Slide 1: Jefferies Utilities Summit
Boston, Mass. | June 15, 2017 Jefferies Utilities Summit
Slide 2: 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 3: Company Overview: Key Statistics
Company Overview Key Statistics • One of the largest publicly traded natural gas distribution companies 72% market share – 2.2 million customers • 42,700 miles of distribution and 88% market share transmission pipeline • Estimated 2017 average rate base: $3.1 billion* 13% market share – 41% in Oklah
Slide 4: Value Creation Strategy
Value Creation Strategy
Slide 5: Value Creation Strategy: Sustainable Business
Value Creation Strategy Sustainable Business • Well-defined capital investment plan Focused business strategy • 100% regulated natural gas distribution utility • One of the largest publicly traded natural gas distributors • High percentage of residential customers and fixed charges Significant scale
Slide 6: Well-defined Capital Investment Plan
Focused Business Strategy Well-defined Capital Investment Plan $ millions 2017 Guidance $ 255 System Integrity 73% 21% $ 72 Customer Growth 6% $ 23 Other/IT $ 350 Total Capital Expenditures System Integrity Customer Growth Other/IT Page 6
Slide 7: High Percentage of Residential Customers
Significant Scale High Percentage of Residential Customers * * *Based on 2016 annual results Page 7
Slide 8: High Percentage of Fixed Charges
Significant Scale High Percentage of Fixed Charges Kansas Oklahoma Texas Total Fixed Charges – Sales 55% 88% 70% 74% customers* Average Annual Heating 4,860 3,264 1,785 - Degree Days – Normal Weather Normalization 100% 100% 100% 100% Kansas Corporation Commission Oklahoma Corporation “Home Rule” wit
Slide 9: Location Supports Sustainability
Proximity to Natural Gas Supply Location Supports Sustainability • Close proximity to significant natural gas reserves Topeka – 126 active rigs in Oklahoma* – 463 active rigs in Texas* – 64% of all rigs in U.S. operating in ONE Gas territories • Leads to competitive natural gas delivered costs: – Co
Slide 10: 3-to-1 Average Advantage Continues in ONE Gas Territories
Natural Gas vs. Electricity 3-to-1 Average Advantage Continues in ONE Gas Territories $50 3.8x 4.0 3.2x $40 2.9x $37.95 3.0 $32.30 $29.51 $30 2.0 $20 $10.97 $10.07 1.0 $9.25 $10 $- - Texas Oklahoma Kansas Natural gas price equivalent of electricity/Dth (1) OGS delivered cost of natural gas/Dth (2) N
Slide 11: Financial Objectives
Financial Objectives
Slide 12: 2017 Guidance
2017 Guidance Announced January 17, 2017 • Net income: range of $152-$162 Diluted EPS million $3.50 • EPS: range of $2.87 - $3.07 $3.00 • Rate base expected to grow an $2.97 average of approximately 5.0-5.5% $2.50 $2.65 per year between 2016-2021 • Expected average annual EPS $2.00 $2.24 $2.07 growt
Slide 13: Building Shareholder Value
Growing Dividends Building Shareholder Value • Dividend increased 20% for 2017 Dividends Declared • Quarterly dividend of 42 cents per share, resulting in an annualized dividend of $1.68 per share* $1.68 $1.40 • Target dividend payout ratio of 55- $1.20 65% of net income $0.84 • Expected average ann
Slide 14: Capital Spending Exceeds Depreciation
Capital Investment Drives Rate Base Growth Capital Spending Exceeds Depreciation • Majority of capital expenditures for $350-$380/year safety, reliability and efficiency $350 – System integrity and replacement $294 $302 $307 – Efficiency • Automated meter reading (in millions) • Operational efficien
Slide 15: Capital Expenditures by State
Capital Expenditures By State Oklahoma Kansas Texas 2017: 2.3x depreciation 2017: 1.9x depreciation 2017: 2.9x depreciation $154 $136 $132 $134 $100 $96 $89 $88 $82 $81 $85 $76 (in millions) $64 $68 $63 $51 $57 $44 $47 $41 $35 $29 $21 $24 2014 2015 2016 2017G 2014 2015 2016 2017G 2014 2015 2016 2017
Slide 16: Long-Term Commitment to System Modernization
Investment Horizon Long-Term Commitment to System Modernization Pipeline Replacement 2017-2021 Estimate 2016 259 131 390 750 (in miles) 2015 245 180 425 1,100 2014 352 123 475 ¹ Vintage Replacement Program ² Risk-Mitigation and Government Relocations Pipeline replacement due to changes in state or f
Slide 17: Building a Foundation for Long-term Affordability
Focused on O&M expenses Building a Foundation for Long-term Affordability • Leveraging technology to control O&M Expense expenses by: $421 $419 $414 $417 – Increasing efficiency and optimizing processes (in millions) – Enhancing value for customers by more user-friendly and efficient websites, and a
Slide 18: Sources and Uses
2017 Cash Flow Sources and Uses $493 $493 Short-term debt and Asset removal costs working capital changes $54 • Dividends and capital expenditures $97 primarily funded by cash flow from operations (in millions) Cash flow from Capital operations* expenditures • $700 million revolving credit $396 $350
Slide 19: Commitment to Investment-Grade Ratings
Investment Grade Commitment to Investment-Grade Ratings • Strong liquidity position will support capital expenditure and working capital needs Capital Structure As of March 31, 2017 – Stable operating cash flows – $700 million revolving credit facility – Commercial paper program • Strong investment-
Slide 20: Regulatory Update
Regulatory Update
Slide 21: Regulatory Mechanisms
Regulatory Mechanisms Overview • Oklahoma Natural Gas – Performance-based rate structure (PBR) with a targeted ROE band of 9-10 percent that provides for annual rate reviews between rate cases • Kansas Gas Service – Gas System Reliability Surcharge (GSRS) – for incremental safety-related and governm
Slide 22: Minimize the Gap
Return on Equity Minimize the Gap 8.1% • Goal: Minimize the gap between 7.6% 7.4% 7.7% allowed and actual returns – 2017 ROE estimate: 8.1% – 2016 ROE achieved: 7.7% – 2015 ROE achieved: 7.4% – 2014 ROE achieved: 7.6% 2014 2015 2016 2017G Page 22
Slide 23: Regulatory Filing Timeline
Regulatory Filing Timeline Oklahoma & Kansas Filed general rate case application in July 2015, new General rate case application filing in June 2021, rates approved and effective January 2016 with new rates effective early 2022, if applicable 2015 2016 2017 2018 2019 2020 2021 2022 ONG Performance-b
Slide 24: Regulatory Filing Timeline (Texas)
Regulatory Filing Timeline Texas Jurisdiction Filing Highlights Status Increase in Rates Base Rates Effective Central Texas • GRIP for both incorporated and environs areas Filed March 3, 2017 $4.9 million TBD West Texas • GRIP for both incorporated and environs areas Filed March 15, 2017 $4.5 millio
Slide 25: Rate Base
Rate Base Capital Investment Drives Rate Base Growth Rate Base 2017 Estimated Rate Base Total: $3.1 billion* $3.1 $2.9 $2.3 $2.4 27% 41% (in billions) 32% 2014 2015 2016 2017G Oklahoma Kansas Texas * Estimated average rate base; calculation consistent with utility ratemaking in each jurisdiction Pag
Slide 26: Key Takeaways
Key Takeaways Focused Strategy • Well-defined capital investment plan with 70% targeted toward system integrity – Rate base expected to grow an average of 5.0-5.5% per year between 2016-2021 • Focus on controlling operating expenses • Minimize gap between actual and allowed returns – Annual filings
Slide 27: Appendix
Appendix
Slide 28: Customer and Asset Mix
Customer and Asset Mix Key Statistics as of Dec. 31, 2016 Kansas Gas Service Oklahoma Natural Gas Texas Gas Service Total Average Number of Customers 636,625 865,548 650,017 2,152,190 Average Number of Employees 1,000 1,200 800 3,400* Distribution – Miles 11,600 18,500 10,100 40,200 Transmission – M
Slide 29: Regulatory Constructs
Regulatory Constructs By State Mechanism Oklahoma Kansas Texas* Performance-based rates X Capital investments; safety-related riders X** X X Weather normalization X X X Purchased Gas Adjustment/Cost of Gas riders X X X Energy efficiency/conservation programs X X Pension and Other Post-Retirement Ben
Slide 30: Regulatory Information
Regulatory Information By State as of January 2017 - Authorized Rate Base Rate Base per Authorized Authorized (in millions) Customer Rate of Return on Return Equity Oklahoma Natural Gas¹ $1,202 $1,396 7.31% 9-10% Kansas Gas Service² $925 $1,457 N/A N/A Texas Gas Service¹ $760 $1,177 7.5% 9.6% ¹ The
Slide 31: Authorized Rate Base Historical by State
Authorized Rate Base Historical by State at Year End Oklahoma¹ Kansas² Texas¹ $1,202 $938 $979 $925 $781 $826 $760 (in millions) $639 $542 2014 2015 2016 2014 2015 2016 2014 2015 2016 ¹ Rate bases presented in this table are those from the last approved rate filings for each jurisdiction. These amou
Slide 32: 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 33: Kansas Gas Service Rate Case
Kansas Gas Service Rate Case New Rates Effective November 2016 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, 201
Slide 34: Central Texas Service Area – New Rates Effective November 2016
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 35: West Texas Service Area – New Rates Effective October 2016
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 36: Operating Safely and Environmentally Responsibly
Safety and Environment Operating Safely and Environmentally Responsibly • Ongoing effort to replace aging assets – Replaced approximately 390 miles of distribution and transmission facilities in 2016 • Replaced approximately 22 miles of cast iron pipe in 2016 – Remaining 48 miles of cast iron pipe e
Slide 37: Customer Growth
Customer Growth Average Customer Count 2,152 2,140 2,127 2,114 2,101 2012 2013 2014 2015 2016 (in thousands) Page 37
Slide 38: Service Territory Population Growth
Service Territory Population Growth 1.45% CAGR (2000-2016) ONE Gas Major Metro U.S. Census County Population 1,400,000 County 2000 Population 2016 Population % Growth Travis, TX 811,776 1,199,323 48% 1,200,000 El Paso, TX 679,568 837,918 23% Travis County, TX Oklahoma, OK 660,581 782,970 19% Tulsa,
Slide 39: Compressed Natural Gas (CNG)
Compressed Natural Gas (CNG) Current Outlook CNG Volume • Currently operate 26 fueling stations Dth – in millions accessible to the public, 4 private stations • Currently transporting supply to 66 retail and 143 stations supplied 129 stations supplied 49 private CNG stations 115 stations supplied •
Slide 40: Cost of Gas
Cost of Gas Passed Through to Customers • Actual costs of the commodity, transportation and storage of natural gas are passed through to customers without markup – Natural gas used in operations is recovered in “Purchased Gas” or “Cost of Gas” riders • Cost of Gas component of bad debts and hedging
Slide 41: Cash Flow From Operations
Cash Flow From Operations Before Changes In Working Capital* 2017 (Millions of dollars) 2016 Change Guidance Net Income $ 153 $ 140 $ 13 Depreciation and amortization 155 144 11 Deferred taxes 73 87 (14) Other 15 16 (1) Cash flow from operations before changes in working capital $ 396 $ 387 $ 9 * Am
Slide 42: 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
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