ONE Gas Inc (OGS) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to ONE Gas fourth-quarter 2015 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Ziola. Please go ahead, sir.

Thank you, Dana. Welcome, everyone, to the ONE Gas fourth-quarter and full-year 2015 conference call. We appreciate your interest and investment in ONE Gas. This call is being webcast live on the Internet with a replay made available. After prepared remarks from our speakers, we'd 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 result could differ materially from those projected in any forward-looking statement. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.

Our first speaker this morning is Curtis Dinan, Senior Vice President, Chief Financial Officer and Treasurer of ONE Gas. Curtis?

Thanks, Andrew. Good morning, everyone, and thank you for joining us today.

Our quarterly and year-end results fell in line with our previously announced 2015 net income guidance range of $118 million to $120 million. Net income for the fourth-quarter 2015 was $39.2 million or $0.74 per diluted share, due primarily to new rates in Oklahoma and Texas, compared with $36.6 million or $0.69 per diluted share for the same period last year.

Despite weather that was 21% warmer than normal and total gas sales volumes that were down 10% compared with the prior year, our high percentage of fixed charges and weather normalization mechanisms worked as expected and the warmer weather did not significantly affect fourth-quarter results.

Operating costs for the fourth quarter were relatively flat compared with the same period last year. Employee related expenses were higher but were mostly offset by lower IT and outside service expenses.

Full-year 2015 net income was $119 million or $2.24 per diluted share compared with $109.8 million or $2.07 per diluted share in 2014. In 2015, our results were impacted positively by new rates and residential customer growth in Oklahoma and Texas. We averaged 13,000 more customers in 2015, which is an increase of approximately 0.6% compared with 2014.

Operating costs overall were lower in 2015 driven by IT expenses incurred in 2014 associated with our separation from ONEOK and lower outside service costs due primarily to operational efficiencies. These lower costs were partially offset by higher headcount and employee related benefit expenses.

We ended the fourth quarter with a total debt-to-capitalization ratio of 40% and do not anticipate any equity needs in our five-year financial plan.

Last month, the ONE Gas Board of Directors declared a dividend of $0.35 per share compared with the previous dividend of $0.30 per share. With the separation complete, we now have more clarity around our expenses and performance as a standalone company and recently increased our average annual dividend growth rate between 2015 and 2020 to 8% to 10% from 6% to 8%.

This dividend level is consistent with the Company's expected 55% to 65% dividend payout ratio. We also announced our 2016 earnings per share guidance range of $2.40 to $2.60 per share with an expected earned ROE of 7.6% in 2016 compared with 7.4% in 2015. This improvement in ROE is primarily attributable to our recent rate case in Oklahoma.

We expect capital expenditures to be $305 million in 2016 with more than 70% targeted for system integrity and replacement projects. ONE Gas's rate base is expected to grow an average of approximately 5% per year between 2015 and 2020. This guidance includes the extension through 2019 of bonus appreciation, which improves our cash flows and debt metrics but slightly lowers our rate base growth.

Following approval, of our recent rate case in Oklahoma, 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 $2.7 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 that our rate base in 2016 will average approximately $2.9 billion with 43% of that being our rate base in Oklahoma, 31% in Kansas and 26% in Texas.

And now I will turn it over to Pierce Norton, ONE Gas President and Chief Executive Officer. Pierce?

Thanks, Curtis. Good morning, everyone.

This time last year we were wrapping up our first year as a new standalone publicly traded company. We spent a lot of time during the year, year one, laying out our plans and goals for the future success of our Company. In year two, we were able to put our plans into action, working toward our goals and measuring our success. And I believe these results reflect those efforts.

We are committed to being a 100% regulated natural gas utility and are solely focused on leading the industry as a safe, dependable provider of natural gas for our customers.

As Curtis mentioned, our capital expenditure plan includes investing more than 70% in system integrity and replacement projects. We replaced approximately 22 miles of cast-iron pipe in 2015 and will continue this pace over the next four years. To give you some perspective, cast-iron is roughly 0.3% of our distribution pipe inventory. We expect to replace the remaining cast-iron pipe in our system, about 70 miles in Kansas and Texas, by 2019.

Let me update you on our regulatory activity. Last month in Oklahoma, the Corporation Commission approved a joint stipulation and settlement agreement for an increase in Oklahoma natural gas base rates. The performance-based rate change tariff that was established in 2009 will continue with certain modifications. These new rates went into effect in early January and are reflected in our 2016 guidance.

Moving on to Kansas. Last November the Kansas Corporation Commission approved our annual request for interim rate relief under the Gas System Reliability Surcharge, or GSRS, for an increase in rates of approximately $2.4 million, which became effective in December of 2015. The next Kansas general rate case filing is expected to be May of 2016, based on a 2015 test year, with new rates expected to be effective in January of 2017.

Now on to Texas. In November 2015, Texas Gas Service notified the City of El Paso and the surrounding incorporated areas that it would be filing a full rate case instead of the El Paso Annual Rate Review, or EPARR, in 2016. In December of 2015, we filed a rate case for the Galveston and South Jefferson County service areas requesting an increase in revenues of $3.1 million. If approved by these cities and railroad commission, new rates should be effective in June of this year.

Later this year we plan to file a rate case in Central Texas jurisdiction, which includes the City of Austin. In our other Texas jurisdictions, Texas Gas Service received approval in 2015 for interim rate relief under the Gas Reliability Infrastructure Program, or GRIP, and cost of service adjustments totalling approximately $4.8 million driven by capital investments and changes in cost of service.

As a reminder, this regulatory time line information is included on a state-by-state basis in our investor presentations, which are posted on our website.

Finally, I would like to close by thinking our employees for increasing our mission of delivering natural gas for a better tomorrow and for their constant efforts to meet the needs of our customers. This foundation of our Company strategy is having a high-performing work force, and I appreciate their hard work every day.

Operator, we are now ready for questions.

(Operator Instructions)

Chris Sighinolfi, Jefferies.

Hey. Good morning, guys.

Good morning, Chris.

Thanks for the added color this morning and for the January update. I thought that was really helpful. One quick question for me, Curtis, when you talked about the cash flow side of it, the bonus depreciation extension that we got in December, I assuming that was all incorporated in the January forecast?

That is right, Chris.

Okay. The question I had is, when we think of -- you said no equity needs in the five-year plan. I'm curious, when I think about the cash flow from operations that you guys had forecasted in January, I think it was $365 million, roughly. I think about the CapEx you put forth this year and then think about the dividend at the current share count. Basically, your -- ballpark figure, you're cash flow neutral. But was curious, you guys did do a small share repurchase last year, and I was wondering if that had been contemplated at all? Or if you could remind us what the conditions were around the purchase in the second quarter of last year?

About a year ago, the Board gave us authorization to buy back up to $20 million a year in outstanding shares. That is exclusive of any funds that come in from employee stock purchase program or from dividend reinvestments, those sorts of things. That would push that number higher if that additional cash comes in.

But essentially, what that program is designed for is to hold our outstanding shares at a constant level, to not have any dilution come in because of any issuances through that or through our different equity compensation programs. Again, that was a multi-year authorization that they provided to us and that is really the intent behind that program.

Okay. So when we think about modeling forward, we should just think about it as a flat share count not any decline -- or do you think if we -- if it is opportunistic, do you think you'll be in the market purchasing anything?

No. Again, the intent behind that program is to hold those share counts relatively flat.

Okay. Perfect. Terrific, guys, I think that's all I really had for you. Thanks a lot.

Thanks, Chris.

Tim Winter, Gabelli & Company.

Good morning, guys, and congratulations on a strong year. Now you are two years out from the spin out; you're stocks have doubled. There continues to be a lot of consolidation in the industry. I was wondering what your thoughts were on -- given where your currency is, about the whole consolidation arena, where guys fit in? Might you be interested in buying?

Okay. First of all, good morning, Tim. The way I would answer that is, consolidation has been going on in this industry for years. In my opinion, each case has been unique and strategic to those individual cases. The terms of those deals are driven by the buyers and the sellers in each individual deal. I can't necessarily speak to the specifics of each deal, but we do understand the dynamics behind each one of those. We actually run theoretical cases at these acquisition multiples as an alternative to our plan.

But every time that we run those numbers, we look at the runway that we have for continuing to invest in our assets and our efficiency opportunities. It tells us the same thing, which is continue to keep doing what we are doing, which is execute on our plan and continue to invest in our existing systems and focus on our rate filings and the safety and reliability of our system. So, we are going to continue to do the same thing that we have been doing, and we are committed to that 100% regulated model.

Okay. One other question -- thanks for that answer. How close do you think you can get to earning your allowed ROE over the next couple of years?

We've looked at that a lot, Tim. Based on the current capital spending levels, it looks like it's probably going to be 100 to -- probably max 150 basis points swing there. I would say that is our targeted range, but our limitation there is the amount of capital that we are spending. And, with the current mechanisms that we have, we have that 100 to 150 basis point lag. Other than that, that is our goal. We're pushing toward getting that narrowed down into that level.

Okay. Thank you.

Stephen [D'ambrosio, Capstone] Investment Management.

Hi, guys. How are you?

Good. How are you?

Good. I just had a quick question. What was the rationale between pursuing a general rate case in El Paso versus filing an EPARR?

We took a step back and looked at EPARR and there were some certain things that were not being necessarily pick up in EPARR in the way of expenses. We felt like it was better to -- that those numbers were big enough that -- so we went ahead and notified the City of El Paso and the environs area that we felt like it was best to do a rate case there.

We engaged them, and so that is -- actually, the way that process works under EPARR is that if you want to make any modifications to it, it says you opt out and then you go in and file a rate case. So, it is as simple as that.

The GRC is to pick up other expenses or is to modify EPARR so that in future term times you'll pick up those expenses?

Well, it is actually to pick up the additional expenses.

Okay. That's it. That's all I had. Thanks, guys.

Christopher Sighinolfi, Jefferies.

Hey, Curtis, a quick follow-up to something Tim was inquiring about. We've seen in some of the other deals that I think he was referencing, we've seen companies pursue pipe assets. I was wondering in the context of being 100% regulated, when you're defining it that way or you talking -- should we interpret that to be strictly distribution regulated? Or would you entertain, if an opportunity came up, let's say within your service territory to own something that was transmission regulated, FERC regulated, something of that nature?

We certainly understand, Chris, that 100% regulated could include distribution and say an intra-state type transmission deal. But in our areas, we just don't see -- it's not that we wouldn't necessarily entertain something like that. It's just we just do not see the need for it. We have so many pipes and so much access to supply, in our areas, and our service providers do a good job. And they do it at reasonable rates, which is good for our customers, that we just don't see any need for it in our areas. So unless that changed, I would say our focus is going to be on the 100% distribution side.

Okay. That is what I suspected, but wanted to clarify. Final, just a sort of catch-up question for me with regard to 4Q in 2015 results. You guys talked about declines in fleet related expenses, is that just fuel?

Primarily fuel.

Okay. I suspected that as well. Thanks a lot.

Thank you, Chris.

With no further questions in the queue, I would like to turn the conference back to Andrew Ziola for any additional or closing remarks.

Okay, well thank you for joining us this morning, everybody. Our quiet period for the first quarter of 2016 starts when we close our books in early April. We will extend until we release earnings in early May. We will provide details on the conference call at a later date.

If you have not done so, I encourage you to visit the investor Relations page on our website, register for email alerts and view our fourth-quarter and year-end earnings documents. Again, thank you and have a good day.

Again, that does conclude today's presentation. We thank you for your participation.