ONE Gas, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. ONE Gas is a regulated natural gas distributor serving more than 2 million customers in Oklahoma, Kansas and Texas. It became an independent, publicly traded company on January 31, 2014.
Financial results and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $241.5 million | $219.7 million | $1,304.5 million | $1,167.3 million |
| Net margin | $166.5 million | $159.2 million | $602.8 million | $589.4 million |
| Operating income | $19.1 million | $14.2 million | $155.3 million | $155.3 million |
| Net income | $4.7 million | $0.4 million | $73.2 million | $68.9 million |
| Diluted EPS | $0.09 | $0.01 | $1.38 | $1.32 |
| Operating cash flow | — | $250.0 million | $176.1 million | |
| Capital expenditures | $76.0 million | $76.4 million | $224.6 million | $206.4 million |
Q3 revenue rose 10% and net margin 5% year over year. Operating income increased 35%; lower interest expense helped lift net income. For the nine-month period, revenue rose 12% and net margin 2%, while operating income was essentially unchanged; net income increased about 6%.
At September 30, cash was $59.7 million, current assets were $505.2 million and current liabilities were $274.1 million. Long-term debt, excluding current maturities, was $1.201 billion. The company reported a 40% debt-to-capital ratio, $699.3 million of available revolving-credit capacity, no revolver borrowings and no commercial paper outstanding. The $700 million unsecured revolver expires in January 2019. Senior notes issued in January 2014 comprise $300 million due 2019 at 2.07%, $300 million due 2024 at 3.61% and $600 million due 2044 at 4.658%.
Dividends declared were $0.28 per share in Q3; the 2014 year-to-date declared amount was $0.56 per share. Nine-month cash flow from operations exceeded capital expenditures by $25.4 million, before financing and other investing items.
Material changes and drivers
- Comparisons are affected by the January 2014 separation: 2014 results include ONE Gas after separation and the predecessor business for January; 2013 periods consist entirely of predecessor results. Pre-separation allocations and standalone-company costs may also affect comparability.
- Q3 net margin increased mainly from new Oklahoma and Texas rates, residential customer growth and higher transportation volumes. Nine-month margin also benefited from customer growth, transportation and CNG/line-extension revenues, partly offset by lower rider and surcharge recoveries and weaker Kansas volumes.
- Operating costs rose $3.4 million in Q3 and $19.5 million year to date. Drivers included separation-related services, pipeline maintenance, insurance, IT and labor costs; lower benefit costs partly offset the increases. Q3 separation costs were approximately $3.3 million; nine-month separation costs were approximately $6.1 million.
- Nine-month operating cash flow increased $73.9 million, primarily reflecting working-capital timing, collections and recovery of gas costs. Capital expenditures increased $18.2 million, largely for pipeline replacements and IT assets.
Outlook, regulation and risks
- No specific earnings or revenue guidance is provided. Management expects operating cash flow and short- and long-term financing to support planned operations and infrastructure investment, and characterizes the customer mix, fixed-charge margin and rate mechanisms as supporting stable cash flows.
- Oklahoma’s approved rate settlement provided an approximately $13.7 million base-rate increase plus $0.9 million in adjustments. Kansas Gas Service requested an approximately $3.5 million rate increase. Texas approvals included $3.5 million for El Paso, $0.6 million for the remainder of that service area and approximately $5.2 million for Austin-area rate relief, in addition to other approved adjustments.
- Key risks include regulatory recovery of costs and investment, weather and demand variability, natural-gas supply and price exposure, pipeline integrity and safety requirements, environmental compliance, access to capital and credit ratings, pension funding, and the costs and execution risks of operating as a newly independent company.
- Natural-gas price exposure is mitigated through purchased-gas adjustment mechanisms and seasonal storage; purchased call-option costs and settlements are recoverable through those mechanisms. At September 30, options for 37.4 Bcf had a fair value of $9.5 million. The company had no designated derivative hedges.
- The company reported various ordinary-course legal matters and believes reasonably possible losses are not material. It has environmental responsibilities at 12 former manufactured-gas sites in Kansas; source removal or remediation was addressed at 11, and three had regulatory closure. Management did not expect material future environmental expenditures. Potential costs from future pipeline safety rules remain unknown.
- Management found no goodwill impairment in its July 2014 assessment. The company was in compliance with its credit-facility covenants, and disclosure controls were reported effective. A transition of accounting and financial systems from ONEOK occurred during Q3.
Important facts for investors to verify
- How the separation and predecessor accounting affect period-to-period earnings, costs and cash-flow comparisons.
- Whether approved and pending rate changes are implemented as expected and recover infrastructure, pension and other costs promptly.
- Capital spending, operating cash generation and dividend coverage, particularly given seasonal working-capital swings.
- Debt and credit metrics, refinancing needs, ratings, and compliance with the revolver’s 70% debt-to-capital covenant.
- Actual costs and timing of pipeline safety, environmental remediation and ongoing standalone-company systems and service transitions.