ONE GAS, INC. 2026 Q2 Earnings Call

Thank you, Dennis. Good morning, everyone, and thank you for joining us on our second quarter 2026 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. 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, the Securities Act of 1933, and the Securities Exchange Act of 1934, each as amended. Actual results could differ materially from those projected in any forward-looking statement. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.

This call will include financial results and guidance with respect to adjusted net income and adjusted net income per share, which are non-GAAP financial measures as defined by the SEC. A reconciliation of the company's GAAP net income and GAAP earnings per share to adjusted net income and adjusted net income per share, along with additional disclosures required by Regulation G, are available in the earnings release that we issued yesterday. Joining us this morning are Sid McAnnally, Chief Executive Officer, Chris Sighinolfi, Senior Vice President and Chief Financial Officer, and Curtis Dinan, President and Chief Operating Officer. Now I'll turn the call over to Sid.

Thanks, Erin, and good morning, everyone. Our strong second quarter performance reflects solid execution across the business and the continued strength of our growth strategy, supported by constructive jurisdictions. Adjusted EPS was $0.82 for the quarter, compared to $0.54 in the same period last year. Through the first half of the year, we've grown adjusted EPS by 16% over last year, despite weather that was 25% warmer. Importantly, we delivered these results while keeping the average customer bill flat year-over-year and increasing our dividend. This balanced approach to operating a 100% regulated company is intentional. Our strategy is to strengthen our delivery system and grow the business through disciplined investment while keeping our long-term customer bill growth in line with inflation. Combined with the legislative and regulatory framework that supports investment and economic development, we're able to deliver growth that is both durable and sustainable.

The opportunity to serve large load customers continues to broaden across our service territory. Rising demand is being driven by ongoing electric load growth and the need for reliable, dispatchable energy. Interest from gas-fired generation, data centers, and advanced manufacturing has grown meaningfully, creating additional avenues for sustainable long-term growth. We expect the factors driving our strong performance in the first half of this year to continue, and we now expect to achieve adjusted earnings within the upper half of our 2026 guidance range. We're confident in our outlook, which is supported by new rates taking effect and continued customer growth, along with ongoing benefits from constructive legislative developments in Kansas and Texas. Now I'll turn it over to Chris to discuss the details of our financial performance and regulatory activities.

Chris? Thanks, Sid, good morning, everyone.

Adjusted net income for the second quarter was $52.1 million, or $0.82 per diluted share, compared with $32.7 million, or $0.54, in the same period last year. A 52% increase. On a GAAP basis, EPS was $0.74, compared with $0.53 last year, a nearly 40% increase. These results were supported by approximately $16 million of new revenue from new rates and greater than anticipated benefits from Texas House Bill 4384. As we have discussed previously, the Texas House Bill supports economic development by allowing natural gas utilities to defer depreciation expense and ad valorem taxes and accrue a carrying cost on capital expenditures between the time of project in-service and its inclusion in rates. The impact will fluctuate by quarter based on the timing and amount of eligible capital placed into service.

Given the cadence of our annual GRIP filing, we generally expect the second quarter to represent a larger share of the annual benefit with a smaller contribution in the third quarter. This timing reflects how eligible investments are accrued before the annual GRIP filing takes effect. Once the filing is reflected in customer rates, the amount recognized through accruals declines in the third quarter before building again. With first half 2026 results complete, we now expect House Bill 4384 to contribute approximately $0.42 to full-year adjusted EPS. This expectation, along with new rates and ongoing cost discipline, gives us confidence in raising our financial expectations for the full year. As I noted on our last quarter call, the warm winter weather created some positive offsets, which we expected to see play out later in the year, that has proven true.

We consumed less gas for storage this winter than we would have under normal conditions, finishing the first quarter with inventory levels about 25% higher than we had planned. Higher spring storage balances mean we have less to inject this refill season, creating the opportunity for capacity release in Kansas, the revenues from which we share 50/50 with customers. Net to our interests, we recognized about $900,000 in related revenue during the second quarter and have realized a total of $2.8 million in capacity release revenues year to date. We believe an incremental $1.2 million in capacity release opportunities remain through the injection season. Second quarter O&M expenses increased approximately 6.6% year-over-year, moderating from the first quarter increase. Line-locating tickets, largely related to fiber installation activity, remain elevated, reflecting continued construction and economic activity across our service territories.

We have also experienced increased fuel costs from our fleet due to geopolitical unrest. We are not changing our 3%-4% long-term guidance for annual O&M increases, however, and expect the sequential growth in overall O&M expenses to move meaningfully lower over the back half of this year. Excluding amounts related to KGSS-I, second quarter interest expense decreased by $3.8 million compared with the prior year, due in part to lower commercial paper rates. Turning to equity, we have forward sale agreements in place which total approximately $41.5 million, roughly half our need for this year. We will continue to be opportunistic about issuing equity as we meet our remaining needs, which, given our trading liquidity, can easily be funded through our ATM program. Yesterday, the ONE Gas Board of Directors declared a dividend of $0.68 per share, unchanged from the previous quarter.

Our financial guidance for the year remains adjusted net income of $306 million-$314 million and adjusted EPS of $4.83-$4.95. With strong first half performance and the impact of the Texas legislation, we expect to achieve adjusted earnings within the upper half of these ranges, or $310 million-$314 million and $4.89-$4.95. Now I'll turn to regulatory activities. Oklahoma Natural Gas filed its annual performance-based rate change application in February, seeking a $28.7 million rate increase. At the hearing in June, the administrative law judge recommended approval of the application as filed. Interim rates subject to refund were implemented in late June. Texas Gas Service made its Gas Reliability Infrastructure Program filing in March, requesting a $36.9 million revenue increase. In June, the Texas Railroad Commission approved the requested increase, and new rates became effective in July.

This was our first statewide GRIP filing and the first to reflect the expanded benefits of Texas House Bill 4384. Kansas Gas Service filed an application under the Gas Reliability Surcharge statute in July, seeking an approximately $14.3 million increase, with rates expected to take effect in October.

The filing reflects the expanded recovery provisions under House Bill 2435, which broadened eligible investments to all direct capital investments in Kansas, increased the maximum residential monthly surcharge to $1.35 from $0.80, and shortened the review period to 90 days from 120 days. We do not have any full rate cases planned until we file the Oklahoma rate case in 2027, as required by tariff. Now, Curtis, I'll turn things to you.

Thank you, Chris, and good morning, everyone. I'll start with an update on growth and capital deployment. We completed $188 million worth of capital projects this quarter, relatively in line with the same period last year. Growth across our service territory remains broad-based. Through July, we installed 11,000 new meters, led by Oklahoma City and El Paso. Beyond this ongoing residential growth, we are advancing large load opportunities and currently have three high-volume projects under contract. Together, they represent roughly $15 million of incremental annual revenue and $175 million of associated capital within service dates spanning the second half of 2026 through 2028. One of these projects is the Western Farmers Gas-Fired Generation Project, which was announced late last year. We are preparing to bid the construction contract and expect to begin installation early in 2027. The project remains on track for a Q3 2028 in-service date.