ONE Gas (OGS) Q1 2026 earnings review
Rate Base Growth Shields Earnings from Warm Winter Shock
ONE Gas delivered a textbook utility quarter, proving the resilience of its fully regulated model. Despite an 11% drop in revenue driven by lower pass-through gas costs, and macro weather that was 25% warmer than last year, Adjusted Net Income grew 11% to $133.4 million ($2.11 per share). The secret was a $27.3 million margin injection from new rate cases, which completely absorbed base volume declines and rising employee costs. With the timely passage of favorable Kansas legislation and reaffirmed 2026 guidance, the company's structural 5-7% EPS growth engine remains fully intact.
🐂 Bull Case
The signing of Kansas HB 2435 expands qualifying infrastructure investments for the GSRS surcharge and hikes the monthly residential cap by 68% (from $0.80 to $1.35), severely limiting regulatory lag and accelerating cash flow.
Regulatory normalization mechanisms successfully protected the bottom line from weather that was 20.5% warmer than normal, validating the downside protection of the tariff structures.
🐻 Bear Case
Operating and maintenance costs continue to pressure margins, with employee-related costs jumping $6.8M year-over-year, challenging the company's ability to hold its 4% long-term CAGR target.
Net of weather normalization, lower base sales and transport volumes still dragged operating income down by $8.9M, hinting at conservation headwinds offsetting physical meter additions.
⚖️ Verdict: 🟢
Bullish. The underlying pass-through revenue drop is irrelevant to earnings. Core operating income grew 5% despite a historically warm winter, proving that aggressive rate case execution and new legislation are effectively eliminating regulatory lag.
Key Themes
Kansas HB 2435 Supercharges Capital Recovery
Accelerating. The April 2026 passage of Kansas House Bill 2435 is a massive legislative victory. It expands the types of infrastructure eligible for immediate surcharge recovery and hikes the maximum monthly residential fee from $0.80 to $1.35. This structural change significantly cuts regulatory lag, accelerating cash flows without requiring exhaustive, full-blown rate cases.
Volume Declines Contradict Customer Growth Narrative
Reversing. Management consistently touts its resilient residential growth engine, pointing to ~23,000 new meter connections annually. However, Q1 data contradicts the impact of this physical growth. Stripping out the noise of weather normalization, underlying sales and transport volumes still dragged operating income down by $8.9M. This proves that structural usage declines—driven by energy efficiency and price elasticity—are currently overpowering the revenue benefits of new connections.
Labor Investments Threaten O&M Margin Targets
Accelerating. Operations and maintenance expenses jumped $11.6M year-over-year to $146.9M. Employee-related costs drove $6.8M of this increase, completely erasing the margin benefits of lower outside service costs. Management points to 'planned investments in the workforce,' but this aggressive cost inflation raises immediate red flags regarding the company's ability to cap long-term O&M growth at its strict 4% target.
Texas HB 4384 Creates Structural Earnings Premium
Stable. The non-GAAP adjusted earnings framework introduced in late 2025 is executing exactly as modeled. By allowing the company to defer equity carrying costs on Texas capital projects, Q1 Adjusted Net Income reached $133.4M, carving out a permanent $4.7M premium over GAAP earnings. This legislative adjustment is the primary engine derisking the multi-year 5-7% EPS growth target.
Weather Normalization Absorbs Macro Volatility
Stable. First-quarter weather was a staggering 20.5% warmer than normal across ONE Gas territories. Under traditional models, this level of macro volatility would have crushed utility volumes and quarterly earnings. Instead, state-approved weather normalization mechanisms acted as an absolute firewall, containing the volume damage and allowing operating income to actually grow 5% year-over-year.
In-Sourcing Tech Drives Long-Term Efficiency
Stable. To structurally combat external contractor inflation, ONE Gas continues to integrate 'Watch and Protect' digital routing technology and in-house line locating (now covering ~40% of the network). While internalizing this technology drives near-term employee cost spikes, it permanently reduces third-party damage ratios and locks in operational control over critical infrastructure.
The Regulatory Treadmill Dependency
Stable. The entirety of this quarter's operating income growth rests on a $27.3M injection from new rate adjustments. With a $28.7M base rate request pending in Oklahoma and a $36.9M GRIP filing active in Texas, the company is perpetually tethered to the regulatory treadmill. Any pushback or delay from state commissions would instantly stall the earnings momentum holding up the stock.
Other KPIs
Reversing. In a highly capital-intensive sector crippled by rising interest rates, ONE Gas actually lowered its net interest expense by $3.3M to $32.4M in Q1. This drop was achieved through utilizing commercial paper borrowings at lower rates and leveraging the favorable capitalization mechanics of Texas HB 4384.
Stable. Q1 capital and asset removal costs came in at $169.6M, slightly decelerating from $177.7M a year ago. The expenditure focus remains heavily directed toward system integrity and extending service to new growth zones, pacing perfectly with the $800M full-year investment target.
Guidance
Stable. Reaffirmed at $4.83 - $4.95. The midpoint of $4.89 represents a healthy 9% step up from FY25's $4.48 actual adjusted result, securing the company's multi-year promise to deliver 5-7% baseline growth.
Stable. Reaffirmed at $306M - $314M. Propelled by consistent capital deployment, new rate case execution, and the advantageous deferred accounting rules of Texas HB 4384.
Accelerating. Total projected 2026 CapEx steps up to $800M from FY25's final $760M print. This includes a robust $230M dedicated exclusively to financing infrastructure extensions for new customers.
Key Questions
O&M Trajectory vs Long-Term Target
With Q1 employee costs adding $6.8M alone, are you currently tracking above your strict 4% long-term O&M CAGR target for the full year, or are these purely front-loaded investments?
Kansas Surcharge Timing
Now that Kansas HB 2435 is officially signed into law, how quickly will you file to capture the newly expanded asset base and the increased $1.35 monthly customer cap?
Usage Per Customer Headwinds
Base volumes declined by $8.9M net of weather adjustments. Are you seeing a structural shift in conservation or price elasticity that is permanently offsetting the revenue benefit of your ~23,000 annual meter additions?
Large Load Project Conversions
Last year, you highlighted an active pipeline of 1.5 GW of power generation and data center opportunities. Have any of these hyperscale projects reached final investment decisions or broken ground?