ONE GAS, INC. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the Notes to Consolidated Financial Statements in this Quarterly Report, as well as our Annual Report. Due to the seasonal nature of our business, the results of operations for the three and six months endedJune 30, 2021 are not necessarily indicative of the results that may be expected for a 12-month period.
RECENT DEVELOPMENTS
Winter Storm Uri - InFebruary 2021 , theU.S. experienced Winter Storm Uri, a historic winter weather event impacting supply, market pricing and demand for natural gas in a number of states, including our service territories ofKansas, Oklahoma , andTexas . During this time, the governors ofKansas, Oklahoma , andTexas each declared a state of emergency, and certain regulatory agencies issued emergency orders that impacted the utility and natural gas industries, including statewide utility curtailment programs and orders requiring jurisdictional natural gas and electric utilities to do all things possible and necessary to ensure that natural gas and electricity utility services continued to be provided to their customers. Due to the historic nature of this winter weather event, we experienced unforeseeable and unprecedented market pricing for gas costs in ourKansas, Oklahoma , andTexas jurisdictions, which resulted in aggregated natural gas purchases for the month of February of approximately$2.1 billion .
On
OnMarch 11, 2021 , we issued$1.0 billion of 0.85 percent senior notes due 2023,$700 million of 1.10 percent senior notes due 2024, and$800 million of floating-rate senior notes due 2023. The floating-rate senior notes bear interest at a rate equal to three-month LIBOR plus 61 basis points per year reset quarterly for the applicable interest period (0.73 percent atJune 30, 2021 ). The net proceeds from the issuance were used for general corporate purposes, including payment of gas purchase costs resulting from Winter Storm Uri. The net proceeds of theMarch 2021 debt issuance reduced the commitments under theONE Gas 2021 Term Loan Facility on a dollar-for-dollar basis, and as a result no commitments remained outstanding and the facility was terminated concurrently with the closing of the debt issuance. Our purchased gas costs are recoverable through our tariffs in each state where we operate. Due to the higher level of gas purchase costs during Winter Storm Uri, related financing costs and other operational response costs, we are working with regulators to extend the recovery periods of such costs in order to lessen the immediate customer impact. In that regard, the OCC, KCC and the RRC each authorized certain utilities, including local natural gas distribution companies, to record regulatory assets to account for the extraordinary costs associated with this winter weather event, including but not limited to gas purchase costs and other costs related to the procurement and transportation of gas supply, carrying costs and other operational costs. We have deferred approximately$2.0 billion in costs associated with Winter Storm Uri.
See "Regulatory Activities," "Liquidity and Capital Resources," and Note 3 of the Notes to Consolidated Financial Statements in this Quarterly Report for additional discussion of the effects of the 2021 winter weather event on us.
ONE Gas Commercial Paper Program - OnJune 22, 2021 , we increased the size of our commercial paper program to permit the issuance of commercial paper to fund short-term borrowing needs in an aggregate principal amount not to exceed$1.0 billion outstanding at any time. Prior to this increase, our commercial paper program permitted us to issue commercial paper notes in an aggregate principal amount not to exceed$700 million outstanding at any time. ONE Gas Credit Agreement - OnMarch 16, 2021 , we entered into the second amended and restated ONE Gas Credit Agreement, which was previously amended and restated onOctober 5, 2017 . The ONE Gas Credit Agreement provides for a$1 billion revolving unsecured credit facility and includes a$20 million letter of credit subfacility and a$60 million swingline subfacility. In connection with the amendment of the ONE Gas Credit Agreement, all commitments under theONE Gas 364-day Credit Agreement were terminated, and all obligations under theONE Gas 364-day Credit Agreement were paid in full and discharged. 28 -------------------------------------------------------------------------------- COVID-19 - Throughout the COVID-19 pandemic, we have continued to provide essential services to our customers. We have implemented a comprehensive set of policies, procedures and guidelines to protect the safety of our employees, customers and communities. These actions include following safety protocols developed during the pandemic, remote work for our office-based employees, limiting direct contact with our customers, and generally suspending disconnections and late payment fees beginning inmid-March 2020 throughApril 2021 , when disconnects were resumed in all service areas, exceptTexas , where disconnects were resumed inJune 2021 .
During the six months ended
•lower late payment, reconnect and collection fees and incremental expenses for bad debts related to the suspension of disconnects for nonpayment in each of our jurisdictions; •incremental expenses for PPE, cleaning supplies, outside services and other expenses; and •lower expenses for travel and employee training that have been impacted by the pandemic. We are in regular communication with our regulators to keep them apprised of the effects COVID-19 is having on the service we provide. We have received accounting orders 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 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. AtJune 30, 2021 , no regulatory assets have been recorded. We continue to evaluate the impacts of COVID-19 on our business and will record regulatory assets for financial reporting purposes at such time as recovery is deemed probable. Accordingly, there could be a delay in the recognition of amounts that may be approved for recovery until the conclusion of future regulatory proceedings.
See "Regulatory Activities," "Financial Results and Operating Information," "Capital Expenditures and Asset Removal Costs," and Note 3 and Note 12 of the Notes to Consolidated Financial Statements in this Quarterly Report for additional discussion of the effects of COVID-19 on us.
Dividend - InJuly 2021 , we declared a dividend of$0.58 per share ($2.32 per share on an annualized basis) for shareholders of record as ofAugust 13, 2021 , payable onSeptember 1, 2021 .
REGULATORY ACTIVITIES
Oklahoma - OnFebruary 12, 2021 , the governor ofOklahoma declared a state of emergency for all 77 counties in the state ofOklahoma in light of expected severe weather and freezing temperatures associated with a winter weather event. The declaration cited anticipated damage to private and public properties and utilities, including electric, gas, and water systems, within the state ofOklahoma . OnFebruary 16, 2021 , the OCC approved an emergency order (i) directing natural gas and electric utilities to prioritize deliveries of natural gas and electricity for services necessary for life, health, and public safety, and of natural gas to electric generation facilities that serve human needs customers, and (ii) directing local utilities to communicate with their customers in order to reduce all non-essential energy consumption, and to reduce load in a safe and reasonable manner. The OCC order recognized that the severe weather conditions resulted in increased commodity prices for both gas and electric utilities, along with issues relating to commodity acquisition, line pressure, and supply shortages. The OCC order expired onFebruary 20, 2021 . In response to a motion filed byOklahoma Natural Gas onMarch 2, 2021 , the OCC issued an order stating thatOklahoma Natural Gas shall defer to a regulatory asset the extraordinary costs associated with this unprecedented winter weather event, including commodity costs, operational costs and carrying costs. The order further states that after all deferred costs have been accumulated and recorded,Oklahoma Natural Gas shall file a compliance report detailing the extent of such costs incurred. The order also provides that recovery of the deferred costs will be addressed in a future proceeding that will include a prudence review. InApril 2021 , a bill permitting the state to pursue securitized financing of extraordinary expenses, such as fuel costs, financing costs and other operational costs incurred by regulated utilities during extreme weather events, was signed into law by theOklahoma governor. OnApril 29, 2021 ,Oklahoma Natural Gas submitted an initial application requesting a financing order pursuant to this legislation. OnJuly 30, 2021 ,Oklahoma Natural Gas filed a supplemental motion with its compliance report 29 -------------------------------------------------------------------------------- pursuant to theMarch 2, 2021 order from the 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 date of this supplemental motion to consider the issuance of a financing order. If the OCC approves the financing order, theOklahoma Development Finance Authority (ODFA) has 24 months to complete the process to issue the securitized bonds. AtJune 30, 2021 ,Oklahoma Natural Gas has deferred approximately$1.3 billion in extraordinary costs attributable to Winter Storm Uri. See "Liquidity and Capital Resources," in this Quarterly Report for additional discussion. As required, PBRC filings are made annually on or beforeMarch 15 , until the next general rate case, which was required to be filed on or beforeJune 30, 2021 , based on a calendar 2020 test year. OnMay 28, 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 ROE of 9.95 percent 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 percent with a 9.95 percent midpoint. The case also includes a request to spend$10 million per year on RNG 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 RNG capital expenditures that would be included in rate base. A hearing is scheduled forOctober 28, 2021 , and, by rule, the OCC has 180 days from the filing date to issue an order. InMay 2021 , a bill amending theOklahoma state income tax code was signed into law that reduced the state income tax rate to four percent from six percent beginningJanuary 1, 2022 . As a result of the enactment of this legislation, we remeasured our 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 our 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 our current general rate case application filed inMay 2021 . InJune 2020 , the OCC issued an order permitting the creation of regulatory assets and deferrals related to COVID-19. Each utility is authorized under the OCC's order to record as a regulatory asset increased bad debt expenses, costs associated with expanded payment plans, waived fees, and incremental expenses that are directly related to the suspension of or delay in disconnection of service (or the reconnection of service) beginningMarch 15, 2020 , as a result of the governor's executive order declaring a state of emergency. In addition, the OCC recognizes that utilities report taking many steps to ensure the continuity of utility service, while protecting utility personnel, customers, and the general public. Such steps include procuring additional PPE, increasing sanitation efforts at facilities, implementing health-screening processes, and securing temporary facilities for potential sequestration of critical operations personnel. The OCC has stated it supports the continuation of these critical response and planning efforts and acknowledges such efforts cause incremental costs that it will allow to be deferred and reviewed in a future rate case. The OCC's deferral authorization does not bind the OCC to any specific treatment of these items in any future proceeding, nor does it prohibit the OCC from considering the effect of any operational savings, or other financial impacts that may occur as a result of COVID-19. AtJune 30, 2021 , no regulatory assets have been recorded. In ourMay 2021 general rate case application, the test year includes the impacts of COVID-19 on our revenues and expenses throughDecember 31, 2020 , and we have proposed to include future impacts as part of the annual PBRC mechanism. InFebruary 2020 ,Oklahoma Natural Gas filed its fourth annual PBRC application following the general rate case that was approved inJanuary 2016 . A settlement was reached, and the OCC approved a joint stipulation inJuly 2020 . This stipulation included a base rate increase of$9.7 million and an energy efficiency incentive of$2.2 million , with new rates reflecting these changes effective inJune 2020 . This stipulation also included a credit of$12.2 million associated with EDIT issued through a bill credit toOklahoma customers in the first quarter of 2021.Kansas - OnFebruary 14, 2021 , the governor ofKansas issued a State of Disaster Emergency due to wind chill warnings and stress on utility and natural gas providers expected from the significantly colder than normal weather forecasted throughoutKansas . The executive order also urgedKansas citizens to conserve energy to help ensure a continued supply of natural gas and electricity and keep their personal costs down. The declaration also noted that due to increased energy demand and natural gas supply constraints caused by sub-zero temperatures, utilities at the time were experiencing wholesale natural gas prices anywhere from 10 to 100 times higher than normal. OnFebruary 15, 2021 , the KCC issued an emergency order (i) directing all jurisdictional natural gas and electric utilities to coordinate efforts and take all reasonably feasible, lawful, and appropriate actions to ensure adequate delivery of natural gas and electricity to interconnected, non-jurisdictional utilities inKansas , (ii) requiring jurisdictional natural gas and electric utilities to do all things possible and necessary to ensure that natural gas and electricity utility services continued to be provided to their customers inKansas , and (iii) allowing those electric and natural gas distribution utilities who incur extraordinary costs to ensure their customers and other interconnected customers continued to receive utility service during this unprecedented cold 30 -------------------------------------------------------------------------------- weather event to defer those costs to a regulatory asset account. These deferred costs may also include carrying costs at the utility's weighted average cost of capital. Each jurisdictional utility will be required to file a compliance report detailing the extent of such costs incurred and presenting a plan to minimize the financial impacts of this event on ratepayers over a reasonable time frame. These costs will be subject to review for reasonableness and accuracy in future regulatory proceedings. OnMarch 9, 2021 , the KCC issued an order adopting the KCC staff's recommendation to open company-specific investigations to accept each utility's filing of financial impact compliance reports and permit the KCC staff to conduct a review of the utility's compliance report and its actions during the winter weather event. InApril 2021 , a bill permitting utilities to pursue securitization to finance extraordinary expenses, such as fuel costs incurred during extreme weather events, was signed into law by theKansas governor. This bill gives the KCC the authority to oversee and authorize the issuance of ratepayer-backed securitized bonds issued by a public utility. OnJuly 30, 2021 , Kansas Gas Service submitted a compliance report to the KCC, which includes a proposal to issue securitized bonds and collect the extraordinary costs resulting from Winter Storm Uri from its customers over a period of either 5, 7, or 10 years. A procedural schedule will be developed to determine the timeline for evaluatingKansas Gas Service's compliance report. If the KCC approvesKansas Gas Service's proposed financing plan, thenKansas 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 considerKansas Gas Service's application. If the KCC approves the financing order, Kansas Gas Service can begin the process to issue the securitized bonds. AtJune 30, 2021 , Kansas Gas Service has deferred approximately$383 million in extraordinary costs associated with Winter Storm Uri. See "Liquidity and Capital Resources," in this Quarterly Report for additional discussion. InMay 2021 , Kansas Gas Service filed a motion requesting a limited waiver of penalty provisions of its tariff to eliminate the multipliers in the penalty calculation when calculating the penalties to assess on marketers and individually balanced transportation customers for their unauthorized usage during Winter Storm Uri. The KCC has not yet issued an order on this motion. InAugust 2020 , Kansas Gas Service submitted an application to the KCC requesting an increase of approximately$7.8 million related to its GSRS. This filing incorporates the effect on the requested GSRS rate increase of a bill amending theKansas income tax code that eliminates public utilities regulated by the KCC from payingKansas state income taxes beginningJanuary 1, 2021 . InSeptember 2020 , Kansas Gas Service submitted an erratum to the application which modified the requested increase to approximately$7.5 million . InNovember 2020 , the KCC approved the increase effectiveDecember 2020 . InMay 2020 , a bill amending theKansas state income tax code was signed into law that exempts public utilities regulated by the KCC from payingKansas state income taxes beginningJanuary 1, 2021 , and authorizes the KCC to adjust utility rates for the elimination ofKansas state income tax beginningJanuary 1, 2021 . As a result of the enactment of this legislation, we remeasured our ADIT. As a regulated entity, the reduction in ADIT of$81.5 million was recorded as an EDIT regulatory liability and will be refunded to our customers. This adjustment had no material impact on our income tax expense and no impact on our cash flows for the three and six months endedJune 30, 2021 . The bill stipulates that, if requested by the utility, this EDIT will be returned toKansas customers over a period of no less than 30 years, with the exact timing to be determined in our next general rate proceeding. InAugust 2020 , Kansas Gas Service submitted an application to the KCC to reduce its base rates to reflect the elimination ofKansas state income taxes by approximately$4.9 million . InDecember 2020 , the KCC approved the reduction, effectiveJanuary 1, 2021 . See Note 3 of the Notes to Consolidated Financial Statements in this Quarterly Report for additional information. InApril 2020 , Kansas Gas Service filed an application with the KCC for an AAO to accumulate and defer certain incremental costs incurred, including bad debt expenses and lost revenues, as well as associated carrying costs, related to COVID-19 beginningMarch 1, 2020 , for recovery inKansas Gas Service's next rate case filing. InJuly 2020 , the KCC approved the request for an AAO subject to the recommendations set forth in its Staff Report and Recommendation and clarifications sought by Kansas Gas Service. The AAO provides notice thatKansas Gas Service may identify, track, document, accumulate, and defer in a regulatory asset extraordinary costs (net of any cost decreases) and lost revenue, plus carrying costs, associated with the COVID-19 pandemic. The KCC states that approval of the AAO is not a finding that tracked costs and lost revenue will be included in future rates; rather, any determination regarding recoverability will occur in a future rate proceeding. In a separate order applicable to all regulated utilities, the KCC approved the deferral of bad debt expense and late payment fees associated with the KCC's suspension of disconnection activity and customer protection provisions. The recovery, the carrying charges and amortization period will be determined inKansas Gas Service's next rate case or alternative rate recovery filing. AtJune 30, 2021 , no regulatory assets have been recorded. We continue to evaluate the impacts of COVID-19 on our business and will record regulatory assets for financial statement purposes at such time as recovery is deemed probable. 31 -------------------------------------------------------------------------------- InNovember 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, aUnited States Army installation. The KCC approved the Company's application inMay 2019 . The transition period ended inJune 2021 , after which we assumed operation of the system.Texas - OnFebruary 12, 2021 , the governor ofTexas issued a state of disaster for all 254 counties inTexas in response to the then-forecasted weather conditions. The declaration certified that severe winter weather posed an imminent threat due to prolonged freezing temperatures, heavy snow, and freezing rain statewide. Also, onFebruary 12, 2021 , the RRC issued an emergency order to temporarily implement a statewide utilities curtailment program intended to protect residences, hospitals, schools, churches, and other human needs customers. OnFebruary 17, 2021 , the RRC extended its emergency order issued onFebruary 12, 2021 , toFebruary 23, 2021 . OnFebruary 13, 2021 , the RRC issued a Notice to Local Distribution Companies acknowledging that due to the demand for natural gas expected during the upcoming winter weather event, natural gas utility LDCs may be required to pay extraordinarily high prices in the market for natural gas and may be subjected to other extraordinary costs when responding to the event. The RRC also encouraged natural gas utilities to continue to work to ensure that the citizens of theState of Texas were provided with safe and reliable natural gas service. To partially defer and reduce the impact on customers for these costs that ultimately are reflected in customer bills, the RRC authorized LDCs to record a regulatory asset to account for the extraordinary costs associated with this winter weather event, including but not limited to gas cost and other costs related to the procurement and transportation of gas supply. These costs will be subject to review for reasonableness and accuracy in future regulatory proceedings. InJune 2021 , a bill permitting the state to pursue securitized financing of extraordinary expenses, such as fuel costs, financing costs and other operational costs incurred by utilities during extreme weather events, was signed into law by theTexas governor. This bill gives the RRC the authority to approve amounts to be recovered from the issuance of ratepayer-backed securitized bonds by theTexas Public Financing Authority (TPFA). Pursuant to this legislation and aJune 17, 2021 RRC Notice toGas Utilities ,Texas Gas Service submitted an application to the RRC onJuly 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 considerTexas Gas Service's application and an additional 90 days to issue a single financing order for Texas Gas Service and any other natural gas utilities inTexas 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 TPFA will begin the process to issue the securitized bonds. AtJune 30, 2021 , Texas Gas Service has deferred approximately$286 million in extraordinary costs associated with Winter Storm Uri. See "Liquidity and Capital Resources," in this Quarterly Report for additional discussion. InApril 2020 , the RRC issued an order authorizing utilities to use a regulatory accounting mechanism and a subsequent process through which Texas Gas Service may seek future recovery of incremental expenses resulting from the effects of COVID-19, including bad debt and associated credit and collections costs, and other reasonable and necessary incremental costs to address the impact of COVID-19. The timing of any recovery will be determined as we work with our regulators. AtJune 30, 2021 , no regulatory assets have been recorded. We continue to evaluate the impacts of COVID-19 on our business and will record regulatory assets for financial statement purposes at such time as recovery is deemed probable. West Texas Service Area - InMarch 2021 , Texas Gas Service made GRIP filings for all customers in theWest Texas service area, requesting an increase of$9.7 million to be effective inJuly 2021 . OnJune 21, 2021 , the city ofEl Paso approved a motion which found the GRIP filing to be in compliance with the GRIP statute. The city subsequently denied the requested increase and assessed fees associated with its review of the filing. OnJuly 2, 2021 , Texas Gas Service appealed the city's action to the RRC. The RRC granted and approved the appeal, and new rates were effective onAugust 3, 2021 . All other municipalities, and the RRC, approved the new rates or allowed them to take effect with no action.
In
Central-Gulf Service Area - In
In 2019, Texas Gas Service filed a rate case for all customers in theCentral Texas andGulf Coast service areas, seeking a rate increase of$15.6 million and a$1.3 million credit to customers associated with EDIT, and requesting to consolidate the two service areas into one. InAugust 2020 , the RRC approved all terms of a$10.3 million settlement, as well as consolidation of 32 -------------------------------------------------------------------------------- theCentral Texas service area and theGulf Coast service area into a new Central-Gulf service area. The RRC also approved an$8.5 million credit to customers associated with EDIT. The settlement included an ROE of 9.5 percent and a capital structure with equity of 59 percent and debt of 41 percent, and new rates became effective inAugust 2020 . OtherTexas Service Areas - InApril 2021 , Texas Gas Service filed annual Cost-of-Service Adjustments (COSA) for the incorporated areas of theRio Grande Valley service area and theNorth Texas service area. InJuly 2021 , the cities in theRio Grande Valley andNorth Texas service areas agreed to increases of$3.5 million and$1.4 million , respectively. New rates will become effective inAugust 2021 . In the normal course of business, Texas Gas Service has filed rate cases and sought GRIP and COSA increases in various otherTexas jurisdictions to address investments in rate base and changes in expenses. As of the six months endedJune 30, 2021 , no annual rate increases associated with these filings have been approved and$1.8 million were approved for the year endedDecember 31, 2020 . Winter Storm Uri Deferred Costs - The amounts deferred atJune 30, 2021 , include invoiced costs for natural gas purchases that have not been paid as we work with our suppliers to resolve discrepancies in invoiced amounts. The amounts deferred may be adjusted as the differences are resolved. In addition, as a result of Winter Storm Uri, we were assessed and may assess penalties as a result of over- or under-deliveries during periods that operational flow orders were imposed on us or that we, in turn, imposed on our transport customers or their agents. Amounts recorded reflect management's best estimate and may be adjusted in future periods as the disposition of such penalties is determined. As these amounts are related to the extraordinary gas purchase costs associated with Winter Storm Uri, which are deferred, future adjustments are not expected to have a material impact on earnings. 33 --------------------------------------------------------------------------------
FINANCIAL RESULTS AND OPERATING INFORMATION
We operate in one reportable business segment: regulated public utilities that deliver natural gas to residential, commercial and transportation customers. The accounting policies for our segment are the same as described in Note 1 of our Notes to Consolidated Financial Statements in our Annual Report. We evaluate our financial performance principally on net income. Selected Financial Results - For the three months endedJune 30, 2021 , net income was$30.1 million , or$0.56 per diluted share, compared with$25.3 million , or$0.48 per diluted share, in the same period last year. For the six months endedJune 30, 2021 , net income was$125.7 million , or$2.35 per diluted share, compared with$117.0 million , or$2.20 per diluted share, in the same period last year.
The following table sets forth certain selected financial results for our operations for the periods indicated:
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, 2021 vs. 2020 2021 vs. 2020
Financial Results 2021 2020 2021 2020 Increase (Decrease) Increase (Decrease)
(Millions of dollars, except percentages)
Natural gas sales $ 282.6 $ 243.5 $ 865.4 $ 730.3 $ 39.1 16 % $ 135.1 18 %
Transportation revenues 26.3 24.3 62.5 58.5 2.0 8 % 4.0 7 %
Other revenues 6.7 5.5 13 12.7 1.2 22 % 0.3 2 %
Total revenues 315.6 273.3 940.9 801.5 42.3 15 % 139.4 17 %
Cost of natural gas 93.7 62.5 407.8 288.6 31.2 50 % 119.2 41 %
Net margin 221.9 210.8 533.1 512.9 11.1 5 % 20.2 4 %
Operating costs 120.0 118.8 248.6 240.2 1.2 1 % 8.4 3 %
Depreciation and amortization 50.8 47.4 103.1 94.9 3.4 7 % 8.2 9 %
Operating income $ 51.1 $ 44.6 $ 181.4 $ 177.8 $ 6.5 15 % $ 3.6 2 %
Capital expenditures and asset
removal costs $ 129.4 $ 130.6 $ 238.4 $ 254.0 $ (1.2) (1) % $ (15.6) (6) %
Natural gas sales to customers represent revenue from contracts with customers
through implied contracts established by our tariffs and rates approved by the
regulatory authorities, as well as revenues from regulatory mechanisms related
to natural gas sales, which are included as other revenues in our Notes to
Consolidated Financial Statements.
Transportation revenues represent revenue from contracts with customers through implied contracts established by our tariffs and rates approved by the regulatory authorities, as well as tariff-based negotiated contracts.
Other utility revenues include primarily miscellaneous service charges which
represent implied contracts with customers established by our tariffs and rates
approved by the regulatory authorities and other revenues from regulatory
mechanisms, which are included in the consolidated statements of income and our
Notes to Consolidated Financial Statements as other revenues.
Non-GAAP Financial Measure - We have disclosed net margin, which is considered a
non-GAAP financial measure, in our selected financial data and selected
financial results. Net margin is comprised of total revenues less cost of
natural gas. Cost of natural gas includes commodity purchases, fuel, storage,
transportation and other gas purchase costs recovered through our cost of
natural gas regulatory mechanisms and does not include an allocation of general
operating costs or depreciation and amortization. In addition, these regulatory
mechanisms provide a method of recovering natural gas costs on an ongoing basis
without a profit. Therefore, although our revenues will fluctuate with the cost
of natural gas that we pass-through to our customers, net margin is not affected
by fluctuations in the cost of natural gas. Accordingly, we routinely use net
margin in the analysis of our financial performance. We believe that net margin
provides investors a more relevant and useful measure to analyze our financial
performance as a 100 percent regulated natural gas utility than total revenues
because the change in the cost of natural gas from period to period does not
impact our operating income. As such, the following discussion and analysis of
our financial performance will reference net margin rather than total revenues
and cost of natural gas individually.
34
--------------------------------------------------------------------------------The following table sets forth a reconciliation of net margin to the most directly comparable GAAP measure for the periods indicated:
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, 2021 vs. 2020 2021 vs. 2020
Non-GAAP Reconciliation 2021 2020 2021 2020 Increase (Decrease) Increase (Decrease)
(Millions of dollars, except percentages)
Total revenues $ 315.6 $ 273.3 $ 940.9 $ 801.5 $ 42.3 15 % $ 139.4 17 %
Cost of natural gas 93.7 62.5 407.8 288.6 31.2 50 % 119.2 41 %
Net margin $ 221.9 $ 210.8 $ 533.1 $ 512.9 $ 11.1 5 % $ 20.2 4 %
The following table sets forth our net margin by type of customer for the
periods indicated:
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, 2021 vs. 2020 2021 vs. 2020
Net Margin 2021 2020 2021 2020 Increase (Decrease) Increase (Decrease)
Natural gas sales (Millions of dollars, except percentages)
Residential $ 157.5 $ 151.7 $ 380.7 $ 367.3 $ 5.8 4 % $ 13.4 4 %
Commercial and industrial 29.7 27.8 72.7 70.2 1.9 7 % 2.5 4 %
Other 1.7 1.5 4.2 4.2 0.2 13 % - - %
Net margin on natural gas sales 188.9 181.0 457.6 441.7 7.9 4 % 15.9 4 %
Transportation revenues 26.3 24.3 62.5 58.5 2.0 8 % 4.0 7 %
Other revenues 6.7 5.5 13.0 12.7 1.2 22 % 0.3 2 %
Net margin $ 221.9 $ 210.8 $ 533.1 $ 512.9 $ 11.1 5 % $ 20.2 4 %
Our net margin on natural gas sales is comprised of two components, fixed and
variable margin. Fixed margin reflects the portion of our net margin
attributable to the monthly fixed customer charge component of our rates, which
does not fluctuate based on customer usage in each period. Variable margin
reflects the portion of our net margin that fluctuates with the volumes
delivered and billed and the effects of weather normalization. The following
table sets forth our net margin on natural gas sales by revenue type for the
periods indicated:
Three Months Ended Six Months Ended Three Months Six Months
June 30, June 30, 2021 vs. 2020 2021 vs. 2020
Net Margin on Natural Gas
Sales 2021 2020 2021 2020 Increase (Decrease) Increase (Decrease)
Net margin on natural gas
sales (Millions of dollars, except percentages)
Fixed margin $ 158.3 $ 153.9 $ 310.4 $ 303.5 $ 4.4 3 % $ 6.9 2 %
Variable margin 30.6 27.1 147.2 138.2 3.5 13 % 9.0 7 %
Net margin on natural gas
sales $ 188.9 $ 181.0 $ 457.6 $ 441.7 $ 7.9 4 % $ 15.9 4 %
Net margin increased $11.1 million for the three months ended June 30, 2021 ,
compared with the same period last year, due primarily to the following:
•an increase of $6.4 million from new rates, primarily in Texas and Oklahoma ;
•an increase of $2.3 million in residential sales due primarily to net customer
growth in Oklahoma and Texas ; and
•an increase of $0.9 million in transportation volumes, primarily in Kansas and
Oklahoma .
Net margin increased
•an increase of$15.5 million from new rates, primarily inTexas andOklahoma ; •an increase of$4.6 million in residential sales due primarily to net customer growth inOklahoma andTexas ; •an increase of$1.8 million in rider and surcharge recoveries due to a higher ad-valorem surcharge inKansas , which was offset with higher regulatory amortization expense, in depreciation and amortization expense; and •an increase of$1.3 million in transportation volumes, primarily inKansas andOklahoma , offset partially by; 35 -------------------------------------------------------------------------------- •a decrease of$3.2 million due to the reduction in net margin associated with the impact of weather normalization, net of increased sales volumes, primarily inTexas andKansas . For the six months endedJune 30, 2021 , heating degree days inTexas andKansas were 25 percent and 9 percent higher, respectively, compared with the same period in 2020.
Operating costs increased
•an increase of
Operating costs increased
•an increase of
Depreciation and amortization expense increased$3.4 million and$8.2 million for the three and six months endedJune 30, 2021 , compared with the same periods last year, due primarily to an increase in depreciation from our capital expenditures being placed in service and an increase in the amortization of the ad-valorem surcharge rider inKansas . Other Factors Affecting Net Income - Other factors that affected net income for the three months endedJune 30, 2021 , compared with the same period last year, include a decrease of$1.9 million in other income (expense), net, 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. Other factors that affected net income for the six months endedJune 30, 2021 , compared with the same period last year, include an increase of$3.4 million in other income (expense), net, due primarily to a$2.8 million increase in income resulting from the change in the value of investments associated with nonqualified employee benefit plans. EDIT - We credited income tax expense$2.6 million and$2.5 million , respectively, for the amortization of the regulatory liability associated with EDIT that was returned to customers during the three months endedJune 30, 2021 and 2020, and$10.7 million and$9.4 million , respectively, during the six months endedJune 30, 2021 and 2020. Capital Expenditures and Asset Removal Costs - Our capital expenditures program includes expenditures for pipeline integrity, extension of service to new areas, modifications to customer service lines, increases in system capacity, pipeline replacements, automated meter reading, government-mandated pipeline relocations, fleet, facilities, information technology assets and cybersecurity. It is our practice to maintain and upgrade our infrastructure, facilities and systems to ensure safe, reliable and efficient operations. Asset removal costs include expenditures associated with the replacement or retirement of long-lived assets that result from the construction, development and/or normal use of our assets, primarily our pipeline assets. Capital expenditures and asset removal costs were$1.2 million lower for the three months endedJune 30, 2021 , compared with the same period last year, due primarily to the timing of our capital projects in the second quarter 2021, compared with the second quarter 2020. Capital expenditures and asset removal costs were$15.6 million lower for the six months endedJune 30, 2021 , compared with the same period last year, due primarily to the timing of capital projects in the first quarter 2021 being negatively impacted by Winter Storm Uri. Our full-year capital expenditures and asset removal costs are expected to be approximately$540 million for 2021. 36 --------------------------------------------------------------------------------
Selected Operating Information - The following tables set forth certain selected operating information for the periods indicated:
Three Months Ended Variances
June 30, 2021 vs. 2020
(in thousands) 2021 2020 Increase (Decrease)
Average Number of Customers OK KS TX Total OK KS TX Total OK KS TX Total
Residential 826 593 651 2,070 814 591 640 2,045 12 2 11 25
Commercial and industrial 76 50 35 161 75 50 36 161 1 - (1) -
Other - - 3 3 - - 3 3 - - - -
Transportation 5 6 1 12 5 6 1 12 - - - -
Total customers 907 649 690 2,246 894 647 680 2,221 13 2 10 25
Six Months Ended Variances
June 30, 2021 vs. 2020
(in thousands) 2021 2020 Increase (Decrease)
Average Number of Customers OK KS TX Total OK KS TX Total OK KS TX Total
Residential 826 594 649 2,069 814 591 639 2,044 12 3 10 25
Commercial and industrial 77 50 35 162 76 50 36 162 1 - (1) -
Other - - 3 3 - - 3 3 - - - -
Transportation 5 6 1 12 5 6 1 12 - - - -
Total customers 908 650 688 2,246 895 647 679 2,221 13 3 9 25
The increase in the average number of customers for the three and six months
ended June 30, 2021 , compared with the same periods last year, is due primarily
to the connection of new customers resulting from the extension and expansion of
our system in our service areas. For the three months ended June 30, 2021 , our
average customer count includes approximately 5,400 new customer connections
during the period compared to approximately 5,700 for the same period last year.
Additionally, for the six months ended June 30, 2021 , our average customer count
includes the impact of approximately 11,300 new customer connections during the
period compared to approximately 11,900 for the same period last year. Also
contributing to the increase is a reduction in disconnects for nonpayment by our
customers as a result of the suspension of collection activities in response to
the COVID-19 pandemic.
The following table reflects the total volumes delivered, excluding the effects of WNA mechanisms on sales volumes.
Three Months Ended Six Months Ended
June 30, June 30,
Volumes (MMcf) 2021 2020 2021 2020
Natural gas sales
Residential 14,802 15,640 77,781 70,884
Commercial and industrial 5,617 4,729 24,106 21,041
Other 421 316 1,502 1,333
Total sales volumes delivered 20,840 20,685 103,389 93,258
Transportation 52,457 50,918 116,776 116,331
Total volumes delivered 73,297 71,603 220,165 209,589
Total sales volumes delivered increased for the six months ended June 30, 2021 ,
compared with the same period last year, due primarily to additional
transportation volumes delivered in the second quarter 2021 and colder weather
in the first quarter 2021. The impact of weather on residential and commercial
net margin is mitigated by WNA mechanisms in all jurisdictions.
37
--------------------------------------------------------------------------------The following table sets forth the HDDs by state for the periods indicated:
Three Months Ended
June 30,
2021 2020 2021 vs. 2020 2021 2020
Actual
Heating Degree Days Actual Normal Actual Normal Variance Actual as a percent of Normal
Oklahoma 274 191 289 191 (5) % 143 % 151 %
Kansas 415 394 442 394 (6) % 105 % 112 %
Texas 62 50 44 52 41 % 124 % 85 %
Six Months Ended
June 30,
2021 2020 2021 vs. 2020 2021 2020
Actual Actual as a percent of
Heating Degree Days Actual Normal Actual Normal Variance Normal
Oklahoma 2,319 1,966 1,925 1,966 20 % 118 % 98 %
Kansas 2,905 2,855 2,664 2,855 9 % 102 % 93 %
Texas 1,127 1,050 900 1,062 25 % 107 % 85 %
Normal HDDs are established through rate proceedings in each of our jurisdictions for use primarily in weather normalization billing calculations. See further discussion on weather normalization in our Regulatory Overview section in Part 1, Item 1, "Business," of our Annual Report. Normal HDDs disclosed above are based on:
•Oklahoma - For years 2016 through the current period, 10-year weighted average HDDs as ofDecember 31, 2014 , as calculated using 11 weather stations acrossOklahoma and weighted on average customer count. •Kansas - ForApril 2019 and forward, a 30-year rolling average for years 1988-2017 calculated using three weather stations acrossKansas and weighted on HDDs by weather station and customers. For 2017 toMarch 2019 , 30-year average for years 1981-2010 published by theNational Oceanic and Atmospheric Administration , as calculated using four weather stations acrossKansas and weighted on HDDs by weather station and customers. •Texas - An average of HDDs authorized in our most recent rate proceeding in each jurisdiction and weighted using a rolling 10-year average of actual natural gas distribution sales volumes by service area.
Actual HDDs are based on the quarter-to-date weighted average of:
•11 weather stations and customers by month for
CONTINGENCIES We are a party to various litigation matters and claims that have arisen in the normal course of our operations. While the results of litigation and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable outcome of such matters will not have a material adverse effect on our results of operations, financial position or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
General - We have relied primarily on operating cash flow and commercial paper
for our liquidity and capital resource requirements. We fund operating expenses,
working capital requirements, including purchases of natural gas other than the
extraordinary gas purchases during Winter Storm Uri, and capital expenditures,
primarily with cash from operations and commercial paper.
We believe that the combination of the significant residential component of our
customer base, the fixed-charge component of our natural gas sales net margin
and our rate mechanisms that we have in place result in a stable cash flow
profile and
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historically has generated stable earnings. Additionally, we have rate
mechanisms in place in our jurisdictions that reduce the lag in earning a return
on our capital expenditures and provide for recovery of certain changes in our
cost of service by allowing for adjustments to rates between rate cases. We
anticipate that our cash flow generated from operations and our expected short-
and long-term financing arrangements will enable us to maintain our current and
planned level of operations and provide us flexibility to finance our
infrastructure investments.
Our ability to access capital markets for debt and equity financing under reasonable terms depends on market conditions, our financial condition and credit ratings. By maintaining a conservative financial profile and stable revenue base, we expect to maintain an investment-grade credit rating, which we believe will provide us access to diverse sources of capital.
Short-term Financing - OnJune 22, 2021 , we increased the size of our commercial paper program to permit the issuance of commercial paper notes to fund short-term borrowing needs in an aggregate principal amount not to exceed$1.0 billion outstanding at any time. Prior to this increase, our commercial paper program permitted us to issue commercial paper notes in an aggregate principal amount not to exceed$700 million outstanding at any time. The maturities of the commercial paper notes vary but may not exceed 270 days from the date of issue. The commercial paper notes are generally sold at par less a discount representing an interest factor. AtJune 30, 2021 , we had no commercial paper outstanding. OnMarch 16, 2021 , we entered into the second amended and restatedONE Gas Credit Agreement, which was previously amended and restated onOctober 5, 2017 . The ONE Gas Credit Agreement provides for a$1 billion revolving unsecured credit facility and includes a$20 million letter of credit subfacility and a$60 million swingline subfacility. We can request an increase in commitments of up to an additional$500 million upon satisfaction of customary conditions, including receipt of commitments from either new lenders or increased commitments from existing lenders. We will be able to extend the maturity date by one year, subject to the lenders' consent, up to two times. TheONE Gas Credit Agreement expires inMarch 2026 , and is available to provide liquidity for working capital, capital expenditures, acquisitions and mergers, the issuance of letters of credit and for other general corporate purposes. The ONE Gas Credit Agreement utilizes LIBOR as the reference rate for determining interest to accrue on the borrowings. In the event LIBOR is not available, and such circumstances are unlikely to be temporary, our lenders may establish an alternative interest rate for the senior notes by replacing LIBOR with one or more secured overnight financing-based rates or another alternate benchmark rate. The ONE Gas Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintainingONE Gas' total debt-to-capital ratio of no more than 72.5 percent at the end of any calendar quarter throughDecember 31, 2021 , and 70 percent at the end of any calendar quarter thereafter. AtJune 30, 2021 , our total debt-to-capital ratio was 64 percent and we were in compliance with all covenants under theONE Gas Credit Agreement. We may reduce the unutilized portion of the ONE Gas Credit Agreement in whole or in part without premium or penalty. The ONE Gas Credit Agreement contains customary events of default. Upon the occurrence of certain events of default, the obligations under the ONE Gas Credit Agreement may be accelerated and the commitments may be terminated. In connection with the amendment of the ONE Gas Credit Agreement onMarch 16, 2021 , all commitments under ourONE Gas 364-day Credit Agreement, dated as ofApril 7, 2020 , were terminated and all obligations under theONE Gas 364-day Credit Agreement were paid in full and discharged.
At
Long-Term Debt - InMarch 2021 , we issued$1.0 billion of 0.85 percent senior notes due 2023,$700 million of 1.10 percent senior notes due 2024, and$800 million of floating-rate senior notes due 2023. The floating-rate senior notes bear interest at a rate equal to three-month LIBOR plus 61 basis points per year reset quarterly for the applicable interest period (0.73 percent atJune 30, 2021 ). The net proceeds from the issuance were used for general corporate purposes, including payment of gas purchase costs resulting from Winter Storm Uri. In the event LIBOR is not available, and such circumstances are unlikely to be temporary, we or our designee may establish an alternative interest rate for our floating-rate senior notes due 2023 by replacing LIBOR with one or more secured financing-based rates or another alternate benchmark rate. We may redeem the senior notes issued inMarch 2021 in whole or in part, plus accrued and unpaid interest to the redemption date, on or afterSeptember 11, 2021 . We do not have the right to redeem these senior notes prior toSeptember 11, 2021 . 39 --------------------------------------------------------------------------------
In
The indenture governing our Senior Notes includes an event of default upon the acceleration of other indebtedness of$100 million or more. Such events of default would entitle the trustee or the holders of 25 percent in aggregate principal amount of the outstanding Senior Notes to declare those Senior Notes immediately due and payable in full. OnFebruary 22, 2021 , we entered into theONE Gas 2021 Term Loan Facility as part of the financing of our natural gas purchases in order to provide sufficient liquidity to satisfy our obligations as a result of Winter Storm Uri. The net proceeds of theMarch 2021 debt issuance reduced the commitments under theONE Gas 2021 Term Loan Facility on a dollar-for-dollar basis, and as a result no commitments remained outstanding and the facility was terminated concurrently with the closing of the debt issuance. InApril 2021 , legislation inOklahoma andKansas was approved and inJune 2021 , legislation inTexas was approved that permits utilities to pursue securitization to finance extraordinary expenses, such as fuel costs incurred during extreme weather events. See "Regulatory Activities" forOklahoma ,Kansas andTexas in this Quarterly Report for additional discussion of the securitization legislation in each state. We expect to seek approval from our regulators to utilize the securitization legislation in each state to repay or refinance our debt incurred due to the extraordinary costs associated with Winter Storm Uri.
At
Credit Ratings - Our credit ratings as of
Rating Agency Rating Outlook
Moody's A3 Negative
S&P BBB+ Negative
Our commercial paper is rated Prime-2 by Moody's and A-2 by S&P. We intend to
maintain credit metrics at a level that supports our balanced approach to
capital investment and a return of capital to shareholders via a dividend that
we believe will be competitive with our peer group.
At-the-Market Equity Program - In February 2020 , we initiated an at-the-market
equity program by entering into an equity distribution agreement under which we
may issue and sell shares of our common stock with an aggregate offering price
up to $250 million . Sales of common stock are made by means of ordinary brokers'
transactions on the NYSE, in block transactions or as otherwise agreed to
between us and the sales agent. We are under no obligation to offer and sell
common stock under the program. During the six months ended June 30, 2021 and
2020, respectively, we had issued and sold 198,438 shares and 4,783 shares of
our common stock for $15.3 million and $0.4 million , generating proceeds, net of
issuance costs, of $15.1 million and $0.4 million , and had $221.1 million and
$249.6 million of equity available for issuance under the program. Proceeds from
the program are available for general corporate purposes, which may include
repaying or refinancing a portion of our outstanding indebtedness and funding
working capital and capital expenditures.
EDIT - The return of EDIT to our customers is not expected to have a material
impact on earnings, as any reduction or credit in rates is offset by a noncash
reduction in income tax expense. However, as a result, cash flows for the three
months ended June 30, 2021 and 2020, were reduced by approximately $2.6 million
and $2.5 million , respectively, for EDIT returned to customers. Cash flows for
the six months ended June 30, 2021 and 2020, were reduced by approximately
$10.7 million and $9.4 million , respectively, for EDIT returned to customers.
Pension and Other Postemployment Benefit Plans - In 2021, our contributions are
expected to be $1.1 million to our defined benefit pension plans, and no
contributions are expected to be made to our other postemployment benefit plans.
Information about our pension and other postemployment benefits plans, including
anticipated contributions, is included under Note 14 of the Notes to
Consolidated Financial Statements in our Annual Report. See Note 9 of the Notes
to Consolidated Financial Statements in this Quarterly Report for additional
information.
CASH FLOW ANALYSIS
We use the indirect method to prepare our consolidated statements of cash flows.
Under this method, we reconcile net income to cash flows provided by operating
activities by adjusting net income for those items that impact net income but
may not result
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in actual cash receipts or payments and changes in our assets and liabilities
not classified as investing or financing activities during the period. Items
that impact net income but may not result in actual cash receipts or payments
include, but are not limited to, depreciation and amortization, deferred income
taxes, share-based compensation expense and provision for doubtful accounts.
The following table sets forth the changes in cash flows by operating, investing and financing activities for the periods indicated:
Six Months Ended
June 30, Variance
2021 2020 2021 vs. 2020
(Millions of dollars)
Total cash provided by (used in):
Operating activities $ (1,577.4) $ 278.7 $ (1,856.1)
Investing activities (219.1) (235.0) 15.9
Financing activities 1,997.6 (51.1) 2,048.7
Change in cash and cash equivalents 201.1 (7.4) 208.5
Cash and cash equivalents at beginning of period 8.0 17.9
(9.9)
Cash and cash equivalents at end of period
Operating Cash Flows - Changes in cash flows from operating activities are due primarily to changes in net margin and operating expenses discussed in Financial Results and Operating Information, the effects of Winter Storm Uri and tax reform discussed in Regulatory Activities and changes in working capital. Changes in natural gas prices and demand for our services or natural gas, whether because of general economic conditions, variations in weather not mitigated by WNAs, changes in supply or increased competition from other service providers, could affect our earnings and operating cash flows. Typically, our cash flows from operations are greater in the first half of the year compared with the second half of the year. Operating cash flows were lower for the six months endedJune 30, 2021 , compared with the prior period, due primarily to the increased natural gas purchases resulting from Winter Storm Uri, which were deferred and included in regulatory assets. See Note 3 of the Notes to Consolidated Financial Statements in this Quarterly Report for additional information. Investing Cash Flows - Cash used in investing activities decreased for the six months endedJune 30, 2021 , compared with the prior period, due primarily to a decrease in capital expenditures associated with the impact of Winter Storm Uri on the timing of our capital projects in 2021. Financing Cash Flows - Cash provided by financing activities increased for the six months endedJune 30, 2021 , compared with the prior period, due primarily to borrowings to finance the increased natural gas purchases resulting from Winter Storm Uri.
ENVIRONMENTAL, SAFETY AND REGULATORY MATTERS
COVID-19 - Throughout the COVID-19 pandemic, we have continued to provide essential services to our customers. We have implemented a comprehensive set of policies, procedures and guidelines to protect the safety of our employees, customers and communities. These actions include following safety protocols developed during the pandemic, remote work for our office- based employees, limiting direct contact with our customers, and generally suspending disconnections and late payment fees beginning inmid-March 2020 throughApril 2021 , when disconnects were resumed in all service areas, exceptTexas , where disconnects resumed inJune 2021 . See "Regulatory Activities," "Financial Results and Operating Information," and "Capital Expenditures and Asset Removal Costs," as well as Notes 3 and 12 of the Notes to Consolidated Financial Statements in this Quarterly Report for additional discussion regarding the effects of COVID-19 on us.
Since the onset of the pandemic in the first quarter of 2020, impacts on our results of operations as a result of COVID-19 include but are not limited to:
•lower late payment, reconnect and collection fees and incremental expenses for
bad debts related to the suspension of disconnects for nonpayment in each of our
jurisdictions;
•incremental expenses for PPE, cleaning supplies, outside services and other
expenses; and
•lower expenses for travel and employee training that have been impacted by the
pandemic.
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We have received accounting orders 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 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, 2021 , no regulatory assets have been recorded.
We continue to evaluate the impacts of COVID-19 on our business and will record
regulatory assets for financial reporting purposes at such time as recovery is
deemed probable. We do not expect COVID-related impacts to have a material
adverse effect on our results of operations or cash flows during 2021.
Environmental Matters - We are subject to multiple historical, wildlife
preservation and environmental laws and/or regulations, which affect many
aspects of our present and future operations. Regulated activities include, but
are not limited to, those involving air emissions, storm water and wastewater
discharges, handling and disposal of solid and hazardous wastes, wetland
preservation, hazardous materials transportation, and pipeline and facility
construction. These laws and regulations require us to obtain and/or comply with
a wide variety of environmental clearances, registrations, licenses, permits and
other approvals. Failure to comply with these laws, regulations, licenses and
permits or the discovery of presently unknown environmental conditions may
expose us to fines, penalties and/or interruptions in our operations that could
be material to our results of operations. In addition, emission controls and/or
other regulatory or permitting mandates under the Clean Air Act and other
similar federal and state laws could require unexpected capital expenditures. We
cannot assure that existing environmental statutes and regulations will not be
revised or that new regulations will not be adopted or become applicable to us.
Revised or additional statutes or regulations that result in increased
compliance costs or additional operating restrictions could have a material
adverse effect on our business, financial condition and results of operations.
Our expenditures for environmental investigation and remediation compliance
to-date have not been significant in relation to our financial position, results
of operations or cash flows, and our expenditures related to environmental
matters had no material effects on earnings or cash flows during the three and
six months ended June 30, 2021 and 2020.
We own or retain legal responsibility for certain environmental conditions at 12
former MGP sites in Kansas . These sites contain contaminants generally
associated with MGP sites and are subject to control or remediation under
various environmental laws and regulations. A consent agreement with the KDHE
governs all environmental investigation and remediation work at these sites. The
terms of the consent agreement require us to investigate these sites and set
remediation activities based upon the results of the investigations and risk
analysis. Remediation typically involves the management of contaminated soils
and may involve removal of structures and monitoring and/or remediation of
groundwater. Regulatory closure has been achieved at five of the 12 sites, but
these sites remain subject to potential future requirements that may result in
additional costs.
We have completed or are addressing removal of the source of soil contamination
at all 12 sites and continue to monitor groundwater at seven of the 12 sites
according to plans approved by the KDHE. In 2019, we completed a project to
remove a source of contamination and associated contaminated materials at the
twelfth site where no active soil remediation had previously occurred. A
remediation plan was submitted to the KDHE concerning this site in 2020 and the
KDHE has provided comments that we are addressing. We are also working on a
remediation plan that will be submitted to the KDHE in 2021 for an additional
site. At June 30, 2021 , the reserve for remediation of our MGP sites was
$13.5 million .
We have an AAO that allows Kansas Gas Service to defer and seek recovery of
costs necessary for investigation and remediation at, and nearby, these 12
former MGP sites that are incurred after January 1, 2017 , up to a cap of $15.0
million , net of any related insurance recoveries. Costs approved for recovery in
a future rate proceeding would then be amortized over a 15-year period. The
unamortized amounts will not be included in rate base or accumulate carrying
charges. Following a determination that future investigation and remediation
work approved by the KDHE is expected to exceed $15.0 million , net of any
related insurance recoveries, Kansas Gas Service will be required to file an
application with the KCC for approval to increase the $15.0 million cap. At June
30, 2021 , we have deferred $18.8 million for accrued investigation and
remediation costs pursuant to our AAO. Kansas Gas Service expects to file an
application as soon as practicable after the KDHE approves the plans we have
submitted and anticipates that filing will occur in 2021.
We also own or retain legal responsibility for certain environmental conditions
at a former MGP site in Texas . At the request of the Texas Commission on
Environmental Quality , we began investigating the level and extent of
contamination associated with the site under their Texas Risk Reduction Program.
A preliminary site investigation revealed that this site contains contaminants
generally associated with MGP sites and is subject to control or remediation
under various environmental laws and regulations. Until the investigation is
complete, we are unable to determine what, if any, active remediation will be
required. A reliable estimate of potential remediation costs is not feasible at
this point due to the amount of uncertainty as to the levels and extent of
contamination.
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Our expenditures for environmental evaluation, mitigation, remediation and
compliance to date have not been significant in relation to our financial
position, results of operations or cash flows, and our expenditures related to
environmental matters had no material effects on earnings or cash flows during
the three and six months ended June 30, 2021 and 2020. Environmental issues may
exist with respect to MGP sites that are unknown to us. Accordingly, future
costs are dependent on the final determination and regulatory approval of any
remedial actions, the complexity of the site, level of remediation required,
changing technology and governmental regulations, and to the extent not
recovered by insurance or recoverable in rates from our customers, could be
material to our financial condition, results of operations or cash flows.
We are subject to environmental regulation by federal, state and local
authorities. Due to the inherent uncertainties surrounding the development of
federal and state environmental laws and regulations, we cannot determine with
specificity the impact such laws and regulations may have on our existing and
future facilities. With the trend toward stricter standards, greater regulation
and more extensive permit requirements for the types of assets operated by us,
our environmental expenditures could increase in the future, and such
expenditures may not be fully recovered by insurance or recoverable in rates
from our customers, and those costs may adversely affect our financial
condition, results of operations and cash flows. We do not expect expenditures
for these matters to have a material adverse effect on our financial condition,
results of operations or cash flows.
Pipeline Safety - We are subject to PHMSA regulations, including
integrity-management regulations. PHMSA regulations require pipeline companies
operating high-pressure transmission pipelines to perform integrity assessments
on pipeline segments that pass through densely populated areas or near
specifically designated HCAs. In January 2012 , the Pipeline Safety, Regulatory
Certainty and Job Creation Act was signed into law. The law increased maximum
penalties for violating federal pipeline safety regulations and directs the DOT
and the Secretary of Transportation to conduct further review or studies on
issues that may or may not be material to us. These issues include, but are not
limited to, the following:
•an evaluation of whether natural gas pipeline integrity-management requirements
should be expanded beyond current HCAs;
•a verification of records for pipelines in class 3 and 4 locations and HCAs to
confirm MAOPs; and
•a requirement to test previously untested pipelines operating above 30 percent
yield strength in HCAs.
In April 2016 , PHMSA published a NPRM, the Safety of Gas Transmission &
Gathering Lines Rule, in the Federal Register to revise pipeline safety
regulations applicable to the safety of onshore natural gas transmission and
gathering pipelines. Proposals include changes to pipeline integrity-management
requirements and other safety-related requirements. The NPRM comment period
ended July 7, 2016 , and comments were reviewed by PHMSA. As part of the comment
review process, PHMSA was advised by the Technical Pipeline Safety Standards
Committee, informally known by PHMSA as the GPAC, a statutorily mandated
advisory committee that advises PHMSA on proposed safety policies for natural
gas pipelines. The GPAC reviews PHMSA's proposed regulatory initiatives to
assure the technical feasibility, reasonableness, cost-effectiveness and
practicality of each proposal. The GPAC met six times since January 2017 to
review public comments and make recommendations to PHMSA. The GPAC completed
their review of the NPRM on March 28, 2018 , except for gas gathering pipelines.
The GPAC met in June 2019 on gas gathering pipelines. In addition to reviewing
public and committee comments, PHMSA announced they will split this NPRM into
three separate final rulemakings:
•the first final rule addresses the legislative mandates from the Pipeline
Safety, Regulatory Certainty and Jobs Creation Act and will be called the Safety
of Gas Transmission Pipelines: MAOP Reconfirmation, Expansion of Assessment
Requirements, and Other Related Amendments;
•the second final rule will be called the Safety of Gas Transmission Pipelines:
Repair Criteria, Integrity Management Improvements, Cathodic Protection,
Management of Change, and Other Related Amendments and will cover all remaining
elements of the NPRM (except for gas gathering pipelines); and
•the third final rule will be called the Safety of Gas Gathering Pipelines and
will address gas gathering pipelines.
A significant number of recommendations have been made to PHMSA to improve the
NPRM. The industry trade associations filed joint comments to the "legislative
mandates" rulemaking to amend the federal safety regulations applicable to gas
transmission and gathering pipelines.
On October 1, 2019 , PHMSA published the first of the three final rules
referenced above, which addressed the 2011 congressional mandates. This final
rule expands integrity management principles beyond HCAs and requires operators
to collect traceable, verifiable and complete records moving forward, retain
existing and new records for the life of the pipeline, and reconfirm pipeline
MAOP in populated areas. The final rule also outlines methods for reconfirming a
pipeline's MAOP within 15 years. The first final rule became effective July 1,
2020 . The estimated capital and operating expenditures associated with
compliance with the first final rule are not material.
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PHMSA has not yet issued the second final rule. The potential capital and
operating expenditures associated with compliance with this rule are currently
being evaluated and could be significant depending on the final regulations. We
do not expect to be impacted by the third final rule, as we do not own gas
gathering pipelines.
Air and Water Emissions - The Clean Air Act, the Clean Water Act, analogous
state laws and/or regulations promulgated thereunder, impose restrictions and
controls regarding the discharge of pollutants into the air and water in the
United States . Under the Clean Air Act, a federally enforceable operating permit
is required for sources of significant air emissions. We may be required to
incur certain capital expenditures for air-pollution-control equipment in
connection with obtaining or maintaining permits and approvals for sources of
air emissions. We do not expect that these expenditures will have a material
impact on our respective results of operations, financial position or cash
flows. The Clean Water Act imposes substantial potential liability for the
removal of pollutants discharged to waters of the United States and remediation
of waters affected by such discharge.
International, federal, regional and/or state legislative and/or regulatory
initiatives may attempt to regulate greenhouse gas emissions. We monitor
relevant legislation and regulatory initiatives to assess the potential impact
on our operations. The EPA 's Mandatory Greenhouse Gas Reporting Rule requires
annual greenhouse gas emissions reporting as carbon dioxide equivalents from
affected facilities and for the natural gas delivered by us to our natural gas
distribution customers who are not otherwise required to report their own
emissions. The additional cost to gather and report this emission data did not
have, and we do not expect it to have, a material impact on our results of
operations, financial position or cash flows. In addition, Congress has
considered, and may consider in the future, legislation to reduce greenhouse gas
emissions, including carbon dioxide and methane. Likewise, the EPA may institute
additional regulatory rulemaking associated with greenhouse gas emissions. At
this time, no rule or legislation has been enacted for natural gas distribution
that assesses any costs, fees or expenses on any of these emissions.
CERCLA - CERCLA, also commonly known as Superfund, imposes strict, joint and
several liability, without regard to fault or the legality of the original act,
on certain classes of "persons" (defined under CERCLA) that caused and/or
contributed to the release of a hazardous substance into the environment. These
persons include, but are not limited to, the owner or operator of a facility
where the release occurred and/or companies that disposed or arranged for the
disposal of the hazardous substances found at the facility. Under CERCLA, these
persons may be liable for the costs of cleaning up the hazardous substances
released into the environment, damages to natural resources and the costs of
certain health studies. We do not expect that our responsibilities under CERCLA
will have a material impact on our respective results of operations, financial
position or cash flows.
Pipeline Security - In May and July 2021 , the U.S. Department of Homeland
Security's Transportation Security Administration issued security directives
which included several new cybersecurity requirements for critical pipeline
owners and operators. We are currently evaluating the potential effect of these
directives on our operations and facilities, as well as the potential cost of
implementation, and will continue to monitor for any clarifications or
amendments to these directives.
The Transportation Security Administration issued pipeline security guidelines
in March 2018 . Our pipeline facilities have been reviewed according to those
guidelines and no material changes have been required to date.
Environmental Footprint - Our environmental and climate change strategy focuses
on taking steps to minimize the impact of our operations on the environment.
These strategies include: (1) developing and maintaining an accurate greenhouse
gas emissions inventory; (2) employing advanced leak detection technologies and
improving the integrity of and reducing leaks on our pipelines; (3) following
developing technologies for reducing emissions; (4) promoting end-use
conservation through programs that incentivize and inform customers regarding
the use of high-efficiency equipment; and (5) reducing the release of methane
into the atmosphere from operational practices, such as blow-downs and
third-party line hits. In addition, RNG and hydrogen technologies offer
potential opportunities to secure new natural gas supply sources that could be
transported on our pipeline system and reduce greenhouse gas emissions.
We participate in the EPA 's Natural Gas STAR Program to voluntarily reduce
methane emissions. We continue to focus on reducing emissions through expanded
implementation of best practices, such as mobile compression and vacuum
technologies to limit the release of natural gas during pipeline and facility
maintenance and operations. Additionally, in March 2016 , we were one of 40
founding partners to launch the EPA 's Natural Gas STAR Methane Challenge
Program, whereby oil and natural gas companies agree to promote and track
commitments to reduce methane emissions beyond what is federally required. Our
Methane Challenge Program commitment to annually replace or rehabilitate at
least two percent of our combined inventory of cast iron and
noncathodically-protected steel pipe aligns with our planned system integrity
expenditures for infrastructure replacements. We exceeded our goal by achieving
an overall replacement rate greater than two percent annually in 2016, 2017,
2018, and 2019 and anticipate reporting on our 2020 progress in 2021.
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In September 2020 , we announced membership in Our Nation's Energy Future (ONE
Future), a group of natural gas companies working together to voluntarily reduce
methane emissions across the natural gas value chain to one percent or less by
2025. In its most recent report, ONE Future reported that its members registered
a 2019 methane intensity of 0.334%. We have submitted our 2020 data and
anticipate that ONE Future will report on 2020 methane intensity in the fourth
quarter of 2021.
Additional information about our environmental matters is included in the
section entitled "Environmental Matters" in Note 12 of the Notes to Consolidated
Financial Statements in this Quarterly Report. We cannot assure that existing
environmental statutes and regulations will not be revised or that new
regulations will not be adopted or become applicable to us. Revised or
additional regulations that result in increased compliance costs or additional
operating restrictions could have a material adverse effect on our business,
financial condition and results of operations. Our expenditures for
environmental investigation, and remediation compliance to-date have not been
significant in relation to our financial position, results of operations or cash
flows, and our expenditures related to environmental matters had no material
effects on earnings or cash flows for the three and six months ended June 30,
2021 and 2020.
Regulatory - Several regulatory initiatives impacted the earnings and future
earnings potential of our business. See additional information regarding our
regulatory initiatives in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
IMPACT OF NEW ACCOUNTING STANDARDS
Information about the impact of new accounting standards, if any, is included in Note 1 of the Notes to Consolidated Financial Statements in this Quarterly Report.
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ from our estimates. Information about our estimates and critical accounting policies is included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Estimates and Critical Accounting Policies," in our Annual Report.
FORWARD-LOOKING STATEMENTS
Some of the statements contained and incorporated in this Quarterly Report are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements relate to our anticipated financial performance, liquidity, management's plans and objectives for our future operations, our business prospects, the outcome of regulatory and legal proceedings, market conditions and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.
Forward-looking statements include the items identified in the preceding paragraph, the information concerning possible or assumed future results of our operations and other statements contained or incorporated in this Quarterly Report identified by words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "should," "goal," "forecast," "guidance," "could," "may," "continue," "might," "potential," "scheduled," "likely," and other words and terms of similar meaning.
One should not place undue reliance on forward-looking statements, which are
applicable only as of the date of this Quarterly Report. Known and unknown
risks, uncertainties and other factors may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by forward-looking statements. Those
factors may affect our operations, costs, liquidity, markets, products, services
and prices. In addition to any assumptions and other factors referred to
specifically in connection with the forward-looking statements, factors that
could cause our actual results to differ materially from those contemplated in
any forward-looking statement include, among others, the following:
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•our ability to recover costs (including operating costs and increased commodity
costs related to Winter Storm Uri), income taxes and amounts equivalent to the
cost of property, plant and equipment, regulatory assets and our allowed rate of
return in our regulated rates;
•our ability to manage our operations and maintenance costs;
•the concentration of our operations in Kansas, Oklahoma , and Texas ;
•changes in regulation of natural gas distribution services, particularly those
in Oklahoma , Kansas and Texas ;
•regulations in local jurisdictions in which we operate authorizing utilities to
record in a regulatory asset account or comparable account the expenses
associated with Winter Storm Uri, including but not limited to gas costs, other
costs related to the procurement and transportation of gas supply and the
associated financing costs;
•the economic climate and, particularly, its effect on the natural gas
requirements of our residential and commercial customers;
•the length and severity of a pandemic or other health crisis, such as the
outbreak of COVID-19, including the impact to our operations, customers,
contractors, vendors and employees, the effectiveness of vaccine campaigns
(including the COVID-19 vaccine campaign) on our workforce and customers and the
effect of other measures that international, federal, state and local
governments, agencies, law enforcement and/or health authorities implement to
address the pandemic or other health crises, which may (as with COVID-19)
precipitate or exacerbate one or more of the above-mentioned and/or other risks,
and significantly disrupt or prevent us from operating our business in the
ordinary course for an extended period;
•competition from alternative forms of energy, including, but not limited to,
electricity, solar power, wind power, geothermal energy and biofuels;
•conservation and energy efficiency efforts of our customers;
•adverse weather conditions and variations in weather, including seasonal
effects on demand and/or supply, the occurrence of storms, including Winter
Storm Uri in the territories in which we operate, and climate change, and the
related effects on supply, demand and costs;
•indebtedness could make us more vulnerable to general adverse economic and
industry conditions, limit our ability to borrow additional funds and/or place
us at competitive disadvantage compared with competitors;
•our ability to secure reliable, competitively priced and flexible natural gas
transportation and supply, including decisions by natural gas producers to
reduce production or shut-in producing natural gas wells and expiration of
existing supply and transportation and storage arrangements that are not
replaced with contracts with similar terms and pricing;
•our ability to complete necessary or desirable expansion or infrastructure
development projects, which may delay or prevent us from serving our customers
or expanding our business;
•operational and mechanical hazards or interruptions;
•adverse labor relations;
•the effectiveness of our strategies to reduce earnings lag, margin protection
strategies and risk mitigation strategies, which may be affected by risks beyond
our control such as commodity price volatility, counterparty performance or
creditworthiness and interest rate risk;
•the capital-intensive nature of our business, and the availability of and
access to, in general, funds to meet our debt obligations prior to or when they
become due and to fund our operations and capital expenditures, either through
(i) cash on hand, (ii) operating cash flow, or (iii) access to the capital
markets and other sources of liquidity;
•our ability to borrow funds, if needed, to meet our liquidity needs including
raising the funds on commercially reasonable terms, or on terms acceptable to
us, or at all;
•limitations on our operating flexibility, earnings and cash flows due to
restrictions in our financing arrangements;
•cross-default provisions in our borrowing arrangements, which may lead to our
inability to satisfy all of our outstanding obligations in the event of a
default on our part;
•changes in the financial markets during the periods covered by the
forward-looking statements, particularly those affecting the availability of
capital and our ability to refinance existing debt and fund investments and
acquisitions to execute our business strategy;
•actions of rating agencies, including the ratings of debt, general corporate
ratings and changes in the rating agencies' ratings criteria;
•changes in inflation and interest rates;
•our ability to recover the costs of natural gas purchased for our customers,
including those related to Winter Storm Uri and any related financing required
to support our purchase of natural gas supply, including the securitized
financings currently contemplated in each of our jurisdictions;
•impact of potential impairment charges;
•volatility and changes in markets for natural gas and our ability to secure
additional and sufficient liquidity on reasonable commercial terms to cover
costs associated with such volatility;
•possible loss of LDC franchises or other adverse effects caused by the actions
of municipalities;
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•payment and performance by counterparties and customers as contracted and when due, including our counterparties maintaining ordinary course terms of supply and payments; •changes in existing or the addition of new environmental, safety, tax and other laws to which we and our subsidiaries are subject, including those that may require significant expenditures, significant increases in operating costs or, in the case of noncompliance, substantial fines or penalties; •the effectiveness of our risk-management policies and procedures, and employees violating our risk-management policies; •the uncertainty of estimates, including accruals and costs of environmental remediation; •advances in technology, including technologies that increase efficiency or that improve electricity's competitive position relative to natural gas; •population growth rates and changes in the demographic patterns of the markets we serve, and conditions in these areas' housing markets; •acts of nature and the potential effects of threatened or actual terrorism and war; •cyber-attacks, which, according to experts, have increased in volume and sophistication since the beginning of the COVID-19 pandemic, or breaches of technology systems that could disrupt our operations or result in the loss or exposure of confidential or sensitive customer, employee or Company information; further, increased remote working arrangements as a result of the pandemic have required enhancements and modifications to our IT infrastructure (e.g. Internet, Virtual Private Network, remote collaboration systems, etc.), and any failures of the technologies, including third-party service providers, that facilitate working remotely could limit our ability to conduct ordinary operations or expose us to increased risk or effect of an attack; •the sufficiency of insurance coverage to cover losses; •the effects of our strategies to reduce tax payments; •the effects of litigation and regulatory investigations, proceedings, including our rate cases, or inquiries and the requirements of our regulators as a result of the Tax Cuts and Jobs Act of 2017; •changes in accounting standards; •changes in corporate governance standards; •discovery of material weaknesses in our internal controls; •our ability to comply with all covenants in our indentures, the ONE Gas Credit Agreement, a violation of which, if not cured in a timely manner, could trigger a default of our obligations; •our ability to attract and retain talented employees, management and directors, and shortage of skilled-labor; •unexpected increases in the costs of providing health care benefits, along with pension and postemployment health care benefits, as well as declines in the discount rates on, declines in the market value of the debt and equity securities of, increases in funding requirements for, our defined benefit plans; and •the ability to successfully complete merger, acquisition or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also have material adverse effects on our future results. These and other risks are described in greater detail in Part 1, Item 1A, Risk Factors, in our Annual Report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Other than as required under securities laws, we undertake no obligation to update publicly any forward-looking statement whether as a result of new information, subsequent events or change in circumstances, expectations or otherwise.
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