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Edited Transcript of OGE earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 OGE Energy Corp Earnings Call

OKLAHOMA CITY Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of OGE Energy Corp earnings conference call or presentation Thursday, August 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert Sean Trauschke

OGE Energy Corp. - Chairman, President & CEO

* Stephen E. Merrill

OGE Energy Corp. - CFO

* Todd Tidwell

OGE Energy Corp. - Director of IR

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Conference Call Participants

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* David Christian Peters

Wolfe Research, LLC - Research Analyst

* Gregory Harmon Gordon

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research

* Insoo Kim

Goldman Sachs Group Inc., Research Division - Equity Research Analyst

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

* Shahriar Pourreza

Guggenheim Securities, LLC, Research Division - MD and Head of North American Power

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Presentation

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Operator [1]

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Good morning, and welcome to the Second Quarter 2019 OGE Energy Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

At this time, I would like to turn the conference call over to Mr. Todd Tidwell. You may begin.

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Todd Tidwell, OGE Energy Corp. - Director of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to OGE Energy Corp's Second Quarter 2019 Earnings Call. I'm Todd Tidwell, Director of Investor Relations. And with me today, I have Sean Trauschke, Chairman, President and CEO of OGE Energy Corp.; and Steve Merrill, CFO of OGE Energy Corp.

In terms of the call today, we will first hear from Sean, followed by an explanation from Steve of second quarter results and finally, as always, we will answer your questions.

I would like to remind you that this conference is being webcast and you may follow along on our website at ogeenergy.com. In addition, the conference call and accompanying slides will be archived following the call on that same website.

Before we begin the presentation, I would like to direct your attention to the safe harbor statement regarding forward-looking statements.

This is an SEC requirement for financial statements and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date.

I would also like to remind you that there is a Regulation G, reconciliation for gross margin in the appendix.

I will now turn the call over to Sean Trauschke for his opening comments. Sean?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [3]

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Thank you, Todd. Good morning, everyone, and thank you for joining us on today's call. Earlier this morning, we reported second quarter consolidated earnings of $0.50 per share compared to $0.55 per share in 2018.

The utility earnings of $0.37 per share and our portion of Enable's earnings were $0.13 per share both businesses continued to perform well and are on plan for the year. Steve will discuss the details in a moment, but right now, I want to highlight our second quarter achievements. During the quarter, we added more than 8,000 new customers compared to the second quarter last year.

New customer sales growth was approximately 2%. This is the fifth quarter we've seen new customer additions around this 2% mark.

Obviously, this is positive and helps offset energy efficiency. It does appear, our rates and economic development efforts are paying dividends. All of this comes together, as you know, in terms of load growth.

As I've mentioned on previous calls, we are clearly -- we're clearly and closely watching these positive trends, which could increase load growth above our historical 1%. The latest economic statistics for the Oklahoma's unemployment rate at 3.2%, which is on par with the national average.

In our largest load center, Oklahoma City, unemployment is below 3%. Overall, our service territory is strong from an economic standpoint.

For example, Pratt & Whitney just announced the multimillion expansion operations at Tinker Air Force Base. In addition, there are over a dozen other companies that have announced new investment or expansion in existing facilities in our service territory. Our rates and high reliability are often cited as primary factors in their decision-making process.

Operationally, we continued to perform very well in the second quarter, despite historic flooding and mild weather. The mild weather affected earnings by $0.06 per share compared to normal. For the year, compared to normal, whether has reduced earnings by $0.03. The good news is we continue to deliver for our customers and are on plan to achieve our 2019 financial objectives. I'm proud of everyone here for continuing to deliver these results.

In fact, our O&M cost per customer have been flat for 5 years. The second quarter in Oklahoma and Arkansas is typically impacted by severe weather, and this year was no different. Many parts of our service territory experienced record rainfall that caused historic flooding in some areas. Particularly hard hit was the city of Muskogee, including Muskogee power plant. We also had more than 20 substations partially or fully submerged in floodwaters. Our members worked tirelessly to restore power quickly and safely.

In Arkansas, we saw firsthand the benefits of investing in enhanced grid technology. We've upgraded about 1/3 of our circuits there. And on May 18, a major storm hit our Arkansas service territory, with winds approaching 80 miles per hour. The resiliency of these updated circuits was dramatic. We saw no structural damage. The minutes of customer interruption were 89% less than the legacy circuits. Armed with this demonstrated level of improved performance, we look forward to making similar investments across our entire footprint.

A few other highlights for the quarter. We successfully integrated the newly acquired River Valley plant into our fleet and the first megawatt [flowed] in June. At our Sooner Power Plant, we have completed our testing on the scrubbers and they are operating as planned.

Turning to regulatory. We reached a settlement in our most recent Oklahoma rate review that provides for full recovery of our environmental investment in the Sooner and Muskogee plants.

We're pleased the administrative law judge also recommended approval to the OCC. And once the final order is issued, this decade-long journey of environmental compliance investments will be complete. This journey required not only hundreds of millions of investment dollars but also many millions of work hours.

We continually advocate on behalf of our customers to maintain reliable, low-cost generation through fuel diversity. I believe we've accomplished -- I have accomplished that goal with this settlement.

In fact, since 2011, we've invested more than $6 billion in our system and customer rates are lower today than they were 8 years ago.

So it comes as no surprise that a recent Standard & Poor's article highlighted OG&E as having the lowest rates in the nation. We have many partners that share in this achievement but no greater credit goes to the hard working men and women of our company. Make no mistake, they make this level of performance possible. Moving forward, we will continue to work with the Commissioner, staff and key parties to develop a recovery mechanism for our distribution investments.

As I stated in the past, we have many customer-enhancing projects that are not included in the capital investment forecast. And as we move forward, we will continue to update our investment plans.

Turning to Enable, on their call earlier this week, they reported solid results and increased their distribution rate to unitholders by 4%. Compared to the second quarter of last year, financial and operational measures are up across the board.

Enable currently has 54% of the rigs operating in the SCOOP and STACK dedicated to them. By the end of 2019, OGE will have received more than $1 billion in distributions since the formation of the partnership.

You've heard me say before that our core is solid. We have a lot of momentum and to me that is most important. If you have good people, take care of your customers, invest in your communities and manage your assets, that is what drives success. We've come a long way from where we were just a few years ago.

Customers are joined -- enjoying higher reliability, along with the lowest rates in the nation. We've added new generation. We've upgraded our system. We've achieved industry-leading emissions reductions. And the balance sheet and financial metrics are strong.

So in closing, I want to reiterate how pleased I am with the performance of both businesses. We're committed to executing on our strategy to continue growing our business, growing our communities and creating long-term shareholder value.

Thank you. And I'll now turn the call over to Steve to review the financial results for the second quarter. Steve?

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Stephen E. Merrill, OGE Energy Corp. - CFO [4]

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Thanks, Sean, and good morning, everyone. For the second quarter, we reported net income of $100 million or $0.50 per share as compared to net income of $111 million or $0.55 per share in 2018.

The contribution by business unit on a comparative basis is listed on the slide. At OG&E, net income for the quarter was $75 million or $0.37 per share in 2019 as compared to net income of $92 million or $0.46 per share in 2018.

Second quarter gross margin at the Utility decreased approximately $23 million, which I will discuss on the next slide.

Looking at the other key drivers, second quarter O&M expense increased approximately $3 million, primarily due to the timing of work performed when compared to last year. O&M expense for the year is on plan.

Depreciation expense increased $3 million and equity AFUDC decreased approximately $5 million as certain projects were completed and assets were placed into service. Interest expense decreased $6 million, primarily due to lower average debt costs.

Finally, income tax expense decreased $7 million due to low pretax -- lower pretax income.

Turning to the second quarter gross margin, Utility margins decreased approximately $23 million for the quarter, largely due to mild weather. Compared to the second quarter of 2018, cooling degree days were 38% lower, reducing margin by $24 million.

Compared to normal, mild weather reduced margins by $17 million for the quarter. Partially offsetting the mild weather, new customer growth increased gross margin by approximately $3 million.

Before we move on to Enable, I want to touch on the regulatory schedule. For the Oklahoma rate review, as Sean mentioned, we received the ALJ report in July that recommended approval of the stipulation. The hearing on exceptions was held this week, and we expect an order soon.

In Arkansas, we received conditional approval of our capacity acquisition filing, discovery is ongoing. We made the Act 310 filing on May 31. You'll recall that this is the rider mechanism used for environmental compliance investments. And finally, we will file the second evaluation report for the Formula Rate plan on October 1 of this year. There's been a lot of regulatory activity this year as we work to bring many of our proceedings to a conclusion.

Turning to our investment in Enable. Enable had a solid second quarter and their financial metrics were strong. They continue to see solid growth in the gathering and processing segment, in part, due to the Velocity acquisition, which increased crude gathering volumes.

In addition, Enable Midstream made cash distributions of approximately $35 million, the same amount received in the second quarter of 2018.

This week, Enable announced a 4% increase to their quarterly distribution. This will increase our annual distribution by $5.5 million, bringing the total on an annual basis to approximately $147 million going forward. This is unencumbered cash that supports Utility investments and dividend growth.

Turning to the 2019 outlook, both consolidated and Utility guidance remain unchanged. As you know, over half of our earnings will occur in the third quarter.

This concludes our prepared remarks, and we will now answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question coming from the line of Julien Dumoulin-Smith with Bank of America.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [2]

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Can you hear me?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [3]

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Great.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [4]

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Listen, so, well, first off, great progress on the regulatory front. I'd be curious how do you think about the evaluating prospects or further capital investment and just refreshing that budget, given the significant progress you'll have seen of late, especially this year?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [5]

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Yes. So I think the short answer is, we're working with our customers, and everyone over at the commission staff, about how to proceed forward with this plan. We're going to come up with an arrangement there. And then as we've done in the past, we'll continue to update our investment outlook there.

But first things first, we want to get the order in hand for the Sooner projects and then we'll follow that up with subsequent filings and updates to our capital expenditures.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [6]

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And I suspect, would this principally have a focus on grid mod?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [7]

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Absolutely. I think we've said before, while we were going through this environmental compliance plan, we probably -- we slowed down a lot of our leading technology advancements that we were adopting. We were one of the first out there to put the Smart meters out there, and we've slowed that down. So in my mind, while we're still probably a little bit ahead of others, we're behind. And I want us to kind of catch back up. And we think there's a lot of good things we can do that will actually benefit our customers.

And I think the other point I'd make here, just from a regulatory perspective, I think these are different filings. Before, we were making large investments that were lumpy, that were to comply with the federal government mandates. These are things that people are going to be able to recognize the real benefit for in terms of their operational savings.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [8]

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Excellent. And perhaps if I can follow that up in brief. We've seen some of you regional peers talk and have good success with respect to some of these voluntary renewable tariffs. Where are you in that thought process at all -- if at all?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [9]

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We're -- probably where we are right now is we're in really good shape from a generation standpoint and really focused on more customer-facing activities than -- tariffs are kind of a bad word.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [10]

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No. No, but sorry, but like a voluntary program, for those who opt to pursue renewables for their own merit?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [11]

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Yes. Well, okay, so I misunderstood your question. That's exactly how we've set up our solar program. It's a subscription arrangement where customers that want to subscribe and take their energy from a solar farm, we're building those solar farms for them on a community basis, on the distribution system where they can have access to it. And that seems to be working pretty well.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [12]

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Got it. But that's not a meaningful driver, it sounds like, with your capital outlook for the time being?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [13]

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No. I mean it's going to be incremental as we go. It will all be incremental. It's not in there now, but it will all be incremental as we build up customer subscriptions.

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Operator [14]

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Our next question coming from the line of Greg Gordon with Evercore ISI.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [15]

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So looking at the guidance for the year, I know that it looks like Enable is going to be at the low end of the earnings guidance range. And look, I'm -- I have empathy for the fact that you guys focus more on the cash flow that Enable generates for you rather than their earnings in any given year. But that being said, just doing math, it would seem like you'd have to get to the high end of the guidance range for the Utility business to hit the midpoint of guidance for this fiscal year. So can you give us a sense of within the guidance range for the Utility, given that the summer is almost but not completely behind us, what the drivers are? And where you think you'll be on the Utility guidance range for the year?

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Stephen E. Merrill, OGE Energy Corp. - CFO [16]

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Sure, Greg. I mean what we've said is we're affirming our guidance at the Utility and consolidate it. Keep in mind that approximately 70% of our earnings occur in the second half of the year. So I'm not of the opinion summer's over. 55% of that happens in the next few months. So we've got a lot of year ahead of us. But we feel really good about where we are at the Utility and on a consolidated basis.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [17]

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Okay. I'm just a little bit concerned because consensus is that $2.14 and that -- given that you've said Enable would likely be at the low end of the range, you'd have to be towards the high end of the range to -- of the Utility to get to that number, not withstanding the fact that your guidance range compensates for a lot of that uncertainty, right?

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Stephen E. Merrill, OGE Energy Corp. - CFO [18]

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That's correct. But I'll just affirm, we feel very good about where we are at the Utility on a consolidated basis.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [19]

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Okay. And the second question is, you've obviously done a yeoman's work over the last several years, getting to a good place with the regulator in Oklahoma, as evidenced by your last rate decision and the pending decision. To dovetail on Julien's question, your guidance for the Utility is 4% to 6% rate basis and earnings growth, in part, because Enable's such a robust cash flow generator, you don't need to issue equity. Do you see as you think about the deployment of all these new technologies, which I agree with you, or it's -- you have a very, very significant customer benefits, to the ability to perhaps grow faster than 6%, while still delivering good bill outcomes for customers? Or is there just a practical limit to how much you can spend in any given year and that the alternative is just it gives us some comfort in the longevity of your capital spend? Or is it some combination of both?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [20]

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Yes. So I mean that's a great question, Greg. And let me kind of try to -- I think the last -- the latter part of your question was really spot on. We're very comfortable, and we have a long list of objectives. So we're not short on investment opportunities that we see. So the real issue we're dealing with, and we're going to work with our customers and the Commission and staff and everybody is, over what period we have these opportunities, okay? So we certainly could do a lot more sooner or we could spread that over 4, 5 years. It really is going to boil down to the recovery mechanisms and the customer benefits, and the timing of that. But I don't think there is a shortage of investment opportunities. We're very bullish on that element. I think what we're working through now with all the interested parties is how we spread that over the investment horizon.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [21]

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And last question before I cede the floor. What do you think that the timeline is? And where the milestones might be for us to get a sense of how that is shaking out? And when we might get an update from you, given the conversations you're having with all of the other relevant parties as to where we shake out in that sort of -- the duration of the spend and the size of the spend?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [22]

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Right. And I think you're going to see us be more forthcoming after we get the final order for the Sooner, Muskogee plant. We're going to begin talking more and more about what's next.

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Operator [23]

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(Operator Instructions) Our next question coming from the line of Insoo Kim with Goldman Sachs.

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [24]

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Insoo? Hello?

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Operator [25]

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Our next question is coming from the line of Shar Pourreza with Guggenheim Partners.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [26]

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Can you just -- most of my questions were answered. But just around the grid mod in Oklahoma and how you guys sort of think about your 4% to 6% and incremental capital. Can you just remind us if there is any amount of placeholder CapEx you guys have in that growth rate in Oklahoma around grid mod? So when you guys sort of present your plan and you bring it forward, is there an amount that you guys have already kind of -- you sort of reserved in that number?

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Stephen E. Merrill, OGE Energy Corp. - CFO [27]

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Yes. So, Shar, the way I'd answer that is we aren't necessarily solving for the CapEx that's necessary to meet that growth rate. What we're focused on is those projects that bring the maximum customer benefit. I think those projects are more than adequate to hit our growth rate. And I think you can just do the math and know what that delta is on that. We have actually greater opportunities than that. We just want to insure that we're bringing results to our customers. That's our focus.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [28]

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Got it. But just to make sure the -- when you guys -- is there a placeholder for grid mod already in sort...

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [29]

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Yes. There's some grid mod in the CapEx plan already. Yes.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [30]

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So that's what I wanted to make sure. So when you sort of announced whatever plan there is, there is a net amount that you've already included in your plan for incremental grid mod?

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Stephen E. Merrill, OGE Energy Corp. - CFO [31]

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That's correct.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [32]

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Okay. That's one question. And then how is the weather so far in July?

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Stephen E. Merrill, OGE Energy Corp. - CFO [33]

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Weather was good. It was basically normal for July, and the heat index is about 105 today. So August is heating up.

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Operator [34]

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And our next question is coming from the line of David Peters with Wolfe Research.

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David Christian Peters, Wolfe Research, LLC - Research Analyst [35]

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Yes. I'm just curious now with Enable starting to grow its distribution again. Just curious if you guys think that's sustainable? And maybe when you might expect to see some realization of the value in the IDRs? And then just related, kind of any updated thoughts, now with CenterPoint opting to kind of maintain their investment in the partnership?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [36]

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Sure. So we certainly were pleased to see the distribution increase. Enable has done a very good job of managing through a difficult cycle. Their distribution coverage ratio has grown significantly. And 2 of the major, I'd say, overhangs or headwinds that Enable had are gone. I mean there was a lot of concern about ArcLight's ownership, they've exited that position. That's positive for Enable. Certainly the CenterPoint 13D, that was previously out there, was a bit of a headwind for Enable. That's gone. That's a positive development. So Enable felt like the time was right to grow the distribution.

Kind of future distribution growth, I'm going to leave that to Enable to speak to their growth. We're certainly excited about this distribution growth. We'd like to see more. As you pointed out, it's not going to take much more to step into the IDRs. And that's real value. As you know, we have 60% of those IDRs, and I want to see that value realized for the benefit of the OGE shareholders. And so that's what really we're focused on. I can't really speak to the future direction of Enable distributions right now, that's better served for Enable. But we're hopeful that distributions will continue to grow, and we want to see that value realized. Does that help?

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Operator [37]

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Our next question is coming from the line of Insoo Kim with Goldman Sachs.

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Insoo Kim, Goldman Sachs Group Inc., Research Division - Equity Research Analyst [38]

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And apologies. Earlier, I actually hung up the phone while trying to unmute myself.

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [39]

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I can't say, I've never done that.

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Insoo Kim, Goldman Sachs Group Inc., Research Division - Equity Research Analyst [40]

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It's the end of earnings seasons a little bit out there. Just -- I don't know if this was covered while I was out. But in terms of the dividend, just getting on the back of the upcoming maybe growth forecast that you guys will be giving post this rate case. Would we get an updated dividend growth and/or payout forecast in tandem with that, the rate-based growth assumptions?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [41]

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Yes. I think you should expect that. We're -- as we said before, we're targeting kind of an 8% to 10% total return. And with kind of a CapEx outlook, that coincides with a dividend outlook as well.

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Insoo Kim, Goldman Sachs Group Inc., Research Division - Equity Research Analyst [42]

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Understood. And then in your Utility jurisdiction, I know the business and customer exposure to those in the oil and gas industry is more limited, probably less than 10% of your customer base. But just given some of the more recent headwinds faced by the industry and in that area, are you seeing any indications of growth slowing down or customers moving away?

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [43]

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No. We really haven't. And I think your assessment there, it's less of a component of our overall customer mix than it once was, so the economy is much more diversified. But we've actually seen positive movement in that sector only from -- if nothing more, from electrification, compression and things like that. So we're actually seeing positive results out of that business.

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Operator [44]

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And at this time, I'm showing no further questions. So I would like to turn the conference back over to Mr. Sean Trauschke for closing remarks.

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Robert Sean Trauschke, OGE Energy Corp. - Chairman, President & CEO [45]

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Okay. Thank you. And thank you to all of you for being on the call today and most importantly, thank you for your interest in OGE Energy. Have a great day.

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Operator [46]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.