ONE Gas, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. ONE Gas became an independent, publicly traded company on January 31, 2014, following its separation from ONEOK. The company provides regulated natural-gas distribution service to more than 2 million customers in Oklahoma, Kansas and Texas. Comparisons are affected by the separation: 2013 results are predecessor results, and first-half 2014 includes pre-separation predecessor activity for January.
Financial results and position
Amounts below are in millions, except per-share data. Figures may not sum due to rounding.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $296.8 | $311.6 | $1,063.0 | $947.5 |
| Net margin | $176.5 | $178.4 | $436.3 | $430.1 |
| Operating income | $26.8 | $39.3 | $136.2 | $141.1 |
| Net income | $9.5 | $15.0 | $68.5 | $68.4 |
| Diluted EPS | $0.18 | $0.29 | $1.31 | $1.31 |
- First-half operating cash flow was $261.7 million, versus $225.0 million; capital expenditures were $148.6 million, versus $130.0 million. Cash at June 30 was $161.3 million.
- At June 30, long-term debt was $1.201 billion, with $6 thousand of current maturities. Debt-to-capital was 40%; capitalization was 40% debt and 60% equity. The $700 million revolving facility had no borrowings, $0.7 million of letters of credit and $699.3 million available.
- Total assets were $4.284 billion and equity was $1.780 billion. The company declared and paid a $0.28-per-share dividend in May; another $0.28-per-share dividend was declared in July.
Material changes versus prior periods
- Q2 revenue declined $14.8 million and net income declined $5.5 million year over year. Operating income fell $12.5 million, as operating costs rose $12.2 million while net margin decreased $1.9 million.
- Management attributed lower Q2 margin principally to warmer weather and reduced rider and surcharge recoveries, partly offset by new rates and customer growth. Residential sales volumes fell 17% in the quarter; weather-normalization mechanisms mitigated the margin effect.
- First-half net margin increased $6.2 million, while operating income decreased $4.9 million. Higher rates and customer/transportation activity helped margin; lower rider recoveries partly offset those benefits. Revenue rose largely alongside higher natural-gas costs and first-quarter demand.
- First-half operating costs increased $16.1 million, reflecting higher labor and compensation, insurance, IT and separation-related costs, partly offset by lower benefit costs. Capital expenditures increased $18.6 million, primarily for pipeline replacement.
- The January separation changed the capital and financing structure: ONE Gas issued $1.2 billion of senior notes and paid approximately $1.13 billion to ONEOK. Cash flows and balance-sheet comparisons also reflect the transition from ONEOK’s centralized cash management.
Outlook, commentary, risks and unusual items
- Outlook: No earnings guidance was provided in the filing. Management expects operating cash flow and financing arrangements to support operations and infrastructure investment, and expects to pursue a balanced approach to capital investment and shareholder dividends. A commercial-paper program was planned; the company expected to complete its senior-note exchange offer in Q3 2014.
- Rates: An Oklahoma rate settlement providing approximately $13.7 million in base-rate increases plus $0.9 million for program true-up and incentives was approved in August 2014. Texas rate actions approved in July included $3.5 million for El Paso and $0.6 million for the remainder of that service area; Austin-area interim relief of approximately $5.2 million took effect in May. Oklahoma Natural Gas planned a rate case in 2015.
- Pension and separation items: At separation, approximately $1.1 billion of pension and postretirement obligations and $1.0 billion of plan assets were transferred to ONE Gas. Associated regulatory assets and deferred taxes increased by approximately $331 million and $86 million, respectively. Certain separation balance estimates were expected to be finalized in Q3 2014.
- Key risks: Recovery of costs and regulatory assets depends on regulatory approval; weather affects usage and demand; pipeline integrity requirements may entail unknown future costs; environmental regulation could require additional spending. The company also cites natural-gas supply, interest rates, credit access, pension funding, operating costs and its ability to function as a newly independent company as risks.
- Contingencies: Management considered ordinary-course litigation losses not material. Of 12 former manufactured-gas sites in Kansas, source removal or remediation had been completed or addressed at 11, with regulatory closure at three; management did not expect material future environmental expenditures. Potential costs from evolving pipeline-safety requirements were not quantified.
- Liquidity and credit: Moody’s rated the company A2 and S&P rated it A−, both with stable outlooks. The revolving facility requires a debt-to-capital ratio no greater than 70%; the company reported compliance at quarter-end.
Investor verification points
- Review the separation-related reporting basis and its effect on comparisons, cash flows and allocation of corporate costs.
- Track regulatory approvals and recovery of the substantial pension-related regulatory asset, along with the planned 2015 Oklahoma rate case.
- Monitor operating-cost growth, capital spending and weather-normalized margin performance.
- Verify ongoing liquidity, debt covenant compliance, credit ratings and dividend coverage as a standalone issuer.
- Assess future pipeline-safety and environmental compliance costs, which the filing does not clearly quantify.