ONE Gas, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. ONE Gas is a regulated natural-gas distributor serving more than 2 million customers in Oklahoma, Kansas and Texas. Results are seasonal; the nine-month 2014 comparison includes one month of predecessor-company results before the January 2014 separation.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $225.2 million | $241.5 million | $1,158.5 million | $1,304.5 million |
| Net margin | $170.5 million | $166.5 million | $610.3 million | $602.8 million |
| Operating income | $25.0 million | $19.1 million | $165.2 million | $155.3 million |
| Net income | $7.4 million | $4.7 million | $79.8 million | $73.2 million |
| Diluted EPS | $0.14 | $0.09 | $1.50 | $1.38 |
- Revenue declined 7% in Q3 and 11% year to date, primarily reflecting lower natural-gas prices and lower sales volumes. Net margin increased 2% in Q3 and 1% year to date; operating income rose 30% and 6%, respectively.
- Management attributed higher net margin mainly to new rates, especially in Oklahoma and Texas, partly offset year to date by warmer-weather-related volume declines, lower line-extension and other revenues, and lower transportation volumes. Weather-normalization mechanisms mitigated the impact on residential and commercial margins.
- Operating cash flow was $349.5 million for the nine months, versus $250.0 million. Capital expenditures were $199.7 million, down from $224.6 million. Cash increased to $53.0 million from $11.9 million at year-end; dividends paid were $47.2 million.
- Long-term debt was approximately $1.201 billion. The company had no short-term borrowings, $699 million of undrawn credit availability and $1 million of letters of credit. Debt-to-capital was 40%; the company reported compliance with credit-facility covenants. Current ratings were Moody’s A2 and S&P A-, both with stable outlooks.
- Quarterly dividends declared were $0.30 per share, versus $0.28 a year earlier; the October 2015 declaration set a $0.30-per-share dividend payable December 1, equivalent to $1.20 annualized.
Changes, outlook and notable items
- Oklahoma Natural Gas filed for a $50.4 million base-rate increase, based on a requested 10.5% return on equity; a hearing was scheduled for November 2015. No outcome was reported in this filing.
- Kansas Gas Service expected to file a rate case in 2016. It also sought approximately $2.4 million in customer-bill increases through its gas-system reliability surcharge.
- Texas Gas Service agreed to an $8.0 million rate increase in the El Paso service area, effective August 2015; other Texas rate actions were also approved during the year.
- The filing provides no quantified earnings guidance. Management said operating cash flow and expected short- and long-term financing should support planned operations and infrastructure investment, while emphasizing access to capital markets and investment-grade credit.
- Pipeline safety requirements may require future spending, but the potential costs were unknown. Environmental compliance, remediation at 12 former Kansas manufactured-gas sites, weather, rate recovery, gas supply, operating costs, interest rates, credit access and regulatory decisions are identified risks. Management did not expect environmental matters or ordinary-course litigation to have a material adverse effect.
- In October 2015, pension-plan amendments and a postretirement medical-plan change were announced; related plan assets and obligations were to be remeasured in Q4. The filing does not quantify the effect.
Investor verification points
- Track the outcome and timing of the Oklahoma rate case and the Kansas surcharge and rate proceedings.
- Assess whether higher rates and customer growth can offset warmer-weather impacts, lower volumes and cost inflation.
- Review cash generation against infrastructure capital needs, dividends and any share repurchases.
- Verify the financial impact of Q4 benefit-plan remeasurement and monitor debt, ratings and credit-facility covenant headroom.
- Follow pipeline-safety rulemaking and environmental remediation developments, whose potential future costs are not quantified.