TULSA, Okla., Oct. 28, 2019 /PRNewswire/ -- ONE Gas, Inc. (NYSE: OGS) today announced its third-quarter 2019 financial results, declared its quarterly dividend and affirmed its 2019 financial guidance.

Highlights include:

• Third-quarter 2019 net income was $17.5 million, or $0.33 per diluted share, compared with $16.3 million, or $0.31 per diluted share, in the third quarter 2018;
• Year-to-date 2019 net income was $135.6 million, or $2.55 per diluted share, compared with $127.5 million, or $2.41 per diluted share, in the same period last year;
• The board of directors declared a quarterly dividend of $0.50 per share, or $2.00 per share on an annualized basis, payable on Dec. 2, 2019, to shareholders of record at the close of business on Nov. 12, 2019.

"New rates and residential customer growth supported our quarterly results," said Pierce H. Norton II, president and chief executive officer. "Our focus continues to be on reinvesting in our systems to enhance our ability to provide the safe and reliable natural gas delivery service our 2.2 million customers expect."

THIRD-QUARTER 2019 FINANCIAL PERFORMANCE

ONE Gas reported operating income of $38.8 million in the third quarter 2019, compared with $36.2 million in the third quarter 2018.

Net margin, which is comprised of total revenues less cost of natural gas, increased by $11.9 million compared with third quarter 2018, which primarily reflects:

• A $7.3 million increase from new rates;
• A $1.9 million increase attributed to net residential customer growth in Oklahoma and Texas; and
• A $1.3 million increase due to higher transportation volumes in Kansas.

Third-quarter 2019 operating costs were $114.6 million, compared with $110.5 million in the third quarter 2018, which primarily reflects:

• A $2.3 million increase in employee-related expenses;
• A $1.8 million increase in outside service costs; and
• A $0.7 million increase in materials for pipeline repair and maintenance activities; offset by
• A $1.6 million decrease in bad debt expense.

Depreciation and amortization expense for the third quarter 2019 was $45.5 million, compared with $40.3 million in the third quarter 2018, due primarily to an increase in depreciation expense from capital investments placed in service, higher depreciation rates in Kansas and an increase in amortization of the ad-valorem surcharge rider in Kansas.

Third-quarter 2019 interest expense increased $3.4 million compared with the same period last year, resulting primarily from the refinancing of the company's $300 million senior notes, at a 2.07% interest rate, with $400 million senior notes, at a 4.50% interest rate, due November 2048.

Income tax expense for the third quarter 2019 includes amortization of excess accumulated deferred income taxes (ADIT) of $1.4 million, which is offset in revenues.

Capital expenditures and asset removal costs increased $18.4 million for the third quarter 2019 compared with the same period last year, 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 7.8 billion cubic feet (Bcf) in the third quarter 2019, up 4% compared with the same period last year;
• Total natural gas sales volumes were 12.0 Bcf in the third quarter 2019, up 4% compared with the same period last year;
• Natural gas transportation volumes were 47.9 Bcf in the third quarter 2019, up 4% compared with the same period last year; and
• Total natural gas volumes delivered were 59.9 Bcf in the third quarter 2019, up 4% compared with the same period last year.

YEAR-TO-DATE 2019 FINANCIAL PERFORMANCE

Operating income for the nine-month 2019 period was $213.3 million, compared with $207.6 million for the same period last year.

Net margin increased by $29.4 million compared with the same period last year, which primarily reflects:

• A $21.6 million increase from new rates;
• A $4.8 million increase attributed to net residential customer growth in Oklahoma and Texas;
• A $1.6 million increase due to higher sales volumes, net of weather normalization, in Texas; and
• A $1.6 million increase due to higher transportation volumes in Kansas; offset by
• A $0.9 million decrease due to a compressed natural gas federal excise tax credit that was enacted in February 2018 and retroactive to 2017.

Operating costs for the nine-month 2019 period were $355.2 million, compared with $346.8 million for the same period last year, which primarily reflects:

• A $3.9 million increase in employee-related expenses;
• A $2.0 million increase in legal-related expenses;
• A $1.7 million increase in outside service costs; and
• A $1.6 million increase in materials for pipeline repair and maintenance activities; offset by
• A $2.2 million decrease in bad debt expense.

Depreciation and amortization expense for the nine-month 2019 period was $134.3 million, compared with $119.0 million for the same period last year, due primarily to an increase in depreciation expense from capital investments placed in service, higher depreciation rates in Kansas and an increase in amortization of the ad-valorem surcharge rider in Kansas.

For the nine-month 2019 period, other expense, net, decreased $4.5 million compared with the same period last year, due primarily to earnings on investments associated with nonqualified employee benefit plans, which offset the increase in costs for the plans included in operating costs.

Interest expense increased $10.2 million for the nine-month 2019 period compared with the same period last year, resulting primarily from the refinancing of the company's $300 million senior notes, at a 2.07% interest rate, with $400 million senior notes, at a 4.50% interest rate, due November 2048.

Income tax expense for the nine-month 2019 period includes amortization of excess ADIT of $10.3 million, which is offset in revenues.

Capital expenditures and asset removal costs increased $25.4 million for the nine-month 2019 period compared with the same period last year, due primarily to increased system integrity activities and extending service to new areas.

The company ended the third quarter 2019 with $12.6 million of cash and cash equivalents, $395.0 million of commercial paper outstanding and $698.8 million of remaining credit available under its $700 million credit facility. The long-term debt-to-capitalization ratio at Sept. 30, 2019, was 38%, and the ratio of total debt-to-capitalization was 44%.

>  View earnings tables

REGULATORY UPDATE

Oklahoma

In August 2019, a settlement was reached, and the Oklahoma Corporation Commission approved a joint stipulation. The stipulation includes a Performance-Based Rate Change (PBRC) credit of $15.6 million to be spread over a 12-month period through a bill credit to Oklahoma customers beginning in the third quarter 2019 and a credit of $12.7 million associated with excess ADIT timing to be issued in 2020.

As required, PBRC filings are made annually on or before March 15, until the next general rate case, which is required to be filed on or before June 30, 2021, based on a calendar 2020 test year.

Kansas

In August 2019, Kansas Gas Service submitted an application to the Kansas Corporation Commission (KCC) requesting an increase of approximately $4.2 million related to its Gas System Reliability Surcharge. An order from the KCC is expected in December 2019, with new rates effective Jan. 1, 2020.

2019 FINANCIAL GUIDANCE AFFIRMED

ONE Gas affirmed its 2019 financial guidance, which was updated July 29, 2019, with net income expected to be in the range of $180 million to $190 million, or approximately $3.39 to $3.57 per diluted share.

Capital expenditures, including asset removal costs, are still expected to be approximately $450 million in 2019, with approximately 70% of these expenditures targeted for system integrity and replacement projects.

EARNINGS CONFERENCE CALL AND WEBCAST

The ONE Gas executive management team will conduct a conference call on Tuesday, Oct. 29, 2019, 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 800-263-0877, pass code 6868219, 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 6868219.

LINK TO EARNINGS TABLES

https://investor.onegas.com/files/doc_downloads/earnings_tables/2019/Q3-2019-Earnings-Tables.pdf

NON-GAAP INFORMATION

ONE Gas has disclosed net margin in this news release, which is considered a non-GAAP financial metric used to measure the company's financial performance. Net margin is comprised of total revenues less cost of natural gas. Cost of natural gas includes commodity purchases, fuel, storage, transportation and other gas purchase costs recovered through our cost of natural gas regulatory mechanisms and does not include an allocation of general operating costs or depreciation and amortization. In addition, these regulatory mechanisms provide a method of recovering natural gas costs on an ongoing basis without a profit. Therefore, although our revenues will fluctuate with the cost of natural gas that we pass through to our customers, net margin is not affected by fluctuations in the cost of natural gas. Accordingly, we routinely use net margin in the analysis of our financial performance. We believe that net margin provides investors a more relevant and useful measure to analyze our financial performance as a 100% regulated natural gas utility than total revenues because the change in the cost of natural gas from period to period does not impact our operating income. A reconciliation of net margin to the most directly comparable GAAP measure is included as a table at the end of the earnings tables accompanying this release.

ONE Gas, Inc. (NYSE: OGS) is a 100% regulated 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, headquartered in Tulsa, Oklahoma, provides natural gas distribution services to more than 2 million customers in Kansas, Oklahoma and Texas. Its divisions include Kansas Gas Service, the largest natural gas distributor in Kansas; Oklahoma Natural Gas, the largest in Oklahoma; and Texas Gas Service, the third largest in Texas, in terms of customers.

For more information, visit the website at 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," "likely," 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 of natural gas distribution services, particularly those in Oklahoma, Kansas and Texas;
• 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 and energy storage 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, which may be affected by risks beyond our control such as commodity price volatility and counterparty creditworthiness;
• our ability to generate sufficient cash flows to meet all our liquidity 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 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 local distribution company 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 existing or the addition of new environmental, safety, tax and other laws to which we and our subsidiaries are subject;
• the uncertainty of estimates, including accruals and costs of environmental remediation;
• advances in technology, including technologies that increase efficiency or that improve electricity's competitive position relative to natural gas;
• 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 and war;
• cyber attacks or breaches of technology systems that could disrupt our operations or result in the loss or exposure of confidential or sensitive customer, employee or company information;
• 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 and the requirements of our regulators as a result of the Tax Cuts and Jobs Act of 2017;
• changes in accounting standards;
• changes in corporate governance standards;
• discovery of material weaknesses in our internal controls;
• our ability to comply with all covenants in our indentures and the ONE Gas Credit Agreement, a violation of which, if not cured in a timely manner, could trigger a default of our obligations;
• our ability to attract and retain talented employees, management and directors;
• 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, Inc.; 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 Part 1, 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.