One Gas, Inc. · NYSE:OGS
One Gas — American Gas Association Financial Forum 2018
55 slides from One Gas's conference presentation, May 21, 2018
Slide 1: American Gas Association Financial Forum
AMERICAN GAS ASSOCIATION FINANCIAL FORUM Phoenix, Arizona | May 20 – 22, 2018
Slide 2: Pierce Norton, President and Chief Executive Officer
PIERCE NORTON President and Chief Executive Officer
Slide 3: Forward-Looking Statements
FORWARD-LOOKING STATEMENTS Statements contained in this presentation that include company expectations or predictions should be considered forward-looking statements that are covered by the safe harbor provisions of the Securities Act of 1933 and the Securities and Exchange Act of 1934. It is import
Slide 4: Value Creation Strategy
VALUE CREATION STRATEGY
Slide 5: Value Creation Strategy
VALUE CREATION STRATEGY Sustainable Business Model • Clear vision, mission, values-driven strategy and safety culture Focused Business Strategy • 100% regulated natural gas distribution utility • Conservative financial profile (“A” rated) • 20+ year vintage pipeline replacement program Capital Horiz
Slide 6: Focused Business Strategy
FOCUSED BUSINESS STRATEGY
Slide 7: Mission, vision, strategy and values
FOCUSED BUSINESS STRATEGY Mission, vision, strategy and values Mission – Why we exist Core Values – Our compass • Safety: We are committed to operating safely We deliver natural gas for a better tomorrow and in an environmentally responsible manner. • Ethics: We are accountable to the highest ethica
Slide 8: Operating Safely and Environmentally Responsibly
FOCUSED BUSINESS STRATEGY Operating Safely and Environmentally Responsibly • Focus on culture, engagement, decision-making and processes; drive toward zero harm • Utilization of American Gas Association peer review safety process • Ongoing program to replace aging assets and the quality control of t
Slide 9: 100% regulated natural gas utility
FOCUSED BUSINESS STRATEGY 100% regulated natural gas utility • One of the largest publicly traded natural gas distribution companies 72% market share – 2.2 million customers – ~3,500 employees – ~60,500 miles of distribution mains, services 88% market share and transmission pipelines • Estimated 201
Slide 10: Conservative Financial Profile: Investment-Grade Credit Ratings
FOCUSED BUSINESS STRATEGY Conservative Financial Profile: Commitment to Investment-Grade Credit Ratings • Strong liquidity position will support CAPITAL STRUCTURE capital expenditure and working capital As of March 31, 2018 needs – Stable operating cash flows – $700 million revolving credit facility
Slide 11: Capital Horizon & Clarity
CAPITAL HORIZON & CLARITY
Slide 12: Well-defined capital investment plan: $2 billion 2018-2022
CAPITAL HORIZON & CLARITY Well-defined capital investment plan: Spending $2 billion from 2018 – 2022 CAPITAL INVESTMENTS 2018E CAPITAL RECOVERY TIMING (MILLIONS) $375-$415/year $366 $375 $23 20% $302 $307 $32 $294 $80 $91 $28 $22 $64 $65 $62 $261 $254 $46 $220 $212 $184 $151 $164 $131 $140 80% $119
Slide 13: Pipeline Replacement: Safe and Reliable Operations
CAPITAL HORIZON & CLARITY Pipeline Replacement: Focus on Maintaining Safe and Reliable Operations PIPELINE REPLACEMENT (MILES) 2018-2022E 190 35 5 150 380 Average Annual Est. 2017 196 61 23 1 144 425 2016 192 43 22 2 131 390 2015 194 25 24 2 180 425 2014 282 44 21 5 123 475 Unprotected Bare Steel Pr
Slide 14: Vintage Pipeline Replacement Program
CAPITAL HORIZON & CLARITY Vintage Pipeline Replacement Program • ~60,500 total miles of distribution VINTAGE PIPE AS PORTION OF TOTAL PIPELINE INVENTORY (MILES) mains and services and transmission pipelines • ~5,600 miles of identified vintage inventory 750 1,150 5,600 2018-2022E • Over past 4 years
Slide 15: Capital Investment – Rate Base Growth
CAPITAL HORIZON & CLARITY Capital Investment – Rate Base Growth RATE BASE 2018 ESTIMATED RATE BASE (BILLIONS) TOTAL: $3.4 BILLION* $3.4 $3.2 $2.9 $2.4 $0.95 billion $2.3 $1.43 billion $1.02 billion 2014 2015 2016 2017 2018G 2019-2022 Oklahoma Kansas Texas * Estimated average rate base; calculation c
Slide 16: Regulatory Construct & Update
REGULATORY CONSTRUCT & UPDATE
Slide 17: Regulatory Construct: Governance
REGULATORY CONSTRUCT Governance KANSAS OKLAHOMA TEXAS Kansas Corporation Commission Oklahoma Corporation Commission “Home Rule” with six jurisdictions* Texas Railroad Commission has Three commissioners appointed by the Three commissioners elected to appellate authority; three governor to four-year s
Slide 18: Recovery Mechanisms By State
REGULATORY CONSTRUCT Recovery Mechanisms By State COMPREHENSIVE RECOVERY MECHANISMS OKLAHOMA KANSAS TEXAS* Interim capital recovery X X X Weather normalization X X X Purchased gas riders (including gas cost portion of bad debts) X X X Energy efficiency/conservation programs X X Pension and other Pos
Slide 19: Filing Timeline: Oklahoma & Kansas
REGULATORY CONSTRUCT Filing Timeline: Oklahoma & Kansas General rate case application filing in June 2021, with new rates effective early 2022, if applicable 2017 2018 2019 2020 2021 2022 ONG Performance-based rates change Performance-based rates Performance-based rate filings in March 2019 and 2020
Slide 20: Filing Timeline: Texas
REGULATORY CONSTRUCT Filing Timeline: Texas RATES JURISDICTION FILING HIGHLIGHTS STATUS AMOUNT EFFECTIVE West Texas • GRIP for both incorporated and environs areas Filed March 2018 $3.5 million increase Expected July 2018 • Tax reform adjustment to rates for both incorporated Filed March 2018 $4.7 m
Slide 21: Kansas GSRS: Expanded Gas System Reliability Surcharge
REGULATORY CONSTRUCT Kansas GSRS: Expanded Gas System Reliability Surcharge 6/30/2017 TEST YEAR 6/30/2018 TEST YEAR - ESTIMATED CAPITAL COST PER RESIDENTIAL CAPITAL COST PER RESIDENTIAL REVENUE REVENUE EXPENDITURES CUSTOMER EXPENDITURES CUSTOMER (MILLIONS) (MILLIONS) (MILLIONS) PER MONTH (MILLIONS)
Slide 22: Cash Flow Stability
CASH FLOW STABILITY
Slide 23: Revenue Drivers
CASH FLOW STABILITY Revenue Drivers KANSAS OKLAHOMA TEXAS TOTAL Fixed Charges – Sales customers* 54% 88% 66% 71% Weather Normalization 100% 100% 100% 100% Average Annual Heating Degree Days – Normal 4,889 3,264 1,785 - Note: Based on 2017 annual results * Percentage of total net margin on natural ga
Slide 24: High Percentage of Residential Customers
CASH FLOW STABILITY High Percentage of Residential Customers Note: Based on 2017 annual results 24
Slide 25: Population Growth in Service Territories
CASH FLOW STABILITY Population Growth in Service Territories MAJOR METRO COUNTY POPULATION AVERAGE CUSTOMER COUNT (THOUSANDS) (THOUSANDS) 1,300 Travis County, TX 2,166 1,227 2,152 1,100 2,140 2,127 2,114 900 El Paso County, TX; 840 Oklahoma County, OK 788 700 Tulsa County, OK; 646 Johnson County, KS
Slide 26: O&M Expense Control
CASH FLOW STABILITY O&M Expense Control: Building a Foundation for Long-Term Affordability • Leveraging technology to control expenses by: O&M EXPENSE* (MILLIONS) – Increasing efficiency and optimizing processes $411 $397 $400 – Making it easier for customers to self-serve • Forecasting average annu
Slide 27: Competitive Advantage
COMPETITIVE ADVANTAGE
Slide 28: Proximity to Supply
COMPETITIVE ADVANTAGE Proximity to Supply: Location Supports Sustainability • Close proximity to significant natural gas reserves1 – 63% of all rigs in U.S. operating in Oklahoma and Texas • Net natural gas exporters² – Texas: 2.6 Tcf of 4.0 Tcf produced – Oklahoma: 1.5 Tcf of 2.3 Tcf produced • Est
Slide 29: Natural Gas vs. Electricity
COMPETITIVE ADVANTAGE Natural Gas vs. Electricity 3.5-TO-1 AVERAGE ADVANTAGE CONTINUES IN ONE GAS TERRITORIES 4.4x 3.1x 3.2x $38.89 $32.77 $30.72 $10.52 $9.48 $8.78 TEXAS OKLAHOMA KANSAS ¹ Natural gas price equivalent of electricity/Dth ² OGS delivered cost of natural gas/Dth ³ Natural gas advantage
Slide 30: Curtis Dinan, Chief Financial Officer and Treasurer
CURTIS DINAN Senior Vice President, Chief Financial Officer and Treasurer
Slide 31: Financial Performance & Objectives
FINANCIAL PERFORMANCE & OBJECTIVES
Slide 32: 2018 Guidance
2018 GUIDANCE Announced January 16, 2018 • Net income range of $156-$168 million DILUTED EPS • EPS range of $2.96 - $3.20 $3.08 $3.08 • Rate base expected to grow an average of ~6.0-6.5% per year between 2017- $3.04 2022 $2.65 $2.95 • Expected average annual EPS growth of $2.24 5-7% between 2017 and
Slide 33: Growing Dividends
GROWING DIVIDENDS Building Shareholder Value • Quarterly dividend of 46 cents DIVIDENDS DECLARED & PAYOUT RATIO per share, resulting in an annualized dividend of $1.84 $1.84 $1.68 per share* $1.40 $1.20 • Target dividend payout ratio 60% 55% of 55-65% of net income 54% 53% • Expected average annual
Slide 34: 2018 Cash Flow: Sources and Uses
2018 CASH FLOW Sources and Uses • Dividends and capital expenditures $528 $528 primarily funded by cash flow from Financing requirements operations $148 • $700 million revolving credit Capital (MILLIONS) expenditures and facility supports financing needs asset removal costs through the commercial pa
Slide 35: Manageable Debt Profile
MANAGEABLE DEBT PROFILE Strong Liquidity Position – as of March 31, 2018 DEBT MATURITIES LIQUIDITY PROFILE (MILLIONS) (MILLIONS) $600 $285 $300 $300 $700 $415 2019 2024 2029 2034 2044 Credit Facility Drawn Amount* Available Liquidity * Includes commercial paper and letters of credit 35
Slide 36: Tax Cuts and Jobs Act of 2017
TAX CUTS AND JOBS ACT OF 2017 Summary Revenue deferral offset by lower tax expense Excess deferred taxes will be refunded over 25-30 years End of bonus depreciation impacts cash flows Rate base growth increases 36
Slide 37: Key Takeaways
KEY TAKEAWAYS
Slide 38: Key Takeaways
KEY TAKEAWAYS • Focused business strategy • Well-defined capital investment plan • Stable revenue and cash flow profile 38
Slide 39: Questions
QUESTIONS
Slide 40: Appendix
APPENDIX
Slide 41: Corporate Structure
CORPORATE STRUCTURE INCORPORATED ENTITY 100% regulated natural gas distribution No levered holding company, all debt issued at OGS Division capital structures match Corporate capital structure 41
Slide 42: Customer and Asset Mix
CUSTOMER AND ASSET MIX Key Statistics as of December 31, 2017 KANSAS OKLAHOMA TEXAS GAS TOTAL GAS SERVICE NATURAL GAS SERVICE Average Number of Customers 638,119 871,482 656,480 2,166,081 Distribution – Miles* 11,400 18,500 10,300 40,200 Transmission – Miles* 1,600 700 300 2,600 * Totals do not incl
Slide 43: Capital Expenditures by State
CAPITAL EXPENDITURES By State OKLAHOMA KANSAS TEXAS 2018: 2.3x depreciation 2018: 1.9x depreciation 2018: 3.1x depreciation $161 $155 $136 $132 $134 $116 $106 $105 $98 $85 $89 $88 (MILLIONS) $82 $81 $76 $73 $63 $64 $67 $57 $50 $52 $44 $47 $41 $39 $34 $29 $21 $24 2014 2015 2016 2017 2018G 2014 2015 2
Slide 44: Authorized Rate Base: Historical by State
AUTHORIZED RATE BASE Historical by State at Year End OKLAHOMA¹ KANSAS² TEXAS¹ $1,257 $1,202 $979 $947 $938 $925 $781 $826 $822 (MILLIONS) $760 $639 $542 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 ¹ Rate bases presented in this table are those from the last approved rate filings for
Slide 45: Tax Reform – Detail by State
TAX REFORM – DETAIL BY STATE Tax Cuts and Jobs Act of 2017 • OKLAHOMA: In March 2018, ONG’s PBRC filing requested potential refunds including: – A regulatory liability reflecting the revaluation of accumulated deferred income tax (ADIT) for the change in the federal income tax rate that will be retu
Slide 46: Return on Equity: Opportunity to Improve
RETURN ON EQUITY Opportunity to Improve • Goal: Minimize the gap between 7.7% 7.9% allowed and actual returns 7.4% 7.3% • Variance in 2018 due to timing of rate activity, higher capital spending and effects of tax reform 2015 2016 2017 2018G 46
Slide 47: Regulatory Information by State
REGULATORY INFORMATION By State as of March 2018 - Authorized AUTHORIZED AUTHORIZED RATE BASE RATE BASE PER RATE OF RETURN ON (M ILLIONS) CUSTOMER RETURN EQUITY Oklahoma Natural Gas¹ $1,257 $1,423 7.225% 9-10% Kansas Gas Service² $947 $1,463 N/A N/A Texas Gas Service¹ $822 $1,241 7.4% 9.6% ¹ The rat
Slide 48: Oklahoma Natural Gas Rate Case
OKLAHOMA NATURAL GAS RATE CASE New Rates Effective January 2016 HIGHLIGHTS Amount $29.995 million Customer impact $2.96 per month increase for typical residential customer Rate base $1.2 billion Return on equity 9.5% (midpoint of allowed band) Common equity ratio* 60.5% Debt costs 3.95% Other • Cont
Slide 49: Kansas Gas Service Rate Case
KANSAS GAS SERVICE RATE CASE New Rates Effective January 2017 HIGHLIGHTS* Increase in base rates $15.5 million total increase, $8.1 million net increase (already recovering $7.4 million through GSRS) Operating income impact Approximately $9.1 million in 2017 Other New rates effective January 1, 2017
Slide 50: Kansas Gas Service Accounting Authority Order
KANSAS GAS SERVICE Accounting Authority Order HIGHLIGHTS Details • The agreement allows Kansas Gas Service to defer manufactured gas plant (MGP) costs for the investigation and remediation at the 12 former MGP sites incurred after January 1, 2017, up to a cap of $15.0 million, net of any related ins
Slide 51: Texas Gas Service: Central Texas Service Area
TEXAS GAS SERVICE Central Texas Service Area – New Rates Effective November 2016 HIGHLIGHTS Increase in base rates $6.8 million; $3.4 million impact to operating income Return on equity 9.5% Common equity ratio 60.1% Other • Approved consolidation of the South Texas service area with the Central Tex
Slide 52: Texas Gas Service: West Texas Service Area
TEXAS GAS SERVICE West Texas Service Area – New Rates Effective October 2016 HIGHLIGHTS Increase in base rates $8.8 million; $7.6 million impact to operating income Return on equity 9.5% Common equity ratio 60.1% Other • September 2016: Approved consolidation of the El Paso, Dell City and Permian se
Slide 53: Compressed Natural Gas (CNG): Current Outlook
COMPRESSED NATURAL GAS (CNG) Current Outlook • Currently operate 27 fueling stations CNG VOLUME accessible to the public, 5 private stations DTH – MILLIONS 147 stations • Currently transporting supply to 67 retail 129 stations 143 stations supplied supplied and 52 private CNG stations 115 stations s
Slide 54: Non-GAAP Information
NON-GAAP INFORMATION ONE Gas has disclosed in this presentation cash flow from operations before changes in working capital, which is a non-GAAP financial measure. Cash flow from operations before changes in working capital is used as a measure of the company's financial performance. Cash flow from
Slide 55: Cash Flow From Operations Before Changes in Working Capital
CASH FLOW FROM OPERATIONS Before Changes in Working Capital* 2018 (MILLIONS) 2017 CHANGE GUIDANCE Net Income $162 $163 $ (1) Depreciation and amortization 164 152 12 Deferred taxes 41 92 (51) Other 13 16 (3) Cash flow from operations before changes in working capital $380 $423 $(43) * Amounts shown
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