Executive Summary / Key Takeaways

• ONE Gas (NYSE:OGS) demonstrates a robust investment thesis rooted in its stable, regulated natural gas distribution business across Oklahoma, Kansas, and Texas, underpinned by consistent execution of its regulatory strategy and disciplined cost management.
• The company is experiencing significant organic growth driven by strong residential customer additions and increasing demand from high-growth sectors like data centers, advanced manufacturing, and utility-scale power generation, leveraging its existing infrastructure for efficient expansion.
• Strategic investments in system integrity and reinforcement, such as the Austin System Reinforcement project, enhance reliability, provide access to lower-cost gas supplies, and position the company for future growth opportunities within its regulated framework.
• Recent legislative developments, notably Texas House Bill 4384, are structurally improving capital recovery in Texas, contributing to a durable, higher growth outlook for the core business, with management projecting an EPS CAGR of approximately 6% through 2029.
• ONE Gas maintains a strong financial profile with a projected adjusted CFO to debt ratio around 19% and stable credit ratings, supported by effective hedging strategies for commodity price and interest rate risks, and a commitment to operational efficiency through in-sourcing initiatives.

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

ONE Gas, Inc. (NYSE:OGS), established in 1906, stands as a cornerstone in the natural gas distribution sector, serving approximately 2.3 million customers across Oklahoma, Kansas, and Texas. The company operates as a pure-play regulated natural gas utility, a business model inherently designed for stability and predictable cash flows. Its long history, marked by strategic expansion and a significant spin-off from ONEOK Inc. (OKE) in 2014, has forged a resilient enterprise focused on delivering safe, reliable, and affordable natural gas. This foundational strength is particularly relevant in its service territories, where state governments actively encourage natural gas use for residential, commercial, and industrial applications, providing a supportive backdrop for sustained demand.

The company's strategic approach is deeply integrated with its operational capabilities and a commitment to infrastructure modernization. ONE Gas has systematically upgraded its system, notably completing its cast iron replacement plan in 2019 and the bare steel service line replacement program in Kansas in 2024. These initiatives have not only enhanced safety but also contributed to a significant 51% reduction in leak-related emissions by 2005, with the company on track to achieve a 55% reduction from 2005 levels by 2035. This focus on system integrity and environmental stewardship is a core differentiator, ensuring long-term operational efficiency and regulatory compliance.

Technological Edge and Operational Excellence

While ONE Gas operates within a traditional utility framework, its technological differentiation lies in its advanced approach to pipeline integrity management and operational efficiency. The company employs sophisticated inspection and maintenance plans, integrity management programs, and operator qualification programs as mandated by federal pipeline safety statutes like the PIPES Act and analogous state regulations. These programs, coupled with a robust public awareness initiative and a control room management plan, ensure the safe and efficient operation of its extensive transmission and distribution pipeline network. The tangible benefit is a highly reliable system with reduced operational risks and enhanced safety for customers and employees.

A key operational innovation for ONE Gas has been the strategic in-sourcing of critical services. By bringing line locating resources in-house, the company achieved a 13% year-over-year decrease in total excavation damages by the third quarter of 2025, despite an 8% increase in ticket volumes. This initiative, with employees now performing about 40% of line locating services, demonstrates a quantifiable improvement in operational performance and safety. Management plans to extend this in-sourcing model to its "Watch and Protect" program, anticipating similar long-term benefits in efficiency and talent development, even with initial upfront training costs. This approach creates a pipeline of future talent and reduces reliance on external contractors, reinforcing operational control and cost management.

Competitive Landscape and Strategic Positioning

In the competitive landscape, ONE Gas operates alongside other regulated natural gas distribution utilities such as Atmos Energy Corporation (ATO), NiSource Inc. (NI), Spire Inc. (SR), and CenterPoint Energy, Inc. (CNP). While these competitors often boast broader geographic footprints or diversified energy portfolios, ONE Gas carves out its niche through a focused regional strategy and deep local expertise. Its proximity to major natural gas production and existing pipeline infrastructure allows for fast, cost-effective service, whether for new connections, line extensions, or system upgrades. This enables ONE Gas to efficiently respond to the burgeoning demand from high-growth sectors.

Compared to larger, more diversified players like Atmos Energy, ONE Gas's specialized focus in Oklahoma, Kansas, and Texas fosters stronger local relationships and potentially more tailored customer service, enhancing customer loyalty. While NiSource might lead in strategic adaptability due to its broader energy mix, ONE Gas's commitment to its regulated gas distribution model ensures stable, predictable returns. The company's extensive pipeline network provides a competitive advantage in coverage and scalability, distinguishing it from companies like Spire Inc. that emphasize storage. In Texas, where it directly competes with CenterPoint Energy, ONE Gas's dedicated gas distribution focus allows it to compete effectively, even against CNP's integrated electric and gas services. The dual listing on NYSE Texas, effective November 11, 2025, further underscores its commitment to the state and aims to broaden investor access and awareness.

Financial Performance and Growth Trajectory

ONE Gas has consistently delivered strong financial results, reflecting its effective regulatory strategy and operational discipline. For the nine months ended September 30, 2025, the company reported net income of $177.9 million, or $2.94 per diluted share, a significant increase from $145.8 million, or $2.56 per diluted share, in the same period last year. This performance was largely driven by a $92.2 million increase from new rates and a $5.3 million increase in residential sales due to net customer growth in Oklahoma and Texas. Total revenues for the nine months ended September 30, 2025, reached $1.74 billion, up from $1.45 billion in the prior year.

Operating income for the nine months ended September 30, 2025, increased by $43.1 million, primarily due to new rates and customer growth. The company's business model effectively mitigates commodity price risk, as natural gas costs are passed through to customers without profit, ensuring operating income stability. Operating and maintenance (O&M) expenses have been well-managed, with a 2% increase in Q1 2025 and a 2.4% increase in Q4 2024, contributing to an approximate 4% increase for the full year 2024. Management projects a 4% CAGR in O&M expenses across its five-year plan, balancing anticipated employee costs with ongoing efficiency investments.

Liquidity and capital resources remain robust. In October 2025, ONE Gas enhanced its financial flexibility by increasing its revolving unsecured credit facility to $1.50 billion and extending its maturity to October 30, 2030. The company's total debt-to-capital ratio, excluding non-recourse KGSS-I debt, stood at a healthy 49.70% as of September 30, 2025, well within its covenant limit of 70%. Cash provided by operating activities increased for the nine months ended September 30, 2025, primarily due to working capital changes related to the recovery of regulatory assets.

Outlook and Strategic Initiatives

ONE Gas has narrowed its 2025 earnings forecast, now expecting diluted earnings per share between $4.34 and $4.40, with net income projected between $262 million and $266 million. Capital expenditures for 2025 are anticipated to be approximately $750 million. The company's adjusted CFO to debt ratio is projected to be around 19%, aligning with the upper end of its current credit ratings. Management's five-year financial plan includes an earnings per share CAGR of approximately 6% through 2029, reflecting a derisked approach with reduced capital intensity and funding needs.

A significant tailwind for the company is Texas House Bill 4384, enacted in June 2025, which allows Texas gas utilities to defer and recover specific costs for property, plant, and equipment not yet in base rates. This legislation is considered a structural and durable benefit, enhancing capital recovery and contributing to a higher growth outlook. The Austin System Reinforcement project, a landmark capital investment, was completed in the third quarter of 2025. This project boosts winter peak capacity by approximately 25% and provides increased access to natural gas indexed at the Waha hub, which typically trades at a discount, enhancing both reliability and affordability for Austin customers.

ONE Gas is actively pursuing substantial growth opportunities, including approximately 1.5 gigawatts of utility-scale power generation projects across its three states, alongside advanced manufacturing facilities and data centers. These projects are strategically chosen to enhance system resiliency and leverage existing infrastructure, often requiring only modest increases to forecasted capital budgets. The company's consistent customer growth, with 23,000 new meters set in 2024 and approximately 16,800 new connections in the first nine months of 2025, underscores the ongoing demand for natural gas in its expanding metropolitan service areas.

Risks and Mitigation

Despite a stable outlook, ONE Gas faces inherent risks common to regulated utilities. Environmental laws and regulations pose a continuous challenge, with potential for increased compliance costs or operational restrictions from new rulemakings, such as those under the PIPES Act. The company manages environmental liabilities at former manufactured gas plant (MGP) sites, with the Kansas Corporation Commission approving an increased cap of $32 million for remediation costs in July 2025.

Interest rate fluctuations present another risk, particularly concerning commercial paper borrowings and new debt financing. However, ONE Gas actively manages this through a mix of fixed-rate and floating-rate debt and, at times, interest-rate swaps. The company's commodity price risk is largely mitigated by purchased-gas cost adjustment mechanisms, which pass natural gas costs directly to customers without affecting operating income. Counterparty credit risk is diversified across its 2.3 million customers, and an allowance for doubtful accounts is maintained.

Conclusion

ONE Gas stands as a compelling investment in the regulated natural gas utility sector, characterized by its stable operational footprint, disciplined financial management, and strategic growth initiatives. The company's consistent track record of meeting or exceeding earnings guidance, coupled with structural improvements in capital recovery from legislation like Texas House Bill 4384, underpins a durable growth trajectory. Its commitment to system integrity, operational efficiency through in-sourcing, and strategic investments in high-growth areas like data centers and power generation, all within a regulated framework, reinforces its competitive moat. While regulatory and interest rate risks persist, ONE Gas's proactive mitigation strategies and strong financial health position it well to capitalize on the increasing demand for natural gas, delivering long-term value to its stakeholders.