Q3 2019 Earnings Call

Please standby.

Good day and welcome to the one gas third quarter earnings Conference call.

Today's conference is being recorded at this time I'd like to turn the call over to Mr. branded lousy. Please go ahead Sir.

Good morning, and thank you for joining us on our third quarter 2019 earnings Conference call. This call is being webcast live at a replay will be made available later today.

After our prepared remarks, we'll be happy to take your questions. You 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 Nike three three in 34.

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, our care Longhorn senior Vice President and Chief Financial Officer, Chris Dining Senior Vice President commercial said Mcanally Senior Vice President operations in Pierce Norton, President and Chief Executive Officer, and now I'll turn the call over to Karen.

Thanks, Fred Good morning, everyone and thank you for joining us today.

Net income for third quarter, 2019 was $17.5 million or 33 cents per diluted share compared with $16.3 million or 31 cents per diluted share for the same period last year.

Our third quarter results reflect higher net margin from new rights and residential customer growth, primarily in Oklahoma and Texas.

Operating cost for the third quarter for $114.6 million compared with $110.5 million in the same period last year, primarily due to an increase in employee related costs.

No that on a year to date basis, our operating costs have increased 2.4%, which is in line with our guidance for the full year.

Interest expense has increased relative to the prior year due primarily to the refinancing a $400 million. That's senior notes in the fourth quarter of last year at a higher interest rate.

Income tax expense includes the amortization of the regulatory liability for excess accumulated deferred income taxes or 80 I T.

Which was $1.4 million for the third quarter and $10.3 million for the year to date.

You will recall that this amortization is offset in revenues.

Authorized rate base, reflecting the recently completed regulatory activity in central Texas, It's approximately $3.5 billion as of September the Thirtyth <unk>.

Authorized rate base is defined as a rate base reflected and completed regulatory proceedings, including full rate cases and interim rate filings.

We projected for 2019, our estimated average rate base, which is defined as authorized rate base plus additional investment in our system and other changes in the components of our rate base that are not yet reflected in a period regulatory filings.

Approximately 3.4.

Excuse me $3.64 billion with 42% in Oklahoma, 29% in Kansas and 29% in Texas.

I guess ended the quarter with approximately $304 million of capacity under our commercial paper program.

As we had indicated previously our lower cash flows and 2019 reflect the impact of tax reform.

There are three contributors I would like to highlight first Oklahoma natural gas is still dealing with the final impact of tax reform on its face right.

Right in Oklahoma were lowered in February of this year.

As Curtis will describe in a moment our customers are receiving a credit for the outcome of the 2019 PBR see filing.

Secondly, we're returning approximately $16 million to our customers in Kansas and Oklahoma for excess 80 I T.

And the dark attributable I'll mention is that where a cash taxpayer and 29 team for the first time with expected payments of approximately $30 million.

We have previously shared that our financing plans contemplate $500 million to $550 million at net financing needs through 2023 with approximately one third of being equity.

Yesterday, the one guess board of directors declared a dividend at 50 cents per share unchanged from the previous quarter.

This dividend is consistent with our guidance for 2019.

As we've indicated previously we expect the average annual dividend increase to be 7% to 9% between 2018, and 2023, well the targeted dividend payout ratio at 55% to 65% of net income.

Lastly, we are affirming our 2019 net income guidance of $180 million to $190 million or approximately $3.39 to $3.57 per diluted share.

As you May recall last quarter, we updated guidance based on our positive results through the first six months of the year and now I'll turn it over to Kurdistan and for regulatory update Curtis.

Thanks, Karen and good morning, everyone, let's begin with Oklahoma.

As anticipated and discussed last quarter, The Oklahoma Corporation Commission approved the settlement stipulation in Oklahoma Natural gas is performance based rate change filing or PBR C.

You'll recall that the stipulation requires Oklahoma natural gas to credit its customers $15.6 million over a 12 month period.

Which began in the third quarter and reflects the return of earnings from the 2018 test year that were above the 9.5% mid point of its or are we band.

In addition, Oklahoma natural gas from credit its customers $12.7 million in 2020 for the annual reversal of excess accumulated deferred income taxes.

As a reminder, the provisions of the order will not have a significant impact on earnings than either 2019 or 2020, but as Karen mentioned does impact cash flows.

We will have one more PBR see filing and 2020 before a full rate case is required to be filed in 2021.

Having worked through the effects of tax reform. We expect this next filing based on a 2019 test year to result in a rate increase and be the first increase in Oklahoma since 2016.

And then Kansas in August we requested an increase of $4.2 million were 43 cents per residential customer per month.

Related to the gas system reliability surcharge or G.S. Rs.

For the period covering September 2018 through June 2019.

The filing covers less than one year due to the last rate case that included capital expenditures through August 2018.

This is our first filing under the new legislation that expands the scope of expenditures that are eligible for recovery under GE Srs.

And increases the cap on the monthly residential surcharge to 80 cents per customer.

The staff of the Kansas Corporation Commission has filed a recommendation with the commissioners that the GE Srs filing be approved as filed.

In order from the Kansas Corporation Commission is expected sometime later in the fourth quarter.

In Texas, we anticipate filing a rate case in central Texas before the end of the year.

This will include addressing the refund of excess 80 to 80 I T to those customers.

Now I'll turn it over to our CEO Pierce Norton.

Yes, Thanks Curtis of light my remarks on these quarterly calls have focused on what we're doing to ensure the safety and reliability of our system.

In keeping with that theme I am pleased to report that as of this month, we have removed all sections of cast iron from our system.

This is a major milestone for our company.

Our customers and our communities.

This accomplishment is the culmination of years of executing our plan to eliminate cast iron in our natural gas distribution systems.

We will redirect the time energy and resources expended on cast our two other types of vintage pipe through our risk based replacement program.

Which has been a key part of managing the integrity of our system.

And optimizing our capital spend.

At our current pace and spending level.

We still anticipate 20 plus years to replace our existing inventory of vintage assets.

Our long term strategy remains to be a 100% regulated natural gas distribution company.

Focused on operating safely.

Managing expenses and building a sustainable future for our customers and employees.

As always I want to take the opportunity to again recognize our employees.

Live out our core values every day as they go about their work.

Im thankful for their efforts and their commitment to serving our customers.

And our communities I'd like to thank you all for joining us this morning.

Operator, we're now ready to answer any questions.

Thank you she would like to ask a question. Please signal by pressing star one on your telephone keypad.

We're using a speaker phone. Please make sure you mean function is turned off to lag or signal to reach our equipment again that is star one if you'd like to ask a question.

As for just a moment to allow everyone an opportunity to signal.

Our first question will come from Sarah Akers with Wells Fargo.

Hey, good morning.

Good morning, Sarah.

So it looks like in the quarter bad debt expense was up is that a material increase on a percentage basis and do you think that's indicative of any weakness in the local economy or what's driving that.

Good morning, Sarah This is Karen.

No I think assisted normal routine evaluation of where we are on our bad debts. There is little bit fluctuation as you would expect as we have collection activity a dead fluctuate a bit with the weather so before we get into the.

Hello part of the year, we have done some disconnects and people are reconnecting so as our routine evaluation at where we are on that reserve.

Got it and then in terms of customer growth what level of growth did you see in the quarter and are you starting to hear any push back on new gas hook ups like we're starting to hear on the coast.

Sarah This is Curtis and the short answer is no we're not seeing the push back on a on new homes being being connected to natural gas our activity around capturing new new developments in our marketplace have remained very strong it's a little hard to.

Compare quarter to quarter at a growth rate of customers, it's really better to look at it on an annualized basis.

Because of the time, especially when you're at a shoulder months like the third quarter, because the timing of hook ups can be a little bit different for customers that are new to the system are coming back on the system, but overall I would say the trends have remained very strong for us and we're not seeing any weakness in that area.

Great. Thank you.

Thank you thanks Sara.

Once again that is star one if you'd like to ask a question.

Next we'll hear from AG asked me wrote Scott with yes.

Good morning.

Good morning, I guess.

Income has filed its Sars DSRA other in your legislation could you. Please discuss how much capex do you plan to recover with this filings versus your last GSR S and how will that introduce your regulatory lag.

So I get this as Curtis.

In that filing I don't have right here the exact amount of capital that we had included in that as part of the.

The increase but if the yield of it is about $4.2 million.

Of new revenues.

Overall, I think we our latest guidance has been that.

All of all of our capital about 90% of it is subject to annual filings, whether it's through the GE Srs.

Other mechanisms we have in the other territories.

The what drove that increase from the old 80% is the GE Srs legislation and we're just now starting to partially see the effects of that.

Perfect. Thank you I'm Karen mentioned, one further funding will be financed with equity should we assume that most of that will be for ATM in 2020 and beyond.

Good morning, I guess, we have not determined exactly how we will finance our needs. It would make sense for us to consider an aftermarket program and we certainly Arbor, we haven't made any final decisions on that.

Okay, great. Thank you for taking my question.

Thank you.

And with no further questions I'd like to turn the call back over to management for any additional or closing remarks.

Thank you all again for your interest in one gas our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in February .

We will provide details on the conference call later date have a great day.

<unk>.

Again that does conclude our call for today. Thank you for your participation you may now disconnect.