ONE Gas, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. ONE Gas is a regulated natural gas distributor serving approximately 2.3 million customers in Oklahoma, Kansas and Texas. Results are seasonal; first-half performance is not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $429.0 million | $315.6 million | $1,400.4 million | $940.9 million |
| Operating income | $58.6 million | $51.1 million | $199.3 million | $181.4 million |
| Net income | $32.1 million | $30.1 million | $131.0 million | $125.7 million |
| Diluted EPS | $0.59 | $0.56 | $2.42 | $2.35 |
| Dividends declared per share | $0.62 | $0.58 | $1.24 | $1.16 |
- Revenue rose 36% in Q2 and 49% in the first half, principally reflecting higher natural gas costs passed through to customers. The company says purchased-gas cost mechanisms recover these costs without profit; revenue growth therefore does not directly indicate margin expansion.
- Operating income increased $7.5 million in Q2 and $17.9 million in the first half. Management cited new rates and customer growth as key contributors, partly offset by higher outside-service, depreciation and employee-related costs.
- Other expense increased $4.4 million in Q2 and $8.2 million in the first half, mainly due to lower market values of investments associated with nonqualified employee benefit plans. Net interest expense was $16.3 million in Q2 and $31.9 million in the first half.
- First-half operating cash flow was $286.7 million, compared with cash used of $1.577 billion in 2021, when Winter Storm Uri purchases drove substantial cash outflows. Investing activities used $251.5 million; capital expenditures were $251.1 million. Cash ended the period at $7.4 million.
Balance sheet, debt and liquidity
- At June 30, assets were $8.411 billion and equity was $2.454 billion. Interest-bearing debt comprised $2.284 billion of long-term debt, $1.400 billion of current maturities and $490.1 million of commercial paper.
- The $1.400 billion current maturity primarily reflects senior notes due in March 2023. Management expects securitization proceeds to repay the outstanding March 2023 notes and part of the March 2024 notes.
- The $1.0 billion unsecured revolving credit facility matures March 2027, subject to possible lender-approved extensions. There were no revolver borrowings, $1.2 million of letters of credit and $998.8 million of remaining availability. The company reported a 63% total debt-to-capital ratio and compliance with its covenants.
- Credit ratings were Moody’s A3 with a stable outlook and S&P BBB+ with a positive outlook. The company reported a 60% long-term debt-to-capital ratio.
Material developments, outlook and risks
- Winter Storm Uri recovery: Approximately $1.9 billion of extraordinary costs remained deferred as regulatory assets at June 30. Oklahoma had approval to securitize approximately $1.3 billion over 25 years; bond marketing began in July, with issuance expected in Q3 2022. Texas bond issuance was expected in Q4 2022, with customer recovery over no more than 30 years. A Kansas settlement proposed approximately $328 million plus issuance fees, but a KCC financing order remained pending. Recovery timing, final amounts and supplier invoice discrepancies remain relevant.
- Rates: Oklahoma put a $19.6 million annual base-rate increase into effect July 13, subject to refund and OCC approval. Texas rate and surcharge filings also advanced; some remained subject to appeal or regulatory action.
- Spending and dividend: Management expected 2022 capital expenditures and asset-removal costs of approximately $650 million. In July, the company declared a $0.62-per-share dividend, or $2.48 annualized, payable September 1, 2022.
- Other unusual item: A pension-plan amendment and remeasurement was expected to increase 2022 pension expense by approximately $7.2 million, net of capitalization and regulatory deferrals, beginning May 1.
- Key risks: Recovery of regulatory assets and Uri costs; refinancing and interest-rate exposure; higher operating and infrastructure costs; pipeline safety and environmental requirements; cyber threats; and weather, supply, regulatory and customer-demand conditions. Management said reasonably possible losses from ordinary-course litigation were not material.
Investor verification priorities
- Track actual timing, proceeds and use of Oklahoma, Texas and Kansas securitization financings, and confirm final recoverable Uri balances.
- Assess the March 2023 debt maturity against available liquidity and planned securitization proceeds.
- Monitor approval or refund outcomes for the Oklahoma rate increase and pending Kansas and Texas proceedings.
- Compare actual 2022 capital spending with the approximately $650 million outlook and assess funding needs and dividend coverage.
- Review whether supplier invoice discrepancies or regulatory decisions change Uri cost recovery, and whether pipeline safety or environmental rules create material incremental costs.