ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the Notes to Consolidated Financial Statements in this Annual Report. We have disclosed non-GAAP financial measures of adjusted net income and adjusted net income per share. Management and the Board of Directors use these non-GAAP financial measures, in addition to GAAP financial measures, to evaluate financial performance, specifically impacts from certain regulatory mechanisms designed to mitigate regulatory lag, understand and compare operating results across accounting periods, and for planning and forecasting. These non-GAAP financial measures are additional information and should not be considered as alternatives to, or more meaningful than, the related GAAP financial measures or comparable to similar measures used by other companies.
EXECUTIVE SUMMARY
We are a 100-percent regulated natural gas distribution company. As such, our regulators determine the rates we are allowed to charge for our service based on the revenue requirements needed to achieve our authorized rates of return. We earn revenues from the delivery of natural gas, but do not earn a profit on the natural gas that we deliver, as those costs are passed through to our customers at cost. The primary components of our revenue requirements are the amount of capital invested in our business, which is also known as rate base, our allowed rate of return on our capital investments, and our recoverable operating expenses, including depreciation, interest expense, and income taxes. The variable component of our rates is dependent on the consumption of natural gas, which is impacted primarily by the weather and, to a lesser extent, economic activity. While we have WNA mechanisms that adjust customers’ bills when actual HDDs differ from normalized HDDs, these mechanisms are in place for only a portion of the year, except in Kansas, and do not offset all fluctuations in usage resulting from weather variability. Accordingly, the weather can have either a positive or negative impact on our financial performance.
Our financial performance is contingent on a number of factors, including: (1) our regulatory construct, including the rates we are allowed to charge for our service, and the authorized rates of return on our investments in rate base; (2) the consumption of natural gas, which impacts the amount of natural gas revenues derived from the variable component of our rates; (3) customer growth; (4) our operating performance; and (5) the perceived value of natural gas relative to other energy sources, particularly electricity, which influences our customers’ choice of natural gas to provide a portion of their energy needs.
We are subject to regulatory requirements for pipeline integrity, pipeline and cyber security, and environmental compliance. These requirements impact our operating expenses and the level of capital expenditures required for compliance. Historically, our regulators have allowed recovery of these expenditures. However, because integrity and environmental regulations are frequently changing, our capital and operating expenditures to comply are changing as well. Although we believe our regulators will continue to allow recovery of such expenditures in the future, we will continue to make these expenditures with no assurance about if, or over what period, we will be permitted to recover them.
RECENT DEVELOPMENTS
Infrastructure Initiative - On December 18, 2025, we announced an infrastructure initiative to support economic growth and enhance energy reliability in southeast Oklahoma. Once operational, the new pipeline will deliver over 100 Bcf of natural gas annually in southeast Oklahoma, including servicing Western Farmers Electric Cooperative’s natural gas-fueled generation at its Hugo plant. The project includes a 43-mile, natural gas pipeline connecting to the Bennington Natural Gas Hub. We will invest approximately $120 million and Oklahoma Natural Gas will install and operate the pipeline, which is expected to be completed by the third quarter of 2028.
Credit Facility - In October 2025, we amended and restated the ONE Gas Credit Agreement. During this process we increased the capacity to $1.5 billion from $1.35 billion with the addition of one new lender and reduction of three lenders. The term of the agreement was extended to October 30, 2030, from March 16, 2028. The expansion option in the revolver was set at an additional $750 million, and all other terms and conditions of the ONE Gas Credit Agreement are materially unchanged.
Commercial Paper - In December 2025, we increased the capacity of our commercial paper to $1.5 billion from $1.35 billion.
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Equity issuances - On December 29, 2025, we settled forward sale agreements for 2,633,700 shares of our common stock for net proceeds of $205.0 million.
In May 2025, we entered into an underwriting agreement and a forward sale agreement for 2,500,000 shares of our common stock. The forward sale agreement provides for settlement on a date, or dates, to be specified at our discretion, but which will occur no later than December 31, 2026.
In February 2023, we entered into an at-the-market equity distribution agreement under which we may issue and sell shares of our common stock with an aggregate offering price up to $300 million. Sales of common stock are made by means of ordinary brokers’ transactions on the NYSE and the NYSE Texas, in block transactions, or as otherwise agreed to between us and the sales agent. We are under no obligation to offer and sell common stock under the program. At December 31, 2025, we had $225.5 million of equity available for issuance under the program.
The following table summarizes our outstanding forward sale agreement at December 31, 2025:
Maturity
Original Shares
Remaining Shares
Forward Price
Net Proceeds Available
(Shares)
(Shares)
(Per share)
(Thousands of dollars)
December 31, 2026
See “Liquidity and Capital Resources” and Note 7 of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of our at-the-market equity program.
Dividend - In January 2026, we declared a dividend of $0.68 per share ($2.72 per share on an annualized basis) for shareholders of record as of February 20, 2026, payable on March 6, 2026.
Texas House Bill 4384 - In June 2025, Texas House Bill 4384 was signed into law, allowing gas utilities in Texas to defer, and later recover, specific costs related to property, plant and equipment placed in service, but not yet reflected in base rates, including depreciation, ad valorem taxes, and a carrying cost. The RRC is required to adopt rules to implement the new law within 270 days of the effective date. Texas Gas Service began applying the new provisions to property, plant and equipment placed in service but not yet reflected in rates in the third quarter of 2025.
Unsecured Term Loan - On February 11, 2026, the variable interest rate on our unsecured term loan reset for the new six‑month interest period to 6‑month Term SOFR of 3.58% plus a 90‑basis‑point spread, resulting in a 4.48% all‑in interest rate, a decrease from the prior period rate of 4.96%.
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REGULATORY ACTIVITIES
Oklahoma - On February 27, 2025, Oklahoma Natural Gas filed its required PBRC application for the year ended December 31, 2024. The filed request included a $41.5 million base rate revenue increase, $2.4 million energy efficiency incentive, and $13.2 million of estimated EDIT to be credited to customers in 2026. The parties reached a settlement which included a $41.1 million base rate revenue increase, a $2.4 million energy efficiency incentive, and $17.9 million of estimated EDIT to be credited to customers in February 2026. On June 12, 2025, the administrative law judge recommended approval of the settlement. Rates were implemented on June 27, 2025, and the OCC issued an order approving the settlement on July 23, 2025.
Kansas - In April 2025, Kansas Gas Service submitted an application to the KCC requesting an increase of approximately $7.2 million related to its GSRS. In July 2025, the KCC approved a $7.2 million increase effective August 2025.
Texas - In June 2025, Texas Gas Service filed a rate case for all customers in the previously designated Central-Gulf, West-North, and Rio Grande Valley service areas requesting a $41.1 million revenue increase. The filing included a request to consolidate all service areas into a single division. The filing was based on a requested 10.4 percent return on equity and a 59.9 percent common equity ratio. In December 2025, the parties filed a non-unanimous partial settlement agreement for an increase of $15.0 million based on a 9.8 percent return on equity and 59.9 percent common equity ratio, which addressed all issues except consolidation. The consolidation issues were addressed at a hearing before an administrative law judge in November 2025. On December 23, 2025, the administrative law judge recommended a revenue increase of $14.5 million and consolidation of all service areas into a single statewide division. The RRC approved the administrative law judge’s proposed order and new rates and consolidation were effective on January 27, 2026.
West-North Service Area - In February 2025, Texas Gas Service made a GRIP filing for all customers in the previously designated West-North service area, requesting a $8.2 million increase to be effective in June 2025. In May 2025, the RRC approved an increase of $8.2 million, and new rates became effective in June 2025.
Central-Gulf Service Area - In February 2025, Texas Gas Service made a GRIP filing for all customers in the previously designated Central-Gulf service area, requesting a $15.4 million increase to be effective in June 2025. In May 2025, the RRC approved an increase of $15.4 million, and new rates became effective in June 2025.
Rio Grande Valley Service Area - In April 2025, Texas Gas Service made a GRIP filing for all customers in the previously designated Rio Grande Valley service area, requesting a $3.2 million increase to be effective in September 2025. In August 2025, the RRC approved an increase of $2.9 million, and new rates became effective in September 2025.
See “Regulatory Activities,” “Liquidity and Capital Resources,” and Notes 1 and 3 of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of the securitization transactions.
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FINANCIAL RESULTS AND OPERATING INFORMATION
We operate in one reportable business segment: regulated public utilities that deliver natural gas to residential, commercial, and transportation customers. We evaluate our financial performance principally on net income.
Selected Financial Results - Net income was $264.2 million, or $4.37 per diluted share, $222.9 million, or $3.91 per diluted share, and $231.2, or $4.14 per diluted share, for the years ended December 31, 2025, 2024, and 2023, respectively.
The following table sets forth certain selected financial results for our operations for the periods indicated:
Year Ended
Variances
Variances
December 31,
Financial Results
Increase (Decrease)
Increase (Decrease)
(Millions of dollars, except percentages)
Natural gas sales
Transportation revenues
Securitization customer charges
Other revenues
Total revenues
Cost of natural gas
Operating costs
Depreciation and amortization
Operating income
Net Income
Capital expenditures and asset removal costs
Natural gas sales to customers represent revenue from contracts with customers through implied contracts established by our tariffs and rates approved by regulatory authorities, as well as revenues from regulatory mechanisms related to natural gas sales. Natural gas sales also include recovery of the cost of natural gas.
Our natural gas sales include fixed and variable charges related to the delivery of natural gas and gas costs that are passed through to our customers in accordance with our cost of natural gas regulatory mechanisms. Fixed charges reflect the portion of our natural gas sales attributable to the monthly fixed customer charge component of our rates, which does not fluctuate based on customer usage in each period. Variable charges reflect the portion of our natural gas sales that fluctuate with the volumes delivered and billed and the effects of weather normalization.
Transportation revenues represent revenue from contracts with customers through implied contracts established by our tariffs and rates approved by regulatory authorities, as well as tariff-based negotiated contracts.
Securitization customer charges represent revenue from contracts with customers through implied contracts established by the financing order approved by the KCC, related to the securitization of extraordinary costs incurred during Winter Storm Uri in the state of Kansas. See Note 17 of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of the securitization transaction in Kansas.
Other revenues include primarily miscellaneous service charges, which represent implied contracts with customers established by our tariffs and rates approved by regulatory authorities and other revenues from regulatory mechanisms.
Cost of natural gas includes commodity purchases, fuel, storage, transportation, hedging costs, and settlement proceeds for natural gas price volatility mitigation programs approved by our regulators and other gas purchase costs recovered through our cost of natural gas regulatory mechanisms. Cost of natural gas does not include an allocation of general operating costs or depreciation and amortization. These regulatory mechanisms provide a method of recovering natural gas costs on an ongoing basis without a profit. Therefore, although our revenues fluctuate with the cost of natural gas that we pass through to our customers, operating income is not affected by fluctuations in the cost of natural gas.
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2025 vs. 2024 - Operating income increased $58.4 million due primarily to the following:
• an increase of $116.0 million from new rates; and
• an increase of $6.6 million in residential sales due to net customer growth in all three states.
These increases were offset partially by:
• an increase of $20.6 million in depreciation expense due to additional capital expenditures being placed in service;
• an increase of $17.0 million in employee-related costs;
• an increase of $14.7 million in ad-valorem taxes;
• an increase of $3.8 million in outside services;
• an increase of $2.9 million in insurance expense;
• an increase of $1.5 million in bad debt expense;
• an increase of $1.0 million in fleet expense; and
• a carrying charge of $2.9 million refunded to Oklahoma customers from the settlement of a disputed gas purchase invoice.
For the year ended December 31, 2025, revenues reflect an increase of $3.0 million and a decrease in interest expense, net, of $1.4 million associated with KGSS-I, which are offset by a $4.5 million increase in amortization and operating expense.
Other Factors Affecting Net Income - Other factors that affect net income for the year ended December 31, 2025, compared with 2024, include a decrease of $0.8 million in other income, net and a decrease of $4.4 million in interest expense, net. The decrease in other income, net is due primarily to a $2.4 million decrease in the credit for non-service costs associated with pension and other postemployment benefits, offset partially by a $1.0 million increase in the market value of investments associated with our nonqualified deferred compensation plans. The decrease in interest expense is due primarily to commercial paper borrowings at lower rates and the implementation of Texas House Bill 4384.
EDIT - The return of EDIT to our customers is not expected to have a material impact on earnings, as any reduction or credit in rates is offset by a reduction in income tax expense. During the years ended December 31, 2025 and 2024, we credited income tax expense $17.6 million and $25.7 million, respectively, for the amortization of the regulatory liability associated with EDIT that was embedded in base rates.
Capital Expenditures and Asset Removal Costs - Our capital expenditures program includes expenditures for pipeline integrity, extending service to new areas, reinforcing and increasing system capabilities, pipeline replacements, automated meter reading, government-mandated pipeline relocations, fleet, facilities, IT assets, and cybersecurity. It is our practice to maintain and upgrade our infrastructure, facilities, and systems to ensure safe, reliable, and efficient operations. Asset removal costs include expenditures associated with the replacement or retirement of long-lived assets that result from the construction, development, and/or normal use of our assets, primarily our pipeline assets.
Capital expenditures and asset removal costs decreased $2.6 million for 2025, compared with 2024. Our capital expenditures and asset removal costs are expected to be approximately $800 million for 2026. While we did not experience a significant impact to our capital expenditure program during the year ended December 31, 2025, our future capital expenditure activity is dependent on several factors, including economic conditions and our supply chains for contract labor, materials, and supplies.
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Non-GAAP Financial Measures - Adjusted net income and adjusted net income per share are calculated as GAAP net income plus the deferral of an equity portion of a carrying cost attributable to shareholders’ investment capitalized for regulatory purposes but not for financial reporting purposes. These carrying costs relate to property, plant and equipment that has been placed in service, but not yet reflected in base rates. Adjusted net income and adjusted net income per share should not be considered in isolation or as a substitute for GAAP net income or GAAP EPS.
Management believes these non‑GAAP measures provide useful information because they offer a more complete view of our overall regulatory economics, reflect the period-specific effects of certain regulatory mechanisms designed to mitigate regulatory lag associated with property, plant and equipment placed in service prior to regulatory action, and reflect the impact of regulatory timing differences that arise under the Company’s rate-setting framework. These adjustments, net of applicable tax effects, are expected to recur as a result of the Company’s regulatory framework and are a consistent part of our earnings profile.
The following table contains a reconciliation of the Company’s GAAP net income and GAAP EPS to adjusted net income and adjusted net income per share:
Year Ended December 31,
(Thousands, except per share amounts)
Net income - GAAP
Other income - deferred carrying cost (a)
Income taxes (a)
Adjusted net income - non-GAAP
Earnings per share - GAAP
Basic
Diluted
Adjusted net income per share - non-GAAP
Basic
Diluted
Average shares (thousands)
Basic
Diluted
(a) The allowance for earnings on shareholders’ investment capitalized for regulatory purposes but not for financial reporting purposes applied to property, plant and equipment placed in service, but not yet reflected in base rates as authorized by our regulators or state law. This increases book income but is non-taxable, creating a permanent tax difference.
Selected Operating Information - The following tables set forth certain selected operating information for the periods indicated:
Year Ended
Variances
December 31,
(in thousands)
Increase (Decrease)
Average Number of Customers
Total
Total
Total
Residential
Commercial and industrial
Other
Transportation
Total customers
The increase in the average number of customers for 2025, compared with 2024, is due primarily to the connection of new customers resulting from the extension and expansion of our system in our service areas. For 2025 and 2024, our average customer count includes 23,000 new customer connections in each year.
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The following table reflects total volumes delivered, excluding the effects of WNA mechanisms on sales volumes:
Year Ended December 31,
Volumes (MMcf)
Natural gas sales
Residential
Commercial and industrial
Other
Total sales volumes delivered
Transportation
Total volumes delivered
The impact of weather on residential and commercial natural gas sales is tempered by WNA mechanisms in all jurisdictions.
The following table sets forth the HDDs by state for the periods indicated:
Year Ended December 31,
HDDs
Actual
Normal
Actual
Normal
Actual Variance
Actual as a percent of Normal
Oklahoma
Kansas
Texas
Normal HDDs are established through rate proceedings in each of our jurisdictions for use primarily in weather normalization billing calculations. Normal HDDs disclosed above are based on:
• Oklahoma - A 10-year weighted average as of June 30, 2021, as calculated using 11 weather stations across Oklahoma and weighted on average customer count.
• Kansas - A 30-year rolling average for years 1994-2023 calculated using three weather stations across Kansas and weighted on HDDs by weather station and customers.
• Texas - An average of HDDs authorized in our most recent rate proceeding in each jurisdiction and weighted using a rolling 10-year average of actual natural gas distribution sales volumes.
Actual HDDs are based on the quarter-to-date weighted average of:
• 11 weather stations and customers by month for Oklahoma;
• 3 weather stations and customers by month for Kansas; and
• 9 weather stations and natural gas distribution sales volumes for Texas.
CONTINGENCIES
We are a party to various litigation matters and claims that have arisen in the normal course of our operations. While the results of litigation and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable outcome of such matters will not have a material adverse effect on our results of operations, financial position, or cash flows. See Note 15 of the Notes to Consolidated Financial Statements in this Annual Report for information with respect to legal proceedings.
LIQUIDITY AND CAPITAL RESOURCES
General - We have relied primarily on operating cash flow, commercial paper, and equity forward agreements for our liquidity and capital resource requirements. We fund operating expenses, working capital requirements, including purchases of natural gas, and capital expenditures primarily with cash from operations, commercial paper, and settlements of equity forward agreements.
Our stable cash flow and earnings profile is due to the significant residential component of our customer base, the fixed-charge component of our natural gas sales revenues, and the rate mechanisms that we have in place. Additionally, we have rate
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mechanisms in place in our jurisdictions that reduce the lag in earning a return on our capital expenditures and provide for recovery of certain changes in our cost of service by allowing for adjustments to rates between rate cases. We anticipate that our cash flow generated from operations and our expected short- and long-term financing arrangements will enable us to maintain our current and planned level of operations and provide us flexibility to finance our infrastructure investments. Our ability to access capital markets for debt and equity financing under reasonable terms depends on market conditions, our financial condition, and credit ratings.
Short-term Debt - The ONE Gas Credit Agreement contains certain financial, operational, and legal covenants. Among other things, these covenants include maintaining ONE Gas’ total debt-to-capital ratio, excluding the debt of KGSS-I, of no more than 70 percent at the end of any calendar quarter. At December 31, 2025, our total debt-to-capital ratio, excluding KGSS-I, was 47.6 percent and we were in compliance with all covenants under the ONE Gas Credit Agreement. We may reduce the unutilized portion of the ONE Gas Credit Agreement in whole or in part without premium or penalty. The ONE Gas Credit Agreement contains customary events of default. Upon the occurrence of certain events of default, the obligations under the ONE Gas Credit Agreement may be accelerated and the commitments may be terminated.
In October 2025, we amended and restated the ONE Gas Credit Agreement, increasing the aggregate committed capacity to $1.5 billion from $1.35 billion, with the addition of one new lender and the reduction of three existing lenders. The maturity date of the agreement was extended to October 30, 2030, from March 16, 2028. The agreement provides for a revolving unsecured credit facility, which includes a $20 million letter of credit subfacility and a $60 million swingline subfacility. Under the terms of the agreement, the Company may, subject to satisfaction of customary conditions and receipt of commitments from new or existing lenders, request an increase in total commitments of up to an additional $750 million. Proceeds from the agreement may be used for working capital, capital expenditures, acquisitions and mergers, the issuance of letters of credit, and other general corporate purposes.
At December 31, 2025, we had approximately $2.4 million in letters of credit issued and no borrowings under the ONE Gas Credit Agreement as in effect, with approximately $1.5 billion of remaining credit, which is available to repay our commercial paper borrowings and for other permitted purposes.
In December 2025, we increased the capacity of our commercial paper to $1.5 billion from $1.35 billion. Under our commercial paper program, we may issue unsecured commercial paper up to the maximum amount of $1.5 billion to fund short-term borrowing needs. The maturities of the commercial paper vary but may not exceed 270 days from the date of issue. Commercial paper is generally sold at par less a discount representing an interest factor. At December 31, 2025 and December 31, 2024, we had $737.4 million and $914.6 million of commercial paper outstanding with a weighted-average interest rate of 3.94 percent and 4.77 percent, respectively.
Senior Notes - At December 31, 2025, our long-term debt-to-capital ratio was 40.9 percent, exclusive of KGSS-I debt.
At December 31, 2025, we had outstanding $2.2 billion of Senior Notes with none due within the next year. The indenture governing our Senior Notes includes an event of default upon the acceleration of other indebtedness of $100 million or more. Such events of default would entitle the trustee or the holders of 25 percent in aggregate principal amount of the outstanding Senior Notes to declare those Senior Notes immediately due and payable in full.
Depending on the series, we may redeem our Senior Notes at par, plus accrued and unpaid interest to the redemption date, starting one month, three months, or six months, before their maturity dates. Prior to these dates, we may redeem these Senior Notes, in whole or in part, at a redemption price equal to the principal amount, plus accrued and unpaid interest and a make-whole premium. The redemption price will never be less than 100 percent of the principal amount of the respective Senior Note, plus accrued and unpaid interest to the redemption date. Our Senior Notes are senior unsecured obligations, ranking equally in right of payment with all of our existing and future unsecured senior indebtedness.
Unsecured Term Loan - In August 2025, we entered into a 13-month unsecured term loan agreement totaling $250 million. The loan bears interest at a variable rate based on Term SOFR, initially set using the 6-month Term SOFR at closing, plus a 90 bps spread as specified in the agreement. The interest rate resets automatically at months six and twelve, each based on the prevailing 6-month Term SOFR plus a spread of 90 bps, and 1-month Term SOFR plus a spread of 90 bps, respectively, until the term loan matures in September 2026. Interest is payable quarterly, and the loan includes customary covenants and default provisions. Proceeds of the term loan will be available for working capital, capital expenditures, acquisitions, mergers, and other general corporate purposes.
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Credit Ratings - Our credit ratings at December 31, 2025, were:
Rating Agency
Long-term Rating
Short-term Rating
Outlook
Moody’s
Prime-2
Stable
Stable
We intend to maintain credit metrics at a level that supports our balanced approach to capital investment and a return of capital to shareholders via a dividend that we believe will be competitive with our peer group.
Securitized Utility Tariff Bonds - At December 31, 2025, we had outstanding $257.9 million of 5.486 percent KGSS-I Securitized Utility Tariff Bonds with $30.6 million due within the next year. The bonds are governed by an indenture between KGSS-I and the indenture trustee. The indenture contains certain covenants that restrict KGSS-I’s ability to sell, transfer, convey, exchange, or otherwise dispose of its assets.
Equity Issuances - On December 29, 2025, we settled forward sale agreements 2,633,700 shares of our common stock for net proceeds of $205.0 million.
In May 2025, we entered into an underwriting agreement and a forward sale agreement for 2,500,000 shares of our common stock and granted the underwriter an option to purchase up to 375,000 additional shares of our common stock, which was not exercised. The forward sale agreement provides for settlement on a date, or dates, to be specified at our discretion, but which will occur no later than December 31, 2026.
In December 2024, we amended the two forward sale agreements we entered into in September 2023 to extend the maturity date of 223,000 and 180,000 shares of our common stock, to December 31, 2025 from December 31, 2024. The amended forward sale agreements provided for settlement on a date, or dates, to be specified at our discretion but which will occur no later than December 31, 2025. The remaining shares under the two forward sale agreements were settled as part of the December 29, 2025, share settlement.
In February 2023, we entered into an at-the-market equity distribution agreement under which we may issue and sell shares of our common stock with an aggregate offering price up to $300 million. Sales of common stock are made by means of ordinary brokers’ transactions on the NYSE and the NYSE Texas, in block transactions or as otherwise agreed to between us and the sales agent. We are under no obligation to offer and sell common stock under the program. At December 31, 2025, we had $225.5 million of equity available for issuance under the program.
Pension and Other Postemployment Benefit Plans - For the year ended December 31, 2025, we contributed $6.4 million to our defined benefit pension plans, and no contributions were made to our other postemployment benefit plans. For the year ended December 31, 2024, we contributed $1.6 million to our defined benefit pension plans, and no contributions were made to our other postemployment benefit plans. Additional information about our pension and other postemployment benefit plans, including anticipated contributions, is included under “Critical Accounting Estimates - Pension and Other Postemployment Benefits” and under Note 11 of the Notes to Consolidated Financial Statements in this Annual Report.
CASH FLOW ANALYSIS
We use the indirect method to prepare our consolidated statements of cash flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that impact net income but may not result in actual cash receipts or payments and changes in our assets and liabilities not classified as investing or financing activities during the period. Items that impact net income but may not result in actual cash receipts or payments include, but are not limited to, depreciation and amortization, deferred income taxes, share-based compensation expense, and provision for doubtful accounts.
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The following table sets forth the changes in cash flows by operating, investing and financing activities for the periods indicated:
Year Ended December 31,
Variance
Variance
( Millions of dollars )
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Change in cash, cash equivalents, restricted cash and restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
Operating Cash Flows - Changes in cash flows from operating activities are due primarily to changes in sales revenues, natural gas costs, and operating expenses discussed in “Financial Results and Operating Information,” and changes in working capital. Changes in natural gas prices and demand for our services or natural gas, whether because of general economic conditions, variations in weather not mitigated by WNA mechanisms, changes in supply, or increased competition from other service providers, could affect our earnings and operating cash flows. Typically, our cash flows from operations are greater in the first half of the year compared to the second half of the year.
Operating cash flows were higher for the year ended December 31, 2025, compared to 2024, due primarily to working capital changes related to the recovery of regulatory assets.
Investing Cash Flows - Cash used in investing activities increased for the year ended December 31, 2025, compared to 2024, due primarily to an increase in capital expenditures for system integrity and extension of service to new areas.
Financing Cash Flows - Cash used in financing activities increased for the year ended December 31, 2025, compared to 2024, due primarily to the repayment of notes payable, offset by lower repayment of long-term debt.
ENVIRONMENTAL, SAFETY, AND REGULATORY MATTERS
Environmental Matters - We are subject to multiple laws and regulations regarding protection of the environment and natural and cultural resources, which affect many aspects of our present and future operations. Regulated activities include, but are not limited to, those involving air emissions, storm water and wastewater discharges, handling and disposal of solid and hazardous wastes, wetland preservation, plant and wildlife protection, hazardous materials use, storage, and transportation, and pipeline and facility construction. These laws and regulations require us to obtain and/or comply with a wide variety of environmental clearances, registrations, licenses, permits, and other approvals. Failure to comply with these laws, regulations, licenses, and permits or the discovery of presently unknown environmental conditions may expose us to fines, penalties, and/or interruptions in our operations that could be material to our results of operations. In addition, emission controls and/or other regulatory or permitting mandates under the CAA and other similar federal and state laws could require unexpected capital expenditures. We cannot assure that existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us. Revised or additional statutes or regulations that result in increased compliance costs or additional operating restrictions could have a material adverse effect on our business, financial condition, and results of operations. Our expenditures for environmental investigation and remediation compliance to date have not been significant in relation to our financial position, results of operations, or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows during 2025, 2024, and 2023.
We own or retain legal responsibility for certain environmental conditions at 12 former MGP sites in Kansas. These sites contain contaminants generally associated with MGP sites and are subject to control or remediation under various environmental laws and regulations. A consent agreement with the KDHE governs all environmental investigation and remediation work at these sites. The terms of the consent agreement require us to investigate these sites and set remediation activities based upon the results of the investigations and risk analysis. Remediation typically involves the management of contaminated soils and may involve removal of structures and monitoring and/or remediation of groundwater. We have completed or are addressing removal of the source of soil contamination at all 12 sites and continue to monitor groundwater at
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seven of the 12 sites according to plans approved by the KDHE. Regulatory closure has been achieved at five of the 12 sites, but these sites remain subject to potential future requirements that may result in additional costs.
We have an AAO that allows Kansas Gas Service to defer and seek recovery of costs necessary for investigation and remediation at, and nearby, these 12 former MGP sites that are incurred after January 1, 2017. In January 2025, Kansas Gas Service requested to increase the cap on the AAO to $32.0 million from $15.0 million. The original $15.0 million cap approved in 2017 was the result of a unanimous settlement agreement and contained additional reporting requirements and obligations. In May 2025, Kansas Gas Service, the KCC staff, and the Citizens’ Utility Ratepayer Board filed a unanimous settlement agreement with the KCC agreeing to increase the cap to $32.0 million and to leave all of the other provisions of the 2017 settlement agreement in place. The KCC issued an order approving the settlement agreement in July 2025.
Pursuant to the AAO, costs approved for recovery in a future rate proceeding are to be amortized over a 15-year period. The unamortized amounts are not included in rate base or accumulate carrying charges. Following a determination that future investigation and remediation work approved by the KDHE exceeds $32.0 million, net of any related insurance recoveries, Kansas Gas Service is required to file an application with the KCC for approval to increase the $32.0 million cap. At December 31, 2025 and December 31, 2024, we have deferred $30.1 million and $31.1 million, respectively, for accrued investigation and remediation costs, net of insurance proceeds, pursuant to our AAO.
We also own or retain legal responsibility for certain environmental conditions at a former MGP site in Texas. At the request of the TCEQ, we began investigating the level and extent of contamination associated with the site under their Texas Risk Reduction Program. A preliminary site investigation revealed that this site contains contaminants generally associated with MGP sites and is subject to control or remediation under various environmental laws and regulations. At December 31, 2025, estimated costs associated with expected remediation activities for this site are not material.
Our expenditures for environmental evaluation, mitigation, remediation, and compliance to date have not been significant in relation to our financial position, results of operations, or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows during the years ended December 31, 2025, 2024, and 2023. The reserve for remediation of our MGP sites was $13.7 million and $14.3 million at December 31, 2025 and 2024, respectively.
Environmental issues may exist with respect to these MGP sites that are unknown to us. Accordingly, future costs are dependent on the final determination and regulatory approval of any remedial actions, the complexity of the site, level of remediation required, changing technology and governmental regulations, and to the extent not recovered by insurance or recoverable in rates from our customers, such costs could be material to our financial condition, results of operations, or cash flows.
We are subject to environmental regulation by federal, state, and local authorities. Due to the inherent uncertainties surrounding the development of federal and state environmental laws and regulations, we cannot determine with specificity the impact such laws and regulations may have on our existing and future facilities. With the trend toward stricter standards, greater regulation, and more extensive permit requirements for the types of assets operated by us, our environmental expenditures could increase in the future. Such expenditures may not be fully recovered by insurance or recoverable in rates from our customers, and those costs may adversely affect our financial condition, results of operations, and cash flows.
Environmental Footprint - We cannot assure that existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions could have a material adverse effect on our business, financial condition, and results of operations. Our expenditures for environmental investigation and remediation compliance to date have not been significant in relation to our financial position, results of operations, or cash flows, and our expenditures related to environmental matters had no material effects on earnings or cash flows for 2025, 2024, and 2023.
Pipeline Safety - We are subject to regulation under federal pipeline safety statutes and any analogous state regulations. These include safety requirements for the design, construction, operation, and maintenance of pipelines, including transmission and distribution pipelines. At the federal level, we are regulated by PHMSA. PHMSA regulations require the following for certain pipelines: inspection and maintenance plans; integrity management programs, including the determination of pipeline integrity risks and periodic assessments on certain pipeline segments; an operator qualification program, which includes certain trainings; a public awareness program that provides certain information; and a control room management plan.
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PHMSA promulgates various regulations related to pipeline safety. As part of the Consolidated Appropriations Act, 2021, the PIPES Act reauthorized PHMSA through 2023 and directed the agency to move forward with several regulatory actions. Outstanding regulatory actions include the “Pipeline Safety: Class Location Change Requirements”, “Pipeline Safety: Safety of Gas Distribution Pipelines,” and “Pipeline Safety: Gas Pipeline Leak Detection” proposed rulemakings. The “Pipeline Safety: Gas Pipeline Leak Detection” proposed rule would require operators of new and existing transmission and distribution pipeline facilities to conduct certain leak detection and repair programs and require facility inspection and maintenance plans to align with those regulations. On January 20, 2025, an executive order began a regulatory freeze on all rulemakings that were not yet effective pending further review. To the extent such rulemakings impose more stringent requirements on our facilities, we may be required to incur expenditures that may be material.
Regulatory - Several regulatory initiatives impacted the earnings and future earnings potential of our business. See additional information regarding our regulatory initiatives in the “Regulatory Activities” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
IMPACT OF NEW ACCOUNTING STANDARDS
Information about the impact of new accounting standards, if any, is included in Note 1 of the Notes to Consolidated Financial Statements in this Annual Report.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ from our estimates.
The following summary sets forth what we consider to be our most critical estimates and accounting policies. Our critical accounting policies are defined as those estimates and policies most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgment, particularly because of the need to make estimates concerning the impact of inherently uncertain matters.
Regulation - Our operations are subject to regulation with respect to rates, service, maintenance of pipeline and accounting records and various other matters by the respective regulatory authorities in the states in which we operate. We account for the financial effects of the ratemaking and accounting practices and policies of the various regulatory authorities in our consolidated financial statements. We record regulatory assets for costs that have been deferred for which future recovery through customer rates is considered probable and regulatory liabilities when it is probable that revenues will be reduced for amounts that will be returned to customers through the ratemaking process. As a result, certain costs that would normally be expensed under GAAP are capitalized or deferred on the balance sheet because it is probable they can be recovered through rates. Discontinuing the application of this method of accounting for regulatory assets and liabilities could significantly increase our operating expenses, as fewer costs would likely be capitalized or deferred on the balance sheet, which could reduce our net income. Further, regulation may impact the period in which revenues or expenses are recognized. The amounts to be recovered or recognized are based upon historical experience and our understanding of the regulations. The impact of regulation on our operations may be affected by decisions of the regulatory authorities or the issuance of new regulations.
For further discussion of regulatory assets and liabilities, see Note 3 of the Notes to Consolidated Financial Statements in this Annual Report.
Revenue Recognition - For regulated deliveries of natural gas, we read meters and bill customers on a monthly cycle. We recognize revenues upon the delivery of natural gas or services rendered to customers. The billing cycles for customers do not necessarily coincide with the accounting periods used for financial reporting purposes. We accrue unbilled revenues for natural gas that has been delivered but not yet billed at the end of an accounting period. Accrued unbilled revenue is based on a percentage estimate of amounts unbilled each month, which is dependent upon a number of factors, some of which require management’s judgment. These factors include customer consumption patterns and the impact of weather on usage. The accrued unbilled natural gas sales revenue at December 31, 2025 and 2024 was $216.4 million and $212.0 million, respectively, and is included in accounts receivable on our consolidated balance sheets.
We have determined the majority of our natural gas sales and transportation tariffs to be implied contracts with customers, which are settled over time, where our performance obligation is settled with our customer when natural gas is delivered and
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simultaneously consumed by the customer. In addition, we use the invoice method practical expedient, where we recognize revenue for volumes delivered for which we have a right to invoice. For our other utility revenue, which are primarily one-time service fees that meet the requirements under ASC 606, the performance obligation is satisfied at a point in time when services are rendered to the customer. Certain revenues that do not meet the requirements under ASC 606 as revenues from contracts with customers are reflected as other revenues in determining total revenue. See Note 2 of the Notes to Consolidated Financial Statements in this Annual Report for additional information regarding our revenues.
Pension and Other Postemployment Benefits - We have defined benefit pension plans covering eligible retirees and eligible employees. We also sponsor welfare plans that provide other postemployment medical and life insurance benefits to eligible retirees and employees who retire with at least five years of service.
To calculate the expense and liabilities related to our plans, we utilize an outside actuarial consultant, which uses statistical and other factors to anticipate future events. These factors include assumptions about the discount rate, expected return on plan assets, rate of future compensation increases, age and mortality, and employment periods. We use tables issued by the Society of Actuaries to estimate mortality rates. In determining the projected benefit costs, assumptions can change from period to period and may result in material changes in the costs and liabilities we recognize.
For the year ended December 31, 2025, we contributed $6.4 million to our defined benefit pension plans and no contributions were made to our other postemployment benefit plans. For the year ended December 31, 2024, we contributed $1.6 million to our defined benefit pension plans and no contributions were made to our other postemployment benefit plans. In 2026, our contributions are expected to be $12.7 million to our defined benefit pension plans, and no contributions are expected to be made to our other postemployment benefit plans.
We recorded net periodic benefit costs for our defined benefit pension plans, prior to regulatory deferrals, of $5.7 million in 2025, and estimate that in 2026, we will record net periodic benefit cost of approximately $18.6 million. Net periodic benefits credits for our postemployment benefit plans, prior to regulatory deferrals, were $0.2 million in 2025, and we estimate that in 2026, we will record a credit of approximately $0.3 million, prior to regulatory deferrals.
The following table sets forth the significant assumptions used to determine our estimated 2026 net periodic benefit cost related to our defined benefit pension and other postemployment benefit plans and sensitivity to changes with respect to these assumptions:
Rate Used
Cost
Sensitivity (a)
Obligation
Sensitivity (b)
( Millions of dollars )
Discount rate for pension
Discount rate for other postemployment benefits
Expected long-term return on plan assets for pension
Expected long-term return on plan assets for other postemployment benefits
(a) Approximate impact a quarter percentage point decrease in the assumed rate would have on net periodic pension costs.
(b) Approximate impact a quarter percentage point decrease in the assumed rate would have on defined benefit pension obligation.
See Note 11 of the Notes to Consolidated Financial Statements in this Annual Report for additional information regarding our pension and other postretirement benefit plans.
Contingencies - Our accounting for contingencies covers a variety of business activities, including contingencies for legal and environmental exposures. We accrue these contingencies when our assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered and an amount can be reasonably estimated. We expense legal fees as incurred and base our legal liability estimates on currently available facts and our assessments of the ultimate outcome or resolution. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than the completion of a remediation feasibility study. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
Our expenditures for environmental evaluation, mitigation, remediation, and compliance to date have not been significant in relation to our financial position, results of operations, or cash flows, and our expenditures related to environmental matters had no material effect on earnings or cash flows for the years ended December 31, 2025, 2024, and 2023. Environmental issues may exist with respect to these MGP sites that are unknown to us. Accordingly, future costs are dependent on the final determination and regulatory approval of any remedial actions, the complexity of the site, level of remediation required, changing technology
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and governmental regulations, and to the extent not recovered by insurance or recoverable in rates from our customers, such costs could be material to our financial condition, results of operations, or cash flows.
See “Environmental Matters” and Note 15 of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of contingencies.
FORWARD-LOOKING STATEMENTS
Some of the statements contained and incorporated in this Annual Report are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements relate to our anticipated financial performance, liquidity, management’s plans and objectives for our future operations, our business prospects, the outcome of regulatory and legal proceedings, market conditions, and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.
Forward-looking and other statements in this Annual Report regarding our environmental, social, and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking environmental, social, and sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future.
Forward-looking statements include the items identified in the preceding paragraph, the information concerning possible or assumed future results of our operations and other statements contained or incorporated in this Annual Report identified by words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled,” “likely,” and other words and terms of similar meaning.
One should not place undue reliance on forward-looking statements, which are applicable only as of the date of this Annual Report. Known and unknown risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements. Those factors may affect our operations, costs, liquidity, markets, products, services, and prices. In addition to any assumptions and other factors referred to specifically in connection with the forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement include, among others, the following:
• our ability to recover costs, income taxes, and amounts equivalent to the cost of property, plant and equipment, regulatory assets, and our allowed rate of return in our regulated rates or other recovery mechanisms;
• cyber-attacks, which, continue to increase in volume and sophistication, or breaches of technology systems that could disrupt our operations or result in the loss or exposure of confidential or sensitive customer, employee, vendor, counterparty, or Company information; further, increased remote working arrangements have required enhancements and modifications to our IT infrastructure (e.g. Internet, Virtual Private Network, remote collaboration systems, etc.), and any failures of the technologies, including those provided by third-party service providers, that facilitate working remotely could limit our ability to conduct ordinary operations or expose us to increased risk or effect of an attack;
• our ability to manage our operations and maintenance costs;
• changes in regulation of natural gas distribution services, particularly those in Oklahoma, Kansas, and Texas;
• the economic climate and, particularly, its effect on the natural gas requirements of our residential and commercial customers;
• the length and severity of a pandemic or other health crisis which could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period;
• competition from alternative forms of energy, including, but not limited to, electricity, solar power, wind power, geothermal energy, and biofuels;
• adverse weather conditions and variations in weather, including seasonal effects on demand and/or supply, the occurrence of severe storms in the territories in which we operate, climate change, and the related effects on supply, demand, and costs;
• indebtedness, which could make us more vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantage compared with competitors;
• our ability to secure reliable, competitively priced and flexible natural gas transportation, storage, and supply, including decisions by natural gas producers to reduce production or shut-in producing natural gas wells and expiration
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of existing supply and transportation and storage arrangements that are not replaced with contracts with similar terms and pricing;
• our ability to complete necessary or desirable expansion or infrastructure development projects, which may delay or prevent us from serving our customers or expanding our business;
• operational and mechanical hazards or interruptions;
• adverse labor relations;
• the effectiveness of our strategies to reduce earnings lag, revenue protection strategies and risk mitigation strategies, which may be affected by risks beyond our control such as commodity price volatility, counterparty performance or creditworthiness, and interest rate risk;
• the capital-intensive nature of our business, and the availability of and access to, in general, funds to meet our debt obligations prior to or when they become due and to fund our operations and capital expenditures, either through (i) cash on hand, (ii) operating cash flow, or (iii) access to the capital markets and other sources of liquidity;
• our ability to obtain capital on commercially reasonable terms, or on terms acceptable to us, or at all;
• limitations on our operating flexibility, earnings, and cash flows due to restrictions in our financing arrangements;
• cross-default provisions in our borrowing arrangements, which may lead to our inability to satisfy all of our outstanding obligations in the event of a default on our part;
• changes in the financial markets during the periods covered by the forward-looking statements, particularly those affecting the availability of capital and our ability to refinance existing debt and fund investments and acquisitions to execute our business strategy;
• actions of rating agencies, including the ratings of debt, general corporate ratings, and changes in the rating agencies’ ratings criteria;
• changes in inflation and interest rates;
• our ability to recover the costs of upstream transportation, storage, and natural gas purchased for our customers and any related financing required to support our purchase of natural gas supply;
• impact of potential impairment charges;
• volatility and changes in markets for natural gas and our ability to secure additional and sufficient liquidity on reasonable commercial terms to cover costs associated with such volatility;
• possible loss of local distribution company franchises or other adverse effects caused by the actions of municipalities;
• payment and performance by counterparties and customers as contracted and when due, including our counterparties maintaining ordinary course terms of supply and payments;
• changes in existing or the addition of new environmental, safety, tax, cybersecurity, and other laws or regulations to which we and our subsidiaries are subject, including those that may require significant expenditures, significant increases in operating costs or, in the case of noncompliance, substantial fines or penalties;
• the effectiveness of our risk-management policies and procedures, and employees violating our risk-management policies;
• the uncertainty of estimates, including accruals and costs of environmental remediation;
• advances in technology, including technologies that increase efficiency or that improve electricity’s competitive position relative to natural gas;
• population growth rates and changes in the demographic patterns of the markets we serve in Oklahoma, Kansas, and Texas, and economic conditions in these areas;
• acts of nature and naturally occurring disasters;
• political unrest and the potential effects of threatened or actual terrorism and war;
• the sufficiency of insurance coverage to cover losses;
• the effects of our strategies to reduce tax payments;
• changes in accounting standards;
• changes in corporate governance standards;
• existence of material weaknesses in our internal controls;
• our ability to comply with all covenants in our indentures and our short and long term credit agreements, a violation of which, if not cured in a timely manner, could trigger a default of our obligations;
• our ability to attract and retain talented employees, management, and directors, and any shortage of skilled labor;
• unexpected increases in the costs of providing health care benefits, along with pension and postemployment health care benefits, as well as declines in the discount rates on, declines in the market value of the debt and equity securities of, and increases in funding requirements for, our defined benefit plans; and
• our ability to successfully complete merger, acquisition, or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition, or divestiture, and the success of the business following a merger, acquisition, or divestiture.
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also have material adverse effects on our future results.
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These and other risks are described in greater detail in Part 1, Item 1A, Risk Factors, in this Annual Report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Other than as required under securities laws, we undertake no obligation to update publicly any forward-looking statement whether as a result of new information, subsequent events or change in circumstances, expectations, or otherwise.
