Good day, and welcome to the ONE Gas First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brandon Lozzi. Please go ahead, sir.
Good morning, and thank you for joining us on our Q1 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 our Safe Harbor provision of the Securities Acts of 1933 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. Joining us on the call this morning are Karen Lawhorn, Senior Vice President and Chief Financial Officer Curtis Dinan, Senior Vice President, Commercial Sid McAnnally, Senior Vice President, Operations and 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 quarter 2019 was $93,700,000 or 1 point dollars or $1.72 per diluted share for the same period last year. Our first quarter results reflect new rates in Kansas, higher sales volumes, net of weather normalization in Texas and Kansas, and residential customer growth in Oklahoma and Texas. Operating costs for the Q1 were $124,500,000 compared with $118,800,000 in the same period last year, primarily due to an increase in employee and legal related costs.
We also experienced increased interest expense from replacing $300,000,000 of our maturing senior notes with $400,000,000 of new senior notes at a higher interest rate. In Oklahoma and Kansas, we have begun returning the associated regulatory liability through deferred income tax expense. As a result, our effective tax rate, including excess tax benefits on vested share based compensation for Q1 2019 is approximately 5 percentage points lower than the prior year, 16.6% compared with 21.5% and is consistent with our guidance for 2019. As previously indicated, the return of excess ADIT to customers is not expected to have a material impact on our net income. Yesterday, the ONE Gas Board of Directors declared a dividend of $0.50 per share, the same as the previous quarter.
Dividend is consistent with the company's guidance for 2019. As we have indicated previously, we expect the average annual dividend increase to be 7% to 9% between 2018 2023 with a targeted dividend payout ratio of 55% to 65% of net income. We also reaffirmed our 2019 earnings per share guidance of $3.27 to $3.57 per share. Authorized rate base, reflecting the recently completed regulatory activity in Oklahoma and Kansas, is approximately $3,330,000,000 Authorized rate base is defined as the rate base reflected in completed regulatory proceedings, including full rate cases and interim rate filings. We project that for 2019, our estimated average rate base, which is defined as authorized rate base plus additional investments in our system and other changes in the components of our rate base that are not yet reflected in approved regulatory filings, will be approximately $3,610,000,000 with 42% in Oklahoma, 29% in Kansas and 29% in Texas.
ONE Gas ended the quarter with approximately $403,000,000 of capacity under our commercial paper program, we do not anticipate any equity or capital market needs in 2019. And now I'll turn it over to Curtis Donnan for regulatory update. Curtis?
Thanks, Karen, and good morning, everyone. Let's begin with Oklahoma. In March, Oklahoma Natural Gas filed its 3rd annual performance based rate change filing or PBRC since the last general rate case that was approved in January 2016. This filing was based on a 2018 test year and includes 2 proposed customer credits. The first is a PBRC credit of $15,400,000 to be returned to customers over a 12 month period.
This proposed credit represents all earnings, including amounts attributable to tax savings that are above the authorized ROE of 9.5% for 2018. The second proposed credit is $12,700,000 associated with excess ADIT. We have one more PBRC filing in 2020 before a full rate case is required to be filed in 2021. Moving on to Kansas. The Kansas Corporation Commission approved the settlement of Kansas Gas Services rate case, and we implemented new rates in February.
The net base rate increase is $18,600,000 and reflects an amortization credit for the refund of excess ADIT. In a separate order, the KCC required Kansas Gas Service to refund its tax reform liability of $16,600,000 to its customers through a one time bill credit. Customers will see this refund during the Q2 of 2019. Looking ahead in Kansas, we plan to file our next Gas System Reliability Surcharge or GSRS in August for the period covering September 2018 through June 2019. The new GSRS legislation that was passed last year, which expanded the definition of eligible capital expenditures, will apply to this filing.
With this change in Kansas, approximately 90% of all capital spending for ONE Gas will be subject to an annual filing. Finally, in Texas, in March, Texas Gas Service made Gas Reliability Infrastructure Program or GRIP filings for all customers in the West Texas and the Central Texas service areas for increases of $4,100,000 $5,500,000 respectively. We anticipate new rates will be effective in July of this year. At this point, we've dealt with the majority of issues relating to tax reform as it relates to our customers with the exception of excess ADIT in Texas. We will be working with our Texas regulators to determine how excess ADIT will be addressed.
And now I'll turn it over to our CEO, Pierce Norton.
Pierce? Thanks, Curtis and Karen. As we look ahead to the rest of 2019, our focus strategy is unchanged and centers on continuously improving the safety and reliability of our system. We expect to invest $2,400,000,000 in our system over the next 5 years. To support this level of capital spending, we continue to build capacity in the resources that are required to plan and execute the work.
This includes advances in supply chain and logistics, the utilization of emerging technologies and improved efficiency of internal and external labor. Powering appliances with natural gas provides excellent value to our customers, and we continue to work to find more efficient ways to provide better customer service. To maintain this competitive pricing advantage, we remain mindful of our financial metrics and the customer bill impacts. We would not be able to achieve our safety and reliability goals without of our more than 3,500 employees. I want to thank them for their contribution and for working hard every day to serve our 2,200,000 customers.
Thank you all for joining us this morning, and we look forward to seeing many of you at the American Gas
Thank We'll take our first question from Aga Zmrodska of UBS. Please go ahead.
Good morning.
Good morning, Aga.
In early April, some senators announced new legislation, the Lionel Brandon Pipeline Safety Act to address risk related to distribution pipelines post recent incidents. Could you please maybe comment how the proposed legislation could impact ONE Gas and the industry as a whole?
Aga, I want to get a clarification. Are you talking about the legislation that's proposed at the federal level?
Yes.
Okay. I'll let Curtis answer that question.
Sure, Aga. This is Curtis. And we obviously have reviewed that legislation. What I would say is it's pretty early in the process. So trying to handicap where that might go is really difficult to say at this point.
We do have the same at the federal level as in the state levels, folks involved in monitoring the legislation and providing input where needed. So it's really a little bit difficult to be too specific at this point. But again, we are aware of it and we're continuing to monitor what's there.
Thank you. And second question is more a housekeeping question. So in 1Q, the weather was significantly below normal and you reported margin increased by $3,300,000 related to higher sales. Could you please discuss how Wengas can benefit from colder weather despite having weather normalization mechanism?
Aga, I'm going to let Karen answer that question.
Good morning, Aga. This is Karen. So our weather normalization mechanisms are not perfect. So they're designed to offset or to put us back to normal weather obviously, but it's they're complicated algorithms and they don't they just don't work perfectly, especially in Texas. We have several jurisdictions in Texas, each with their own set of weather norm parameters.
And again, they just don't work exactly. So we get pickups sometime, especially in the shoulder months. I know March is not really a shoulder month, but that can happen as well.
Thank you a lot for your color.
Thank you, Aga. Thank you. And we'll take our next question is coming from Chris Sighinolfi of Jefferies. Please go ahead.
Hey, good morning guys. Hey, good morning Chris. Hey, Paris. A quick question, and I don't know if this is for Curtis or Karen. The Kansas refund that's coming here in the Q2, is that simply a cash flow item given it pertains to prior periods or would that be recognized in earnings?
Yes, Chris, that's more of an accounting question, so I'm going to let Karen answer that one.
Good morning. It's Karen. Yes, we do have that liability accrued. You'll notice we disclosed that we accrued an additional $2,400,000 in 2019 and the remainder of that was already accrued in 2018.
Okay. So there's it's not a sort of an acute item that we'd see reflected next quarter. It's been accounted for as a lead up to it?
It's been accounted for and it's cash flow, correct.
Yes. Okay. That's what
I suspect. I just want to check. And then you guys have mentioned, Karen, in the release last night, just on the other income line, some I'm imagining its equity market performance that was strong in the Q1 with regard to some of your non qualified employee pension or benefit programs. Just curious, is there a baseline assumption that you make in the guidance for the performance of those plans? And I guess with the strength in the Q1, have you sort of exceeded what might have been in the guidance?
Or any color on that front would be helpful.
We don't bake in any kind of anticipated earnings on those plans. We expect them to be essentially neutral. So we experienced that pickup in the Q1, but there's a possibility that we could give it back later in the year depending on how the markets perform.
Okay. That is those are my 2 cleanups. Thanks a lot for the time.
Thank you, Chris.
Thank you. We have no further questions, so I'll hand the call back to you for any additional or closing remarks.
Great. Thank you all again for your interest in ONE Gas. Our quiet period for the Q2 starts when we close our books in early July and extends until we release earnings in late July. We'll provide details on the conference call at a later date and have a great rest of your day.
This concludes today's call. Thank you all for your participation. You may now disconnect.