ONE Gas, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts below are in millions of dollars unless stated otherwise.
Business context
ONE Gas is a regulated natural-gas distribution utility serving more than 2 million customers in Oklahoma, Kansas and Texas. It reports one business segment. Results are seasonal and are not necessarily indicative of full-year performance.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $245.9 | $256.8 | $754.3 | $933.3 |
| Net margin | $189.5 | $176.8 | $462.1 | $439.8 |
| Operating income | $43.6 | $31.3 | $159.7 | $140.3 |
| Net income | $20.3 | $12.1 | $85.0 | $72.5 |
| Diluted EPS | $0.38 | $0.23 | $1.61 | $1.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $267.3 | $342.6 |
| Capital expenditures | $69.5 | $70.5 | $144.8 | $125.4 |
For the six-month period, operating expenses were $302.4 million versus $299.5 million. Net margin increased 5%, and operating income increased 14%. Revenue fell 19%, principally reflecting lower natural-gas costs passed through to customers, rather than weaker reported net margin. Warmer first-quarter weather reduced delivered volumes; weather-normalization mechanisms mitigated the residential and commercial margin effect.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $54.3 million, compared with $2.4 million at year-end. The balance included $26.0 million of commercial paper classified as held-to-maturity.
- Long-term debt, net of issuance costs, was $1.192 billion. The company had no short-term borrowings, $699.0 million of remaining capacity under its $700 million revolving credit agreement, and $1.0 million of letters of credit.
- Debt-to-capital was 39%, below the credit-agreement limit of 70%; the company reported compliance with its covenants. Ratings were Moody’s A2/Stable and S&P A-/Positive; S&P revised its outlook to Positive in June.
- Six-month cash from operations declined $75.3 million year over year. Investing used $144.3 million, mainly for capital expenditures; financing used $71.2 million. Cash increased $51.8 million during the period.
- Dividends declared were $0.70 per share for the first half, versus $0.60 in 2015. A $0.35-per-share dividend was declared in July, payable September 1, 2016.
Material changes and management commentary
Net margin rose $12.7 million in Q2 and $22.3 million for the first half, mainly from new Oklahoma and Texas rates and customer growth. First-half net margin gains were partly offset by lower weather-sensitive sales and transportation volumes. Operating costs decreased modestly, while depreciation and amortization increased due to assets placed in service. Capital expenditures increased $19.4 million for the first half, primarily for system integrity work and service extensions.
Management said 2016 capital expenditures were expected to be comparable to 2015 and anticipated operating cash flow and financing arrangements would support planned operations and infrastructure investment. The filing provides no specific earnings or EPS guidance.
Outlook, regulation and risks
- Pending rate requests included Kansas Gas Service’s proposed $28.0 million net base-rate increase (with $7.4 million already recovered through a surcharge), and Texas Gas Service requests for $11.6 million in Central and South Texas and $12.8 million in West Texas service areas. The West Texas request had been denied by several participating cities and appealed to the Texas Railroad Commission; a decision was expected in October 2016.
- Oklahoma’s approved rate case allowed a $29.995 million revenue increase and set a 9.5% authorized return on equity. Texas also reported a $2.3 million settlement increase effective May 2016.
- A proposed PHMSA rule could require changes to pipeline integrity and other safety practices. The company was assessing potential costs, which could be significant depending on final regulations.
- The company retained responsibility for environmental conditions at 12 former manufactured-gas sites in Kansas; source removal or remediation had been addressed at 11, and regulatory closure achieved at three. Management did not expect environmental spending to have a material adverse effect.
- Management considered ordinary-course litigation losses not material. Key risks include regulatory recovery and rate-case outcomes, weather, pipeline safety and integrity, environmental compliance, operating costs, access to capital, and the ability to generate sufficient cash flow.
Investor verification checklist
- Track final decisions and timing for the pending Kansas and Texas rate cases, including the appealed West Texas filing.
- Verify whether final PHMSA requirements create material incremental capital or operating costs.
- Assess why first-half operating cash flow fell despite higher net income, including working-capital and purchased-gas recovery timing.
- Compare actual 2016 capital expenditures with management’s expectation that they would be comparable to 2015.
- Monitor weather-normalized volumes, customer growth, regulatory cost recovery, debt metrics and dividend coverage.