ONE Gas, Inc. — First-Quarter 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. ONE Gas distributed from ONEOK and became an independent, publicly traded company on January 31, 2014. Consequently, first-quarter 2014 results combine ONE Gas results for February and March with predecessor results for January; first-quarter 2013 consists entirely of predecessor results. Comparisons therefore are not fully like-for-like. The business is a regulated natural gas distributor serving more than 2 million customers in Oklahoma, Kansas and Texas. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $766.2 million | $635.9 million | +$130.2 million |
| Net margin | $259.8 million | $251.7 million | +$8.1 million, 3% |
| Operating income | $109.4 million | $101.8 million | +$7.6 million, 7% |
| Net income | $59.1 million | $53.5 million | +$5.6 million |
| Diluted EPS | $1.13 | $1.02 | +$0.11 |
| Operating cash flow | $182.1 million | $157.7 million | +$24.4 million |
| Capital expenditures | $65.7 million | $62.7 million | +$3.0 million |
Natural gas cost was $506.3 million versus $384.3 million, rising faster than revenue; the filing attributes the revenue increase largely to gas sales, while net margin growth was more modest. Operating costs rose $3.9 million, partly from employee-related and separation costs; depreciation and amortization fell $3.4 million. Interest expense was $13.0 million versus $15.3 million. The filing does not present a single consolidated margin percentage.
Balance sheet, liquidity and debt
- At March 31, cash and cash equivalents were $178.6 million, compared with $3.2 million at year-end; current assets were $724.3 million and current liabilities $364.0 million.
- Long-term debt, excluding current maturities, was $1.201 billion; total equity was $1.783 billion. Debt-to-capital was 40%, and the company reported compliance with credit-facility covenants.
- The $700 million revolving credit facility had no borrowings and approximately $699.3 million available, net of $0.7 million in letters of credit. The facility matures in January 2019.
- January’s $1.2 billion senior-note issuance comprised $300 million at 2.07% due 2019, $300 million at 3.61% due 2024, and $600 million at 4.658% due 2044. Proceeds primarily funded a $1.13 billion payment to ONEOK in connection with the separation.
- Cash from financing was $59.1 million, reflecting the debt issuance and separation payment; cash increased $175.5 million during the quarter. Operating cash flow growth was attributed principally to timing of receivable/payable settlements and purchased-gas cost recovery.
Changes, outlook and risks
- Operating drivers: Net margin increased 3%, supported by new Texas rates, colder-than-normal weather, higher transportation volumes and customer growth, partly offset by lower rider and surcharge recoveries. Weather-normalization mechanisms mitigated much of the impact of higher sales volumes. Total customers rose by 19,000 year over year.
- Regulatory activity: Oklahoma Natural Gas filed a performance-based rate application seeking approximately $16.0 million in base-rate increases and $1.2 million for an energy-efficiency true-up and utility incentive adjustment; a rate case was expected in 2015. Texas Gas Service filed an El Paso annual rate review seeking $5.6 million and related GRIP filings seeking $0.6 million; Austin-area GRIP requests sought $5.2 million. These requests were pending, not approved, as described in the filing.
- Capital return: In April, the company declared a $0.28-per-share quarterly dividend, or $1.12 annualized, payable May 15, 2014. Management said it expected operating cash flow and financing arrangements to support planned operations and infrastructure investment, and intended to maintain investment-grade credit metrics. No specific earnings guidance was provided.
- Risks and contingencies: Key risks include regulatory recovery of costs and rate-case outcomes, weather and demand variability, gas supply and price exposure, pipeline integrity and safety requirements, environmental compliance, access to capital and credit ratings, and operating as a newly independent company. Purchased-gas mechanisms mitigate commodity-price exposure, subject to regulatory review. Litigation losses were considered not material; environmental remediation at former Kansas manufactured-gas sites was not expected to require material future expenditures. Potential costs of future pipeline-safety requirements were unknown.
- Unusual items and controls: Separation-related financing, transfers of assets and liabilities, and pension-plan recognition materially changed the balance sheet and financing cash flows. The company recorded approximately $1.1 billion of pension and postretirement obligations and approximately $1.0 billion of plan assets; the asset transfer remained subject to final actuarial adjustment. Management reported disclosure controls were effective and no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Assess earnings comparisons in light of the spin-off and the mixed predecessor/company reporting basis for Q1 2014.
- Track decisions on Oklahoma and Texas rate requests and the timing of approved cost recovery.
- Review debt service, available revolver capacity, credit ratings and compliance with the debt-to-capital covenant.
- Monitor pension-plan asset adjustments, contributions and regulatory recovery of benefit costs.
- Evaluate pipeline-safety and environmental requirements, and whether related future spending or rate recovery changes materially.
- Confirm the dividend payment and sustainability against cash generation and planned capital expenditures.