ONE Gas, Inc. — Q1 2019 Form 10-Q
Business and period: Regulated natural-gas distributor serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018. Results are seasonal and not necessarily indicative of a full year.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $661.0 million | $638.5 million | +$22.5 million, about 4% |
| Net margin (non-GAAP) | $295.9 million | $288.0 million | +$7.9 million, 3% |
| Operating income | $127.6 million | $130.3 million | -$2.7 million, 2% |
| Net income | $93.7 million | $90.8 million | +$2.8 million |
| Diluted EPS | $1.76 | $1.72 | +$0.04 |
| Cash from operations | $122.3 million | $223.3 million | -$101.0 million |
| Capital expenditures | $83.3 million | $86.6 million | -$3.3 million |
Natural-gas cost was $365.1 million, up $14.7 million. Operating costs increased $5.7 million and depreciation and amortization rose $4.9 million, contributing to lower operating income. Net income increased despite higher interest expense ($15.8 million versus $12.4 million), aided by lower income tax expense ($18.6 million versus $24.9 million). Management said the tax decrease primarily reflected amortization of excess deferred-tax liabilities being returned to customers.
Net margin, the company’s non-GAAP measure of revenue less natural-gas cost, rose mainly with new rates, higher sales volumes in Texas and Kansas, and customer growth in Oklahoma and Texas. Colder first-quarter weather increased delivered volumes; weather-normalization mechanisms mitigate its effect on residential and commercial net margin.
Balance sheet, debt and liquidity
- At March 31, 2019, cash was $19.6 million; total assets were $5.52 billion; and equity was $2.10 billion.
- Long-term debt, excluding current maturities, was $1.286 billion. Commercial paper outstanding was $295.5 million. The company reported a 43% total debt-to-capital ratio and a 38% long-term debt-to-capital ratio.
- The $700 million revolving credit facility expires in October 2023. There were no facility borrowings, $1.2 million of letters of credit, and $698.8 million of remaining availability. The company was in compliance with covenants, including the 70% maximum debt-to-capital limit.
- Operating cash flow was lower year over year primarily because of working-capital timing, including customer collections, gas purchases and gas-cost recoveries. Investing cash use was $86.3 million; financing cash use was $37.6 million. Cash declined $1.7 million during the quarter.
Material changes, outlook and risks
- Regulatory and tax items: Oklahoma’s regulator ordered prospective rate reductions and customer credits, including return of excess deferred taxes. Kansas approved a rate increase that incorporates excess-tax amortization credits and ordered a $16.6 million customer bill credit expected in Q2 2019. Texas tax treatment, including excess deferred taxes, remained under discussion with regulators. Management estimated customer refunds would reduce 2019 cash flow by approximately $15.9 million.
- Rates and filings: Kansas’s approved base-rate increase was $18.6 million, with a total increase of $21.5 million including an existing surcharge. ONE Gas filed Oklahoma’s annual performance-based rate application proposing customer credits of $15.4 million and $12.7 million for excess deferred taxes. Texas filings requested increases of $4.1 million in West Texas and $5.5 million in Central Texas, proposed for July 2019 effectiveness.
- Spending and dividend: 2019 capital expenditures and asset-removal costs were expected to total approximately $450 million. In April, the company declared a $0.50-per-share dividend, or $2.00 annualized, payable May 31, 2019.
- Debt and accounting: The company’s November 2018 issuance of $400 million of 4.50% senior notes due 2048 helped retire $300 million of 2.07% notes due 2019 and reduce commercial paper. Adoption of lease accounting in January 2019 resulted in approximately $38.5 million of operating lease liabilities at quarter-end and had no material effect on earnings or cash flow.
- Contingencies and operating risks: ONE Gas reported 12 former manufactured-gas-plant sites in Kansas and environmental investigation at a Texas site. A Kansas site’s estimated remediation cost was $5.6–$7.0 million; the Texas site’s potential cost was not reliably estimable. The company said ordinary-course litigation losses were not expected to be material. Proposed PHMSA pipeline rules could entail significant capital and operating costs, depending on final requirements.
- Management view: Management expects operating cash flow and financing arrangements to support planned operations and infrastructure investment, and describes cash flows as supported by the residential customer base and regulatory mechanisms. Key risks include rate recovery, regulatory changes, weather, pipeline safety and integrity, environmental obligations, financing access and cyber threats.
Most important facts for investors to verify
- Whether approved rate changes and customer credits, especially the Kansas refund and Oklahoma PBRC outcome, affect future revenue and cash flow as expected.
- How working-capital timing and the estimated $15.9 million of 2019 tax-related refunds affect cash generation and financing needs.
- Whether the approximately $450 million 2019 capital and asset-removal spending outlook is maintained, and how it is funded.
- Developments in Texas excess-tax treatment, pipeline-safety rulemaking, and environmental remediation estimates.
- Continued covenant compliance, access to commercial-paper and credit-facility funding, and the effect of refinancing at higher interest rates.