ONE Gas, Inc. — 2017 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2017. ONE Gas is a fully regulated natural gas distribution utility serving more than 2.1 million customers in Oklahoma, Kansas and Texas. The company earns its margin primarily from delivery service; natural gas commodity costs are generally passed through to customers without profit.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1,539.6 million | $1,427.2 million |
| Net margin | $925.1 million | $885.4 million |
| Operating income | $299.5 million | $269.1 million |
| Net income | $163.0 million | $140.1 million |
| Diluted EPS | $3.08 | $2.65 |
| Cash from operations | $253.8 million | $290.6 million |
| Capital expenditures | $356.4 million | $309.1 million |
Net margin increased 4%, and operating income increased 11%. Net margin is revenue less natural gas costs, which are substantially recovered from customers. Approximately 71% of natural-gas-sales net margin came from fixed charges. Sales volumes delivered declined, primarily because of warmer weather in Texas; weather normalization mechanisms partly offset the effect.
At year-end, total assets were $5.21 billion and long-term debt, including current maturities, was $1.19 billion. Commercial paper outstanding was $357.2 million; cash was $14.4 million. The company reported a 44% total debt-to-capital ratio and $340.7 million of available credit under its $700 million revolving facility. Operating cash flow was below capital expenditures, with capital investment financed in part through borrowing. Dividends declared were $1.68 per share, up from $1.40.
Fourth-quarter 2017 revenue was $462.4 million, operating income $89.5 million, net income $47.1 million and diluted EPS $0.89. Fourth-quarter 2016 figures were $440.8 million, $78.5 million, $42.3 million and $0.80, respectively.
Material changes versus 2016
- Net margin rose $39.7 million, primarily from new rates in Texas and Kansas, weather-normalization adjustments, higher transportation volumes and customer growth.
- Operating expenses increased modestly overall; depreciation and amortization rose $8.1 million as new capital projects entered service.
- Operating cash flow fell $36.8 million, chiefly reflecting working-capital changes, including pension and other postemployment benefit contributions of $118.1 million combined.
- Capital expenditures increased 15% to $356.4 million, mainly for system integrity work and service-area expansion.
Outlook, commentary and risks
- Management expected 2018 capital expenditures of approximately $375 million. The filing does not provide a specific earnings or EPS forecast.
- The 2017 Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. ONE Gas recorded a $519.4 million regulatory liability for the remeasurement of deferred taxes expected to benefit customers, and a $2.2 million tax expense for certain items not currently recovered in rates. The remeasurement had no 2017 cash-flow impact; future revenue and cash effects depend on regulatory decisions and customer refunds.
- Management said the tax law is expected to reduce operating cash flow over time, including through lower tax-related customer revenues and refunds of excess deferred taxes. The timing and magnitude remain subject to regulatory proceedings.
- Moody’s changed its outlook to negative in January 2018, citing potential tax-reform effects; the company’s A2 rating remained unchanged. S&P rated the company A with a stable outlook at year-end.
- Key risks include regulatory delays or disallowance of cost recovery, weather and demand variability, competition from other energy sources, access to gas supply and transportation, higher financing costs, pipeline safety and environmental compliance, cyber and operational incidents, and pension funding needs.
- ONE Gas has responsibility for environmental conditions at 12 former manufactured-gas-plant sites in Kansas. Regulators approved deferral of qualifying investigation and remediation costs, subject to a $15 million cap, net of insurance recoveries; final costs and recoverability may differ.
- The company reported no material expected loss from ordinary-course litigation. A proposed federal pipeline-safety rule could entail significant compliance spending, depending on its final form.
Important facts for investors to verify
- How state regulators will implement tax reductions and determine the timing and amount of customer refunds.
- Whether operating cash flow can support planned capital spending, dividends and benefit obligations without materially higher borrowing.
- Progress on rate recovery, regulatory lag and authorized returns across the three states.
- Final remediation costs and recovery prospects for the Kansas MGP sites, and the outcome of pending pipeline-safety rules.
- Whether credit metrics and ratings outlook remain stable as tax-related cash-flow effects emerge.