Andrew Ziola - Vice President, Investor Relations, and Public Affairs Pierce Norton - President and Chief Executive Officer Curtis Dinan - Chief Financial Officer, Senior Vice President, and Treasurer.

Joe Zhou - Avon Capital Advisors Chris Sighinolfi - Jefferies Spencer Joyce - Hilliard Lyons.

Good day, and welcome to the ONE Gas Second Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Ziola. Please go ahead..

Thank you, Mark, and good morning, everyone, and welcome to the ONE Gas second-quarter 2015 earnings conference call. This call is being webcast live on the Internet, with a replay made available. After our prepared remarks, we will 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 Pierce Norton, President, and Chief Executive Officer..

Thanks, Andrew. Good morning, everyone, and thank you for joining us. We appreciate your interest and investment in our Company. Joining me on the call today is Curtis Dinan, our Chief Financial Officer. During our call this morning, Curtis will review our second-quarter 2015 results and 2015 guidance.

I'll then provide a regulatory update, including our recent filing in Oklahoma. And finally, we both will take any questions that you might have. First, I'd like to reiterate our strategy. We're committed to investing the majority of our capital in the system integrity and maintenance projects to keep our systems safe and reliable.

We're also committed to investing in technology and implementing new processes to operate as efficiently as possible. As we have stated in the past, our focus is on executing this strategy. Our second quarter results were supported by lower operating cost and new rates from investments in our system.

Even with warmer than normal weather, our higher percentage of fixed charges, higher percentage of residential customers, and weather normalization mechanisms created stability in our earnings. Earlier this month, we filed our general rate case with the Oklahoma Corporation Commission since our separation from ONEOK.

I will discuss the filing in more detail in a moment; but first, Curtis will review the financial results from the quarter.

Curtis?.

Thanks, Pierce, and good morning. Second-quarter net income was $12.1 million, or $0.23 per diluted share, compared with $9.5 million, or $018 per diluted share for the same period last year. As Pierce mentioned, we continued to deploy capital to enhance the safety and reliability of our systems, which led to new rates in Oklahoma and Texas.

Our average residential customer count increased by more than 6,000 residential customers, both in Oklahoma and Texas, compared with the second quarter of 2014. The quarter also experienced lower operating cost, which I will discuss in more detail in a moment.

Partially offsetting these items were lower volumes due to warmer weather, compared with normal in the same period in 2014. Overall, weather in our service areas was 26% warmer than normal and 30% warmer than last year, which led to lower volumes; but weather normalization mechanisms helped mitigate the impact on our results.

Decreased operating cost in the second quarter 2015 were driven primarily by the timing of outside service expenses related to cost associated with contractor pipeline maintenance. Many of our service territories had significant rainfall in the second quarter that led to adjusting a few maintenance project timelines.

Additionally, in 2014 we incurred cost associated with the separation from ONEOK. Capital expenditure were lower relative to the second quarter 2014, reflecting IT assets purchased last year to establish and enhance our IT systems as a stand-alone Company.

We repurchased approximately 564,000 shares of our outstanding common stock during the quarter, representing the estimated number of shares issued or to be issued in 2015 through our dividend reinvestment plan, direct stock purchase plan, employee stock purchase plan, and our equity compensation plans.

We ended the second quarter with a total debt to capitalization ratio of 40%, and do not anticipate any equity needs in our 5-year financial plan.

ONE gas generated operating cash flow before changes in working capital assets and liabilities of $50 million in the second quarter, and ended the quarter with $136 million of cash and cash equivalents, and no borrowings under our $700 million credit facility.

At June 30, we had 30 BCF of natural gas in storage, and for the 2015/2016 heating season we have leased 50 BCF of natural gas storage, a reduction of 2 BCF from last winter.

Our average cost of natural gas injections, including transportation and storage cost, are estimated to be approximately $3.70 per MCF in 2015, compared with approximately $4.60 per MCF in 2014.

Coupled with the lower leased storage capacity, these two factors have a positive impact of approximately $50 million to $55 million on our 2015 projected cash flows. This month, the ONE Gas Board of Directors declared a dividend of $0.30 per share.

This dividend level is consistent with the Company's guidance for 2015 and its expected 55% to 65% dividend payout ratio. As we indicated in our long-term guidance, we expect the average annual dividend increase to be 6% to 8% over the next five years.

We affirmed our net income range of $108 million to $118 million, and we expect our earned ROE for 2015 to be 7.4%, compared with an ROE of 7.6% for 2014, reflecting capital expenditures of more than two times depreciation and rate case outcomes in Oklahoma and Kansas that we do not expect to be effective until 2016 and 2017 respectively.

As previously stated in December, we expect capital expenditures to be $300 million in 2015, with more than 70% targeted towards system integrity and replacement projects.

At June 30, our current authorized rate base, defined as the rate base established in our latest regulatory proceedings, including full rate cases and interim rate filings, is approximately $2.4 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 2015 will average approximately $2.7 billion, with 42% of that in Oklahoma, 32% in Kansas, and 25% in Texas. Pierce, that concludes my remarks..

Thanks, Curtis. Now for our regulatory update. As I mentioned earlier, Oklahoma Natural Gas filed a request earlier this month for an increase in base rates. The filing is based on a test year, consisting of the 12 months ending March 31, 2015.

If approved, the request represents an increase of $50.4 million in base rates, and is based on a 10.5% return on equity, unchanged from the previous general rate case in 2009. The common equity ratio requested is 60.5%, based on ONE Gas's actual equity ratio as of March 31, 2015, with debt cost of 3.95%.

The filing represents a rate base of approximately $1.2 billion compared with $980 million included in the performance base rates filing in 2014. The increase in rate base includes capital expenditures of $155 million.

The proposed rate increase would result in a typical residential customer paying $4.98 per month more for the utilities natural gas delivery service. This filing also requests the continuation of, and to make permanent with certain modifications, the performance base rate change plan, also known as PBR, that was established in 2009.

The PBR mechanism has streamlined the regulatory process with more transparency, and has proven to reduce time and administrative cost. This stability to the Oklahoma regulatory framework benefits both our customers and the Company. The Oklahoma Corporation Commission has 180 days to consider our proposed rate changes.

We expect new rates to be effective in early 2016. Currently, we remain in discussions with the commission staff and other parties to set the formal procedural schedule. It should be decided in the coming weeks. We have a couple of sensitivities to disclose.

To help you understand the impact of a change to our requested ROE and equity percentage in the Oklahoma rate case. A change in the filed ROE, which is the same as the currently approved ROE of 25 basis points, will result in a revenue requirement change of approximately $2.9 million.

Changing the filed equity percentage by one percent point will result in the change of the revenue requirement of approximately $1.6 million. On to Texas. Texas Gas Service received approval for the rate relief under the Gas Reliability Infrastructure Program, or GRIP, statute for its Central Texas service area in the amount of $3.7 million in May.

The new rates became effective in June. As I mentioned on our last call in March, Texas Gas Service filed under the El Paso Annual Rate Review, or EPARR, requesting an increase in revenues of $9.4 million in the City of El Paso and surrounding incorporated Cities.

The filing included a request for additional revenues of $1.8 million to reflect the payroll adjustment, for a total increase in revenues of $11.2 million. Currently we are continuing our discussions with the City, and hope to come to an agreement and have it approved by August 3 deadline.

If approved, the new rates will become effective August 4, 2015. In closing, In closing, I want to acknowledge the individuals who make ONE Gas all that it is today – the 6,400 people who spend each day finding ways to better serve our customers and improve our business – our employees.

I am grateful for their hard work and diligence to fulfill our mission of delivering natural gas for a better tomorrow. Operator, we're now ready for questions..

Thank you very much. [Operator instructions] Our first question today will come from Joe Zhou, Avon Capital Advisors..

Hi, how are you?.

Good morning, Joe.

Good morning. Just a quick question on Oklahoma.

In the last 12 months, what is your earned ROE in Oklahoma? Do you have that?.

We actually don't disclose our ROEs, Joe, by state. What we do disclose is, out of our allowed ROE of approximately 10% for the entire corporation, our -- it's around 7.4%.

So, 7.4% is the earned in the consolidated basis..

That’s right.

Okay.

And what was it in 2014?.

7.6%..

Do you have that number in Oklahoma? No?.

That was the consolidated number, was 7.6% in 2014..

Okay. I get it. Thank you very much..

Thank you, Joe..

[Operator instructions] And the next question will come from Chris Sighinolfi, Jefferies..

Hey good morning, Pierce.

How are you?.

Good Morning, Chris How are you doing?.

I am wonderful, thanks. Just wanted to follow up quickly. I appreciate your explanation for the filed case – the explanation in terms of the effort to get a higher equity slice, and sort of what that means, versus trying to go after ROE improvement.

Is that something we should extrapolate to when you go into Kansas, for example – an effort that you'll employ in that jurisdiction as well? And if you just remind me where the equity ratio was last improved there?.

Okay, The answer, Chris, is, yes it is. However, as a part of the spinout, we pre-agreed to a equity percentage up in Kansas of 55% in the first rate case; and then, after that, we can ask for any other variations to that equity percentage that we want to.

So, the next rate case we file after 2016, we would expect it to be the actual equity percentage of the Company, which currently is 60%, and we don't anticipate that changing..

Oh, okay. Understood. So, in that jurisdiction in particular, it's a delayed implementation of that strategy, effectively.

But everywhere else, you're unencumbered, and given what you describe, we should think about that as the game plan?.

That's correct..

Okay. Perfect. That's my question. Thanks a lot..

Thank you..

And at this time will figure question from Spencer Joyce, Hilliard Lyons..

Hey Good Morning, guys. Real good quarter here..

Yes, thank you. Good Morning to you, Spencer..

Just a quick one here – I want to go back to the Oklahoma rate case. I know you guys noted a couple of times, and it comes up regularly with the annual filings, but the current allowed ROE there in Oklahoma is 10.5%.

Going back to the last – excuse me, last base rate case, or the last PBR filing, was the allowed equity percentage 60.5%?.

No, it was not. It was lower than that. The last actual rate case that got set in, Spencer, was 2009. And it was lower than 60%..

Okay.

Do you know what it was?.

Approximately 55%..

Okay. And I know one of the other questions alluded to the strategy with regards to your rate case.

But can you give us any comfort that you'll be able to attain or get approved for that 60%-plus? I know with debt costs the way they are, it almost seems counterintuitive to be asking for so much on the equity side, but are there any agitating factors or anything maybe below the surface that could give us some comfort that they may eventually come in at that 60% number?.

Well, I think you have to look at what the equity percentage was, and the structure of the Company at the time that that was approved. So, when Oklahoma Natural filed this last rate case , it was a part of the bigger whole of ONEOK. And so, was kind of their stated policy at the time, they would strive for a 50/50 kind of rate structure.

And so, when you looked at, kind of, the averages and other things in the industry at the time, then the 55% sounded fairly reasonable. For us, though, we are a 100% regulated Company. We have no other businesses inside this entity other than regulated distribution of natural gas.

And we feel like it is an extremely fair request, to request the actual equity that the Company currently holds. And it's not an outlier. If you look at ranges of equity in these kind of companies, it's still within a range, and it's not outlying that range. Now, it is at the upper end of the range, but it's not outlying the upper end.

So, that's our rationale, and we feel comfortable with it.

Okay. So, the -- just to summarize a bit, the prior 2009 case – the 55% was in line with the actual cap structure at ONEOK at the time. So, that's somewhat predicating the ask at this point.

Spencer, this is Curtis. Just to clarify, during that ONEOK period, the 55% was actually higher than ONEOK's corporate structure at that point in time..

Okay, perfect. Okay, That’s all I had. Thanks, guys..

Thank you, Spencer..

[Operator Instructions] And this time we have no questions in the queue. I will turn the call over to our host for any closing or additional comments..

Well, thank you, everyone for joining us this morning. Our quiet period for the third quarter starts when we close our books in early October and extends until earnings are released after the market closes on October 28, followed by our conference call at 11.00 a.m. Eastern, 10.00 a.m. Central on October 29.

We will certainly provide you details on the conference call at a later date. Thank you for joining us, and have a wonderful day..

And that does conclude today's conference call. Thank you for your participation..