ONE Gas, Inc. — 2018 Q3 Form 10-Q
Business and period: ONE Gas is a regulated natural-gas distributor serving more than 2 million customers in Oklahoma, Kansas and Texas. This unaudited report covers the three and nine months ended September 30, 2018; results are seasonal and are not necessarily indicative of a full year.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $238.3m | $247.1m | $1,169.3m | $1,077.2m |
| Net margin (revenue less natural-gas cost) | $187.0m | $188.4m | $673.4m | $672.7m |
| Operating income | $36.2m | $45.1m | $207.6m | $222.9m |
| Net income | $16.3m | $18.8m | $127.5m | $115.9m |
| Diluted EPS | $0.31 | $0.36 | $2.41 | $2.19 |
| Net interest expense | $12.4m | $11.5m | $36.7m | $34.3m |
For the nine months, operating cash flow was $436.8m versus $302.4m; capital expenditures were $279.3m versus $249.1m. Cash at September 30 was $12.4m. Dividends paid during the nine months were $72.4m; dividends declared were $1.38 per share.
At September 30, total assets were $5.15bn and equity was $2.02bn. Long-term debt, including current maturities, was approximately $1.19bn, and commercial paper/notes payable were $276.0m. The company reported a 42% total debt-to-capital ratio and a 37% long-term debt-to-capital ratio. The $700m revolving facility had $423.2m of remaining availability; no facility borrowings were outstanding. The current ratio was approximately 0.45, based on current assets of $374.5m and current liabilities of $836.0m.
Changes versus prior comparable periods
- Q3 revenue fell 3.6%, net margin declined about 0.7%, operating income fell about 20%, and net income fell about 13%. Management attributed the net-margin decrease principally to a $6.0m tax-reform-related revenue deferral; higher costs also pressured operating income.
- Nine-month revenue rose about 8.5%, while net margin was nearly flat. Operating income declined about 7%; net income rose about 10% and diluted EPS rose from $2.19 to $2.41, primarily reflecting lower income-tax expense.
- Tax-rate changes reduced income-tax expense by $2.6m in Q3 and $22.6m for the nine months. The lower tax rate also resulted in customer refunds/credits and regulatory revenue deferrals, including $27.5m for the nine months.
- Operating costs rose $5.7m in Q3 and $10.3m for the nine months, mainly from employee-related costs and bad-debt expense. Capital spending increased, primarily for system integrity work and service-area expansion.
Outlook, management commentary and risks
- No specific earnings or EPS guidance is provided. Management expects operating cash flow and financing arrangements to support planned operations and infrastructure investment, and describes the business’s fixed customer charges and regulatory mechanisms as supporting relatively stable cash flows.
- The company exercised a one-year extension of its revolving credit agreement in October 2018; it now expires in October 2023. Management reported covenant compliance, with a 70% maximum debt-to-capital covenant versus the reported 42% ratio.
- Tax reform creates uncertainty around customer refunds and rate-setting, and management expects it to reduce operating cash flow through lower tax-related rate collections, earlier cash tax payments and refunds of excess deferred taxes. The related regulatory liability for remeasured deferred taxes was $521.7m at September 30; regulators will determine refund timing and amounts.
- Pending regulatory matters include Oklahoma’s annual rate adjustment proceeding, a Kansas base-rate request for a net $42.7m increase, and other state and service-area rate filings. Outcomes and timing remain subject to regulators.
- Pipeline-safety rulemakings expected in 2019 could require significant capital and operating expenditures, depending on final rules. Environmental remediation at one former manufactured-gas-plant site is estimated at $5.6m–$7.0m; a $5.6m reserve was recorded, with recovery subject to regulatory processes. Management says ordinary-course litigation losses are not expected to be material.
- Moody’s rated the company A2 with a negative outlook, changed from stable in January 2018 in view of potential tax-reform effects; S&P rated it A with a stable outlook. Key risks include cost recovery, regulatory decisions, weather, operating and pipeline safety, financing access, and environmental obligations.
Important facts for investors to verify
- Progress and final outcomes of Oklahoma, Kansas and Texas rate proceedings, including treatment and timing of tax-related customer refunds.
- Whether cash flow, credit metrics and available borrowing capacity remain adequate as capital spending and tax-related cash impacts continue.
- Final PHMSA pipeline-safety rules and the resulting compliance investment requirements.
- Whether the MGP remediation estimate changes and whether costs remain recoverable under applicable regulatory orders.
- The drivers behind the divergence between higher nine-month net income and lower operating income, including tax benefits, operating costs and regulatory adjustments.