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ONE Gas Inc. Earnings Improve on Cost Containment

By Matthew DiLallo - Feb 18, 2016 at 9:30AM

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The natural gas distribution company was able to overcome warmer weather.

Despite much warmer weather than normal, which mutes natural gas demand for home heating, ONE Gas (OGS 3.65%) posted solid fourth-quarter results after the closing bell on Wednesday. Fueling its results were cost-reduction efforts as well as investments it's made in its system over the course of the year. Those investments and savings have the company poised to deliver solid growth in 2016, too.

ONE Gas results: The raw numbers

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Net Margin

$231.4 million

$224.2 million

3%

Net Income

$39.2 million

$36.6 million

7%

Earnings Per Share

$0.74

$0.69

7%

Data source: ONE Gas. (Note: Net margin is revenue minus cost of natural gas.)

What happened with ONE Gas this quarter? 
ONE Gas kept its costs in check to cash in on the benefits from higher rates.

  • Net margin increased by $7.2 million, or 3%, year over year due primarily to a $9.5 million increase from new rates in the company's operations in Texas and Oklahoma as well as a $0.8 million increase from higher sales volumes, normalized for the weather. Those gains offset lower transportation volumes from weather-sensitive customers in Kansas and a couple of other minor items.
  • Operating costs increased by 0.5% year over year to $123.1 million. However, that growth was at a much slower pace than the growth in net margin. The company was able to keep a lid on costs by cutting outside service expenses, information technology expenses, and fleet-related expenses to name just a few.
  • ONE Gas' service area experienced weather that was 21% warmer than normal and 19% above last year. That warmer weather pushed total natural gas volumes delivered down by 5% compared to the year-ago quarter.

What management had to say 
On the company's progress in 2015, CEO Pierce Norton said, "We are pleased with our full-year financial results, which were driven by lower operating expenses and continued investments in our system." That was clear in the fourth quarter with net margin increasing by a much faster rate than expenses.

That's important for a company like ONE Gas, because it doesn't have the big-time growth projects that we see at other utilities like Dominion (D 1.79%), for example. Dominion is currently investing roughly $3.2 billion per year on growth capital to construct power plants and pipelines to drive 6%-7% compound annual earnings growth through the end of the decade. ONE Gas, on the other hand, is only investing around $300 million per year and 70% of that capital is being invested in system integrity and replacement projects, not growth. Because of that, its focus needs to be on keeping its expense growth down so more of its incremental top-line growth hits the bottom line.

Looking forward 
Speaking of growth, ONE Gas expects its net income to grow to a range of $127 million to $137 million next year, or $2.40 to $2.60 on a per-share basis. At the midpoint, that's 11% higher than 2015. This growth is expected to be primarily driven by the benefits of new rates and customer growth in Texas and Oklahoma, with the company continuing to keep a lid on expected higher employee-related costs needed to support this growth.

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ONE Gas, Inc. Stock Quote
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