And welcome to the ONE Gas 4th 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 Loecey. Please go ahead, sir.
Good morning, and thank you for joining us on our Q4 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 Acts of 1933 34. Actual results could differ materially from those projected in any forward looking statement.
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 are Karen Lawhorn, Senior Vice President and Chief Financial Officer Curtis Dinan, Senior Vice President, Commercial Sid McAnally, Senior Vice President, Operations Pierce Norton, President and Chief Executive Officer. And now, I'll turn the call over to Karen.
Thanks, Brandon. Good morning, everyone, and thank you for joining us today. Net income for Q4 2019 was $51,200,000 or $0.96 per diluted share compared with $44,700,000 or $0.84 per diluted share for the same period last year. Our 4th quarter results reflect a $16,300,000 increase in net margin, including new rates in our service areas and residential customer growth, primarily in Oklahoma and Texas. Operating costs for the 4th quarter were $133,900,000 compared with $123,800,000 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 $186,700,000 or $3.51 per diluted share, compared with $172,200,000 or $3.25 per diluted share in 2018. Net margin increased 45 point $7,000,000 due to new rates in our service areas, residential customer growth in Oklahoma and Texas, higher volumes from transportation customers in Kansas and higher sales volumes net of weather normalization in Texas. Operating costs for the full year 2019 were 18 $5,000,000 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 $8,400,000 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 up $11,400,000 relative to the prior year due to the refinancing of $300,000,000 of senior notes in the Q4 of 2018 with $400,000,000 of senior notes at a higher interest rate. Our full year 2019 income tax expense includes a credit of $12,800,000 for amortization of the regulatory liability for excess accumulated deferred income taxes or ADIT, which is offset in revenues. Capital expenditures and asset removal costs were $121,200,000 for the 4th quarter, bringing our total for the year to $465,100,000 We ended the year with an average rate base of $3,620,000,000 with 42% of that in Oklahoma, 29% in Kansas and 29% in Texas. Authorized rate base, which is rate base reflected in completed regulatory proceedings, including full rate cases and interim rate filings, was approximately $3,530,000,000 OneGas ended the 4th quarter with approximately $183,500,000 of capacity under our commercial paper program.
In 2019, we were a cash taxpayer for the first time with payments of approximately $30,000,000 In January, the ONE Gas Board of Directors declared a dividend of $0.54 per share, an increase of 0 point a previous dividend of $0.50 per share. We expect the average annual dividend increase to be 6% to 8% between 2019 2024 with a targeted dividend payout ratio of 55% to 65% of net income. Last month, we announced our 2020 earnings per share guidance $3.44 to $3.68 per share. Our 2020 capital expenditures and asset removal costs are projected to be $475,000,000 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 5 year financial guidance is a forecasted average annual increase in operating costs of 2% to 3%. We anticipate net financing needs over the next 5 years of $850,000,000 to $900,000,000 with approximately 1 quarter of that being equity. Our forecasted 5 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 5 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 rate over the next 5 years will average between 6% 8%. And now, I'll turn it over to Curtis Dinan for regulatory updates. Curtis?
Thanks, Karen, 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 $4,200,000 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 1st 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 a 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 $15,600,000 If approved, new rates are expected to become effective in the Q3 2020 and our number of jurisdictions in Texas will decrease to 5 from 6. 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 And now I'll turn it over to our CEO, Pierce Norton.
Pierce?
Thank you, Curtis and Karen. 2019 was another good year for ONE Gas. I'm 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 0 harm to our employees, customers and the public. I want to reiterate that in 2019, we completed our 5 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 out 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 0 emissions, while providing reliable service and keeping energy affordable continues to evolve. In the next decade, it will be important that resiliency and costs 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.
We'll take our first question from Brian Russo with Sidoti and Company.
Hi, good morning. Good morning, Brian.
Hey, 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, I think. It was about 3 or 4 years ago.
Okay, great. So the and the 15 approximately 15,000,000 dollars 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 you got that ONE Gas in Texas is regulated by the Railroad Commission versus the PUCT, Could you just maybe characterize your relationship with the RRC?
Sure. And 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 file 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 at 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. I don't think there's anything out of the norm with either of those.
Got it. Understood. And have you reached settlements in the past with the city council and or the RRRC?
Typically, we have reached settlement in those cases. It has been more unusual that we don't get the settlement with the councils or the RRC and it ends up going to hearings. So your assumption is dead on.
Okay, great. And then also just customer growth, it looks like Oklahoma and Texas are driving that growth of maybe 0.6%, if my math is correct, where Kansas is relatively flat. Can you just real quickly distinguish the growth customer growth profiles amongst the 3 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 to slightly up in the customer growth there.
Okay, great. And then I think also the 2020 guidance assumes an earned ROE of 8.2% and relative to your allowed ROEs, what initiatives do you have in place or plan to implement to further close that gap, whether it's your ongoing O and M management or refinancing at lower rates or I guess and even more importantly, any regulatory initiatives to help improve the 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.
2nd, 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 a 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 cybersecurity safety to 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 $4,200,000 and that's what was approved by the commission through that process. So the impact on the customer was $0.43 per month. And so 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 GESRS filing
be in Kansas?
Sure. You can do one every 3 65 days. So our next one will come in August of this year that will be for capital from July 1, 2019 through June 30, 2020.
Okay, great. 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?
Hi, Brian, this is Karen. 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 a rate case next year and the outcome of that will have a significant impact on our earnings.
Okay, great. Thank you very much.
Hey, 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.
Thank you.
Great. Thanks. Next
Question from Chris Sighinolfi, Jefferies.
Hey, everyone. How are you?
Great, Chris. How are you?
I'm doing well. Thanks for taking my questions as well. I think I'll be quick. I just have a couple for Karen. With regard to I had actually I think missed 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 that it includes those costs as well? 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 2018 to 2019. Is that something you would expect to continue occurring? Can you just 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. Material.
And 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 based. It's all part of our system improvement. So I just want to put that in perspective.
Okay. That was you anticipated my second question, which was because I missed the first part of it. I wanted to make sure that I was thinking about rate base additions correctly. So everything you're quoting as the CapEx forecast is embedded, hopefully, gets embedded over time?
That's correct.
Okay. All right. Really, I mean, that was truthfully, that was it for me. So I appreciate the
time. Thank you, Chris, and
have
a good rest of your day.
You too.
A follow-up question from Brian Russo.
Yes. Hi. Thanks for the follow-up. Just real quickly, the notes payable balance of $516,000,000 at year end 2019, up noticeably year over year. Is will that eventually be termed out?
And is that included or excluded in the financing forecast you guys laid out back in January?
So yes to both. It will eventually be termed out and it is included in our financing needs that we have provided guidance on.
Okay, perfect. Thank you.
Thank you, Brian.
There are no further questions at this time. Mr. Loci, I'll turn the conference back to you for any additional or closing remarks.
Thank you all again for your interest in ONE Gas. Our quiet period for the Q1 starts when we close our books in early April and extends until we release earnings at the end of April. We'll provide details on the conference call at a later date. Have a great day everybody. Thank you.
And this concludes today's call. Thank you for your participation. You may now disconnect.