ONE Gas Inc (OGS) Q2 2019 Earnings Call Transcript

OGS earnings call for the period ending June 30, 2019.

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Motley Fool Transcribers
Jul 30, 2019 at 3:23PM
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ONE Gas Inc (NYSE:OGS)
Q2 2019 Earnings Call
Jul 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Good day and welcome to the ONE Gas Second Quarter Earnings Conference Call. [Operator Instructions]

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 second 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 will be happy to take your questions. 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.

Joining us on the call this morning are Caron Lawhorn, Senior Vice President and Chief Financial Officer; Curtis Dinan, Senior Vice President, Commercial; Sid McAnnally, Senior Vice President of 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 and Chief Financial Officer

Thanks, Brandon. Good morning, everyone and thank you for joining us today. Net income for second quarter 2019 was $24.5 million or $0.46 per diluted share compared with $20.4 million or $0.39 per diluted share for the same period last year. Our second quarter results reflect new rates and lower sales volumes, net of weather normalization in Kansas and residential customer growth in Oklahoma and Texas.

Operating costs for the second quarter were $116.1 million compared with $117.6 million in the same period last year, primarily due to a decrease in employee-related costs. Offsetting part of the increase is the return on employee benefit plan assets, which is included below the line and other income and expense. As you will recall, in November of 2018, we refinanced $300 million of maturing senior notes with $400 million of senior notes, at a slightly higher interest rate, resulting in higher interest expense this year.

In Oklahoma and Kansas, we are returning excess accumulated deferred income taxes to our customers, which is reflected as a reduction of revenues. Income tax expense includes the amortization of the associated regulatory liability, which was $2.1 million for the second quarter. Cash provided by operating activities was approximately $240 million through June of 2019. As we previously indicated, our 2019 cash flows continue to be impacted by tax reform.

In February, base rates in Oklahoma were lowered by $11.3 million, and in Kansas we refunded $16.6 million for the over collection of taxes.

In the third quarter of this year, we expect to begin crediting customers in Oklahoma, $15.6 million over a 12 month period for the 2019 PBRC filing. With these adjustments, we will have worked through the impact of tax reform on base rates in all jurisdictions. Earlier this month, the ONE Gas Board of Directors declared a dividend of $0.50 per share, the same as the previous quarter. This dividend is consistent with the Company's guidance for 2019. As we have 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 updated our 2019 earnings per share guidance on a diluted share basis to a range of $3.39 to $3.57 compared with the previously announced range of $3.27 to $3.57. The new midpoint is $3.48, up from $3.42. Our updated guidance reflects positive impacts from new rates and cooler weather in the first quarter, partially offset by higher operations and maintenance expenses. Capital expenditures are expected to remain approximately $450 million for the year.

Authorized rate base, reflecting the recently completed regulatory activity in central taxes is approximately $3.38 billion as of June, the 30th. Authorized rate base is defined as the rate base reflected and 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 entered the quarter with approximately $406 million of capacity under our commercial paper program, and we still 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 in Oklahoma. In June, a settlement was reached and a stipulation was filed in Oklahoma Natural Gas' Performance-Based Rate Change Filing or PBRC. This stipulation includes a $15.6 million PBRC credit to be returned to customers over a 12 month period. This credit represents all earnings, including amounts attributable to tax savings that were above the authorized ROE of 9.5% for 2018. The second credit is $12.7 million associated with excess ADIT. An order from the Oklahoma Corporation Commission is expected in the third quarter. If approved, the provisions of the joint stipulation will not have a significant impact on 2019 earnings. We will have one more PBRC filing in 2020, before a full rate case is required to be filed in 2021.

Moving on to Texas. In March, Texas Gas Service made Gas Reliability Infrastructure Program or GRIP filings for all customers in the Central Texas and the West Texas service areas. The Railroad Commission in the cities and both service areas agreed to increases of $5.5 million and $4.1 million respectively. New rates in Central Texas became effective in June and new rates in West Texas became effective in July. And 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. As a reminder, this will be our first filing under new legislation that expands the scope of expenditures that are eligible for recovery under GSRS and increases the cap on the monthly residential surcharge.

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

Pierce H. Norton -- President and Chief Executive Officer

Thanks, Curtis. As Caron noted, we have updated our guidance for 2019, where we raised the midpoint of our earnings per share to $3.48 from $3.42. This update, which includes increases in net margin and operating expenses, recognizes our overall performance to date and is reflective of our estimates for the remainder of the year. Included in this updated guidance is an increase in the annual operating expenses of $12 million, which is primarily due to projected annual employee related costs and to a lesser extent outside services.

Employee related cost include our employee incentive program that is based on financial and operating targets that when met benefit and align in the best interest of all stakeholders, the customer, the employee, the bondholder and the equity holder. We take tremendous pride in delivering an energy source natural gas that provides reliable, affordable comfort conveniently to our 2.2 million customers year around. We remain focused on operating safely and managing our expenses as part of our efforts to maintain a competitive advantage over other energy alternatives. It takes every one of our 3,600 employees working together to accomplish our goals. These employees exemplify a culture driven by our core values as they go about their work every day and I am thankful for their efforts.

Thank you for joining us this morning. Now operator, we are now ready for questions.


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Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from Chris Sighinolfi with Jefferies.

Christopher Sighinolfi -- Jefferies -- Analyst

Hey, good morning, everyone. Thanks for the time.

Pierce H. Norton -- President and Chief Executive Officer

Good morning, Chris.

Christopher Sighinolfi -- Jefferies -- Analyst

Hey, Pierce, how are you?

Pierce H. Norton -- President and Chief Executive Officer

Yeah. How are you doing?

Christopher Sighinolfi -- Jefferies -- Analyst

I'm doing well, thanks. I had a couple of cleanup questions, if I could. I think that was for Caron. With regard to the OCC order you're expecting here this quarter and the fact that I guess one of the provisions gets amortized in over a 12 month period. Should we look at sort of the clean operating cash performance of business [Phonetic] net of all of the Tax Cuts and Jobs Act impacts, really commencing in the second half of next year, then that's for the first period where you can look at everything that would have been trued up for the impacts of that, being fully recognized in?

Curtis L. Dinan -- Senior Vice President of Commercial

Hey, Chris, this is Curtis. And I think that is the right way to look at it, because we've already -- you'll recall last year, everything became reflected in rates in Texas. Earlier this year, we had the approval from the rate case in Kansas. And then, what we're anticipating sometime in the third quarter would be the approval from the OCC for Oklahoma Natural Gas' PBRC filing. And once that starts, then 12 months later, I think we'd be into a normal cadence at that point.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay. Because we've -- obviously we've noticed, Curtis, the -- their earnings impacts have been as predicted, but obviously cash has been lumpy because of those impacts. I also noticed some fairly significant working capital fluctuations from year-to-year, it seems like -- with gas prices low and with the heating degree days, this last quarter lower than they were last year. Presumably, the draw that you would normally have -- would normally see as we enter the winter season might be smaller or else equal coming up this fall. So we might see just some more fluctuations. I'm just trying to -- I guess, calibrate our model for what the environment looks like and then also these tax impacts. So, is that the right way you would think about the environment now on maybe uses of cash going into year end, given where the commodity price of environment is?

Pierce H. Norton -- President and Chief Executive Officer

Chris, let me take the piece of that coming out of the rate cases, and Caron can probably speak more to the working capital pieces of it. But you're absolutely right. There were the initial refunds that were happening once we got through the rate cases or are about to happen in the case of Oklahoma's PBRC credit. That have been lumpy, because those have been typically one time type of adjustments, although Oklahoma's will spread out over this 12 month period. But then there's also the EDIT [Phonetic] piece that, we're now on a pretty consistent cadence for Kansas and Oklahoma. As we complete these filings, we still have to address the accumulated or the excess accumulated deferred income taxes in Texas. And we will be doing that as we file upcoming rate cases. Again, Caron, you can probably address better the -- other working capital components.

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

And I think that's fair. And it's kind of interesting, if you look back at our cash flow, really the anomaly was first half of last year. Our cash flow is relatively and consistent and so -- other than all this regulatory noise that we're experiencing, I expect us to continue on that path.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay, great. And then there was one other item, I think this is coming from past quarters, but I haven't bothered to inquire about it. And it's just with regard to how you characterize the movement in other income. There was some mention of just some of that performance on non-qualified employee benefit plans. There's some of the other utility companies we cover [Phonetic] have company own life insurance policies and things of that nature that are invested in among other things, the broad equity market and so fluctuate accordingly. It's sounded like that disclosure would indicate you might have something similar. And I'm just curious, if we get a little bit more color on it. And maybe any formal expectation you had for it in the guidance for the year. Did the performance last quarter exceed what you had expected? Is that one of the factors that led to the guidance move for the full year number?

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

So you're correct. And I think, what we have is probably not similar to what you described other utility have -- other utilities have in terms of how we deal with our employee benefit plans. And you are correct, so our guidance reflects really a flat market. We don't try to anticipate, what the market is going to do and how the employee plans are going to fluctuate. As you know, some of that fluctuation is offset in operating expenses. The movement in those plan assets is offset in operating expenses. So we did anticipate in guidance that some of what we've achieved through the first part of the year would maintain. But then we didn't try to guess what was going to happen for the balance of the year.

Christopher Sighinolfi -- Jefferies -- Analyst

Okay. Now that's very helpful. All right. That's it for me. Thanks. Thanks a lot, guys. I appreciate the time. Thanks, guys.

Pierce H. Norton -- President and Chief Executive Officer

Thanks, Chris.

Operator

[Operator Instructions] Moving on, we'll go to Aga Zmigrodzka with UBS.

Aga Zmigrodzka -- UBS -- Analyst

Good morning. How are you?

Pierce H. Norton -- President and Chief Executive Officer

Good morning, Aga. How are you?

Aga Zmigrodzka -- UBS -- Analyst

Good. Thank you. So as you discussed in the prepared remarks, O&M guidance was revised higher. Could you please discuss your expectation for O&M growth beyond 2019?

Pierce H. Norton -- President and Chief Executive Officer

I think what you ask, you broke up a little bit there, but I think you asked to expand a little bit on growth. I think O&M expenses, is that right?

Aga Zmigrodzka -- UBS -- Analyst

O&M expenses. Yes.

Pierce H. Norton -- President and Chief Executive Officer

O&M expenses. Okay, well, I mean, in general, we have guided toward a 2% to 3% increase on an annual basis in our O&M expenses, kind of year-over-year, some years it'll be a little bit more, some years it'll be a little bit less. So even with the increase that we've had recently of the $12 million in the expected guidance this year, is still falls within that 3% range as to what we originally projected. So that's kind of right in line. Those expenses kind of ebb and flow based on different factors. Some of which were in our control and some not. So I'll ask to Sid McAnnally, he's here on the phone call with us if he's got anything to expand on that.

Robert S. McAnnally -- Senior Vice President of Operations

Hi, Aga. As Pierce said, we don't expect any major variances, but we are always looking for opportunities to improve processes or efficiencies. And one of the ways we look at that, is how we balance work internally and externally. So we may have opportunistic calls that come up when we've got an opportunity to look at, longer term stability, in the way that we execute the work. We also continue to see opportunities arising from technology increases, efficiencies and technologies.

An example of that would be, we recently had a mandate from SIMSA [Phonetic] to inspect farm tabs, with a pretty short fuse, and rather than outsourcing that work, we provide some additional training to some field techs, to add additional capacity, because our routing system provided that capacity. And so we were able to insource that work, which supported our internal goals. And also provide additional skill sets to our employees going forward.

Aga Zmigrodzka -- UBS -- Analyst

Thank you for this color. I also have a question regarding 2Q, was ONE Gas impacted by flooding in Oklahoma? Any impact on the pace of replacement work?

Pierce H. Norton -- President and Chief Executive Officer

We did have significant flooding in Oklahoma as you point out, and we want to thank the first responders that we worked with. We've got a few folks that are still suffering from the flood. And our thoughts go out to them. In terms of the impact on the company, Aga, we did not see any material impact either to our system or our own O&M, although we did incur what you would expect, some additional overtime, a little bit of capital delay that we'll pick back up in the second half. So nothing that was material.

Aga Zmigrodzka -- UBS -- Analyst

Thank you.

Operator

[Operator Instructions] And there are no further questions at this time, I'd like to turn it back to Mr. Lohse for any additional or closing comments.

Brandon Lohse -- Director of Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Brandon Lohse -- Director of Investor Relations

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

Curtis L. Dinan -- Senior Vice President of Commercial

Pierce H. Norton -- President and Chief Executive Officer

Robert S. McAnnally -- Senior Vice President of Operations

Christopher Sighinolfi -- Jefferies -- Analyst

Aga Zmigrodzka -- UBS -- Analyst

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