ONE Gas, Inc. — Q1 2020 Form 10-Q
Business and period: ONE Gas is a regulated natural-gas distributor serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. This unaudited filing covers the three months ended March 31, 2020; results are seasonal and not necessarily indicative of a full year.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $528.2 million | $661.0 million | Down 20% |
| Net margin (non-GAAP) | $302.1 million | $295.9 million | Up $6.2 million, or 2% |
| Operating income | $133.2 million | $127.6 million | Up 4% |
| Net income | $91.7 million | $93.7 million | Down 2% |
| Diluted EPS | $1.72 | $1.76 | Down $0.04 |
| Operating cash flow | $182.7 million | $122.3 million | Up $60.4 million |
| Capital expenditures and asset removal costs | $123.4 million | $94.4 million | Up 31% |
Revenue declined mainly because natural-gas costs passed through to customers fell; the company’s net margin, which excludes natural-gas costs, increased. Net margin benefited primarily from new rates and customer growth, partly offset by warmer weather and lower transportation volumes. Kansas and Oklahoma heating degree days were 19% and 21% lower, respectively, than in Q1 2019. Operating costs declined $3.1 million, while depreciation and amortization rose $3.7 million. Other expense worsened by $6.2 million, largely reflecting lower values of investments associated with nonqualified employee benefit plans; the effective tax rate rose to 25.5% from 24.5%.
Operating cash flow improved mainly due to working-capital timing, especially customer collections. Investing used $113.2 million, principally for capital expenditures; financing used $76.3 million, including $41.8 million of net repayments on notes payable and $28.5 million of dividends paid. Cash declined $6.8 million to $11.1 million.
Balance sheet, debt and liquidity
- At March 31, 2020, total assets were $5.675 billion and equity was $2.189 billion.
- Long-term debt, net of issuance costs, was $1.286 billion; commercial paper outstanding was $474.7 million. The company reported a 45% total debt-to-capital ratio and a 37% long-term debt-to-capital ratio, and was in compliance with credit-facility covenants.
- The $700 million revolving credit facility had no borrowings and $698.8 million of remaining availability, subject to outstanding letters of credit. The company reported $235.2 million of short-term liquidity from its commercial paper program, credit facility and cash on hand. In April 2020, it added a $250 million 364-day revolving credit agreement, which had not been drawn.
- Credit ratings were Moody’s A2 and S&P A, both with stable outlooks. Commercial paper ratings were Prime-1 and A-1, respectively.
- The board declared a $0.54-per-share dividend in April, equivalent to $2.16 annualized. The company also had a $250 million at-the-market equity program; no shares had been sold under it by March 31.
Outlook, developments and risks
- COVID-19: Management said the pandemic had not materially affected Q1 revenue, expenses or cash flows. It expected lower revenue from affected customers and higher bad-debt, protective-equipment, cleaning and other costs. Customer disconnections for nonpayment were suspended through May 15, 2020, based on regulator orders or requests. Management had taken steps to reduce costs and was seeking regulatory authorization to defer certain incremental expenses and lost revenues; recovery depends on regulatory proceedings and amounts being probable of recovery.
- Capital plan: 2020 capital expenditures and asset removal costs were expected to be approximately $475 million, but timing and amount could be affected by COVID-19, supply-chain constraints or operational curtailments. Q1 spending increased with system-integrity work and service extensions.
- Regulatory matters: Oklahoma Natural Gas’s pending annual PBRC application requested an $11.8 million base-rate increase and a $12.2 million EDIT credit; rates were expected, if approved, in Q3 2020. Texas filings included a $4.7 million requested West Texas increase and a Central Texas/Gulf Coast rate case seeking $15.6 million, with outcomes pending.
- Safety and environmental exposure: A pipeline-safety rule effective July 1, 2020 was not expected to have material compliance costs; costs from a second pending rule could be significant depending on final requirements. The company identified remediation obligations at former manufactured-gas-plant sites, including an unresolved Texas site for which a reliable cost estimate was not available. It stated that ordinary-course litigation losses were not expected to be material.
- Other outlook: Management said it did not expect to contribute to pension or other postemployment plans in 2020, although market declines could prompt discretionary contributions. No specific earnings or EPS guidance was provided in the filing text.
Most important facts for investors to verify
- Whether regulators approve requested rate changes and COVID-19 cost or lost-revenue recovery, and when any approved amounts may be recognized.
- COVID-19 effects on customer collections, bad debts, demand, employee availability, supply chains and capital-project timing.
- Execution and funding of the approximately $475 million 2020 capital plan, including use of commercial paper, new credit capacity or the ATM equity program.
- Whether pipeline-safety rules or environmental remediation create costs above current expectations.
- Whether improved operating cash flow persists beyond Q1, given management’s attribution of the increase largely to working-capital timing.