Phoenix January 11-12, 2018 Evercore ISI Utility CEO Conference
Forward-Looking Statements Statements contained in this presentation that include company expectations or predictions should be considered forward-looking statements that are covered by the safe harbor provisions of the Securities Act of 1933 and the Securities and Exchange Act of 1934. It is important to note that the actual results could differ materially from those projected in such forward-looking statements. For additional information that could cause actual results to differ materially from such forward-looking statements, refer to ONE Gas Securities and Exchange Commission filings. All future cash dividends (declared or paid) discussed in this presentation are subject to the approval of the ONE Gas board of directors. All references in this presentation to guidance are based on news releases issued on Jan. 17, 2017, and October 30, 2017, and are not being updated or affirmed by this presentation. Page 2
Company Overview Key Statistics One of the largest publicly traded natural gas distribution companies 2.2 million customers 42,700 miles of distribution and transmission pipeline Estimated 2017 average rate base: $3.1 billion* 41% in Oklahoma 32% in Kansas 27% in Texas ~3,400 employees 72% market share 88% market share 13% market share * Calculation consistent with utility ratemaking in each jurisdiction Page 3
Value Creation Strategy
Value Creation Strategy Sustainable Business Focused business strategy Significant scale Proximity to natural gas supply Conservative financial profile Regulatory diversity Well-defined capital investment plan 100% regulated natural gas distribution utility One of the largest publicly traded natural gas distributors High percentage of residential customers and fixed charges 2.2 million customers More than 70% of customers in metropolitan areas Location to shale plays provides accessibility to affordable long-term reserves Commitment to A-level investment-grade credit ratings Three states; one with six jurisdictions Average approximately 700,000 customers per state Page 5
Focused Business Strategy Well-defined Capital Investment Plan 73% 21% 6% $ millions 2017 Guidance $ 255 System Integrity $ 72 Customer Growth $ 23 Other/IT $ 350 Total Capital Expenditures * System Integrity Customer Growth Other/IT * Actual capital expenditures expected to be in the range of $350 million to $360 million Page 6
Significant Scale High Percentage of Residential Customers * * *Based on 2016 annual results Page 7
Significant Scale High Percentage of Fixed Charges Fixed Charges Sales customers* Kansas Oklahoma Texas Total 55% 88% 70% 74% Average Annual Heating Degree Days Normal 4,860 3,264 1,785 - Weather Normalization 100% 100% 100% 100% Governance Kansas Corporation Commission (three commissioners appointed by the governor to four-year staggered terms) Oklahoma Corporation Commission (three commissioners elected to sixyear staggered terms) Home Rule with 6 jurisdictions (Texas Railroad Commission has appellate authority) Note: Based on 2016 annual results * Fixed percentage of total net margin on natural gas sales Page 8
Proximity to Natural Gas Supply Location Supports Sustainability Close proximity to significant natural gas reserves 120 active rigs in Oklahoma* 453 active rigs in Texas* 62% of all rigs in U.S. operating in ONE Gas territories Leads to competitive natural gas delivered costs: Cost of the commodity Transportation costs Storage fees Topeka * Source: Baker Hughes, as of December 29, 2017 ONE Gas Natural Gas Distribution Areas Natural Gas Basins Natural Gas Shale Plays Page 9
Natural Gas vs. Electricity 3-to-1 Average Advantage Continues in ONE Gas Territories $50 3.8x 4.0 $40 3.2x 2.9x $32.30 $29.51 $30 $20 $37.95 3.0 2.0 $10 $10.97 $9.25 $10.07 1.0 $- Texas Oklahoma Kansas Natural gas price equivalent of electricity/dth (1) OGS delivered cost of natural gas/dth (2) Natural gas advantage ratio (3) - (1) Source: United States Energy Information Agency, www.eia.gov, for the twelve-months period ended December 31, 2016. (2) Represents the average delivered cost of natural gas to a residential customer, including the cost of the natural gas supplied, fixed customer charge, delivery charges and charges for riders, surcharges and other regulatory mechanisms associated with the services we provide, for the year ended December 31, 2016. (3) Calculated as the ratio of the natural gas price equivalent per dekatherm of the average retail price of electricity per kilowatt hour to the ONE Gas delivered average cost of natural gas per dekatherm. Page 10
Financial Objectives
2017 Guidance Updated July 31, 2017 Net income: range of $155-$161 million EPS: range of $2.94 - $3.04 Rate base expected to grow an average of approximately 5.0-5.5% per year between 2016-2021 Expected average annual EPS growth of 5-7% between 2016 and 2021 Note: 2017 guidance did not assume the KGS accounting authority order would be approved in 2017 $3.50 $3.00 $2.50 $2.00 $1.50 Diluted EPS $2.99 $2.65 $2.24 $2.07 2014 2015 2016 2017G* 2018-2021 * Represents midpoint of guidance range Page 12
Growing Dividends Building Shareholder Value Dividend increased 20% for 2017 Quarterly dividend of 42 cents per share, resulting in an annualized dividend of $1.68 per share * Target dividend payout ratio of 55-65% of net income Expected average annual dividend growth of 8-10% between 2016 and 2021 Dividends Declared $1.68 $1.20 $1.40 $0.84 2014** 2015 2016 2017G* 2018-2021 *Subject to quarterly board approval **In 2014, we paid dividends totaling $0.84 per share ($0.28 per share in each of our 2 nd, 3 rd and 4 th quarters) Page 13
Capital Investment Drives Rate Base Growth Capital Spending Exceeds Depreciation Majority of capital expenditures for safety, reliability and efficiency System integrity and replacement Efficiency Automated meter reading Operational efficiency efforts Government relocations Fleet and facilities New service lines and main extensions for customer growth Information technology (in millions) $350-$380/year $350* $294 $302 $307 $154 $140 $119 $131 2014 2015 2016 2017G 2018-2021 Depreciation Note: Capital expenditures include accruals and any adjustments in the year * Actual capital expenditures expected to be in the range of $350 million to $360 million Page 14
Capital Expenditures By State Oklahoma Kansas Texas 2017: 2.3x depreciation 2017: 1.9x depreciation 2017: 2.9x depreciation $154 (in millions) $136 $132 $134 $57 $63 $64 $68 $82 $81 $85 $41 $44 $47 $96 $51 $89 $88 $76 $21 $24 $29 $100 $35 2014 2015 2016 2017G 2014 2015 2016 2017G 2014 2015 2016 2017G Note: Capital expenditures include accruals and any adjustments in the year Depreciation Page 15
Investment Horizon Long-Term Commitment to System Modernization Pipeline Replacement (miles) 2017-2021 Estimate (miles) 2016 259 131 390 2015 245 180 425 1,100 750 2014 352 123 475 Page 16 ¹ Vintage Replacement Program ² Risk-Mitigation and Government Relocations Pipeline replacement due to changes in state or federal regulations is not projected in this 5-year replacement estimate. Replacement mileage includes service lines, distribution mains and transmission pipelines. 1 The vintage asset replacement program includes: cast iron, wrought iron, unprotected bare steel, protected bare steel, vintage plastic. 2 Risk-mitigation pipeline replacement is due to asset operational performance, efficiency and government relocation projects.
Focused on O&M expenses Building a Foundation for Long-term Affordability Leveraging technology to control expenses by: Increasing efficiency and optimizing processes Enhancing value for customers by more user-friendly and efficient websites, and applications Making data-driven decisions (in millions) $421 O&M Expense $414 $417 $419 2014* 2015 2016 2017G *In 2014, approximately $7 million incurred as a result of our separation from ONEOK Page 17
2017 Cash Flow Sources and Uses Dividends and capital expenditures primarily funded by cash flow from operations $700 million revolving credit facility $489 $489 Short-term debt and working capital changes $75 Cash flow from operations* $414 Asset removal costs $48 Capital expenditures $353 (in millions) Dividends $88 Sources * Before changes in working capital Uses Page 18
Investment Grade Commitment to Investment-Grade Ratings Strong liquidity position will support capital expenditure and working capital needs Stable operating cash flows $700 million revolving credit facility Commercial paper program Strong investment-grade credit ratings Rating Agency Rating Outlook Capital Structure As of September 30, 2017 Total Debt 41% Equity 59% Moody s A2 Stable S&P A Stable Page 19
Regulatory Update
Regulatory Mechanisms Overview Oklahoma Natural Gas Performance-based rate structure (PBR) with an ROE band of 9-10 percent that provides for annual rate reviews between rate cases Kansas Gas Service Gas System Reliability Surcharge (GSRS) for incremental safety-related and government-mandated capital investments made between rate cases Texas Gas Service Gas Reliability Infrastructure Program (GRIP) for capital investments made between rate cases Cost-of-service adjustments for capital investments and certain changes in operating expenses Pipeline Integrity Testing (PIT) rider for related expenses Rate cases as needed or required Page 21
Return on Equity Minimize the Gap Goal: Minimize the gap between allowed and actual returns 7.6% 7.4% 7.7% 8.1% 2017 ROE estimate: 8.1% 2016 ROE achieved: 7.7% 2015 ROE achieved: 7.4% 2014 ROE achieved: 7.6% 2014 2015 2016 2017G Page 22
Regulatory Filing Timeline Oklahoma & Kansas Filed general rate case application in June 2015, new rates approved and effective January 2016 General rate case application filing in June 2021, with new rates effective early 2022, if applicable ONG 2015 2016 2017 2018 2019 2020 2021 2022 Performance-based rates change approved August 2017, no modification to base rates Performance-based rate filings in March 2018, 2019 and 2020 KGS Filed general rate case application in May 2016, new rates approved and effective January 2017 2015 2016 2017 2018 2019 2020 2021 2022 $2.9 million GSRS approved November 2017, with new rates effective December 2017 GSRS filing annually in August, with new rates effective in January of the following year; rate cases as needed Page 23
Kansas Gas Service Accounting Authority Order Highlights Details The agreement allows Kansas Gas Service to defer manufactured gas plant (MGP) costs for the investigation and remediation at the 12 former MGP sites incurred after January 1, 2017, up to a cap of $15.0 million, net of any related insurance recoveries and amortize approved costs in a future rate proceeding over a 15-year period The unamortized amounts will not be included in rate base or accumulate carrying charges At the time future investigation and remediation work, net of any related insurance recoveries, is expected to exceed $15.0 million, Kansas Gas Service will be required to file an application with the KCC for approval to increase the $15.0 million cap Estimated Costs A regulatory asset of approximately $5.9 million will be recorded in the fourth quarter 2017 for estimated costs that were accrued at January 1, 2017 Status Approved November 2017 Page 24
Regulatory Filing Timeline Texas Jurisdiction Filing Highlights Status Increase in Base Rates Rates Effective Rio Grande Valley Return on equity: 9.5% Common equity ratio: 61.3% (actual) $0.9 million impact to operating income Approval for recovery of actual PIT costs via rider, estimated at $1.7 million per year Approved $1.9 million October 2017 Central Texas GRIP for both incorporated and environs areas Approved $4.9 million June 2017 West Texas GRIP for both incorporated and environs areas PIT filing for expenses incurred in the prior year Approved Approved $4.3 million $0.5 million July 2017 April 2017 North Texas Annual COSA filing to adjust base rates for incorporated cities Approved $0.9 million August 2017 Other GRIP and COSA increases in other Texas jurisdictions Approved $1.4 million 2017 Page 25
Rate Base Capital Investment Drives Rate Base Growth Rate Base 2017 Estimated Rate Base Total: $3.1 billion* $2.9 $3.1 (in billions) $2.3 $2.4 27% 32% 41% 2014 2015 2016 2017G Oklahoma Kansas Texas * Estimated average rate base; calculation consistent with utility ratemaking in each jurisdiction Page 26
Key Takeaways Focused Strategy Well-defined capital investment plan with 70% targeted toward system integrity Rate base expected to grow an average of 5.0-5.5% per year between 2016-2021 Focus on controlling operating expenses Minimize gap between actual and allowed returns Annual filings for rate adjustments between rate cases File rate cases as warranted Incremental regulated revenue Committed to stable and conservative financial profile Expected average annual dividend growth of 8-10% between 2016 and 2021 Target dividend payout ratio of 55-65% of net income Page 27
Questions
Appendix
Customer and Asset Mix Key Statistics as of Dec. 31, 2016 Kansas Gas Service Oklahoma Natural Gas Texas Gas Service Total Average Number of Customers 636,625 865,548 650,017 2,152,190 Average Number of Employees 1,000 1,200 800 3,400* Distribution Miles 11,600 18,500 10,100 40,200 Transmission Miles 1,500 700 300 2,500 High-Density Cities Percentage of Customers in Metropolitan Areas Kansas City, Topeka, Wichita Oklahoma City, Tulsa Austin, El Paso 7 cities make up the majority of customers 58% 82% 76% 73% Market Share - Customers Served 72% 88% 13% * Includes corporate employees Page 30
Regulatory Constructs By State Mechanism Oklahoma Kansas Texas* Performance-based rates X Capital investments; safety-related riders X** X X Weather normalization X X X Purchased Gas Adjustment/Cost of Gas riders X X X Energy efficiency/conservation programs X X Pension and Other Post-Retirement Benefits Trackers X** X X Cost-of-Service Adjustment X** X * Six jurisdictions in Texas; not all mechanisms apply to each jurisdiction ** Incorporated in performance-based rates Page 31
Regulatory Information By State as of September 2017 - Authorized Rate Base (in millions) Rate Base per Customer Authorized Rate of Return Authorized Return on Equity Oklahoma Natural Gas¹ $1,202 $1,378 7.31% 9-10% Kansas Gas Service² $925 $1,447 N/A N/A Texas Gas Service¹ $822 $1,252 7.4% 9.6% ¹ The rate base, authorized rate of return and authorized return on equity presented in this table are those from the last approved rate filings for each jurisdiction. These amounts are not necessarily indicative of current or future rate bases, rates of return or returns on equity. ² The most recent rate case was settled without a determination of rate base, return on equity or rate of return; rate base reflects Kansas Gas Service s estimate of rate base contained within the settlement. Page 32
Authorized Rate Base Historical by State at Year End Oklahoma¹ Kansas² Texas¹ $1,202 (in millions) $938 $979 $781 $826 $925 $542 $639 $760 2014 2015 2016 2014 2015 2016 2014 2015 2016 Page 33 ¹ Rate bases presented in this table are those from the last approved rate filings for each jurisdiction. These amounts are not necessarily indicative of current or future rate bases. ² Last rate case was settled without a determination of rate base and includes the amounts included in the company s filings; these amounts are not necessarily indicative of current or future rate base. 2014, 2015 and 2016 rate base reflects GSRS approvals.
Oklahoma Natural Gas Rate Case New Rates Effective January 2016 Highlights Amount Customer impact Rate base Return on equity $29.995 million $2.96 per month increase for typical residential customer $1.2 billion 9.5% (midpoint of allowed band) Common equity ratio* 60.5% Debt costs 3.95% Other Continuation of Performance Based Rate Change (PBR) plan Regulatory asset for $2.4 million of separation costs * The initial common equity ratio will be 60.5 percent, unchanged from the original filed request. For each future PBRC filing, the maximum allowed common equity ratio will decrease by 1 percent beginning with a 59 percent common equity ratio in the 2017 PBRC review of calendar year 2016, and ending with a 56 percent common equity ratio in the 2020 PBRC review of calendar year 2019. Page 34
Kansas Gas Service Rate Case New Rates Effective January 2017 Highlights* Increase in base rates $15.5 million total increase, $8.1 million net increase (already recovering $7.4 million through GSRS) Operating income impact Approximately $9.1 million in 2017 Other New rates effective January 1, 2017 * Rate case settlement agreement is a black box settlement, meaning the parties agreed to a specific revenue number but no specific return on equity. Page 35
Texas Gas Service Central Texas Service Area New Rates Effective November 2016 Highlights Increase in base rates $6.8 million; $3.4 million impact to operating income Return on equity 9.5% Common equity ratio 60.1% Other Approved consolidation of the South Texas service area with the Central Texas service area November 2016: New rates effective for customers of incorporated cities of the former Central Texas service area and the unincorporated areas of the new Central Texas consolidated area January 2017: New rates effective for customers in incorporated areas of the former South Texas consolidated service area Page 36
Texas Gas Service West Texas Service Area New Rates Effective October 2016 Increase in base rates Return on equity 9.5% Common equity ratio 60.1% Other Highlights $8.8 million; $7.6 million impact to operating income September 2016: Approved consolidation of the El Paso, Dell City and Permian service areas into a new West Texas service area October 2016: New rates went into effect except for the incorporated cities of the former Permian service area December 2016: New rates went into effect for the incorporated cities in the former Permian service area Page 37
Safety and Environment Operating Safely and Environmentally Responsibly Ongoing effort to replace aging assets Replaced approximately 390 miles of distribution and transmission facilities in 2016 Replaced approximately 22 miles of cast iron pipe in 2016 Remaining 48 miles of cast iron pipe expected to be replaced by year end 2019 Reduction in employee injuries of 30% in 2016 compared with 2015 Utilize peer-review safety process and employee training to promote consistent, steady improvement in workplace safety Page 38
Customer Growth 2,101 Average Customer Count 2,152 2,140 2,127 2,114 (in thousands) 2012 2013 2014 2015 2016 Page 39
Diverse Employment Mix State Employment by Sector* Other Financial Services Services 6% 6% Leisure & Hospitality 9% Manufacturing 11% Kansas Construction 4% Other Services 5% Professional & Business Services 13% Mining ¹ 1% Trade, Transportation & Utilities ² 19% Education & Health Services 14% Government 18% Construction 5% Financial Activities 5% Other Services 5% Manufacturing 8% Leisure & Hospitality 10% Professional & Business Services 11% Oklahoma Mining ¹ 3% Government 21% Trade, Transportation & Utilities ² 18% Education & Health Services 14% Other Services 5% Construction 6% Financial Activities 6% Manufacturing 7% Texas Leisure & Hospitality 11% Professional & Business Services 13% Mining ¹ 2% Trade, Transportation & Utilities ² 20% Education & Health Services 14% Government 16% Page 40 * Non-farm employment, seasonally adjusted ¹ Includes oil drilling, extraction and exploration & production companies ² Includes oil, natural gas and petroleum pipeline transportation and midstream companies Source: U.S. Bureau of Labor Statistics, December 2016 data
Service Territory Population Growth 1.45% CAGR (2000-2016) 1,400,000 1,200,000 1,000,000 800,000 ONE Gas Major Metro U.S. Census County Population County 2000 Population 2016 Population % Growth Travis, TX 811,776 1,199,323 48% El Paso, TX 679,568 837,918 23% Oklahoma, OK 660,581 782,970 19% Tulsa, OK 563,475 642,940 14% Johnson, KS 451,541 584,451 29% Sedgwick, KS 452,901 511,995 13% Total 3,619,842 4,559,597 26% Travis County, TX El Paso County, TX Oklahoma County, OK 600,000 400,000 Tulsa County, OK Johnson County, KS Sedgwick County, KS 200,000 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 * Source: U.S. Census Bureau, updated May 15, 2017 Page 41
Compressed Natural Gas (CNG) Current Outlook 100 stations supplied 1.4 CNG Volume Dth in millions 115 stations supplied 2.0 143 stations supplied 129 stations supplied 2.3 2.5 2013 2014 2015 2016 Currently operate 26 fueling stations accessible to the public, 5 private stations Currently transporting supply to 66 retail and 51 private CNG stations Rebate program in Oklahoma; Austin, Texas Industry Continued interest in CNG for transportation, particularly by fleet operators Tax incentives and rebates further contribute to positive economics Note: Updated as of September 30, 2017 Page 42
Cost of Gas Passed Through to Customers Actual costs of the commodity, transportation and storage of natural gas are passed through to customers without markup Natural gas used in operations is recovered in Purchased Gas or Cost of Gas riders Cost of Gas component of bad debts and hedging costs are included in cost of gas Lease 50 Bcf of natural gas storage No direct commodity risk to ONE Gas divisions Page 43
Cash Flow From Operations Before Changes In Working Capital * (Millions of dollars) Updated 2017 Guidance Previous 2017 Guidance Change Net Income $ 158 $ 157 $ 1 Depreciation and amortization 153 155 (2) Deferred taxes 88 73 15 Other 15 15 - Cash flow from operations before changes in working capital $ 414 $ 400 $ 14 * Amounts shown are midpoints of ranges provided. Page 44
Non-GAAP Information ONE Gas has disclosed in this presentation cash flow from operations before changes in working capital, which is a non-gaap financial measure. Cash flow from operations before changes in working capital is used as a measure of the company's financial performance. Cash flow from operations before changes in working capital is defined as net income adjusted for depreciation and amortization, deferred income taxes, and certain other noncash items. The non-gaap financial measure described above is useful to investors as an indicator of financial performance of the company's investments to generate cash flows sufficient to support our capital expenditure programs and pay dividends to our investors. ONE Gas cash flow from operations before changes in working capital should not be considered in isolation or as a substitute for net income or any other measure of financial performance presented in accordance with GAAP. This non-gaap financial measure excludes some, but not all, items that affect net income. Additionally, this calculation may not be comparable with similarly titled measures of other companies. A reconciliation of cash flow from operations before changes in working capital is included in this presentation. Page 45