ONE Gas(OGS) - 2019 Q2 - Quarterly Report

Part I. Financial Information This section presents the company's unaudited consolidated financial statements and management's discussion and analysis for the reporting period Consolidated Financial Statements This section presents ONE Gas, Inc.'s unaudited consolidated financial statements, including income, comprehensive income, balance sheets, cash flows, and equity, with detailed notes for the periods ended June 30, 2019 and 2018 Consolidated Statements of Income This section provides the unaudited consolidated statements of income for the three and six months ended June 30, 2019 and 2018 Consolidated Statements of Income Highlights | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $290.56 million | $292.52 million | $951.56 million | $930.99 million | | Operating Income | $46.89 million | $41.04 million | $174.51 million | $171.33 million | | Net Income | $24.47 million | $20.42 million | $118.13 million | $111.25 million | | Diluted EPS | $0.46 | $0.39 | $2.22 | $2.10 | Consolidated Balance Sheets This section presents the unaudited consolidated balance sheets as of June 30, 2019, and December 31, 2018 Consolidated Balance Sheet Highlights | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $5,446.61 million | $5,468.64 million | | Net Property, Plant and Equipment | $4,400.65 million | $4,283.71 million | | Total Current Assets | $376.81 million | $543.29 million | | Total Liabilities and Equity | $5,446.61 million | $5,468.64 million | | Long-Term Debt | $1,285.81 million | $1,285.48 million | | Total Equity | $2,108.46 million | $2,042.66 million | Consolidated Statements of Cash Flows This section details the unaudited consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 Consolidated Statements of Cash Flows Highlights | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Cash provided by operating activities | $241.17 million | $399.96 million | | Cash used in investing activities | ($187.33 million) | ($175.83 million) | | Cash used in financing activities | ($64.05 million) | ($225.96 million) | | Change in cash and cash equivalents | ($10.21 million) | ($1.83 million) | Notes to Consolidated Financial Statements This section provides detailed notes explaining significant accounting policies, operations, and financial impacts on the consolidated statements - The company operates as a single reportable segment: regulated public utilities delivering natural gas to 2.2 million customers in Oklahoma, Kansas, and Texas[32][35] - Effective January 1, 2019, the company adopted the new lease accounting standard (Topic 842), recognizing lease liabilities of approximately $32 million with corresponding right-of-use assets of the same amount[40] - The company is addressing environmental conditions at 12 former Manufactured Gas Plant (MGP) sites in Kansas and one in Texas, with costs subject to recovery through regulatory mechanisms[89][92][93] - As a result of the Tax Cuts and Jobs Act of 2017, the company recorded a regulatory liability for the remeasurement of Accumulated Deferred Income Tax (ADIT), which is being refunded to customers as determined by regulators[82] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial performance, focusing on net income growth and net margin, and discusses regulatory impacts, liquidity, capital expenditures, and environmental and safety matters Financial Results and Operating Information This section details the company's financial results, including net income, EPS, operating income, and net margin, along with key operating information and capital expenditure projections Selected Financial Results | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $24.5 million | $20.4 million | $118.1 million | $111.3 million | | Diluted EPS | $0.46 | $0.39 | $2.22 | $2.10 | | Operating Income | $46.9 million | $41.0 million | $174.5 million | $171.3 million | - Net margin, a non-GAAP measure defined as total revenues less the cost of natural gas, is used by management to analyze financial performance. It increased by $9.6 million (5%) for Q2 2019 and $17.5 million (4%) for the first six months of 2019 compared to the prior year periods[128][129] - The increase in net margin was primarily driven by new rates (+$10.4M in Q2, +$14.3M in H1) and residential customer growth in Oklahoma and Texas[129] - Capital expenditures and asset removal costs are projected to be approximately $450.0 million for 2019, driven by system integrity activities and extending service to new areas[133] Regulatory Activities This section outlines the company's regulatory engagements, particularly regarding the 2017 Tax Cuts and Jobs Act and rate adjustments across its operating states - The company is actively working with regulators in Oklahoma, Kansas, and Texas to address the impacts of the 2017 Tax Cuts and Jobs Act, primarily concerning the refund of excess accumulated deferred income taxes (ADIT) to customers[111][113][116] - In Oklahoma, an OCC order in January 2019 required Oklahoma Natural Gas to lower base rates by $11.3 million and established a process for refunding excess ADIT[113] - In Kansas, a KCC order in February 2019 resulted in a net base rate increase of $18.6 million and required a refund of $16.6 million to customers for the 2018 impact of the lower federal corporate income tax rate[116] - In Texas, Texas Gas Service secured rate increases through GRIP filings totaling $9.6 million in the first half of 2019 for its West Texas and Central Texas service areas[117][119] Liquidity and Capital Resources This section assesses the company's liquidity, capital resources, funding sources, credit facilities, debt structure, credit ratings, and cash flow performance - The company relies primarily on operating cash flow and its commercial paper program for liquidity. It maintains a $700 million revolving credit facility, which expires in October 2023[141][147] Credit Facility and Debt Status (as of June 30, 2019) | Item | Amount | | :--- | :--- | | Revolving Credit Facility Size | $700 million | | Available Credit | $698.8 million | | Commercial Paper Outstanding | $293.0 million | | Total Debt-to-Capital Ratio | 43% (Covenant limit: 70%) | Credit Ratings (as of June 30, 2019) | Rating Agency | Rating | Outlook | | :--- | :--- | :--- | | Moody's | A2 | Stable | | S&P | A | Stable | - Operating cash flow decreased to $241.2 million for the first six months of 2019 from $400.0 million in the same period of 2018, primarily due to working capital changes related to the timing of customer collections and gas cost recoveries[159][160] Environmental, Safety and Regulatory Matters This section addresses environmental liabilities at former MGP sites, potential impacts of new pipeline safety regulations, and the company's methane emission reduction initiatives - The company is managing environmental liabilities at 12 former Manufactured Gas Plant (MGP) sites in Kansas under a consent agreement with the KDHE. An Accounting Authority Order (AAO) allows for the deferral and recovery of up to $15.0 million in remediation costs[163][166] - The Pipeline and Hazardous Materials Safety Administration (PHMSA) is expected to publish three separate final rulemakings in 2019 regarding the safety of gas transmission and gathering lines, which could result in significant capital and operating expenditures[170][171][173] - As a founding partner of the EPA's Natural Gas STAR Methane Challenge Program, the company is committed to reducing methane emissions by replacing or rehabilitating at least 2% of its cast iron and non-protected steel pipe inventory annually, a goal it exceeded in 2016 and 2017[179] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include commodity price fluctuations, interest rate changes, and counterparty credit risk, largely mitigated through regulatory mechanisms and a diverse customer base - Commodity price risk from natural gas price fluctuations is mitigated by purchased-gas cost adjustment mechanisms, which allow for the recovery of gas costs from customers[190] - Interest-rate risk is managed through a mix of fixed-rate debt, floating-rate debt, and potentially interest-rate swaps to manage costs on future borrowings[192] - Counterparty credit risk is not material due to a large customer base of 2.2 million across three states, and uncollectible accounts related to natural gas costs are recoverable through regulatory mechanisms[193] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the second quarter of 2019 - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[194] - No changes in internal control over financial reporting occurred during the second quarter of 2019 that have materially affected, or are reasonably likely to materially affect, internal controls[195] Part II. Other Information This section covers legal proceedings, risk factors, other non-financial items, and a list of exhibits filed with the report Legal Proceedings The company is party to various litigation matters and claims, which management believes will not materially adversely affect its financial position or results - The company states that while the results of litigation cannot be predicted with certainty, it believes that reasonably possible losses from such matters are not material, individually or in aggregate[196] Risk Factors This section refers investors to the detailed discussion of risk factors in the company's Annual Report on Form 10-K, noting no material changes - The company directs investors to consider the risks outlined in Part I, Item 1A of its Annual Report, stating there have been no material changes to those risk factors[197] Other Items (2, 3, 4, 5) Items 2, 3, 4, and 5, covering unregistered sales, defaults, mine safety, and other information, are all reported as not applicable for this period - The company reports 'Not applicable' for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, Mine Safety Disclosures, and Other Information[198][199][200] Exhibits This section lists the exhibits filed with the Quarterly Report, including CEO and CFO certifications and XBRL interactive data documents - Exhibits filed with this report include officer certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as XBRL interactive data files[203]