ONE Gas, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2021; comparisons are with the same 2020 periods. ONE Gas operates regulated natural-gas utilities in Oklahoma, Kansas and Texas, serving approximately 2.2 million customers.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $315.6 million | $273.3 million | $940.9 million | $801.5 million |
| Net margin (non-GAAP) | $221.9 million | $210.8 million | $533.1 million | $512.9 million |
| Operating income | $51.1 million | $44.6 million | $181.4 million | $177.8 million |
| Net income | $30.1 million | $25.3 million | $125.7 million | $117.0 million |
| Diluted EPS | $0.56 | $0.48 | $2.35 | $2.20 |
- Net margin increased 5% in Q2 and 4% year to date. Drivers included new rates, customer growth and higher transportation volumes; six-month growth was partly offset by weather-normalization effects.
- Revenue growth partly reflects higher natural-gas costs passed through to customers; the company says these costs generally do not affect net margin.
- Six-month operating cash flow was negative $1.577 billion, versus positive $278.7 million in 2020, primarily reflecting approximately $2.0 billion of Winter Storm Uri costs deferred as regulatory assets. Investing cash outflow was $219.1 million; financing cash inflow was $1.998 billion.
- At June 30, cash was $209.1 million. Long-term debt was approximately $4.1 billion, up from $1.6 billion at year-end 2020, following debt issuance to fund storm-related gas purchases. Debt-to-capital was 64% and the company reported compliance with credit-facility covenants.
- The $1.0 billion revolving credit facility had $998.8 million available; there were no borrowings under it and no commercial paper outstanding. Ratings were Moody’s A3 and S&P BBB+, both with negative outlooks.
- Capital expenditures and asset-removal costs were $238.4 million for the first half. Management expects approximately $540 million for full-year 2021. The declared quarterly dividend was $0.58 per share, or $2.32 annualized.
Material changes and management commentary
- Winter Storm Uri produced unprecedented gas purchases of approximately $2.1 billion in February. At June 30, approximately $2.0 billion was deferred as regulatory assets: $1.32 billion attributable to Oklahoma, $383 million to Kansas and $286 million to Texas. Amounts remain subject to review, possible adjustment and regulatory recovery proceedings.
- ONE Gas issued $2.5 billion of senior notes in March 2021, including $1.7 billion of fixed-rate notes due in 2023 and 2024 and $800 million of floating-rate notes due 2023. Proceeds supported storm-related purchases and general corporate purposes; the related temporary term-loan facility was terminated.
- Regulatory authorities and state laws are enabling potential securitization of storm costs. Subsequent to quarter-end, the utilities filed applications or reports in all three states. Proposed customer recovery periods include 20 years in Oklahoma and 5, 7 or 10 years in Kansas; Texas recovery timing remains subject to regulatory determination. Approvals are not assured.
- Oklahoma Natural Gas filed a general rate case in May seeking a $28.7 million revenue increase, based on a requested 9.95% ROE. A hearing was scheduled for October 2021. The filing also requests continued performance-based rate changes and support for renewable natural gas investments.
- Management expects cash generated from operations and financing arrangements to support operations and planned infrastructure investment, but access to capital depends on market conditions, financial condition and credit ratings. No specific earnings guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Key uncertainty is whether, when and on what terms regulators approve recovery or securitization of Winter Storm Uri costs. Deferred amounts include unpaid supplier invoices under review and estimated delivery-related penalties.
- COVID-19 affected fees, bad-debt expense and operating costs. No COVID-related regulatory assets had been recorded at June 30 because recovery was not yet considered probable; management did not expect a material adverse impact on 2021 results or cash flows.
- Environmental obligations include a $13.5 million reserve for Kansas manufactured-gas-plant remediation and an uncertain Texas site investigation. Pipeline safety rulemaking and new federal cybersecurity directives could add costs; the potential cost of a pending pipeline rule could be significant.
- Ordinary-course litigation losses were assessed as not material. The filing identifies weather, regulatory recovery, elevated debt, refinancing and credit-rating changes, interest rates, cyber risks and environmental regulation as important risks.
Important facts for investors to verify
- Progress and final outcomes of Oklahoma, Kansas and Texas reviews of storm costs, financing orders and securitized-bond issuance.
- Whether deferred storm costs, carrying costs, supplier invoice adjustments and penalties are approved for recovery, and the resulting customer-payment schedules.
- Developments in the Oklahoma rate case and the earnings, cash-flow and rate-base effects of new rates and EDIT customer credits.
- Debt, liquidity, credit ratings and refinancing needs, particularly given the negative rating outlooks and substantial storm-related borrowing.
- Actual 2021 capital spending and operating cash flow compared with management’s approximately $540 million capital-expenditure and asset-removal estimate.