ONE Gas, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. ONE Gas is a regulated natural gas distributor serving approximately 2.3 million customers in Oklahoma, Kansas and Texas.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $335.8 million | $359.4 million | $1,766.1 million | $1,759.8 million |
| Operating income | $57.2 million | $47.1 million | $270.5 million | $246.4 million |
| Net income | $25.2 million | $23.7 million | $160.5 million | $154.7 million |
| Diluted EPS | $0.45 | $0.44 | $2.87 | $2.85 |
| Operating margin, approximately | 17.0% | 13.1% | 15.3% | 14.0% |
Revenue declined 7% in Q3 but was broadly flat for the nine-month period. Natural gas sales revenue fell, largely reflecting lower gas costs passed through to customers; these pass-through costs generally do not affect operating income. Operating income increased 21% in Q3 and 10% year to date, supported mainly by new rates. Higher labor and benefit costs partly offset the gains. Nine-month diluted EPS edged up despite higher interest expense.
- Cash flow: Nine-month cash from operations was $842.5 million, down from $1,555.8 million. Capital expenditures were $490.3 million; cash used in investing was $489.4 million. Cash used in financing was $353.2 million. Period-end cash, cash equivalents and restricted cash totaled $18.0 million.
- Debt and liquidity: At September 30, commercial paper outstanding was $327.0 million at a 5.55% weighted-average rate; there were no revolver borrowings and $998.8 million of available credit under the then-current facility. Total debt-to-capital was 53% (50% excluding non-recourse KGSS-I debt); the company was in covenant compliance. The $1.0 billion revolving facility was increased to $1.2 billion in October 2023 and its maturity was extended to March 2028.
- Debt maturities: $772.9 million of other long-term debt was classified as current at September 30, including $300 million of senior notes due February 2024 and $473 million due March 2024. KGSS-I securitized bonds had $27.5 million of current maturities.
- Capital returns and funding: Dividends declared were $0.65 per share in Q3, up from $0.62 a year earlier. The company had $4.6 million shares under outstanding forward sale agreements, with approximately $351.2 million of potential net proceeds at September 30 if settled. The ATM program had $225.5 million available for issuance.
Material changes and management commentary
- Operating income rose $10.1 million in Q3, primarily from $14.6 million of new-rate impacts and $2.3 million of lower outside service costs, partly offset by $7.5 million of higher labor and benefits costs. For the nine months, new rates contributed $46.0 million; customer growth contributed to higher residential sales.
- Weather was 13.9% warmer than the prior year over the first nine months. Weather normalization mechanisms mitigated the earnings effect. Total delivered volumes were 274,807 MMcf, down from 284,723 MMcf; average customers increased by 9,000 year over year for the nine-month period.
- Interest expense increased $34.1 million year to date, mainly because of higher commercial-paper rates and additional debt issued in 2022. Other income improved year over year, principally due to higher returns on nonqualified employee benefit plan investments.
- Cash from operations was lower year over year largely because the prior-year period included Oklahoma Winter Storm Uri securitization proceeds in 2022, while Texas securitization proceeds were received in March 2023, as well as working-capital changes. The Texas transaction provided approximately $197 million, used to repay indebtedness and for general corporate purposes.
- Management expects approximately $725 million of 2023 capital expenditures and asset removal costs. It expects operating cash flow and financing arrangements to support planned operations and infrastructure investment. Results are seasonal and nine-month results are not necessarily indicative of full-year results.
Outlook, regulatory matters and risks
- Regulatory rate actions include Oklahoma rate increases effective June 2023; Texas GRIP increases implemented during 2023; and a Kansas application seeking an approximately $8.0 million GSRS increase, with an order expected by late December 2023. Texas Gas Service also requested a $9.8 million increase in its Rio Grande Valley rate case, with new rates expected in late 2023 or early 2024.
- Key risks include the ability to recover costs and earn authorized returns through regulation; interest rates, refinancing and access to capital; pipeline safety requirements and potentially material compliance spending; environmental remediation; severe weather and supply disruptions; cybersecurity; and competition from alternative energy sources.
- Environmental exposure includes remediation at former manufactured-gas-plant sites. The Kansas remediation reserve was $14.6 million at September 30, 2023; approximately $32.0 million of Kansas investigation and remediation costs had been deferred under an authorization with a stated $15.0 million cap, and the company expected to seek an increase after agency approval of plans. Texas remediation costs were described as not material. Management considers probable losses from ordinary-course litigation not material.
- The filing reports no material effect on earnings or cash flows from environmental matters during the periods. It also notes that future environmental or pipeline-safety rules could require significant expenditures. Disclosure controls were considered effective, with no material third-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- How the company will refinance or repay the $772.9 million of current debt maturities, and the resulting borrowing costs.
- Whether rate-case outcomes and cost-recovery mechanisms keep pace with rising operating, financing and infrastructure costs.
- Execution of the $725 million 2023 capital program and its funding mix, including potential settlement of forward equity sales or ATM issuance.
- Cash-flow comparability after the timing and amount of Winter Storm Uri securitization proceeds, and the recovery of remaining deferred costs.
- Final regulatory treatment and potential cost exposure for Kansas and Texas remediation, as well as future pipeline-safety and environmental requirements.