ONE Gas, Inc. — Q3 2016 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2016. ONE Gas operates regulated natural-gas distribution utilities in Oklahoma, Kansas and Texas, serving more than 2 million customers. It reports one business segment. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $232.2 million | $225.2 million | $986.5 million | $1,158.5 million |
| Net margin | $179.9 million | $170.5 million | $642.0 million | $610.3 million |
| Operating income | $30.9 million | $25.0 million | $190.6 million | $165.2 million |
| Net income | $12.7 million | $7.4 million | $97.8 million | $79.8 million |
| Diluted EPS | $0.24 | $0.14 | $1.85 | $1.50 |
| Dividends declared per share | $0.35 | $0.30 | $1.05 | $0.90 |
- Cash flow, nine months: Operating cash flow was $281.4 million, down from $349.5 million. Capital expenditures were $231.3 million, versus $199.7 million; investing cash use was $230.8 million. Financing cash use was $48.5 million. Cash increased $2.1 million during the period to $4.5 million.
- Debt and liquidity: Long-term debt, net of issuance costs and excluding current maturities, was $1.192 billion; short-term borrowings were $41.0 million. The company had $658.0 million of remaining credit availability under its $700 million revolving credit agreement and $1.0 million of letters of credit. Its debt-to-capital ratio was 40%, within the 70% covenant limit.
- Balance sheet: Total assets were $4.694 billion and equity was $1.862 billion at September 30, 2016. The company reported $504.9 million of regulatory assets before regulatory liabilities, including $441.0 million for pension and postemployment benefit costs.
Material changes versus prior comparable periods
- Q3 revenue rose about 3%, while nine-month revenue fell about 15%. Management attributed the nine-month revenue decline principally to lower natural-gas costs, which also reduced cost of gas; revenue changes therefore should be considered alongside net margin.
- Net margin increased 6% in both Q3 and the nine-month period. Management cited new rates, primarily in Oklahoma and Texas, and customer growth. For the nine-month period, warmer weather and lower transportation volumes partly offset those gains.
- Operating income rose 24% in Q3 and 15% year to date; net income increased to $12.7 million for Q3 and $97.8 million for nine months. Higher depreciation from assets placed in service partly offset margin gains.
- Nine-month operating cash flow decreased $68.1 million year over year. Management cited lower natural-gas prices and changes in working capital and purchased-gas recoveries. Capital expenditures increased $31.6 million, primarily for system integrity work and service extensions.
Outlook, management commentary, risks and unusual items
- Management expects 2016 capital expenditures to be comparable to 2015. It stated that operating cash flow and expected financing arrangements should support operations and infrastructure investment. The filing does not provide a specific earnings or EPS forecast.
- In October, the board declared a $0.35-per-share dividend, or $1.40 annualized, payable December 1, 2016 to shareholders of record November 14.
- Rate-case developments included an October Kansas settlement for an $8.1 million net base-rate increase, subject to KCC action, and an October Texas settlement for a $6.8 million increase in the consolidated Central/South Texas service area. Texas’s West Texas rate increase of $8.8 million had taken effect in October, while rehearing motions remained pending. These outcomes and timing remain subject to regulatory processes.
- In September, the company abandoned a planned move of eligible pre-65 participants to a health-exchange benefit arrangement amid uncertain market conditions. Remeasurement increased postemployment benefit obligations by $31.5 million and is expected to increase Q4 2016 benefit cost by $0.8 million.
- A proposed PHMSA pipeline-safety rule could require significant capital and operating expenditures, depending on final regulations. The company also remains responsible for environmental conditions at 12 former manufactured-gas sites in Kansas; source contamination has been addressed at 11, with regulatory closure achieved at three. Management said environmental costs and ordinary-course litigation were not expected to have a material adverse effect.
- Key risks include recovery of costs through regulated rates, regulatory outcomes, pipeline integrity and safety requirements, weather and demand, gas supply and transportation, access to capital, pension obligations, and environmental and legal contingencies. The company reported compliance with credit-agreement covenants and effective disclosure controls.
Important facts for investors to verify
- Track whether the Kansas and Texas rate settlements receive final regulatory approval and when approved rates become effective.
- Assess final PHMSA requirements and the resulting pipeline-safety capital and operating costs.
- Monitor operating cash flow against elevated capital spending, available credit, and the company’s dividend commitments.
- Review the ongoing recovery and regulatory treatment of pension-related and other regulatory assets, as well as the impact of the postemployment-benefit remeasurement.
- Interpret reported revenue changes together with net margin and natural-gas costs; compare weather-normalized volumes and customer growth across periods.