ONE Gas, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2017, compared with the same periods in 2016. ONE Gas distributes natural gas to more than 2 million customers in Oklahoma, Kansas and Texas. Results are seasonal and the company cautions that interim performance is not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $279.7 million | $245.9 million | $830.1 million | $754.3 million |
| Net margin | $197.1 million | $189.5 million | $484.4 million | $462.1 million |
| Operating income | $44.1 million | $43.6 million | $169.2 million | $159.7 million |
| Net income | $20.6 million | $20.3 million | $97.1 million | $85.0 million |
| Diluted EPS | $0.39 | $0.38 | $1.83 | $1.61 |
For the six-month period, operating cash flow was $279.3 million versus $276.2 million; capital expenditures were $154.7 million versus $144.8 million. Financing used $134.6 million, and cash declined $9.6 million to $5.1 million. At June 30, long-term debt carrying value was approximately $1.2 billion and short-term borrowings were $79 million. The company reported a 40% debt-to-capital ratio, compliance with credit agreement covenants, and $619.2 million of remaining credit availability.
Changes versus the prior comparable periods
- Six-month net income rose about 14% and diluted EPS rose from $1.61 to $1.83. Management attributed $5.2 million of first-quarter tax benefit to adoption of share-based payment accounting guidance.
- Net margin increased 4% in Q2 and 5% for the first half. Management cited new Texas and Kansas rates, weather-normalization mechanisms, customer growth and, for the first half, higher transportation volumes.
- Q2 operating income increased only slightly despite higher net margin; operating costs and depreciation rose. First-half operating costs increased $8.1 million, including higher pipeline maintenance, IT and employee-related costs, partly offset by lower legal costs.
- First-half capital expenditures increased $9.9 million, primarily for system integrity work and service extensions. Financing cash use increased, mainly due to higher repayments of notes payable and dividends.
Outlook, regulatory matters and risks
- No specific earnings or financial guidance was provided. Management expects operating cash flow and short- and long-term financing arrangements to support planned operations and infrastructure investment, and describes cash flows as supported by residential customers, fixed charges and regulatory mechanisms.
- A July 2017 dividend of $0.42 per share was declared, equivalent to $1.68 annually, payable September 1, 2017.
- Regulatory developments include approved Texas rate increases effective in 2017, a pending Oklahoma PBRC settlement seeking approximately $1.9 million for specified adjustments, and a pending Kansas request concerning manufactured-gas-site costs and insurance recoveries. A Texas Rio Grande Valley rate case seeks $4.5 million in additional revenue.
- The company has 12 former manufactured-gas sites in Kansas. For one site, estimated investigation and remediation costs were $4 million to $7 million; a $4 million reserve was recorded in 2016. Final remediation requirements and potential recovery through insurance or rates remain uncertain.
- Proposed federal pipeline-safety rules could require significant capital and operating expenditures depending on final requirements. Other stated risks include cost recovery and regulation, weather, system integrity, access to financing, environmental compliance and litigation. Management considers ordinary-course litigation losses not material.
- Adoption of share-based payment guidance increased retained earnings by $11.0 million at the start of 2017 through a noncash cumulative adjustment and reduced first-quarter income tax expense by $5.2 million. These are notable accounting effects, not operating revenue growth.
Important facts for investors to verify
- Whether rate-case and regulatory requests are approved as sought, and the timing and amount of resulting customer recovery.
- Whether the $4 million to $7 million site remediation estimate changes and how much cost is ultimately recoverable from customers or insurance.
- The final pipeline-safety rules and resulting compliance spending.
- Whether operating cash flow continues to fund capital investment, dividends and debt obligations, given seasonal working-capital swings and $1.2 billion of long-term debt.
- How much of the first-half earnings increase reflects recurring utility performance versus the $5.2 million tax benefit from accounting-standard adoption.