"Our focus continues to be on safety and reliability through investing in our systems," said Pierce H. Norton II, president and chief executive officer. "Our solid third quarter is reflective of these investments."
THIRD-QUARTER 2016 FINANCIAL PERFORMANCE
ONE Gas reported operating income of $30.9 million in the third quarter 2016, compared with $24.9 million in the third quarter 2015.
Net margin increased by $9.4 million compared with third quarter 2015, which primarily reflects:
- An $8.2 million increase from new rates primarily in Oklahoma and Texas; and
- A $1.1 million increase attributed to net residential customer growth in Oklahoma and Texas.
Third-quarter 2016 operating costs were $112.7 million, compared with $111.6 million in the third quarter 2015.
Third-quarter 2016 depreciation and amortization expense was $36.3 million, compared with $34.0 million in the third quarter 2015, due primarily to an increase in depreciation expense from capital investments placed in service.
Capital expenditures were $86.5 million for the third quarter 2016, compared with $74.3 million in the third quarter 2015, due primarily to increased system integrity activities and extending service to new areas.
Key Statistics: More detailed information is listed in the tables.
- Residential natural gas sales volumes were 7.4 billion cubic feet (Bcf) in the third quarter 2016, down 1 percent compared with the same period last year;
- Total natural gas sales volumes were 11.3 Bcf in the third quarter 2016, down 1 percent compared with the same period last year;
- Natural gas transportation volumes were 46.0 Bcf in the third quarter 2016, up 7 percent compared with the same period last year; and
- Total natural gas volumes delivered were 57.3 Bcf in the third quarter 2016, up 5 percent compared with the same period last year.
YEAR-TO-DATE 2016 FINANCIAL PERFORMANCE
Operating income for the nine-month 2016 period was $190.6 million, compared with $165.2 million for the same period last year.
Net margin increased by $31.7 million compared with the same period last year, which primarily reflects:
- A $32.6 million increase from new rates primarily in Oklahoma and Texas;
- A $2.9 million increase attributed to residential customer growth in Oklahoma and Texas; and
- A $1.2 million increase in ad-valorem recoveries in Kansas, which is offset with higher related amortization expense; offset partially by
- A $3.0 million decrease due to lower sales volumes, net of weather normalization, primarily from warmer weather for the nine-month 2016 period, compared with the same period last year; and
- A $1.3 million decrease due primarily to lower transportation volumes from weather-sensitive customers in Kansas and Oklahoma.
Operating costs for the nine-month 2016 period were $344.9 million, compared with $346.5 million for the same period last year, which primarily reflects:
- A $3.8 million decrease in outside service expenses and fleet and materials costs;
- A $2.6 million decrease in information technology expenses; and
- A $2.4 million decrease from the deferral of separation costs incurred in 2014, which was approved in Oklahoma as a regulatory asset; offset partially by
- A $4.9 million increase in employee-related expenses; and
- A $2.7 million increase in legal expenses.
Depreciation and amortization expense for the nine-month 2016 period was $106.5 million, compared with $98.6 million for the same period last year, due primarily to an increase in depreciation expense from capital investments placed in service.
Capital expenditures for the nine-month 2016 period were $231.3 million, compared with $199.7 million for the same period last year, due primarily to increased system integrity activities and extending service to new areas.
The company ended the third quarter with $4.5 million of cash and cash equivalents, $41.0 million in short-term borrowings and $1.0 million in letters of credit, leaving $658.0 million of credit available under its $700 million credit facility. The total debt-to-capitalization ratio at Sept. 30, 2016, was 40 percent.
> View earnings tables
In January 2016, the Oklahoma Corporation Commission approved a joint stipulation and settlement agreement for an increase in Oklahoma Natural Gas' base rates of $29,995,000. The agreement includes the continuation, with certain modifications, of the Performance-Based Rate Change tariff, established in 2009.
In May 2016, Kansas Gas Service filed a request with the Kansas Corporation Commission (KCC) for an increase in base rates, reflecting system investments and operating costs necessary to maintain the safety and reliability of its natural gas distribution system. Kansas Gas Service's request represented a net base rate increase of $28.0 million. Kansas Gas Service is already recovering $7.4 million from customers through the Gas System Reliability Surcharge (GSRS), resulting in a total base rate increase of $35.4 million.
In October 2016, Kansas Gas Service reached a settlement agreement with all parties for a net increase in base rates of $8.1 million, net of GSRS, resulting in a total base rate increase of $15.5 million. The agreement is a "black-box" settlement, meaning the parties agreed to a specific revenue number but no specific return on equity. The KCC has until Dec. 28, 2016, to make a ruling, with new rates effective no earlier than Jan. 1, 2017.
Central Texas Service Area:
In June 2016, Texas Gas Service filed a rate case requesting an increase in revenues of $11.6 million for its Central Texas and South Texas service areas. The filing included a request to consolidate the South Texas service area with the Central Texas service area. Texas Gas Service filed this rate case directly with the incorporated cities of the Central Texas service area, which includes the City of Austin, and the Railroad Commission of Texas (RRC) for the unincorporated areas.
In October 2016, all parties to the filing reached a settlement agreement for an increase in revenues of $6.8 million for the new consolidated service area. In the agreement, the parties established a 9.5 percent return on equity and 60.1 percent common equity ratio.
New rates will be effective November 2016 for customers in the incorporated cities of the former Central Texas service area. Upon RRC approval, new rates will be effective for customers in the unincorporated areas of the new consolidated Central Texas area in early January 2017.
Texas Gas Service expects to file for these new rates in the incorporated areas of the former South Texas service area by January 2017.
West Texas Service Area:
In March 2016, Texas Gas Service filed a rate case requesting an increase in revenues of $12.8 million for its El Paso, Dell City and Permian service areas. The filing included a request to consolidate these three service areas into a new West Texas service area. Texas Gas Service filed this rate case directly with the incorporated cities of the El Paso and Dell City service areas and the RRC for the unincorporated areas. In July 2016, several incorporated cities, including the City of El Paso, denied the request, and Texas Gas Service appealed the denial to the RRC.
In September 2016, the RRC approved consolidation of the three service areas into the new West Texas service area and a base rate increase of $8.8 million, which was based on a 9.5 percent return on equity and a 60.1 percent common equity ratio.
In October 2016, rates went into effect for all service areas, except for the incorporated cities in the former Permian service area, for which Texas Gas Service expects to file for these new rates in the fourth quarter 2016. Also in October 2016, Texas Gas Service and the City of El Paso filed separate motions for rehearing for various issues. The RRC has until January 2017 to make a ruling.
Other Service Areas:
In the normal course of business, Texas Gas Service has received approval for increases totaling $2.0 million in 2016 for rate relief under the Gas Reliability Infrastructure Program and cost-of-service adjustments in other Texas jurisdictions to address investments in rate base and changes in expenses.
2016 FINANCIAL GUIDANCE AFFIRMED
ONE Gas affirmed its 2016 financial guidance, which was updated Aug. 1, 2016, with net income expected to be in the range of $135 million to $140 million, or approximately $2.55 to $2.65 per diluted share.
Capital expenditures are expected to be approximately $305 million in 2016. More than 70 percent of these expenditures are targeted for system integrity and replacement projects.
EARNINGS CONFERENCE CALL AND WEBCAST
The ONE Gas executive management team will conduct a conference call on Tues., Nov. 1, 2016, at 11 a.m. Eastern Daylight Time (10 a.m. Central Daylight Time). The call also will be carried live on the ONE Gas website.
To participate in the telephone conference call, dial 888-466-4587, pass code 1377239, or log on to www.onegas.com.
If you are unable to participate in the conference call or the webcast, a replay will be available on the ONE Gas website, www.onegas.com, for 30 days. A recording will be available by phone for seven days. The playback call may be accessed at 888-203-1112, pass code 1377239.
LINK TO EARNINGS TABLES
ONE Gas, Inc. (NYSE: OGS) is a stand-alone, 100 percent regulated, publicly traded natural gas utility, and trades on the New York Stock Exchange under the symbol "OGS." ONE Gas is included in the S&P MidCap 400 Index, and is one of the largest natural gas utilities in the United States.
ONE Gas provides natural gas distribution services to more than 2 million customers in Oklahoma, Kansas and Texas.
ONE Gas is headquartered in Tulsa, Okla., and its divisions include Oklahoma Natural Gas, the largest natural gas distributor in Oklahoma; Kansas Gas Service, the largest in Kansas, and Texas Gas Service, the third largest in Texas, in terms of customers.
Its largest natural gas distribution markets by customer count are Oklahoma City and Tulsa, Okla.; Kansas City, Wichita and Topeka, Kan.; and Austin and El Paso, Texas. ONE Gas serves residential, commercial, industrial, transportation and wholesale customers in all three states.
For more information, visit the website at http://www.ONEGas.com.
Some of the statements contained and incorporated in this news release are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements relate to our anticipated financial performance, liquidity, management's plans and objectives for our future operations, our business prospects, the outcome of regulatory and legal proceedings, market conditions and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.
Forward-looking statements include the items identified in the preceding paragraph, the information concerning possible or assumed future results of our operations and other statements contained or incorporated in this news release identified by words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "should," "goal," "forecast," "guidance," "could," "may," "continue," "might," "potential," "scheduled," and other words and terms of similar meaning.
One should not place undue reliance on forward-looking statements, which are applicable only as of the date of this news release. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Those factors may affect our operations, markets, products, services and prices. In addition to any assumptions and other factors referred to specifically in connection with the forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement include, among others, the following:
- our ability to recover operating costs and amounts equivalent to income taxes, costs of property, plant and equipment and regulatory assets in our regulated rates;
- our ability to manage our operations and maintenance costs;
- changes in regulation, including the application of market rates by state and local agencies;
- the economic climate and, particularly, its effect on the natural gas requirements of our residential and commercial industrial customers;
- competition from alternative forms of energy, including, but not limited to, electricity, solar power, wind power, geothermal energy and biofuels;
- conservation efforts of our customers;
- variations in weather, including seasonal effects on demand, the occurrence of storms and disasters, and climate change;
- indebtedness could make us more vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantage compared with competitors;
- our ability to secure reliable, competitively priced and flexible natural gas transportation and supply, including decisions by natural gas producers to reduce production or shut-in producing natural gas wells and expiration of existing supply, and transportation and storage arrangements that are not replaced with contracts with similar terms and pricing;
- the mechanical integrity of facilities operated;
- operational hazards and unforeseen operational interruptions;
- adverse labor relations;
- the effectiveness of our strategies to reduce earnings lag, margin protection strategies and risk mitigation strategies;
- our ability to generate sufficient cash flows to meet all our cash needs;
- changes in the financial markets during the periods covered by the forward-looking statements, particularly those affecting the availability of capital and our ability to refinance existing debt and fund investments and acquisitions;
- actions of rating agencies, including the ratings of debt, general corporate ratings and changes in the rating agencies' ratings criteria;
- changes in inflation and interest rates;
- our ability to purchase and sell assets at reasonable prices and on other reasonable terms;
- our ability to recover the costs of natural gas purchased for our customers;
- impact of potential impairment charges;
- volatility and changes in markets for natural gas;
- possible loss of LDC franchises or other adverse effects caused by the actions of municipalities;
- payment and performance by counterparties and customers as contracted and when due;
- changes in regulation of natural gas distribution services, particularly those in Oklahoma, Kansas and Texas;
- changes in law resulting from new federal or state legislation;
- changes in environmental, safety, tax and other laws to which we and our subsidiaries are subject;
- advances in technology;
- population growth rates and changes in the demographic patterns of the markets we serve;
- acts of nature and the potential effects of threatened or actual terrorism, including cyber attacks or breaches of technology systems and war;
- the sufficiency of insurance coverage to cover losses;
- the effects of our strategies to reduce tax payments;
- the effects of litigation and regulatory investigations, proceedings, including our rate cases, or inquiries;
- changes in accounting standards;
- changes in corporate governance standards;
- discovery of material weaknesses in our internal controls;
- our ability to attract and retain talented employees, management and directors;
- the results of financing efforts, including our ability to obtain financing on favorable terms, which can be affected by various factors, including our credit ratings and general economic conditions;
- declines in the discount rates on, declines in the market value of the debt and equity securities of, and increases in funding requirements for, our defined benefit plans;
- the ability to successfully complete merger, acquisition or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture;
- the final resolutions or outcomes with respect to our contingent and other corporate liabilities related to the natural gas distribution business and any related actions for indemnification made pursuant to the Separation and Distribution Agreement with ONEOK; and
- the costs associated with increased regulation and enhanced disclosure and corporate governance requirements pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also have material adverse effects on our future results. These and other risks are described in greater detail in Item 1A, Risk Factors, in our Annual Report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Other than as required under securities laws, we undertake no obligation to update publicly any forward-looking statement whether as a result of new information, subsequent events or change in circumstances, expectations or otherwise.
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SOURCE ONE Gas, Inc.