ONE Gas' Q3 2025: Contradictions Emerge on Texas House Bill Impact, EPS Growth, Operating Expenses, and Capital Expenditures

Date of Call: November 4, 2025

Financials Results

• Revenue: Third quarter revenues reflect an increase of approximately $19.2M from new rates and $1.4M from continued customer growth
• EPS: $0.44 per diluted share, compared with $0.34 in the same period last year

Guidance:

• EPS for 2025 narrowed to $4.34–$4.40 per diluted share (net income $262M–$266M)
• Capital expenditures projected at approximately $750 million for 2025
• Approximately $200M of forward shares to settle in December and ~$25M deferred to year-end 2026
• Revolving credit facility increased to $1.5B (maturity Oct 2030); quarterly dividend declared at $0.67
• Company will provide a refreshed 5-year outlook and 2026 guidance ahead of Utility Week in December

Business Commentary:

* Profitability and Earnings Guidance: - ONE Gas Inc. reported net income of $26.5 million in Q3 2025, compared to $19.3 million in the same period last year, reflecting an increase of 37%. - The company tightened its 2025 earnings forecast to $4.34 to $4.40 per diluted share, with net income projected to range between $262 million and $266 million. - This increase is attributed to strong year-to-date financial performance and the expected impact of Texas House Bill 4384.

• Capital Expenditures and Infrastructure Investments:
• ONE Gas completed approximately $575 million in capital projects through the third quarter, keeping them on pace to deliver their $750 million full-year budget.
• Notable projects include the Austin System Reinforcement project, the largest in the company's history, delivered ahead of schedule and under budget.

• These investments are driven by the need to meet growing customer demand, enhance system reliability, and support economic growth in the regions served.

• Regulatory and Operational Initiatives:

• The company completed all 2025 interim filings, including the approval of a $3.2 million GRIP filing for the Rio Grande Valley service area.
• ONE Gas is investing in its workforce for long-term success, including plans to bring line locating resources in-house and expand the Watch and Protect program.

• These efforts aim to improve operational efficiency and reduce reliance on external contractors, thereby enhancing service quality and long-term sustainability.

• Interest Expense and Financial Management:

• Interest expense net decreased $3.4 million year-over-year in the third quarter, primarily due to lower rates on commercial paper borrowings.
• ONE Gas issued a $250 million term loan that will mature in 2026, extending its liquidity with a new revolving credit facility increased to $1.5 billion.
• The company's strong financial management is evident in its adjusted CFO to debt ratio projected to be around 19%, at the upper end of its current credit ratings.

Sentiment Analysis:

Overall Tone: Positive

• Management tightened 2025 EPS guidance upward ($4.34–$4.40) and noted strong YTD performance; completed the Austin System Reinforcement ahead of schedule and under budget; Q3 net income $26.5M vs $19.3M prior-year quarter; emphasized expanded growth pipeline (~1.5 GW) and strengthened liquidity (revolver to $1.5B).

Q&A:

• Question from Julien Dumoulin-Smith (Jefferies): Maybe just to start at the highest level here. I mean, how are you thinking about the long-term 4% to 6% here given both, obviously, the tailwind of the legislation as well as some of these recent Fed cuts? And maybe, Chris, specifically, I'd love to get your thoughts about what's reflected in guidance and especially what this means for forward-looking views given the latest Fed actions here.
  Response: Faster-than-expected Fed rate cuts reduce financing costs and are included in the outlook — roughly $0.025 EPS benefit per 25 bps on ~$800M average commercial paper; management expects more cuts and will update the 5-year outlook in December.

• Question from Julien Dumoulin-Smith (Jefferies): If I can follow that up, any color on the tightening of the '25 guidance range? Just you took $0.02 off the top... curious to juxtapose that against the comments you just provided a second ago.
  Response: Guidance tightening reflects timing-driven incremental O&M (a few million dollars) from pulling forward certain activities like environmental remediation after receiving earlier-than-expected permits.

• Question from David Arcaro (Morgan Stanley): I was wondering if you could -- maybe just on the growth rate that you've indicated would be above the 6% level here through the plan. Just curious if you would consider that to be kind of a structural higher growth outlook for the core of the business? And could that be considered to be longer term?
  Response: Management believes the >6% growth is structural and durable through the five-year plan, reflecting sustainable component drivers beyond a one-time boost.

• Question from David Arcaro (Morgan Stanley): Any other clarity on where you're seeing that 1.5 gigawatts come in and what the potential investment opportunities might look like on the back of potentially finalizing some of those new large load projects?
  Response: The ~1.5 GW of utility-scale opportunities are across all three states, largely adjacent to existing system infrastructure, selected disciplinarily, and generally require modest incremental capital by leveraging existing assets.

• Question from Gabriel Moreen (Mizuho Securities USA LLC): I just wanted to ask about the additional investment in bringing stuff in-house. Will that impact O&M upfront? Is it going to be a similar cadence with this and how material would it be?
  Response: In-sourcing (e.g., Watch & Protect) produces episodic front‑end O&M costs for hiring/training but yields durable efficiency gains and lower future costs; Watch & Protect is smaller in scale than prior line-locating initiatives.

• Question from Gabriel Moreen (Mizuho Securities USA LLC): On '26 CapEx — you grew rate base a little less than intended in '25 and finished Austin. Is it right to assume some acceleration in '26 and any discrete projects to point to?
  Response: Expect an upward trajectory and possible step‑up in 2026 CapEx; some projects may be customer-funded which can limit ONE Gas-funded capital needs; formal details to be released next month.

• Question from William Appicelli (UBS Investment Bank): Just a question on the benefits of the legislation in Texas. Can you quantify what that's been year-to-date and maybe what that would be on a full year run rate?
  Response: The Texas change expands 8.209-like accounting to all capital — management points to prior 8.209 experience (~$4–$5M operating income for ~25% of capital) as context scaled to 100% of capital, but quarterly impacts vary with timing of project closures.

• Question from William Appicelli (UBS Investment Bank): Does that influence the capital plan moving forward in terms of sequencing or level of investment because of this mechanism?
  Response: While the legislation increases opportunities, capital allocation remains driven by system integrity and disciplined project analysis; it won't alter spending for safety/reliability.

• Question from Selman Akyol (Stifel, Nicolaus & Company, Incorporated): Beyond line locating and Watch and Protect, are there other opportunities you see to bring activities in-house as we think longer term?
  Response: Yes — additional in‑sourcing opportunities include further line‑locating phases and expanding internal construction, engineering and execution crews where it adds value.

• Question from Selman Akyol (Stifel, Nicolaus & Company, Incorporated): For large load and data center opportunities, are timelines 2026–2027 or extend to 2030, and will these be pursued inside the regulated model or outside it for higher returns?
  Response: Timelines vary from near-term (e.g., Q4) to multi-year multi‑train builds; projects scale over several years and are pursued within the regulated model — management is not seeking non‑regulated structures for these opportunities.

Contradiction Point 1

Texas House Bill 4384 Impact on Financials

It involves the interpretation and impact of Texas House Bill 4384 on financial forecasts, which directly affects the company's EPS projections and investor expectations.

How has Texas House Bill 4384 impacted earnings YTD and the full-year run rate? - William Appicelli (UBS Investment Bank, Research Division)

2025Q3: The bill's impacts are similar to the Texas 8.209 regulatory structure, potentially adding $4 million to $5 million in annual operating income. The impact varies based on the timing of capital deployments throughout the year. - Christopher Sighinolfi(CFO)

How does House Bill 4384 impact your financials? How much could it reduce lag or improve ROE? Is the 2025 EPS impact a full annual run rate? - David Arcaro (Morgan Stanley)

2025Q2: House Bill 4384 extends deferrals and accruals under 8.209 to all Texas capital expenditures. $4 million to $5 million annual pretax earnings benefit. This impact was not considered in prior guidance since the bill wasn't in existence. It's additive to the 2025 plan and applies to half the year post-signature. - Christopher Sighinolfi(CFO)

Contradiction Point 2

Long-Term EPS Growth Expectations

It involves the long-term EPS growth expectations, which are crucial for investor projections and strategic planning.

Is the 6% growth rate structural, and does it indicate a change in the long-term EPS growth target? - David Arcaro (Morgan Stanley, Research Division)

2025Q3: The growth rate above 6% is considered structural, supported by strong year-to-date performance and the Texas House Bill 4384. This structural perspective is reflected in our Investor Relations materials since September, suggesting that the high end of the 4% to 6% guidance range is now exceeded. - Christopher Sighinolfi(CFO)

Are you comfortable using the current guidance's growth rate as the new long-term rate? Can you comment on the bill's impact on Texas capital plans? - Paul Zimbardo (Jefferies)

2025Q2: Our long-term earnings growth outlook remains a 4% to 6% EPS growth rate. - Christopher Sighinolfi(CFO)

Contradiction Point 3

Operating Expenses and In-Sourcing Strategy

It involves changes in the company's approach to operating expenses and in-sourcing, which are crucial for operational efficiency and financial performance.

Can you explain the narrowing of the 2025 guidance range and why the upper end of the range was reduced by $0.02? - Julien Dumoulin-Smith (Jefferies LLC, Research Division)

2025Q3: We experienced some O&M activities earlier than planned, including environmental remediation projects, which added about $2 million in O&M expenses. - Christopher Sighinolfi(CFO)

Can you explain the 1.9% year-over-year increase in O&M expenses and their sustainability amid inflation? - Julien Dumoulin-Smith (Jefferies)

2025Q1: We started with a 5% CAGR in O&M expenses plan, which moved to 4% due to the team's success in in-sourcing activities. - Christopher Sighinolfi(CFO)

Contradiction Point 4

Capital Expenditure Trends

It involves changes in the company's capital expenditure plans, which directly impact investment strategies and financial forecasting.

Can you outline your 2026 CapEx plans and highlight any specific projects? - Gabriel Moreen (Mizuho Securities USA LLC, Research Division)

2025Q3: We anticipate an upward trajectory in capital expenditures, potentially with a more marked increase in 2026. - Christopher Sighinolfi(CFO)

Can you provide the year-over-year change in capital expenditure guidance this year and what it implies for the 5-year guidance? - Selman Akyol (Stifel, Nicolaus & Company, Incorporated, Research Division)

2024Q4: In 2025, capital expenditures are expected to be in the range of $530 million to $560 million, representing approximately 14% of annual revenue. - Christopher Sighinolfi(CFO)

Contradiction Point 5

Impact of Texas House Bill 4384

It highlights the discrepancy in the company's assessment of the impact of Texas House Bill 4384 on its financials, which is crucial for investor expectations and strategic planning.

What impact has Texas House Bill 4384 had on earnings year-to-date and the full-year run rate? - William Appicelli (UBS Investment Bank, Research Division)

2025Q3: The bill's impacts are similar to the Texas 8.209 regulatory structure, potentially adding $4 million to $5 million in annual operating income. - Christopher Sighinolfi(CFO)

Does the choice between 765 kV and 345 kV transmission systems impact data center development in areas with opportunities? - Paul Fremont (Ladenburg)

2024Q4: We believe the bill could add $2 million to $3 million in extra operating income for ONE Gas and reduce the need for additional capital expenditures. - Sid McAnnally(CEO)