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

Good morning, and thank you for joining us on our second quarter 2022 earnings conference call. This call is being webcast live and a replay will be made available later today. After our prepared remarks, we'll 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, 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 us on the call this morning are Sid McAnnally, President and Chief Executive Officer; Caron Lawhorn, 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, Brandon, and good morning, everyone. The last three years have tested all of us, calling us to be flexible and resilient in the face of significant challenges. At ONE Gas, we committed to meet those challenges, while maintaining our focus on three targets, a strong safety culture, excellent customer service, and building the capacity to respond to the organic growth in our service territory. Today, we provide an update on our progress on those three targets. The American Gas Association recognized our employees for having the lowest serious injury rate among our peers for the fifth consecutive year. A national consumer research firm recognized our teams in Oklahoma and Texas for outstanding customer service. And earlier this year, in our guidance, we significantly increased our capital program to expand investments that strengthen our system, while also responding to our growing customer base. Last year, we added a fourth commitment, a stronger focus on ESG opportunities, and you'll hear more about that in a moment. Now, we're also called to respond to today's dynamic macroeconomic environment with both inflation and an increase in the cost of gas impacting customer bills. We remain focused on customer affordability and on managing costs across the enterprise. Our approach is simple, be prudent in managing the present and remain consistent in the long term execution of our core business and growth strategies. The courage and commitment that ONE Gas employees live every day provides a strong foundation for our confidence that we are navigating today's challenges in a way that also builds toward a bright future. With that, I'll turn it over to Caron to discuss the financial details for the quarter. Caron?

Thanks, Sid, and good morning, everyone. Net income for the second quarter was $32.1 million or $0.59 per diluted share, compared with $30.1 million or $0.56 per diluted share in the same period 2021. Our second quarter results include an increase in operating income of $7.5 million or 15% over the same period last year. This reflects an increase of $14.4 million from new rates, primarily due to regulatory filings completed in the second half of last year. Continued residential customer growth, primarily in Oklahoma and Texas contributed to an increase in operating income of $1.5 million. Our operating costs increased $7.1 million over the second quarter 2021, including an increase in outside services of $5.8 million. In addition, employee-related costs were up $0.7 million, which includes higher labor and employee benefit costs that were largely offset by a reduction in expense from the mark-to-market valuation of liabilities for our nonqualified employee benefit plans. Other expense, net, increased $4.4 million for the quarter, primarily due to an increase in expense from the decline in the value of assets associated with our nonqualified employee benefit plans. The increase was partially offset by a reduction in the non-service cost for our pension plans due to a remeasurement of our obligations, which I'll discuss in a moment. Depreciation expense was $4.2 million higher than the prior year, reflecting an increase in net property, plant and equipment, as a result of our continued capital investments. Our capital expenditures and asset removal costs for the second quarter were $149.1 million, compared to $129.4 million in 2021. Our capital investments for the full year are on track for $650 million. Authorized rate base was approximately $4.28 billion as of June 30, and we estimate our average rate base for 2022 will be approximately $4.8 billion. As…

Thank you, Caron, and good morning, everyone. I'll start with a brief update on securitization and recent regulatory activity. In Oklahoma, the Oklahoma Development Finance Authority received validation of the bond issuance by the Oklahoma Supreme Court. On July 15, the ODFA began the marketing process for the bonds, which are expected to be issued and proceeds received in the third quarter of 2022. On July 14, Kansas Gas Service, the Kansas Corporation Commission Staff and the Citizens' Utility Ratepayer Board reached a settlement agreement, allowing the company to issue securitized utility tariff bonds. The bonds will be issued with a scheduled final maturity of between seven and 10 years. The KCC has until September 27 to issue a financing order and if approved, we can begin the process of issuing the bonds. And in Texas, the bond issuance process is being led by the Texas Public Finance Authority and is expected to be completed in the fourth quarter. Turning to other regulatory matters, on March 15, Oklahoma Natural Gas filed its Performance-Based Rate Change application for a $19.7 million increase in base rates. In May, both the Oklahoma Corporation Commission Staff and the Attorney General's office filed statements supporting an increase of $19.6 million. Pursuant to our tariff, the new rates went into effect on July 13, reflecting the $19.6 million revenue increase. Those new rates are interim and, therefore, subject to refund, pending final approval by the commission. A hearing is expected to be scheduled in September. During the first quarter, Texas Gas Service made Gas Reliability Infrastructure Program filings for all customers in the Central-Gulf and West Texas service areas, requesting increases of $9.1 million and $5 million, respectively. New rates in the Central-Gulf service area took effect in June. In the West Texas service area, the…

Thank you, both. On June 28, we published our 2022 ESG Report, which includes additional disclosures compared to previous publications. The report lays out the tenets of our ESG philosophy and strategy and provides relevant disclosures and metrics in alignment with TCFD and SASB reporting standards. I'm grateful for the efforts of all those who work so diligently to help produce this report and while I'm encouraged by our continued progress, I look forward to even more progress in next year's report as we further expand our work in this important area. You've heard us talk before about the application of new technologies to solve problems in a cost-efficient way. When you identify a problem, for which no technology exists, you have the opportunity to be innovative. Recently, a group of employees at ONE Gas received the United States patent for inventing a new technology that allows us to respond to a natural disaster event in real time by overlaying our pipeline assets with the areas impacted by the event. For example, if there is an earthquake, the location and impact of the earthquake is automatically captured by this new technology and overlaid against our pipeline system, allowing us to identify and prioritize assets that need to be inspected. This innovation is one of many examples of the ingenuity of our employees and their ability to bring to their work improved efficiency and productivity, while also improving the safety and well-being of our customers and our communities. In closing, our role is clear, to safely provide natural gas to our customers in an environmentally responsible way. And that work is made possible by the commitment of each one of our 3,650 employees. I'm grateful for their dedication to safety, reliability and growth and privileged to work alongside each of them every day. Thank you all for joining us this morning. Operator, we are now available for questions.

[Operator Instructions] Our first question is from Julien Smith with Bank of America.

Hi, good morning, everyone. It's Kody Clark on for Julien. Thanks for taking my questions.

Good morning, Kody.

Good morning. So first, thinking about the '22 EPS guidance, can you give maybe a little bit more color on how you're thinking about results within the range, given some of the moving pieces you discussed? So, the nonqualified benefit plan, as well as the pension. Can you talk a little bit more about how that plays into your view on guidance? I know you reiterated, but if you can just give a little bit more color there? Thanks.

Good morning, Kody. This is Caron. Related to the mark-to-market on the assets and liabilities to the nonqualified plans, we don't include those in guidance. And what I mean by that is, of course, we've experienced a decline in market value through the six months. But for the balance of the six months, we don't assume positive or negative mark-to-market as we think about the guidance range. With respect to the remeasurement of the pension plan, that's fixed. We've remeasured the pension plan. We've determined the impact on our expense for the balance of the year. As I said, it's about $7 million for 2022 and that will remain. We'll remeasure the pension plan again at the end of - 12/31 for next year.

Okay. Understood. And just following up on that, curious if there is any offsets that you're targeting this year as second half '22 implies a 11% growth over the second half of '21 to kind of meet the midpoint of that guidance. Just wondering if there is any levers that we should be thinking about that would move you higher within the range for the second half.

So, regulatory activity will have some impact on the second quarter. The - by far, the biggest impact that we've pointed to is this pension number, which is going to be $7 million for the balance of the year. Other than that, it's the basic blocking and tackling.

Okay. Got it. Thanks for the time, Sid and team.

Thank you.

Our next question is from Robert Mosca with Mizuho Securities.

Hi. Good morning, everyone.

Good morning.

Just wondering if you guys can maybe talk about the genesis of El Paso's denial for the group rate increase. I think you've had - there has been issues there before. Just wondering what that dynamic is, and is that an area of concern longer term or is that kind of just run-of-the-mill happenings?

Robert, this is Curtis. And as you point out, it happened last year and it had happened once a few years earlier. The net effect is that the rates went into effect as we had filed for them as the Commission approved and all the others approved. We do go through the appeal process and we're in that now, just like we did last year. And those - again, those rates were allowed to take effect, because the Commission had already deemed the filing to be proper and that's the only thing to qualify as you go through that filing. So, it has happened a few times and it's just the situation we deal with in that community.

Got it. Understood. And maybe just on the O&M side, just wondering if you've seen any changes in your inflation expectations or if things are tracking kind of how you laid out last quarter.

It's an interesting question. I can't say that we had any more visibility around inflation than anyone else in the marketplace. We built a plan assuming some. As you heard in the remarks, we've adjusted our plans accordingly as we go forward. But we are confident, as Caron said, that the guidance captures our forward year look and we'll join you in watching how inflation progresses for the remainder of the year. In terms of O&M, we remain focused on opportunities to not only recognize savings, but do so in a way that doesn't impede our commitment to customer service. The example that we gave around the patent that we received, we highlighted that really because we wanted to demonstrate the fact that we've got employees all across the company who are focused on trying to find innovative ways to address problems, but in a way that also introduces efficiency into the organization. That's one of many examples of projects that are underway, as we are focused on affordability, being very conscious of customer bills, and being dedicated to continued activity around efficiency programs and communicating with our customers in a meaningful way around how we might work together to get through this environment.

Great. That's helpful. And thanks, everyone. Appreciate the time.

Thank you for the question.

[Operator Instructions] Our next question will come from Jamieson Ward with Guggenheim Partners.

Hi, guys. How's it going?

Fine. Thanks.

Excellent. So, I just wanted to clarify, you have the $0.05 charge in the first quarter and then you have moving pieces this quarter, which seemed for the market impact and then on the investments and then the net periodic benefit cost decreased. With two of those netting out. It seemed like it was around $0.07. Is the right way to think about it that at the end of the year, if everything else stayed the same from here on out, that you would have kind of $0.12 excluded from - as one-time items from guidance? So - and even though that might be a drag from where you are now, you would present it as - obviously, the market's not going to repeat itself next year. Maybe it will be down again, maybe it will be up. But either way, that's a one-time item. Are you going to back it out that way, or are you going to show results a different way? How should we think about the end of the year and kind of how you're going to present the performance in these plans and your results and think about it going forward?

Jamieson, where we sit today, the impact of the mark-to-market on the noncall plans for 2022 and the impact of the remeasurement for 2022 pretty much negate each other. So, as we think about the year --

Okay.

Okay? All right.

So, if everything else stayed the same from here on out, you're saying there is no negative impact. So, you'd just be flat? If we were - if you were to see improvement then, would that also be treated as one-time or would that be something you would book? Just trying to wrap - make sure wrapping my head properly around how you would treat any further change based on market performance of the investments in the plan in the third and fourth quarters. That's all.

So, the mark-to-market is - it's a non-cash, non-operating item. We historically have not provided a non-GAAP earnings number. We've typically just stuck with our GAAP number and quantified for you any of the impact related to this mark-to-market, because, typically, it's not been hugely material when you look at the full year. So, at this point, I don't anticipate doing that - handling that any differently.

Understood. Thank you very much. Very clear.

Thank you for your question.

It appears we have no further questions today. I'll now turn the call back over to our speakers 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 late October. We'll provide details on the conference call at a later date. Have a great day.

This concludes today's conference. You may please disconnect your lines.