ONE Gas, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. ONE Gas is a regulated natural gas distributor serving approximately 2.3 million customers in Oklahoma, Kansas and Texas. This unaudited filing covers the three and nine months ended September 30, 2022; the company notes that seasonal results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $359.4 million | $273.9 million | $1,759.8 million | $1,214.9 million |
| Operating income | $47.1 million | $41.8 million | $246.4 million | $223.3 million |
| Net income | $23.7 million | $20.3 million | $154.7 million | $145.9 million |
| Diluted EPS | $0.44 | $0.38 | $2.85 | $2.72 |
| Dividends declared per share | $0.62 | $0.58 | $1.86 | $1.74 |
- Q3 revenue increased 31%, operating income 13%, net income 17% and diluted EPS 16% year over year. For the first nine months, those increases were 45%, 10%, 6% and 5%, respectively.
- Natural gas sales revenue rose with higher gas costs and increased sales volumes. Gas costs are generally passed through to customers without profit, so revenue growth from commodity costs does not itself increase operating income.
- Management attributed higher operating income primarily to new rates and customer growth. Higher outside services, depreciation and employee costs partly offset those gains. Nine-month interest expense increased $5.6 million, principally due to commercial paper and the August 2022 notes issuance.
- Nine-month operating cash flow was $1.556 billion, versus cash used of $1.561 billion in the prior-year period. The 2022 figure included approximately $1.331 billion of proceeds from Oklahoma’s Winter Storm Uri securitization; the prior-year comparison was affected by Uri-related gas purchases and regulatory deferrals. Investing cash outflow was $412.2 million, including $412.5 million of capital expenditures; financing cash outflow was $1.142 billion.
Balance sheet, debt and liquidity
- At September 30, 2022, cash was $10.4 million; current assets were $958.4 million and current liabilities were $1.105 billion. Total equity was $2.446 billion.
- Long-term debt, including current maturities, was approximately $2.7 billion; commercial paper outstanding was $423.4 million, with a 3.53% weighted-average rate, compared with 0.38% at December 31, 2021. The company reported a 56% total debt-to-capital ratio and a 52% long-term debt-to-capital ratio.
- The $1.0 billion revolving credit facility had no borrowings and $998.8 million of remaining availability at quarter-end. Its maturity was extended to March 2027, with two potential one-year extensions subject to lender consent. ONE Gas reported compliance with its covenants.
- ONE Gas issued $300 million of 4.25% senior notes due 2032 and used Oklahoma securitization proceeds to repay $1.3 billion of debt. S&P upgraded its debt rating to A- with a stable outlook in August; Moody’s rating was A3, stable.
Material developments, outlook and risks
- Winter Storm Uri recovery: Oklahoma securitized $1.35 billion of ratepayer-backed bonds in August, generating approximately $1.3 billion for Oklahoma Natural Gas. The bonds are obligations of the Oklahoma Development Finance Authority, not ONE Gas or its affiliates. At September 30, $586.2 million of Uri-related costs remained in regulatory assets. Kansas had approval to securitize approximately $328 million plus fees, and Texas’s securitization was expected in Q4 2022. Kansas and Texas amounts and timing remained subject to final processes; some deferred costs reflect disputed or unpaid supplier invoices.
- Investment and earnings outlook: Management expected 2022 capital expenditures and asset removal costs of approximately $650 million. No full-year earnings or EPS guidance is provided in the filing text. The October-declared dividend was $0.62 per share, or $2.48 annualized.
- Regulatory proceedings: Oklahoma’s $19.6 million base-rate increase took effect in July, subject to refund pending OCC approval. Kansas and Texas had rate and surcharge proceedings underway, including a Texas rate-case request for a $13.0 million increase. Regulatory recovery of assets is subject to review by the relevant authorities.
- Operating and regulatory risks: The company highlighted natural gas supply and price volatility, interest rates and refinancing, cost recovery and regulatory outcomes, pipeline safety requirements, cybersecurity, environmental compliance, severe weather and competition from alternative energy. The cost impact of PHMSA’s August 2022 pipeline rule was still being evaluated.
- Environmental and other contingencies: The company reported $29.9 million of deferred Kansas MGP investigation and remediation costs and a $13.2 million MGP remediation reserve. It said litigation losses were not expected to be material; environmental costs could nevertheless rise or prove unrecoverable. The IRA of 2022 was not expected to have a material company impact.
- Disclosure controls were reported effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, final amounts, timing and recovery mechanics for Kansas and Texas Uri securitizations, and reconciliation of remaining Uri regulatory assets and supplier invoices.
- OCC approval of Oklahoma’s rate increase and the outcome of pending Kansas and Texas rate proceedings.
- Whether higher commercial-paper rates, planned debt repayments and capital spending affect interest expense, liquidity or financing needs.
- Delivery against the approximately $650 million 2022 capital and asset-removal spending outlook, and any material cost or timing effects from pipeline safety rules.
- Recoverability and eventual remediation requirements for MGP sites, including the anticipated Kansas application to increase the recovery cap.