ONE Gas(US:OGS)2021-02-26 19:14Part I Business ONE Gas is a regulated natural gas utility serving 2.2 million customers in Oklahoma, Kansas, and Texas, focusing on safety, system investment, and sustainability - ONE Gas is a 100-percent regulated natural gas distribution utility, serving approximately 2.2 million customers across Oklahoma, Kansas, and Texas1516 - The company's business strategy focuses on five key areas: Safety, Compliance and Reliability; Fostering a High-performing Workforce; Investing in Our System; Maintaining a Conservative Financial Profile; and Sustainability (ESG)17 - Operations are regulated by the Oklahoma Corporation Commission (OCC), Kansas Corporation Commission (KCC), and the Railroad Commission of Texas (RRC) and various Texas municipalities, which establish rates and charges1718 - The company is exploring new opportunities in Renewable Natural Gas (RNG) and hydrogen to secure new supply sources and reduce greenhouse gas emissions48 Regulatory Overview The company's rates are set by state regulators, utilizing mechanisms like PBRC, GSRS, GRIP/COSA, and WNA to manage costs, investments, and revenue stability Regulatory Rate Structure Overview (as of Dec 2020) | Division | Jurisdiction | Rate Base (millions) | Authorized ROE | Equity Ratio | | :--- | :--- | :--- | :--- | :--- | | Oklahoma Natural Gas | OK | $1,616 | 9.50% | 56% | | Kansas Gas Service | KS | $1,133 | 9.30% | N/A | | Texas Gas Service | Central-Gulf | $458 | 9.50% | 59% | | Texas Gas Service | West Texas | $397 | 9.50% | 60% | - Interim rate adjustment mechanisms are in place across all jurisdictions (PBRC, GSRS, GRIP/COSA) to allow for recovery of capital investments between general rate cases212223 - Weather normalization adjustment (WNA) mechanisms are utilized in all service areas to reduce the impact of weather variations on customer bills and company revenues26 Market Conditions and Seasonality The company manages natural gas supply with 48.3 Bcf storage capacity, addressing seasonal demand and maintaining a significant cost advantage over electricity while supporting the CNG market - As of December 31, 2020, the company had 48.3 Bcf of contracted natural gas storage capacity with a maximum daily withdrawal capacity of approximately 1.3 Bcf38 Natural Gas vs. Electricity Cost Advantage (2020) | State | ONE Gas Delivered Cost/kWh | Avg. Retail Electricity Price/kWh | Natural Gas Advantage Ratio | | :--- | :--- | :--- | :--- | | Oklahoma | 2.86¢ | 10.09¢ | 3.5x | | Kansas | 3.00¢ | 12.78¢ | 4.3x | | Texas | 3.42¢ | 11.95¢ | 3.5x | - The company supplied 151 CNG fueling stations as of year-end 2020, transporting 2.6 million Dth for this purpose, a 6% decrease from 201947 Employees As of February 2021, ONE Gas employed approximately 3,700 people, with 700 covered by collective bargaining agreements, emphasizing a culture of safety and inclusion - The company employed approximately 3,700 people as of February 1, 202150 Collective Bargaining Agreements (as of Feb 1, 2021) | Union | Approximate Employees | Contract Expires | | :--- | :--- | :--- | | The United Steelworkers | 400 | May 31, 2022 | | International Brotherhood of Electrical Workers | 300 | June 30, 2021 | Risk Factors The company faces diverse risks including operational hazards, regulatory challenges impacting cost recovery, financial volatility from economic conditions and gas prices, and risks related to common stock and general business changes - Operational risks include pandemics (e.g., COVID-19), pipeline safety regulations, operational hazards like leaks and explosions, reliance on technology and cybersecurity threats, and potential labor shortages or strikes586373 - Regulatory and legislative risks include the inability to earn a reasonable rate of return or fully recover costs due to adverse regulatory actions, changes in environmental laws concerning climate change, and potential fines for noncompliance8797 - Financial, economic, and market risks encompass unfavorable economic conditions reducing demand, natural gas price volatility increasing working capital needs, competition from electricity and renewables, and potential credit rating downgrades increasing borrowing costs101103110 - Risks related to common stock include anti-takeover provisions in the company's charter and bylaws, and the dependency of dividend payments on generating sufficient cash flows132137 Properties As of December 2020, ONE Gas owned approximately 43,700 miles of pipeline and held 48.3 Bcf of contracted natural gas storage capacity Pipeline Miles by State (as of Dec 31, 2020) | Properties (miles) | OK | KS | TX | Total | | :--- | :--- | :--- | :--- | :--- | | Distribution | 19,000 | 11,600 | 10,600 | 41,200 | | Transmission | 700 | 1,500 | 300 | 2,500 | | Total properties | 19,700 | 13,100 | 10,900 | 43,700 | - The company has 48.3 Bcf of natural gas storage capacity under contract, with a maximum daily withdrawal capacity of approximately 1.3 Bcf142 Legal Proceedings Legal proceedings information is detailed in Note 17 of the financial statements, with the company not expecting material adverse effects from ongoing litigation - Reference to Note 17 of the Notes to Consolidated Financial Statements for information regarding legal proceedings143 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ONE Gas common stock trades on the NYSE under 'OGS,' with 10,601 shareholders as of February 2021, and a quarterly dividend of $0.58 per share declared in January 2021 - Common stock is listed on the NYSE under the trading symbol "OGS"147 - In January 2021, a dividend of $0.58 per share ($2.32 annualized) was declared147 Management's Discussion and Analysis of Financial Condition and Results of Operations ONE Gas's financial performance, driven by its regulated model, was impacted by the February 2021 winter storm and COVID-19, leading to a $2.5 billion term loan and credit rating downgrades, despite net income growth Recent Developments Recent developments include the February 2021 winter storm, causing $2.2 billion in gas costs and a $2.5 billion term loan, and COVID-19 impacts, with both leading to deferred cost recovery efforts - The February 2021 winter weather event resulted in approximately $2.2 billion in aggregated natural gas purchases for that month155 - On February 22, 2021, the company entered into a $2.5 billion two-year unsecured term loan facility to enhance liquidity for financing the extraordinary gas purchases156 - In response to COVID-19, the company received accounting orders in each jurisdiction to defer certain incremental costs (like bad debt) and lost revenues for future recovery determination in rate cases161 - In February 2020, an at-the-market equity program for up to $250 million was initiated163 Regulatory Activities The company is actively seeking regulatory recovery for February 2021 winter storm costs and COVID-19 impacts, while continuing regular rate activities and adjusting for tax law changes like Kansas's state income tax exemption - Following the Feb 2021 winter storm, the company is seeking regulatory authority in all jurisdictions to record regulatory assets to account for extraordinary costs. Kansas and Texas approved this, while an administrative law judge in Oklahoma has recommended approval167175187 - In May 2020, Kansas passed a law exempting KCC-regulated utilities from state income tax starting Jan 1, 2021. This resulted in an $81.5 million EDIT regulatory liability to be refunded to customers over time177 - In August 2020, the RRC approved a $10.3 million base rate increase for the newly consolidated Central-Gulf service area in Texas192 Financial Results and Operating Information In 2020, net income increased to $196.4 million, driven by a $28.1 million rise in net margin from new rates and customer growth, despite higher operating costs, with capital expenditures reaching $512.2 million Selected Financial Results (in millions) | Financial Results | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenues | $1,530.3 | $1,652.7 | $1,633.7 | | Net margin (Non-GAAP) | $992.9 | $964.8 | $919.1 | | Operating income | $303.5 | $295.3 | $288.4 | | Net income | $196.4 | $186.7 | $172.2 | | Capital expenditures | $512.2 | $465.1 | $447.4 | - Net income increased by $9.7 million (5%) in 2020 compared to 2019199200 - Net margin increased $28.1 million (3%) in 2020 vs. 2019, driven by $23.1 million from new rates and $10.1 million from residential customer growth204205 - The average number of total customers increased by 26,000, from 2.194 million in 2019 to 2.220 million in 2020212 Liquidity and Capital Resources The company funds operations via cash flow and commercial paper, securing a $2.5 billion term loan for winter storm costs, while facing credit rating downgrades, and saw operating cash flow increase to $364.5 million in 2020 - On Feb 22, 2021, the company entered into a $2.5 billion term loan facility to manage liquidity needs arising from the 2021 winter storm227228 Credit Rating Downgrades (February 23, 2021) | Rating Agency | New Rating | Outlook | | :--- | :--- | :--- | | Moody's | A3 | Negative | | S&P | BBB+ | Negative | - The company has a $700 million commercial paper program, with $418.2 million outstanding at year-end 2020226 - Cash provided by operating activities increased by $54.1 million to $364.5 million in 2020, primarily due to working capital changes246247 Environmental, Safety and Regulatory Matters The company manages environmental and safety regulations, including MGP site remediation costs of $9.1 million to $23.3 million, new PHMSA pipeline safety rules, and participates in voluntary methane reduction programs - The company has an estimated potential cost of $9.1 million to $23.3 million for additional investigation and remediation at its former MGP sites. The reserve for these sites was increased to $14.5 million in 2020254507 - A new PHMSA pipeline safety rule became effective July 1, 2020, with non-material compliance costs. A second, potentially significant, rule is still pending260261 - The company participates in voluntary methane reduction initiatives, including the EPA's Natural Gas STAR Methane Challenge and the ONE Future coalition, which aims to reduce methane emissions to 1% or less by 2025268269 Estimates and Critical Accounting Policies Critical accounting policies involve significant judgment, including Regulation accounting (ASC 980) for deferring costs, revenue recognition, pension calculations, annual goodwill impairment testing, and accruals for contingencies like MGP site remediation - Regulation (ASC 980) is a critical policy, allowing the company to record regulatory assets for costs probable of future recovery through rates, and regulatory liabilities for amounts to be returned to customers276 - Accrued unbilled revenue, an estimate of gas delivered but not yet billed, was $144.9 million at Dec 31, 2020, compared to $109.7 million at year-end 2019278 - Goodwill impairment testing is performed annually; the 2020 qualitative assessment did not indicate any impairment287 - In 2020, the reserve for MGP site remediation was increased by $9.1 million to a total of $14.5 million, based on updated cost estimates292 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020, including the independent auditor's report, detailing financial position, operations, and cash flows in accordance with GAAP Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on ONE Gas's 2020 financial statements and internal controls, highlighting rate regulation accounting as a critical audit matter due to significant judgment - The auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion on the financial statements and internal controls317 - A Critical Audit Matter was identified related to the accounting for the effects of rate regulation, due to the significant judgment required by management in assessing regulatory impacts on assets and liabilities325326 Consolidated Financial Statements The 2020 consolidated financial statements show total revenues of $1.53 billion, net income of $196.4 million, total assets of $6.03 billion, and cash from operations of $364.5 million Consolidated Statement of Income Highlights (Year Ended Dec 31, 2020, in thousands) | Metric | Amount | | :--- | :--- | | Total revenues | $1,530,268 | | Operating income | $303,516 | | Net income | $196,412 | | Diluted EPS | $3.68 | Consolidated Balance Sheet Highlights (As of Dec 31, 2020, in thousands) | Metric | Amount | | :--- | :--- | | Total Assets | $6,028,712 | | Net Property, Plant and Equipment | $4,867,057 | | Total Liabilities | $3,795,401 | | Total Equity | $2,233,311 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial figures, including subsequent events like the February 2021 winter storm's $2.2 billion gas costs and $2.5 billion term loan, long-term debt, regulatory assets/liabilities, and environmental remediation - Note 2 (Subsequent Events) discloses that the February 2021 winter storm resulted in approximately $2.2 billion in natural gas purchases and the company entered into a $2.5 billion term loan facility for liquidity402403 - Note 5 (Long-Term Debt) details the company's $1.6 billion in senior notes outstanding, with maturities ranging from 2024 to 2048414 - Note 11 (Regulatory Assets and Liabilities) shows total regulatory assets of $423.7 million and total regulatory liabilities of $563.3 million as of Dec 31, 2020, with the largest liability being $547.6 million related to income tax rate changes437 - Note 17 (Commitments and Contingencies) details the environmental remediation liability for 12 former MGP sites in Kansas, with a reserve of $14.5 million and deferred costs of $18.8 million for regulatory recovery504505507 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, an assessment concurred by PricewaterhouseCoopers LLP - Management concluded that disclosure controls and procedures were effective as of December 31, 2020518 - Management concluded that internal control over financial reporting was effective as of December 31, 2020, an assessment audited and confirmed by PricewaterhouseCoopers LLP519520 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance practices is incorporated by reference from the company's 2021 definitive Proxy Statement - Information concerning directors, corporate governance, the audit committee, and code of ethics is incorporated by reference from the 2021 definitive Proxy Statement524527529 Executive Compensation All information regarding executive compensation is incorporated by reference from the company's 2021 definitive Proxy Statement - All information on executive compensation is incorporated by reference from the 2021 definitive Proxy Statement535 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details stock ownership by major shareholders and management, and equity compensation plans, with most information incorporated by reference from the 2021 definitive Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Number of Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | — | — | 2,942,946 | | Not approved by security holders | — | — | 1,812 | | Total | — | — | 2,944,758 | - Information on security ownership of certain beneficial owners and management is incorporated by reference from the 2021 definitive Proxy Statement536537 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2021 definitive Proxy Statement - All information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 definitive Proxy Statement542 Principal Accounting Fees and Services Information on principal accounting fees and services provided by PricewaterhouseCoopers LLP is incorporated by reference from the 2021 definitive Proxy Statement - All information on principal accountant fees and services is incorporated by reference from the 2021 definitive Proxy Statement543 Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, including corporate documents, debt agreements, compensation plans, and certifications - Lists all financial statements and exhibits filed with the report546 - Exhibits include key corporate documents, debt agreements, compensation plans, and required certifications547548549