ONE Gas, Inc. annual report, FY2019

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ONE Gas, Inc. — 2019 Form 10-K

Business and period: Annual report for the fiscal year ended December 31, 2019, filed February 20, 2020. ONE Gas is a fully regulated natural-gas distribution utility serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. Its rates are set by state and municipal regulators; natural-gas commodity costs are generally passed through to customers without profit.

Financial performance and liquidity

  • Revenue: $1.653 billion, up 1% from $1.634 billion in 2018. Natural-gas cost was $687.9 million, down 4%.
  • Net margin: $964.8 million, up 5% from $919.1 million. This is a non-GAAP measure defined as revenue less natural-gas cost.
  • Operating income: $295.3 million, up 2% from $288.4 million. Operating costs rose 4% to $489.1 million; depreciation and amortization rose 13% to $180.4 million.
  • Net income and EPS: Net income was $186.7 million, up 8% from $172.2 million. Diluted EPS was $3.51 versus $3.25.
  • Fourth quarter: Revenue was $452.6 million, operating income $82.0 million, net income $51.2 million and diluted EPS $0.96. For Q4 2018, the corresponding figures were $464.5 million, $80.9 million, $44.7 million and $0.84.
  • Cash flow and investment: Operating cash flow was $310.3 million, down from $467.7 million. Capital expenditures were $417.3 million; capital expenditures and asset-removal costs totaled $465.1 million. Investing cash use was $422.9 million, and financing provided $109.1 million.
  • Debt and liquidity: Long-term debt, including current maturities, was $1.286 billion. Commercial paper outstanding was $516.5 million; cash was $17.9 million. The company reported $698.8 million of availability on its $700 million revolving credit facility and no revolver borrowings. Total debt-to-capital was 46%; long-term debt-to-capital was 38%. The company was in compliance with its credit-agreement covenants.
  • Balance sheet: Total assets were $5.708 billion and equity was $2.129 billion at year-end. Current assets were $506.2 million and current liabilities were $872.7 million.
  • Dividends: The company declared $2.00 per share for 2019, compared with $1.84 in 2018. In January 2020, it declared a quarterly dividend of $0.54 per share, or $2.16 annualized.

Material changes versus 2018

  • Net margin increased $45.7 million, primarily reflecting $36.2 million from new rates, customer growth and higher transportation volumes.
  • Net income rose despite higher operating costs and depreciation. Interest expense increased $11.4 million, primarily following the 2018 refinancing of $300 million of 2.07% notes with $400 million of 4.50% notes due 2048.
  • Operating cash flow declined $157.3 million, chiefly because of working-capital timing and customer rate reductions and credits associated with federal tax reform.
  • Capital expenditures and asset-removal costs increased $17.7 million, primarily for system integrity work and service extensions. Total customers reached 2.194 million, up 15,000 from 2018.

Outlook, commentary and risks

  • Management expects 2020 capital expenditures and asset-removal costs of approximately $475 million. The filing does not provide a specific 2020 earnings or EPS forecast.
  • Management describes cash flows as supported by the residential customer base, fixed charges and regulatory mechanisms, while noting that weather mechanisms do not eliminate all usage variability. Approximately 72% of 2019 natural-gas sales net margin came from fixed monthly charges.
  • Regulatory approvals and timely recovery of operating costs and infrastructure investment are central risks. Oklahoma’s next general rate case was required by June 30, 2021, based on a 2020 test year. A Texas Central Texas/Gulf Coast rate-case request sought $15.6 million; new rates were expected in the third quarter of 2020.
  • Pipeline safety rulemaking remains a potential cost exposure: the first PHMSA final rule was not expected to have a material compliance cost, but costs for pending rules could be significant depending on final requirements.
  • Environmental liabilities include 12 former manufactured-gas-plant sites in Kansas and a site in Texas. Kansas remediation costs are subject to a $15 million deferral cap, net of insurance, while the Texas site investigation was incomplete and costs could not yet be reliably estimated. Management said litigation losses were not expected to be material.
  • Other disclosed risks include severe weather and supply or transportation disruptions, competition from electricity and other energy sources, cyber and physical security threats, changing environmental or climate regulation, access to capital, and pension-cost assumptions. The auditor identified regulated-asset and regulatory-liability accounting as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.

Investor verification priorities

  • Review the drivers and sustainability of the $45.7 million increase in net margin, including rate outcomes, customer growth and weather normalization.
  • Reconcile the drop in operating cash flow with working-capital movements, customer tax-related credits and the company’s ongoing capital program.
  • Assess commercial-paper refinancing needs, revolver availability and covenant headroom alongside the planned 2020 investment and dividend.
  • Track regulatory decisions, particularly the Texas rate case, Oklahoma rate-review requirements and recovery of safety-related investment.
  • Monitor the final pipeline-safety rules and updated estimates for Kansas and Texas MGP remediation obligations.