Executive Summary / Key Takeaways

• Robust Growth & Strategic Capital Deployment: ONE Gas is executing a disciplined capital plan, evidenced by 11,400 new customer connections in H1 2025 and significant projects like the Austin System Reinforcement, which will boost winter peak capacity by 25% and access lower-cost natural gas.
• Enhanced Financial Outlook & Regulatory Wins: The company raised its 2025 diluted EPS guidance to $4.32-$4.42, driven by strong Q2 performance and the favorable impact of Texas House Bill 4384, which expands capital recovery mechanisms across all Texas investments.
• Operational Excellence & Cost Discipline: A multi-year focus on O&M expense management, including in-sourcing line locating, has moderated cost growth, contributing to consistent financial outperformance and a projected 4% O&M CAGR.
• Fortified Capital Structure & De-risked Plan: ONE Gas has proactively met its 2025 and a portion of 2026 equity needs through forward sale agreements, securing over $226 million in proceeds and de-risking its long-term financial plan for an approximate 6% EPS CAGR through 2029.
• Resilient Regulated Business Model: As a pure-play natural gas utility, ONE Gas benefits from stable, regulated cash flows, effective weather normalization, and pass-through mechanisms that insulate operating income from commodity price volatility, underpinning its consistent dividend and credit profile.

A Foundation of Reliability: ONE Gas's Enduring Utility Model

ONE Gas, Inc. (OGS) operates as a 100% regulated natural gas distribution utility, serving approximately 2.3 million customers across Oklahoma, Kansas, and Texas. Its business model, established through a history dating back to 1906 and solidified by its separation from ONEOK (OKE) in 2014, centers on providing essential natural gas services to residential, commercial, and transportation sectors. This foundational structure provides stable cash flow and earnings, largely insulated from commodity price fluctuations due to robust cost pass-through mechanisms.

The company's strategic approach is deeply rooted in its commitment to system integrity and customer growth. Historically, this has translated into significant infrastructure modernization, including the completion of its cast iron replacement plan in 2019 and the bare steel service line replacement program in Kansas in 2024. These efforts are not merely operational; they are core to its competitive positioning, ensuring safety, reliability, and environmental stewardship.

Operational Excellence: The Unsung Technology of a Modern Utility

While ONE Gas may not develop proprietary microchips or software, its competitive edge lies in its sophisticated operational "technology" and infrastructure management. This encompasses a suite of advanced practices and physical assets that drive efficiency, enhance safety, and ensure reliable service delivery. The company's pipeline integrity management programs, for instance, are a critical differentiator. Through systematic replacement of older infrastructure, ONE Gas has achieved a remarkable 51% reduction in leak-related emissions since 2005, putting it firmly on track to meet its 2035 goal of a 55% reduction from distribution pipelines. This commitment to environmental performance not only aligns with sustainability goals but also mitigates regulatory risks and enhances public trust.

Furthermore, the strategic expansion of its gas storage capacity to over 60 Bcf and diversification of its gas supply portfolio act as crucial operational technologies. These measures enhance system resilience, particularly during extreme weather events, and effectively mitigate the impact of price fluctuations on customers. The Austin System Reinforcement Project, the largest capital investment since the 2014 separation, exemplifies this. This project is on track to increase winter peak capacity by approximately 25% and will provide access to Waha Hub-indexed natural gas, which typically trades at a discount, offering tangible cost benefits and improved supply reliability for customers.

The company's focus on in-sourcing line locating services, with ONE Gas employees now performing about 40% of these tasks, represents another form of operational innovation. This initiative has led to a faster pace of O&M expense moderation than initially projected, demonstrating improved cost control and greater workforce flexibility. An innovative Austin project, where Texas Gas Service will supply natural gas for on-site power generation and construct an interconnection to receive renewable natural gas from a customer's facility, highlights the company's adaptability and the versatility of its natural gas system in supporting evolving customer environmental and business goals. These operational advancements collectively contribute to a strong competitive moat, driving financial performance through lower costs, enhanced service quality, and a robust regulatory standing.

Financial Performance: A Story of Consistent Execution and Strategic Uplift

ONE Gas has consistently delivered strong financial results, underscoring the effectiveness of its regulated utility model and strategic initiatives. For the second quarter of 2025, the company reported net income of $32.0 million, or $0.53 per diluted share, an increase from $27.2 million, or $0.48 per diluted share, in the prior-year period. Year-to-date, net income reached $151.5 million, or $2.51 per diluted share, up from $126.6 million, or $2.23 per diluted share, in the first half of 2024. These gains were primarily driven by new rates, customer growth, and disciplined cost management.

Total revenues for the second quarter of 2025 increased by 20% to $423.7 million, and for the six months ended June 30, 2025, rose by 22% to $1.359 billion. This revenue growth was significantly bolstered by $21.1 million from new rates in Q2 2025 and $73.0 million in the first half of 2025. Customer growth also played a vital role, contributing $1.5 million to residential sales in Q2 2025 and $3.9 million in H1 2025. The company connected approximately 5,800 new customers in Q2 2025 and 11,400 in H1 2025, reflecting a robust 9% year-over-year increase in new customer additions for both quarters.

Operating income for Q2 2025 increased by $2.60 million, and by $37.30 million for the first six months of 2025. While operations and maintenance (O&M) expenses increased by 7.5% year-over-year in Q2 2025, reflecting higher labor-related costs and timing, the company maintains its full-year O&M growth expectation consistent with a 4% CAGR, a testament to its ongoing efficiency initiatives. Interest expense, net, saw a $1.70 million decrease in Q2 2025 due to lower commercial paper rates, though it increased by $2.60 million in H1 2025 following the reopening of senior notes in August 2024.

Strategic Initiatives and Forward Outlook

ONE Gas has demonstrated a proactive and successful regulatory strategy across its jurisdictions. In Oklahoma, the Corporation Commission approved a $41.1 million base rate revenue increase, effective June 2025, following the annual Performance-Based Rate Change (PBRC) application. Kansas Gas Service secured a $7.2 million increase under the Gas System Reliability Surcharge (GSRS) statute, effective August 2025. Most notably, Texas Gas Service filed a rate case in June 2025 requesting a $41.1 million revenue increase and proposing the consolidation of all Texas service areas into a single division. This filing, based on a 10.4% return on equity and a 59.9% common equity ratio, is expected to yield new rates in Q1 2026.

A significant development impacting the company's financial outlook is the enactment of Texas House Bill 4384 in June 2025. This legislation allows Texas gas utilities to defer and recover costs for all property, plant, and equipment placed in service but not yet reflected in base rates, including depreciation, ad valorem taxes, and a carrying cost. This is expected to add approximately $4 million to $5 million in annual pretax earnings, significantly reducing regulatory lag and enhancing earned returns on capital investments.

Building on its strong first-half performance and the positive impact of Texas House Bill 4384, ONE Gas has raised its full-year 2025 financial guidance. The company now expects net income between $261 million and $267 million, and earnings per diluted share between $4.32 and $4.42. This represents a 2.5% increase at the midpoint of its initial guidance ranges. Capital expenditures for 2025 are projected to remain at approximately $750 million, reflecting continued investment in system integrity and growth.

The company has also strategically de-risked its capital plan. Its 2025 equity needs, along with a portion of those for 2026, have been met through completed equity raises, including forward sale agreements totaling over $226 million. These agreements represent roughly 40% of the company's articulated five-year equity need, positioning it well to fund its capital plan and support its long-term EPS CAGR target of approximately 6% through 2029. Management's conservative approach is also evident in its interest rate assumptions, with no additional rate cuts factored into its 2025 plan.

Competitive Landscape and Strategic Positioning

ONE Gas operates in a highly regulated and capital-intensive industry, where its competitive position is shaped by regional focus, operational efficiency, and strong regulatory relationships. Direct competitors include larger, often diversified utilities like Atmos Energy (ATO), NiSource Inc. (NI), Spire Inc. (SR), and CenterPoint Energy, Inc. (CNP).

Compared to these rivals, ONE Gas's pure-play natural gas distribution model offers a focused approach. While companies like Atmos Energy and NiSource benefit from broader geographic footprints and diversified energy portfolios, ONE Gas leverages its regional expertise in Oklahoma, Kansas, and Texas to foster strong community ties and tailored customer relationships. Its operational "technology," particularly in pipeline integrity and gas storage, provides a comparable level of service reliability and efficiency. For instance, the Austin System Reinforcement Project demonstrates a strategic investment to enhance supply and capacity, directly addressing growing demand in a key metropolitan area.

Financially, ONE Gas exhibits solid profitability and efficiency metrics, with a TTM Gross Profit Margin of 53.45% and a Net Profit Margin of 10.63%.

While its scale might not match the largest diversified utilities, its disciplined O&M management and effective regulatory mechanisms contribute to a stable financial profile. The company's consistent track record of meeting or exceeding EPS guidance for 11 consecutive years underscores its operational predictability in a regulated environment.

Indirect competition stems from the broader energy transition, with electric utilities and renewable energy providers posing a long-term challenge. The increasing demand for electricity from data centers and advanced manufacturing, for example, could favor electric infrastructure. However, ONE Gas is actively pursuing opportunities to serve these very sectors with natural gas for baseload and backup power generation, demonstrating its adaptability and the continued relevance of natural gas as a reliable and economic energy source. The innovative Austin project, integrating natural gas supply with renewable natural gas reception, exemplifies this forward-thinking approach to customer needs and environmental goals.

Risks and Mitigation

Despite its stable business model, ONE Gas faces several risks. Environmental regulations, particularly concerning former Manufactured Gas Plant (MGP) sites, require ongoing remediation efforts. The company has deferred $30.60 million for these costs in Kansas, with a recently approved increase in the Accounting Authority Order (AAO) cap to $32.00 million, ensuring cost recovery. Pipeline safety regulations, overseen by PHMSA, could also necessitate material expenditures if more stringent requirements are imposed, though the company actively invests in integrity programs.

Commodity price risk is largely mitigated by purchased-gas cost adjustment mechanisms, which pass costs through to customers without affecting operating income. Interest rate risk, primarily from commercial paper and new debt, is managed through a mix of fixed-rate and floating-rate debt, and the company's conservative guidance assumes no further rate cuts in 2025. Counterparty credit risk is diversified across 2.3 million customers, with allowances for doubtful accounts and recovery mechanisms for fuel-related bad debts.

Conclusion

ONE Gas stands as a resilient and strategically positioned natural gas utility, consistently delivering value through a combination of disciplined operational execution, proactive regulatory engagement, and targeted capital investments. The company's ability to consistently meet or exceed its financial guidance, coupled with its robust infrastructure and commitment to safety, forms the bedrock of its investment thesis. The recent upward revision of its 2025 guidance, driven by strong customer growth, effective cost management, and the favorable impact of Texas House Bill 4384, underscores its capacity for sustained performance.

As ONE Gas continues to modernize its system, expand its customer base, and strategically pursue new demand opportunities from data centers and advanced manufacturing, its operational "technology" and regional expertise provide a durable competitive advantage. The company's de-risked financial plan and proactive equity funding further enhance its stability, making ONE Gas a compelling consideration for investors seeking consistent returns from a well-managed, essential utility in a growing region.