Houston, Texas | November 28, 2017 Jefferies 2017 Energy...

Jefferies 2017 Energy ConferenceHouston, Texas | November 28, 2017

Curtis DinanSenior Vice President, Chief Financial Officer and Treasurer

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.

Forward-Looking Statements

• Company Overview

• Value Creation Strategy

• Financial Objectives

• Regulatory Update

• Q&A

What We’ll Cover

• 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

Company Overview

Key Statistics

* Calculation consistent with utility ratemaking in each jurisdiction

72% market share

88% market share

13% market share

Value Creation Strategy

Focused business strategy• Well-defined capital investment plan• 100% regulated natural gas distribution utility• One of the largest publicly traded natural gas distributors

Significant scale• High percentage of residential customers and fixed charges• 2.2 million customers• More than 70% of customers in metropolitan areas

Proximity to natural gas supply • Location to shale plays provides accessibility to affordable long-term reserves

Conservative financial profile • Commitment to “A-level” investment-grade credit ratings

Regulatory diversity • Three states; one with six jurisdictions• Average approximately 700,000 customers per state

Value Creation StrategySustainable Business

73% 21%

6%

System Integrity Customer Growth Other/IT

Focused Business Strategy

Well-defined Capital Investment Plan

$ millions 2017 Guidance$ 255 System Integrity

$ 72 Customer Growth

$ 23 Other/IT

$ 350 Total Capital Expenditures*

* Actual capital expenditures expected to be in the range of $350 million to $360 million

Significant Scale

High Percentage of Residential Customers

*Based on 2016 annual results

* *

Significant Scale

High Percentage of Fixed Charges

Kansas Oklahoma Texas Total

Fixed Charges – Sales customers* 55% 88% 70% 74%

Average Annual HeatingDegree Days – Normal 4,860 3,264 1,785 -

Weather Normalization 100% 100% 100% 100%

GovernanceKansas Corporation Commission (three commissioners appointed

by the governor to four-year staggered terms)

Oklahoma Corporation Commission (three

commissioners elected to six-year 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

• Close proximity to significant natural gas reserves – 123 active rigs in Oklahoma*– 442 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

Proximity to Natural Gas Supply

Location Supports Sustainability

Topeka

ONE Gas Natural Gas Distribution AreasNatural Gas BasinsNatural Gas Shale Plays

* Source: Baker Hughes, as of November 10, 2017

Natural Gas vs. Electricity

3-to-1 Average Advantage Continues in ONE Gas Territories

(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.

$32.30 $29.51

$37.95

$10.97 $9.25 $10.07

2.9x 3.2x

3.8x

-

1.0

2.0

3.0

4.0

$-

$10

$20

$30

$40

$50

Texas Oklahoma Kansas

Natural gas price equivalent of electricity/Dth (1) OGS delivered cost of natural gas/Dth (2)

Natural gas advantage ratio (3)

Financial Objectives

• 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

2017 Guidance Updated July 31, 2017

$2.07 $2.24

$2.65

$2.99

$1.50

$2.00

$2.50

$3.00

$3.50

2014 2015 2016 2017G* 2018-2021

Diluted EPS

* Represents midpoint of guidance range

• 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

Growing Dividends

Building Shareholder Value

$0.84$1.20

$1.40 $1.68

2014** 2015 2016 2017G* 2018-2021

Dividends Declared

*Subject to quarterly board approval**In 2014, we paid dividends totaling $0.84 per share ($0.28 per share in each of our 2nd, 3rd and 4th quarters)

• 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

$119 $131 $140 $154

2014 2015 2016 2017G 2018 - 2021

(in m

illion

s)

Depreciation

$350-$380/year

Capital Investment Drives Rate Base Growth

Capital Spending Exceeds Depreciation

$294 $302

Note: Capital expenditures include accruals and any adjustments in the year

$307$350*

* Actual capital expenditures expected to be in the range of $350 million to $360 million

Capital Expenditures

By State

$136 $132 $134

$154

$57 $63 $64 $68

2014 2015 2016 2017G

(in m

illion

s)

Oklahoma

$82 $81 $85 $96

$41 $44 $47 $51

2014 2015 2016 2017G

Kansas

Depreciation

$76 $89 $88

$100

$21 $24 $29 $35

2014 2015 2016 2017G

Texas

Note: Capital expenditures include accruals and any adjustments in the year

2017: 2.3x depreciation 2017: 1.9x depreciation 2017: 2.9x depreciation

352

245

259

123

180

131

2014

2015

2016

Pipeline Replacement (miles)

¹ Vintage Replacement Program ² Risk-Mitigation and Government Relocations

390

425

475

Investment Horizon

Long-Term Commitment to System Modernization

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.

7501,100

2017-2021 Estimate (miles)

• 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

Focused on O&M expenses

$421 $414 $417 $419

2014* 2015 2016 2017G

(in m

illion

s)

O&M Expense

*In 2014, approximately $7 million incurred as a result of our separation from ONEOK

Building a Foundation for Long-term Affordability

• Dividends and capital expenditures primarily funded by cash flow from operations

• $700 million revolving credit facility

Asset removal costs$48

Sources Uses

(in m

illion

s)

Dividends$88

Capital expenditures

$353

Cash flow from operations*

$414

$489 $489

$75

2017 Cash Flow

Sources and Uses

* Before changes in working capital

Short-term debt and working capital changes

• 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

Investment Grade

Commitment to Investment-Grade Ratings

Equity59%

Total Debt41%

Capital StructureAs of September 30, 2017

Rating Agency Rating Outlook

Moody’s A2 StableS&P A Stable

Regulatory Update

• 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

Regulatory Mechanisms

Overview

• Goal: Minimize the gap between allowed and actual returns

– 2017 ROE estimate: 8.1%– 2016 ROE achieved: 7.7%– 2015 ROE achieved: 7.4%– 2014 ROE achieved: 7.6%

Return on Equity

Minimize the Gap

7.6% 7.4% 7.7% 8.1%

2014 2015 2016 2017G

2016

Regulatory Filing Timeline

Oklahoma & Kansas

2015 2016 2017 2018 2022

Filed general rate case application in June 2015, new rates approved and effective January 2016

Performance-based rate filings in March 2018, 2019 and 2020

ONG

Filed general rate case application in May 2016, new rates approved and effective January 2017

KGS

GSRS filing annually in August, with new rates effective in January of the following year; rate cases as needed

2019 2020 2021

2015 2017 2018 20222019 2020 2021

General rate case application filing in June 2021, with new rates effective early 2022, if applicable

Performance-based rates change approved August 2017, no modification to base rates

$2.9 million GSRS filed August 2017, with new rates expected January 2018

Filing HighlightsDetails • If approved, the agreement will allow 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 If approved, a regulatory asset of approximately $5.9 million will be recorded for estimated costs that were accrued at January 1, 2017

Status Unanimous settlement agreement filed in October 2017

Order Effective TBD (expected by January 2018)

Kansas Gas Service

Accounting Authority Order

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

ApprovedApproved

$4.3 million$0.5 million

July 2017April 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

Regulatory Filing Timeline

Texas

41%

32%

27%

2017 Estimated Rate BaseTotal: $3.1 billion*

Oklahoma Kansas Texas

Rate Base

Capital Investment Drives Rate Base Growth

* Estimated average rate base; calculation consistent with utility ratemaking in each jurisdiction

$2.3 $2.4$2.9 $3.1

2014 2015 2016 2017G

(in bi

llions

)

Rate Base

• 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

Key Takeaways

Focused Strategy

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 Kansas City, Topeka, Wichita Oklahoma City, Tulsa Austin, El Paso 7 cities make up the

majority of customers

Percentage of Customers in Metropolitan Areas 58% 82% 76% 73%

Market Share - Customers Served 72% 88% 13%

* Includes corporate employees

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

Regulatory Constructs

By State

* Six jurisdictions in Texas; not all mechanisms apply to each jurisdiction** Incorporated in performance-based rates

Regulatory Information

By State as of September 2017 - Authorized

Rate Base(in millions)

Rate Base per Customer

AuthorizedRate 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/ATexas 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.

Authorized Rate BaseHistorical by State at Year End

$938 $979

$1,202

2014 2015 2016

(in m

illion

s)

Oklahoma¹

$781 $826 $925

2014 2015 2016

Kansas²

$542 $639

$760

2014 2015 2016

Texas¹

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.

Highlights

Amount $29.995 million

Customer impact $2.96 per month increase for typical residential customer

Rate base $1.2 billion

Return on equity 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

Oklahoma Natural Gas Rate Case

New Rates Effective January 2016

* 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.

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

Kansas Gas Service Rate Case

New Rates Effective January 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.

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

Texas Gas Service

Central Texas Service Area – New Rates Effective November 2016

HighlightsIncrease in base rates $8.8 million; $7.6 million impact to operating income

Return on equity 9.5%

Common equity ratio 60.1%

Other • 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

Texas Gas Service West Texas Service Area – New Rates Effective October 2016

• 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

Safety and Environment

Operating Safely and Environmentally Responsibly

2012 2013 2014 2015 2016

Customer Growth

Average Customer Count

2,114

(in th

ousa

nds)

2,1272,140

2,101

2,152

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

ONE Gas Major Metro U.S. Census County Population

Travis County, TX

El Paso County, TXOklahoma County, OK

Tulsa County, OKJohnson County, KS

Sedgwick County, KS

Service Territory Population Growth

1.45% CAGR (2000-2016)

* Source: U.S. Census Bureau, updated May 15, 2017

County 2000 Population 2016 Population % GrowthTravis, 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%

Compressed Natural Gas (CNG)

Current Outlook

• 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

1.4 2.0 2.3 2.5

2013 2014 2015 2016

CNG Volume Dth – in millions

143 stations supplied129 stations supplied

115 stations supplied

100 stations supplied

Note: Updated as of September 30, 2017

• 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

Cost of Gas

Passed Through to Customers

Cash Flow From Operations

Before Changes In Working Capital*

(Millions of dollars)Updated

2017 Guidance

Previous 2017

GuidanceChange

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.

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.

Non-GAAP Information

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