ONE Gas, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 18, 2016. ONE Gas is a fully regulated natural gas distribution utility serving more than 2 million customers in Oklahoma, Kansas and Texas. The 2014 comparison includes one month of predecessor operations and eleven months as a separate company, which limits comparability.
Financial and operating results
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1,547.7 million | $1,818.9 million | -15% |
| Net margin | $841.7 million | $827.0 million | +2% |
| Operating income | $239.1 million | $225.3 million | +6% |
| Net income | $119.0 million | $109.8 million | +8% |
| Diluted EPS | $2.24 | $2.07 | +8% |
| Cash from operations | $394.2 million | $246.7 million | +$147.6 million |
| Capital expenditures | $294.3 million | $297.1 million | -1% |
- Revenue fell primarily because lower natural gas prices reduced gas-cost revenues, which are passed through to customers without a profit. Cost of gas declined 29% to $706.0 million.
- Net margin increased $14.7 million, supported chiefly by new rates and customer growth, partly offset by warmer weather, lower transportation volumes and reduced rider recoveries. Fixed charges represented about 73% of natural gas sales net margin.
- Operating costs were $469.6 million, down $6.4 million; lower separation-related IT and outside-service costs were partly offset by higher employee and benefit costs. Depreciation and amortization increased 6% to $133.0 million.
- Year-end assets were $4.64 billion and equity was $1.84 billion. Long-term debt, including current maturities, was $1.20 billion. Debt was 40% of total capitalization.
- At year-end, cash was $2.4 million; commercial paper outstanding was $12.5 million. The $700 million revolving facility had $686.5 million available, with no revolver borrowings. The company reported compliance with its debt covenants.
- Quarterly 2015 net income was $39.2 million in Q4, versus $36.6 million in Q4 2014; diluted EPS was $0.74 versus $0.69.
Changes, outlook and management commentary
- Natural gas delivered declined about 6% to 358.8 Bcf, mainly due to warmer weather; Oklahoma and Kansas heating degree days were 16% and 18% below normal, respectively. Weather mechanisms offset part, but not all, of the margin impact.
- Operating cash flow rose substantially, reflecting working-capital movements, including receivables, payables, gas storage and recovery of purchased-gas costs. Cash used in financing increased, including dividends, lower notes payable and share repurchases.
- Management estimated 2016 capital expenditures of approximately $305 million. No earnings or EPS guidance was provided in the supplied filing text.
- Regulatory proceedings: Oklahoma’s rate settlement was approved in January 2016, providing a $30.0 million revenue increase and setting a 9.5% allowed ROE; Kansas Gas Service expected to file a rate case in 2016, with new rates anticipated in January 2017; Texas Gas Service planned 2016 rate cases in the El Paso and Central Texas jurisdictions. A Texas rate request for $3.1 million was pending.
- The board declared a January 2016 dividend of $0.35 per share, or $1.40 annualized, payable March 11, 2016. 2015 dividends declared were $1.20 per share.
- Management’s strategy emphasizes safety, infrastructure investment, regulatory recovery, operating efficiency, investment-grade credit and a competitive dividend. Management stated that operating cash flow and financing access should support planned operations and investment.
Risks, contingencies and unusual items
- Key risks include regulatory decisions and recovery delays, pipeline safety and integrity requirements, weather and seasonality, competition from electricity and other energy sources, natural-gas supply and transportation availability, and access to capital and credit ratings.
- Environmental exposure includes responsibility for 12 former manufactured-gas sites in Kansas. Source contamination removal was addressed at 11 sites and regulatory closure achieved at three; management said historical environmental expenditures were not material but future costs could rise and may not be recoverable.
- Defined-benefit pension and postemployment obligations, assumptions and asset performance can affect expense and funding needs. 2015 plan amendments reduced postemployment benefit obligations by $11.9 million and reduced 2015 net periodic benefit cost by $3.4 million.
- The company retains certain separation-related liabilities and potential indemnity exposure, including possible tax obligations if the 2014 distribution failed to qualify as tax-free. The filing also identifies cyber, operational, labor, severe-weather and climate-related risks.
- ONE Gas said reasonably possible losses from ordinary-course litigation and claims were not material and expected outcomes would not materially affect results, financial position or cash flows. No goodwill or long-lived-asset impairment was recorded in 2015.
- Auditor PwC issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Progress and final outcomes of the 2016 Oklahoma, Kansas and Texas rate proceedings, including timing and allowed returns.
- Whether planned 2016 capital spending is achieved and recovered through rates, and how regulatory lag affects earned returns and cash flow.
- Cash-flow sustainability after working-capital fluctuations, alongside dividend commitments, debt maturities and commercial-paper usage.
- Weather-normalized volumes, customer growth and fixed-margin performance, given lower 2015 heating demand.
- Updated estimates for Kansas site remediation, pension funding, pipeline-safety compliance and any costs not recoverable from customers.
- Comparability of reported 2014 results with 2015, given the separation and predecessor-period presentation.