ONE Gas, Inc. quarterly report, Q2 FY2023

Business context and reporting period

ONE Gas, Inc. is a regulated natural gas distribution utility serving approximately 2.3 million customers in Oklahoma, Kansas and Texas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; results are seasonal and the first-half performance is not necessarily indicative of full-year results.

Financial results and key metrics

MetricQ2 2023Q2 2022Six months 2023Six months 2022
Revenue$398.1 million$429.0 million$1,430.3 million$1,400.4 million
Operating income$64.0 million$58.6 million$213.3 million$199.3 million
Net income$32.7 million$32.1 million$135.3 million$131.0 million
Diluted EPS$0.58$0.59$2.42$2.42
Operating cash flowNot separately reported for the quarter$748.7 million$286.7 million
Capital expendituresNot separately reported for the quarter$322.2 million$251.1 million

For the first half, cash used in investing was $321.4 million and cash used in financing was $406.1 million. Cash, cash equivalents and restricted cash totaled $39.3 million at June 30, 2023. The filing does not report a standalone quarterly cash-flow figure.

At June 30, total long-term debt, including current maturities, was approximately $2.68 billion; commercial paper outstanding was $217.1 million. Current maturities of other long-term debt were $772.8 million, primarily reflecting senior notes due in 2024. The company had $998.8 million of unused revolving-credit capacity, no revolver borrowings, and a 52% total debt-to-capital ratio (49% excluding non-recourse KGSS-I debt). Its credit-facility covenant limit is 70%; the company reported compliance.

Changes versus the prior comparable period

  • Q2 revenue declined 7% year over year, while operating income rose $5.4 million and net income rose $0.6 million. First-half revenue increased 2%, operating income increased $14.0 million and net income increased $4.3 million.
  • Management attributed operating-income growth mainly to new rates: $14.1 million in Q2 and $31.4 million in the first half. Customer growth also contributed. Higher employee costs and lower sales volumes partly offset these gains.
  • Q2 natural-gas cost fell $58.1 million year over year; first-half cost fell $32.2 million. The company says gas costs are passed through to customers under regulatory mechanisms and do not directly affect operating income.
  • Interest expense increased $11.2 million in Q2 and $25.7 million in the first half, primarily due to higher commercial-paper rates and debt issued in 2022. First-half diluted EPS was unchanged at $2.42; Q2 diluted EPS was $0.58 versus $0.59.
  • First-half operating cash flow increased $462.0 million, primarily due to approximately $197 million of Texas Winter Storm Uri securitization proceeds and working-capital changes. Capital expenditures and asset-removal costs were $354.8 million, up $82.8 million year over year.

Outlook, commentary, risks and unusual items

  • ONE Gas expects 2023 capital expenditures and asset-removal costs of approximately $675 million. No full-year earnings or EPS guidance is stated in the provided filing text.
  • In March 2023, Texas securitization generated approximately $197 million in proceeds, used to repay certain indebtedness and for general corporate purposes. Kansas securitization customer charges contributed $23.7 million of first-half revenue, with related amortization and interest expense substantially offsetting the revenue.
  • Management says stable residential demand, fixed customer charges and rate mechanisms support cash flows. Weather was 6.6% warmer year over year in Q2 and 13.7% warmer in the first half; weather-normalization mechanisms mitigated the earnings impact.
  • The $1.0 billion revolving credit facility was extended to March 2028. The company had $2.0 billion of senior notes due in February and March 2024, of which $772.8 million was classified as current at quarter-end. The filing identifies interest-rate, refinancing, capital-market access and credit-rating risks.
  • Regulatory matters include Oklahoma’s approved $26.3 million rate increase, Texas rate adjustments and a pending $9.8 million Rio Grande Valley rate request. The company also reported approximately $32.0 million deferred for Kansas manufactured-gas-plant remediation under a $15.0 million deferral cap and a $14.8 million remediation reserve. Recovery and ultimate costs remain subject to regulatory and environmental processes.
  • Pipeline-safety and environmental rule changes could require material spending. Management says reasonably possible losses from ordinary-course litigation are not material; no material environmental earnings or cash-flow effects were reported for the periods.
  • ONE Gas declared a $0.65-per-share dividend in July 2023, or $2.60 annualized. It had 3.2 million shares under outstanding forward-sale agreements with approximately $248.7 million of potential net proceeds, subject to settlement; the ATM program had $226.1 million available for issuance.

Important facts for investors to verify

  • Plans and funding terms for the $772.8 million of current debt maturities and the broader 2024 senior-note maturities.
  • Whether forward-sale agreements are settled, the timing and proceeds, and the resulting share dilution; also monitor remaining ATM authorization.
  • Actual capital spending against the approximately $675 million 2023 estimate and its financing mix.
  • Regulatory outcomes and recoverability of Winter Storm Uri, purchased-gas and MGP remediation costs, including Texas rate proceedings and the Kansas remediation cap.
  • Commercial-paper costs, refinancing access, cash generation and covenant headroom as interest rates and seasonal working capital change.