ONE Gas, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. ONE Gas is a regulated natural-gas distributor serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / change |
|---|---|---|
| Revenue | $625.3 million | $528.2 million; up 18% |
| Net margin (non-GAAP) | $311.2 million | $302.1 million; up 3% |
| Operating income | $130.3 million | $133.2 million; down 2% |
| Net income | $95.6 million | $91.7 million |
| Diluted EPS | $1.79 | $1.72 |
| Operating cash flow | $(1.659) billion | $182.7 million |
| Capital expenditures and asset removal costs | $109.0 million | $123.4 million |
Revenue growth mainly reflected higher gas sales and colder weather, but much of the increase was pass-through gas costs. Net margin, which excludes natural-gas costs, increased $9.1 million, primarily from new rates and customer growth, partly offset by weather-normalization effects. Operating costs rose $7.2 million and depreciation and amortization rose $4.8 million. Other expense improved by $5.4 million, mainly because of investment-value changes, supporting the increase in net income despite lower operating income.
At March 31, cash was $704.9 million, compared with $8.0 million at year-end 2020. Total assets were $8.680 billion, including $1.992 billion of noncurrent regulatory assets for Winter Storm Uri costs. Long-term debt was $4.083 billion, versus $1.582 billion at year-end; commercial paper outstanding was $447 million. The company had $998.8 million of available revolving credit, no revolver borrowings, and a 66% total debt-to-capital ratio; it reported compliance with credit-facility covenants. Moody’s rated the company A3 and S&P BBB+, both with negative outlooks.
Material changes and unusual items
- Winter Storm Uri: ONE Gas reported approximately $2.1 billion of natural-gas purchases in February and deferred approximately $2.0 billion of extraordinary costs as regulatory assets: $1.32 billion for Oklahoma, $381 million for Kansas and $295 million for Texas. These include gas, financing and operational costs. Invoiced amounts and potential penalties may be adjusted; recovery remains subject to regulatory review, including prudence and reasonableness reviews.
- The storm drove the unusual operating-cash outflow. Financing activities provided $2.457 billion, including net proceeds from $2.5 billion of March debt issuance. The company issued $1.0 billion of 0.85% notes due 2023, $700 million of 1.10% notes due 2024, and $800 million of floating-rate notes due 2023.
- Oklahoma and Kansas enacted securitization legislation after quarter-end; Texas legislation was advancing. ONE Gas said it expects to seek regulatory approval to use securitization to repay or refinance storm-related debt. Authorization, amounts recoverable and timing are not assured.
- Q1 sales volumes increased with colder weather; heating degree days were 25% higher in Oklahoma, 12% higher in Kansas and 24% higher in Texas than in Q1 2020. Weather-normalization mechanisms mitigate much of the weather effect on residential and commercial net margin.
Outlook, risks and contingencies
- Management expects 2021 capital expenditures and asset removal costs of approximately $540 million. The filing provides no full-year earnings or EPS guidance.
- Management expects to pursue recovery of Uri-related costs and associated financing costs, potentially over extended periods to reduce immediate customer impacts. Regulatory approval and final recoverable amounts remain uncertain and could affect liquidity, financing needs and customer rates.
- The company said it does not expect COVID-19 effects to materially adversely affect 2021 results or cash flows. Disconnects resumed in all service areas in April 2021 except Texas, which remained subject to a moratorium; pandemic-related costs and lost revenues had not been recorded as regulatory assets at quarter-end because recovery was not yet deemed probable.
- Environmental remediation reserves for Kansas manufactured-gas-plant sites were $13.7 million; future costs and recovery remain uncertain. Potential costs from a pending PHMSA transmission-pipeline rule could be significant, depending on final requirements.
- Management considers ordinary-course litigation losses not material. Environmental regulation, pipeline safety, weather, natural-gas supply and financing access are among the disclosed risks.
- The board declared a $0.58-per-share dividend in May 2021, or $2.32 annualized. Q1 dividends paid were $30.9 million.
Most important facts for investors to verify
- Whether regulators approve recovery of the approximately $2.0 billion Uri regulatory asset, the final approved amount and recovery period, and progress on securitization in each state.
- How storm-related financing, commercial paper and debt maturities affect leverage, interest expense, credit ratings and liquidity.
- Whether the reported improvement in net income is sustained by rate increases and customer growth, given Q1 operating income declined and net-margin growth was modest.
- Actual 2021 capital spending versus the $540 million estimate, and any subsequent changes to earnings outlook or dividend policy.
- Developments in Texas customer-disconnection restrictions, COVID-related regulatory recovery, environmental remediation and pending pipeline-safety requirements.