gives us the ability to evaluate these projects in a different way than if we didn't have that level of growth. So we can bring a discretionary view to projects and to Curtis's point look at how they support our strategic plan in the long run in terms of the system build out and areas that we want to expand into so the cone that Curtis and his team have developed is pretty robust and allows us to be very thoughtful about which projects we engage in and be quick to sideline other projects which is a much more efficient way to go about this marketplace.

Thank you Elliot and again to everyone for their interest in one gas. Our quiet period for the third quarter starts when we close our books in early October and extends until we release earnings on November the third. We'll provide details about the conference call at a later date. Have a wonderful day.