Business context and reporting period
ONE Gas, Inc. is a regulated natural-gas distribution utility serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. This Form 10-Q covers the quarter and six months ended June 30, 2019. Results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Revenue | $290.6 million, down 0.7% year over year | $951.6 million, up 2.2% |
| Net margin (non-GAAP) | $208.0 million, up 5% | $503.9 million, up 4% |
| Operating income | $46.9 million, up 14% | $174.5 million, up 2% |
| Net income | $24.5 million, versus $20.4 million | $118.1 million, versus $111.3 million |
| Diluted EPS | $0.46, versus $0.39 | $2.22, versus $2.10 |
| Operating cash flow | Not provided separately for the quarter | $241.2 million, versus $400.0 million |
| Capital expenditures | $101.0 million | $184.3 million |
For the six months, cash used in investing activities was $187.3 million and cash used in financing activities was $64.0 million. Cash declined from $21.3 million at year-end 2018 to $11.1 million at June 30, 2019. Management attributed lower operating cash flow primarily to working-capital timing, including customer collections, gas purchases and gas-cost recoveries.
At June 30, 2019, long-term debt was $1.286 billion and commercial paper outstanding was $293.0 million. The company had $698.8 million of available capacity under its $700 million revolving credit facility, no revolver borrowings, and $1.2 million of letters of credit. Total debt-to-capital was 43%, within the 70% covenant limit; long-term debt-to-capital was 38%. Credit ratings were Moody’s A2 and S&P A, both with stable outlooks.
Changes versus the prior comparable periods
- Second-quarter net margin rose $9.6 million, driven mainly by $10.4 million from new rates and customer growth, partly offset by lower sales volumes, particularly in Kansas. First-half net margin rose $17.5 million, mainly from new rates and customer growth.
- First-half revenue increased while natural-gas cost rose modestly; the company emphasizes net margin, defined as revenue less gas cost, because gas costs are generally passed through to customers.
- Interest expense increased $3.4 million in the quarter and $6.8 million in the first half, principally reflecting the refinancing of $300 million of 2.07% notes with $400 million of 4.50% notes due 2048.
- Depreciation and amortization rose $5.2 million in the quarter and $10.1 million in the first half, reflecting capital projects placed in service, higher Kansas depreciation rates and surcharge amortization.
- First-half cash from operations decreased $158.8 million year over year, while cash used in financing decreased $161.9 million, primarily because of smaller repayments of notes payable.
Outlook, management commentary, risks and unusual items
- Management expected 2019 capital expenditures and asset-removal costs combined to be approximately $450 million. Spending supports pipeline integrity, system upgrades and service-area expansion.
- No specific earnings or EPS guidance is stated in the supplied filing text. Management said operating cash flow and expected short- and long-term financing were expected to support planned operations and infrastructure investment.
- Management estimated that customer refunds of excess accumulated deferred income taxes would reduce 2019 cash flow by approximately $15.9 million. Oklahoma and Kansas refund mechanisms were established; Texas treatment remained under regulatory review. The company credited income tax expense by $8.9 million in the first half for excess-ADIT amortization returned to customers.
- Oklahoma regulators were expected to issue an order in the third quarter on a proposed settlement including a $15.6 million customer credit over 12 months and a $12.7 million excess-ADIT credit. Texas rate increases of $4.1 million in West Texas and $5.5 million in Central Texas took effect in July and June 2019, respectively.
- Pipeline-safety rulemakings were expected during 2019; compliance costs were still being evaluated and could be significant depending on final rules. Environmental remediation costs remain uncertain, including at a Texas former manufactured-gas-plant site where a reliable estimate was not yet possible. Kansas remediation at one site was estimated at $5.6 million to $7.0 million; recovery remains subject to regulatory processes.
- The filing reports ordinary-course litigation and claims that management did not expect to have a material adverse effect. Environmental regulation, weather, rate recovery, operating costs, access to capital, pipeline integrity, and cyber and other operational risks are among the factors that could affect results.
- A $0.50-per-share dividend was declared in July 2019, payable September 3, 2019. The company adopted lease accounting in January 2019 and recognized approximately $32 million of operating lease liabilities at adoption; adoption did not materially affect earnings or cash flows.
Most important facts for investors to verify
- Whether approved rate changes and customer credits, particularly the pending Oklahoma settlement and Texas excess-ADIT treatment, develop as anticipated.
- Whether cash flow rebounds from the first-half working-capital-driven decline and supports the planned approximately $450 million of capital expenditures and asset-removal costs.
- Debt and refinancing costs, including the impact of higher-cost 2048 notes, commercial-paper balances and covenant headroom.
- Final pipeline-safety rules and resulting compliance spending, plus the scope, cost and recoverability of environmental remediation.
- Underlying margin and earnings trends after considering weather, customer growth, rate changes, tax-related credits and higher depreciation and interest expense.