ONE Gas, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter report. ONE Gas is a regulated natural gas distribution utility serving approximately 2.2 million customers in Oklahoma, Kansas and Texas.
Financial results and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1,530.3 million | $1,652.7 million | Down 7% |
| Net margin (non-GAAP) | $992.9 million | $964.8 million | Up 3% |
| Operating income | $303.5 million | $295.3 million | Up 3% |
| Net income | $196.4 million | $186.7 million | Up 5% |
| Diluted EPS | $3.68 | $3.51 | Up 5% |
| Operating cash flow | $364.5 million | $310.3 million | Up $54.1 million |
| Capital expenditures and asset removal costs | $512.2 million | $465.1 million | Up 10% |
Revenue declined largely because natural gas costs passed through to customers fell; cost of natural gas decreased 22% to $537.4 million. Net margin, the company’s non-GAAP measure of revenue less natural gas costs, rose by $28.1 million. Fixed natural-gas-sales margin was $610.3 million and variable margin was $241.5 million. The filing does not provide a directly stated consolidated profit-margin percentage.
At year-end, cash was $8.0 million, commercial paper outstanding was $418.2 million, and long-term debt had a book value of approximately $1.6 billion. Total debt-to-capital was 47%; long-term debt-to-capital was 41%. The company reported $948.8 million of remaining capacity under its revolving credit facilities to repay commercial paper and $538.6 million of short-term liquidity available through its commercial paper program, credit facilities and cash. Operating cash flow exceeded net income, while investing cash outflow was $470.4 million and financing cash inflow was $96.0 million. The 2020 dividend declared was $2.16 per share.
Changes versus 2019
- Net margin increased primarily from new rates, customer growth and residential sales margin. Average customers rose by 26,000, including 26,400 new connections.
- Operating costs rose $5.4 million, including higher COVID-19 response costs and bad-debt expense; depreciation and amortization increased $14.5 million as investment entered service.
- Delivered volumes declined about 3%, mainly due to warmer fourth-quarter weather; Oklahoma and Kansas heating degree days were 12% and 11% lower, respectively, than in 2019. Weather-normalization mechanisms partly mitigate usage effects.
- Capital expenditures and asset removal costs increased $47.1 million, primarily for system integrity, service extensions and government-requested relocations.
Outlook, commentary and risks
- Management expected 2021 capital expenditures and asset removal costs of approximately $540 million, subject to possible effects from the pandemic and operating conditions.
- February 2021 winter weather event: A subsequent event, not part of 2020 results, generated approximately $2.2 billion of natural gas purchases in February, generally payable at March-end. ONE Gas entered into a $2.5 billion unsecured, two-year term loan facility to support liquidity and these costs. Kansas and Texas regulators authorized regulatory-asset treatment for extraordinary costs; Oklahoma approval was still pending an OCC decision. Recovery timing and customer impacts remain important uncertainties.
- On February 23, 2021, Moody’s lowered the issuer rating from A2 to A3 and S&P from A to BBB+, both with negative outlooks; commercial-paper ratings also fell. This followed the winter-event financing needs.
- COVID-19 affected fee collections, bad debts and operating costs. Regulators authorized tracking certain costs and lost revenues, but no COVID-related regulatory assets were recorded at year-end because recovery was not yet considered probable.
- Key risks include regulatory recovery and rate-case outcomes, natural-gas supply and extreme-weather exposure, access to capital and rating changes, pipeline safety requirements, cyber risks, energy-transition competition, and environmental remediation. The company estimated additional investigation and remediation costs for Kansas former manufactured-gas-plant sites at $9.1 million to $23.3 million; the Texas site investigation remained incomplete.
- The company reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls, and identified accounting for rate regulation as a critical audit matter.
Important facts for investors to verify
- How much of the approximately $2.2 billion winter-event gas purchases was funded through the term loan, and the resulting debt, interest expense and covenant headroom.
- Regulatory approval, prudence review, recovery period and carrying-cost treatment for winter-event costs in Oklahoma, Kansas and Texas.
- Whether COVID-related deferred costs and lost revenues become probable of recovery and are recognized in future periods.
- Execution of the 2021 capital plan and the effect of rate proceedings on timely recovery of investment and operating costs.
- Developments in credit ratings, liquidity, customer collections and environmental remediation estimates.