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ONE Gas, Inc -- Moody's downgrades ONE Gas to A3 from A2; outlook negative

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Rating Action: Moody's downgrades ONE Gas to A3 from A2; outlook negativeGlobal Credit Research - 23 Feb 2021Approximately $1.6 billion of debt securities affectedNew York, February 23, 2021 -- Moody's Investors Service, ("Moody's") downgraded the ratings of ONE Gas, Inc, including its senior unsecured rating to A3 from A2 and short-term rating for commercial paper to P-2 from P-1. Moody's revised the outlook for ONE Gas' rating to negative from stable."ONE Gas' credit profile will be materially impacted by the incurrence of approximately $2.2 billion in natural gas procurement costs in February [1] and may continue to face additional ratings pressure without a clear path to address the costs" stated Nana Hamilton, AVP-Analyst. The significant fuel expense, representing about 30 times what is typical for the company in the month of February, resulted from disruptions in the natural gas markets due to unprecedented weather conditions in the company's service territories. We note that the costs are expected to be recovered over time, and we continue to incorporate a view that ONE Gas has constructive and supportive relationships with its utility regulators.RATINGS RATIONALEONE Gas' credit has historically been supported by its business profile as a fully regulated natural gas local distribution company (LDC) operating in jurisdictions with regulatory mechanisms that support predictable revenue and cash flow generation. However, we do not expect existing gas recovery mechanisms to function as usual given the magnitude of costs incurred. While we expect the utility to be allowed some form of regulatory recovery, we anticipate a long timeline of recovery for approved amounts to reduce the customer bill impact.The company has secured a $2.5 billion, 2-year unsecured term loan, scheduled to fund during the week of 22 March 2021, to help cover the gas costs. As of 22 February 2021, ONE Gas also had access to approximately $297 million in total cash and cash equivalent assets and $296 million available under its existing credit facilities. Although we view the company's ability to secure liquidity quickly in distress positively, we see the utility's financial profile for the next few years being weakened by the doubling of its total outstanding debt, which was approximately $1.9 billion at the end of September 2020.Physical climate risks, customer relations, and financial strategy and risk management are three key elements of Moody's assessment of how environmental, social and governance factors respectively affect creditworthiness. The approved recovery timeline for the substantial amounts ONE Gas spent to serve its customers, at a time when customers are under economic pressure caused by the coronavirus pandemic, will be important to the company's credit profile going forward. Furthermore, changes to ONE Gas' corporate finance policies to reduce the financial impacts of the weather-driven natural gas market disruption, and changes to the company's gas supply strategy to mitigate risks associated with extreme weather events will influence our view of ONE Gas' credit.OutlookThe negative outlook reflects the possibility of a sustained deterioration in the company's credit profile, given our expectation that the timeframe over which ONE Gas is allowed to recover its natural gas costs is likely to be several years.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgradeONE Gas' rating could be upgraded if we expect the company to produce a ratio of operating cash flow excluding working capital changes (CFO pre-WC) to debt above 20% on a sustainable basis.Factors that could lead to a downgradeONE Gas' rating could be downgraded if the approved recovery amounts or timeline for the February 2021 fuel costs, together with any management mitigation actions, are such that that the company's ratio of CFO pre-WC to debt is expected to be sustained below 17%. Inadequate cost recovery would not only reduce the company's credit metrics but also could weaken our qualitative scores for regulation.Downgrades:..Issuer: ONE Gas, Inc....Senior Unsecured Commercial Paper, Downgraded to P-2 from P-1....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2Outlook Actions:..Issuer: ONE Gas, Inc....Outlook, Changed To Negative From StableHeadquartered in Tulsa, Oklahoma, ONE Gas provides natural gas distribution services to over 2 million customers in Kansas, Oklahoma and Texas.The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Form 8-K (SEC) 22-Feb-2021Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Nana Hamilton Asst Vice President - Analyst Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infrastructure Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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