ONE Gas Inc (OGS) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the ONE Gas First Quarter 2015 Earnings Conference Call. Today's call is being recorded. And at this time, I'd like to turn the conference over to Mr. Andrew Ziola. Please go ahead, sir.

Thank you, Vicki, and good morning, and welcome to the ONE Gas First Quarter 2015 Earnings Conference Call. This call is being webcast live on the Internet, with a replay made available. 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 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. Pierce?

Thanks, Andrew. Good morning, everyone, and thank you for joining us. We appreciate your interest and investment in our Company. Joining me on the call today is Curtis Dinan, our CFO. On this morning's call, Curtis will review the first quarter 2015 results and dividend announcement. He will also discuss the 2015 guidance. I will then give you a brief regulatory update. And finally, we'll both take any questions that you may have.

We continue to enhance the safety and reliability of our system by investing the majority of our capital in system integrity and maintenance projects. The first quarter of 2015 was a continuation of that plan. With approximately 70% of our revenue requirements collected through fixed charges, more than 90% of our customers being residential and the majority of our territories having whether normalization mechanisms, our results were as expected despite warmer weather in our service territories quarter-over-quarter.

Curtis will now discuss the dividend declaration and review the financial results for the quarter in more detail. Curtis?

Thanks, Pierce, and good morning. Yesterday the ONE Gas Board of Directors declared a dividend of $.30 per share. This dividend level is consistent with the Company's guidance for 2015 and its expected 55% to 65% dividend payout ratio. As we indicated in our most recent guidance, we expect the average annual dividend increase to be 6% to 8% over the next five years.

Now, on to our first quarter results. First quarter net income was $60.4 million, or $1.13 per diluted share, compared with $59.1 million, or $1.13 per diluted share for the same period last year. New rates in Oklahoma and Texas positively impacted results, and were driven primarily by capital investments to enhance the safety and reliability of our systems.

In Oklahoma, residential customer growth also contributed to our results, which were partially offset by lower volumes due to warmer weather in the first quarter of 2015 compared with the same period in 2014. Overall, weather in our service areas was 4% colder than normal, but 8% warmer than last year, which negatively affected net margin by approximately $3.3 million, or $.04 on an EPS basis. Those amounts are net of our weather normalization mechanisms.

Operating costs in the first quarter 2015 were driven primarily by an increase in employee-related costs due to higher labor and benefit cost, offset partially by lower share-based compensation. Our expenses increased compared with the same period last year as we filled several positions that were open at the time of the separation.

Our pension expenses increased $2.6 million compared with 2014 due to a 100 basis point drop in the discount rate and our adoption of the new mortality tables. An increase in IT expenses related to costs required to operate our own IT platform, including the addition of new functionality and capabilities, all of which was partially offset by a decrease in workers' compensation expense and the absence of the one-time separation costs we incurred in 2014.

Capital expenditures were lower relative to the first quarter 2014, reflecting IT assets we purchased to establish our IT systems last year. We ended the first quarter with a total debt to capitalization ratio of 40% and do not anticipate any equity needs in our five-year financial plan.

ONE Gas generated operating cash flows before changes in working capital of $106 million in the first quarter and ended the quarter with $143 million of cash and cash equivalents, and no borrowings under our $700 million credit facility. At March 31, we had 18 BCF of natural gas in storage, and for the 2015-2016 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 reaffirmed our net income range of $108 million to $118 million, and we expect our earned ROE for 2015 to be 7.4% compared with an ROE of 7.6% for 2014, reflecting capital expenditures of more than two times depreciation, and rate case outcomes in Oklahoma and Kansas that will not be effective until 2016 and 2017 respectively.

As previously stated in December, we expect capital expenditures to be $300 million in 2015, with more than 70% targeted towards system integrity and replacement projects. At March 31, 2015, our current authorized rate base, defined as the rate base established in our latest regulatory proceedings, including full rate cases and interim rate filings, is approximately $2.4 billion. Considering investments in our system and other changes in the components of our rate base that have occurred since those regulatory filings, we project that our rate base in 2015 will average approximately $2.7 billion, with 42% of that being our rate base in Oklahoma, 33% in Kansas, and 25% in Texas.

Pierce, that concludes my remarks.

Thanks, Curtis. Now for a brief regulatory update. As previously approved by the Oklahoma Corporation Commission in 2014, Oklahoma Natural Gas will file its general rate case by this August based on a test year consisting of the 12 months ended March 31, 2015. We expect the outcome of this rate case to be reflected in our financials in early 2016.

As we mentioned in our last call, Texas Gas Service made an annual filing for interest rate relief under the Gas Reliability Infrastructure Program, or GRIP, statute for its Central Texas service area in the amount of $3.7 million in February. If approved, the new rates will become effective in May of 2015.

In March, Texas gas service filed under the El Paso annual rate review, or EPAR, requesting an increase in revenues of $9.4 million in the city of El Paso and surrounding incorporated cities. The following included a request for an additional revenue of $1.8 million to reflect a payroll adjustment for a total increase in revenues of $11.2 million. If approved, the new rates will become effective in August of 2015.

In closing, I'd like to thank our 3,300 employees for their hard work and dedication as they continue to serve our customers and operator assets safely and reliably every day. I appreciate their commitment to a high standard of customer service as we deliver efficient energy to our customers.

Operator, we're now ready for questions.

Thank you. (Operator instructions.) Chris Sighinolfi, Jeffries.

Morning, Pierce, how are you?

Good, Chris, how are you?

I'm well, thanks. I had, I guess, couple questions, but first off, and maybe this is a question for Curtis, but I guess as we think about capital deployment throughout the year, been pretty static on a quarterly basis in 2014. I think looking at 1Q, it's kind of the lowest quarterly rate we've seen since you guys spun from ONEOK. And so, I was just curious the cadence of the CapEx spend, maybe what's driving the variance this year versus last, and if we should just think about that as being more back-half loaded, or will there be a step-up here in 2Q? Any help on that?

Yes. I'll let Curtis answer that question.

Hi, Chris. I would say 2015 is really more of the normal pattern. The comment that I made in my remarks, that we had the capital in the first part of 2014, the first quarter of 2014 that was related to the IT as we were ordering the equipment for our own IT infrastructure, that kind of skewed that number, and that's in a magnitude of probably $10 million or $11 million. So, absent that, first quarter 2014 and first quarter 2015 are pretty much in line. And that's what I would expect on a first quarter that we would look like.

Typically, our heavier construction periods happen in the second and third quarters, and a little bit in the early part of the fourth quarter, and then starts to wind down as we get into the heating season. So, that's probably the best I could do for you in terms of the profile to expect.

Okay, that's helpful. And then, any update on the NGV side of your business? I guess I'm curious, since we last spoke about it, there's been obviously a pretty material and physical decline in crude oil prices and gasoline prices. And I'm just wondering if that thwarts at all any of the growth plans that were envisioned on the NGV side of the business.

No, we haven't seen any material differences in that, Chris. In the past quarters, we've been seeing about a 47% growth rate kind of quarter-over-quarter when you look at the trailing 12 months. This past analysis showed about a 42%. So, a little bit of a falloff, but not a material falloff in that number.

I think most of the people that have already converted their units are continuing to use natural gas, still is economical to do so. Some of the people that are probably looking at converting them, probably taking a little bit stronger look at the economics, but we haven't seen a material dropoff as of this time. What we typically do is let the free market work there, and they put their capital to work as far as these stations go, and then we spend very little capital to pick up the transport dollars on that segment of the business.

Right. And I remember a prior discussion, Pierce, about the potential for improvements on the compression units for home design, things like that, that might be sort of a step change function in terms of away from the fleet activity but more towards the individual retail residential customer. Has there been any improvement on the technology that's worth mentioning, or are we still sort of in a -- go ahead.

Yes. Not really. Not really, Chris. There's not been any really material breakthroughs on that front yet. But, whenever there is, we'll definitely let you guys know.

Okay. And I guess final question from me, it's kind of one of those philosophical questions. And I realize that you guys sit in around some pretty prolific production, gas production basins, but there's been a discussion more broadly within the utility make-up, whether it's on the electric side or on the gas side, with a notion of perhaps in the midst of the low natural gas price [that I think] we're seeing, perhaps looking at potentially moving into cost-of-service reserve development models to provide sort of a longer-term physical hedge on a price. One of your peer companies has talked about recently signing up utility companies for such programs. I'm just curious the appetite within ONE Gas, where your regulator -- your constituents in the three states for that type of framework.

Right. So far, Chris, there's really not been much of an appetite in that area primarily because we do set so close to those reserves, and there's so many E&P companies in our territories, and the expertise that they have in that area. The model that seems to be working in our area is the E&P companies would focus on E&P. They seem to be doing a very good job of that, and then we focus on the distribution side. And our regulators seem to like the way that model is working right now. So, there doesn't seem to be a lot of appetite in our territories to go to that new model that's being talked about.

Okay. Well, I appreciate the time this morning. Thanks for taking my questions.

Thank you very much, Chris.

(Operator instructions.) Joe Zhou, Avon Capital Advisors.

Hi, thank you for taking my question. So, I see there's $2 million of pension expense due to a increase in the discount rate, so it roughly translates to $.04 per share. So, my question is -- I've got two questions. The first question is what's your current funding status for your pension? And secondly is how should I look at it in the upcoming quarters for incremental pension expense?

Joe, I'm going to let Curtis take that question for you. And first of all, thanks for joining the call and the question.

Good morning, Joe. So, I'll take a couple of those questions. The pension expense, that gets at when we do our actuarial study at the beginning of each year. So, those trends, what you've seen in the first quarter, that will continue in each quarter through 2015.

Keep in mind that in Kansas we have a deferral mechanism to the extent that that expense changes from what's built into our base rates, and so that number is net of that deferral. And then, in our other territories, as we go through, whether it's a COSA type of a filing or a full rate case in Texas, or in our upcoming Oklahoma filing, those expenses will impact the amounts that get filed for and the rate relief that's sought in those proceedings.

In terms of the funding, a year ago we were right at 100%, or pretty close to 100% funded. When we did our remeasurement this year, we had the 100 basis point drop in the discount rate, and then we [had] also adopted the new mortality tables that were issued last fall. So, the combination of those things lowered us into the low 80% range in terms of a funded status. I think that was all of your questions, but did I miss one?

No. Thank you very much.

Great. Thanks, Joe.

Thank you, Joe.

Thank you.

Chris, Jeffries.

Hey, thanks again. Just a quick update, if you would, on two things, Pierce. You're probably annoyed by this question about M&A in this space, but it seemingly is consistently a theme. And in the wake of the General Electric decision to sort of streamline its business, there was discussion of potentially the source gas assets being on the market. I know there's a number of other assets, but I'm just wondering your latest thoughts as it pertains to areas outside your current jurisdictions that may be of interest, or is there enough on your plate already with the plans you've outlined that that really doesn't materially affect how we should be thinking about the business?

Yes. I mean, what we have said all along, Chris, is that our strategy when it comes to M&A, we think the best thing for our shareholders is to continue to invest in our existing assets because of the dollar-per-dollar recovery on those investments when you look at the multiples and those kind of things that are paid for these assets today. And so, that continues to be our strategy. And so, that's what we're sticking to.

Okay. And then, separately, you mentioned the filing forthcoming in Oklahoma. And I don't know in advance of the formal filing if you can talk much about what -- sort of help us get a sense of what maybe the magnitude of the deficiency is there.

Going back and looking at what you asked for and received in 2014, it seems like, aside from the revenue items, that the basic structure of the equity return and the cap structure, the overall return pretty much fell in line with what you guys had been requesting. Is there anything that's changed in these last two years that would make you feel any differently about the treatment there? I think that was a settlement process. Are we likely to see a settlement here again, or how do you think things are shaping up in early discussions?

Well, I think the short answer to that, Chris, is no. I don't see any material changes. I think the process has worked in the past, and we expect the process to work in the future.

Okay. And we'll just wait for the [filing] (inaudible) in terms of -- anything you can guide us to in terms of (inaudible) [deficiency] there now?

Yes, I think we're just going to wait and let the process play out, Chris.

Okay. Okay, thanks a lot.

All right, thank you.

And Mr. Ziola, I'd now like to turn it back to you for any additional or closing remarks.

All right. Well, thank you, everybody, for joining us. We hope to see many of you at the upcoming AGA Financial Forum. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings in later July. We will provide details on the conference call logistics at a later date. So again, thank you for joining us, and have a wonderful day.

And that does conclude our conference for today. I like to thank everyone for your participation, and have a great day.