ONE Gas Inc (OGS) 2016 Q3 法說會逐字稿

Today's conference is being recorded. Andrew Ziola, please go ahead.

Good morning and thank you all for joining us for our third-quarter 2016 earnings conference call. This call is being web-cast live with a replay made available. After prepared remarks from our speakers, we would 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. Our first speaker this morning is Curtis Dinan, Senior Vice President, Chief Financial Officer and Treasurer of ONE Gas. Curtis?

Yesterday the ONE Gas Board of Directors declared a dividend of $0.35 per share. This dividend is consistent with the Company's guidance for 2016. As we previously indicated, we expect the average annual dividend to increase to be 8% to 10% between 2015 and 2020. We also affirmed our 2016 guidance, which we updated back in August. We expect net income to be within the range of $135 million to $140 million or $2.55 to $2.65 per diluted share. We anticipate releasing our 2017 guidance and our updated five-year forecast in January.

Now, on to third quarter results. Net income for the third quarter 2016 was $12.7 million or $0.24 per diluted share, compared with $7.4 million or $0.14 per diluted share for the same period last year. New rates from investing in our system -- systems, which includes the effect of the Oklahoma rate case that was approved earlier this year and other various rate filings in Texas over the past year, as well as residential customer growth in Oklahoma and Texas led to our positive results.

Operating costs for the third quarter were slightly higher compared with the same period last year, reflecting an increase in outside service costs and fleet and materials expenses. Year-to-date operating costs were slightly lower compared with the same period last year. This year-to-date decrease was driven primarily by lower outside service costs and lower IT expenses, offset partially by higher employee related expenses.

Capital expenditures for the third quarter were $87 million compared with $74 million for the same period last year. We expect capital expenditures to be approximately $305 million in 2016, with more than 70% targeted toward system integrity and replacement projects.

ONE Gas ended the quarter with a total debt-to-capitalization ratio of 40% and $4.5 million in cash and cash equivalents. We had $42 million in short-term borrowings and letters of credit which leaves $658 million of credit available under our $700 million credit facility.

At September 30, 2016, our current authorized rate base, defined as the rate established in our latest regulatory proceedings, including full rate cases and interim rate filings was 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 $3 billion with 42% of that being our rate base in Oklahoma, 32% in Kansas and 26% in Texas. Now I will turn it over to Pierce Norton, ONE Gas President and Chief Executive Officer.

Thanks Curtis, and good morning everyone. ONE Gas is focused on being an industry leader as a safe and reliable provider of natural gas to our 2.1 million customers, a critical component of our strategy and why we reinvest in our systems and our facilities.

As you may have noticed in our press release, we had quite a bit of regulatory activity that represents the recovery of those investments. So with that, we will continue to have a collective basket of regulatory activity across all three of our states. The various regulatory outcomes in all of our service territories determine where our results may fall within the low to high range of our five-year plan.

Let's start with Kansas which represents approximately 30% of our total rate base. On October 5, Kansas Gas Service reached a settlement agreement with all parties, for a total base rate increase of $15.5 million or a net increase in base rates of $8.1 million, after considering the Gas System Reliability Surcharge already being recovered.

If approved by the KCC, the impact to 2017 operating income will be approximately $9.1 million. As with our last rate case in Kansas, the agreement is a black box settlement, meaning the parties agree to a specific revenue number but no specific return on equity. The KCC has until December 28 to make a ruling with new rates being effective no earlier than January 1, 2017.

Now let's move to Texas and I will start with the central Texas service area which includes the city of Austin. Last month Texas Gas Service reached a settlement agreement for its central Texas and South Texas jurisdictions for an increase in revenues of $6.8 million, which has an operating income impact of $3.4 million. As a result of the agreement, the parties agree to consolidate the two service areas and establish a 9.5% return on equity and a 60.1% common equity ratio. New rates will be effective in November of this year for the Incorporated cities of the former central Texas service area. For the unincorporated areas, new rates are expected to be effective in early January upon approval from the Railroad Commission of Texas or the RRC.

For our West Texas service area, in September the RRC approved consolidation of the El Paso, Dell City and Permian service areas into a new West Texas service area. The RRC approved a base rate increase of $8.8 million, which will have a $7.6 million impact on operating income. This approved filing was based on a 9.5% return on equity and a 60.1% common equity ratio.

Last month, rates went into effect for all service areas, with the exception of the incorporated cities in the former Permian service area. Texas Gas Service expects to file for these new rates this quarter. Also in October 2016, Texas Gas Service and the City of El Paso filed separate motions for rehearing for various issues. The RRC has until January 2017 to make their ruling.

Our jurisdiction count in Texas will be 6 if the RRC approves the central Texas settlement compared with 10 we started with earlier this year. This consolidation of jurisdictions benefits our stakeholders by creating administrative efficiencies and the savings are passed on to our customers. For additional details of our Texas regulatory activity, please see our third quarter 10-Q that will be filed later today.

In closing, I would like to thank all of our more than 3,400 employees for their continued focus and commitment to providing safe and reliable service to our 2.1 million customers. Operator, we're now ready for questions.

(Operator Instructions)

Gabriel Moreen, Bank of America Merrill Lynch.

Question just interested, I'm not fishing for 2017 guidance per se, in know you are not giving it on this call, but when you gave the guidance for the five year outlook on EPS and dividend growth at the beginning of this year, was that 5% to 8% basically meaning that you could or could not fall below that range for one year or is that just really looking at sort of an average over that five-year time horizon to 2020?

Good morning Gabe, this is Curtis. The one, the guidance I would give you is, first off, yes it was based off of 2015 as the starting point and then within that five-year period, that is just an average, the compounded average growth rate over the period of time.

So there will be periods that it is more lumpy as it relates to, if we have above average period of rate case activity versus a period where we may not have as many rate cases in process. Some years it may be a little higher, some years it maybe a little lower but it is still, our projection was to average out for the 5% to 8% over that five-year period.

This question turns into the Kansas rate case. Can you talk about the settlement amount relative to what you're asking for, and I appreciate it's a black-box settlement, you can't really talk ROE but were there any major line items on expenses or things that were disputed in rate-based that maybe you can flag for us in terms of what the potential outcome settlement of that case is going to be?

At this time Gabe, this is Pierce. We really do not have any reason or indication to believe that this settlement won't be approved. But, I guess the way I would answer that is that there is always a multiple of things that get deducted there. There is a lot of things that go into that.

We do believe though, that the settlement is the best thing for all of the parties at this time. The way we look at all of our rate activity, is that the regulatory process is a marathon, it is not a sprint. So we'll let the KCC make their ruling on December 28 or before. Then we'll look back and do a post-mortem and see if there's anything we need to do differently in the future.

On the post-mortem Pierce, can you just talked about, is there going to be a stay-out provision here and would you envision coming back to the KCC at some point in the not too distant future if there is not a stay-out provision?

At this time Gabe, there is no stay-out provision that is contemplated in the settlement agreement. So, if for some reason the KCC decided as the commissioners to make a change, then if it's deemed a material difference from the settlement agreement, then it goes back to all of the parties to re-look at that. As far as the rate activity going forward, we're going to give you a guidance into that when we come out with our guidance for the entire company in January.

Joe [Doe], Avon Capital Advisors.

Just a quick question on your O&M, I see that your nine months ended O&M is tracking almost flat year to date. Should I expect that to be flat going forward or how do you manage that? On your five-year plan how should I model that going forward?

As you know Joe, there a lot of moving parts to O&M. What we are concentrating on is our labor cost and our outside services cost and any sort of ancillary cost that are tied to those two. And we said all along our focus is to deploy technology so that we can maintain those expenses going forward. We do think that this is a little more indicative level of what we can see in the future as opposed to what has been there in the past. So that's the way I would answer that.

[Steven Den Breezy] (Inaudible),.

Just a quick question, the comment on the Kansas settlement. The net increase is $8.1 million but the impact to operating was $9.1. What is the difference between those two numbers?

Hey Steve this is Curtis. [In addition -- part of that revenue requirement there's additional depreciation that gets recorded or amortization of Reg. assets that have been set up over the past few years, so we're recovering those costs, then with that change in the amortization of those, it gives you a little bit different answer than the revenue requirement. So net-net it is a positive impact.

(Operator Instructions)

Chris Sighinolfi

Just had a question. In the outcomes in Texas, was just noticing some enhancement to, I think one of you asked about, in terms of the equity layer. Obviously some not quite what you had asked about in terms of an ROE (inaudible) component. So just curious, given the cadence of discussion that you had in your Oklahoma case as it pertains to Texas, it seems there is more comfort around the 61% equity layer.

Is there anything noteworthy that the way those outcomes took shape and the discussions sort of more favoring equity component as opposed to ROE?

So first of all Chris, it might have been my southern dialect that made you think that was 61% it was 60.1%, which is actually what our actual equity is at the time of the filing. So we asked for the actual and in both cases we got the actual.

As far as the nine and one-half is more indicative of what the railroad commission has been approving down there and in other cases. So there is consistency that we saw across basically different jurisdictions and different companies in the state of Texas.

That was my misinterpretation of the equity there. I was hearing 61 so thank you for the clarification.

That was my dialect.

Also was thinking, there has been a lot of recapitalization that has happened with the E&T community. We are seeing rigs go back to work. West Texas is an area that has really picked up from the bottom and I'm curious as it pertains to your service territory there, but also in parts of Oklahoma how that -- if at all shapes what you guys are thinking might be in store and intermediate term in terms of customer -- capital spend if there is the ability to sort of flex forward within the five-year plan some of the spending to accommodate enhanced customer growth or if it was just spare capacity that you think going to get sort of taken back up as people back into those areas.

There is a lot packed into that question Chris. I think I heard three things that I will try to answer. The first one is, as far as the E&T community, as it relates to Oklahoma and Texas the best word I can describe it is resiliency. Even during the downturn, when the prices were low and rigs were laid down across the entire United States, 60% of the active drilling rigs in the US continued to run in the states of Texas and Oklahoma.

Yes, we had a little bit of an uptake lately, but we're still somewhere around that 60% number facts as far as the drilling rigs the United States. When it comes to flexing capital spending, that is something that we'll analyze and give clarity to when we do our updated guidance for 2017 and our five-year plan. I would characterize that as we seem to be steady as far as customer growth goes.

It is along the same numbers that we have always recorded and it shifts around just a little bit from time to time based on the seasonality and things that happen in the year. But we expect that to continue. But the main spend will continue to be on system integrity. That will dwarf the spending that we will have even if the customer growth picks up. But at the end of the day, it all goes into rate base.

It's final question for me Pierce, obviously there has been more of an emphasis the last couple of years on the regulatory filings in Oklahoma and in Kansas particularly and on the costing side of the equation moving off to separation and some of the achievements you guys have made on efficiencies. But curious [C&GS] remains a small part of the program is something you talked about the past. Has there been anything from a materiality standpoint that has taken shape within your ambitions in that realm or from a technology perspective, anything to be aware of?

The short answer Chris is no, but we do continue to see growth in that area. We continue to add more and more stations. Our station count right now that we serve is around 140. I think the last time we talked it may have been in the 115 to 118 range.

We have continued to see growth in that area and it is really focused on the larger vehicles, fleets such as FedEx, UPS, those kind of folks, we do continue to see growth there. Immateriality, I would say we're not there yet and we don't see, at least anything currently, that is going to be a breakthrough as far as a game-changer yet in the technology.

There appears to be no more questions at this time, so I'd like to turn the call back over to Andrew for closing remarks.

Thank you everyone for joining us. Our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in February 2017. We will certainly provide details on the conference call at a later date. If you have not done so, I encourage you to visit the IR page on our website, register for email alerts and view our third quarter documents. Have a great rest of your day.

That does conclude today's presentation. Thank you for your participation. You may disconnect.