8-K: ONE Gas Reports Solid 2023 Results, Announces Dividend Increase

ONE Gas announced its fourth quarter and full year 2023 financial results, with diluted earnings per share of $1.27 and $4.14, respectively, and a dividend increase.

Summary

• ONE Gas reported a net income of $70.7 million, or $1.27 per diluted share, for the fourth quarter of 2023, compared to $67.0 million, or $1.23 per diluted share, in the same period of 2022.
• Full year 2023 net income reached $231.2 million, or $4.14 per diluted share, up from $221.7 million, or $4.08 per diluted share, in 2022.
• Operating income for the fourth quarter of 2023 was $107.1 million, compared to $103.6 million in the fourth quarter of 2022, driven by new rates and customer growth.
• Full year 2023 operating income was $377.6 million, compared to $350.0 million in 2022, also benefiting from new rates and customer growth.
• The company settled 1,032,403 shares of its common stock under forward contracts for net proceeds of $79.0 million in December 2023.
• ONE Gas issued $300 million of 5.10 percent senior notes due April 2029 in December 2023.
• The company increased its quarterly dividend by 1 cent to $0.66 per share, or $2.64 annualized, for the first quarter of 2024.
• Capital expenditures and asset removal costs were $189.6 million for the fourth quarter 2023 and $728.7 million for the full year 2023.
• Weather was 12.5 percent warmer than normal for the three months ended Dec. 31, 2023, but the impact on operating income was mitigated by weather normalization mechanisms.
• The company expects 2024 net income to be in the range of $214 million to $231 million, or $3.70 to $4.00 per diluted share, with capital expenditures of approximately $750 million.

Sentiment

Score: 7

Explanation: The sentiment is positive due to the company's solid financial results, dividend increase, and strategic investments. However, there are some concerns about rising costs and external risks, which temper the overall sentiment.

Positives

• Both fourth quarter and full year net income and earnings per share increased compared to the previous year.
• Operating income saw growth in both the fourth quarter and full year, driven by new rates and customer growth.
• The company successfully settled a significant number of shares under forward contracts, generating $79.0 million in net proceeds.
• A dividend increase was announced for the first quarter of 2024, demonstrating confidence in the company's financial health.
• The company is actively investing in system integrity and expansion, with a significant portion of capital expenditures allocated to these areas.

Negatives

• Employee-related costs increased by $8.1 million in the fourth quarter and $26.5 million for the full year.
• Depreciation expense increased by $5.4 million in the fourth quarter and $19.3 million for the full year due to additional capital expenditures.
• Weather was 12.5 percent warmer than normal in Q4 2023, which could have negatively impacted sales volumes if not for weather normalization mechanisms.
• Net interest expense increased by $1.5 million in Q4 2023, excluding the interest expense related to securitized bonds in Kansas, and $22.1 million for the full year, excluding interest related to KGSS-I bonds.

Risks

• The company faces risks related to its ability to recover costs, income taxes, and a fair rate of return in regulated rates.
• Cyber-attacks and breaches of technology systems pose a threat to operations and sensitive data.
• The company's operations are concentrated in Oklahoma, Kansas, and Texas, making it vulnerable to regional economic and regulatory changes.
• Competition from alternative energy sources could impact the demand for natural gas.
• Adverse weather conditions and climate change can affect supply, demand, and costs.
• The company's indebtedness could limit its ability to borrow additional funds and make it more vulnerable to economic downturns.
• The company's ability to secure reliable and competitively priced natural gas transportation and supply is a risk.
• The company's ability to complete necessary expansion or infrastructure development projects is a risk.
• Changes in environmental, safety, tax, and other laws could require significant expenditures and increase operating costs.
• The company's ability to attract and retain talented employees is a risk.

Future Outlook

ONE Gas expects its 2024 net income to be in the range of $214 million to $231 million, or $3.70 to $4.00 per diluted share, with capital expenditures of approximately $750 million, with nearly 75 percent of these expenditures targeted for system integrity and replacement projects and $170 million for extensions to new customers.

Management Comments

• Robert S. McAnnally, president and chief executive officer, stated that the team's execution enabled them to deliver results in line with guidance despite rapidly changing macroeconomic conditions.
• He also emphasized the company's dedication to the safe and reliable delivery of natural gas, supporting their growing service territory, and commitment to long-term value creation.

Industry Context

This announcement reflects the performance of a regulated natural gas utility in a market facing changing macroeconomic conditions and increasing focus on renewable energy. The company's focus on system integrity and expansion aligns with industry trends of maintaining and upgrading infrastructure. The regulatory updates highlight the ongoing process of rate adjustments and the introduction of renewable natural gas programs.

Comparison to Industry Standards

• ONE Gas's performance is comparable to other mid-cap natural gas utilities in the US, such as Southwest Gas Holdings (SWX) and Spire Inc. (SR).
• The company's capital expenditure plans are in line with the industry's need to invest in infrastructure upgrades and system integrity.
• The increase in operating income due to new rates is a common trend in the regulated utility sector, as companies seek to recover costs and earn a fair return.
• The company's focus on renewable natural gas programs is similar to other utilities exploring alternative energy sources to meet environmental goals and customer demand.
• The company's dividend increase is consistent with the industry's practice of returning value to shareholders through regular dividend payments.

Stakeholder Impact

• Shareholders will benefit from the increased dividend and the company's solid financial performance.
• Customers will benefit from the company's investments in system integrity and reliability.
• Employees may be impacted by the increase in employee-related costs.
• The company's suppliers and creditors will be impacted by the company's capital expenditure plans and debt management.

Next Steps

• The company will host a conference call on February 22, 2024, to discuss the results.
• The company will continue to execute its capital expenditure plan, focusing on system integrity and expansion.
• The company will monitor regulatory developments and seek to recover costs through rate adjustments.
• The company will continue to assess the tariff and pilot program for renewable natural gas in the next rate case.

Key Dates

Keywords

natural gas, utility, earnings, financial results, dividend, capital expenditures, regulatory, operating income, net income, ONE Gas