Atmos Energy Corp (ATO) — Q1 2017 Earnings Call Transcript

Thank you, Jessie. Good morning, everyone and thank you for joining us. This call is being webcast live on the Internet. Our earnings release, conference call slide presentation and Form 10-Q are all available on our website at atmosenergy.com. As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Our forward-looking statements and projections could differ materially from actual results and the factors that could cause such material differences are outlined on Slide 22 and more fully described in our SEC filings. I would like to now turn the call over to Kim Cocklin, Chief Executive Officer of Atmos Energy.

Thank you. Thank you very much, Susan and good morning, everyone. It's early here in Dallas, but we want to send a shout out to all you Brady fans and congratulations to the Patriots. We do appreciate you joining us and your interest in Atmos Energy. We are off to another very, very good start. We continue to refine and sharpen our business model of delivering safe and reliable natural gas to the over 3.1 million customers we serve in eight states and after divesting the non-regulated marketing business effective January 1, we're now the largest pure play natural gas distributor traded on the New York Stock Exchange and the reorganization of our portfolio of assets is now complete. As a 100% fully regulated utility, we will take full advantage of this opportunity to intensify our focus on our strategy and vision of becoming the safest natural gas utility. Progress with our rates and regulatory framework continues to provide rate relief, which is the primary driver of our financial performance. We continue to emphasize and build relationships with our regulators and communicate the importance of our infrastructure investments to ensure the safety and reliability of our system. And as of yesterday, rate outcomes have provided annual operating increases of about $20 million and we filed cases that are pending, which seek about $78 million of increases. The more significant filings include the APT general rate case, the intrastate pipeline, which we've talked to everyone about for about the last three years, filed with the Texas Railroad Commission in early January, and we are seeking to recover a deficiency of about $55 million. As again we have emphasized that there are no surprises in this filing, the test period for the case ended on September 30, 2016. The proposed rates are designed with a 13.5% return on equity and a 59% equity component and a rate base value of roughly $1.77 billion. The filing, as you recall, is required by the GRIP Statute and will provide a comprehensive review of our existing rates as well as a review of all capital investments made under the GRIP Statute. The procedural schedule is expected to be final this week and a final order is required by law to be issued on or before July 10 of this year. Other filings that are currently pending include the rate stabilization clause in Louisiana's jurisdiction seeking a deficiency of about $4 million, the annual review mechanism in Tennessee seeking $2 million, the rate review mechanism for the West Texas cities of about $5 million and the Dallas annual rate review for the City of Dallas requesting $10 million, and these are all part of the annual mechanisms that we have in place in those jurisdictions. We do expect to make between 12 to 15 more filings this fiscal year, which will request between $70 million and $80 million of additional operating increases and most of this is shown on Slide 18, provides the summary of those expected remaining 17 filings. Again, we've begun our sixth consecutive year of executing our strategy to grow by investing in our regulated assets. We're projecting to invest between $1.1 billion and $1.25 billion of capital this year and $1.1 billion to $1.4 billion every year through fiscal 2020 and the successful execution of this strategy is critical to making our system more safe and reliable, growing our rate base and achieving our commitment to provide an increase to earnings per share of 6% to 8% annually, which translates into our earnings per share guidance of $4.10 to $4.40 in fiscal 2020. Again, it's very important to emphasize and recognize that we're now able to have a singular focus because our portfolio of assets are fully regulated and we'll continue to build upon the trust and strengthen the important relationships we have with our customers, regulators and legislatures in the states and communities we serve. Finally, our results are coming from our existing operations with no reliance on stock buybacks or one-time adjustments. We voted with our pocketbook again for our shareholders and our Board raised the indicated annual dividend rate for fiscal 2017 to $1.80, which is a 7.1% increase over last year. Yesterday the 133rd consecutive quarterly cash dividend of $0.45 per share was declared and we will continue our commitment to deliver total shareholder return in the 9% to 11% range through fiscal 2020. Now, I am very pleased to introduce our new Senior Vice President and Chief Financial Officer, Chris Forsythe. Chris joined our company in 2003, coming to us from Price Waterhouse Cooper. He served as Vice President and Controller since 2009, giving him exposure and leadership responsibility in all areas of finance and accounting for the company. He most recently led the team responsible for the sale of the nonregulated assets. Chris has the trust and confidence of our Board. He will be a great asset to the Senior Management Team and will be a tremendous Chief Financial Officer.

Thank you, Kim. I appreciate your kind remarks and I look forward to serving my new role and good morning, everyone. We appreciate your interest at Atmos Energy. I look forward to the opportunity to meet all of you in the coming months. As Kim mentioned, we exited the nonregulated gas marketing business effective January 1. Historically, this business represented up to one-third of our former nonregulated segment. The sell-off provides us the opportunity to realign our reporting segments. Beginning this quarter, we report our operations under the following three segments: the distribution segment, which is primarily comprised of natural gas distribution and related sales operations in eight states and two storage assets located in Kentucky and Tennessee. These storage assets are used for operation in these states and will be reported in our nonregulated segment. The pipeline storage segment is comprised primarily of the regulated pipeline storage operations of our Atmos Pipeline Texas division and our natural gas transmission operations in Louisiana, which were also formerly reported in our nonregulated segment. Finally, the natural gas marketing segment, which is comprised of the natural gas marketing business we sold in January. We've reported these operations as discontinued operations. My remarks this morning will focus on income from continuing operations. Net income from continuing operations was $114 million or $1.08 per diluted share compared with $102 million or $0.99 one year ago. Slides 3 and 4 provide financial highlights for each continuing segment for the three-month period. Positive rate outcomes remain the primary driver of our success. Rate increases for our distribution and pipeline storage segments combined generated almost $27 million in incremental margin for the first quarter of fiscal 2017. About $16 million of the related rate filings completed in fiscal 2016 came from the distribution business. The largest driver of the increase came from our Mid-Tex division, which saw a gross profit rise of nearly $7 million quarter-over-quarter. We also experienced a $4.5 million increase in our Louisiana division and a $2 million increase in our West Texas division. The remaining $11 million came from our pipeline and storage segment, primarily as a result of new rates and APT's GRIP filings in fiscal 2016. Distribution transportation revenues rose quarter-over-quarter by about $2 million largely from industrial expansions and increased demand for natural gas. As an example, in Tennessee, the General Motors plant in Spring Hill has expanded and recently added a third shift. We transport the natural gas used within the plant to support the manufacturing process. The increase in production has a positive trickle-down effect on the automotive component manufacturers in the area, many of whom are our transportation customers. Additionally, several of our distillery customers in Kentucky are expanding and natural gas is used in processing the mash, sterilizing the bottles and cleaning facilities. Finally, in the Kansas City area, we supply the natural gas used to fuel UPS' Waste Management CNG fleet. Both CNG facilities came online in 2016. Our distribution business also continues to add customers, resulting in a $2 million increase in gross profit compared to the prior year's quarter. Over the last 12 months, we experienced a net customer growth of about 0.8% or about 24,000 customers. On the spending side, O&M continued operations increased about $5 million quarter-over-quarter, mainly due to incremental pipeline maintenance spending. During the quarter, we elected to accelerate higher testing and other pipeline charity work in the first quarter ahead of what was originally planned for later in the fiscal year because the crews were available following the completion of similar work at the end of 2016. Capital spending increased by $7 million to about $298 million in the first quarter compared to one year ago. This increase was in line with expectations as we continue to focus on safety and consistent reliability in infrastructure programs. Approximately 78% of our CapEx was associated with safety and reliability and we expect to begin earning on over 95% of our capital spending within six months of the test year end. In addition, in December we acquired a 140-mile 24-inch pipeline for $85 million to provide additional capacity to serve our growing North Texas market. It also drives increased access in the Barnett Shale, Oklahoma and the Northeast gas supply basins. As Kim mentioned, we remain on track to achieve our capital budgeted target of $1.1 billion to $1.25 billion for fiscal 2017, inclusive of this pipeline purchase. Moving now to our earnings guidance, our guidance and assumptions remain unchanged. We still expect fiscal 2017 earnings from continuing operations to range between $3.45 and $3.65 per diluted share. Slide 16 details our earnings and selected expenses projected for 2017. The continued execution of our rate strategy is still expected to be the primary driver for this year's results with annual increases in incremental rate activity in 2017 ranging between $90 million and $110 million. Slides 6 through 11 provide details of the progress we've made during fiscal 2017 in pursuing a regulatory strategy. Thank you for your time this morning and we'll now open up the call for questions. Jessie?

Good morning.

Good morning, Chris.

I wanted to get some more color on short-term debt when you guys think of terming any of that out a little ways down the road. Are there any hedges in place right now in terms of forwards that you are thinking about or awarded on?

Our short-term debt was about $941 million at the end of the quarter. We did receive proceeds upon the sale at AEM of about $135 million, which was basically used to pay down that debt. As of early this week, our short-term debt balance was about $750 million. As you're aware, we do have a $250 million debt financing that matures in June of 2017. We do have hedges in place for that at about 3.367% and if that debt matures and we do have cash flows in place, we do anticipate refinancing at that time.

Okay. But that one particular issuance that you know is coming hedge but nothing else?

The 2019s are also hedged. We're focusing on the near-term and we have those in place at roughly 3.5% as well.

Got you. Okay. And then on the pipeline business, could you kind of remind me of the sharing mechanism with customers there and exactly how that works and kind of where you've been the past couple of years if over at all?

Yes, Chris, the rate feature was market-based revenue as credited back to the LBC primarily LDC customers, the benchmark was set in the last case 2011 at $84 million. And in our annual filings, we've been coming in under that. As you know, there is a 75-25 share. So, we pick up 25%. We're insulated from that perspective. Customers would pick up 75% of any shortfall and vice versa if we run over customers benefit and 75% of any of the over. So, we've been coming in under. If you look at the filing, the filing requests an adjustment to that benchmark of just around $70 million. Based on what we're seeing in terms of the changing marketplace, lower basis spreads and also declining volumes out of the Barnett shale.

Okay. So, you've been running under and you've been absorbing 25% of that difference between $84 million and where you're actually at right now for the past year or couple of years.

Correct, correct. That's why, Chris, we're adjusting it from $84 million to $70 million as we've been running under. The mechanism we're proposing not to change this year and allocation either.

And in terms of an overall sharing mechanism for over-earning from the rest of the assets, my understanding is there is a sharing mechanism in place there, is that correct?

Over-earning, we don't over-earn. You talked about…

If you were to, would you have to give it back to customers?

Are you talking about the mechanism just for that revenue? There is actually an earnings band associated with the GRIP mechanism and if we were to exceed that 75 basis points currently above the 9.36 allowed rate of return, if we were to exceed that, we would be called in for a case. We had to go in for a case. That's where that earnings band and the annual earnings monitor report is filed, but we have not come close to that. So, that's unrelated, but there is not a sharing mechanism there. It's just an earnings governor on the GRIP mechanism. But as Kim said on the revenue sharing related to prior, the recommended adjustment of our benchmark is $70 million, but keeping the structure of the mechanism with the sharing 75-25 the same as it is today.

Okay. So, for the pipeline business overall, there is a ban around the authorized ROE and if you go above that ban, which you've not been doing so far, you could be called in for a case?

Yes, the earnings monitor report is filed annually and that's available. It's a public record and that reflects the return, the overall return that was achieved by the pipeline in that 12-month period and to the extent that we exceed our overall rate of return, which is the 11.8 per equity at current 50.5 design and then weighted average cost of debt, which gives us a 9.36 overall return, which includes a 75 basis point band around that, but we've never exceeded that cap.

Okay. Perfect. That's what I wanted to understand. Thanks guys.

Sure. Thank you, Chris.

Thank you.

Hey guys. Another good quarter.

Good morning, Mark.

Yes. Good morning to you, Kim. A couple of quick questions and your low end, high end of the range, the $3.45 and $3.65 low end, high end of the range on CapEx, anything in particular that would happen over the course of this year, that would take you to either one end or the other?

It's still early, but we are confident in our decision to restate and reconfirm our guidance at this level. We believe we had a strong first quarter, with everything performing as expected. We may have spent a bit more on operations and maintenance, but we anticipate that will bounce back. Overall, we are on track to fulfill our commitments to the state within the earnings range and to achieve the 6% to 8% earnings per share we have discussed, while continuing to invest appropriately.

And then from a political perspective, potential tax rate changes and impact on you guys and Kim, is there anything else politically that you see with the new administration that could either have a positive or negative impact looking forward?

We're in Texas and have plans to succeed from the union. We're grateful that we're regulated by balanced states. Our tax experts, including Chris and our Vice President of Tax, along with the team in rates and planning, are analyzing the proposals, but the outcome is uncertain. We are closely monitoring the situation, but given the unpredictability in Washington, we can't provide any anticipated results at this time. We're focused on managing our business for the long-term. We have successfully navigated through previous administrations, and we're confident we can continue to thrive and manage our responsibilities. We'll make necessary adjustments, but most of the current proposals appear manageable for us given our capital structure and ongoing execution of our strategy.

Got it. And then on the Texas pipeline case, any scenario you can envision that would have a negative or adverse impact to your long-term earnings guidance?

We're drilling that top water beta out here today aren’t you?

Overall, I trust your judgment on this, but I want to know if there’s anything that might raise concerns about the long-term guidance, or do you believe that even in a worst-case scenario, you're still fine?

Yeah, I think that we are positioned like in the pipeline team again we started 3.5 ago there are absolutely no surprises to the folks that are in that case. It would do us no good. So, we want to maintain a relationship and the credibility and trust that we build with the customers and with the regulators and so there is nothing in that case other than the fact that we haven't been in for 6.5 years. So, we do have a significant deficiency, which reflects the current rate design which builds upon a 13.5 return upon a much different capital structure, which includes a 59% equity layer versus the current, the existing rates of 50.5 and then you've got a significant increase in O&M because of the need to comply with all the new regulations. The existing rates are designed on $80 million of O&M and we're spending close to $130 million right now. So, those things will be talked about and we want to be the safest natural gas utility. Our customers want safe and reliable service and we're going to work with them and meet them in the middle.

Last question before I pass it on to someone else. As you consider your spending plans over the next several years, are you experiencing or do you expect any bottlenecks related to labor, materials, or anything else that might slow your progress, or does everything appear to be on track as you look ahead?

Everything looks fine. We don't see any bottlenecks. Our relationships with regulators are strong, and we have solid long-term partnerships with contractors. Our engineering team is exceptional, and we have projects planned for the next five years. We have 30 years of costs projected for pipe replacement and significant growth in the North of Metroplex. We have no concerns regarding materials, excess materials, labor, or any other factors.

Great. Appreciate it. Congrats on a great start to the year.

Thanks, Mark.

Hi. Good morning.

Good morning, Brian.

Could you just elaborate a little bit on the APT general rate case process, no procedures schedule is set and there is discovery and request for information. Is there a window of time for settlement discussions?

Yes, as Kim I think said in his earlier comments, we expect to have a procedural schedule this week with the statutory deadline of July 10. We're in discovery now, I would say maybe a third of the way through that process and then there will be testimony, hearings, several opportunities for settlement conferences. Those conversations occur consistently throughout the process. So, we expect the proposal for decision typically would be in mid-May timeframe and you've got opportunities for corrections, but it's a very measured process and there is opportunity for settlement all along the way.

Okay. And then Kim, you're filing directly with the RRC, you're not in negotiations with the cities or anything?

No, you're correct. We filed directly with the railroad commission, the intervenors, same lawyers that represent the cities in our distribution cases, and so we got great relationships with them. We work with them every year on those annual filings. So, there is really nothing new. As Kim said, we file based on preference. We've been preparing this for three years or longer. We've had open communications all along about what's driving our investment. As he said, we've seen significant increases O&M. It's driven by new compliance requirements and we've been open and transparent about it all along. And so far, the dialogue has been very good and positive. It doesn’t mean we all have significant disagreement from where it should end up, but it's proceeding as we would expect.

Okay. Great. And can you remind me was the last APT rate case settled or was it litigated?

It was litigated, and certain issues were resolved and settled prior to that litigation. However, the return was definitely litigated in this case, along with depreciation. Normally, there’s a selection process for various costs included. We are requesting that certain agreed-upon costs be recognized as part of the service costs. The rate base has also been reviewed as part of the GRIP proceedings and our filings. There will be ongoing oversight, and we’ll conduct some retrospective reviews. In the last case, we adjusted a very small amount of the GRIP, about $1 million. This process is quite structured, allowing all parties to conduct a thorough review and engage in meaningful discussions. However, there are specific timelines for discovery requests, testimonies, hearings, initial decisions, and subsequent briefings and comments, culminating in a statutory deadline of July 10 this year. We appreciate the questions, and we're in the best position possible. We've been preparing for this for about three to three and a half years, and this is certainly not our first experience in Texas.

Understood. Thank you.

Thank you.

Good morning, Kim. Good morning, Chris. Nice to have you on the call.

You're running out of companies to cover.

No kidding, but I appreciate you keeping at least one for me out there.

It will be two water companies and two utilities I guess.

Yes, absolutely. Hopefully, a couple of pretty quick ones for me, the recently acquired pipeline assets in North Texas, how long until those are, I guess, wrapped into APT a rate making or a regulatory standpoint, are they perhaps included in this most recent five-year GRC?

Spencer, this is Mike, they're not included in the rate case that we just filed, but the transaction closed on December 20, which puts it in the three-month period that we will include in a GRIP filing once we come immediately, once we come out of this case. So, in the fourth quarter.

Okay. Got you.

The GRIP filing that Mike mentioned pertains to the capital investment period from October 1 to December 31, 2016. We have the test period ending on September 30. Therefore, all the rates being considered in the case include all costs and investments up to September 30. Once we conclude this case, we will file what is commonly referred to as a stub filing for that three-month investment, and the $85 million will be included in that filing.

Okay. So, it seems pretty easy from a regulatory standpoint to just wrap those assets into your regulatory workflow if you will, just right off the bat.

Absolutely, this situation is very unique because of the minimal lag time involved. It immediately enhances our position due to the transportation contracts acquired with the pipeline, which offers significant benefits to our customers. As mentioned earlier, the pipeline stretches 140 miles from west to east, north of the DFW Metroplex. We already have one connection with our system and plan to add three more. This integration will happen quickly, particularly since much of our growth is occurring north of the Metroplex. Thus, this enhancement provides immediate support, allowing us additional access to supply from the Barnett shale, and eventually from Oklahoma and Northeast Gas. Our customers will greatly benefit from this, and we are acquiring it at a fraction of the cost it would take to build a new pipeline, making it a true win-win scenario.

And it's easy, Spencer, because of the excellent management and the strategic focus that replaced on the relationships and creating the necessary mechanisms to provide this opportunity. You wouldn't find the capability of doing this in a lot of jurisdictions or in a lot of companies. Again, it's six years, it's over work where we've emphasized an efficient and effective process for ratemaking and everybody's involved. Everybody understands, there is a clear line of sight from what we're doing in the field to what eventually ends up creating more safety and more reliability and an enduring to the benefit of the shareholders long-term. So, it is easy only because of what the people at Atmos Energy have been able to do throughout the entire organization.

Yes, duly noted there and I know…

Yes, okay.

Yes, you've done a great job working towards being able to effectively navigate the regulatory process there in Texas. Switching gears a little bit, Chris this might be one for you, the $135 cash inflow from the AEM sale, it's mostly working capital right?

That's correct. The purchase price was $38.3 million of working capital and we estimated just prior to the end of the calendar quarter, was about $103 million. We will be truing up that working capital here in the second quarter and hope to have that completed by the end of March. In addition to that, $7 million in total proceeds from the transaction or roughly $141.5 million using the estimated working capital of $103.2. $7 million went into escrow under the terms and conditions of the purchase and sale agreement, assuming no indemnification issues that we would have to reimburse us for $0.4 we would expect to get $3 million back in January of 2018. The remaining $4 million in January of 2019.

Okay. Perfect. Perfect. Very helpful there. Last one real quick, am I right that there were a few assets that were previously held in the non-reg segment that have now migrated into the pipeline and storage and Chris, I apologize, I think you might have hit this.

Yes, I touched on it briefly. The primary asset is our 21-mile intrastate pipeline in Louisiana. We refer to it as Trans Louisiana Gas Pipeline or TLGP. That pipeline was built in 1985 to help supply our Louisiana gas distribution operations at that time. So, that is the primary asset that moved from the nonregulated segment. We also have a couple of other smaller assets that aren’t material that did roll up in the segment as well, but that was the primary piece.

Okay. Perfect. Just a point of clarity on mine there, but in any case Kim, as always, congrats on a nice quarter and we'll be talking soon.

Thank you. Thank you, Spencer. Look forward to seeing you soon.

Good morning. Kim, first of all I am in total agreement with you. You're spending a lot of time speculating on what might come out of Washington DC is an exercise in futility. However, my job as an analyst is obviously to try to think about those kind of things, but specific to Atmos and tell me if my thinking is right. Since your debt is at the Op Co level, really you're in pretty good shape, but you would just wait until there is changes to your returns that reflect any kind of changes in the tax increases and you should be pretty neutral regardless of what comes out of DC. Am I thinking about that correctly?

Given the current information coming out, we would be neutral to good.

Okay. And then let me maybe as a follow-up, your payout ratio is still 50%, 55% I believe.

It's right around 51% yes.

But your target is 50%, 55%.

Yes. We're growing the dividend at a rate equivalent to the earnings per share rate of 6% to 8%.

Okay. That's all I have. Thank you for that help.

Hey, guys. How are you?

Ted, what happened? I thought you were in the MLP space.

I'm still here guys. I haven't forgotten about you.

Welcome back. Good to hear your voice.

Good to hear you. Let's question usually obviously on the pipeline rate case, so I guess maybe just starting with the ROE, you are asking for a 13.5 year, you authorized to 11.8 year. You are in the Mid-Tex between 10 and 10.5 range, I guess how do you square that as relative to other sort of numbers?

For the 118 it was set back in the 11 and there is a much different economic climate out there. There is currently different administration out there. I mean there is a whole lot of discussion and debate about what the tax treatment should be. The Fed has indicated that they are definitely going to make a move this year once now we hear twice maybe three times, so you are looking at a 75 basis point potential move maybe even more depending on what the economy does. So, I mean given the risk profile of the intrastate pipeline and the fact that the peer group is the FERC and you cover those folks. So, I mean that's what they're going to look at and we are not being overzealous in requesting a 13.5%. We think that reflects the level of our return that we need to compete and attract capital in the marketplace going forward.

Okay. And a similar question I guess you're asking for 60% equity layer, you are authorized to 50% before you are running at 50% of the corporate level I guess what's the gist of that risk…

It will be. There is better that the actual cap structure for the parent because we're not the hold-co. It is what it is and 60% equity ratio and taxes is recognized as it's not out of the ordinary. And again, it's not considered excessive. And we don't anticipate much of an argument on the 59.7 that we've reflected in the case. And in taxes short-term debt is excluded from calculation which is why this is coming at 59.

Got it. And then on the GRIP itself is the presumption is that that will continue here even though you're in for the general rate cases or anything that would change that mechanism at all coming out of this case?

No, no. That's a statute, that's legislation. So, the regulators really can't touch that, that has to be adjusted over, it would be modified only by the legislature and that legislation was enacted in 2003.

And so, then the ROE established in this case just to make clear that's where they are going to the GRIP filing on a forward basis as well?

Yes, that's right.

Okay. That's great. And then last one the rate case at least what do you have baked into, so you got the long-term guidance $4.10 to $4.40 in 2020 what have you baked in terms of ROE and equity layer on the taxes, interest about?

Nice try, but we're not there yet. We want to remind you that when we set the guidance of $4.10 to $4.40 for the 2020 fiscal period, it was established about a year and a half ago, prior to the filing of this case. We made certain assumptions, and we don't take those commitments lightly. We know you rely on these figures for your models, and we fully understand the significance of making those representations.

Understood. And then if I could get two more on still on the pipeline system a lot of talk now on the risk that there may not be enough gas take away out of the West Texas, out of the Permian with all the activity out there. Is there any more room to squeeze any more volumes on the western end of the system?

We have some capacity available yes and there has been a lot of interest in conversations with producers.

Anyway, to quantify that is I don't know 100 million cubic feet per day or less or more?

I mean it's in the 200 million a day I think we have to trade this one down.

Got it.

In West Texas.

In West Texas, so just be adding compression or you wouldn’t consider looping the line or anything like that?

We haven't included at this point to find out the opportunity for incremental capital investment, but that is something that where the team is looking at as well as at this point in time. Obviously, anything that we would do there is really in to the benefit of our LDC customers. I mean we are in a good location out there and we have expanded in the past, so we have the capability with our right away that we have in place to potentially look at the flow studies that would incorporate some additional looping of lines to increase capacity or we could add compression. And that's all certainly you know a daily task that we look at and if the need arises and the opportunity that arises we are in positions to take full advantage of it.

We did that a number of years ago, I mean where the economics makes sense and we got a long-term in our contracts is certainly something that we will do.

Got it. And then similar question the last one for me, is a lot of activity north of you on the scoop and stack in Oklahoma some questions around gas take away there, how much room is there on the northern end of the system to take an incremental gas?

Really that acquisition of North Texas pipeline gives us an awful lot of opportunity as east end of that 140-mile pipeline, we got interconnects with three interstate lines. We don't have the capability right now, but in the future we would have the capability to bring gas into the system from Oklahoma as well as from the Northeast. So, a lot of opportunity there in the future.

Anyway to quantify how much more you could bring in you think?

Not at this time.

Okay. All right. I'll leave at that. I appreciate all the answers.

Thanks, Ted.

Good morning.

Joe Zu, how are you doing?

I'm good. Congratulations and Chris congratulations.

Thank you very much, Joe Zu.

Most of my questions have been answered. Just a quick one on the tax side, do you take any repair tax deduction?

Yes, we do.

Can you quantify that?

It's roughly 30%, 45% of our capital expenditures on an annual basis.

And do you expect any tax reform will remove that deduction?

When comparing the house plan to the Trump plan, the house plan features 100% expensing under the Trump plan. There is also potential for optionality. If either plan advances in its current form, it would affect the repairs deduction. However, as Kim mentioned, there is a lot of uncertainty right now, and we are still assessing all the options. At this moment, we cannot definitively say how tax reform will affect us.

Right and if all things considered, it should be neutral too good for you guys right.

Yes. Based on current proposals and what we're seeing, definitely neutral to good Joe. Again, the people, we're not going to put out any kind of prognostication on what could happen based on what's up there now because there's so much that can change that would be I think reckless and imprudent to say okay, if this happens then there's this much accretion or that happens then there's this impact. I think that sends you down some rabbit trails that are pretty unnecessary at this point.

Right. Understood. Thank you very much and congratulations on a good quarter.

Thank you, Joe.

Thank you, Jessie. I just want to remind you all that a recording of the call is available on our website through May 3. We appreciate you joining us. Have a great day.