ONE Gas, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. ONE Gas is a regulated natural-gas distributor serving more than 2 million customers in Oklahoma, Kansas and Texas. The business is seasonal. The six-month 2014 comparison includes one month of predecessor results before the January 2014 separation, which limits comparability.
Financial performance and liquidity
- Second quarter: Revenue was $256.8 million, down 13.5% from $296.8 million; net income rose to $12.1 million from $9.5 million. Diluted EPS was $0.23 versus $0.18. Operating income increased to $31.3 million from $26.8 million.
- First half: Revenue was $933.3 million versus $1,063.0 million; net income was $72.5 million versus $68.5 million. Diluted EPS was $1.36 versus $1.31. Operating income rose to $140.3 million from $136.2 million.
- Margins and costs: Net margin was $176.8 million in Q2, nearly unchanged year over year, and $439.8 million for the first half, up $3.5 million. Lower natural-gas costs reduced reported revenue, while regulated gas-cost recovery mechanisms largely pass those costs through. Q2 operating costs declined $5.9 million; depreciation and amortization increased $1.7 million.
- Cash flow and investment: First-half cash from operations was $342.6 million, up from $261.7 million. Capital expenditures were $125.4 million, down from $148.6 million. Cash increased to $135.9 million from $11.9 million at year-end; financing cash flow was negative $93.2 million, including $24.1 million of share repurchases and $31.5 million of dividends paid.
- Debt and liquidity: Long-term debt was approximately $1.201 billion. Cash was $135.9 million; there were no short-term borrowings and $699.0 million of unused capacity under the $700 million revolving facility, with $1.0 million of letters of credit outstanding. Debt-to-capital was 40%, below the 70% covenant limit; the company reported covenant compliance. Current assets were $477.5 million and current liabilities $246.9 million.
- Capital returns: The company declared dividends of $0.30 per share for Q2 and again in July, equivalent to an annualized $1.20 per share. It repurchased 563,895 shares in Q2 for approximately $24.1 million.
Changes, outlook and risks
- Net margin gains reflected new rates, mainly in Oklahoma and Texas, and customer growth; warmer weather and lower transportation volumes partly offset those gains. Q2 heating degree days were below normal in all three states, while weather-normalization mechanisms mitigated residential and commercial margin effects.
- In July, Oklahoma Natural Gas requested a $50.4 million base-rate increase, based on a 10.5% return on equity and approximately $1.2 billion rate base. Approval was pending. Texas rate adjustments and a Kansas pipeline-replacement regulatory review were also in progress.
- The filing provides no specific earnings or financial guidance. Management said operating cash flow and expected financing should support planned operations and infrastructure investment, but results and cash flows are seasonal.
- Key risks include regulatory recovery and rate-case outcomes; weather and demand; natural-gas supply and cost recovery; pipeline integrity and potential new safety requirements, whose costs are unknown; environmental compliance; financing and credit-market access; and pension-related obligations.
- The company identified 12 former manufactured-gas sites in Kansas: source removal or related work had been completed at 11, and three had regulatory closure. Management did not expect material future environmental spending. It considered reasonably possible losses from ordinary litigation not material.
Important facts for investors to verify
- Progress and final outcome of the Oklahoma rate request and other state regulatory proceedings, including timing and allowed returns.
- Whether weather, customer growth, rate changes and transportation volumes sustain net-margin growth in subsequent periods.
- Capital spending and pipeline-safety requirements, including the potential cost of future regulations.
- Cash-flow seasonality, funding needs, debt covenants, and the sustainability of dividends and share repurchases.
- Comparability of first-half 2014 results given the predecessor-period inclusion, and the company’s significant pension and regulatory-asset balances.