ONE Gas, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014, with unaudited fourth-quarter results. ONE Gas became an independent, publicly traded regulated natural-gas utility on January 31, 2014, serving more than 2 million customers in Oklahoma, Kansas and Texas.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $1,818.9 million | $1,690.0 million |
| Net margin | $827.0 million | $813.0 million |
| Operating income | $225.3 million | $220.3 million |
| Net income | $109.8 million | $99.2 million |
| Diluted EPS | $2.07 | $1.90 |
| Cash from operating activities | $246.7 million | $154.2 million |
| Capital expenditures | $297.1 million | $292.1 million |
Revenue increased 8%, net margin 2%, operating income 2% and net income 11%. Natural-gas costs are generally passed through to customers; net margin, rather than gross revenue, is a more informative measure of utility performance. Fixed charges generated approximately 71% of natural-gas sales net margin in 2014, versus 69% in 2013.
Fourth-quarter 2014 revenue was $514.4 million, net margin $224.2 million, operating income $70.0 million, net income $36.6 million and diluted EPS $0.69. In fourth-quarter 2013, the respective figures were $522.7 million, $223.7 million, $65.0 million, $30.3 million and $0.58.
At year-end, long-term debt including current maturities was $1.201 billion; commercial paper outstanding was $42 million. The company reported $11.9 million of cash, $657 million of available credit under its $700 million revolving facility, and a 41% debt-to-capital ratio. The facility’s covenant ceiling is 70%; the company reported compliance. Cash from operations rose year over year, while capital spending exceeded operating cash flow.
Business changes and comparability
The 2014 results include ONE Gas for eleven months and its predecessor for January; 2013 and 2012 are predecessor results prepared as though the business had operated separately. Pre-separation statements include allocated ONEOK corporate costs and may not represent the expenses of a standalone company. The separation also changed the capital structure: ONE Gas issued $1.2 billion of senior notes and paid approximately $1.13 billion to ONEOK.
Net margin growth reflected new rates, customer growth, higher transportation volumes and CNG revenue, partly offset by lower rider recoveries and warmer weather versus 2013. Operating costs rose $28.1 million, including $6.8 million of separation-related costs, maintenance, technology, insurance, rent and employee expenses. Depreciation and amortization declined, partly due to lower rider-related amortization.
Outlook, risks and notable items
- Management expected 2015 capital expenditures of approximately $300 million, principally for pipeline integrity, replacements, reliability, system growth and technology.
- Management cited stable cash flows from the regulated business, fixed customer charges and cost-recovery mechanisms, while noting regulatory lag and weather exposure. Achieved ROE for 2014 was 7.6% across service territories.
- Natural-gas demand is seasonal and weather-sensitive. Weather-normalization mechanisms reduce, but do not eliminate, earnings variability. Regulatory decisions affect rates, cost recovery and returns on infrastructure investment.
- Key risks include pipeline safety and integrity requirements, environmental regulation, severe weather and operational interruptions, cyber risk, labor and pension costs, access to capital, competition from other energy sources, and the company’s limited standalone history.
- ONE Gas reported $528.9 million of regulatory assets, including $484.8 million for pension and postretirement benefit costs. Recovery depends on regulatory treatment. Pension and postretirement obligations were approximately $1.286 billion against plan assets of approximately $997 million at year-end.
- Management said litigation losses were not expected to be material. Environmental expenditures had not materially affected results; remediation responsibilities remain for 12 former manufactured-gas sites in Kansas, with source contamination addressed at 11.
- The 2014 separation transferred pension obligations and assets to ONE Gas and increased regulatory assets and deferred taxes. The company also faces potential indemnity exposure under separation and tax agreements; failure of the distribution to retain tax-free status could create significant liabilities.
Important facts for investors to verify
- Assess year-over-year results with the predecessor accounting and standalone-cost caveat in mind; confirm which comparisons are most representative.
- Review the assumptions and regulatory support for the large pension-related regulatory asset and the timing of its recovery through rates.
- Track rate proceedings, regulatory lag and whether approved rates permit recovery of planned infrastructure and compliance spending.
- Monitor cash generation against capital expenditures, dividends and debt obligations, including commercial-paper use and revolving-credit availability.
- Check progress and potential costs for pipeline safety, Kansas site remediation, pension funding and separation-related obligations.