埃特莫斯能源 (ATO) 2017 Q1 法說會逐字稿

Greetings and welcome to the Atmos Energy first-quarter 2017 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Susan Giles, Vice President, Investor Relations for Atmos Energy. Thank you. You may begin.

Thank you, Jessie. Good morning, everyone, and thank you for joining us. This call is being webcast live on the Internet. Our earnings release, conference call slide presentation and Form 10-Q are all available on our website at atmosenergy.com.

As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meeting of the Securities Act and the Securities Exchange Act. Our forward-looking statements and projections could differ materially from actual results. And the factors that could cause such material differences are outlined on slide 22 and more fully described in our SEC filing.

I would like to now turn the call over to Mr. Kim Cocklin, Chief Executive Officer of Atmos Energy.

Thank you. Thank you, Susan, and good morning, everybody. It's early here in Dallas but we want to send out a shout out to all you Brady fans and congratulations to the Patriots.

We do appreciate you joining us and your interest in Atmos Energy. We are off to another very, very good start. We continue to refine and sharpen our business model of delivering safe and reliable natural gas to the over 3.1 million customers we serve in eight states and after divesting the non-regulated marketing business effective January 1, we are now the largest pure play natural gas only distributor traded on the New York Stock Exchange.

And the reorganization of our portfolio of assets is now complete. As a 100% fully regulated utility, we will take full advantage of this opportunity to intensify our focus on our strategy and vision of becoming the safest natural gas utility. Progress with our rates and regulatory framework continues to provide rate [relief], which is the primary driver of our financial performance.

We continue to emphasize and build relationships with our regulators and communicate the importance of our infrastructure investments to ensure the safety and reliability of our system. And as of yesterday, rate outcomes have provided annual operating increases of about $21 million and we filed cases that are pending, which seek about $78 million of increases.

The more significant filings include the APT general rate case, the intrastate pipeline which we talked to everyone about for about the last three years. We filed with the Texas Railroad Commission in early January and we are seeking to recover deficiency of about $55 million. Again, we have to emphasize that there are no surprises in this filing. The test period for the case ended on September 30, 2016.

The proposed rates are designed with a 13.5% return on equity and a 59% equity component and a rate base value of roughly $1.77 billion. The filing, as you recall, is required by the group statute and we'll provide a comprehensive review of our existing rates as well as a review of all capital investments made under the GRIP statute.

The procedural schedule is expected to be final this week and a final order is required by law to be issued on or before July 10 of this year. Other filings that are currently pending include the rate stabilization clause in Louisiana's TransLa jurisdiction, seeking a deficiency of about $4 million. The annual review mechanism in Tennessee, seeking $2 million; the rate review mechanism for the West Texas cities of about $5 million; and the Dallas annual rate review for the city of Dallas, requesting $10 million.

These are all part of the annual mechanisms that we have in place in those jurisdictions. We do expect to make between 12 to 15 more filings this fiscal year which will request between $70 million and $80 million of additional operating increases and most of this is shown on slide 18 provides a summary of those expected remaining 17 filings.

Again, we begin our sixth consecutive year of executing our strategy to grow by investing in our regulated assets. We are projecting to invest between $1.1 billion and $1.25 billion of capital this year, and $1.1 billion to $1.4 billion every year through FY20.

The successful execution of this strategy is critical to making our system more safe and reliable, growing our rate base and achieving our commitment to provide an increase to earnings per share of 6% to 8% annually, which translates into our earnings-per-share guidance of $4.10 to $4.40 in FY20.

Again, it's very important to emphasize and recognize that we are now able to have a singular focus because of our portfolio of assets are fully regulated and we will continue to build upon the trust and strengthen the important relationships we have with our customers, regulators, and legislatures in the states and communities we serve.

Finally, our results are coming from our existing operations with no reliance on stock buybacks or one-time adjustments. We voted with our pocketbook again for our shareholders and our Board raised the indicated annual dividend rate for FY17 to $1.80, a 7.1% increase over last year. Yesterday, the 133rd consecutive quarterly cash dividend of $0.45 per share was declared and we will continue our commitment to deliver total shareholders return in the 9% to 11% range through FY20.

Now I'm very pleased introduced to you our new Senior Vice President and Chief Financial Officer, Chris Forsythe. Chris joined our Company in 2003, coming to us from PricewaterhouseCoopers. He served as Vice President and Controller since 2009, giving him exposure and leadership responsibility in all areas of finance and accounting for the Company.

He most recently led the team responsible for the sale of the non-regulated assets. Chris has the trust and confidence of our Board. He will be a great asset to the senior management team and will be a tremendous Chief Financial Officer. Chris, welcome.

Thank you, Kim. I appreciate your kind remarks and I look forward to serving my new role. And good morning, everyone. We appreciate your interest at Atmos Energy. I look forward to the opportunity to meet all of you in the coming months. As Kim mentioned, we exited the non-regulated gas marketing business January 1.

Historically, this business represented up to one-third of our former non-regulated segment. The sale offered the opportunity for us to realign our reporting segments. Beginning this quarter, we report our operations under the following three segments. The distribution segment, which is primarily comprised of natural gas distribution and related sales operations in eight states and two storage assets located in Kentucky and Tennessee.

These storage assets are used to support our operation in the states and will be formally reported in our non-regulated segment. The pipeline and storage segment is comprised primarily of the regulated storage operations or Atmos Pipeline-Texas Division and our natural gas transition operations in Louisiana, which are also formally reported in our non-regulated segments. And finally, the natural gas market segment, which is comprised of a natural gas marketing business result in January.

We reported these operations as discontinued operations. My remarks this morning will focus on income from continuing operations. Net income from continuing operations was $114 million, or $1.08 per diluted share compared to $102 million, or $0.99 one year ago.

Slides 3 and 4 provide financial highlights for each of our continuing segments for the three-month periods. Positive rate outcomes remain the primary driver of our success. Rate increase or distribution of Pipeline and storage segments combined generated almost $27 million of incremental margin for the first quarter of FY17.

About $16 million of the related rate filings completed in FY16 came from our distribution business. The largest driver of the increase came from Mid-Tex division, which saw a gross profit rise of nearly $7 million quarter over quarter. We also experienced a $4.5 million increase in our Louisiana division and a $2 million increase in our West Texas division.

The [$11 million] came from Pipeline and Storage segment, primarily as a result of the new rates of APT's [grip] volumes compared to FY16. Distribution and transportation revenues rose quarter over quarter by about $2 million, largely from the industrial expansion and increased demand for natural gas. As an example, in Tennessee, a General Motors plant in Springhill has expanded and recently added a third shift.

We transport the natural gas used for either plant and to support the manufacturing process. The increase in production has a positive trickle down effect to automotive component manufacturers in the area, many of whom are transportation customers. Additionally, several of our distillery customers in Kentucky are expanding. Natural gas is used in processing the [mesh], sterilizing the bottles and cleaning facilities.

Finally, in the Kansas City area, we supply the natural gas used to fuel UPS' Waste Management CNG fleet. Both CNG facilities came online in 2016.

Our distribution business also continues to add customers, resulting in $2 million increase in gross profit compared to the prior quarter. Over the last 12 months, we're experiencing net customer growth of about 0.8%, or about 24,000 customers.

On the spending side, owned and continued operations increase by about $5 million quarter over quarter mainly due to incremental pipeline maintenance spending. Here in the quarter, we elected to accelerate hydro testing other pipeline [charity] work into the first-quarter, as had been originally planned for later in the fiscal year because the crews were available on the completion of similar work at the end of 2016.

Capital spending was increased by $7 million to about $298 million in the first quarter compared to one year ago. This increase was in line with expectations, as we continued to focus on safety and system reliability in our infrastructure programs. Approximately 70% of our CapEx was associated with [safety and system] reliability and we expect to begin earning on over 95% of our capital spending within six months of the test [we ran].

In addition, in December, we acquired a 140-mile 24-inch pipeline of $85 million to write additional capacity to serve a growing Texas market. It also drives increased access to growing a channel, Oklahoma and the Northeast gas supply basis. As Kim mentioned, we remain on track to achieve a capital budget targets of $1.1 billion to $1.25 billion for FY17 inclusive of supply pipeline purchase.

Moving on to our earnings guidance. Our guidance assumptions remain unchanged. We still expect FY17 earnings from continuing operations to range from $3.45 and $3.65 per diluted share. Slide 16 details our earnings and selected expenses projected for 2017. The continued execution of rate strategy is still expected to be primary driver for this year's results with annual increases of implemented rate activity in 2017, ranging between $90 million and $110 million.

Slides 6 through 11 provide details of the progress we have made in FY17 in pursuing our regulatory strategy. Thank you for your time this morning. We will now open up the call for questions. Jessie?

(Operator Instructions)

Chris Turner, JPMorgan.

I wanted to get some more color on short-term debts when you guys think of terming any of that out a little ways down the road. Are there any hedges in place right now in terms of forwards that you are thinking about or have already done?

Our short-term debt was about $941 million at the end of the quarter. We did receive proceeds from the sale of [ADM] of about $135 million which was basically used to pay down that debt. As of early this week, our short-term debt balance is about $750 million and as you are aware, we do have a $250 million debt refinancing debt that matures in June of 2017. We do have hedges in place for that at about 3.67% and as the debt matures, we do have cash flows that's in place, we do anticipate refinancing at that time.

Okay, but that's it. So that one particular issuance that you know is coming to hedge but nothing else?

The 2019s are also hedged. We're focusing on the near-term and we have those in place at roughly 3.5% as well.

Got you. Okay. And then on the pipeline business. Could you kind of remind me of the sharing mechanism with customers there and exactly how that works and kind of where you've been the past couple of years, if over at all?

Yes, Chris, the [writer] rev feature where the market based revenue is credited back to the LDC -- primarily LDC customers. The benchmark was set at in the last case 2011 at $84 million and our annual filings, we have been coming in under that. As you know, there is a 75/25 share so we pick up 25%. We are insulated from that perspective.

Customers would pick up 75% of any shortfall and vice versa if we run over, customer would benefit 75% of any of the overage. We have been coming in under it. If you look at the filing request and adjustment to that writer rev benchmark, it's just around $70 million. Based on what we are seeing in terms of the change in marketplace, lower basis spread and also declining volumes out of the Barnett Shale.

Okay, so you had been running under and you have been absorbing 25% of that difference between $84 million and where you are actually at right now for the past year or couple years.

Correct, correct. Chris, we are adjusting it from 84% to 70%. Because we have been running under. (multiple speakers) The mechanism we are proposing not to change the sharing allocation either.

And then in terms of the overall sharing mechanism for over earning from the rest of the assets, my understanding is there is a sharing mechanism in place there; is that correct?

Over earning? No, we don't over earn. Are you talking --

If you were to, would you have to give back to customers?

Are you talking about the mechanism just for that revenue? There's actually an earnings band associated with the GRIP mechanism and if we were to exceed that at 75 basis points, currently about the 9.36% allowed rate of return, if we were to exceed that, we would be called in for a case. We would have to go in for a case.

That's where that earnings band and the annual earnings monitor report is filed. But we have not come close to that so that's unrelated. There's not a sharing mechanism there. It's just a earnings governor on a GRIP mechanism. As Kim said on the revenue sharing related to writer rev, the recommended adjustment or recommending adjustment benchmark of $70 million but keeping the structure of the mechanism with the sharing of 75/25 the same as it is today.

Okay. So for the pipeline business overall, there is a band around the authorized ROE and if you go above that band, which you have not been doing so far, you could be called in for a case.

Yes. The earnings monitor report is filed annually and that's available. It's a public record. That reflects the return. The overall return that was achieved by the pipeline in that twelve-month period.

And to the extent that we exceed our overall rate of return which is 11.8% for equity at current [50.5%] design and then the weighted average cost of debt, which gives us a 9.36% overall return which includes a 75 basis point band around that. But we have never -- we've never exceeded that cap.

Okay. Perfect. That's what I wanted to understand. Thanks, guys.

Mark Levin, Seaport Global.

Another good quarter. Morning to you, Kim. A couple quick questions. Your low end, high end of the range the $3.45 to $3.65, low end, high end of the range on CapEx. Anything in particular that would happen over the course of this year that would take you to either one end or the other?

Well, it's very early and we are very confident to -- we went ahead and restated and reconfirmed the guidance at that level. We are, obviously -- again first quarter stuff. We thought we had an excellent quarter. Everything is performing as expected.

We might have spent a little bit on our end but we expect that to come in line. Everything is lining up right now to provide us to meet the commitments that we have made to the states. In the earnings range and then to generate the 6% to 8% earnings per share that we talked about, continuing to invest in the rate base to do that

And then from a political perspective, potential tax rate changes and impact on you guys and Kim, is there anything else politically that you see with the new administration that could either have a positive or negative impact looking forward?

Well, we're in Texas. We are seceding from the union as planned. (laughter) No, I mean, Lord have mercy, we are very thankful that we are regulated by -- in eight very balanced states. All the tax information, we obviously have our subject matter experts in house, including Chris and our Vice President of Tax and then the folks in the rates and planning area.

They are all studying the proposals but who knows what it's -- where they will end up. We are staying on top of it. The information that's being provided from some other folks, I mean we are just not in a position to provide any kind of anticipated outcome given the total uncertainty surrounding what happens in Washington. We will wait on -- you might pick up -- on Saturday Night Live, I think there's some better information than what's coming out daily.

But it's just -- we are managing our business for the long-term and as I said before, we thrived during the Obama administration. We thrived during the Bush administration. We thrived during the Clinton Administration. We are going to be able to thrive and manage and that's our responsibility and accountability.

We will adjust if necessary but everything that's coming out right now in most of the proposals look to be extremely manageable from our standpoint the way that we are currently capitalized and the way that we currently continue to execute our strategy.

Got it. And then on the Texas pipeline case. Any scenario you can envision that would have a negative or adverse impact to your long-term earnings guidance?

Well, you are throwing that top water bait out there today a lot, aren't you? (laughter)

Big picture, letting you run with it. But, is there anything -- any type of situation or anything there that would cause you some concern for the long-term guidance or do you feel there's not -- even under a worst case scenario, you are okay?

Yes. I think that we are positioned -- Mike and the pipeline team, again, we started 3.5 years ago. There's absolutely no surprises to the folks that are in that case. It would do us no good.

So we want to maintain the relationship and the credibility and trust that we have built with the customers and with the regulators. There's nothing in that case other than the fact that we haven't been in for 6.5 years so we do have a significant deficiency which reflects the current rate design which builds upon a 13.5% return upon a much different capital structure which includes a 59% equity layer versus the current -- I mean, the existing rates of [50.5%] and then you've got a significant increase in O&M because of the needs to comply with all the new regulations.

The existing rates are designed on $80 million of O&M and we're spending close to $130 million right now. I mean, that's -- those things will be talked about and we want to be the safest natural gas utility. Our customers want safe and reliable service. We are going to work with them and meet them in the middle.

Makes perfect sense. Last question and I'll leave for someone else. Any -- as you think about your pipeline spending or your pipeline-related spending over the next several years, are you seeing or do you anticipate any bottlenecks whether it be labor, materials, anything that would cause you to have to slow the pace or does everything kind of look fine as you look out over the next several years?

Mark, everything looks fine. We don't see any bottlenecks. Our relationships again, as Kim said, relationship with regulators. We've got very strong long-term relationships with contractors. We have got just a top-notch engineering team. We've got projects lined up already identified for the next five years. We've got 30 years of process spending on pipe replacement, we've got tremendous growth north of Metroplex. We don't see any -- we don't have any concerns about the materials, excess of materials, labor or anything else for that matter.

Great. Appreciate it. Congrats on a great start to the year.

Brian Russo, Ladenberg Thalmann.

Could you just elaborate a little bit on the APT general rate case process or -- procedural schedule is set. There's discovery and request for information. Is there a window of time for settlement discussions?

Definitely. As Kim, I think, said in his earlier comments, we expect to hear -- or have a procedural schedule this week with the statutory deadline of July 10. We are in discovery now. I'd say maybe a third of the way through that process and then there will a testimony hearings, several opportunities for settlement conferences.

Those conversations occur consistently throughout the process. We expect a proposal for decision typically would be in mid-May timeframe and you've got opportunities for correction. But it's a very measured process and there is opportunity for settlement all along the way.

Okay and can -- you are filing directly with the RRC; you're not in negotiation with the cities or anything?

No, you've got -- the intervenors -- you are correct. We file directly with the Railroad Commission. The intervenors are the same lawyers that represent the cities in our distribution cases and so we've got great relationships with them. We work with them every year on those annual filings. So there's really nothing new.

As Kim said, the file based on precedent and we have been preparing this for three years or longer. We've had open communications all along about what's driving our investment. As he said, we have seen significant increases in O&M that's driven by new compliance requirements.

We've been open and transparent about it all along. So far, the dialogue has been very good and positive. It doesn't mean we [all] have significant disagreements in terms of where it should end up but it's proceeding as we would expect.

Okay. Great. Can you remind me, was the last APT rate case settled or was it litigated?

It was litigated. It was the outcome of a litigated -- certain of the issues were resolved and settled prior to the litigation but I think -- the return was definitely litigated in that case and maybe depreciation

Normally, you will find that they will pick and choose. There's a lot of the costs that are included that were requesting that are agreed upon as part of the cost of service. The rate base, again, is being reviewed as part of the GRIP proceedings and the filings that we've made so there will be continued oversight of that and a little bit of a look back.

In the last case, I think we had a very small amount of the GRIP that we adjusted maybe $1 million. It's a pretty prescriptive process and it lends itself to the opportunity of all the parties conduct a very good and full review, but at the same time to have, as Mike said, plenty of opportunity for discussion.

It does have to be fairly -- they are prescriptive in terms of the discovery dates and the answers to those discovery requests and then the filing of the testimony and the hearing on the issues that are going to be heard, the initial decision and then the briefings and comments on that initial decision and then leading to the statutory deadline of July 10 of this year.

But again, we're -- I think you are right to ask all the questions and there's -- we are in as good a position as we can be. We can't emphasize the fact that we started looking and preparing for this about three to 3.5 years ago. This is certainly not our first rodeo here in Texas.

Understood. Thank you.

Spencer Joyce, Hilliard Lyons.

Spencer, you're running out of Companies to cover.

No kidding, but I appreciate you keeping at least the one for me out there.

There will be two water companies and two utilities, I guess.

Absolutely. Hopefully, a couple pretty quick ones for me. The recently acquired pipeline assets in North Texas how long until those are wrapped into APT from a ratemaking or a regulatory standpoint. Are they perhaps included in this most recent five-year GRC?

Spencer, this is Mike. Great question. They are not included in the rate case that we just filed but the transaction closed on December 20, which puts it in the three-month period that we will include in a GRIP filing once we come out -- immediately once we come out of this case. So in the fourth quarter.

Okay. Got you.

That GRIP filing that Mike is talking about covers the period of investment -- capital investment from October 1 to 12/31/16. We had a test period ending September 30. So all of the rates in the case that are being proposed include all of the cost and investment up until September 30.

Once we get out of the case, then we will file what everybody calls a stub filing for that three-month of investment and that $85 million will be included in that filing.

Okay. So I guess it seems pretty easy from a regulatory standpoint to just wrap those assets into your regulatory workflow, if you will, just right off the bat.

Absolutely, which makes it -- it's very unique because of that. There's very little lag. It's immediately accretive given the transportation contracts we have that we acquired with the pipeline and that pipeline provides significant benefits to our customers.

I was mentioning earlier, it's 140 miles. It runs west to east, north of the DFW Metroplex. We have one interconnect with our system today. We expect to add three others.

It will be integrated in very short order and all of our growth is -- a lot of our growth is north of the Metroplex and provide immediate fortification, give us additional access to additional supply in Barnett Shale as well as eventually, we will be able to bring in Oklahoma and Northeast gas.

So our customers will benefit tremendously and we are able to purchase that at a fraction of the cost but it would take to build something like that. It's truly a win-win-win.

It's only easy, Spencer, because of the excellent management and the strategic focus that we placed on the relationships and creating the necessary mechanisms to provide this opportunity. You wouldn't find the capability of doing this in a lot of jurisdictions or in a lot of companies. Again, it's six years.

It's over work where we've emphasized an efficient and effective process for ratemaking and everybody is involved. Everybody understands there's a clear line of sight from what we're doing in the field to what eventually ends up, creating more safety and more reliability and then entering to the benefit of the shareholders' long term. It is easy only because of what this -- what the people at Atmos Energy have been able to do throughout the entire organization.

Duly noted there. (multiple speakers) You all have done a great job of working towards being able to effectively navigate the regulatory process there in Texas. Switching gears a little bit. Chris, this might be one for you. The $135 million cash inflow from the AEM sale; that's mostly working capital, right?

That's correct. Yes, the purchase price was $38.3 million of working capital. We estimated just prior to the end of the fiscal -- or calendar quarter was about $103 million. We will be truing up that working capital here in the second quarter and hope to have that completed by the end of March. In addition to that, the $7 million, the total proceeds from the transaction were roughly $141.5 million using the estimated working capital of $103.2 million.

$7 million went into escrow under the terms and conditions of the purchase and sale agreement. Assuming no indemnification issues that we would have to reimburse that $7.4 million, we would expect to get $3 million back in January 2018 and the remaining $4 million in January 2019.

Okay. Perfect. Perfect. Very helpful there.

Last one. Real quick. Am I right that there were a few assets that were previously held in the non-reg segment that have now migrated into pipeline and storage -- and Chris, I apologize. I think you might have hit this.

I touched on it briefly. The primary asset is our 21-mile intrastate pipeline in Louisiana. We refer to it as TransLouisiana Gas Pipeline or, TLGP. We had that pipeline was built in 1985 to help supply our Louisiana gas distribution operations at that time.

So that is the primary asset that moved from the non-regulated segment. We also have a couple of other smaller assets that aren't material that did roll up into that segment as well but that was the primary piece.

Okay. Perfect. Just a point of clarity on my end there. In any case, Kim, as always, congrats on a nice quarter and we will be talking soon.

Charles Fishman, Morningstar.

Kim, first of all, I am in total agreement with you. Spending a lot of time speculating on what might come out of Washington, DC, is an exercise in futility. (multiple speakers) However, my job as an analyst is obviously to try to think about those kind of things.

But specific to Atmos, and tell me if my thinking is right, since your debt is at the OpCo level, really, you are in pretty good shape. You would just wait until there is changes to your returns that reflect any changes in the tax increases. I mean, you should be pretty neutral regardless of what comes out of DC. Am I thinking about that correctly?

Under the current -- all the current propaganda that's coming out, we would be neutral to good.

Okay. And then let me maybe as a follow up, your payout ratio is still 50% to 55%, I believe?

It's right around 51%, yes.

But I mean your target is 50% to 55%.

Yes, growing the dividend at a rate equivalent to the earnings per share rate is 6% to 8%.

Okay. If something does come out of Washington DC, you would certainly have the capacity, especially with the sale of the marketing group which incrementally reduces any -- reduces the risk, increases the consistency of your cash flow. Would the Board, do you think consider increasing that payout ratio if there's -- if, all of a sudden, dividends are more attractive to investors? It seems like you do have the room.

Absolutely. That's a very important leverage that we have available to us because we have one of the -- I think maybe the lowest payout ratio in the peer group. So consequently, our highest and best use right now based on the current laws that are in place and that tax treatment is to pour the dollars back into the ground and improve our safety and reliability. But for sure if there's motivation and incentives, then you're rewarded and if we need to reward our shareholders in that manner, we certainly would.

Okay. That's all I've got. Thank you for that help.

Ted Durbin, Goldman Sachs.

Looks like the question of the hour obviously on the pipeline rate case. So I guess just starting with the ROE, you're asking for 13.5%; you are authorized 11.8%. You're -- in the Mid-Tex, you're in the 10%, 10.5% range. How do you square that [actual] to the other set of numbers?

With the 11.8%, you step back in 2011 and there's a much different economic climate out there. There's a completely different administration out there. There is a whole lot of discussion and debate about what the tax treatment should be. The Fed has indicated they are definitely going to make a move this year once; now we hear twice, maybe three times.

So you are looking at 75 basis points attention move, maybe even more depending on what the economy does. Given the risk profile of the intrastate pipeline and the fact that the peer group is -- the FERC and you cover those folks. So that's what they are going to look at.

It is not -- we are not being overzealous in requesting a 13.5%. We think that reflects the level of return that we need to compete and attract capital in the marketplace going forward.

Okay. And a similar question, I guess. You're asking for a 60% equity layer. You are authorized a 50%, you're running at 50% of the corporate level. What is -- just that risk (multiple speakers) --

At the actual cash structure for the parent because we are not holdco. It is what it is and 60% equity ratio in Texas is recognized as not out of the ordinary and again, it's not considered excessive and we don't anticipate much of an argument on the 59.7% that we have reflected in the case. And in Texas, short-term debt is excluded from calculation which is why it is coming in at 59%.

Got it. And then on the GRIP itself, is the presumption is that, that will continue here even though you're in for the general rate case. Is there anything that would change that mechanism at all coming out of this case?

No, that's a statue. That's legislation. The regulators really can't touch that. That has to be adjusted or it would be modified only by the legislature.

And that legislation was enacted in 2003.

The ROE you established in this case, just to make clear, that's what will go into the GRIP filings in a forward basis as well?

That's correct.

That's great. And then last one on the rate case at least. What you have baked into as you're thinking about the long-term guidance of the $4.10 to $4.40 in 2020. What do you have baked in towards ROE and equity layer on the Texas interest --

Nice try. (laughter) Mark it in there at the end. (multiple speakers) We will remind you that when we established the $4.10 to $4.40 for the FY20 period, it was prior to the time that we filed this case. I think it was, what, a year-and-a-half ago or so that we established that. So we had -- we baked in assumptions and again, we're not -- we don't put out those commitments lightly.

Those are things that affect trust and confidence by you all. We know that you take them to the bank and put them in your models. We have got -- those are very important and we understand the significant importance of making those representations.

Understood. And if I could get two more in -- still on the pipeline system. A lot of talk now on the risk that there may not be enough gas takeaway out of West Texas out of the Permian with all the activity out there. Is there any more room out there to squeeze any more volumes on the western end of the system?

We have some capacity available, yes, and there's been a lot of interest and conversations with producers.

Anyway to quantify that? Is it 100 million cubic feet a day or less or more?

It's in the 200 million a day, I think we have to trade at this point in time -- in West Texas.

Would you just be adding compression? Or you wouldn't consider moving the line or anything like that?

We haven't concluded at this point in time the opportunity for income and capital investment but that is something that we're -- the team is looking at as well at this point in time. Obviously, anything we would do there is really to the benefit of our LDC customers.

We are in a good location out there and we have expanded in the past, Ted. So we have the capability with our right-away that we have in place to potentially look at the flow studies that would incorporate some additional moving of lines to increase capacity or we could add compression.

That's all certainly a daily task that we look at and if the need arises and the opportunity arises, we are in a position to take full advantage of it. We did that a number of years ago and really, the economics makes sense and we got a lot of internal contracts. It's certainly something we could do.

Got it. And a similar question; last one for me is a lot of activity north of you on the SCOOP and the STACK in Oklahoma. Some questions around gas takeaway there. How much room is there on the northern end of the system to take in incremental gas?

Well, the -- really, that acquisition of the North Texas Pipeline from EnLink gives us an awful lot of opportunity at the east end of that 140-mile pipeline. It interconnects with three interstate lines.

We don't have the capability right now but in the future, we would have the capability to bring gas into the system from Oklahoma as well as from the Northeast. So lot of opportunity there in the future.

Any way to quantify how much more you could bring in, you think?

Not at this time.

Okay. I will leave it at that. I appreciate all the answers.

Joe Zhou, Avon Capital Advisors.

Congratulations. Chris, congratulations. Most of my questions have been answered. Just a quick one on the tax side. Do you taken a repaired tax deduction?

Yes, we do.

Can you quantify that?

It's roughly 35% to 45% of capital expenditures on an annual basis.

Do you expect any tax reform will remove that deduction?

If you look at the side-by-side comparison of the House plan and Trump plan, and there is in House plan the 100% expensing. On the Trump plan, there is the potential for optionality so if one of those plans move forward in their current versions, then yes, that would impact the repairs deduction.

But as Kim said, there's a lot of noise out there right now. We are just evaluating all the options and we are really not in a position at this point to definitively say one way or the other how tax reform can impact us.

Right. And if all things considered, it should be neutral to good for you guys, right?

Yes. Based on current proposals and what we are seeing. Definitely neutral to good, Joe. But again, we are not going to put out any kind of prognostication on what could happen based on what's out there now because there is so much that can change.

That it would be, I think, reckless and imprudent to say, okay, if this happens, then there is this much accretion or if that happens, then there is this impact. I think that sends you all down some rabbit trails that are pretty unnecessary at this point.

Right. Understood. Thank you very much and congratulations on a good quarter.

Thank you. It appears we have no further questions at this time. So I'd like to pass the floor back to Susan Giles for any additional concluding comments.

Thank you, Jesse, and I just want to remind you all that a recording of the call is available on our website through May 3. We appreciate you joining us. Have a great day.