ONE Gas Inc  (NYSE: OGS)
Q1 2019 Earnings Call

April 30, 2019, 11:00 a.m. ET

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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the ONE Gas First Quarter Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Brandon Lohse. Please go ahead, sir.

Brandon Lohse -- Director of Investor Relations

Good morning and thank you for joining us on our First Quarter 2019 Earnings Conference Call. This call is being webcast live and a replay will be made available later today. After our prepared remarks, we'll 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 our 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. Joining us on the call this morning are Caron Lawhorn, Senior Vice President and Chief Financial Officer; Curtis Dinan, Senior Vice President and Commercial; Sid McAnnally, Senior Vice President Operations; and Pierce Norton, President and Chief Executive Officer.

And now I'll turn the call over to Caron.

Caron A. Lawhorn -- Senior Vice President & Chief Financial Officer

Thanks, Brandon. Good morning, everyone, and thank you for joining us today. Net income for first quarter 2019 was $93.7 million or $1.76 per diluted share compared with $90.8 million or $1.72 per diluted share for the same period last year. Our first quarter results reflect new rates in Kansas, higher sales volumes net of weather normalization in Texas and Kansas, and residential customer growth in Oklahoma and Texas. Operating costs for the first quarter were $124.5 million compared with $118.8 million in the same period last year, primarily due to an increase in employee and legal related costs. We also experienced increased interest expense from replacing $300 million of our maturing senior notes with $400 million of new senior notes at a higher interest rate. In Oklahoma and Kansas, we have begun returning excess accumulated deferred income taxes to customers, which is reflected as a reduction of revenues.

Accordingly, we are also amortizing the associated regulatory liability through deferred income tax expense. As a result, our effective tax rate including excess tax benefits on vested share-based compensation for first quarter 2019 is approximately 5 percentage points lower than the prior year 16.6% compared with 21.5% and is consistent with our guidance for 2019. As previously indicated, the return of excess ADIT to customers is not expected to have a material impact on our net income. Yesterday the ONE Gas Board of Directors declared a dividend of $0.50 per share, the same as the previous quarter. The dividend is consistent with the Company's guidance for 2019. As we had indicated previously, we expect the average annual dividend increase to be 7% to 9% between 2018 and 2023 with a targeted dividend payout ratio of 55% to 65% of net income. We also reaffirmed our 2019 earnings per share guidance of $3.27 to $3.57 per share.

Authorized rate base reflecting the recently completed regulatory activity in Oklahoma and Kansas is approximately $3.33 billion. Authorized rate base is defined as the rate base reflected in completed regulatory proceedings, including full rate cases and interim rate filings. We project that for 2019 our estimated average rate base, which is defined as authorized rate base plus additional investments in our system and other changes in the components of our rate base that are not yet reflected in approved regulatory filings, will be approximately $3.61 billion with 42% in Oklahoma, 29% in Kansas, and 29% in Texas. ONE Gas ended the quarter with approximately $403 million of capacity under our commercial paper program and we do not anticipate any equity or capital market needs in 2019.

And now, I'll turn it over to Curtis Dinan for regulatory update. Curtis?

Curtis L. Dinan -- Senior Vice President of Commercial

Thanks, Caron, and good morning, everyone. Let's begin with Oklahoma. In March, Oklahoma Natural Gas filed its third annual performance-based rate change filing or PBRC since the last general rate case that was approved in January 2016. This filing was based on a 2018 test year and includes two proposed customer credits. The first is a PBRC credit of $15.4 million to be returned to customers over a 12-month period.

This proposed credit represents all earnings, including amounts attributable to tax savings, that are above the authorized ROE of 9.5% for 2018. The second proposed credit is $12.7 million associated with excess ADIT. We have one more PBRC filing in 2020 before a full rate case is required to be filed in 2021.

Moving on to Kansas. the Kansas Corporation Commission approved the settlement of Kansas Gas Service's rate case and we implemented new rates in February. The net base rate increase is $18.6 million and reflects an amortization credit for the refund of excess ADIT. In a separate order, the KCC required Kansas Gas Service to refund its tax reform liability of $16.6 million to its customers through a one-time bill credit. Customers will see this refund during the second quarter of 2019. Looking ahead in Kansas, we plan to file our next Gas System Reliability Surcharge or GSRS in August for the period covering September 2018 through June 2019. The new GSRS legislation that was passed last year, which expanded the definition of eligible capital expenditures, will apply to this filing.

With this change in Kansas, approximately 90% of all capital spending for ONE Gas will be subject to an annual filing. Finally in Texas, in March Texas Gas Service made Gas Reliability Infrastructure Program or GRIP filings for all customers in the West Texas and the Central Texas service areas for increases of $4.1 million and $5.5 million, respectively. We anticipate new rates will be effective in July of this year. At this point, we've dealt with the majority of issues relating to tax reform as it relates to our customers with the exception of excess ADIT in Texas. We will be working with our Texas regulators to determine how excess ADIT will be addressed.

And now I'll turn it over to our CEO, Pierce Norton. Pierce?

Pierce H. Norton II -- President and Chief Executive Officer

Thanks, Curtis and Caron. As we look ahead to the rest of 2019, our focused strategy is unchanged and centers on continuously improving the safety and reliability of our system. We expect to invest $2.4 billion in our system over the next five years. To support this level of capital spending, we continue to build capacity in the resources that are required to plan and execute the work. This includes advances in supply chain and logistics, the utilization of emerging technologies, and improved efficiency of internal and external labor. Powering appliances with natural gas provides excellent value to our customers and we continue to work to find more efficient ways to provide better customer service

To maintain this competitive pricing advantage we remain mindful of our financial metrics and the customer bill impacts. We would not be able to achieve our safety and reliability goals without the dedication of our more than 3,500 employees. I want to thank them for their contribution and for work -- working hard every day to serve our 2.2 million customers. Thank you all for joining us this morning and we look forward to seeing many of you at the American Gas Association Financial Forum in a few weeks.

Operator, we're now ready for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll take our first question from Aga Zmigrodzka from UBS. Please go ahead.

Agnieszka Zmigrodzka -- UBS -- Analyst

Good morning.

Pierce H. Norton II -- President and Chief Executive Officer

Good morning, Aga.

Agnieszka Zmigrodzka -- UBS -- Analyst

In early April some senators announced new legislation, the Leonel Rondon Pipeline Safety Act to address risks related to distribution pipeline's most recent incident. Could you please maybe comment how the proposed legislation could impact ONE Gas and the industry as a whole? Thank you.

Pierce H. Norton II -- President and Chief Executive Officer

Aga, I want to get a clarification. Are you talking about the legislation that's proposed at the federal level?

Agnieszka Zmigrodzka -- UBS -- Analyst

Yes.

Pierce H. Norton II -- President and Chief Executive Officer

Okay. I'll let Curtis answer that question.

Curtis L. Dinan -- Senior Vice President of Commercial

Sure, Aga. This is Curtis. And we obviously have reviewed that legislation. What I would say is it's pretty early in the process so trying to handicap where that might go is really difficult to say at this point. We do have the same at the federal level as in the state levels of folks involved in monitoring the legislation and providing input where needed. So it's really a little bit difficult to be too specific at this point, but again we are aware of it and we're continuing to monitor what's there.

Agnieszka Zmigrodzka -- UBS -- Analyst

Thank you. And second question is more a housekeeping question. So in 1Q the weather was significantly below normal and you reported margin increased by $3.3 million related to higher sales. Could you please discuss how ONE Gas can benefit from colder weather despite having weather normalization mechanism?

Pierce H. Norton II -- President and Chief Executive Officer

Aga, I'm going to let Caron answer that question.

Caron A. Lawhorn -- Senior Vice President & Chief Financial Officer

Good morning, Aga. This is Caron. So, our weather normalization mechanisms are not perfect. So, they are designed to offset or to put us back to normal weather obviously; but it's -- they're complicated algorithms and they don't -- they just don't work perfectly especially in Texas with several jurisdictions in Texas each with their own set of weather norm parameters and again they just don't work exactly. So we get pickups sometime, especially in the shoulder months. I know March is not really a shoulder month, but that can happen as well.

Agnieszka Zmigrodzka -- UBS -- Analyst

Thank you a lot for your color.

Pierce H. Norton II -- President and Chief Executive Officer

Thank you, Aga.

Operator

Thank you. And we'll take our next question that's coming from Chris Sighinolfi of Jefferies. Please go ahead.

Christopher Sighinolfi -- Jefferies & Company -- Analyst

Hey, good morning, guys.

Pierce H. Norton II -- President and Chief Executive Officer

Hey, good morning, Chris.

Christopher Sighinolfi -- Jefferies & Company -- Analyst

Hey, Pierce. Quick question and I don't know if this is for Pierce or Caron. The Kansas refund that's coming here in the second quarter, is that simply a cash flow item given that it's a change to prior periods or would that be recognized in earnings?

Pierce H. Norton II -- President and Chief Executive Officer

Yes, Chris. That's more of an accounting question so I'm going to let Caron answer that one.

Caron A. Lawhorn -- Senior Vice President & Chief Financial Officer

Good morning, This is Caron. Yes, we do have that liability accrued. If you'll notice, we disclosed that we accrued an additional $2.4 million in 2019 and the remainder of that was already accrued in 2018.

Christopher Sighinolfi -- Jefferies & Company -- Analyst

Okay. So, there's not a -- it's not sort of an acute item that we'd see reflected next quarter. It's been accounted for in the lead up to it.

Caron A. Lawhorn -- Senior Vice President & Chief Financial Officer

It's been accounted for and it's cash flow, correct.

Christopher Sighinolfi -- Jefferies & Company -- Analyst

Yes, OK. That's what I suspected, just wanted to check back. And then you guys had mentioned, Caron, in the release last night just on the other income line some -- I'm imagining it's equity market performance that was strong in the first quarter with regard to some of your non-qualified employee pension benefit programs. Just curious is there a baseline assumption that you make in the guidance for the performance of those plans and I guess with the strength in the first quarter, have you sort of exceeded what might have been in the guidance or any color on that front would be helpful?

Caron A. Lawhorn -- Senior Vice President & Chief Financial Officer

We don't bake in any kind of anticipated earnings on those plans. We expect them to be essentially neutral. So, we experienced that pickup in the first quarter, but there's a possibility that we could give it back later in the year depending on how the markets perform.

Christopher Sighinolfi -- Jefferies & Company -- Analyst

Okay. That is -- those are my two cleanups. Thanks a lot for the time.

Pierce H. Norton II -- President and Chief Executive Officer

Thank you, Chris.

Operator

Thank you. (Operator Instructions) As we have no further questions so I'll hand the call back to you for any additional or closing remarks.

Brandon Lohse -- Director of Investor Relations

Great. Thank you all again for your interest in ONE Gas. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings in late July. We'll provide details on the conference call at a later date. And have a great rest of your day.

Operator

This concludes today's call. Thank you all for your participation. You may now disconnect.

Duration: 14 minutes

Call participants:

Brandon Lohse -- Director of Investor Relations

Caron A. Lawhorn -- Senior Vice President & Chief Financial Officer

Curtis L. Dinan -- Senior Vice President of Commercial

Pierce H. Norton II -- President and Chief Executive Officer

Agnieszka Zmigrodzka -- UBS -- Analyst

Christopher Sighinolfi -- Jefferies & Company -- Analyst

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