Good day, and welcome to the ONE Gas Fourth Quarter Year-End Earnings 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..

Good morning and thank you for joining us on our fourth quarter and year-end 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.

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 Act of 1933 and '34.

Actual results could differ materially from those projected in any forward-looking statement for 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, Operations; and Pierce Norton, President and Chief Executive Officer. And now I'll turn the call over to Caron..

Thanks Brandon. Good morning everyone and thank you for joining us today. Net income for fourth quarter 2019 was $51.2 million or $0.96 per diluted share, compared with $44.7 million, or $0.84 per diluted share for the same period last year.

Our fourth quarter results reflected $16.3 million increase in net margin including new rates in our service areas and residential customer growth primarily in Oklahoma and Texas.

Operating costs for the fourth quarter were $133.9 million, compared with $123.8 million in the same period last year, contributing to the increase for employee related expenses and bad debt expenses. While our bad debt expense was down slightly through mid-year, we ended the full year with a slight increase relative to 2018.

Net income for 2019 was $186.7 million, or $3.51 per diluted share, compared with $172.2 million or $3.25 per diluted share in 2018.

Net margin increased $45.7 million due to new rates in our service areas, residential customer growth in Oklahoma and Texas, higher volume from transportation customers in Kansas and higher sales volumes, net of weather normalization in Texas.

Operating costs for the full-year 2019 were $18.5 million higher than 2018 primarily due to employee related costs, and minor increases in general operating costs including outside service costs, materials for pipeline maintenance activities, fleet costs, legal-related costs and the aforementioned bad debt expense.

Other expense net decreased $8.4 million from the prior year due primarily to earnings on investments associated with our non-qualified employee benefit plans, which offset the cost for these plans included in operating costs. After netting these earnings against the associated expenses, operating costs increased 2.5% from the prior year.

Interest expense was at $11.4 million relative to the prior year due to the refinancing of $300 million of senior notes in the fourth quarter of 2018 with $400 million as senior notes at a higher interest rates Our full-year 2019 income tax expense includes a credit of $12.8 million for amortization as a regulatory liability for excess Accumulated Deferred Income Taxes or ADIT, which is offset in revenues.

Capital expenditures and asset removal costs were $121.2 million for the fourth quarter, bringing our total for the year to $465.1 million. We ended the year with an average rate base of $3.62 billion with 42% of that in Oklahoma, 49% in Kansas, and 29% in Texas.

Authorized rate base, which is rate base reflected and completed regulatory proceedings, including full rate cases and interim rate filings was approximately $3.53 billion ONE Gas ended the fourth quarter with approximately $183.5 million of capacity under our commercial paper program.

In 2019, we were a cash taxpayer for the first time with payments of approximately $30 million. In January, the ONE Gas Board of Directors declared a dividend of $0.54 per share, an increase of $0.04 or 8% compared with a previous dividend of $0.50 per share.

We expect the average annual dividend increase to be 6% to 8% between 2019 and 2024 with a targeted dividend payout ratio of 55% to 65% of net income. Last month, we announced our 2020 earnings per share guidance at $3.44 to $3.68 per share.

Our 2020 capital expenditures and asset removal costs are projected to be $475 million and will remain primarily focused on maintaining the safety and reliability of our system, as well as extending service to new areas. We will also continue to make investments in technology to increase efficiencies, and improve the customer experience.

Embedded in our five year financial guidance is a forecasted average annual increase in operating costs of 2% to 3%. We anticipate net financing needs over the next five years of $850 million to $900 million with approximately one quarter of that being equity. Our forecasted five year EPS growth rate is 5% to 7%.

This compares to our previous forecast of 6% to 8%, which was the guidance we provided last year for both net income and EPS. For the first time since becoming a standalone company, we're planning to issue equity over the next five years and have refined our long-term growth rate to focus specifically on EPS.

Our earnings outlook hasn't changed significantly. We anticipate that our net income growth rates over the next five years will average between 6% and 8%. And now, I'll turn it over to Curtis Dinan for regulatory updates.

Curtis?.

Thanks, Caron and good morning everyone. Let's begin with Kansas. In November 2019, the Kansas Corporation Commission approved Kansas Gas Services request for interim rate relief under the Gas System Reliability Surcharge or GSRS rider for $4.2 million. Rates became effective in December.

In Oklahoma, we anticipate making a performance based rate change filing this month, and that Oklahoma natural gas will request an increase in base rates. If approved, it will be the first rate increase in Oklahoma since early 2016. New rates are expected to be effective in August 2020. As required by our tariff, we will file a full rate case in 2021.

And finally in Texas, Texas Gas Service filed the rate case for all customers in the Central Texas and Gulf Coast Service areas requesting to consolidate the Gulf Coast service area with Central Texas and increase rates by $15.6 million.

If approved, new rates are expected to become effective in the third quarter 2020 and our number of jurisdictions in Texas will decrease to five from six. Our filing is based on a return on equity of 10%, and a capital structure with equity of approximately 62%.

We estimate that a 25 basis point change in ROE would change the revenue requirement by approximately $950,000 and a 1% change in equity by approximately $350,000. And now I'll turn it over to our CEO, Pierce Norton.

Pierce?.

Thank you, Curtis and Caron. 2019 was another good year for ONE Gas. We are very proud of the continued progress we made in 2019 on our safety metrics. We will continue to focus on a culture and processes that target zero harm to our employees, customers, and the public.

I want to reiterate that in 2019 we completed our five-year accelerated cast iron replacement program. That is important from a risk reduction perspective, but also was an important part of our strategy to reduce methane emissions. We will now turn our attention to other vintage pipe materials remaining in our system.

With the remaining vintage materials left to replace, we still have a 20 plus year runway to deploy our capital. We will continue to monitor and adjust our pace based on the balance among risk reduction, quality construction resource availability, credit metrics, and customer impact.

With the completion of a decade, we can proudly reflect on all that we've accomplished from when we first spun at as a new company in 2014. But more importantly, look ahead to the opportunities we have in the next decade to implement solutions that continue our focus on safety, reliability, reducing emissions and organic growth.

The technology and solutions to solve the complexities of achieving zero emissions, while providing reliable service and keeping energy affordable continues to evolve. In the next decade, it will be important that resiliency and cost become part of the discussion related to achieving significant emissions reductions.

We have a great conviction that natural gas and natural gas distribution assets will continue to be a significant part of the solution. It's the talented employees of this company that have and will continue to make it possible to execute our business strategy.

I thank them for living out our core values, and for serving our customers and communities every day. Thank you for joining us this morning and operator we're now ready to take questions..

[Operator Instructions] We'll take our first question from Brian Russo with Sidoti and Company..

Thank you for the incremental information on the Texas rate case filing, could you remind us when was the last rate case?.

The last Central Texas rate case or the last rate case in Texas?.

Whatever is more applicable to this current rate case?.

The last one in Central Texas was approximately, yes 2015, is about three or four years ago..

And 15, approximately 15 million revenue increase request, what percentage increase is that on average?.

Brian, I don't have that detailed data with me right here, but we can certainly get that for you..

Okay, that's fine.

And with the understanding that ONE Gas in Texas is regulated by the Railroad Commission versus the PUCT, can you just maybe characterize your relationship with the RRC?.

Let me back up just a second, Brian. We're actually first we file with the City Councils in the incorporated areas of those jurisdictions. And then in the unincorporated areas, we filed with the Railroad Commission. So the biggest population that's affected by those rate cases are in the incorporated cities.

And so again, that starts with the City Council. And then if it's not resolved at that level, then it can get appealed to the RRC. So I would say broadly, that we have a very constructive relationship both at the City Council levels and with the RRC. But I don't think there's anything out of the norm with either of those..

And have you reached a settlements in the past with the City Council and/or the RRC?.

Typically we have reached settlement in those cases. It has been more unusual that we don't get the settlement with the council's or the RRC and it ends up going to hearing. So your assumption is dead on..

And then also just a customer growth, it looks like Oklahoma and Texas are driving that growth of maybe 0.6%, my math is correct while Kansas is relatively flat.

Can you just real quickly distinguish the growth - customer growth profiles amongst three states?.

Yes, you're picking up on exactly that trend, our highest growth rates above that average have been in Texas primarily in the Austin and El Paso areas. Both have been really strong for a number of years in Oklahoma, we're right at that average, maybe a little above it.

And you're right that in Kansas, it's a little closer to flat but slightly up in the customer growth there..

And then I think also the 2020 guidance assumes an earned ROE of 8.2% and relative to your allowed ROE, what initiatives do you have in place or plan to implement further close that gap whether it's your ongoing or the management or refinancing at lower rates or and even was - more importantly, any regulatory initiatives to help improve their earned ROE?.

Yes, there's a number of things that we try to look for internally, as well as externally, as you described. Let me correct one thing, the first is that the ROE expected is 8.4% for 2020.

And so some of the initiatives that we take are first to do everything we can to be as efficient as possible in our operations so that we are doing a good job of controlling costs first. Second, we look to be as efficient as we can be in our regulatory processes.

So as we make filings, whether it's a full rate case, or it's the interim rate filings, looking for different ways to make sure that those are as reflective as possible as what's happening in the company. So I'll give you an example of that and where we sought external help.

The GSRS legislation that was passed in Kansas about a year ago, which increased the cap of GSRS filing from having a bill impact to the customer - a monthly bill impact to the customer of $0.40.

It increased that cap to $0.80 and it also more importantly defined other types of capital as it relates to system safety, physical and cyber security safety it also be included and eligible for those filings. We had our first filing under that legislation last year.

It was only a partial year filing and we ended up requesting $4.2 million and that's what was approved by the Commission through that process. So the impact on the customer was $0.43 per month. And - again, that was the first one over $0.40 and that was not a full year impact.

So that's a process or an external reach that we sought to provide some relief from a rate perspective that has been able to help improve those ROEs over time..

Okay, that's very helpful.

When will your next GSRS filing be in Kansas?.

Sure, you can do one every 365 days, so our next one will come in August of this year. And that will be for capital from July 1 of 2019 through June 30 of 2020..

And then just, the EPS CAGR that’s now at 5% to 7%.

How should we kind of look at that on a go forward basis I mean, is it smooth, given your recovery mechanisms or is it and the kind of levelized capital expenditures forecast over the next several years or will it be - will it vary year by year given a rate case or any other developments?.

Brian, this is Caron, you're exactly right. Our capital spending is projected to be relatively smooth, that steady kind of uptick, fluctuating a little bit with weather and whatnot. But regulatory activity can have a big impact on year-to-year swings. Oklahoma is still our largest jurisdiction we've got an Oklahoma rate case coming up.

This is the test year so we will be filing our rate case next year and the outcome of that will have a significant impact on our earnings..

Okay great. Thank you very much..

Brian, this is Curtis again. Just to come back to your first question on the Central Texas rate case, all in that's about a 9% increase as filed in that filing..

[Operator Instructions] Question from Chris Sighinolfi, Jefferies..

I think I'll be quick. I just had a couple for Caron. With regard to - I would actually - I think miss this last night, but the fact that asset removal costs are in the operating cash line items and it looks like in working capital. As you think about the capital budget you've given, how do you think - given it includes those costs as well.

Are those - I guess question as to what you see the profile of asset removal looking like over the next couple of years? Is that something I know it trended modestly down from '18 to '19? Is that something you would expect to continue during this - maybe educate me a little bit on that side of it?.

So Chris, I don't expect a significant change in asset removal costs. They may come down a bit this year. Those are in part an estimate. So as we fine-tune how we estimate those costs, it may come down slightly, but I don't think it will be material.

If we don't really - while they get presented separately on the cash flow statement as a practical matter, we don't really think about them any differently. It's all rate days. It's all part of our - as our system improvement, so just kind of put that in perspective..

That was - you anticipated my second question, which was - because I missed the first part of that I wanted to make sure that - I was thinking about rate case additions correctly.

So everything you're quoting as the CapEx forecast is embedded over time?.

That's correct..

[Operator Instructions] Follow up questions from Brian Russo..

Yes, hi, thanks for the follow up, just real quickly the notes payable balance of $516 million at the year-end 2019 up noticeably year-over-year.

Will that eventually be termed out and instead included or excluded in the financing forecast you guys laid out back in January?.

Say yes to those, it will eventually be turned out and it is included in our financing needs that we have provided guidance on..

There are no further questions at this time. Mr. Lohse, I will turn the conference back to you for any additional or closing remarks..

Thank you all again for your interest in ONE Gas. A quite period for the first quarter starts when we close our books in early April and extends until we release earnings at the end of April. We will provide details in the conference call later today. Have a great day everybody. Thank you..

And this concludes today's call. Thank you for your participation. You may now disconnect..