Tulsa’s ONE Gas, Inc. announced its second quarter 2020 financial results on Monday showing a slight increase in net income but also a slight drop in year to year income, an increase in operating costs as well as bad debt expense and more money spent on the company’s response to the COVID-19 pandemic.
ONE Gas reaffirmed its 2020 earnings guidance issued Jan. 21, 2020, with net income expected to be in the range of $186 million to $198 million, with a midpoint of $192 million, or $3.44 to $3.68 per diluted share, with a midpoint of $3.56 per diluted share.
Capital expenditures, including asset removal costs, are now expected to be in the range of $500 million to $525 million for 2020, up from $475 million. The increase is driven primarily by extension of service to new customers.
“During the second quarter, we remained focused on operating our systems safely and protecting our workforce and customers during this pandemic,” said Pierce H. Norton II, president and chief executive officer. “We continued to see the positive impact from customer growth and new rates. Looking ahead, we are well positioned to execute on our proven strategy of modernizing our infrastructure and providing clean, reliable natural gas to our customers.”
- Second quarter 2020 net income was $25.3 million, or $0.48 per diluted share, compared with $24.5 million, or $0.46 per diluted share, in the second quarter 2019;
- Year to date 2020 net income was $117.0 million, or $2.20 per diluted share, compared with $118.1 million, or $2.22 per diluted share, in the same period last year;
- Actual heating degree days across the company’s service areas were 775 in the second quarter 2020, 22% colder than normal and 33% colder than the same period last year;
- In April 2020, ONE Gas issued $300 million of 2.00% senior notes due 2030. The proceeds from the issuance were used to reduce the amount of outstanding commercial paper and for general corporate purposes.
- The company ended the quarter with $230.5 million of commercial paper and $1.2 million in letters of credit outstanding, leaving $468.3 million available in its commercial paper program and $250 million under its 364-day credit agreement; and
- A quarterly dividend of $0.54 per share, or $2.16 per share on an annualized basis, was declared on July 20, 2020, payable on Sept. 1, 2020, to shareholders of record at the close of business on Aug. 14, 2020.
ONE Gas reported operating income of $44.6 million in the second quarter 2020, compared with $46.9 million in the second quarter 2019.
Net margin, which is comprised of total revenues less cost of natural gas, increased by $2.8 million compared with second quarter 2019, which primarily reflects:
- A $3.4 million increase from new rates primarily in Kansas and Texas; and
- A $2.0 million increase attributed to net residential customer growth; offset by
- A $1.9 million decrease due to lower late payment, reconnect and collection fees primarily related to the moratoriums on disconnects for nonpayment in response to the COVID-19 pandemic in each of the company’s rate jurisdictions.
Second quarter 2020 operating costs were $118.8 million, compared with $116.1 million in the second quarter 2019, which primarily reflects:
- A $3.2 million increase in bad debt expense; and
- A $2.2 million increase in expenses related to the company’s response to the COVID-19 pandemic; offset partially by
- A $1.7 million decrease in expenses for travel that has been restricted due to the COVID-19 pandemic; and
- A $1.1 million decrease in employee-related costs.
Depreciation and amortization expense for the second quarter 2020 was $47.4 million, compared with $45.0 million in the second quarter 2019, due primarily to an increase in depreciation expense from capital investments placed in service, higher depreciation rates in Kansas and an increase in the amortization of the ad-valorem surcharge rider in Kansas.
For the second quarter 2020, other income, net, increased $3.2 million compared with the same period last year, due primarily to a $2.9 million increase in the value of investments associated with nonqualified employee benefit plans.
Income tax expense includes a credit for amortization of excess accumulated deferred income taxes (EDIT) of $2.5 million and $2.1 million for the three-month periods ended June 30, 2020, and 2019, respectively.
Capital expenditures and asset removal costs increased $16.4 million for the second quarter 2020 compared with the same period last year, due primarily to system integrity activities, extension of service to new areas and government relocation projects.
YEAR TO DATE 2020 FINANCIAL PERFORMANCE
Operating income for the six-month 2020 period was $177.8 million, compared with $174.5 million for the same period last year.
Net margin increased by $9.0 million compared with the same period last year, which primarily reflects:
- An $11.3 million increase from new rates primarily in Kansas and Texas;
- A $4.5 million increase attributed to net residential customer growth; and
- A $1.3 million increase in rider and surcharge recoveries due to a higher ad-valorem surcharge in Kansas; offset by
- A $4.1 million decrease due to lower sales volumes, net of weather normalization, primarily in Kansas and Oklahoma from warmer weather in 2020 compared with the same period in 2019. For the six months ended June 30, 2020, heating degree days in Kansas and Oklahoma were 14% and 15% lower, respectively, compared with the same period in 2019;
- A $2.8 million decrease due to lower late payment, reconnect and collection fees primarily related to the moratoriums on disconnects for nonpayment in response to the COVID-19 pandemic in each of the company’s rate jurisdictions; and
- A $1.6 million decrease due to lower transportation volumes primarily in Kansas.
Operating costs for the six-month 2020 period were $240.2 million, compared with $240.6 million for the same period last year, which primarily reflects:
- A $2.7 million decrease in employee-related costs, which reflects a $3.7 million decrease in the expense associated with the change in the value of the liabilities for nonqualified employee benefit plans and a $0.9 million increase in labor costs;
- A $2.3 million decrease in legal-related expenses; and
- A $2.0 million decrease in expenses for travel that has been restricted due to the COVID-19 pandemic; offset partially by
- A $4.0 million increase in bad debt expense; and
- A $2.2 million increase in expenses related to the company’s response to the COVID-19 pandemic.
Depreciation and amortization expense for the six-month 2020 period was $94.9 million, compared with $88.8 million for the same period last year, due primarily to an increase in depreciation expense from capital investments placed in service, higher depreciation rates in Kansas and an increase in the amortization of the ad-valorem surcharge rider in Kansas.
For the six-month 2020 period, other expense, net, increased $3.0 million compared with the same period last year, due primarily to a $3.8 million decrease in the value of investments associated with nonqualified employee benefit plans.
For the six months ended June 30, 2020, income tax expense increased $1.1 million compared with the same period last year, due primarily to an increase in the effective tax rate.
Income tax expense includes a credit for amortization of EDIT of $9.4 million and $8.9 million for the six-month periods ended June 30, 2020, and 2019, respectively.
Capital expenditures and asset removal costs increased $45.4 million for the six-month 2020 period compared with the same period last year, due primarily to system integrity activities, extension of service to new areas and government relocation projects.
REGULATORY UPDATE
As of July 2020, accounting orders have been received in each of our jurisdictions authorizing us to accumulate and defer for regulatory purposes certain incremental costs incurred, including bad debt expenses and certain lost revenues, net of offsetting expense reductions associated with COVID-19. Pursuant to these orders, the appropriateness of recovery of any net incremental costs and lost revenue will be determined in future rate cases or alternative rate recovery filings in each jurisdiction.
For financial reporting purposes, any amounts deferred as a regulatory asset for future recovery under these accounting orders must be probable of recovery. At June 30, 2020, no regulatory assets have been recorded.
Oklahoma
In July 2020, the Oklahoma Corporation Commission (OCC) approved a settlement and joint stipulation in Oklahoma Natural Gas’ Performance-Based Rate Change application. The stipulation includes a base rate increase of $9.7 million, with new rates effective in June 2020. The stipulation also includes a $12.2 million credit associated with EDIT to be issued in the first quarter 2021.
Kansas
In May 2020, a bill amending the Kansas state income tax code was signed into law that exempts public utilities regulated by the Kansas Corporation Commission (KCC) from paying Kansas state income taxes beginning Jan. 1, 2021, and authorizes the KCC to adjust utility rates for the elimination of Kansas state income tax beginning Jan. 1, 2021.
As a regulated entity, the reduction in accumulated deferred income taxes (ADIT) of $81.5 million was recorded as an EDIT regulatory liability and will be refunded to customers. This adjustment had no material impact on income tax expense and no impact on cash flows for the three months and six months ended June 30, 2020.
A reduction of approximately $5.3 million in rates due to the elimination of the Kansas state income tax rate is expected beginning in 2021, which will be offset by lower income tax expense. The timing of the return of the EDIT to customers in Kansas will be determined in the next general rate proceeding.
Texas
West Texas Service Area
In March 2020, Texas Gas Service made Gas Reliability Infrastructure Program filings for all customers in the West Texas service area. In June 2020, an increase of $4.7 million was authorized with new rates effective in the same period.
Central Texas Service Area
In 2019, Texas Gas Service filed a rate case for all customers in the Central Texas and Gulf Coast service areas, seeking a $15.6 million rate increase and a $1.3 million credit to customers associated with EDIT, and requesting to consolidate the two service areas into one.
In July 2020, the Administrative Law Judge and Technical Examiners recommended the Railroad Commission of Texas (RRC) approve all terms of a $10.3 million settlement, as well as approve consolidation of the Central Texas service area and the Gulf Coast service area into a new Central Gulf service area. The settlement included a 9.5% return on equity and a 59% equity ratio. If approved, new rates are expected to become effective in the third quarter 2020.
The ONE Gas executive management team will conduct a conference call on Tuesday, July 28, 2020, at 11 a.m. Eastern Daylight Time (10 a.m. Central Daylight Time). The call also will be carried live on the ONE Gas website.
Source: ONE GAS