ONE Gas, Inc. Q3 FY2025 earnings call

• Sid McAnnally noted that in August, the full-year guidance was raised, and now the 2025 earnings forecast is tightened to $4.34-$4.40 per share. The states served by ONE Gas provide a strong foundation for growth in various sectors.
• Chris Sighinolfi discussed third quarter financial results, including net income, revenue increase, O&M expense details, debt and liquidity updates (e.g., $250 million term loan issued, revolving credit facility increased to $1.5 billion), and dividend declaration.
• Curtis Dinan talked about regulatory filings, in-sourcing initiatives for line locating and Watch and Protect program, strong capital execution with $575 million spent YTD, completion of the Austin System Reinforcement project, and utility scale projects in 3 states with approximately 1.5 gigawatts of capacity in the pipeline.

Third quarter net income was $26.5 million or $0.44 per diluted share compared with $19.3 million or $0.34 in the same period last year. Third quarter revenues reflect an increase of approximately $19.2 million from new rates and $1.4 million from continued customer growth. Operating and maintenance expenses increased approximately 4.9% year-over-year. Capital expenditures are projected to be approximately $750 million for the year. The states served by ONE Gas are key to the nation's energy supply, with growth in core residential and high-growth sectors like data centers, advanced manufacturing, and utility scale power generation.

• 2025 earnings per share expected to be between $4.34 and $4.40, with net income ranging from $262 million to $266 million.
• Capital expenditures projected to be approximately $750 million for the year.
• Fed rate cuts are expected to impact EPS, with an expected 4 additional cuts, and O&M timing issues have tightened the 2025 guidance range due to earlier execution of certain activities.

Q: Maybe just to start at the highest level here. I mean, how are you thinking about the long-term 4% to 6% here given both, obviously, the tailwind of the legislation as well as some of these recent Fed cuts? And maybe, Chris, specifically, I'd love to get your thoughts about what's reflected in guidance and especially what this means for forward-looking views given the latest Fed actions here.

A: Yes. Thanks, Julien. Maybe I'll take those in reverse order. If you think about interest rates and just a reminder, we utilize commercial paper to finance the initial investments we make in rate base before they're included in regulatory outcomes and formally in rate base and to underwrite our investments in gas and storage above recovered amounts. And on average throughout the year, that at present sizing is about $800 million of carried CP. If you go back a couple of years ago, we had outlined -- when the Fed policy rate was at 5.5% and our CP rate was 5.6% to 5.7%. We had outlined a model in our financial forecast of 10, 25 basis rate cuts by the end of 2027. We have achieved with the Fed cut last week 6 of those 10 cuts. They each came earlier than we had expected them to. And that 10 cut in total got down to a rate that we saw as normalized against what the Federal Reserve stipulates its own normalized policy rate to be. So we still expect 4 additional cuts over the next couple of years, in line with the Fed's forecast of normalization. If you think about order of magnitude, at $800 million of average CP and our tax rate, every 25 basis point cut, if true for the full year is about $0.025 of EPS pickup. So we -- our plan did contemplate a normalization in monetary conditions. We've seen that. We've seen that come faster than we initially expected it to, and we do fully expect more to come. If you think about the 4% to 6% EPS guidance range and note that this year, we talked about being at the high end of that range. In the wake of strong year-to-date performance and then the signing of the Texas House bill in June, we had updated our forecast in September's Investor Relations deck to note that we would be above the high end of that range with the impact of those items. So that's as much as I think we'll say now. A reminder, we will have a refreshed 5-year outlook and a more specific 2026 outlook on our normal cadence ahead of Utility Week in December.

Q: If I can follow that up, and I don't mean to nitpick too much, but any color on the tightening of the '25 guidance range? Just you took $0.02 off the top. Like I don't mean to nitpick, but curious to juxtapose that against the comments you just provided a second ago.

A: If you note in my prepared remarks, Julien, it's a good question. I noted that some of our O&M experience this year was the result of doing some activities earlier than we had previously planned to do them. There are certain -- for example, there are certain environmental remediation projects where we received permits to take action earlier than we had expected to. And so there's a couple of million dollars of additional O&M that we expect to bear this year that was not originally in the forecast.

Q: I was wondering if you could -- maybe just on the growth rate that you've indicated would be above the 6% level here through the plan. Just curious if you would consider that to be kind of a structural higher growth outlook for the core of the business? And could that be considered to be longer term? Could we see growth continue at that rate? Or is it more -- is 4% to 6% still the right level? Just maybe depends on the starting year as to how you think about that?

A: David, it's Chris again. Yes, I do believe it is structural in nature. That's why we've outlined it that way. Again, 4% to 6%, the initial high end of that range. And then with some of the changes in the environmental backdrop suggesting in our Investor Relations materials in September that we would be above the high end of that range for the duration of the 5-year period. I think you can look as your question assumes at those component items as being structural in nature and having a carryforward effect that we believe is durable.

Q: I was wondering if you could -- maybe just on the growth rate that you've indicated would be above the 6% level here through the plan. Just curious if you would consider that to be kind of a structural higher growth outlook for the core of the business? And could that be considered to be longer term? Could we see growth continue at that rate? Or is it more -- is 4% to 6% still the right level? Just maybe depends on the starting year as to how you think about that?

A: David, it's Chris again. Yes, I do believe it is structural in nature. That's why we've outlined it that way. Again, 4% to 6%, the initial high end of that range. And then with some of the changes in the environmental backdrop suggesting in our Investor Relations materials in September that we would be above the high end of that range for the duration of the 5-year period. I think you can look as your question assumes at those component items as being structural in nature and having a carryforward effect that we believe is durable.

Q: I was wondering if you could -- maybe just on the growth rate that you've indicated would be above the 6% level here through the plan. Just curious if you would consider that to be kind of a structural higher growth outlook for the core of the business? And could that be considered to be longer term? Could we see growth continue at that rate? Or is it more -- is 4% to 6% still the right level? Just maybe depends on the starting year as to how you think about that?

A: David, it's Chris again. Yes, I do believe it is structural in nature. That's why we've outlined it that way. Again, 4% to 6%, the initial high end of that range. And then with some of the changes in the environmental backdrop suggesting in our Investor Relations materials in September that we would be above the high end of that range for the duration of the 5-year period. I think you can look as your question assumes at those component items as being structural in nature and having a carryforward effect that we believe is durable.

Q: I just wanted to ask about, I think, the additional investment in bringing stuff in-house. Will that impact you think O&M upfront? I know you've been really successful at line locating and maybe you just had a little more cost upfront for savings later. Is it going to be kind of a similar sort of cadence with this and how material would it be?

A: Gabe, this is Curtis. And one of the items that Chris was talking about earlier on some of the things that we pulled forward, it's a continuation of those initiatives. We're opportunistic when we do it, looking at a couple of things, our past experience and where we are in the maturity of those folks that have joined the company and developed and gotten their qualifications to be able to go into full service. And then it's looking at what's available in the market. We've seen a lot of opportunities to hire some really quality individuals to join our company as well as having really good experience of the folks that we've brought in, allowing us to get ahead. We realized some of the benefits quicker. And so that's given us the confidence to move a little bit earlier to in-source some of those additional activities. So it's somewhat episodic in terms of when those larger classes are brought in and we go through that process. But as you said, at the front end of it, it's a little bit higher investment, but it's yielding really good benefits for us. And we continue to expect even more benefits in the longer term.

Q: I was wondering if you could -- maybe just on the growth rate that you've indicated would be above the 6% level here through the plan. Just curious if you would consider that to be kind of a structural higher growth outlook for the core of the business? And could that be considered to be longer term? Could we see growth continue at that rate? Or is it more -- is 4% to 6% still the right level? Just maybe depends on the starting year as to how you think about that?

A: David, it's Chris again. Yes, I do believe it is structural in nature. That's why we've outlined it that way. Again, 4% to 6%, the initial high end of that range. And then with some of the changes in the environmental backdrop suggesting in our Investor Relations materials in September that we would be above the high end of that range for the duration of the 5-year period. I think you can look as your question assumes at those component items as being structural in nature and having a carryforward effect that we believe is durable.

Q: Just a question on the benefits of the legislation in Texas. I don't know if you can quantify what that's been year-to-date and maybe what that would be on a full year run rate?

A: Yes, Bill, I would point you back to the commentary we had in last quarter's call. Effectively, what we were seeking to do with that is give you some context based on our experience with the safety-related 8.209 regulatory structure that's been in place in Texas for a long time. Given that the accounting treatment under that context is now applicable to all capital, we were giving some context about how you would -- you could gross that up on a full year basis. And what we were noting with 8.209 is it was $4 million to $5 million of operating income benefit for about 25% of our capital deployment that would now be applicable to 100% of the capital deployment in Texas. One thing just to note is that capital deployment is not a uniform thing. We don't deploy the same amount of capital every day throughout the year. And obviously, there's a greater impact on projects that close in January than projects that close in December. And so there's somewhat -- I'm a little bit apprehensive to index to any particular quarter or anything of that nature. I wouldn't want you to take a look at third quarter, for example, and think that it's emblematic of every quarter, there are fluctuations that will occur. But I think if you anchor back to the commentary we offered on the second quarter call, that's as good a representation as I can offer you.

Q: I appreciate the comments and the results you're getting on the line locating and bringing that in-house. And I heard你loud and clear in terms of the Watch and Protect program being somewhat less. But just curious, are there other opportunities you see beyond those 2 as we think longer term?

A: Yes. Selman, this is Curtis. And you're absolutely right. There are other things that we're looking at. In addition to the Watch and Protect, we still have more to go in what we want to get to from a line locating process. So I think that opportunity will continue for a few more years in addition to Watch and Protect. There's other areas that we have been using more internal crews to complete around some of our construction projects. So we've been growing our capabilities in that regard, both from an engineering standpoint as well as our execution in the field. So we've relied on those internal resources more, and we've added to those crews to be able to respond to it. So just like our thought processes around the line locating and the Watch and Protect, we'll continue to look for those types of opportunities where it makes sense for us and where we can get more value out of bringing those in-house and again, at the same time, grow our capabilities as a company. So it's a really good spot to be in, continuing to invest and grow in that regard. And we've proven we can do it, and we're seeing the benefits of having taken those actions.