ONE Gas Inc (OGS) 2014 Q1 法說會逐字稿

Good day and welcome to the ONE Gas first quarter 2014 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference to Andrew Ziola. Please go ahead, sir.

Thank you, Jessica. Welcome to the ONE Gas first quarter 2014 earnings conference call. This call is also being webcasted live on the Internet at ONEGas.com with a replay available. After our prepared remarks, we would be happy to take any 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.

Our first speaker is Pierce Norton, President and CEO of ONE Gas.

Thanks, Andrew. Good morning, everyone. Thank you for joining us for the ONE Gas first-quarter 2014 earnings call. We appreciate your interest and investment and are excited to discuss our first-quarter results with you for the first time as a publicly traded company.

Joining me on the call is Curtis Dinan, our Chief Financial Officer. On this morning's call, we will review the first-quarter 2014 financial results, discuss 2014 guidance and some new state-by-state disclosures, provide a regulatory update in our three states and close with comments about our commitments.

I am very pleased to report as a stand-alone, 100% regulated natural gas distribution company, we recorded strong first-quarter 2014 financial results. Colder than normal weather and the effects of capital investments on new rates in Texas positively impacted our financial results.

We also reaffirmed our 2014 net income guidance range of $95 million to $105 million. Last month our Board of Directors declared our first quarterly dividend of $0.28 per share, representing an important first step in delivering value to our shareholders.

Despite the record cold temperatures in most of our service territories, for example, 6 of our 12 all-time peak delivery days in Oklahoma occurred last winter. We were able to procure the needed gas supply to meet our customers' needs.

Our lease storage positions combined with our proximity to the gas reserves helps to mitigate the risk of bringing gas to our distribution systems. I am pleased to report our systems performed very well from a volume delivery and mechanical reliability standpoint.

Curtis will now review the financial highlights and 2014 guidance.

Thanks, Pierce, and good morning. First-quarter net income was $59.1 million or $1.13 per diluted share compared with $53.5 million or $1.02 per diluted share for the same period last year. Operating income increased 7% due primarily to higher net margin and lower depreciation and amortization expense. Net margin increased 3% due primarily to colder than normal weather in Kansas and Oklahoma.

Overall, weather in our service areas was 13% colder than normal and 9% colder than last year, which contributed approximately $7 million of net margin or $0.08 on a per-share basis. Those amounts are net of our weather normalization mechanisms.

The $7 million impact from the weather is split almost equally between our natural gas sales customers and our transport only customers. Our natural gas sales customers represented 87% of net margin in the first quarter. The impact of the colder than normal weather on these customers was less than 2%.

As a reminder, approximately 70% of the margin from sales customers is generated by fixed charges. First-quarter results were also higher from new rates, primarily in our Texas jurisdictions.

Operating costs increased 3% compared with the same period last year, due primarily to higher employee-related expenses and expenses related to the separation from ONEOK. Depreciation and amortization decreased $3.4 million or 10%, due primarily to lower rider and surcharge recoveries in Kansas and the expiration of a take or pay rider in Oklahoma. ONE Gas generated operating cash flow of $182 million in the first quarter and ended the quarter with $179 million of cash and cash equivalents and no borrowings under our $700 million credit facility.

At March 31, we had 17 BCF of natural gas in storage, and for the 2014-2015 heating season, we have leased 52 BCF of natural gas storage. Our current cash position and available credit facility provide ample liquidity to meet our injection season needs.

We received approximately $1.19 billion of cash from our private placement of senior notes in January and then used a portion of those proceeds to fund a cash payment of approximately $1.13 billion to ONEOK in connection with the separation. We ended the first quarter with a debt to capitalization ratio of approximately 40%. We had previously disclosed a debt to capitalization ratio range of 40% to 45%.

We reaffirmed our 2014 net income guidance range of $95 million to $105 million. Although we benefited from colder than normal weather and lower interest expense compared with the guidance we provided in December of 2013, we now expect higher operating costs in 2014, due primarily to the timing of certain one-time separation costs previously assumed to occur in 2015 that will now be incurred primarily in 2014. Longer term, ONE Gas expects an average annual increase in net income of 4% to 6% between 2014 and 2018 through continued capital investment in systems integrity and reliability.

Following our first quarter, the ONE Gas Board of Directors declared our an initial dividend of $0.28 per share consistent with the guidance we provided last December of a $1.12 annual dividend. This dividend level is consistent with the Company's expected 55% to 65% dividend payout ratio.

As Pierce mentioned, we are providing additional disclosures related to our capital expenditures, estimated rate base and allowed ROEs on a per-state basis. We will also include this information in our investor presentations going forward.

For 2014, we expect to spend approximately 40% of our capital budget in Oklahoma and 30% each in Kansas and Texas. 65% to 70% of our total capital plan is for system integrity and pipeline replacements.

Our current authorized rate base, defined as the rate base established in our latest regulatory proceedings including full rate cases interim rate filings is approximately $2.2 billion. Considering additional investments in our system and other changes in the components of our rate base that have occurred since those regulatory filings, we project our rate base in 2014 will average approximately $2.5 billion with approximately 40% of that being our rate base in Oklahoma, approximately 35% in Kansas and 25% in Texas.

The performance-based rate mechanism in Oklahoma authorizes an ROE within a band of 10% to 11%. Within our 10 Texas jurisdictions, we are authorized to earn an average of approximately10.4%.

In Kansas, our last rate case was settled with new rates effective in January of 2013. In that black box settlement, there was no return on equity specified.

Pierce, that concludes my remarks.

Thanks, Curtis. Now for a brief regulatory update from our three states.

In March of 2014, Oklahoma Natural Gas filed a performance-based rate change application requesting an increase in base rates of approximately $16 million, driven primarily by capital investments of approximately $122 million. The hearing on the merits is scheduled for June 12, and if approved, the new rates are expected to go into effect in July.

Oklahoma Natural Gas is required to file a general rate case in 2015 based on the test year consisting of 12 months ending March 31, 2015. This will be the first full rate case of separation.

In February of 2014, Texas Gas Service filed a request for interim rate relief under the Gas Reliability Infrastructure Program statute known as GRIP for the central Texas service area, which includes the city of Austin for approximately $5.2 million, representing $39 million of capital investments since the last filing. This city councils are expected to take action sometime this month.

In April of 2014, Texas Gas Service filed an application with the city of El Paso requesting an adjustment to customer rates as part of the recently approved utility rate setting process called the El Paso Annual Rate Review or EPARR, which in lieu of a filing under the GRIP statute. EPARR is a streamlined annual review of the review requirement and base rates between rate cases.

Using EPARR, Texas Gas Service has requested to increase its revenues in the city of El Paso by approximately $5.6 million. This city of El Paso has 105 days to review and render a decision on the filing.

For Kansas, we expect to continue annual gas system reliability surcharge filings, which is a capital recovery mechanism that allows us to recover safety-related and government-mandated capital investments made between rate cases. The general rate case filing is expected to be in 2016 using 2015 as a test year with new rates effective in January 2017, and again, we will be the first full rate case post separation.

Lastly, I would like to reiterate the commitments we have made and discussed when we were on the road meeting with investors and preparing for the spinoff. Our first and foremost commitment is to the safety and well-being of our employees, customers and the public. Without this commitment, not much else matters.

Second, we will continue to target our capital investments primarily toward system integrity and reliability. These expenditures allow us to operate in a safe and reliable manner while bringing an energy alternative for our customers.

Finally, we are committed to minimizing the gap between our actual and our lab returns, lowering expenses to sustainable levels, recovering our expenses and developing incremental sources of regulated revenue. We are focused on being a 100% regulated utility, setting us apart from our peers.

In closing, I'd like to thank our more than 3000 employees whose hard work, dedication and commitment to our customers enable our assets to operate safely and reliably and environmentally responsible every day. It's an incredible honor to have this opportunity to lead this Company. Operator, we are ready for questions.

(Operator Instructions)

We will take our first question from Dan Fidell with US Capital Advisors.

Good morning.

Good morning, Dan.

Thanks as always for the call and congratulations on your call post separation. I wanted to ask a couple quick questions.

First, you mentioned you thought you'd have some acceleration in the separation costs from 2015 and pulling him back into 2014. Can you give us more color on maybe -- a little more specifics in terms of what those costs are and some scale?

The scale of those, Dan, is approximately $12 million. We had originally anticipated that these are one-time stand-up cost and that they would be spread over 2014 and 2015. We now anticipate that will be primarily all in and 2014.

That should give you an idea of the range of the magnitude on that. Again, it is one-time cost. Those are not ongoing costs.

And the timing on the booking of the costs? Is it going to be by quarter, would they be all in -- more backend loaded? Any thoughts in terms of how they will roll in?

Those are going to be more spread out. They will start occurring in the second quarter and continue on through the third and fourth quarter.

Great. Thanks very helpful. And a question -- switching topics -- on customer growth.

Noticing over the last 12 months that 1%, wondering how that stacks up for your separation plan? Are you seeing additional opportunities in any of the jurisdictions? Just general thoughts on where customer growth is now?

On average, Dan, we're still seeing customer growth in about the 0.5% to 0.6% range. It's still a little bit stronger in Texas. A little bit weaker in Oklahoma than Texas, and following up in third place is Kansas.

Okay, but just as far as the quarter went, that's just about in line with what you were expecting in terms of more modest customer additions in the other two jurisdictions and stronger in Texas?

It was definitely in line.

Okay, and last question from me, just on CapEx, $66 million or so for the quarter. As we go forward, should we expect the spend to be linear in future quarters, or might there be some lumpiness to it?

It is pretty much linear throughout the year, Dan. We do expect -- we've given guidance in the $263 million range, we've given a range of $240 million to $285 million. Because of the standup cost that we're having to buy some IT equipment and those kinds of things, we do expect probably to be more toward the higher end of that range this year.

Great. Thanks. That's all I had, and I appreciate all the color, and we will see you in Miami shortly. Thank you.

Thank you for participating, Dan.

(Operator Instructions)

We will now go to Carl Kirst from BMO Capital.

Thank you. Good morning and congratulations as well. Can I first -- I want to make sure I better understand the weather impact since it's net of the normalization. So as I think about the jurisdictions, I guess Oklahoma and Kansas have weather normalization. Texas, maybe a few of the 10 do.

I want to better understand, is the weather normalization just a band we should think about and now it broke that band, but is it possible it could go the other way had we had a much warmer than normal winter. I wanted to better understand that, and is that $7 million of net benefit, did that come from one jurisdiction perhaps more so than the others?

It was primarily in Kansas and in Oklahoma. Texas actually, in our jurisdictions, actually was not colder than normal this year. Because most of our customer base in Texas, Carl, is located in El Paso and Austin, and it just so happened that the weather was not colder than normal there.

But we have weather normalization in all of our jurisdictions, and as Curtis indicated, 70% weighted average across all of our areas are actually fixed charges. So that helps mitigate any weather impact both colder than normal and warmer than normal, and that was indicated in Curtis' comments. I think that might help you think through that.

The least number of fixed charges we have is actually in the state of Kansas, but that's where our highest number of heating degree days is. So there's that combined with weather normalization tends to make it impact less.

The only thing that's not weather normed is our transport customers. So that's where a portion of that was picked up, and I think about half of that was picked up of the $7 million.

Is there any merit as you look forward and you look forward to the rate cases both in Oklahoma and Kansas over the next couple years that as you look back on perhaps the severity of the recent weather, as a push for an even higher base rate charge? Is that something you think the regulators would be amenable to, or is that even something you guys would like? Or do you like the variable component?

We are probably about as high as we're going to get in Oklahoma. We've got a really good structure there. Kansas is something we talk to them about all the time. We broached that subject last time, and we will broach it again in the future.

Okay, thank you. And one other question if I could, just speaking to the Oklahoma PBR, I guess a two-pronged question. One is the $16 million you requested, would that by your calculations close whatever gap is between allowed and earned ROE?

And two, is any relief that is granted, is some level of that already accounted for in guidance? Would that be incremental to guidance?

Let me take the first question. What that does is this $16 million actually resets -- the way that the performance base rates work is when it falls outside the band, it resets the number at a 10.5%. So that's really what it's doing.

To the extent there is any sort of disallowed cost in those numbers, then we will still have some gap there. And to the extent we continue to invest capital in the state of Oklahoma, which we will, then you have the normal lag that occurs there also.

So we don't close the gap all the way just by definition. You will continue to spend money and have a lag on the capital spend, and if there's any sort of disallowances of cost, you have that phenomenon going on also.

And then you've got the separation costs that are occurring this year that aren't in this particular filing because this is on a 2013 test year. And that will not get picked up until the 2014 test year and the 2015 fold loan rate case.

Excellent. And just to close the circle, would the PBR or a component of the PBR be already in guidance, or should we think of that as something outside the guidance window?

The PBR is already baked into guidance.

Thank you so much.

Thank you, Carl.

(Operator Instructions)

We will now go to Chris Sighinolfi with Jefferies.

Thank you. How are you this morning?

Good morning, Chris.

Carl and Dan had most of it, Pierce, but just a couple questions from my perspective. Anything new to report on the CNG front within the service territory?

I know that was something we talked about during the roadshow as an additive enhancer to the story. Just wondering given some announcements from peers, seems like that market's gaining traction as it moves through time. Just curious if there's anything noteworthy for you guys?

It is gaining traction in our territory too, Chris. I will give you little more color. Our 12 months ending March 31, 2016, we actually had 96 stations in our territory. The 12 months ending March 31, 2014, has actually grown to 102.

And when you look at the amount of [decotherms] that has traveled through all of those stations, we've actually increased the percentage change by 45% between those two periods. So, our strategy is working.

Our strategy is to deploy a minimum amount of capital to hook up these stations and allow the free market to work and to pick up extra transport dollars off of the gas that goes through these stations. So we picked up quite a bit more volume going through those stations.

So we are very pleased with the growth we are seeing in CNG, and that's part of what we can do to pick up some of that incremental regulated revenue that I alluded to in my comments. So we're very pleased with what's happening on CNG in our territories.

Great. Thanks for that. Final one from me, just sort of a high level question.

I've been reading, Pierce, about heightened seismic activity in Oklahoma. I know there was a USGS morning yesterday about the potential for some larger magnitude events in the central part of the state. So I'm wondering, if that has been a conversational topic point with the OCC, if that's something you've discussed internally and if you think there's anything you are going to do or contemplate doing in response to that from a distribution network perspective?

So far, Chris, we've had no issues at all with anything there. In the OCC, no conversations have occurred between them and us. We all the time do routine leak surveys, and we're not seeing any additional activity because of any of that rhetoric that's out there.

Okay, great. That's it for me. I will see you in Florida. Thanks.

See down there, Chris. Thank you very much for your call.

It appears there are no further questions. I will turn the conference back over to our presenters for any additional or closing remarks.

Thank you, everyone, for joining us. Our quiet period for the second quarter starts when we close our books in early July. And extends until earnings are released after the market closes on August 4 followed by our conference call at 11:00 AM Eastern on August 5.

We will provide details on the conference call at a later date. I will be available throughout the day to answer any follow-up questions you may have. Thank you everybody, and have a great day.

This concludes today's presentation. Thank you for your participation.