OGS
#Thanks, <UNK>.
Good morning, everyone, and thank you for joining us.
Net income for the first quarter 2017 was $76.5 million or $1.44 per diluted share compared with $64.7 million or $1.22 per diluted share for the same period last year.
Results were driven by new rates from investments made in our systems, which includes the effect of the Kansas rate case and various Texas filings approved in 2016.
Net income was also impacted by the new accounting standard for share-based compensation that we adopted prospectively on January 1, 2017.
We recorded a $5.2 million tax benefit and income tax expense, which resulted in a $0.10 per diluted share positive impact in the first quarter, slightly higher than the $0.08 per share indicated in our guidance in January.
The impact in future years of the new standard will be driven by the performance of our stock and our relative total shareholder return compared with our peers.
Weather was 24% warmer than normal, and we experienced 12% less heating degree days compared with the same period last year.
But our higher percentage of fixed monthly service charges and weather normalization mechanisms mitigated the effect, with minimal impact on our net margin from sales customers.
Operating cost for the first quarter increased compared with the same period last year, reflecting an increase in outside services, material, bad debt and IT cost, partially offset by lower legal and employee-related expenses.
Capital expenditures for the first quarter were approximately $70 million compared with $75 million for the same period last year.
The decrease was due primarily to the timing of projects planned in 2017.
The mix of operations and maintenance projects and capital projects was weighted less to capital projects in the first quarter of 2017 compared with the first quarter of 2016.
The net result was slightly lower capital expenditures and slightly higher operations and maintenance expense in the first quarter of 2017.
We still expect capital expenditures to be approximately $350 million in 2017, with more than 70% targeted towards system integrity and replacement projects.
Yesterday, we affirmed our 2017 earnings per share guidance of $2.87 to $3.07 per share.
The ONE Gas Board of Directors also declared a dividend of $0.42 per share.
As a reminder, our targeted dividend payout ratio range is 55% to 65%.
At March 31, 2017, 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 $2.9 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 2017 will average approximately $3.1 billion, with 41% of that being a 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>, good morning, everyone.
ONE Gas is focused on leading the industry as a safe, dependable provider of natural gas to our customers, an important component of our strategy, and while we reinvest in our systems and facilities.
As you may have read in our press release, we have some regulatory activity to highlight on this call.
So I'm going to begin with Texas.
In March, we made a filing under the Gas Reliability Infrastructure Program, or GRIP, for the incorporated and environs customers of the Central Texas Service Area for $4.9 million.
If approved, new rates are expected to be effective in June.
In the West Texas Service Area, we also filed a GRIP for $4.5 million.
And if approved, new rates are expected to take effect in July.
So now moving to Oklahoma.
We filed our first annual performance-based rate change, or PBR, after the general rate case that was approved in January of 2016.
The filing demonstrated that we are earning within the allowed range of a 9.0% to 10.0% ROE.
Therefore, we did not request a change in base rate.
And in Kansas, we are expecting to file a request for interim rate relief under the Gas System Reliability Surcharge rider during the third quarter, with new rates effective January of 2018.
As always, I'd like to close by thanking our 3,400 employees for what they do every day for our customers.
I appreciate their hard work, dedication and commitment to delivering our product, natural gas, to more than 2.1 million customers safely and reliably.
Operator, we're now ready for questions.
Yes.
So this is <UNK>, <UNK>.
A couple of different points there.
The entire tax benefit related to this item was recorded in the first quarter.
So the $5.2 million relates to some long-term incentive shares that vested in that period.
And so it's recognized all of that point in time as opposed to being spread across the entire year.
So overall, our effective tax rate, absent that item, would be pretty consistent for the balance of the year, as it has been in prior years.
Then on a go-forward basis, each first quarter is the vesting period for the long-term incentive program.
So depending upon what our share price does over the vesting period, as well as how our share ---+ our total shareholder return compares to our peer group, will determine what that expense ultimately is each year and what that tax benefit is that gets recorded.
Does that help you.
Close.
The one difference would be that you look to the share price at the beginning of the 3-year period.
And so it's a ---+ it's what ---+ when the shares were granted, so the ones that were vested here in 2017, they were granted in 2014.
So you look at what happens to the share price over that period of time.
Probably a little bit deep in accounting, but that's the inside part of it.
Yes.
So just broadly, and there's a little bit more detail that will be in our 10-Q that we file later today.
But 2 of the states compare the weather in the current period to an average 10-year period, and one of the states uses an average over a 30-year period.
And so it's a comparison of the actual heating degree days that you experience in the current period compared to what those averages were in that either 10- or 30-year average period that's used as the comparison point.
And then to the extent you experience more or less, you get a ---+ you make a revenue accrual either to the customer's benefit or to help the company in the case of a warmer year, like this year, that effectively smooths out the revenues that you recognize, so you don't get a dollar ---+ a big dollar impact from the weather.
<UNK>, you're exactly right in terms of the income statement.
So the $5.2 million is truly related to the tax benefit from the grants that vested in the first quarter this year.
Now there was an $11 million impact that was recorded to retained earnings on January 1 when we adopted the standard.
And that related to some tax benefits that we had not been able to recognize in prior years.
And so that was a catch-up piece, but that did not go through the income statement.
That was recorded straight to paid in capital.
No.
The impact can be positive or negative.
So again, I'll get a little deeper into the accounting perhaps.
But whenever the awards are granted, you measure the compensation for book purposes on that date.
And to the extent that the share price increases or decreases, that creates a tax difference because your tax deduction is the value of the shares that are actually vest and what the price is at the vesting date.
So if that price were lower and you had less tax expense, it would create a negative tax impact.
In this case, these were shares from 2014, and I think we were trading somewhere around $34 ---+ $33, $34 at that point in time, so you have the increase in the share price and then the actual performance of the units.
Yes, as well as the performance of the units.
So if you had performance shares that vested at 0, that ---+ it's not going to matter what the share price is.
That would have a negative impact on it.
You should be prepared to set for the CPA exam now, so look forward to talking to you.
Thanks, <UNK>.
No, the ---+ you're exactly right, the accounting for that is exactly the same.
In the first quarter, we did have 2 awards that were granted.
That was through the $68 share.
We've had a $69 share in April, and the $70 share will exhaust that program.
So after first quarter, there's the potential for 2 additional shares, one of which has already been awarded.
That's correct.
They're expensed on the day that they're granted.
So Chris, this is <UNK>.
Right now there is no plan to continue that program.
Chris, all of those ups and downs on the gas cost actually gets passed through to the PGA.
The only thing that I would mention that can be affected by that is if gas costs rise, then you have ---+ there's more defaults on the bill.
So we had about, I think, about $800,000 of a delta between this quarter and last quarter last year; same period last year of about $800,000.
Now that is the portion that we don't collect on, that doesn't pass through to the right payer.
So you pass through the gas cost, but then the service piece of that, we have to book.
So because that's not separated from the bill, you can have a little bit of an impact as gas prices rise as it relates to that phenomenon.
And Chris, just a little more detail.
At the end of '16, we were under-recovered by about $20 million.
And at the end of the first quarter, we're under-recovered by roughly $5 million.
So we've collected some of the under-collection ---+ under-collected position that we were at year-end.
Yes, that's pretty close to a push.
Those mechanisms adjust fairly frequently.
So it would take a pretty extreme situation to get too far out whack.
The thing I'd say to that, Chris, is that Oklahoma has been pretty resilient even when gas prices were down into the $2 range.
Now granted there's a significant [amount more] drilling rigs running all over the United States right now than it was this time last year, but if you look back at Oklahoma, it was over 60% of the drilling rigs are running when the price was in the $2 range in our territories in Oklahoma and Texas.
If you look forward to today, it's around 65%.
So what it tells you is the lifting cost in our territories are fairly low.
So not only can they sustain the lower prices, but they're sure going to be drilled because their margins are better as the prices increase.
It's typically ---+ yes, short answer is no, Chris.
But people that are typically who want to work on the rigs are not necessarily the people that would be working inside the cities on our assets.
