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Edited Transcript of OGS earnings conference call or presentation 29-Oct-19 3:00pm GMT

Q3 2019 ONE Gas Inc Earnings Call

Tulsa Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of ONE Gas Inc earnings conference call or presentation Tuesday, October 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brandon Lohse

ONE Gas, Inc. - Director of IR

* Caron A. Lawhorn

ONE Gas, Inc. - Senior VP & CFO

* Curtis L. Dinan

ONE Gas, Inc. - SVP of Commercial

* Pierce H. Norton

ONE Gas, Inc. - President, CEO & Director

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Conference Call Participants

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* Aga Zmigrodzka

UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs

* Sarah Elizabeth Akers

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the ONE Gas Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Mr. Brandon Lohse. Please go ahead, sir.

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Brandon Lohse, ONE Gas, Inc. - Director of IR [2]

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Good morning, and thank you for joining us on our third quarter 2019 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 statements made during this call that might include ONE Gas expectations or predictions should be considered forward-looking statements and are covered by 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. 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 Caron Lawhorn, Senior Vice President and Chief Financial Officer; Curtis Dinan, Senior Vice President in Commercial; Sid McAnally, Senior Vice President in Operations; and Pierce Norton, President and Chief Executive Officer.

And now, I'll turn the call over to Caron.

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Caron A. Lawhorn, ONE Gas, Inc. - Senior VP & CFO [3]

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Thanks, Brandon. Good morning, everyone, and thank you for joining us today. Net income for third quarter 2019 was $17.5 million or $0.33 per diluted share compared with $16.3 million or $0.31 per diluted share for the same period last year.

Our third quarter results reflect higher net margin from new rates and residential customer growth primarily in Oklahoma and Texas. Operating costs for the third quarter were $114.6 million compared with $110.5 million in the same period last year primarily due to an increase in employee-related costs.

Note that on a year-to-date basis, our operating costs have increased 2.4%, which is in line with our guidance for the full year. Interest expense has increased relative to the prior year, due primarily to the refinancing of $400 million of senior notes in the fourth quarter of last year at a higher interest rate.

Income tax expense including amortization of the regulatory liability for excess accumulated deferred income taxes, or ADIT, which was $1.4 million for the third quarter and $10.3 million for the year to date. You will recall that this amortization is offset in revenues.

Authorized rate base reflecting the recently completed regulatory activity in Central Texas is approximately $3.5 billion as of September 30. Authorized rate base is defined as the rate base reflected and completed regulatory proceedings, including full rate cases and interim rate filings.

We project that for 2019 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 3.4 -- excuse me, $3.64 billion with 42% in Oklahoma, 29% in Kansas and 29% in Texas.

ONE Gas ended the quarter with approximately $304 million of capacity under our commercial paper program. As we have indicated previously, our lower cash flows in 2019 reflect the impact of tax reform. There are 3 contributors I would like to highlight. First, Oklahoma Natural Gas is still dealing with the final impact of tax reform on its base rate. Rates in Oklahoma were lowered in February of this year, and as Curtis will describe in a moment, our customers are receiving a credit for the outcome of the 2019 PBRC filing.

Secondly, we're returning approximately $16 million to our customers in Kansas and Oklahoma for excess ADIT. And the third contributor I'll mention is that we're a cash taxpayer in 2019 for the first time, with expected payments of approximately $30 million.

We have previously shared that our financing plans contemplate $500 million to $550 million of net financing needs through 2023, with approximately 1/3 being equity.

Yesterday, the ONE Gas Board of Directors declared a dividend of $0.50 per share, unchanged from the previous quarter. This dividend is consistent with our guidance for 2019. As we have indicated previously, we expect the average annual dividend increase to be 7% to 9% between 2018 and 2023 with a targeted dividend payout ratio of 55% to 65% of net income.

Lastly, we are affirming our 2019 net income guidance of $180 million to $190 million or approximately $3.39 to $3.57 per diluted share. As you may recall, last quarter, we updated guidance based on our positive results for the first 6 months of the year.

And now I'll turn it over to Curtis Dinan for a regulatory update. Curtis?

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Curtis L. Dinan, ONE Gas, Inc. - SVP of Commercial [4]

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Thanks, Caron, and good morning, everyone. Let's begin with Oklahoma. As anticipated and discussed last quarter, the Oklahoma Corporation Commission approved the settlement and stipulation in Oklahoma Natural Gas' performance-based rate change filing or PBRC.

You'll recall that the stipulation requires Oklahoma Natural Gas to credit its customers $15.6 million over a 12-month period, which began in the third quarter and reflects the return of earnings from the 2018 test year that were above the 9.5% midpoint of its ROE band.

In addition, Oklahoma Natural Gas will credit its customers $12.7 million in 2020 for the annual reversal of excess accumulated deferred income taxes.

As a reminder, the provisions of the order will not have a significant impact on earnings in either 2019 or 2020 but, as Caron mentioned, does impact cash flows. We will have one more PBRC filing in 2020 before a full rate case is required to be filed in 2021.

Having worked through the effects of tax reform, we expect this next filing, based on a 2019 test year, to result in a rate increase and be the first increase in Oklahoma since 2016.

And in Kansas, in August, we requested an increase of $4.2 million or $0.43 per residential customer per month related to the Gas System Reliability Surcharge, or GSRS, for the period covering September 2018 through June 2019.

The filing covers less than 1 year due to the last rate case that included capital expenditures through August 2018. This is our first filing under the new legislation that expands the scope of expenditures that are eligible for recovery under GSRS and increases the cap on the monthly residential surcharge to $0.80 per customer.

The staff of the Kansas Corporation Commission has filed a recommendation with the commissioners that the GSRS filing be approved as filed. An order from the Kansas Corporation Commission is expected sometime later in the fourth quarter.

In Texas, we anticipate filing a rate case in Central Texas before the end of the year, which will include addressing the refund of excess ADIT to those customers.

And now, I'll turn it over to our CEO, Pierce Norton.

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Pierce H. Norton, ONE Gas, Inc. - President, CEO & Director [5]

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Thanks, Curtis. Of late, my remarks on these quarterly calls have focused on what we're doing to ensure the safety and reliability of our system.

In keeping with that theme, I am pleased to report that as of this month, we have removed all sections of cast iron from our system. This is a major milestone for our company, our customers and our communities.

This accomplishment is the combination of years of executing our plan to eliminate cast iron in our natural gas distribution systems. We will redirect the time, energy and resources expended on cast iron to other types of vintage pipe through our risk-based replacement program, which is been a key part of managing the integrity of our system and optimizing our capital spend.

At our current pace and spending level, we still anticipate 20-plus years to replace our existing inventory of vintage assets. Our long-term strategy remains to be a 100% regulated natural gas distribution company focused on operating safely, managing expenses and building a sustainable future for our customers and employees.

As always, I want to take the opportunity to again recognize our employees who live out our core values every day as they go about their work. I'm thankful for their efforts and their commitment to serving our customers and our communities. I'd to thank you all for joining us this morning, and operator, we are now ready to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Sarah Akers with Wells Fargo.

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Sarah Elizabeth Akers, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [2]

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So it looks like in the quarter bad debt expense was up. Is that a material increase on a percentage basis? And do you think that's indicative of any weakness in the local economy? Or what's driving that?

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Caron A. Lawhorn, ONE Gas, Inc. - Senior VP & CFO [3]

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Sarah, this is Caron. No, I think it's just a normal routine evaluation of where we are on our bad debts. There's a little bit of fluctuation as you will expect as we have collection activity that fluctuates a bit with the weather. So before we get into the cold part of the year, we have done some disconnects and people are reconnecting. So it's just a routine evaluation of where we are on that reserve.

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Sarah Elizabeth Akers, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [4]

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Got it. And then in terms of customer growth, what level of growth did you see in the quarter? And are you starting to hear any pushback on new gas hookups, like we're starting to hear on the coast?

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Curtis L. Dinan, ONE Gas, Inc. - SVP of Commercial [5]

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Sarah, this is Curtis, and the short answer is no. We're not seeing the pushback on new homes being connected to natural gas. Our activity around capturing new developments in our marketplace have remained very strong. It's a little hard to compare quarter-to-quarter at a growth rate of customers. It's really better to look at it on an annualized basis. Just because of the time -- especially when you're in the shoulder months like the third quarter because the timing of hookups can be a little bit different for customers that are new to the system or coming back on the system. But overall, I would say the trends have remained very strong for us, and we're not seeing any weakness in that area.

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Operator [6]

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(Operator Instructions) And next we'll hear from Aga Zmigrodzka with UBS.

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Aga Zmigrodzka, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs [7]

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In Kansas, OGS filed its first GSRS under newer legislation. Could you please discuss how much CapEx do you plan to recover with this filing versus your last GSRS? And how will that reduce your regulatory lag?

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Curtis L. Dinan, ONE Gas, Inc. - SVP of Commercial [8]

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So Aga, this is Curtis. In that filing, I don't have right here the exact amount of capital that we had included in that as part of the increase. But if the yield of it is about $4.2 million of new revenues. Overall, I think we -- our latest guidance has been that all -- of all of our capital, about 90% of it is subject to annual filings, whether it's through the GSRS or other mechanisms we have in the other territories that -- what drove that increase from the old 80% is the GSRS legislation. And we're just now starting to partially see the effects of that.

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Aga Zmigrodzka, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs [9]

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Perfect. And Caron mentioned 1/3 of funding will be financed with equity. Should we assume that most of that will be through ATM in 2020 and beyond?

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Caron A. Lawhorn, ONE Gas, Inc. - Senior VP & CFO [10]

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Good morning, Aga. We have not determined exactly how we will finance our needs. It would make sense for us to consider an at-the-market program and we certainly are, but we haven't made any final decisions on that.

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Operator [11]

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And with no further questions, I'd like to turn the call back over to management for any additional or closing remarks.

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Brandon Lohse, ONE Gas, Inc. - Director of IR [12]

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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 later date, and have a great day.

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Operator [13]

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Once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.