ONE Gas, Inc. — Form 10-Q Summary
Business context and reporting period
ONE Gas is a regulated natural-gas distribution utility serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. This filing covers the quarter and nine months ended September 30, 2019; results are unaudited. Management cautions that the business is seasonal and interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $248.6 million | $238.3 million | $1,200.1 million | $1,169.3 million |
| Net margin (non-GAAP) | $198.9 million | $187.0 million | $702.8 million | $673.4 million |
| Operating income | $38.8 million | $36.2 million | $213.3 million | $207.6 million |
| Net income | $17.5 million | $16.3 million | $135.6 million | $127.5 million |
| Diluted EPS | $0.33 | $0.31 | $2.55 | $2.41 |
| Interest expense | $15.8 million | $12.4 million | $47.0 million | $36.7 million |
For the nine months, cash from operations was $288.5 million, down from $436.8 million, primarily due to working-capital timing. Investing activities used $308.8 million, including $305.8 million in capital expenditures. Financing activities provided $11.5 million, compared with $159.4 million used in the prior-year period. Cash was $12.6 million at September 30.
At September 30, long-term debt, excluding current maturities, was $1.286 billion and commercial paper outstanding was $395.0 million. The company reported a 44% total debt-to-capital ratio and compliance with credit-facility covenants. Its $700 million revolving facility had $698.8 million available, with no facility borrowings. The facility was extended in October 2019 to expire in October 2024, subject to the agreement’s terms. The current dividend was $0.50 per share quarterly, or $2.00 annualized.
Material changes versus prior comparable periods
- Q3 revenue rose 4%, net margin 6%, operating income 7%, and net income 7% year over year. Nine-month revenue rose 3%, net margin 4%, operating income 3%, and net income 6%.
- Management attributed higher net margin chiefly to new rates, customer growth and increased transportation volumes. Nine-month sales volumes were higher, primarily reflecting colder first-quarter weather; weather-normalization mechanisms mitigate weather effects on residential and commercial net margin.
- Operating costs increased $4.1 million in Q3 and $8.4 million year to date, including higher employee, outside-service and pipeline-maintenance costs; lower bad-debt expense partly offset the increases.
- Depreciation and amortization increased $5.2 million in Q3 and $15.3 million year to date, mainly from assets placed in service, higher Kansas depreciation rates and rider amortization.
- Interest expense increased $3.4 million in Q3 and $10.2 million year to date, primarily following the refinancing of $300 million of 2.07% notes with $400 million of 4.50% senior notes due 2048.
- Capital expenditures and asset removal costs were $343.9 million year to date, up $25.4 million. Net property, plant and equipment increased to $4.488 billion from $4.284 billion at year-end 2018.
Outlook, management commentary, risks and unusual items
- Management expected 2019 capital expenditures and asset removal costs of approximately $450 million. No specific earnings guidance is stated in the supplied filing text.
- Regulatory rate changes supported results. Oklahoma customers began receiving a $15.6 million PBRC credit in Q3 over 12 months; an additional $12.7 million excess-ADIT credit was scheduled for 2020. Kansas issued a $16.6 million customer refund in Q2. Excess deferred-tax amortization credited income-tax expense by $10.3 million year to date, offset by customer credits in revenues.
- Tax reform is expected to reduce 2019 cash flows by approximately $15.9 million for Oklahoma and Kansas customer refunds. Texas excess-ADIT treatment remains subject to future regulatory filings.
- Pipeline-safety rulemaking could drive additional spending. Compliance costs for the PHMSA rule issued October 1, 2019 were under review and not expected to be material; costs for two pending rules could be significant depending on final requirements.
- Environmental exposures include 12 former manufactured-gas-plant sites in Kansas and a former site in Texas. One Kansas site has an estimated remediation range of $5.6 million to $7.0 million; Texas remediation costs could not yet be reliably estimated. Kansas recovery of qualifying site costs is subject to a $15 million cap and regulatory approval.
- Management said ordinary-course litigation losses were not expected to be material. Other key risks include recovery of costs through rates, regulation, weather, operating and pipeline-safety events, environmental obligations, interest rates, access to capital, and customer demand.
Important facts for investors to verify
- Whether approved rates and regulatory mechanisms continue to recover capital, operating and deferred-tax costs, and the timing and extent of Texas excess-ADIT treatment.
- Whether working-capital timing normalizes and operating cash flow supports planned capital spending, dividends and short-term borrowing needs.
- The final cost and implementation schedule for pending PHMSA rules, and the eventual remediation requirements and recoverability of environmental costs.
- How higher financing costs and the 2019 capital program affect leverage, interest expense and future earnings.
- That net margin is a company-defined non-GAAP measure; it is revenue less natural-gas cost, not a GAAP profit or operating margin.