ONE Gas, Inc. Aktie

Good day, and welcome to the ONE Gas Second Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Dailey. Please go ahead, Ms. Dailey.

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 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. 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. And 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 are 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, and 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 accruals declines in the third quarter before building again. With first half 2026 results complete, we now got 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. And 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 interest, 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 for our -- from our fleet due to geopolitical unrest.

We are not changing our 3% to 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 to $314 million and adjusted EPS of $4.83 to $4.95. But 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 to $314 million and $4.89 to $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 brought eligible investments to all direct capital investments in Kansas, increased the maximum residential monthly surcharge to $1.35 from $0.80 and shorten the review period to 90 days from 120 days. We do not have any full rate cases planned until we filed the Oklahoma rate case in 2027 as required by tariff.

And 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 3 high-volume projects under contract. Together, they represent roughly $15 million of incremental annual revenue and $175 million of associated capital with in-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. It includes the construction of a 43-mile 24-inch pipeline in Southern Oklahoma. The other 2 contracted projects are already in construction or commissioning. One of the projects is in El Paso to serve an advanced manufacturing facility and the other will serve a data center in Oklahoma. Both are expected to be placed in service this quarter.

On our last earnings call, we noted 6 additional projects in late-stage discussions that, in aggregate, could support approximately 3 gigawatts of generation and up to 1 Bcf per day of demand across Kansas, Oklahoma and Texas. One of those 6 projects is the Oklahoma data center that I just mentioned, which is now not only under contract but expected to be in service this quarter. This project highlights one of our strategies in pursuing large load opportunities.

By leveraging our existing pipeline network, we can respond quickly to meet customer needs and create value for all customers. The remaining 5 projects are in late-stage discussions and project scoping and represent our highest conviction prospects. We have 17 additional opportunities in early stages of evaluation and we'll provide updates as the projects advance.

Turning to O&M. Our coworkers continue to drive improvements in workforce efficiency and safety. Second quarter line locating activity increased approximately 7% year-over-year, while damages declined 6%. This highlights the operational benefits of bringing certain work in-house. In addition to the in-sourcing progress on our line locating function, we have also insourced 40% of the Watch and Protect function in Oklahoma and are on track to have that fully insourced by year-end. This initiative further demonstrates our focus on operational excellence by enhancing safety and system integrity while driving more effective management of O&M expenses.

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

Thanks, Curtis. We operate in a region that continues to experience residential growth driven by economic development. Kansas, Oklahoma and Texas have business-friendly policies and regulatory frameworks that attract investment and support growth. Our states also enjoy abundant natural gas resources and extensive infrastructure, creating an attractive environment for large load customers. We are well positioned to serve this growing demand, driving sustainable growth and shareholder value all while maintaining our commitment to safety and affordability.

Our performance over the first half of the year reflects the strength of our strategy, the quality of our execution and our ability to capitalize on the opportunities before us. The disciplined focus of our coworkers and their commitment to safety and operational excellence continues to drive our success. I want to thank each of them for their contributions and dedication to serving our customers and our communities. As we look forward, we continue to see a clear runway for growth and remain focused on serving our customers while generating attractive returns for our investors.

With that, we'll open the call for questions.

[Operator Instructions] And your first question is from the line of Constantine Lednev with Wells Fargo.

It's actually Alex on for Constantine. Just in terms of the capital allocation strategy on a go-forward basis, some of the improved regulatory contracts you've highlighted, do you see maybe a CapEx shift or pull forward of capital if the better [indiscernible] with less ROE lag? And maybe just to frame that, would you provide sort of accretive opportunity within your current 5% to 7% longer term?

Alex, this is Curtis. And let me just talk first a little bit about how we think about capital in general. So the first thing our capital focus is on is our system integrity sending, and that typically represents about 60% to 70% of our capital budget. So that is agnostic to regulatory treatment in any of our jurisdictions. That's purely driven by the needs of our system and the replacements we need to make. In terms of allocating other capital, our growth capital that's driven mostly by what customer needs are and where those growth opportunities are taking place.

We're seeing that in all 3 of our states and across the different types of projects that I mentioned in my comments and Sid also mentioned in his, whether that's utility scale generation, it's advanced manufacturing or it's data center opportunities, Again, that exists in all 3 states. We're seeing a little bit higher level of activity with customers in the state of Texas, which as your question suggest, that's beneficial to us because of the legislation that we talked about earlier. So where there is the opportunity the greater opportunities are or in Texas. That, again, is driven a lot by what the customer needs are and being able to respond to what's in the marketplace.

Alex, to your second question, you can expect us to continue to be very open handed in the reports that we offer the Street relative to the capital projects in front of us. We have a great deal of confidence in our execution going through the remainder of this year. But we don't see limitations in the years to come. Your question about our 5% to 7%, we offered that guidance in December of 2025, and we will continue to execute this plan and look forward to the opportunity to speak to the investment community about 2027 later this year.

Got it. That makes sense. And then just touching on the dividend policy. It's been credit supportive. So just the current policy of 1% to 2% growth still makes sense with the improving cash flow metrics and sort of where do you sort of want to be over the long term relative to your peers?

Alex, this is Chris. That is a Board decision. It's a discussion with them on a quarterly basis. But the 5-year plan that we communicated last December, the same plan Sid just referenced, did contemplate a 1% to 2% growth rate in the dividend annually through the duration of that plan. So through 2030. We think about it in a cash flow modeled basis and 100% regulated company as we are, where we have actual capital structure in our rate designs in all 3 states, we believe the best return on investment and the fastest earnings per share growth rates can be achieved as we self-fund a greater percentage of our capital investments.

And so the strategy around the dividend, the deceleration in dividend growth, which we put in place 3 years ago was really driven to pivot our funding structure to be more self-funded from an equity perspective. You've seen the payout ratio fall from 68% a couple of years ago to an implied 57% on a GAAP basis this year. That will continue to moderate as our plan runs through. And the point of lift off in terms of the when are we satisfied that we have internally funded the growth strategy of the business and when can elevated levels of dividend growth be offered. That's going to be an active conversation as we come into the planning process this fall.

Our next question is from the line of Richard Sunderland with Truist Securities.

I wanted to go back to the start of the script and that opportunity around the large load customers. You talked about interest across a number of avenues and growth there. Is that reflective of kind of new inbounds you are seeing across generation data centers, advanced manufacturing? Or is this a continued trend that you've been speaking to for several quarters now? Just trying to get a sense of the customer side and maybe how that feeds into the 17 projects in other stages of evaluation also offered in the script?

Richard, this is Curtis. And these are normally kind of longer lead type of development. So these are customers that we've been working with for a period of time, developing the projects, trying to understand what their needs are and as they go through their investment decision process where they're supporting them to think about options and how to approach the different opportunities. There are other projects in that mix of 17 that have come up much more quickly have gone very quick to -- we know that there's limited capacity in this area, and we want to secure that supply as we continue to finalize their investment decisions.

So it's a mix of those and again, that's across all 3 states and each of those different types of categories that I was describing earlier. We continue to make progress on them. And as I said in my comments, we'll have -- we'll share more once additional projects reach final investment decisions, and they're under contract with us.

Understood. That's helpful there. And then just on the numbers themselves and I guess some of the O&M cometary in particular, you spoke to 1H versus 2H dynamics. Could you parse out a little bit more in terms of the O&M trajectory on 2H basis that you're expecting? And is there any kind of knock-on effects in the '27 on how you're staging some of that activity this year versus next?

Rich, let me offer just a little bit of context and then ask Chris to go into detail and responding to your question. We started some years ago looking at the opportunities that we had to insource some work. And as we piloted those programs, we realized that not only could we match or beat the cost that we were experiencing externally, we saw a significant step-up in the quality of the work that was being done. So over the last few years, we've been fairly aggressive in in-sourcing and line dating, and we're coming to a point in that project where we're finding the balance that we saw a few years ago when we started.

As Curtis said, we've shifted that over and watch and protect. That's where we send folks out to watch our system when we know that there's construction around critical areas of the system and we're seeing the same level of performance there. So as we signal both in our first quarter call and in this call, we knew that we would see escalated O&M related in part to increased in-sourcing and we continue to recognize the efficiencies of that as we go through the remainder of the year. So the shape of O&M through the year is something that we did to signal all along and we continue to be committed to the fact that we're going to see a pretty significant reduction in the second half. Chris?

Rich, to follow on from Sid's comment, I mentioned in the prepared remarks that we expected as you look at a sequential growth in O&M from the prior period to the current period to see a meaningful step down in the back half. We were 8-plus percent in the first quarter and 6% and change in the second quarter. Your expectation should be meaningfully below that in the third and fourth quarters. There are external factors. Curtis mentioned line-locate activity up 7% year-over-year. So there's a lot of economic growth going on in our territories. That's a cost that we bear that we have to respond to, to locate our assets on behalf of others who are digging.

I mentioned in my prepared remarks, fuel costs, we're paying close attention to what refined product inventories look like and the dynamics with that we travel about 10 million miles a quarter in customer in company-owned vehicles. So you think about the $9-ish million of additional O&M expense this quarter versus last year in the second quarter, about 15% of that was fuel -- elevated fuel year-over-year. So we've baked all of that into the expectations that I'm offering you.

As you think about a cascade in the future, we talked about a 3% to 4% long-term O&M growth rate. We do -- so as you think about it, it will cascade to lower levels of annual O&M growth in future periods. Some of that is driven by the benefits of the in-sourcing effort that Curtis has noted, primarily line locating, but now, Watch and protect, and they continue to explore other functions that are worthwhile for in-sourcing.

Your next question is from the line of Julien Dumoulin-Smith with Jefferies.

This is Luke Fenker on for Julien. I just wanted to ask if you could quantify the benefits from HB 4384 this quarter and how that showed up across D&A and interest expense and if not, maybe color on how we should think about cadence for the rest of the year after the July GRIP reset would be helpful?

Luke, this is Chris. I don't have it for the quarter. If you thought about it maybe in the first half of the year, across both the elements included in GAAP and then the non-GAAP adjustment, which reflects the equity return, it's about $0.28, $0.29. As you think about the back half, one thing to note is the benefits, the accrual benefits, I spoke about this in my prepared commentary is driven by capital in service in Texas.

So a reminder, the largest project that we've completed as a company was the Austin System Reinforcement Project, which was in Austin as the name implies, and was placed into service in the third quarter of last year. So the first full quarter for which this legislative benefit was available, our largest project took effect. We don't have projects in Texas of that caliber plan for the back half of this year. And so as you think about sequentially back half last year to back half of this year, I would just note to you that we had a very large project take effect in the third quarter that we don't see this year. I did note a $0.42 full year impact anticipated given what we now know from first half performance.

Got it. Yes, that helps. And then maybe you previously discussed evaluating low-cost rate protection, including a [indiscernible] color for commercial paper. Can you update us on where that valuation stands and whether you expect to put any hedge structures in place this year just given expectations with rising rates?

Yes. Thanks, Luke. We did explore that, you're right, to raise it. And we are not of the mind to pursue it at the moment. It's something that's available to us. But as we thought about the cost of that structure and some of the complexities around it, mainly some of the volatility that it may introduce to our earnings reports on a quarterly basis. We didn't feel like it presented the value that we maybe initially thought it might. In addition, as we thought about the voting members of the FOMC and yes, the markets focus a lot on is the next move 25 basis point hike or how many hikes might we have through the balance of the year.

The expectations were for 3 rate cuts at the beginning of the year and now the market expectation is for 2 rate hikes. But if you think -- if you watch the dot plot and think about where each of the FOMC voting members is positioned for future expectations, they all see a lower Fed funds rate as you scroll out through '27 into '28 and '29. They all represent the current level of Fed funds rate as restrictive relative to a broadly 3% neutral rate. And so with all of those factors, it's not something that we have decided to take action on today, but it does -- it still represents an option to us.

Your next question is from the line of David Arcaro with Morgan Stanley.

This is Amanda on for Dave. Maybe just on the expectation rate. Anything that you could speak to in terms of specific aspects that give you confidence to land in that upper half? I know, Chris, you mentioned the Texas House Bill combination. Just wondering if there are any other specific moving pieces that you would point to for the raise?

Amanda, Well, that's one of them. Another is some of the solidification of some of the projects that Curtis mentioned. I mean you mentioned one that had moved from sort of prospect to in service this quarter that will start contributing in a way that we were not totally certain about before. And then as I talked about O&M and a real focus internally coming off the winter, we had spent some time on last quarter's call about levers we thought were available to us that could help us moderate from a cost standpoint and overcome some of the margin hit that we took in the first quarter with the weakness in the weather dynamics.

As we've walked through that with teams throughout the company, we have a greater level of confidence and cost discipline through the back half of the year.

And Amanda, this is Sid. I'd just add that the capacity release program has been a real success and credit to our gas supply team for the way that they've taken advantage of what was excess supply coming out of a relatively warm winter with the exception of one significant storm. I also want to point back to question in Chris' comment, when you think about the way that the projects come into service, they come in, in a way that we have some visibility around but not perfect visibility around. But the funnel that Curtis speaks to is one that will allow us to have ongoing projects.

And so we do have forward visibility into what the marketplace looks like in terms of projects and the probability of those projects. We've been very intentional in building a funnel that allows us to evaluate opportunities and to take advantage of those that we think are beneficial not only to our investors, but also to our customers in the way that they are positively impacted by some of the projects that we've already talked about and projects that we're working for the future.

So the Austin system reinforcement project came online last year, and there are other projects of scale in addition to Western Farmers there just to Curtis' point, not to the point that we want to talk about them publicly because we don't talk about projects publicly until we have contracts in place and a high level of certainty.

Great. To the extent that you can, maybe just a follow-up on that in terms of maybe like timing of those large load opportunities between generation data centers and manufacturing, I guess, you pulled one of the projects forward, but kind of what does that look like for the remaining 5 projects in late stage and the 17 in the early stage?

I think I made the comment on the first call, Amanda, this is Curtis. About the ones that we put in the late stage, we thought there was a decent probability that those would move into a contracted stage here in fiscal '26. And in fact, one of those did. We're still working on the other projects, and we could be in a position where they're signed and announced before the end of the year. If not, it would likely be in the first part of 2027. In terms of the other 17 that I mentioned, those are, again, a little bit earlier stages of evaluation, working with the customers to figure out exactly what their needs are and what their timing is going to be. And so that's really what will drive getting to a final point where we speak publicly about them specifically.

Your next question is from the line of David Paz with Wolfe Research.

Looking out to the back half of your plan, the better results this year pushed you to the upper half of that 5% to 7%, say, like in 2029, '30 off your current 2025 base?

Yes, David, thank you for the question. As you heard in our prepared remarks, we were confident moving into the upper half of the range given performance in the first half. And we have a fairly high degree of confidence as we go into the first half and are engaged in our planning for 2027. So we look forward to coming back to you at the appropriate time with more insight into what 2027 looks like in the forward 5-year guidance. Anything you'd add, Chris?

No, I think that's right. David, if you think about, we've had some developments this year that we did not anticipate in the plan last year. The expansion of our GSRS mechanism in Kansas is one we've talked with you and others about. The conversion of some of the large load, and I think some of the maturation of what exists in the funnel and continues to be added to the funnel is additive in a way different than we thought about 9 months ago, 12 months ago. So those are supportive functions that I think wise to pay attention to.

Got it. And just following up, when you do give your update on this fall, I believe, will you be -- do you expect to rebase it off of a new year? Should we assume still '25, given '26 and '27 are, I don't know if you want to say abnormal, but they're not in that 5% to 7% range?

No, you should expect from us a consistency where we would use as the base the current guidance at that time for 2026. That has been our practice since we separated from ONEOK. And one of the things that you kind of -- you understand if you back test is that if we achieve what we aim to achieve, which is the upper half of this range, and you look at where we started in 2014, you will see a compound annual growth rate of adjusted EPS that's north of 7%, yet we've never really guided that level.

And so the consistent outperformance that we've generated has kind of gotten baked into the historical performance in a way that maybe doesn't get fully captured by the forward guidance. We ratchet forward every year, which means outperformance like this year or we outperformed last year, and we outperformed in '24, sometimes gets overlooked by forward guidance in a way when you compare it to the peer set. I think that we just focus your attention on that.

That concludes the question-and-answer session. I would now like to hand it back to the ONE Gas team for closing remarks.

Thank you again to everyone for your 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 2. We'll provide details about the conference call at a later date. Have a great day.

This concludes the ONE Gas Second Quarter Earnings Conference Call and Webcast. You may now disconnect.

Good day, and welcome to the ONE Gas First Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Dailey. Please go ahead, Ms. Dailey.

Thank you, Regina. Good morning, everyone, and thank you for joining us on our First Quarter 2026 Earnings Conference Call. This call is being webcast live, and a replay will be made available later today. After our prepared remarks, we are 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 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. 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 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. And now I'll turn the call over to Sid.

Thanks, Erin, and good morning, everyone. We're glad to be with you to discuss our first quarter results and to affirm our guidance. We delivered strong results in the first quarter with adjusted EPS growing 6% year-over-year despite one of the warmest winters in the history of our service territory, 25% warmer than the first quarter last year. Our performance reflects disciplined execution of our long-term plan, advancing our regulatory strategy, driving operational efficiencies and supporting growing customer needs. We continue to meet our growth targets while maintaining a strong focus on customer affordability, which was particularly important during a volatile winter.

While conditions were historically warm across Kansas, Oklahoma and Texas, we did experience Winter Storm Fern in January, a brief isolated cold event that temporarily drove higher gas prices across our service territory. Our 20% increase in storage capacity since Winter Storm Uri allowed us to shield customers from price volatility and save $98 million relative to purchasing gas at spot prices. Ultimately, this performance reflects the same focus that guides our business every day: safe, reliable and affordable service to our customers and long-term value creation for our investors.

Safety remains a priority for our company. Our strong performance in 2025, especially in the areas of workplace safety and safe driving continues to place ONE Gas among the safest natural gas utilities in the nation. The Safety Achievement Award is given each year by the American Gas Association to companies who experienced the fewest number of serious injuries when compared to peers. Last month, AGA named ONE Gas as the winner of this award for 2025, the ninth consecutive year ONE Gas has received the Safety Achievement Award. We are grateful for the commitment and dedication of our entire workforce to operating safely as we serve our customers and support our coworkers.

Now I'll ask Chris to discuss the details of our financial performance and regulatory activities. Chris?

Thanks, Sid, and good morning, everyone. As Sid noted, we delivered strong first quarter financial performance, demonstrating the resilience of our business model during a historically warm winter. This was largely due to new rates taking effect and the impact of Texas House Bill 4384. We are affirming our financial guidance which includes adjusted net income of $306 million to $314 million and adjusted earnings per diluted share of $4.83 to $4.95. Adjusted net income for the first quarter was $133.4 million or $2.11 per diluted share compared with $120.1 million or $1.99 in the same period last year.

First quarter revenues reflect an increase of approximately $27 million from new rates. Depreciation and amortization expense was down 6% year-over-year and interest expense was down 9%. Texas and Oklahoma experienced their warmest winters since 1895 when regional temperature tracking began. Kansas had its second warmest winter in that period and its warmest of the past 34 years. While we have effective weather normalization mechanisms that tempered the earnings impact, we were not completely insulated.

Along with earnings impact, cash flows were affected as we monetized less gas in storage than we would have under normal conditions. Higher spring storage balances mean we will inject less this refill season. We expect the storage-related cash flow impact to normalize as we move through the remainder of the year.

First quarter O&M expenses increased approximately 8.6% year-over-year compared with 1.9% year-over-year growth in the prior year period. The increase was primarily driven by employee-related costs. We also experienced elevated line locating activity. In particular, more fiber installations, led to an increase in line-locating tickets. Quarterly O&M naturally fluctuates due to the timing and the nature of our operations, and we continue to expect compound annual O&M expense growth of 3% to 4% over our 5-year plan.

Other income net decreased by $2.6 million compared with the same period last year, in part due to decreases in the market value of investments associated with our nonqualified deferred compensation plan. Excluding amounts related to KGSS-I, interest expense was $3 million lower year-over-year in the first quarter, due in part to the impact of Texas House Bill 4384 and 2025 Federal Reserve rate cuts, a reminder that our 2026 guidance did not assume any rate reductions.

Turning to liquidity. During the first quarter, we executed forward sale agreements under our at-the-market equity program for approximately 237,000 shares of common stock. We also have roughly 269,000 shares remaining to be issued under a forward sale agreement executed in May of last year. Had all shares under forward sale agreement been fully settled as of March 31, net proceeds would have totaled approximately $41.5 million. We will continue to be opportunistic about issuing equity as we meet our remaining needs.

Our balance sheet remains strong. Our adjusted CFO-to-debt ratio was 19.1% for 2025 and supporting our A- credit rating and stable outlook from S&P and our A3 rating and stable outlook from Moody's. Our financial plan supports similar performance going forward. Yesterday, the ONE Gas' Board of Directors declared a dividend of $0.68 per share, unchanged from the previous quarter.

I'll now turn to our regulatory activities. Oklahoma Natural Gas filed its annual performance-based rate change application in February, seeking a $28.7 million adjustment with rates expected to go into effect in late June. In March, Texas Gas Service made its gas reliability infrastructure program filing for all Texas customers seeking a $36.9 million revenue increase that is expected to take effect in July.

Kansas Gas Service has not yet made a 2026 Gas System Reliability Surcharge filing. The GSRS was amended by statute effective July 1, 2026. The amendment expands the qualifying infrastructure investments eligible for recovery to include all state-specific utility plant investments. It also increases the maximum monthly residential surcharge to $1.35 from $0.80. Filings can be done once per calendar year, and we expect to make ours in the third quarter. As a reminder, we do not have any full rate cases planned until we file the Oklahoma rate case in 2027 as required by tariff.

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

Thank you, Chris, and good morning, everyone. I'll start with an update on growth and capital deployment. We completed $170 million worth of capital projects this quarter, relatively in line with the same period last year. We are on schedule with final system design and acquiring right of way for the Western Farmers project that was announced late last year. This project, which includes the construction of a 43-mile 24-inch pipeline in Southern Oklahoma is on track to be in service in 2028.

Our teams have also completed construction of the 1.6-mile 12-inch pipeline serving the advanced manufacturing facility near El Paso. Commissioning of the pipeline and final installation of the meter set are on schedule to be in service early in the third quarter, meeting our customers' needs. This project required multiple complex crossings including 5 irrigation canals and was executed in close coordination with local authorities and other stakeholders to ensure safe, timely and successful completion.

We continue to see steady residential customer growth, even with slower new housing starts due to macroeconomic conditions. Through April, we've installed over 6,300 new meters with Oklahoma City and El Paso showing the strongest growth year-to-date. Across the board, our major metropolitan areas are adding customers at a healthy rate. We are advancing opportunities to serve additional large-load customers across our footprint. Our active discussions include a range of prospects such as large manufacturing facilities, data centers and grid connected utility generation.

We have 6 projects in late-stage discussion that in aggregate could support approximately 3 gigawatts of generation and up to 1 Bcf per day of demand across Kansas, Oklahoma and Texas. We recently signed a transportation agreement for one of these projects to supply 20 million cubic feet of natural gas per day to an Oklahoma data center. This is another example of how we're leveraging our existing system to support economic growth that benefits all of our customers. We will update our growth forecast as final agreements are executed.

Turning to O&M. Our coworkers continue to drive improvements in workforce efficiency and safety. First quarter line locating activity increased approximately 8.5% year-over-year while damages declined 2%. This highlights the operational benefits of bringing certain work in-house. Building on that progress, we plan to begin in-sourcing the Watch and Protect function in Oklahoma this year. We will be deploying our personnel at excavation sites near transmission and critical high-pressure distribution pipelines to support safe digging practices. This initiative further enhances public safety and system integrity while supporting more proactive management of O&M expenses.

We are also using AI technology to drive efficiency. One process improvement initiative has already generated more than 12,000 hours of annualized labor savings. By automating certain tasks, AI allows employees to focus on higher value work while improving consistency, accuracy and reliability. These efficiencies are not onetime gains. They are embedded in our daily operations and supported by a stable and growing technology platform. Our investment in automation reflects a deliberate data-driven approach to cost management and operational excellence while maintaining the safety, affordability and service quality our customers expect.

Operator, we're now ready for questions.

[Operator Instructions]

Our first question will come from the line of Richard Sunderland with Truist Securities.

I realize there are a lot of moving pieces with 2026, but I wanted to start there. You called out the weather, line locates and the Kansas GSRS filing timing. I guess, a shift around that last one in consideration of the new legislation. How do just kind of aggregate in terms of line of sight to 2026? Is -- I guess is the weather putting you in a hole that you have to overcome? I'm just curious about the moving pieces here and how you see them stacking up?

Rich, it's Chris. Yes, you're right. I noted in my prepared remarks that weather normalization mechanisms while effective, didn't fully mitigate the impact of the warmth that we experienced in the first quarter. There are both structural things that will be recognized later in the year that derive from that weather, and there are discretionary decisions that we'll make around managing that.

So if you look at the structural, for example, in Kansas, we have capacity release of some of the pipeline capacity that we maintain in part due to how warm it was. We didn't need it in the moment, and we don't need it in terms of storage refill. We can sell that capacity. We share that capacity release with customers. You'd have to look back a decade or more to find a weather dynamic that rivals this and where you'd see that similar type of structural delayed benefit, but that's part of what is present in the back half of the year.

And then also, if you recall, Rich, last year, we accelerated some O&M projects into 2025 that had originally been planned in 2026. That affords us some flexibility and optionality as we think about managing 2026. We had contemplated a sleeve of projects that we could pull forward from '27 into '26. We formerly assumed we would do them. They're not time sensitive. There's not a safety-related or integrity component to them. So we can defer those projects and create some added capacity in that way.

Rich, this is Sid. You also mentioned Curtis' reference to the Watch and Protect program. You'll recall that we've had great success in-sourcing line locating and seen an improvement not only in performance, but significant savings. We are running that same play with Watch and Protect. And so it may feel counterintuitive to speak to the plan that we have to address the impact of weather.

But I think it's important to continue those programs that we know are accretive, both in the short term and the long term. They're investments that have a meaningful return. And so we'll continue to make those, but we wanted to be very clear and open with the support for our guidance because we have confidence in the plan and our ability to execute that over the course of the year.

That's all very clear. And then turning to the large-load commentary, it sounds like a lot of exciting activity there. The 6 projects referenced in late-stage discussion, are those all incremental to your current capital plan? And then any kind of order of magnitude on the capital opportunity across those 6 projects?

Yes, Rich, this is Curtis. When we talk about late stage, that means we're literally talking about final contract terms and final needs of our customers, final design, final understandings of where they will be sourcing the gas supply from because these are transport customers. They're not gas sales customers.

So in terms of the scale of those projects, I gave a sense of the magnitude overall. The one that we have announced that gives you a little bit of context, that's the largest one that we've ever announced. That's the Western Farmers project that we talked about at the end of last year. So other projects are more like the one that I mentioned in my prepared remarks that we've just signed that contract. It's not a large capital investment, but it's a meaningful contribution to our operations where we make that investment, it is very immediate-accretive because it's not a large project to put into service. So that one would be, maybe on the smaller scale of some of them that we're talking about.

There was another part of Rich's question?

Capital plan.

The capital plan. So the way we think about that, Rich, or the way we give the guidance is in our 5-year plan in the earlier parts -- the earlier years of the 5-year plan, those projects and those growth dollars are pretty specifically identified in what they're going to. Projects in the latter part of the year are -- there's several different options of those that will ultimately get commercialized. And so we think of those as filling in the bucket ultimately.

Is there the opportunity that those buckets may overrun with additional projects? Yes, that's a possibility. We'll just have to continue to see when customers decide to move forward with the projects and what the timing of that might be versus what we've assumed. And as that happens, we'll continue to update what that growth profile looks like.

[Operator Instructions]

And our next question will come from the line of Paul Zimbardo with Jefferies.

And just a follow-up on the prior question. Could you quantify what that weather plus kind of the storage excess capacity, just in terms of like an EPS impact from all those kind of abnormal weather items in the quarter? And also, if you had the number, the benefit from that House Bill 4384 in the quarter as well?

Paul, I don't. I'd have to follow up with you. I mean we broke out specifically for the Texas House Bill, the non-GAAP, the equity return component. But in terms of how much it impacted interest expense and depreciation, I don't have that offhand. But if you're looking for sort of a total, "Hey, how much did this impact you?" I think that's something we could probably work to provide.

In terms of the weather impacts, we have weather norm that doesn't fully reflect in the quarter. What happens? There's somewhat of a delay there. In terms of the capacity release benefits that are coming, it's in the couple of million dollar territory.

Okay. Okay. Great. That's helpful. And then also just to follow up on the large-load side. So like that 20 Mcf project, it sounds like there could be some of those. And I think you said it's decently accretive. I don't want to put words in your mouth, but just is there a way to kind of frame what that benefit could be either to shareholders and/or customers from executing on some of those capital-light opportunities?

Paul, this is Curtis. And we have not quantified that project. Probably the easiest way is if you look at what our tariff is, and I've given you what the volumes are, but we've not made a specific comment about what the total of that would be. And typically, we wouldn't on any individual projects like that. So -- but we will include it as part of our overall guidance as we update it.

Okay. Okay. Understood. And then just the last really quick. Is there anything on the weather normalization, like lessons learned, things that you'd recommend proposing? I know this is a really extreme mild period. I don't know if there's any kind of refinements that you're looking to advocate for?

Paul, this is Sid. If you look at the way that our weather norm mechanisms have worked across the service territory, on balance, they've been very effective in achieving the goal, which is protecting all of the participants to make sure that everyone is incented to continue to focus on reliable and affordable gas service.

And so there are some extraordinary situations like think about this winter, and we covered it a bit in the prepared remarks, where you have essentially no meaningful winter and then one spike that is really significant in the amount of gas that was used and the requirements on the system and then back down to no winter. So it really was an extraordinary first quarter from that standpoint. We don't have any concerns about the weather mechanism going forward.

Chris just spoke to the capacity release. That's a pretty elegant solution that the Kansas Commission put in place to incent the company to be prepared. So we know that if we're oversupplied, then there's a capacity release option that's available. It supports good service to our customers, and it is all wrapped around affordability, which takes me back to your previous question.

The way that we are treating data centers and large-load opportunities not only is pursuing those opportunities, but as we've said in the past, has 2 other components. The first component is what's the impact to our customers and how do we derisk our participation in those projects to ensure that our customers aren't exposed in a way that we don't think is appropriate. And we successfully have done that, and we continue to do that.

The other is how does it fit with the long-term strategy that we have for our own system. So we're thoughtful about these opportunities when they come up. Does it forward the plan that we have already to build a system that's designed to serve our customers and provide economic development opportunities across our service territory? Or is it essentially an alley with a dead end that doesn't have that kind of knock-on growth potential?

We're very focused on what's the long-term potential and how does it support our long-term growth profile. So kind of a long answer, but I think you have to understand that we are constantly looking at not weather norm in isolation, not large-load in isolation, not pulling projects forward or pushing them back. We're trying to maintain flexibility so we can operate the company in a way that allows us to respond to whatever the event may be, in this case, weather, but do it in a way that doesn't interrupt our long-term vision for how we support growth for the company and long-term returns for our investors.

And that concludes the question-and-answer session. I would now like to hand it back to the ONE Gas team for closing comments.

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 few 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 4. We'll provide details about the conference call at a later date. Have a great day.

This concludes the ONE Gas First Quarter Earnings Conference Call and Webcast. You may now disconnect.

Good day, and welcome to the ONE Gas Fourth Quarter and Year-End 2025 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Dailey. Please go ahead, Ms. Dailey.

Good morning, and thank you for joining us to discuss our fourth quarter and year-end financial results. This call is being webcast live, and a replay will be made available later today. After our prepared remarks, we are 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 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.

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 is available in the appendix to the earnings release we issued yesterday.

Joining me on the call this morning are Sid McAnnally, Chief Executive Officer; Christopher Sighinolfi, Chief Financial Officer; and Curtis Dinan, Chief Operating Officer. And now I'll turn the call over to Sid.

Thanks, Aaron, and good morning, everyone. I began our call today by recognizing our coworkers across the company for their dedication to serving our 2.3 million customers during Winter Storm Fern. This storm was the first multi-day subfreezing event we've experienced since Winter storm Yury in 2021. On the peak day of the storm, we delivered over 3 billion cubic feet of gas to our customers with no supply disruptions. This performance is a testament to the work completed after Yury, including the Austin system reinforcement, which boosted our available winter peak capacity by approximately 25%.

Our posterior investments also included a focus on gas supply. We increased our storage capacity to over 60 Bcf implemented strategic reinforcements across our system and diversified our gas supply, all enhancing reliability and reducing the impact of price fluctuation on our customers. As a result, across our service territory, over 80% of the gas supply needed during the storm was shielded from temporary price increases.

Our full year 2025 financial results were also strong. In August, based on a solid first half performance and the expected impact of Texas House Bill 4384, we raised the midpoint of our EPS guidance to $4.37. We finished the year fully in line with that mid-summer expectation. This marks our 12th consecutive year of meeting or surpassing the midpoint of our initial EPS guidance.

Finally, to ensure that the financial impact of the Texas legislation is appropriately reflected in our disclosures, we've introduced a non-GAAP adjustment to our net income and earnings per share. This update adds clarity to our disclosures and helps better illustrate the earnings that our regulator allows.

I'll ask Chris to discuss the details. Chris?

Thanks, Ted, and good morning, everyone. With solid fourth quarter performance, we delivered full year financial results squarely in line with our revised guidance. 2025 net income totaled $264 million or $4.37 per diluted share compared with $223 million and $3.91 in 2024. Capital expenditures totaled $760 million for the year. As Sid noted, we have introduced non-GAAP adjustments to our financial reports and our earnings guidance. These adjustments offer a comprehensive view of our performance within the Texas regulatory model and better reflect the returns allowed by our regulator.

I want to spend a moment detailing specifically what these adjustments represent and why we are introducing them now. In 2011, the Texas Railroad Commission adopted rule 8.209 of the Texas Administrative Code. This rule allows natural gas utilities to defer depreciation expense and ad valorem taxes and accrue a carrying cost on qualifying safety-related capital expenditures between the time of project in service and its inclusion in rates. Texas House Bill 4384 signed into law last June, extends the approved deferrals and accruals of Rule 8.209 to all capital expenditures in the state. The carrying cost allowed to be accrued under both provisions is defined as the unrecovered gross plant multiplied by the utilities pretax weighted average cost of capital as established in its most recent rate proceeding.

As we know, weighted average cost of capital includes a return on debt and a return on equity. It is specifically the accrual and allowed recovery of this equity return and the timing of its impact that cause a delta between our regulatory books in Texas, and our reported GAAP financials. This difference in treatment between our regulatory accounting and GAAP accounting has existed since the adoption of Rule 8.209 in 2011, but it represented a modest annual impact when only Rule 8. 209 applied.

For example, in 2024, this difference was approximately $2 million or roughly $0.03 per diluted share. With the expansion of qualifying capital under House Bill 4384 last year, this delta widened to nearly $7 million or roughly $0.11 per diluted share. With a full year of impact in 2026, we anticipate it will constitute an approximate $12 million variance, roughly $0.18 per diluted share or 4% of our projected consolidated full year EPS. In sum, this difference in treatment is a fundamental aspect of our regulatory framework and an embedded feature of our financial profile.

Texas House Bill 4384 has amplified the impact of these adjustments and with them meaningfully increased the persistent delta between regulatory accounting and GAAP accounting. For these reasons, we will report non-GAAP adjusted net income and EPS figures as key indicators of business performance going forward.

Adjusted net income for the fourth quarter was $90 million or $1.48 per diluted share compared with $78 million and $1.35 in the same period in 2024. For the full year, adjusted net income was $271 million or $4.48 per diluted share compared with $225 million and $3.94 in 2024. Our expected financial performance, as expressed in our 2026 financial guidance has not changed, but we intend to also provide guidance based on our adjusted numbers going forward. So for 2026, we expect adjusted net income in the range of $306 million to $314 million and adjusted earnings per share in the range of $4.83 and to $4.95. Consistent with our previously communicated 5-year financial outlook, we expect long-term adjusted net income growth of 7% to 9% and and adjusted EPS growth of 5% to 7%. These growth rates now use adjusted 2025 actual results as the baseline for the 2026 through 2030 planning period, implying a 2030 adjusted EPS midpoint of roughly $6.

Turning to other financial results. O&M expense for the full year was up approximately 5% over 2024, slightly above our 4% CAGR guidance. As I noted on our third quarter call, we had the opportunity and capacity to execute some projects earlier than we had initially planned, resulting in the slightly elevated expense rate for 2025. Executing certain projects ahead of schedule is another example of how we continually look for ways to deliver improvements more efficiently, while maintaining financial discipline. Our long-term outlook continues to project a 3% to 4% O&M CAGR as indicated in our guidance.

Excluding amounts related to KGSS1, interest expense in the quarter was $2.9 million lower year-over-year, primarily reflecting lower rates on commercial paper borrowings and and the implementation of Texas House Bill 4384. We benefited from Federal Reserve rate cuts in 2024 and 2025, which we anticipated though they occurred more quickly than we had assumed in our plan. As a reminder, we have assumed no further rate cuts in 2026. As with everything we do, we are focused on efficient execution of our financing strategy, so any future rate cuts flow through to our bottom line.

Our balance sheet remains strong. In December, S&P affirmed its A- credit rating and stable outlook. And earlier this month, Moody's affirmed its A3 rating and stable outlook. 2025 cash flow metrics were several hundred basis points above our respective downgrade thresholds with both agencies. And our financial plan supports similar performance going forward.

With that, Curtis, I'll turn it to you.

Thank you, Chris, and good morning, everyone. I'll begin with an update on regulatory and legislative activity. Earlier this month, we received a final order in the Texas rate case. The Railroad Commission approved a $14.4 million revenue increase, a 9.8% return on equity and a 59.9% equity ratio. The commission also approved consolidation of our 3 remaining Texas jurisdictions into a single statewide division. We plan to make one GRIP filing for Texas Gas Service and our PBR filing in Oklahoma later this quarter. Our Kansas GSRS filing is planned for April. We have no full rate cases planned until the Oklahoma filing in 2027 as required by our tariff.

Turning to legislative activity. We are supporting proposed legislation in Kansas that would allow for more efficient recovery of the capital we invest in the Kansas Gas Service system. We view this as a constructive step towards better aligning capital recovery with investment timing as we help to advance ongoing economic development in Kansas.

Moving on to operations and commercial activity. Our strong finish to the year reflects the consistent disciplined execution of our capital plan, which is designed to support growth while staying closely aligned with our affordability, safety and reliability commitments. We completed $760 million worth of capital investment projects during 2025, with $170 million dedicated to serving our growing customer base. An example of the investments we're making is the new pipeline announced in December, where ONE Gas will invest roughly $120 million to deliver over 100 billion cubic feet of natural gas annually to Western Farmers Electric Cooperative and Southeastern Oklahoma. This project will support a new natural gas fuel generation plant and create capacity for future economic growth across the region.

We have also broken ground on a project to serve an advanced manufacturing plant outside of El Paso, which is on track to be in service by the third quarter of this year. This is another project that supports reliability and system growth without increasing costs for residential customers. Both projects were included in our guidance. Beyond these projects, we continue to add about 23,000 new residential customers each year. Growth in our customer base allows us to spread costs more efficiently, helping keep service affordable.

In addition to our customer-focused growth strategy, our overall approach to running the business ensures customer affordability remains a key priority. Sid alluded to some of the steps we take to mitigate gas cost. Examples include sourcing gas at the Waha Hub, which often offers favorable pricing, increasing our storage by 20% and using physical and financial hedges to mitigate temporary price fluctuations like we saw last month. We're also focused on long-term value and efficiency as we make staffing and operational decisions.

Our in-sourcing program is a good example. While onboarding and training new employees temporarily increases cost, the long-term benefits are clear: our teams operate more efficiently, deliver stronger performance and create a pipeline of future talent. We completed 1.3 million line locates last year and now perform about 40% of that work in-house. In-sourcing this work has delivered significant operational improvements as our ratio of total excavation damages per 1,000 locates, a common industry metric decreased by over 14% year-over-year even though we experienced an 8% increase in ticket volumes. Bringing this work in-house reflects our broader focus on improving execution, reducing long-term cost and strengthening our operational capabilities. Our efforts to run the business efficiently have paid off as we have kept our cumulative residential bill CAGR below inflation at just under 2%, while continuing to deliver top-tier safety performance.

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

Thank you, Curtis. Yesterday, we announced that Curtis will take on an expanded role as President and Chief Operating Officer. As our system continues to grow and the number and scale of new projects increases, this change will allow us to leverage the experience that Curtis brings from both his time in operations as COO and his financial experience as CFO in the early years of our company. We're fortunate to have someone that combines deep experience across the business with strong leadership skills to take on this expanded role at an exciting time for our company. Operator, we're now ready for questions. .

[Operator Instructions]

First question comes from Kate Moreen with Mizuho.

Good morning, everyone, and congrats to Curtis. I'm sure he's looking forward to saving all that time on conference calls talking through only one Texas regulatory jurisdiction at this point.

Thank you, Gabe. .

I want to start off on the -- some of the non-GAAP adjustments here. I'm curious why, first of all, maybe you couldn't -- didn't feel like you could speak to this in December. But then sort of as a larger picture here, given that this, I think, is a bit of a material step change as far as kind of your starting point here for EPS growth, does that also play into kind of equity issuance or needed equity issuance? How you think about your cap structure, your dividend payout ratio? Or does it matter less because this is sort of, as you mentioned, regulatory versus financial accounting?

Gabe, it's Chris. On the timing, A couple of things to note. We -- this was obviously a legislation pass in June, and we studied it throughout the period. As you may recall, the Railroad Commission had a 270-day window to draft and pass procedural rules associated with this legislation. -- we've been party to that process throughout the fall and the early part of the winter. And so we participant in comments, we looked at early drop. The final rules are on the RRC agenda for approval at next Tuesday's meeting.

So if there was a final step to solidify our understanding of the state's intent in this legislation, we feel very confident that we know with the final rules sitting for approval where the state's intent is. And so that was kind of the final step. It was the increase in the magnitude of the delta between regulatory books and GAAP books, and then it was the conclusion of that process that led us to take action on this at this point and not at an earlier juncture.

As it pertains to your question as to the capital market side of the plan, it really doesn't have an effect in a meaningful way on that. The house bill accounting treatment is in the early part of it, more impactful to earnings than it is to cash flow. And so I wouldn't expect that it would change that in a material way. It may over time, but not initially.

Got it. And then maybe if I can just pivot a little bit to some of the, I think, growth opportunities with the Western Farmers announcement and the like. Can you just talk about sort of the competitive landscape and I think some of the backlog within the projects that I think you're in negotiation on? How you're competing with, I think, some other providers, like midstream providers that also may be looking to lay their lines to additional power gen facilities? How that shapes up within kind of, I think, the regulatory construct that you're probably pitching to potential customers?

Gabe, it's a really good point. The -- what we tried to do early in the process, we have lots of these opportunities coming towards us. And one of the early filters we apply to it is do we have a competitive advantage to serve that facility. There are some situations where we are very competitively advantaged because of assets we already have nearby to the opportunity, and there's other situations where we're not as competitive. We don't have assets in those areas, so we quickly try to move on from those.

You're right, though, where those 2 things are maybe equal between a midstream provider and us, the tiebreaker often is our regulatory structure and being able to be very transparent about what's included in our rates, how top charges to that customer would be funded if there are any customer payments required for the construction. It's very transparent by being able to look at our tariffs. So I think in many ways, just that transparency gives us a competitive advantage, but that's just one of the pieces of it, in addition to what I was describing as the geographic advantages we have sometimes.

We now turn to Paul Zimbardo with Jefferies.

Congratulations Curtis as well. The first question, is there any way that you could frame the potential benefit from that proposed Kansas legislation you mentioned, whether earned ROE or net income? That would be helpful. .

So Paul, it's still in the early stages. I think just this morning, the proposed bill cleared, the House of Representatives. The main parameters in the bill as it's written that's going to the Senate is an increase in the types of capital that can be included. Essentially all of the capital that we invest directly in Kansas would now be part of that GSRS filing, so an expanded universe, so to speak. And then the cap would increase T.oday, it is $0.80 per month impact to a customer. That $0.80 would increase to $1.35. But I would emphasize it's -- the point it is, it's clear the house. It still has to go through the Senate process. So I would characterize this still as in early innings. .

Okay. And how much of -- you said it would make substantially all the capital qualify, how much will qualify currently?

Currently, what qualifies is safety-related expenditures, so system integrity type of work as well as cybersecurity. So this would add in any growth capital we're doing facilities that we're putting in place, those types of things that are directly in the state of Kansas. Any corporate allocation such as an ERP system and that applies to all of the company, that would have to go through a full rate case to be able to be included. So it substantially includes all of the capital we're spending up there other than those corporate items. .

And you've seen our filings each year, at $0.80, it's been about an $8 million GSRS filing. So it would increase from that $0.80 to $1.35.

Okay. That's helpful. And then a bigger picture one, just as you add in the Texas legislation benefit to the adjusted profile, any direction you're providing on kind of where within that growth rate range? I think latest vintage was around the midpoint, long term. Any refreshed thoughts on that as you shift?

Paul, it's Chris. No, not specifically. When we offered guidance last year, we had noted in the high end of the range. This year, we noted the midpoint. It's so -- and we were just 6 weeks in. I would stick to that for now.

[Operator Instructions]

We now turn to David Arcaro with Morgan Stanley.

Congratulations, Curtis as well. Best wishes to you in the new expanded role here. I was wondering -- let me see. Just to check, does the guidance and the adjusted EPS level, does that assume the latest Texas rate case outcome essentially that you just got in terms of what cost of capital is being embedded in there?

Yes, it does. Our original guidance back in the fall, embedded the best estimate for what we thought that would prove to be and it's pretty close to that. So it's in on the GAAP side and obviously carries forward from there to the non-GAAP.

Got it. Okay. And didn't quite catch it, Chris, but is the adjustment -- is there a cash component to that? Like in terms of the higher earnings from the regulatory perspective, are you getting that as a cash recovery, like a boost to cash in some way is that all pure just on paper in terms of the accounting?

The accrual and deferral is not. But once obviously, that gets rolled into the GRIP filing it will be a larger cash flow item than it would have been without the legislation. So there is a cash component, but a cash component shows up as it would in normal rates and not in the deferral accrual.

Got it. Yes, that's clear. And then just last quick one. I was curious, how are treasuries and the current kind of treasury curve lining up against your guidance expectations at this point?

We've seen pretty strong market performance from issuers that have gone so far. I would say, David, if we were to move with something today, it's probably slightly favorable to what we embedded in our in our refinancing for the year. But that term loan that we put in place last year does not mature until September. And so I'm always nervous to take today conditions that may or may not exist by the time we access the capital markets. But specific to your question, it's favorable to it today.

That concludes the question-and-answer session. I would now like to hand it back to the ONE Gas team for closing remarks.

Thank you again for your interest in ONE Gas. We look forward to seeing many of you at upcoming conferences in Chicago and New York. Our quiet period for the first quarter starts when we close our books in early April and extends until we release earnings in May. We'll provide details on the conference call at a later date. Have a wonderful day.

This concludes the ONE Gas Fourth Quarter and Year-end 2025 Earnings Conference Call and Webcast. You may now disconnect.

Good day, and welcome to the ONE Gas 2026 Financial Guidance Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Dailey. Please go ahead, Ms. Dailey.

Good morning, and thank you for joining us for our 2026 financial guidance conference call. Our guidance presentation can be found on the Investor page in the Financials and Filings section at www.onegas.com. This call is being webcast live and a replay will be available later today. After our prepared remarks, we will be 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 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 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.

Thanks, Erin, and good morning, everyone. Thank you all for joining us this morning to discuss our 2026 and 5-year financial outlook. The financial guidance we released yesterday underscores our commitment to creating value for our stakeholders as we meet rising customer demand across our service territory. Our strategic plan positions us to capitalize on emerging opportunities while preserving robust balance sheet fundamentals and strengthening our roughly 3:1 affordability advantage over electricity as an energy source. Driven by our strong growth trajectory and proven performance, we are pleased to announce an increased long-term EPS growth outlook of 5% to 7%, reflecting our confidence in continued value creation.

As highlighted on Slide 7 of our guidance presentation, we have consistently delivered long-term EPS CAGRs in the 6% to 7% range. Since becoming an independent company in 2014, we have met or surpassed the midpoint of our EPS guidance each year, underscoring our track record of reliable performance and disciplined execution. We see strong growth potential as an ongoing economic development continues to accelerate within our service territory. We are strategically positioned to capitalize on significant large load demand opportunities emerging across our 3-state footprint, which Curtis will speak to in a moment. These projects enable us to expand our infrastructure in a disciplined manner, minimizing capital risk while delivering clear affordability advantages to our residential customers.

Now I'll turn it over to Chris to discuss the details of our 2026 and 5-year financial outlook. Chris?

Thanks, Sid. And for 2026, we project net income to range from $294 million to $302 million, with earnings per diluted share of $4.65 to $4.77, an approximate 8% increase over the midpoint of our latest 2025 EPS guidance. As Sid noted, we have raised our long-term EPS CAGR to 5% to 7%. Consistent with our long-standing practice, we utilized the midpoint of our updated 2025 guidance as the starting point for our new 5-year outlook. The uplift is driven by ongoing customer growth, the constructive accounting change affected by Texas House Bill 4384, and our derisked and increasingly self-funded financing model.

Our forecasted 5-year compound annual net income growth rate remains 7% to 9%. Driven by robust growth and ongoing system integrity initiatives, we plan to invest approximately $800 million in capital next year, $50 million more than our 2025 plan. These investments are projected to support an average 2026 rate base of $6.3 billion.

Over the next 5 years, we anticipate total capital spending of $4.3 billion, supporting 7% to 9% compound annual rate base growth. Notably, our current plan increases 5-year capital investment by about 7.5% compared to last year's outlook, while reducing total equity financing needs by roughly 35% as we transition toward a more self-funded model.

Safety and system integrity remains central to our strategy. We expect 2026 through 2030 financing needs of approximately $1.3 billion, down from the $1.5 billion contemplated in the last 5-year plan, with roughly 30% of this amount to be in the form of equity issuances.

As a reminder, we currently have forward sale agreements covering approximately 2.9 million shares of common stock outstanding at an average price of about $78 per share. If all forward shares were settled at the end of the year, we would receive net proceeds of approximately $226 million. We plan to settle $205 million of this amount at year-end and carry the balance for settlement at year-end 2026.

Regarding debt financing, we regularly assess capital market opportunities to tailor debt issuances to our annual needs while maintaining our regulatory capital structure at its historic ratios.

Our funding model benefits from a reduction in the Fed funds rate as it reduces the cost of commercial paper borrowings, which we use to finance investments prior to their formal inclusion in rate base. We have modeled a gradual normalization of monetary policy in our guidance outlook the last 2 years. And the aggregate 150-basis-point reduction in Fed funds rate over the last 15 months has come ahead of the pace and schedule we initially anticipated. We continue to expect an incremental 100 basis points of rate cuts by the end of 2027 to match the Fed's self-described neutral level and have formally assumed 125-basis-point reduction in 2026 occurring in the middle of the year.

We continue to maintain a healthy balance sheet and are comfortably within the adjusted CFO to debt range for our current investment-grade credit ratings. With the execution of this plan, we expect our adjusted CFO to debt ratio to improve from approximately 19% this year to roughly 20% by 2030, further enhancing our financing efficiency and flexibility.

Finally, we anticipate delivering a 1% to 2% compound annual dividend growth rate through 2030, subject to Board approval. Our consistent track record of delivering dividend increases since becoming an independent company reflects our commitment to shareholder returns, and our strategic plan positions us to sustain this growth while continuing to invest in the business' long-term expansion.

Now I'll turn things over to Curtis to speak more about our growth expectations, capital deployment plans and management of operating and maintenance expenses.

Thank you, Chris, and good morning, everyone. First, a quick regulatory update. A partial settlement has been reached in the Texas rate case with a $15 million revenue increase, our actual equity capital structure of 59.9% and a 9.8% return on equity. A hearing on the issue of consolidation was held before the administrative law judge on November 5 and the partial settlement was filed with the Texas Railroad Commission on November 19. The administrative law judge is scheduled to make a recommendation in mid-December and the Texas Railroad Commission is scheduled to render a decision on the settlement and the issue of consolidation in January.

The next full rate case we plan to file is Oklahoma in 2027 as required by tariff. In the meantime, we will continue leveraging interim mechanisms across our service territories to ensure timely recovery of capital investments, support ongoing growth and maintain the safety of our system.

Turning to operations. We have reduced the O&M CAGR in our guidance to a range of 3% to 4%, down from the 4% increase expected in the prior year's forecast. Due in part to the success of our program to in-source certain positions, our teams have continued to mitigate the rise in operating expenses. Our new coworkers have not only replaced contractors in certain areas, but can also be deployed to do other work as needed, increasing efficiency and improving service for our customers. As we've noted, we will continue to look for similar opportunities as we enter the new year.

We are confident that ongoing economic development in our service areas will drive continued residential housing growth, resulting in sustained demand for natural gas. We expect total meter sets this year to be roughly in line with levels we've seen over the last 2 years, which were meaningfully above prepandemic levels. Housing demand continues to outpace available supply in our markets, and leading indicators, including developer activity and permitting are gaining positive momentum. Over the past several years, we have steadily scaled the business, allowing us to complete key system integrity projects and meet growing customer demand.

We prioritize capital investment in pipeline replacement initiatives, enhancing the safety, reliability and environmental performance of our natural gas system. At the same time, we are actively pursuing opportunities to support economic growth and serve new customers throughout our service territory. For example, Texas Gas Service has reached commercial terms with a customer to deliver natural gas for 100 megawatts of on-site generation at an advanced manufacturing facility near El Paso, Texas. This is the first phase of a project that has the potential for regional expansion and significant high-tech job creation, growth made possible in part by reliable, affordable natural gas. We expect the project to be in service in the third quarter of 2026.

We are also advancing negotiations on another project that is designed to supply natural gas to support up to 1.3 gigawatts of electric generation. In addition to meeting power generation needs, the planned pipeline can serve additional customers and strengthen the region's economic competitiveness. We will provide further updates once our agreement is signed.

These are great examples of the types of projects that make perfect sense for our company as they both serve a current customer need and put us in a strong position to deliver the energy infrastructure that supports additional regional growth. We are actively engaging with manufacturers, electric generation providers and data center developers across our 3-state footprint as they seek reliable, efficient and cost-effective energy solutions to power their growth initiatives. We are pursuing these opportunities with a disciplined capital deployment, ensuring that investments are strategically targeted to minimize risk exposure while preserving the affordability of our services for residential customers. This approach supports sustainable returns and positions us to capitalize on emerging opportunities without compromising financial stability.

With that, I'll turn it back to Sid for closing remarks.

Thank you both. Our company has a solid track record of delivering the returns indicated by our guidance. Looking toward 2026, we are poised to capture new growth opportunities, maintain safety, control O&M expenses and uphold affordability for our customers, all while providing attractive returns for our shareholders. These priorities position us to build on our success and achieve even greater results in the year ahead.

As we conclude, we extend our sincere gratitude to every team member across the company whose dedication and hard work make our success possible.

Operator, we're now ready for questions.

[Operator Instructions] First question comes from Gabe Moreen with Mizuho.

I wanted to ask about, I think, the cadence of EPS growth. In terms of just the shaping of sort of your expectations, it looks like growth for the range for -- is a little bit above the range for '26. Maybe if you can just speak to that in terms of some of the factors and how linear it will be versus lumpy?

Gabe, it's Chris. We had noted some items last year that are mechanical in nature that provide some degree of nonlinearity in the plan. If you recall, we have a statutorily required rate case in Oklahoma in 2027. And unlike the GRIP filings and rate case cadence in Texas, we don't have a PBR in the same year as a general rate case in Oklahoma. So that will provide some degree of moderation relative to the trend line in '27. And then we had noted that we have one remaining low coupon note that matures in 2030, in the second quarter of 2030, and so 2030 would have a refinancing item. That's a 2% coupon on $300 million notional value. And so that's another item depending on what you assume in that year.

That would provide -- those are the 2 items I would just flag to you. As you see, we have a plus 8% expectation for 2026.

And maybe another one for you, just around the dividend growth here. If you look at, I think, projected out through 2030, you may be falling below the end of your kind of payout ratio. Can you just talk about whether that payout ratio that you, I think, laid out last year still holds, whether you'd consider accelerating the dividend, or are you really focused on some of the internal financing growth that you discussed on the call?

Yes, it's a good question, Gabe. If you'll recall, when we separated from ONEOK in 2014, we established a targeted payout ratio range of 55% to 65%. And in effect, that was where the peer universe was at that time as. We've thought about changes in the landscape that have transpired since that time, Curtis has spoken about both the diversity and the aggregate amount of growth opportunities in our region, and we think about the most efficient way to finance that, and we look at the peer set, there is a wider payout ratio range present today than existed at that point. And we believe it's prudent to moderate that payout ratio over time as you see implied by the guidance.

Dividends are subject to the discretion of our Board of Directors. And so we make this plan. We revisit it on a regular cadence. But if you -- you're right to assume, if you trail out the EPS growth rate and the dividend growth rate, you'll find, by the end of the plan, an implied payout ratio in sub-50%.

I do think at some point, you'll see significant reacceleration of dividend, but not as contemplated by this plan in the 5-year window.

[Operator Instructions] Now I turn to David Arcaro with Morgan Stanley.

I was wondering is there something structural that lowers the amount of equity that you need to finance this plan versus the prior plan? Is that new 30% level, is that something that you'd expect to kind of continue going forward as an overall split?

David, it's Chris again. Well, there's a couple of things going on mechanically. As you think about the prior question from Gabe, the payout ratio is declining. And so, in effect, when we think about the amount of retained equity that we can apply towards rate base growth, that's getting larger every year in the plan. We get, as Curtis noted, our actual capital or historically have been successful at getting our actual capital into rates in all 3 jurisdictions. And broadly speaking, that's a 60% equity, 40% debt ratio. And so as the business gets larger, we can address it with more debt appropriately as the rate base growth.

And so when you think about just the equity component, more of it can be self-funded unless that it has to be externally financed. That's the biggest component that's changing over the course of the plan. You'll see we noted $205 million expectation for equity forward settlements at the end of this year. That's down from the $245 million we settled at the end of last year, and we generally would expect a decline in cadence as you move through the plan.

Okay. Got it. That makes sense. And then I was curious, is there a potential timing that you're willing to give on that 1.3 gigawatt potential opportunity? And I'm wondering also maybe more broadly, for some of these large customer opportunities, is there a way you're able to frame the financial impact and opportunity for you?

Yes, David, this is Curtis. So the timing of that project is still part of the negotiations that are going on. I think we've got a pretty good sense of when it will be, but it's a larger project, and it's a longer build to get to that point. For our customer, it's actually a multiphase development that will occur over a number of years. So that one is a little further out in the 5-year plan in terms of when we would actually be starting service with it.

Then your second question was around what, remind me?

Oh, sure. For some of these large customer opportunities, curious if you're able to frame the financial impact or financial opportunity as some of these come through?

Yes. So we have modeled into the 5-year plan and the capital, some of these projects that we have very clear line of sight into and that we're anticipating in the near term. But as I commented during the third quarter call, many of these projects are either fully funded or partially funded by the customer. So everything that we're doing to serve these customers falls in line with our tariff that we have in each respective state. And depending upon the level of capital required, there's a portion, and in some cases, all of the capital is funded by the customer upfront. So that lessens the overall strain. And when I talked about derisking our capital profile, derisking these projects, that's the main tool to support doing that.

Yes, David, this is Sid. I think that your first question and Gabe's question both frame a really important part of this plan. As Curtis points out, we're engaging in service of these opportunities across our service territory, but we're doing so in a way that doesn't expose us to risk. The plan is really balanced in the way it thinks about payout ratio and balance sheet strength and leaning into these opportunities that are presented by economic activity in our service territory, but also considers affordability. So you've got this balancing that goes on across the spectrum, and we think this plan really hits the sweet spot in all of those areas. We are able to maintain what is attractive to our investors about being in a regulated business and still pursue opportunities that expose us to the economic development that's going on in our service territory, all while balancing affordability and the strength of our balance sheet. So that's why we talk about this in a more holistic way. We think when you look at the plan as a whole, it's really strong going into 2026.

We now turn to Selman Akyol with Stifel

Just following up on sort of the last question there and thinking about these opportunities. I don't know, is there any way you can sort of frame up, just maybe put bookends around what the size is that you're looking at? I presume most of it is in Texas, but can you talk about the other service territories? And then should we also assume this is all behind the meter?

Selman, this is Curtis. And first, the opportunities are across all 3 states. And it's -- right now, I would say we have projects in the range of 25 different things that we're looking at. All of those are in different phases. Some are in preliminary discussions and some are at the other end of the spectrum, like what I described of reaching commercial terms on the project in El Paso. So the timing of those, when those negotiations will be completed really is driven by the customer and what their needs are.

They're making much larger capital investments. And so the period of time for them to do that is, in many cases, greater than the length of time for us to do our part of the project. The El Paso project that I mentioned, we've just reached commercial terms, and we expect that project to be completed and in service by the third quarter of next year. So that's obviously a much smaller project, much smaller build that serves a really -- again, 100 megawatts of power generation that, that customer needs.

So there's other ones that I've mentioned in the past that are even a little bit smaller than that. There was a generation combination RNG project, that's about 25 megawatts of generation, so on the smaller end, and in the upper end the one I described at 1.3 gigawatts. So a wide range of projects, a wide range of different statuses that those are in from a commercialization standpoint. But those really are driven by the customer and what their needs are, how quickly they're trying to get to market? But in each of these cases, of the ones that I described as in the range of 25, those are all projects that we know we have the ability to execute on. It leverages our existing system, and it provides other benefits to our system and to our other customers.

So working our way through the funnel of trying to identify those projects that we should be involved in and hit all of those marks that I described in my prepared comments, all of those fall into that type of a category.

That concludes the question-and-answer session. I would now like to hand it back to the ONE Gas team for closing remarks.

Thank you all again for your interest in ONE Gas. We will be attending the Jefferies Virtual Gas Utilities Conference, the Mizuho Power Energy and Infrastructure Conference, and the Wells Fargo Midstream Energy and Utility Symposium next week in New York and look forward to seeing many of you while in town. As a reminder, our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in mid- to late February. We'll provide details about the conference call at a later date. Have a great day.

This concludes the ONE Gas 2026 Financial Guidance Conference Call and Webcast. You may now disconnect.

Good day, and welcome to ONE Gas Third Quarter Earnings Conference Call. Today's conference is being recorded. And now at this time, I would like to turn the conference over to Erin Dailey. Please go ahead, Ms. Daily.

Thank you, Elliot. Good morning, and thank you for joining us on our third 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.

Statement 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 and 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 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.

Good morning. We appreciate your interest in ONE Gas and are pleased to be with you to share highlights and key developments from our third quarter. In August, we raised our full year guidance on strong year-to-date financial performance and the expected impact of Texas House Bill 4384. Based on third quarter results and confidence in our outlook for the rest of the year, we've also tightened our 2025 earnings forecast. We now expect earnings per share to be between $4.34 and $4.40.

Our 3 states serves as a cornerstone of the nation's energy supply producing over 1/3 of U.S. natural gas. The states we serve are committed to economic growth and actively encourage the use of natural gas for both residential and commercial applications. This strong foundation is fueling continued momentum from both our core residential base and high-growth sectors like data centers, advanced manufacturing and utility scale power generation. We are fully leveraging these opportunities to support growth and invest in our system, all while keeping our commitment to customer affordability.

One example of our forward-thinking approach to serve this growing customer demand is the Austin System Reinforcement project, which we completed in the third quarter. This project boosts our available -- capacity by approximately 25% and provides increased access to natural gas indexed at the Waha hub, which typically trades at a discount to other sources of supply for the Austin Metro area. As a result, our customers benefit from enhanced reliability during peak demand periods and improved affordability as we are able to pass on savings from lower cost supply sources. This landmark capital investment the largest by far in on gas history was delivered ahead of schedule, under budget and without any lost time injuries, underscoring our ability to efficiently execute major projects. As we meet the needs of our residential and commercial customers today, we are confidently pursuing growth opportunities.

Now I'll turn the call over to Chris for the quarter's financial details. Chris?

Thanks, Sid, and good morning, everyone. As Sid noted, we are narrowing our 2025 earnings forecast. We now expect net income to range between $262 million and $266 million. With earnings per diluted are projected between $4.34 and $4.40. There was no change to the respective midpoints of our net income and earnings per share guidance which, as we discussed during our second quarter call are above the levels we initially guided. We continue to project capital expenditures of approximately $750 million for the year.

Turning to our third quarter financial results. Net income was $26.5 million or $0.44 per diluted share compared with $19.3 million or $0.34 and 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. Third quarter operating and maintenance expenses increased approximately [ 4.9% ] year-over-year, consistent with our guidance and primarily reflecting higher labor costs, and a decision to execute certain O&M activities earlier than initially planned.

Excluding interest related to KGSS-I, securitized bonds, interest expense, net decreased $3.4 million year-over-year in the third quarter, primarily due to lower rates on commercial paper borrowings. In August, we issued long-term debt in the form of a $250 million term loan that will mature in 2026. Our next maturity after this is not until 2029. As I mentioned during last quarter's call, we have fully satisfied our 2025 equity needs and covered a portion of 2026 through existing forwards, which in total represent approximately 40% of our planned 5-year equity need.

For added clarity, we plan to settle roughly $200 million of forward shares in December and defer approximately $25 million for year-end 2026 settlement. Our balance sheet remains strong with an adjusted CFO to debt ratio projected to be around 19%, which is at the upper end of the range for our current credit ratings. In addition, last week, we enhanced our liquidity by increasing the size of our revolving credit facility to $1.5 billion and extending the facility's maturity to October of 2030. Yesterday, our Board declared a quarterly dividend of $0.67 per share, unchanged from the prior quarter.

Curtis, I'll turn things over to you.

Thank you, Chris, and good morning, everyone. On the regulatory front, we completed all 2025 interim filings, including September's approval of a $3.2 million GRIP filing for the Rio Grande Valley service area. As we have noted previously, Texas Gas Service filed a rate case requesting a $41.1 million increase and proposing to consolidate our 3 service areas into a single jurisdiction. The case remains on track with the procedural schedule, and a final decision is expected to be effective during the first quarter of 2026. .

Turning to operations. We continue to invest in our workforce for the long-term success of our business. Alongside our efforts to bring line locating resources in-house, we are also planning to do the same with our Watch and Protect program. While onboarding and training new employees temporarily increases cost, the long-term benefits are clear. Our teams operate more efficiently, deliver strong performance, create a pipeline of future talent and reduce our reliance on external contractors. Insourcing line locating has delivered significant operational improvements as total excavation damages have decreased by 13% year-over-year, even though we've seen an 8% increase in ticket volumes.

Capital execution remains strong. We have completed approximately $575 million in capital projects through the third quarter, keeping us on pace to deliver our $750 million full year budget. This included the Austin system reinforcement project, which represents our most significant project to date. This pipeline installation was technically challenging, requiring 3 complicated river boards while working in a busy metro area. Ultimately, we installed approximately 50,000 feet of pipe introducing a new source of supply and expanding system capacity to support system reliability and to meet growing land in the Austin area.

Delivering this large and complicated project ahead of schedule and budget demonstrates our ability to effectively execute the mini utility scale generation advanced manufacturing and data center opportunities that are moving forward across our 3 states. For many of these large-scale projects, partnering with us as the utility is a natural fit, our proximity to major natural gas production and existing pipeline infrastructure allows us to provide fast, cost-effective service, whether through new connections, short line extensions or system upgrades.

We are able to serve these customers under our fully regulated framework and in most cases, with only modest increases to our forecasted capital budgets all while keeping natural gas service affordable for our residential customers, provide greater clarity on these opportunities. We are working across all 3 of our states and significant utility scale power generation projects, approximating 1.5 gigawatts of capacity. Customers are now progressing through the late stages of their investment decisions and we are ready to execute these projects as they advance. Other examples include providing natural gas to a 200-megawatt fabrication plant and data center and a project announced earlier this year that supplies natural gas for on-site power generation and receives renewable natural gas from the customer's facility.

Our approach to these opportunities is deliberate prioritizing projects that enhance our system, position us for additional growth opportunities and provide inefits for all customers. We will provide more details once final agreements are in place.

With that, I'll turn it back to Sid.

Thank you, Curtis. As we pursue these new large-scale projects that will support our region's economy, we remain committed to our current customers providing them with safe, reliable and affordable natural gas keep their homes warm and their business is running. With winter approaching, I want to thank all of our coworkers whose dedication allows us to deliver comfort and value to our 2.3 million customers. I'm proud to work alongside each of them.

Operator, we're now ready for questions.

[Operator Instructions] First question comes from Julien Dumoulin-Smith with Jefferies.

Maybe just to start with 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?

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 in 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 RCP rate was 5.6% to 5.7%. We had outlined 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 Fed 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 pick 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. 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 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.

Totally, Excellent. 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.

If you note in my prepared remarks, Julie, 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.

Got it. It seems like more of a timing issue than anything there.

That's correct. .

Nicely done. We'll speak in a couple of months here.

Yes, thanks for the question, Julien.

We now turn to David Arcaro with Morgan Stanley.

I was wondering if you could -- maybe just on the growth rate that you've indicated it 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 it depends on the starting year as to how you think about that.

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 due. .

Excellent. Yes, that helps. And then I appreciate the update here on the large load activity that you're seeing. I was wondering if you could talk about maybe just any other clarity on where you're seeing that 1.5 gigawatts come in and what the potential investment opportunities might look like on the back of potentially finalizing some of those new large projects?

David, this is Curtis. And as I mentioned in my remarks, we're seeing that across all 3 states, opportunities to provide service to different entities that are looking at much larger scale than perhaps we've served in the past, and that's been built in and around our systems. The last part of that answer is really important, the in and around our systems. We're trying to leverage our existing system, our existing workforce and everything that goes to support that to respond to these customer inquiries. There's certainly more in the market, and we can read about those each day, but we're staying very disciplined in those projects that we will pursue and for those reasons, there are lower capital needs. We have infrastructure in place. We have folks in place and we can respond to them very quickly. And that's the need of those customers in many cases is the quick response. And so I think we're best positioned to be able to do that.

We'll continue to look at different opportunities that come up, but it's a fairly tight set of criteria that we look at to evaluate those before we put a lot of resources behind to chase those. So my comments around not a lot of -- or not a significant impact to our capital forecast really ties back to that. We're leveraging off of -- or some that's already there. It's working with our upstream providers, the relationships we have established there to be able to respond to these requests. And I think that makes us very efficient in being able to do that.

We now turn to Gabe Moreen with Mizuho.

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 in line locating and maybe 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.

Gabe, this is Curtis. And one of the items that Chris was talking about earlier on some of the things that we've 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 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 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.

So Gabe, this is you're wise to compare this to line locating, we shared with you a number of years ago that we believe there would be a benefit to in-sourcing line located from both an execution standpoint and building additional capacity that we could deploy when there was no line locating to be done. And over the last 3 or 4 years, we've really proven that. We've seen the value add. We've seen it be accretive, and we've also seen the quality of the work. So Watch and Protect is just another step in that direction, and we wanted to be transparent about it. But we believe, given the fact that we've presented a theory, tested the theory and proven it, now we can go on this with a pretty high level of confidence and run the same play with Watch and Protect. .

And to your question about materiality, the scale of Watch and Protect is much less than line locate. So the impact will be less, but you're right that there's a front-end cost in bringing people along and doing the training on the front end.

Got it. And then maybe if I can ask on '26 CapEx you grew rate base a little bit less than, I think, your intended CAGR in '25. You also finished up that big Austin project. But is it right to assume there will be some sort of acceleration in '26? And are there any discrete other projects you kind of point to around '26 CapEx plans. .

Dave, it's Chris. I think you're right, given commentary from Curtis about activities in the territory to think about an upward sloping trajectory of capital expenditure, and there might be a more punctuated step up next year. Again, full details for that. I'd hold your patience until we up with that formally in about a month's time, but you're thinking about the component items in the way I would, if I read it.

One of the other things to think about is in some of those capital projects to -- depending upon the type of contract that it is the term of service that a customer wants, they may be actually the ones paying the capital in those situations. So to derisk the exposure to us and to all of our other customers in the longer term that may hold a lid on capital somewhat compared to what you might think it would be given the activity levels.

We now turn to Bill Appicelli with UBS.

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?

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 Ontex 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 is a greater impact on projects that closed in January than projects that closed 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 or 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 that can offer you.

Okay. And then, I mean, does that influence the capital plan moving forward in terms of whether it's the sequencing of projects or the level of investment because of this mechanism. I mean, I think just comparing to -- I don't know how much of that was contemplated when the original guidance was given this time last year and the target of where you expect to be within the earnings range? I know we're going to get an update on all of that in the next few weeks. But just any color in terms of how you guys are -- is that a meaningful tool and the toolkit now that influences sort of the capital allocation decisions? Or is it more of a -- I don't want to make more of it than it is.

Yes. Bill, it's fair your observation about the landscape having changed since the offered guidance for 2025 is accurate. And you'll see that reflected as we share our guidance in just a few weeks. In terms of the impact of the Texas legislation on our forward planning, we allocate our system integrity investments based on system needs. There's no attempt to leverage anything external. It's really looking at what the system needs and where we need to invest to keep operating a system that's safe and reliable.

On the growth side, as Curtis said, we've been pretty disciplined around how we analyze projects that come our way. And we're thinking about not only can we find an opportunity to be supportive of economic development across our footprint. But where does this fit our forward plans for our system on the whole. So there's enormous growth in Texas, but we also see growth in Oklahoma as the Dallas area continues to grow north. There are many opportunities for us. I guess the safest thing for me to say to you is we are grateful for the Texas legislation, but it will not work our spending in terms of system integrity or growth. We're going to pursue opportunities using the same strategy that we have before we just have more opportunities and at a greater scale.

We now turn to Selman Akyol with Stifel.

Appreciate the comments and the results you're getting on the line locating and bringing that in-house. And I heard you 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?

Sean, 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 a 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.

Got it. And I guess this next one really sort of a 2-parter in and around the large load and data center. But curious, do you see -- are your conversations like '26, '27? Or do they extend all the way through '30, '31 when people would be looking to get in service? And then I guess, and I'm really thinking about sort of your growth profile? And does this opportunity set bend that higher?

And then the other question related to that is everything you're discussing being done under the regulatory framework? Or would there be any chance to get higher returns outside of that?

Yes. So a couple of parts to your question there. Let me talk about the term of some of these. Some of the larger projects would end up being multi-trains of what I would think of in terms of the number of generators that they will deploy over time. So those will extend out over a number of years and will scale into larger opportunities. That's also true in some of the advanced manufacturing facilities that we're talking to. There's an initial project load, but they have plans to continue to scale that over the next 4 or 5 years. So that does build in a growth profile from that respect. And there are other smaller projects like the one that I mentioned in my prepared remarks, we announced it earlier this year, that project will be in service here in the fourth quarter.

So obviously, a much shorter time frame from execution of the contracts to completion and I think that speaks to our approach of pursuing those projects that are in and around our system, that wasn't a significant build to be able to serve that customer to deliver them gas off of our system and then as they produce RNG to be able to take that gas back into our system where they're able to recognize the value of those RNG that they can generate. So that's -- I know that answer sounds a little broad, but it truly is all over the board, both in terms of the size and the timing of when those projects will continue to be developed.

In terms of our regulated model are trying to create something outside the regulated model, we are not looking at something outside the regulated model. I think this is a really good opportunity to continue to serve our existing customers. When we do things like the Austin system reinforcement project, that was a project to reinforce our system as the name implies in the Austin area but it also because we're bringing additional supply into that community, it gives us the chance to support additional growth. There will be other projects that do that same thing that help reinforce the supply we have coming into our existing communities and trying to pair those with growth opportunities, be it generation, be it data centers, or whatever those needs are. We just -- we can be much more efficient when we compare several different opportunities together and solve several customers' problems that will create more value for those customers and we'll continue to grow our company, and the net benefit of that is to our existing customers, where they're going to have more reliable supply just like we described in the Austin project.

So a lot of good things happening there, and we see a real advantage of being able to do that within our regulated model.

That concludes the question-and-answer session. I would now like to hand back to the ONE Gas team for closing remarks.

Thank you all again for your interest in ONE Gas. We look forward to seeing many of you at conferences in New York the second week of December. Our quiet period for the fourth quarter will start when we close our books in early January and extend until we release earnings in mid- to late February.

We'll provide conference call details at a later date. Have a wonderful day.

This concludes the ONE Gas Third Quarter Earnings Conference Call. You may now disconnect.