OGS
#Thanks, <UNK>, and welcome to the ONE Gas team.
Good morning, everyone, and thank you for joining us.
Beginning with our financial results.
Net income was $90.8 million or $1.72 per diluted share compared with $76.5 million or $1.44 per diluted share for the same period last year.
The strong quarterly results reflect increases from new rates in Texas and Kansas that were approved in 2017.
Weather-normalization mechanism effects in Kansas and Oklahoma and higher volumes from transportation customers.
It's important to note that, while weather in the first quarter was 1% warmer than normal, it was 31% colder than the same period last year, resulting in our net margin being positively affected by $2.5 million or $0.05 on an earnings per share basis compared with the prior year.
Due to the new accounting standard for share-based compensation that we adopted prospectively on January 1, 2017, we recorded a $2.8 million tax benefit in income tax expense, which resulted in a $0.05 per share positive impact to net income in the first quarter of 2018, slightly higher than the $0.04 per share indicated in our guidance in January but below the $0.10 impact we recorded in the first quarter of 2017.
As we previously indicated, the impact of this new accounting standard will depend on future share performance.
Operating costs for the first quarter were lower by $1.9 million compared with the same period last year, and capital expenditures increased $16 million compared with the same period last year, as our mix of projects was more heavily weighted to capital spending versus operational spending.
We continue to invest in technology and infrastructure, which translates into improved efficiencies and reduced operating cost.
One such example is our investment in AMR or automated meter reading.
At the end of 2013, AMR penetration was around 65% of our meter assets, and as of the end of Q1, we were over 85%.
This technology reduces our labor, equipment and other operating costs, helping achieve our goal of reducing expenses to sustainable levels.
This investment has been beneficial, and we will continue to make additional investments to improve efficiencies and reduce operating cost over the next several years.
Regarding tax reform.
In compliance with the Accounting Authority Orders in each of our regulatory jurisdictions, we have established a regulatory liability for the difference in federal taxes included in our rates that have been calculated based on a 35% statutory income tax rate and the new 21% statutory income tax rate.
The establishment of this regulatory liability resulted in a $12.3 million reduction to our revenues in the first quarter 2018 or $9.3 million net of tax, offset by a $16.2 million reduction in our income tax expense.
This timing difference between the revenue deferral and the reduction in our income tax expense created a $0.13 positive impact in our results this quarter, but the impact is expected to reverse by year-end.
While the long-term effect of tax reform is negligible, in the near-term, it will impact the timing and distribution of our quarterly earnings profile.
Our earnings profile has some seasonality to it, so in quarters where seasonal earnings are higher, the impact of tax reform will be positively accentuated and vice versa.
Moving on from tax reform.
Yesterday, the ONE Gas Board of Directors declared a dividend of $0.46 per share, the same as the previous quarter.
This dividend is consistent with the company's guidance for 2018.
As we have indicated previously, we expect the average annual dividend increase to be 7% to 9% between 2017 and 2022, with a targeted dividend payout ratio of 55% to 65% of net income.
We also affirmed our 2018 earnings per share guidance of $2.96 to $3.20 per share.
However, with the strong first quarter, we believe that the more likely scenario puts us in the upper half of that range.
At March 31, 2018, our current authorized rate base, defined as the rate base established in our latest regulatory proceedings, including full rate cases and interim rate filings, was approximately $3 billion.
With 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 2018 will average approximately $3.4 billion, with 42% of that being our rate base in Oklahoma, 32% in Kansas, and 27% in Texas.
And now I'll turn it over to <UNK> <UNK>, ONE Gas President and Chief Executive Officer.
<UNK>.
Thanks, <UNK>, and good morning, everyone.
I'd like to give you an update on a recent regulatory activity in our service areas.
So let's begin in Oklahoma.
In March, we filed our second annual performance-based rate change application since the general rate case that was approved in January of 2016.
We identified a $5.6 million credit to our base rates associated with the impact of tax reform.
Our procedural schedule has not yet been approved, but we do anticipate an order in the third quarter of 2018.
Now on to Kansas.
In April, the legislative bill expanding the scope of the Gas System Reliability Surcharge mechanism was approved.
Beginning January 1, 2019, the scope of safety-related capital investments that qualify under the GSRS statute will be expanded to include expenditures to replace, upgrade or modernize obsolete facilities as well as projects that enhance the integrity of pipeline system components or extend the useful life of such assets.
Safety-related investments will also include expenditures for physical and cybersecurity.
In addition, the capital, or the cap on the surcharge will be increased to $0.80 per residential per month from $0.40.
This legislation allows us to begin earning on eligible capital sooner with the expanded definition through GSRS filings, instead of having to wait for the general rate case.
While the updated scope of GSRS will assist in the timing of recovery for capital spending, we're already spending at accelerated paces in Kansas to support our long-term plan.
We have only 17 miles of cast iron pipe remaining in Kansas, and are on pace to have all cast iron out of our system by the end of next year.
After all the cast iron is removed, those capital dollars will be shifted to remove more bare steel pipe.
We're expecting to file our next general rate case in Kansas before July 2018 based on a 2017 test year.
The impacts of tax reform will be reflected through our filed cost of service.
And in Texas, we've made the filings under the Gas System Reliability infrastructure program for all customers in the West Texas Service Area requesting an increase of $3.5 million.
This increase is offset by $4.7 million request for a decreased rates due to the reduction in the federal income tax rate.
A onetime refund of $2.4 million is also being requested for changes to the tax rate for the period between January 1, 2018, to the date when the new rates are implemented.
If approved, both filings for West Texas are expected to become effective July 2018.
Similar to West Texas, we've also made GRIP filings for all customers in the Central Texas Service Area, requesting a $3.3 million decrease ---+ increase, which is offset by a $4.9 million request for decreased rates, due to the reduction in the federal income tax rate.
A onetime refund for $2.5 million is also being requested for changes to the tax rate for the period between January 1, 2018, to the date when the new rates are implemented.
If approved, both filings for Central Texas are expected to become effective in July 2018.
Filings to incorporate tax reform into rates were also made in the Rio Grande Valley service area, but are not material to earnings.
ONE Gas is focused on leading the industry in a safe, reliable provider of natural gas to our customers, an important component of our strategy and why we reinvest in our natural gas distribution systems and facilities.
In 2018, we expect to spend $375 million on capital expenditures, and we expect to spend approximately $2 billion through 2022, more than 70%, which will be spent on system integrity and pipe replacement projects.
We continue to take a risk-based approach to analyzing and upgrading our distribution systems, which creates the safest and most reliable system that our customers and regulators expect.
To close, I'd like to thank all of our 3,500 employees for their engagement, dedication and commitment to safely and reliably delivering our product and for focusing on continuous improvements that benefit all of our stakeholders.
Operator, we're now ready to answer any questions.
<UNK>, this is <UNK>.
And about 70% of our capital will qualify into that program.
Yes, historically, we've been closer to 30% or 35%.
Yes, <UNK>, that's a net number.
So there's a base rate change from going through the PBR mechanism and then that gets more than offset by the tax reform.
So overall, it's a net reduction in rates.
That's correct.
No, that was a total number to begin with, Chris.
The thing I would point out to you, though, is before, if you looked at the June 30, 2018, test year under the old program, the capital expenditures were around $37-point-something million, resulting in increased revenues of about $3.6 million, which was a customer impact of about $0.37.
Under the new program, the capital expenditures are in the neighborhood of $68 million, $69 million with an additional revenue associated with that, instead of $3.6 million, it would be about $6.7 million.
It raises the customer impact to about $0.68.
We're still under that $0.80.
So we don't expect to accelerate anything unless there's some sort of a PHMSA regulation that comes out and says that we need to do some things in the past.
We're already on an accelerated pace.
So it really didn't expand what's there, it just gives us quicker recoveries, and you don't have it under the rate case.
A big picture way to look at that is everything is going to be, kind of, reset in this year's annual rate case filing.
So effectively, what this does is impacts our future earnings in that 2020 kind of timeframe.
So long term, it does have an impact on us.
So hopefully, that answers your question.
Right.
That's correct.
Yes, so on the tax piece, you're exactly right that, that $0.13 will reverse in the second and third quarters, and it'll probably reverse even a little bit more than the $0.13 before we get into the fourth quarter, which is a little bit stronger earnings quarter for us, typically.
So that's the first thing I would point to.
The second thing is that the positive impact that we're having from rates ---+ or that we had from rates in the first quarter, that was from rate cases that went into effect in the last half of 2017.
And so we're getting the full annualized effects here in the first and second quarters.
And there's not a lot of activity replacing that in 2018, as we've been talking about over the past year.
The last thing I would mention is, in the first quarter a year ago, we were a little bit behind on our capital compared to this year.
I think I made the comment that our mix of projects was more heavily weighted in the first half of last year to operating-type projects as opposed to capital.
This year, we're a little more evenly spread, which is why our capital is up in the first quarter.
So we'll still see the same mix of capital, and operations-type projects are just spread a little bit differently between the years.
So it's really a combination of those 3 factors that are creating the situation that you're describing.
That's right.
We use a lot of internal labor in our capital projects.
So that labor gets capitalized.
When we have higher capital spending, we're therefore capitalizing more of that labor as opposed to expensing it for operating-type projects.
Okay.
Well, the one thing that has surprised me, Chris, is the ability of our operating people to continually find ways to improve our efficiencies.
And so we continue to deploy technology to allow our people to do things much quicker on the spot as opposed to having to bring in a lot of data and do a lot of data entry in the back office.
So we get a lot of that stuff done, kind of, on-site.
We continue to improve the way that we deliver service and efficiency in deploying our people.
It's not any one particular thing, it's just a multitude of continuous improvement in our processes and the technology that we deployed.
I do think that, that's going to continue into the future.
We also have, as I mentioned, going from basically the 65% to 85% AMR, we did that, basically, over a 4-year period.
So we still have many years left to continue to improve in AMR as well.
We're also improving the stuff as it relates to safety as well.
So just the combination of everything, Chris, is really what's leading to that, but we're laser focused in that area.
Thank you, Chris.
We're not seeing anything right now, Chris.
I mean, not Chris but Tim.
We would ---+ if you go back all the way in most of our history in this room, a lot of these assets started off in C corps.
And then they morphed into the MLP structure.
So that MLP structure kind of captures those earnings to be distributed through their distributions.
And so it was hard to kind of get assets out of there.
We don't see anything immediately on our radar screen.
But probably overall, if things morph back to C corps, there could be, long term, some assets out there that might be bought and brought back in to these distribution companies, but right now, I'm not seeing any of those opportunities in our territories.
