Good day, and welcome to the ONE Gas 2024 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.

Good morning, and thank you for joining us on our Second Quarter 2024 Earnings Conference Call. This call is being webcast live, and a replay will be available later today. After our prepared remarks, we are happy to take your questions. 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 provision of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934, each as amended. Actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Joining us on the call this morning are Sid McAnnally, President and Chief Executive Officer; Chris Sighinolfi, Senior Vice President and Chief Financial Officer; and Curtis Dinan, Senior Vice President and Chief Operating Officer. And now I'll turn the call over to Sid.

Thanks, Erin, and good morning, everyone. We're happy to be with you today to share our second quarter results. Our performance through the first half of the year is consistent with our financial plans and the expectations we shared when we issued guidance last November. We entered the second half of the year with positive momentum and constructive regulatory activity in all of our jurisdictions. Curtis will speak to the latest activity, a unanimous settlement agreement in the Kansas Gas Service full rate case. We continue to fulfill our commitment to deliver affordable and reliable natural gas to our customers, while effectively managing the business. One example of our focus on execution is our line locating project. When we updated our 5-year outlook in November 2022, we projected an average O&M increase of 5% over the 5-year guidance period, due primarily to wage increases and investments we were making to bring certain services like line locating in-house in those locations where there was an opportunity for efficiencies. In that guidance, we noted that we expected the increase in O&M expenses to be front-end loaded, as we hired new employees and trained them to perform line locating and other skills, and then expected to see expenses decrease as those employees not only replaced contractors in certain areas, but also could be deployed to do other work as needed. That is exactly what we've seen. As outside service costs related to line locating have been reduced by an amount greater than the cost related to in-sourcing. While we saw a 7% year-over-year total O&M increase in the second quarter, this year those same expenses increased to just 3% year-over-year as we begin to realize the benefit of line locating and other investments. Now I'll turn it over to Chris to discuss financial details for the quarter.

Thanks, Sid, and good morning, everyone. Net income for the second quarter was $27 million or $0.48 per diluted share, compared with $33 million or $0.58 per diluted share in the same period in 2023. Revenue from new rates contributed $14.7 million to operating income year-over-year, while continued growth in our residential and commercial customer base, primarily in Oklahoma and Texas, contributed $1.6 million. Although weather across our service territories for the second quarter was 40% warmer than normal, our weather normalization mechanisms again mitigated the impact on earnings. As Sid noted, our operations and maintenance expenses increased 3% over the second quarter of 2023, due primarily to expected increases in employee-related costs, which we have mitigated in part through our insourcing efforts. Excluding the impact of the Kansas securitization, depreciation and amortization expenses were approximately $5 million higher than the prior year, reflecting an increase in net property, plant and equipment due to our higher level of capital investment. Excluding the impact of Kansas securitization, interest expenses in the quarter were approximately $10 million higher than the same period in 2023, which primarily reflects the issuance of $300 million of 5.1% senior notes in December and the maturity of lower coupon notes in February and March, which we repaid with commercial paper. Our capital expenditures and asset removal costs for the second quarter were approximately $195 million compared to $190 million in 2023. Expected capital investments for the full year remain on track with our $750 million forecast. As planned, we have satisfied our 2024 equity need through the forward settlement agreements that we issued last year. Those agreements cover approximately 3.6 million shares of our common stock with settlement by year-end at an average price of approximately $77 per share. Had all forward shares been settled at quarter end, we would have received net proceeds of approximately $275 million. On July 15, the ONE Gas Board of Directors declared a dividend of $0.66 per share, unchanged from the prior quarter. And lastly, we reaffirm our 2024 financial guidance, including net income of $214 million to $231 million, and earnings per diluted share of $3.70 to $4. Curtis, I'll now turn it to you.

Thank you, Chris, and good morning, everyone. I'll start with a brief update on our regulatory activities. As we discussed last quarter, Kansas Gas Service filed a general rate case in March. A unanimous settlement agreement was reached with all parties and filed with the Kansas Corporation Commission last week. It is a black box settlement, meaning that the agreement does not contain a stated ROE, capital structure, or rate base. The settlement agreement does include an approved total increase of $70 million and a net increase of $35 million after considering what is already being recovered through the gas system reliability surcharge mechanism. The final order in the case is due to be issued by October 25th. In February, we filed our annual performance-based rate change application in Oklahoma, reflecting a 2023 test year and seeking a $31.8 million rate increase. We reached a settlement with the commission staff reflecting a $31.4 million increase, which the administrative law judge supported. New rates were implemented on July 1, subject to refund until the commission enters a final order. In Texas, the Central Gulf Gas Reliability Infrastructure Program, or GRIP, that was filed in February, went into effect in June with a rate increase of $12.2 million. Also in June, Texas Gas Service filed a rate case for all customers in the Central Gulf service area, requesting a $25.8 million increase. This filing is based on a 10.25% return on equity and a 59.6% common equity ratio. New rates are expected to take effect towards the end of this year. The West-North GRIP filed in March was also approved by the Railroad Commission and went into effect in July, reflecting a rate increase of $8.5 million. Two of the cities denied Texas Gas Service's request, and we have appealed the denial to the Railroad Commission. In May, Texas Gas Service filed a GRIP in the Rio Grande Valley service area, requesting a $3.7 million increase. New rates are expected to take effect in September. Turning to commercial and operating activities. Our capital execution remains on target to complete our 2024 plan and meet the needs of an expanding customer base. We expect to complete during the third quarter, the final phase of a major system extension west of Austin. These projects are bringing natural gas service to underserved communities and will support the build-out of several large master plan developments. We continued to see steady growth, not only in Austin but also across our service territory with Oklahoma City and El Paso in particular experiencing robust demand for new meters. And now I'll turn it over to Sid for closing remarks.

Thanks, Curtis and Chris. We recently published our 2024 sustainability report, which highlights our focus on supporting our coworkers and communities, reducing emissions, and employing sound governance practices. Our robust disclosures have resulted in achieving a AAA ESG rating from MSCI due to our management of safety and climate risks and a prime corporate rating from ISS. Regarding governance, we're pleased to share that we welcomed two new board members to our Board of Directors in July. Sanjay Meshri is the former Chairperson of Advanced Research Chemicals, the owner and Chairperson of Thompson Chemical Corporation and Chairperson of Meshri Holdings. He will support our continued focus on business execution and operational and safety excellence. Yves Siegel has over 35 years of experience managing significant energy portfolios and launching new investment strategies and energy infrastructure. He brings additional financial acumen to our Board, as well as prospective gain from decades of experience as an energy analyst. In closing, I want to thank each of my coworkers for working every day to keep our customers safe and enjoying the many benefits that natural gas provides. Operator, we're now ready for questions.

The first question comes from Julian Smith with Jefferies.

Look, I come back to the O&M increases that you guys have described. I mean, clearly, obviously, something of a step function as you bring in-house. I mean, just relative to that you guys articulated earlier this year and as you think about it on a multiyear basis, I mean, is this kind of that realizing that step function here in the quarter with that 7%? And do you think it normalizes through the course of the year and especially into next year? I just want to understand sort of the cadence as you think about how that's realized into your numbers given the sort of outsized increase? And maybe related, just adjacent, the interest expense saw kind of a meaningful increase here in the quarter as well. If you can just speak to that a little bit ex securitization.

Sure, Julian. I'll provide an overview and then have Curtis address some operational and maintenance issues related to the strategies we’ve implemented to control those costs. Chris will also address your question regarding interest. In previous meetings, we discussed our strategy of preparing for the future instead of focusing solely on short-term contracts, which we saw as a challenge. If we had opted for short-term contracts, we wouldn't have been ready to capitalize on the growth we anticipated in our service areas over the longer term. Our guidance reflects our belief that increasing staffing where efficiency can be improved would benefit us not only in the short term by enhancing service levels and compliance but also in preparing for future growth, especially given the disconnect between housing demand and availability in our service territory. To highlight this, our quarterly O&M performance shows that we had a 10.1% increase in the first quarter of 2023, but this has decreased each quarter since, with a 4.8% increase in the first quarter of 2024 and 3% in the most recent quarter. We believe this indicates that our strategy has been effective in managing O&M expenses while supporting our goal of future growth and serving the expanding communities in Kansas, Oklahoma, and Texas. Curtis, please feel free to add any additional insights.

Sid, I guess the thing I would say is that some of the bets that we were making in in-sourcing those functions, we're realizing some of those benefits a little bit quicker than we might otherwise have thought when we did our initial analysis. We're getting really good performance out of those teams. And one of the things we really like about it for the long term is that these will be additional coworkers that we have that have other qualifications that enable them to do other tasks. So line locating, just as an example, isn't a function that happens at the same level five days a week. It has peaks and valleys through the week. And so by having a workforce that is able to flex in and out of those types of roles, that creates other efficiencies for other work that we need to do in those valleys. So we gain not only the efficiencies with the line locating efforts, but we gain efficiencies with those other compliance tasks that have to be completed. So I think it's been a really good story, from an operational standpoint. And then from just the line locating requirements in each of our states, we have worked with the legislatures and the one call boards around different changes that have improved how line locates and second or follow-up locates are done, subsequently that has also changed the level of activity required. So we've actually eliminated some of those line locate tickets that has allowed us to also gain some efficiency. So a couple of really good stories in there, both from an operational standpoint as well as what our public advocacy teams have been working on.

And Julian, to follow up on your question regarding interest expense, this is Chris. One thing to note, everything was consistent with how we had planned it to be for the year, but I'm not sure everybody picked up on the nuances of the timing. And so if you think about the first quarter, we had a $300 million 3.6%, 10-year note that matured in mid-February. That was prefunded by the issuance we had done in December. But effectively, you're talking about $300 million moving from 3.6% to 5.1%. So you're picking up 150 basis points of exposure there. But you were shielded on part of that for half the quarter. And then we had the $473 million, 1.1% note that didn't mature until March 11. That was replaced with CP at 5.6%. So you're picking up 400-plus basis points of impact there. So first quarter, while the maturities occurred in that quarter, had some shielding effects from the total impact of the interest headwind. The second quarter warehouse all of those impacts. And then if you think about Curtis' regulatory review, the back half of the year with rates starting to go into effect on filings that occurred in the spring, you start to have some pickup in regulatory revenue in the back half. And then, as you know, we had previously discussed terming out some of the commercial paper in the back half of the year, and we have the equity forwards, which we intend to sell by the end of the year. So I think when you look at the second quarter, you're looking at the sort of full impact of the maturities we talked about in the winter.

Right. Exactly. Appreciate it. And Curtis, maybe just go back to the comments briefly what you said. Clearly, there's a timing element. You remain overall on track against that 5-year number on the O&M CAGR, correct?

That’s correct, Julian.

The next question comes from Paul Fremont with Ladenburg.

I guess first question is like a point of clarification on the Kansas settlement. Will the commitment in its final order make public the rate base, the ROE, and the equity ratio? Or is it your expectation that they'll remain silent on that?

Paul, this is Curtis. In past rate cases, when we've reached a black box settlement, even in the final order, those items you identified do not get listed or detailed in it. It's just a revenue requirement change and doesn't go into the detail of how the calculation is done.

Great. I have another question regarding the progress you’ve made. I understand you’ve set a long-term growth expectation for O&M at 5%. Do you foresee the potential to exceed that expectation in the future?

We'll always strive to come in better than that, Paul. We're focused always on how can we be more efficient and still provide the safe and reliable service that we think our customers are entitled to. So it's possible that it would come in lower. We wanted to disclose the performance for the quarter and give some color around that to give you a sense of the kinds of projects that we think lead to that level of performance. But right now, we're not updating the 5% number, but we'll continue to work toward lowering that number and we'll provide updates as appropriate.

Okay. And I guess the last question I have is sort of on interest rates. With interest rates lower than they were at the end of the year, are you seeing any potential benefit on that front?

Paul, this is Chris. Yes, the short answer is yes. There’s a lot of speculation, obviously, about what may happen with the Fed funds rate. Obviously, our commercial paper rate is tethered specifically to Fed funds rates. So should the Federal Reserve lower its policy rate, we would expect that commercial paper borrowing costs would decline in sympathy with that. A reminder that our forecast was that we would not see that happen this year. But obviously, there’s been a change in market view on that front. And then on long-term issuances or intermediate long-term issuances, we’ve seen both treasury rates come in and corporate credit spreads come in. And so that’s been favorable versus where things stood at the beginning of the year, to your point.

The following comes from David Arcaro with Morgan Stanley.

Could you remind me about the timing for financing? You mentioned extending some of the commercial paper in the second half. Do you see an opportunity where you might be able to speed that up? How are you considering the recent decline in yields in the market?

Yes. David, this is Chris. We enter an open window here in a couple of days. That will remain until we close the books for the quarter. So that's one window we've targeted for potential terming out of that credit. And then as you look at the equity forwards, our expectation, as you've seen us do in the past, is to settle those closer to year-end.

Okay, I understand. That's helpful. I have a broader question regarding the Kansas settlement. Are the details of the settlement aligned with your current earnings expectations and outlook? Are there any significant changes from what you had initially anticipated?

David, the short answer is no major changes to what we had assumed in our guidance. There are many items that we factor into that, and this fits within the profile that we had provided.

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. Our quiet period for the third quarter starts when we close our books in early October and extends until we release earnings in early November. We'll provide details on the conference call at a later date. Have a great day.

This concludes the ONE Gas 2024 Second Quarter Earnings Conference Call and Webcast. You may now disconnect.