ONE Gas(OGS) - 2020 Q1 - Quarterly Report

Part I. Financial Information This part presents the unaudited consolidated financial statements, management's discussion and analysis, and disclosures on market risk and internal controls Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for ONE Gas, Inc. for Q1 2020 and 2019, including income, balance sheets, cash flows, and equity statements Consolidated Statements of Income For Q1 2020, ONE Gas reported total revenues of $528.2 million and a net income of $91.7 million, a slight decrease from Q1 2019 Consolidated Statements of Income Highlights (Q1 2020 vs Q1 2019) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Total revenues | $528.2 million | $661.0 million | | Operating income | $133.2 million | $127.6 million | | Net income | $91.7 million | $93.7 million | | Diluted EPS | $1.72 | $1.76 | Consolidated Balance Sheets As of March 31, 2020, total assets were $5.67 billion, a slight decrease from year-end 2019, while total equity increased to $2.19 billion Balance Sheet Summary (As of March 31, 2020) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total assets | $5.67 billion | $5.71 billion | | Net property, plant and equipment | $4.63 billion | $4.57 billion | | Total liabilities | $3.49 billion | $3.58 billion | | Long-term debt | $1.29 billion | $1.29 billion | | Total equity | $2.19 billion | $2.13 billion | Consolidated Statements of Cash Flows For Q1 2020, cash provided by operating activities significantly increased to $182.7 million, while investing and financing outflows also rose Cash Flow Summary (Q1 2020 vs Q1 2019) | Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Cash provided by operating activities | $182.7 million | $122.3 million | | Cash used in investing activities | ($113.2) million | ($86.3) million | | Cash used in financing activities | ($76.3) million | ($37.6) million | | Change in cash and cash equivalents | ($6.8) million | ($1.7) million | Notes to Consolidated Financial Statements The notes detail accounting policies and financial items, focusing on COVID-19 impacts, environmental remediation, and pipeline safety regulations - The company operates as a regulated public utility delivering natural gas to approximately 2.2 million customers in Oklahoma, Kansas, and Texas[31] - Received or expects accounting orders to defer incremental COVID-19 costs, including bad debt and lost revenues, for future recovery[50][69] - Initiated a $250 million at-the-market equity program in February 2020, with no shares issued as of March 31, 2020[58] - Responsible for environmental conditions at 12 former Manufactured Gas Plant (MGP) sites in Kansas and one in Texas, with ongoing remediation[71][74] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting a 2% net margin increase, COVID-19 response, regulatory activities, and strong liquidity Recent Developments The company provides essential services during COVID-19, implementing safety protocols, and expects future financial impacts, while securing deferral orders and new credit facilities - Implemented comprehensive policies to protect employees and customers during COVID-19, enabling remote work for 49% of employees and providing PPE for field staff[92] - Suspended disconnects for nonpayment through May 15, 2020, anticipating future revenue reductions and increased bad debt expenses due to the pandemic[92][93] - Entered into a new $250 million 364-day credit agreement in April 2020 to provide additional liquidity[93] Regulatory Activities The company is actively engaged in regulatory proceedings across its jurisdictions, seeking rate increases and deferrals for COVID-19 related costs - Oklahoma: Filed its fourth annual Performance-Based Rate Change (PBRC) application requesting an $11.8 million base rate increase[97] - Kansas: Filed for an Accounting Authority Order (AAO) to defer incremental costs and lost revenues related to COVID-19 for recovery in a future rate case[101] - Texas: The RRC issued an order authorizing a mechanism for future recovery of incremental expenses from COVID-19; GRIP filings were made in West Texas for a $4.7 million increase[106][107] Financial Results and Operating Information Net income for Q1 2020 was $91.7 million, down from $93.7 million in Q1 2019, with net margin increasing by 2% due to new rates Financial Results Summary (Q1 2020 vs Q1 2019) | Metric | Q1 2020 | Q1 2019 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $528.2M | $661.0M | ($132.8M) | (20)% | | Cost of natural gas | $226.1M | $365.1M | ($139.0M) | (38)% | | Net margin (Non-GAAP) | $302.1M | $295.9M | $6.2M | 2% | | Operating income | $133.2M | $127.6M | $5.6M | 4% | - The increase in net margin was primarily driven by $7.9 million from new rates and $2.5 million from residential customer growth, offset by a $3.9 million decrease due to warmer weather[119] - Heating Degree Days (HDDs) were significantly lower than Q1 2019: 21% lower in Oklahoma, 19% lower in Kansas, and 15% lower in Texas[119][127] Liquidity and Capital Resources The company maintains strong liquidity through operating cash flow, a $700 million commercial paper program, and a new $250 million credit facility - Primary liquidity sources are operating cash flow and a $700 million commercial paper program, supported by a $700 million revolving credit agreement[129][133][134] - In April 2020, the company entered into an additional $250 million 364-day credit agreement to enhance liquidity[138] Credit Ratings (as of March 31, 2020) | Rating Agency | Rating | Outlook | | :--- | :--- | :--- | | Moody's | A2 | Stable | | S&P | A | Stable | Cash Flow Analysis Operating cash flow increased by $60.4 million to $182.7 million, while investing and financing outflows also increased due to capital expenditures and debt repayments Cash Flow Changes (Q1 2020 vs Q1 2019) | Activity | Q1 2020 | Q1 2019 | Variance | | :--- | :--- | :--- | :--- | | Operating activities | $182.7M | $122.3M | $60.4M | | Investing activities | ($113.2M) | ($86.3M) | ($26.9M) | | Financing activities | ($76.3M) | ($37.7M) | ($38.6M) | Quantitative and Qualitative Disclosures About Market Risk The company manages commodity price, interest-rate, and counterparty credit risks, largely mitigating them through regulatory mechanisms and diversification - Commodity Price Risk: Mitigated by purchased-gas cost adjustment mechanisms that allow recovery of natural gas costs from customers[177] - Interest-Rate Risk: Exposure exists from commercial paper borrowings and future debt financing, managed with a mix of fixed and floating-rate debt[178] - Counterparty Credit Risk: Diversified across 2.2 million customers; the company has suspended disconnects due to COVID-19 and is seeking regulatory deferral of associated bad debt expenses[179] Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2020, with no material impact from the shift to remote work due to COVID-19 - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[180][181] - No material changes in internal control over financial reporting during the quarter, despite the shift to remote work due to COVID-19[182] Part II. Other Information Legal Proceedings The company is involved in various litigation matters, but management believes reasonably possible losses are not material to financial results - The company states that it is not involved in any legal proceedings expected to have a material adverse effect on its financial condition or results of operations[183] Risk Factors A new risk factor highlights the unprecedented impact of pandemics like COVID-19 on the economy, customers, and company operations - A new risk factor has been identified concerning the adverse effects of pandemics or other health crises, such as COVID-19[184][185] - The COVID-19 pandemic creates significant uncertainties regarding its potential adverse effects on the economy, customers, employees, and supply chain partners, leading to financial market volatility[185] - Governmental actions like 'stay-at-home' orders may cause financial hardship for customers, increasing payment delinquencies, and could force the company to curtail or suspend certain business operations[186] Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable[189] Exhibits This section lists exhibits filed with the Quarterly Report, including corporate governance documents and credit agreements - Lists exhibits filed with the report, including the Equity Distribution Agreement for the at-the-market program and the new Credit Agreement dated April 7, 2020[195]