ONE Gas Inc. (NYSE:OGS) Q2 2016 Earnings Conference Call August 2, 2016 11:00 AM ET
Andrew Ziola – Vice President-Investor Relations and Public Affairs
Curtis Dinan – Senior Vice President, Chief Financial Officer and Treasurer
Pierce Norton – President and Chief Executive Officer
Chris Sighinolfi – Jeffries
Good day, and welcome to the ONE Gas Second Quarter Earnings Conference Call. Today’s conference is being record. And at this time, I would like to turn the conference over to Mr. Andrew Ziola. Please go ahead, sir.
Thank you, Leva and good morning. And thank you for joining us for our second quarter 2016 earnings conference call. This call is being webcast live with a replay made available. After prepared remarks from our speakers, 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 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 Curtis Dinan, Senior Vice President, Chief Financial Officer, and Treasurer of ONE Gas. Curtis?
Thanks, Andrew. Good morning everyone, and thank you for joining us. Net income for the second quarter 2016 was $20.3 million or $0.38 per diluted share, compared with $12.1 million or $0.23 per diluted share for the same period last year. New rates in Oklahoma and Texas positively impacted results. This includes the approved rate case in Oklahoma this past January and approvals from various GRIP and cost of service filings in Texas over the past year.
Operating cost for the second quarter were $110 million, compared with $112.5 million for the same period last year. Outside services, fleet related cost and IT expenses decreased but were partially offset by higher employee-related costs. Year-to-date operating costs were $232.2 million, compared with $234.9 million for the same period last year. I will provide additional detail on operating costs as it relates to our updated guidance in a moment.
Capital expenditures for the second quarter were approximately $70 million, compared with $71 million for the same period last year. ONE Gas ended the quarter with $54 million of cash and cash equivalents, no borrowings under our $700 million credit facility and a total debt to capitalization ratio of 39%. Last week the ONE Gas Board of Directors declared a dividend of $0.35 per share, unchanged from the previous quarter. This dividend is consistent with the Company’s guidance for 2016. As we have indicated previously, we expect the average annual dividend increase to be 8% to 10% between 2015 and 2020.
Now on to our updated guidance. As announced in the press release, we updated our net income guidance range for 2016 to $135 million to $140 million, compared with the previous range of $127 million to $137 million. Earnings per diluted share, is expected to be $2.55 to $2.65, compared with the previously announced range of $2.40 to $2.60. This updated guidance reflects lower operating cost, approximately 2% driven by lower outside service cost, lower fleet and IT expenses.
Day-to-day processes are being improved by leveraging technology throughout the organization, including field operations, customer service and information technology, enabling our company to be more efficient and customer-focused.
Net margin is expected to be slightly lower, less than 1%, due primarily to warmer than normal weather in our service territories, experienced primarily in the first quarter of 2016. We still expect capital expenditures to be approximately $305 million in 2016, with more than 70% targeted towards system integrity and replacement projects. For line item breakdown, we provided an updated guidance table on the last page in the press release.
We expect our earned ROE for 2016 to be 7.6%, compared with an ROE of 7.4% for 2015, reflecting the approved rate filings this year. At June 30, 2016 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 $2.7 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 2016 will average approximately $3 billion with 43% of that being a rate base in Oklahoma, 31% in Kansas and 26% in Texas.
And now I will turn it over to Pierce Norton, ONE Gas President and Chief Executive Officer. Pierce?
Thanks, Curtis for that update and good morning everyone. I’ll start with a brief regulatory update and then I’ll wrap up with a few comments on the updated guidance. Beginning with Texas, in June we filed a rate case requesting an increase in revenues of $11.6 million for our Central Texas and South Texas jurisdictions, our request is based on a 10% return on equity and a common equity ratio of 60.5% based on ONE Gas’ actual equity ratios as of December 31, 2015.
This rate case reflects $43 million of investments in its systems and facilities for these services areas. This filing also includes a proposal to consolidate the South Texas service area with the Central Texas service area. If approved, new rates are expected to be effective no later than January of 2017.
In March of 2016, we filed a rate case requesting an increase in revenues of $12.8 million for the El Paso, Dell City and Permian service areas. The request is based on a 10% return on equity and a 60.1% common equity ratio. This rate case reflects $34 million of system and facility investments. The following also included a request to consolidate these three service areas, into a new West Texas service area. We recently concluded the hearing on merits at the Texas Railroad Commission and we expect a final decision by October.
Now onto Kansas, where we filed a rate case in May. The procedural schedule for Kansas Gas Service’s filing was approved by the Kansas Corporation Commission on June 8. The evidentiary hearings are scheduled for October 18, through the 20 and a final order from the Commission is due December 28.
Now I’d like to share my thoughts related to our updated guidance. I’m very pleased with our company’s focus on our processes and the outcomes we are producing. From day one of this company’s span, I have stated that we will be focused – we will be a focused organization dedicated to a standard, our standard operate and maintain this 100% regulated natural gas distribution business.
Everyday, we focus on the process of maintaining or lowering our operating expenses to sustainable levels. We will continue to invest in our systems and in our technology to further improve the efficiency of our operations and will remain vigilant in driving cost to sustainable levels. These expected improvements will help us better serve our customers, as well as moderate future cost increases.
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 are now ready for the questions.
[Operator Instructions] And we will take our question from Chris Sighinolfi with Jeffries.
Hey Pierce, how are you?
Hey, good morning, Chris. How are you?
I am well, thanks. Just a couple follow-up items from last night’s release in your prepared remarks, was curios you had mentioned the case that was filed in Texas where you just had the hearing on Merits. I think with regard to El Paso, Dell City and the Permian areas.
Could you just talk about perhaps I don’t know, to the extent you can discuss given the Railroad Commission’s making decision. What were the issues there, was it an issue regarding how much you expand, was it an issue regarding ROE, or requesting or was it an issue regarding the equity slice, or was it something entirely different than those?
Well, at any time Chris, you are in a full blown rate case, it’s basically everything that you mentioned.
You look at ROE, you look at the equity percentages, the spend, the expenses, so it’s all wrapped up into one for our total count case. So there wasn’t anything particularly focused out on that, it’s just a combination of multiple things.
Okay. And then I guess switching gears, I also get [ph] decision on that here shortly. And then I guess switching gears than on the cost improvements and clearly you reiterate today it appears, but that was, I remember at the time of the separation something that you were driving a home to – you guys could be in an independent sense sort of laser focused on efficiency gains and the execution of the business.
Curious in amongst that you’ve seen some benefits we talked about last quarter from lower fuel cost and things of that nature which maybe transient nature we’ll have to say. But Curtis was talking that some of the improvements you are making in technology and automation, can you just explore a little bit more of that and then as it relates where that might go over the next couple years?
So the technology improvements that we’re making Chris, without getting into a tremendous amount of details, it allows us to be more efficient in our processes. So it allows us to be more efficient in the way we dispatch people, not only on the customer side, but on the asset side. That was the piece that was actually missing prior to the spend as we focused on how we dispatch the work on the asset side of the business.
So it really blows down to the two pieces which is internal labor and outside labor or external labor. So what we’re focused on is we ask that question, is it better on any particular type of patch both from a maintenance project and capital project standpoint to perform that work either internally or externally?
So what we’re planning out is by putting that focus on there we’re able to optimize the differences there between doing things internally and externally and that’s where we’re seeing a lot of gains. It’s actually helped by the technology that we’re deploying.
Okay. And in terms of the successful continuation of that let’s just pretend for a moment that the fuel side of it remains if viewed, regulatory picture progresses the way that you sort of anticipate in your baseline it will. Does this efficiency element in and of itself Pierce have you – is it large enough to drive us towards the upper end of your growth range or is it something where you think more along the lines there’s some puts and takes when we wind up sort of without any changes to the out-year projections?
Well, I would say Chris that number one, there’s a long way to go between now and a five-year projection. So that’s the first thing that I would say. Number two there’s a lot to regulatory outcomes. I think that probably has more to do with it and anything we’ve always stated that you can either get a higher regulatory outcome or lower regulatory outcome and that’s what kind of drives us between that low number and high number.
Certainly the efficiencies, as we indicated in our script, was it’s about moderating those cost increases, because you’re going to have increased cost to the customer because of the investments in the assets which is the right thing to do for reliability and safety reasons. So we want to try to offset some of those increases, do to – and moderate those increases by maintaining a certain level of cost structure.
Okay, got it. All right well thanks so lot for taking my questions. Appreciate the time.
Okay. Thank you, Chris.
[Operator Instructions] And it appears there are no further questions at this time. Mr. Ziola, I’d like to turn the conference back to you for any additional or closing remarks.
Right, well thank you. Looks like Chris wins the Starbucks card this quarter. So again thank you for joining us. Our acquired period for the third quarter starts when we close our books in early October, and extends until we release earnings in late October. We will provide details on that conference call at later date. If you have not done so, I encourage you to visit the Investor Relations page on our website and register for e-mail alerts and view our second quarter 2016 documents.
Have a great rest of your day.
This concludes today’s conference. We appreciate your participation. You may now disconnect.
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