ONE Gas, Inc. — 2021 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 2, 2021. ONE Gas is a regulated natural-gas distribution utility serving approximately 2.2 million customers in Oklahoma, Kansas and Texas.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $273.9 million | $244.6 million | $1,214.9 million | $1,046.1 million |
| Net margin (revenue less natural-gas cost; non-GAAP) | $214.5 million | $204.1 million | $747.7 million | $717.0 million |
| Operating income | $41.8 million | $40.7 million | $223.3 million | $218.5 million |
| Net income | $20.3 million | $21.1 million | $145.9 million | $138.1 million |
| Diluted EPS | $0.38 | $0.39 | $2.72 | $2.59 |
| Operating cash flow | Not separately presented for the quarter | $(1,560.6) million | $325.3 million |
- Q3 revenue rose 12% and net margin rose 5%, but net income declined 4%. For the first nine months, revenue rose 16%, net margin rose 4%, and net income rose 6%.
- Management attributed higher net margin mainly to new rates and customer growth. Operating costs increased $6.1 million in Q3 and $14.5 million year to date; depreciation and amortization increased $3.2 million and $11.4 million, respectively.
- Q3 operating margin, calculated as operating income divided by revenue, was approximately 15.3%, versus 16.6% a year earlier. Revenue includes pass-through natural-gas costs, so management emphasizes net margin as a non-GAAP performance measure.
- Cash and cash equivalents were $6.5 million at September 30, 2021. Long-term debt was $3.683 billion and short-term debt/commercial paper was $336 million. The filing reports a 63% debt-to-capital ratio and compliance with credit-agreement covenants.
- The company had a $1.0 billion revolving credit facility, with $998.8 million available after letters of credit and no revolver borrowings. Moody’s rated the company A3 and S&P BBB+, both with negative outlooks.
- Capital expenditures were $347.7 million for the first nine months; capital expenditures plus asset-removal costs were $382.9 million. Cash used in investing activities was $349.4 million.
Material changes and unusual items
- Winter Storm Uri: ONE Gas deferred approximately $2.0 billion of extraordinary costs at quarter-end: $1.3 billion in Oklahoma, $385.8 million in Kansas and $255.1 million in Texas. The costs include gas purchases, financing/carrying costs and operational costs. Regulatory recovery, prudence reviews and securitization remain subject to regulatory decisions.
- Uri-related gas purchases and regulatory deferrals were the primary reason operating cash flow swung from $325.3 million provided in the prior-year period to $1.561 billion used. Financing activities provided $1.908 billion, largely reflecting debt issuance. Cash flow should therefore be read alongside the regulatory-asset and financing developments.
- In March, the company issued $2.5 billion of senior notes, including $800 million of floating-rate notes, and used proceeds partly for Uri-related gas costs. In September, it redeemed $400 million of floating-rate notes at par using cash and commercial paper. Long-term debt increased from $1.582 billion at year-end 2020 to $3.683 billion at September 30, 2021.
- Net regulatory assets and liabilities shifted to a net asset of $1.731 billion from a net liability of $139.6 million at December 31, 2020, principally due to the Uri deferrals.
- Q3 results included an $11.2 million increase in estimated contractor costs for former manufactured-gas-plant remediation; the related reserve was $24.7 million at September 30, 2021.
Outlook, regulatory matters and risks
- Management expected 2021 capital expenditures and asset-removal costs of approximately $540 million. The filing does not provide a specific full-year earnings or EPS forecast.
- Management said operating cash flow and expected short- and long-term financing arrangements should support planned operations and infrastructure investment. The company was pursuing securitization of Uri-related costs in all three states to repay or refinance related borrowing.
- Regulatory outcomes remain important. Oklahoma’s proposed settlement in a general rate case would increase base rates by $15.3 million if approved. In Texas, a unanimous settlement on securitization was filed after quarter-end; Kansas proceedings and proposed recovery periods were also pending. These are not all final approvals.
- The company declared a November 2021 dividend of $0.58 per share, or $2.32 annualized. Dividends declared were $1.74 per share for the first nine months, versus $1.62 a year earlier.
- COVID-19 affected fees, bad-debt expense and operating costs; no related regulatory assets had been recorded at September 30 because recovery was not yet deemed probable. Management did not expect COVID-19 to materially adversely affect 2021 results or cash flows.
- Key risks include regulatory disallowance or delay in recovering Uri costs, elevated debt and negative credit-rating outlooks, access to capital, interest-rate and commodity-market exposure, environmental remediation uncertainty, pipeline-safety requirements, cybersecurity directives, and broader environmental regulation. The company said ordinary-course litigation was not expected to have a material adverse effect.
Investor verification priorities
- Track final regulatory approval, prudence review, amount and timing of recovery, and securitization terms for the approximately $2.0 billion of Uri costs.
- Reconcile Uri-related regulatory assets, supplier invoice disputes, penalty settlements and any subsequent adjustments against cash needs and debt balances.
- Monitor debt maturities, commercial-paper usage, credit ratings and covenant headroom, particularly given the negative outlooks and materially higher debt.
- Compare the $540 million 2021 capital-spending expectation with actual investment and resulting operating cash flow.
- Review the Oklahoma rate-case outcome and other pending rate and surcharge proceedings, as well as the evolving $24.7 million MGP remediation reserve.