ONE Gas, Inc. — Q1 2023 Form 10-Q
Business context and period. ONE Gas is a regulated natural-gas distributor serving approximately 2.3 million customers in Oklahoma, Kansas and Texas. It operates as one reportable segment. This unaudited filing covers the three months ended March 31, 2023; results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $1,032.1 million | $971.5 million |
| Operating income | $149.2 million | $140.8 million |
| Net income | $102.6 million | $98.9 million |
| Diluted EPS | $1.84 | $1.83 |
| Operating cash flow | $469.1 million | $107.6 million |
| Capital expenditures and asset removal costs | $164.6 million | $122.9 million |
| Dividends declared per share | $0.65 | $0.62 |
Revenue grew 6%, while operating income increased 6% and net income increased 4%. Cost of natural gas rose 4%; these commodity costs are generally passed through to customers without profit. Operating expenses excluding gas costs increased 9%, and depreciation and amortization rose 25%. Interest expense increased $14.5 million, partly offset by a $6.7 million improvement in other income. The filing attributes higher interest expense mainly to higher commercial-paper rates and debt issued in 2022.
Cash provided by operations substantially exceeded the prior-year quarter, primarily because of the Texas Winter Storm Uri securitization proceeds and working-capital movements. The $197.4 million securitization receipt is an unusual and significant contributor to Q1 operating cash flow. Investing used $149.9 million; financing used $310.4 million, mainly reflecting repayments of notes payable. Cash, cash equivalents and restricted cash totaled $26.9 million at quarter-end.
Financial position, liquidity and debt
- Total assets were $7.42 billion and equity was $2.65 billion at March 31, 2023.
- Reported long-term debt, net, was $2.68 billion, including $772.7 million of current maturities of other long-term debt and $34.5 million of current securitized-bond maturities. Commercial paper outstanding was $280 million, at a 5.41% weighted-average rate.
- The company had no borrowings under its $1.0 billion revolving credit facility and $998.8 million of remaining availability, net of letters of credit. Its debt-to-capital ratio was 53%; it reported compliance with covenants. The facility maturity was extended to March 2028.
- Ratings were Moody’s A3 and S&P A-, both with stable outlooks. Management said operating cash flow and financing arrangements are expected to support operations and planned infrastructure investment, while noting capital-market access depends on market and company conditions.
Material changes and developments
- Texas Winter Storm Uri securitization closed in March 2023; ONE Gas received approximately $197 million of net proceeds, used to repay certain indebtedness and for general corporate purposes. Remaining excess interest costs are deferred for consideration in future Texas rate proceedings.
- Operating income rose $8.4 million, principally from $17.3 million of new-rate impacts and lower COVID-19-related expenses. These were partly offset by higher depreciation, employee-related costs and bad-debt expense.
- Average customer count increased by 15,000 year over year, while total volumes delivered declined from 148.2 to 138.8 Bcf. First-quarter weather was 14.5% warmer than the prior year; weather-normalization mechanisms limited the earnings impact.
- Interest expense increased as commercial-paper rates rose and the company carried additional debt. Commercial paper outstanding fell from $552 million at year-end 2022 to $280 million at March 31, 2023.
Outlook, regulatory matters and risks
- Management expects 2023 capital expenditures and asset removal costs of approximately $675 million. It cautioned that worsening economic conditions could delay capital work through supply-chain constraints affecting labor, materials and supplies.
- Oklahoma Natural Gas filed for a $27.6 million base-rate revenue increase, a $2.5 million energy-efficiency incentive and an estimated $11.9 million EDIT customer credit for 2024; a hearing was scheduled for June 2023. Texas Gas Service requested GRIP increases of $11.5 million and $7.4 million in two service areas. A separate Texas rate-case order approved an $8.8 million increase effective February 2023.
- ONE Gas entered a forward sale agreement for 2.0 million shares, which could provide approximately $152.7 million in net proceeds if settled at March 31 terms. Its at-the-market program permits up to $300 million of equity issuance; none of that capacity was used as of quarter-end. These arrangements may dilute shareholders if shares are issued.
- Environmental and pipeline-safety regulation may require additional costs. Kansas MGP remediation liabilities include $29.8 million of deferred costs against an existing $15.0 million deferral cap; the company expects to seek an increase after regulatory review of remediation plans. The MGP remediation reserve was $12.7 million. Texas MGP remediation estimates were described as not material.
- Management believes ordinary-course litigation losses are not material. Principal disclosed risks include regulatory cost recovery, interest rates and access to capital, natural-gas supply and prices, weather, pipeline safety, environmental requirements, cybersecurity, and competition from alternative energy sources.
Key facts for investors to verify
- How much of the strong Q1 operating cash flow reflects the nonrecurring Texas securitization receipt and working-capital timing.
- Plans to refinance or repay the $772.7 million of current long-term debt maturities and the terms available when refinancing.
- Whether the Oklahoma and Texas rate requests are approved, and their timing and final amounts.
- Actual 2023 capital spending versus the approximately $675 million expectation, including any project delays or cost changes.
- Settlement timing and pricing of the equity forward and any issuance under the $300 million at-the-market program.
- Progress on Kansas MGP remediation and the requested recovery-cap treatment for deferred costs.