ONE Gas, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. ONE Gas is a fully regulated natural gas distributor serving approximately 2.2 million customers in Oklahoma, Kansas and Texas.
Financial results and key metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $1,633.7 million | $1,539.6 million | +6% |
| Net margin (revenue less natural gas cost; non-GAAP) | $919.1 million | $925.1 million | -1% |
| Operating income | $288.4 million | $316.7 million | -9% |
| Net income | $172.2 million | $163.0 million | +6% |
| Diluted EPS | $3.25 | $3.08 | +6% |
| Operating cash flow | $467.7 million | $253.8 million | +$213.9 million |
| Capital expenditures | $394.5 million | $356.4 million | +11% |
Fourth quarter: Revenue was $464.5 million versus $462.4 million in Q4 2017; operating income was $80.9 million versus $93.8 million; net income was $44.7 million versus $47.1 million; diluted EPS was $0.84 versus $0.89.
Cash flow and investment: Operating cash flow less capital expenditures was approximately $73.2 million. Cash and equivalents were $21.3 million at year-end. The company paid $96.6 million in dividends during 2018; declared dividends were $1.84 per share.
Debt and liquidity: Long-term debt, including current maturities, was reported at $1.286 billion; commercial paper outstanding was $299.5 million. The $700 million revolving credit facility had $399.3 million available and no borrowings at year-end. Total debt-to-capital was 44%, below the 70% covenant limit. A $400 million, 4.50% senior note due 2048 was issued in November; proceeds helped retire $300 million of 2.07% notes due 2019 and reduce commercial paper.
Material changes versus prior year
- Revenue increased largely as natural gas costs passed through to customers; cost of gas rose 16%. Net margin declined $6.0 million, principally due to a $42.3 million reduction related to tax-reform refund liabilities, partly offset by new rates, higher transportation activity, colder weather and customer growth.
- Operating income fell $28.3 million as operating costs and depreciation rose. Net income nevertheless increased, primarily reflecting a $39.6 million reduction in income tax expense following the federal corporate tax-rate reduction to 21%.
- Operating cash flow improved substantially, influenced by working-capital timing, colder-weather-related delivery volumes and pension and benefit contributions that were $68.0 million lower than in 2017.
- Capital spending increased for system integrity and service-area expansion. Year-end net property, plant and equipment was $4.284 billion, up from $4.008 billion.
Outlook, management commentary and risks
- Management expects 2019 capital expenditures and asset-removal costs of approximately $450 million. The filing does not provide an earnings or EPS guidance range.
- Management emphasizes regulated rate-base investment, system safety and reliability, cost control, investment-grade credit metrics and dividends. Approximately 71% of 2018 natural-gas-sales net margin came from fixed monthly charges; weather mechanisms mitigate, but do not eliminate, weather exposure.
- Tax reform reduced 2018 revenue by $36.6 million through regulatory liabilities. Refunds of excess deferred taxes are expected to begin in 2019; management estimated 2019 cash flow would be reduced by approximately $23 million. Kansas tax-refund treatment remained unresolved in the filing.
- Regulatory decisions affect cost recovery and allowed returns. Oklahoma’s January 2019 order required an annual $11.3 million base-rate reduction beginning February 2019 and a $15.8 million liability for estimated excess 2018 earnings to be returned to customers. A Kansas rate-case order issued in February 2019 provided a total increase of $21.5 million, including existing surcharge recovery.
- Pipeline safety rules under consideration could require significant capital and operating expenditures, depending on final regulations. Other material risks include regulatory lag or disallowances, extreme weather, supply or transportation disruptions, higher financing costs, competition from electricity and other energy sources, cybersecurity, and environmental remediation.
- Environmental matters include 12 former manufactured-gas-plant sites in Kansas and a site in Texas. The company said environmental spending had not materially affected earnings or cash flows; some future remediation costs remain uncertain. Ordinary-course litigation losses were assessed as not material.
- Moody’s affirmed its A2 rating and changed its outlook from negative to stable on January 28, 2019; S&P rated the company A with a stable outlook at year-end. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track regulatory implementation and timing of tax-related refunds, particularly the unresolved Kansas liability and the estimated 2019 cash-flow impact.
- Assess why operating income and net margin declined while net income and EPS rose, including the effects of tax reform and regulatory accounting.
- Monitor capital spending against the approximately $450 million 2019 estimate, and whether infrastructure investments receive timely rate recovery.
- Review refinancing, interest expense and liquidity needs alongside commercial-paper levels, the 2048 notes and credit-rating developments.
- Follow final PHMSA pipeline-safety rules and updates to MGP remediation estimates, recoveries and regulatory approvals.