Good day, and welcome to the ONE Gas third quarter earnings conference call. Today's conference is being recorded, and at this time, I would like to turn the conference over to Mr. Brandon Lohse. Please go ahead, sir.
Good morning, and thank you for joining us on our third quarter 2020 earnings conference call. This call is being webcast live, and a replay will be made available later today. After our prepared remarks, we will be happy to take your questions. A reminder that these statements made during this call that might include ONE Gas expectations or predictions should be considered forward-looking statements and are covered under the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward-looking statements and include, among others, statements about the length and severity of a pandemic or other health crisis, such as the outbreak of COVID-19. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.
Joining us on the call this morning are Pierce Norton, President and Chief Executive Officer; Caron Lawhorn, Senior Vice President and Chief Financial Officer; Curtis Dinan, Senior Vice President and Chief Commercial Officer; and Sid McAnnally, Senior Vice President and Chief Operating Officer. Now I'll turn the call over to Caron.
Thanks, Brandon. Good morning, everyone. Yesterday, we announced that we updated our 2020 financial guidance with net income and earnings per diluted share expected to be near the upper end of the ranges, which are $186 million-$198 million for net income and $3.44-$3.68 for earnings per share. Our guidance for capital expenditures and asset removal costs remains $500 million-$525 million for the year. Turning to our actual results, net income for the third quarter was $21.1 million, or $0.39 per diluted share, compared with $17.5 million or $0.33 per diluted share in the same period 2019. Our third quarter results reflect an increase in net margin of $5.2 million over the same period last year, which is primarily due to $3.7 million from new rates and $2.7 million in residential sales from net residential customer growth.
Operating costs for the third quarter were $0.8 million higher compared to the same period last year. This includes an increase of $1.8 million in expenses related to our response to the COVID-19 pandemic and a $1.5 million increase in employee-related costs. Offsetting a portion of those cost increases is a reduction in expenses of dollars for travel and employee training costs that have been impacted by the pandemic. We have not recorded any regulatory assets for financial accounting purposes pursuant to the accounting orders received in all jurisdictions that allow us to defer, for regulatory purposes, certain net increases in expenses and lost revenue due to COVID-19. We continue to evaluate whether amounts expected to be recoverable under these accounting orders are both measurable and probable of recovery and will record such amounts for financial accounting purposes when we meet that hurdle.
Our guidance for 2020 does not assume that we will record any regulatory assets by the end of the year. Our capital expenditures and asset removal costs decreased this quarter compared with the third quarter last year simply due to timing. Yesterday, the ONE Gas Board of Directors declared a dividend of $0.54 per share. Authorized rate base reflecting our recent regulatory activity is approximately $3.71 billion as of September the 30th. Authorized rate base is defined as the rate base reflected in completed regulatory proceedings, including full rate cases and interim rate filings.
We project that for 2020, our estimated average rate base, which is defined as authorized rate base plus additional investments in our system and other changes in the components of our rate base that are not yet reflected in approved regulatory filings, will be approximately $3.91 billion, with 42% of that in Oklahoma, 29% in Kansas, and 29% in Texas. We ended the quarter with adequate liquidity, which includes approximately $391 million of capacity in our commercial paper program and all of the capacity under our $250 million 364-day credit facility. Additionally, as of September 30th, 2020, we have issued approximately $13 million of equity under the $250 million at-the-market equity program we put in place earlier this year. We have no plans to issue equity for the remainder of 2020.
Now I'll turn it over to Curtis for our regulatory and commercial update.
Thank you, Caron, and good morning, everyone. First, I'll provide an overview of recent regulatory activity and then provide an update on our commercial activities. Kansas Gas Service filed a Gas System Reliability Surcharge, or GSRS, that seeks an increase in rates of approximately $7.5 million for capital expenditures incurred during the period covering July 2019 through June 2020. An order from the KCC is expected in December 2020, with new rates going into effect in January. Texas Gas Service filed a rate case in December 2019 for all customers in the Central Texas and Gulf Coast service areas, seeking a rate increase and requesting to consolidate the two service areas.
In August, the Railroad Commission approved all terms of a $10.3 million settlement, as well as consolidation of the Central Texas service area and the Gulf Coast service area into a new Central Gulf service area. This is a continuation of our strategy to consolidate jurisdictions, which is a benefit to customers. With this latest consolidation, we now have five jurisdictions in Texas, down from 10 at the time of spin-off in 2014. Moving on to our commercial activities. During our second quarter analyst call, I discussed the return to normal business levels for a couple of our large transport customers that had temporarily curtailed operations at the start of the pandemic, and that we were not seeing any other significant disruptions with our transport customers.
For the third quarter 2020, our transport revenues and volumes were above the same period in 2019, and on a year-to-date comparison between years, our transport revenues have erased the second quarter 2020 impact and are now flat year-over-year. We continue to see strong interest in natural gas from builders and developers. Capital spending to extend our service to reach new customers is the primary driver behind our increased capital expenditures guidance for 2020, as we described last quarter. Despite the pandemic, we're seeing positive economic signs across our footprint, particularly in Texas and Oklahoma. As an example, in the Austin area, there have been over 100 new business relocations or expansions announced thus far in 2020, which are expected to provide over 14,000 additional new jobs. This increase in economic activity across our territories has resulted in continued growth in our customer base.
Year to date, we have averaged approximately 24,000 more sales customers than the same period last year. This increase includes the connection of 18,600 new customers, compared with 14,600 new customers in the same period last year, or a 27% increase over last year's pace. As I described during our last two quarterly analyst calls, the impact of the moratoriums on disconnects for non-payment by our customers, which expired in May in Oklahoma and Kansas, and early October in some areas of Texas, has also impacted our average customer counts. Now I'll turn it over to Sid for an update on operations.
Thanks, Curtis. Our team in the field continues to adapt well to the current environment with maintenance and compliance work on or ahead of schedule. Our supply chain remains uninterrupted, we see no forward constraints to our planned work, thanks to steady performance by our resource management team related to materials and contractor resources. As Caron mentioned, while our capital spend was lower this quarter than the third quarter of last year, the issue is timing rather than performance. We've been pleased with the cadence of capital execution year-to-date, with more consistent capital spend quarter to quarter than last year due to favorable weather and improved planning by our asset management, engineering, and field operations teams. We remain on track to meet our capital expenditure guidance as discussed earlier. Now I'll turn it over to Pierce.
Thank you, Caron, Curtis, and Sid. The pandemic has changed many things for many people. Our homes have become the place where we spend more and more time. Our customers take comfort in the warmth that our product provides, especially as we head into colder weather. As we near the end of the year, it's natural to reflect on how far we've come. For me, three things stand out. Our resiliency, adaptability, and commitment to safety. Our performance this year demonstrates the resiliency of our business model and the continued value of natural gas as a preferred energy source for homes and businesses. This year, we were able to grow our customer base, improve system integrity, and established a remote workforce amidst great adversity. Despite the challenges brought on by the pandemic, our industry is accustomed to frontline response.
Across our organization, we quickly implemented additional safety protocols and new processes designed to keep our employees and our customers safe during the pandemic. Thanks to the adaptability and diligence of each employee, we've continued providing service to our customers with minimal disruptions. Finally, in closing, I'd like to recognize the ONE Gas employees and give each of them a special thank you for their continued professionalism under stress, resolve when there's no clear end in sight, and poise in the face of uncertainty. We'll get through this pandemic by relying on the values that we anchor our company to as we address the challenges that face our business. Thank you all for joining us this morning. Operator, we're now ready for questions.
Al right, if you would like to ask a question, you may signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal. All right. The first question is from Richard Ciciarelli with Bank of America.
Hey, good morning. Can you hear me okay?
We can. Good morning, Richard.
Hey, thanks for taking my question. I was just curious how you guys are thinking about COVID-19 into peak winter heating season here. I realize ONE Gas has a higher proportion of residential versus C&I transport customers, but how are you thinking about factoring the lingering impact, especially with the resurgence of cases, as you begin to look at your 2021 outlook and the moving pieces? Maybe just also comment on the equity needs into next year as well.
Richard, it's Sid. Let me start and throw to Curtis for the commercial part of that question, and then Caron can come in on the end in terms of the financing question. We have been preparing for winter since March. We understood that there was a high probability that we would see a second wave and that we would see some commingling of COVID and the flu. Our medical protocols were built with that in mind. We have not seen constraints in our service territories, and our employees have done a remarkable job of proactively participating in our medical program to make sure that we can provide them with the best medical advice to keep them and their families and our customers safe, but also to allow us to tamp down any widespread unavailability of employees in any of our service territories. We feel like we're well-prepared.
We don't say that spiking the ball on the 50. We recognize that there is a challenging time ahead of us, but we think we're as well-prepared as we can be. Let me toss to Curtis to respond to the commercial question.
Richard, on the commercial side of things, as you know, we have a very high percent of our customer base being residential. About 12%, that's our transport customers. One of the things that I noted in my comments is that we're really not seeing an impact at this point from our transport customers. We seem to have returned to a normal level of operations and have actually closed the gap with the activity we saw in the third quarter, closing the gap from what we saw during the second quarter of this year. On the residential side of things, I think we're well-prepared in our customer call centers to handle the call volume that we typically run into this time of the year.
One of the good things about the moratoriums being lifted when they were at the end of May for Oklahoma and Kansas, and then a little bit later in Texas, is that while those moratoriums were in place, Sid's operations teams were able to divert those resources to handle a lot of our other normal annual activities and to get ahead of those activities such that when the moratoriums were lifted, we were able to focus more of our resources on the disconnect process, which helped with our collection through that period. Several factors that we had to remain agile to handle during the year, but cooperation and the work between our commercial and operations teams helped us work through that part of it to be ready when we could again resume disconnects, and that's helped our overall process.
The last piece I would say is, as Caron talked about, we do have the regulatory accounting orders in each of our jurisdictions. We'll continue to monitor the activities for increased expenses as well as areas where we've been able to decrease expenses and continue to accumulate those until we're able to go through the regulatory process to begin recovery of those.
I'll pick up on the financing question. We have not updated our longer-term guidance for financing, which currently is that we anticipate $850 million-$900 million of net financing worth with about a quarter of that being equity. When we issue our guidance for 2021, which we expect to do probably sometime after the first of the year, we'll provide a closer look on what 2021 looks like.
Okay, got it. That's very helpful. Appreciate all the color there. Maybe just switching gears here, obviously, with elections on top of mind, just curious how you're thinking about decarbonization goals and just given really some of the potential for electrification in buildings and some of the supply and cost constraints on the R&D side. I mean, is that really the solution, or is green hydrogen potentially a more likely candidate? Just maybe curious if you can provide some thoughts overall on timing and when we can see more formal adoption of these technologies.
Another good question, Richard. This is Curtis again. On the commercial side, I've talked before about efforts we've had around renewable natural gas. There are several different projects and developers that we're talking to. Some already capture RNG and use it for alternative uses. What we may be able to bring to the table is the opportunity to improve the commercial economics of that captured gas. By bringing it into our system and getting it tracked through to be used as replacement for diesel for other products through compressed natural gas. We're continuing to explore, and hopefully, we'll be in a position that we have some of those projects as we move into next year. We've proven the commercial ability of those projects, and we've established the gas standards and everything that we would need to do to bring that product into our system.
Again, we continue to make progress on that. We're also in an H2@Scale project with the University of Texas and some other parties, including the DOE to run some different scale projects of converting or producing hydrogen, both from renewable power as well as from landfill gas, and then using that hydrogen that's produced to run a computer center at the University of Texas, as well as provide fuel for hydrogen fuel cell vehicles. That project just started earlier in the mid part, actually, of 2020. It's about a three-year project, but promising results come out of that. I'm going to turn it to Sid, and he can talk a little bit more about what we're doing and what we're seeing on the operations side to analyze the impact of hydrogen.
Yeah, Richard, thank you for the question. As you know, there is a commercial component to this, an R&D component as you point out, but there are also some practical implications that companies need to consider as emergent opportunities like hydrogen start to be developed. We have two working groups in place currently. One is looking at technical issues, including the engineering implications. There will be policies and procedures around hydrogen use. There are also some system integrity implications to make sure that you can introduce hydrogen at the proper blending rate and handle that safely in terms of continuing to focus on safety of our system. The second is a really interesting working group that's looking at the gas supply implications. Hydrogen is a different material to compress and transport inside the location of manufacturing facilities comes into play.
We're scoping all of that right now and excited about continuing the conversation.
All right. Thanks very much for all the color there. That's all I have.
All right. Once again, that is star one to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing star two. I apologize if I say this incorrectly, Agnieszka Zmigrodzka with UBS.
Good morning.
Morning, Aga.
Could you give us an update on bad debt and how is it trending this year as we head into winter?
Sure. Good morning, Aga, this is Caron. We're still, as Curtis described, some of our collection's activity, that's still at play, so we're not out of the COVID impact, certainly by a long stretch. We currently are $8.8 million of bad debt expense through the nine months. That compares to $4.6 million last year. We're up about $4 million year-over-year. Again, we're just working to monitor the situation. There are still some moratoriums in place in some of the service areas, and so until we get completely back to normal collections activities for an extended period of time, it's going to be difficult to really determine what the impact has been.
How does the change in Kansas related to eliminating state income taxes from rates could impact ONE Gas's cash flow going forward?
We don't expect it to have a material impact in the scheme of things. It's not large in our overall tax picture. The elimination of the state income tax is not a large event.
Perfect. Last question from me. To follow up on Richard's question on decarbonization, is there a regulatory framework in place to invest in RNG across your jurisdictions? Do you have tariffs established to potentially cover some additional costs related to investments in RNG? Any color would be helpful.
Aga, this is Curtis. RNG is actually contemplated in the tariffs in Texas. It is a recoverable gas cost there. That has previously been contemplated as part of the gas supply picture. In Oklahoma, there was legislation introduced in the last session to compel the commission to study RNG and to look at ways to bring RNG into the Oklahoma gas supply. With the pandemic starting, that was not a bill that was considered all the way through session. Outside of that, the Oklahoma Corporation Commission has opened up a notice of inquiry looking at several different energy questions, one of which is renewable natural gas and the way that the state and the commission should deal with that product. There are efforts underway at the state levels also. Not as much at this point in Kansas.
The other two states are a little bit further along in that regard.
Thank you for the color and stay safe.
Thank you, Aga.
All right. Once again, that is star one to ask a question. It appears there are no further questions at this time. Mr. Lohse, I'd like to turn it back to you for any additional or closing remarks.
Thank you all again for your interest in ONE Gas. Our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in February. We'll provide details on the conference call at a later date. Have a great day.
This concludes today's call. Thank you for your participation. You may now disconnect.