ONE Gas saw increases in its second quarter 2021 net income and its year-to-date 2021 net income. But the Oklahoma-based company awaits February winter storm-related regulatory moves in the state and in Kansas and Texas.
The company announced its quarterly financial results on Monday indicating second quarter net income was $30.1 million or 56 cents a diluted share compared with $25.3 million and 48 cents for the second quarter 2020.
The firm’s year-to-date net income was $125.7 million or $2.35 a diluted share, better than the $117 million and $2.20 a diluted share for the same period last year.
“Our strong second quarter results can be attributed to the focus and commitment of employees across our company as we continue to execute on our strategy,” said Robert S. McAnnally, president and chief executive officer.
ONE Gas reported operating income of $51.1 million in the second quarter 2021, compared with $44.6 million in the second quarter 2020.
Net margin, a non-GAAP financial measure comprised of total revenues less cost of natural gas, increased $11.1 million compared with second quarter 2020, which primarily reflects:
- A $6.4 million increase from new rates, primarily in Texas and Oklahoma;
- A $2.3 million increase attributed primarily to net residential customer growth in Oklahoma and Texas; and
- A $0.9 million increase in transportation volumes, primarily in Kansas and Oklahoma.
Second quarter 2021 operating costs were $120.0 million, compared with $118.8 million in the second quarter 2020, which primarily reflects:
- A $1.7 million increase in outside services costs;
- A $1.2 million increase in employee-related costs; and
- A $1.0 million increase in ad valorem taxes; offset partially by
- A $2.7 million decrease in bad-debt expense; and
- A $1.0 million decrease in expenses related to the company’s response to the COVID-19 pandemic.
For the second quarter 2021, other income (expense), net, decreased $1.9 million compared with the same period last year, due primarily to a $2.1 million reduction in income resulting from the change in the value of investments associated with nonqualified employee benefit plans.
Income tax expense includes a credit for amortization of the regulatory liability associated with excess accumulated deferred income taxes (EDIT) of $2.6 million and $2.5 million for the three-month periods ended June 30, 2021 and 2020, respectively.
Capital expenditures and asset removal costs were $129.4 million for the second quarter 2021 compared with $130.6 million in the same period last year. The decrease was due primarily to differences in the timing of capital projects between the two periods.
Operating income for the six-month 2021 period was $181.4 million, compared with $177.8 million for the same period last year.
Net margin increased $20.2 million compared with the same period last year, which primarily reflects:
- A $15.5 million increase from new rates, primarily in Texas and Oklahoma;
- A $4.6 million increase attributed primarily to net residential customer growth in Oklahoma and Texas;
- A $1.8 million increase in rider and surcharge recoveries due to a higher ad-valorem surcharge in Kansas, which is offset with higher regulatory amortization expense; and
- A $1.3 million increase in transportation volumes, primarily in Kansas and Oklahoma; offset partially by
- A $3.2 million decrease due to the reduction in net margin associated with the impact of weather normalization, net of increased sales volumes, primarily in Texas and Kansas.
Operating costs for the six-month 2021 period were $248.6 million, compared with $240.2 million for the same period last year, which primarily reflects:
- A $4.6 million increase in employee-related costs;
- A $3.3 million increase in outside services costs; and
- A $2.0 million increase in ad valorem taxes; offset partially by
- A $2.1 million decrease in bad-debt expense.
The February winter storm that smacked Oklahoma, Texas and Kansas is still be felt by the company as it indicated in an update.
Winter Storm Uri
In the three states where we operate, legislation was approved permitting utilities to pursue securitization to finance extraordinary expenses, such as fuel costs incurred during extreme weather events. The company is seeking approval from regulators to utilize the securitization legislation in each state to repay or refinance the debt that was incurred to finance the extraordinary costs associated with Winter Storm Uri.
On July 30, 2021, Oklahoma Natural Gas filed a supplemental motion with its compliance report pursuant to the March 2, 2021 order from the Oklahoma Corporation Commission (OCC) detailing the extent of extraordinary costs incurred and all required components pursuant to the legislation for the issuance of a financing order, which includes a proposed period of 20 years over which these costs will be collected from customers.
The OCC has 180 days from the filing of this supplemental motion to consider the issuance of a financing order. If the OCC approves the financing order, the Oklahoma Development Finance Authority has 24 months to complete the process to issue the securitized bonds. At June 30, 2021, Oklahoma Natural Gas has deferred approximately $1.3 billion in extraordinary costs attributable to Winter Storm Uri.
On July 30, 2021, Kansas Gas Service submitted a compliance report to the Kansas Corporation Commission (KCC), which includes a proposal to issue securitized bonds and collect the extraordinary costs resulting from Winter Storm Uri over a period of either 5, 7 or 10 years.
A procedural schedule will be developed to determine the timeline for evaluating this compliance report. If the KCC approves the proposed financing plan, then Kansas Gas Service will file an application, in a separate proceeding, requesting a financing order for the issuance of securitized utility tariff bonds. The KCC will have 180 days from the date of the filing requesting a financing order to consider Kansas Gas Service’s application. If the KCC approves the financing order, Kansas Gas Service can begin the process to issue the securitized bonds. At June 30, 2021, Kansas Gas Service has deferred approximately $383 million in extraordinary costs associated with Winter Storm Uri.
Pursuant to securitization financing legislation and a June 17, 2021, Railroad Commission of Texas (RRC) Notice to Gas Utilities, Texas Gas Service submitted an application to the RRC on July 30, 2021, for an order authorizing the amount of extraordinary costs for recovery and other such specifications necessary for the issuance of securitized bonds.
The RRC will have 150 days from the date of the filing to consider the application and an additional 90 days to issue a single financing order for Texas Gas Service and any other natural gas utilities in Texas participating in the securitization process, which will include a determination of the period over which the costs will be collected from customers. Upon issuance of a financing order, the Texas Public Financing Authority will begin the process to issue the securitized bonds. At June 30, 2021, Texas Gas Service has deferred approximately $286 million in extraordinary costs associated with Winter Storm Uri.
Oklahoma
In May 2021, Oklahoma Natural Gas filed a general rate case seeking a revenue increase of $28.7 million. The revenue requirement is based on a requested return on equity (ROE) of 9.95% applied to a rate base of over $1.7 billion. This filing also requests the continuation, with certain modifications, of the performance-based rate change plan that was established in 2009, based on an allowed ROE range of 9.45% to 10.45% with a 9.95% midpoint. The case also includes a request to spend $10 million per year on renewable natural gas as part of its gas supply portfolio, the cost of which would be recovered through its purchased-gas cost mechanism, as well as $10 million of annual renewable natural gas capital expenditures that would be included in rate base. A hearing is scheduled for Oct. 28, 2021, and, by rule, the OCC has 180 days from the filing date to issue an order.
In May 2021, a bill amending the Oklahoma state income tax code was signed into law that reduced the state income tax rate to 4% from 6% beginning Jan. 1, 2022. As a result of the enactment of this legislation, the company remeasured its accumulated deferred income taxes (ADIT). As a regulated entity, the reduction in ADIT of $29.3 million was recorded as an EDIT regulatory liability. The impact of the change in the state income tax rate on Oklahoma Natural Gas’ rates, as well as the timing and amount of the impact on the annual crediting mechanism for the EDIT regulatory liability, will be addressed during the processing of the current general rate case application filed in May 2021.
Kansas
In November 2018, Kansas Gas Service submitted an application to the KCC requesting approval of its contract to operate and maintain the natural gas distribution system at Fort Riley, a United States Army installation. The KCC approved the company’s application in May 2019. The transition period ended in June 2021, after which Kansas Gas Service assumed operation of the system.
Texas
Central-Gulf Service Area
In February 2021, Texas Gas Service made Gas Reliability Infrastructure Program (GRIP) filings for all customers in the Central-Gulf service area, requesting an increase of $10.7 million to be effective in June 2021. All municipalities, and the RRC, approved the new rates or allowed them to take effect with no action.
West Texas Service Area
In March 2021, Texas Gas Service made GRIP filings for all customers in the West Texas service area, requesting an increase of $9.7 million to be effective in July 2021. On June 21, 2021, the city of El Paso approved a motion which found the GRIP filing to be in compliance with the GRIP statute. The city then denied the requested increase and assessed fees associated with its review of the filing. On July 2, 2021, Texas Gas Service appealed the city’s action to the RRC. The RRC has up to 105 days from the date of the appeal to act. All other municipalities, and the RRC, approved the new rates or allowed them to take effect with no action.
Other Texas Service Areas
In April 2021, Texas Gas Service filed annual Cost-of-Service Adjustments (COSA), for the incorporated areas of the Rio Grande Valley service area and the North Texas service area. In July 2021, the cities in the Rio Grande Valley and North Texas service areas agreed to increases of $3.5 million and $1.4 million, respectively. New rates will become effective in August 2021.
2021 FINANCIAL GUIDANCE
ONE Gas reaffirmed its financial guidance issued on Jan. 19, 2021, with 2021 net income expected to be in the range of $198 million to $210 million, or $3.68 to $3.92 per diluted share. Capital expenditures, including asset removal costs, are expected to be approximately $540 million for 2021.
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