ONE Gas, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. ONE Gas is a regulated natural-gas distribution utility serving approximately 2.2 million customers in Oklahoma, Kansas and Texas. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the same 2019 period.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $273.3 | $290.6 | $801.5 | $951.6 |
| Net margin (non-GAAP) | $210.8 | $208.0 | $512.9 | $503.9 |
| Operating income | $44.6 | $46.9 | $177.8 | $174.5 |
| Net income | $25.3 | $24.5 | $117.0 | $118.1 |
| Diluted EPS | $0.48 | $0.46 | $2.20 | $2.22 |
| Cash provided by operations | — | — | $278.7 | $241.2 |
| Capital expenditures and asset removal costs | $130.6 | $114.2 | $254.0 | $208.6 |
Q2 revenue fell 6%, while net margin rose 1%; first-half revenue fell 16%, while net margin increased 2%. Revenue and natural-gas costs declined largely because lower commodity costs flow through to customers; management considers net margin more informative because those costs are generally recovered without profit. Net margin growth reflected new rates and customer growth, partly offset by COVID-related fee reductions and, in the first half, warmer weather and lower transportation volumes. Weather-normalization mechanisms mitigate some weather effects.
Q2 net income increased year over year, helped in part by higher other income, including investment gains associated with nonqualified employee benefit plans. First-half net income and diluted EPS decreased slightly; management cited lower investment-related income and higher income tax expense. Operating costs increased $2.7 million in Q2, including higher bad-debt and pandemic-response costs, but decreased $0.4 million for the first half.
Balance sheet, debt and liquidity
- At June 30, cash was $10.5 million, compared with $17.9 million at December 31, 2019. Net property, plant and equipment was $4.71 billion.
- Long-term debt was $1.58 billion, excluding current maturities and issuance costs; commercial paper outstanding was $230.5 million. Total debt-to-capital was 45%, and long-term debt-to-capital was 42%. The company reported compliance with its credit covenants.
- ONE Gas issued $300 million of 2.00% senior notes due 2030 in April, using proceeds to reduce commercial paper and for general corporate purposes. It also added a $250 million 364-day revolving credit facility. The $700 million revolving facility had $698.8 million remaining available; the company reported total short-term liquidity of $728.8 million, including commercial-paper capacity, credit facilities and cash.
- Operating cash flow rose $37.5 million year over year for the first half, primarily due to working-capital timing, including payments for natural-gas purchases. Investing cash use increased $47.7 million, primarily reflecting higher capital spending. Financing cash use was $51.1 million, including $57.1 million of dividends paid.
- Dividends declared were $0.54 per share in each 2020 quarter, versus $0.50 per share in 2019. A further $0.54-per-share dividend was declared in July, payable September 1, 2020.
Outlook, developments and risks
- Capital plan: Management expects 2020 capital expenditures and asset removal costs of $500 million to $525 million. Pandemic-related workforce or supply-chain disruptions could delay or curtail work.
- COVID-19: Customer disconnection suspensions, bad debts, lower late-payment and related fees, pandemic-response spending, and reduced travel expenses affected results. Management expects ongoing effects, including possible lower commercial and transportation customer revenues. Regulators authorized tracking and deferral of certain costs and lost revenues, but recovery will be determined in future proceedings. No COVID-related regulatory assets had been recorded at June 30 because recovery was not yet considered probable.
- Regulation and taxes: A Kansas law effective in 2021 exempts regulated utilities from state income tax. The resulting $81.5 million reduction in deferred taxes was recorded as a regulatory liability for customer refunds; the company expects lower Kansas rates of approximately $5.3 million, offset by lower income tax expense. Oklahoma approved a rate stipulation in July that included a $9.7 million base-rate increase and a $12.2 million EDIT customer credit. A Texas rate settlement was recommended by administrative reviewers in July but remained subject to approval.
- Environmental and safety matters: ONE Gas recorded a $2.0 million reserve adjustment for a Kansas former manufactured-gas-plant site, where estimated additional investigation and remediation costs were $2 million to $6 million; the adjustment also increased a regulatory asset. Costs at a Texas former site could not yet be reliably estimated. A pending PHMSA rule could require significant expenditures depending on its final terms; the first related rule was effective July 1, 2020, with compliance costs not expected to be material.
- Other risks: The company cited pandemic duration and customer payment capacity, future regulatory recovery, cyberattacks and remote-work technology, pipeline integrity, environmental obligations, weather, access to capital and credit ratings. Management said ordinary-course litigation was not expected to have a material adverse effect and did not expect pension-plan contributions to be required in 2020, though market declines could prompt discretionary contributions.
Important facts for investors to verify
- Whether pandemic-related bad debts, lost revenues and incremental costs are ultimately recoverable through rates, and when any recovery may be recognized.
- Progress on the $500 million to $525 million capital program and any resulting financing needs or delays.
- Final regulatory outcomes and timing for Kansas tax-related customer refunds, Oklahoma rates and the Texas rate settlement.
- Customer payment trends, commercial and transportation demand, and whether operating cash flow remains sufficient alongside capital spending and dividends.
- Final PHMSA requirements and updated estimates for environmental remediation, especially at the Kansas and Texas former manufactured-gas-plant sites.