ONE Gas, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. ONE Gas is a regulated natural-gas distributor serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. This unaudited report covers the three and nine months ended September 30, 2020; comparisons are with the same periods in 2019. Results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $244.6 million | $248.6 million | $1,046.1 million | $1,200.1 million |
| Net margin, a non-GAAP measure | $204.1 million | $198.9 million | $717.0 million | $702.8 million |
| Operating income | $40.7 million | $38.8 million | $218.5 million | $213.3 million |
| Net income | $21.1 million | $17.5 million | $138.1 million | $135.6 million |
| Diluted EPS | $0.39 | $0.33 | $2.59 | $2.55 |
- Margins and results: Net margin increased 3% in Q3 and 2% for the nine months. Q3 net income rose about 21%; nine-month net income rose about 2%. The filing defines net margin as revenue less natural-gas costs; it is non-GAAP and excludes operating costs and depreciation.
- Cash flow, nine months: Operating cash flow was $325.3 million, versus $288.5 million. Capital expenditures were $348.9 million; cash used in investing was $347.8 million. Cash and cash equivalents declined to $6.2 million from $17.9 million at year-end 2019.
- Debt and liquidity: Long-term debt, net of issuance costs, was $1.582 billion, compared with $1.286 billion at December 31, 2019; commercial paper outstanding was $308.0 million, versus $516.5 million. The company issued $300 million of 2.00% senior notes due 2030. It reported $948.8 million of remaining credit under its two revolving facilities, $1.2 million of letters of credit, and no facility borrowings. Total debt-to-capital was 46%, and the company reported compliance with covenants.
- Shareholder returns: Dividends declared were $0.54 per share in Q3, compared with $0.50 a year earlier. In November, the company declared another $0.54 per share, or $2.16 annualized.
Material changes versus the prior period
- Revenue declined 2% in Q3 and 13% for the nine months, largely reflecting lower natural-gas sales and commodity costs passed through to customers. Natural-gas cost fell 18% in Q3 and 34% for the nine months; as a regulated utility, the company reports that these pass-through cost changes do not drive net margin.
- Net margin grew despite lower nine-month sales volumes. New rates, residential customer growth and a $1.3 million retroactive CNG federal excise-tax credit supported results. Warmer weather reduced nine-month heating degree days in Oklahoma and Kansas by 14% and 12%, respectively; weather normalization mechanisms mitigate the effect on residential and commercial margin.
- Nine-month operating costs were roughly flat. Higher bad-debt expense ($4.2 million) and COVID-related costs ($4.0 million) were partly offset by lower travel, legal, pipeline-maintenance and certain employee-related expenses. Depreciation and amortization increased $8.6 million for the nine months, principally due to assets placed in service and Kansas surcharge amortization.
- Capital expenditures and asset-removal costs totaled $377.9 million for the nine months, up $34.0 million year over year, primarily from system-integrity work, service-area expansion and government relocations.
Outlook, risks and unusual items
- Capital plan: Management expected 2020 capital expenditures and asset-removal costs of $500 million to $525 million. Timing could be affected by COVID-related employee absences or supply-chain constraints. The company said it had not experienced significant supply-chain disruption to date.
- COVID-19: Customer disconnection suspensions, lower collection-related fees, higher bad debts and incremental safety and operating costs affected results. Management expected impacts to continue and noted possible revenue reductions from commercial and transportation customers. Regulators authorized tracking and deferral of certain costs and lost revenues, but recovery remains subject to future proceedings; no COVID-related regulatory assets had been recorded at September 30 because recovery was not yet deemed probable.
- Regulatory matters: A Kansas law ending state income taxes for regulated utilities from January 1, 2021, led to an $81.5 million reduction in deferred taxes recorded as a regulatory liability for customer refunds. Kansas rate adjustments were pending, with decisions expected in December 2020 and new rates expected January 1, 2021. Oklahoma’s 2020 rate mechanism included a $9.7 million base-rate increase and a $2.2 million energy-efficiency incentive; a $12.2 million EDIT customer credit was expected in Q1 2021.
- Contingencies and regulation: A Kansas former manufactured-gas-plant site had estimated additional investigation and remediation costs of $2 million to $6 million; the company recorded a $2 million reserve adjustment in Q2 and a corresponding regulatory asset under an existing order. Costs at a Texas site could not yet be reliably estimated. The pending second PHMSA gas-transmission rule could require significant capital and operating expenditures, depending on final requirements; the first rule’s expected costs were not material. Management considered ordinary-course litigation losses not material.
- Other risk factors: Management highlighted pandemic duration and customer payment capacity, regulatory recovery, weather, access to capital, pipeline safety and integrity, environmental obligations, and increased cyber risk associated with remote work. The company reported investment-grade ratings of A2 from Moody’s and A from S&P, both with stable outlooks.
Important facts for investors to verify
- Whether regulators ultimately approve recovery of COVID-related costs, bad debts and lost revenues, and when any approved recovery would be recognized.
- Outcomes and timing of the pending Kansas rate adjustments and future Oklahoma rate proceedings, including the treatment and timing of customer tax-credit refunds.
- Progress against the $500 million to $525 million 2020 capital plan and the effect of investment spending on cash flow, debt and equity issuance.
- Future customer collections, bad-debt expense and commercial or transportation demand as pandemic conditions evolve.
- Final PHMSA requirements and resulting compliance costs, plus updated estimates and recoverability of environmental remediation obligations.