OGE Energy Corp (OGE) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 OGE Energy earnings conference call. My name is Mark, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Todd Tidwell. Please proceed, sir.

Thank you, Mark. And good morning, everyone, and welcome to OGE Energy Corp.'s fourth-quarter 2013 earnings call. I am Todd Tidwell, Director of Investor Relations; and with me today I have Pete Delaney, Chairman, President and CEO of OGE Energy Corp.; and Sean Trauschke, President of OG&E and CFO of OGE Energy Corp.

In terms of the call today, we will first hear from Pete, followed by an explanation from Sean of fourth-quarter results and year-to-date 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 site at OGE.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 the presentation of our results reflect the 2-for-1 stock split, which was effective July 1, 2013. In addition, because Enable Midstream is in the process of an Initial Public Offering, we will not be discussing or answering any questions regarding the guidance for Enable or the S-1 filing. Once the IPO is complete, Enable will be able to provide you additional information.

I will now turn the call over to Pete Delaney for his opening comments. Pete?

Thank you, Todd. Good morning, everyone, and thank you for joining us this morning.

This morning we reported full-year 2013 earnings of $1.94 per share compared to $1.79 per share in 2012. And I'm pleased to report that both of our businesses reported higher earnings for the year as well as in the fourth quarter, reporting earnings per share for the quarter of $0.29 compared to $0.19 in 2012.

That primary driver, as in past periods, for increased consolidated earnings was due to our interest in Enable Partnership and transmission earnings at the utility. Our 2014 consolidated earnings guidance of $1.94 to $2.06 per average share, in line with our long-term growth rates of 5% to 7%.

From 2010 to the midpoint of our 2014 guidance, we will have achieved just over 7% annual growth rate, which is at the top of our long-term growth targets. Sean will discuss the guidance for each of our businesses later in the call.

Earnings at the utility continue to be driven by our FERC jurisdictional transmission projects, and secondly, by customer growth. As expected, operational maintenance costs in the last quarter were higher as we completed generating plant maintenance deferred earlier in the year.

However, for the full year, O&M expenses were 2% lower, due primarily to attrition associated with retirements. As we have said for some time, the Company continues to focus on productivity and operational efficiencies in order to mitigate the impact of environmental compliance costs on the customer's bill. As you know, we are concerned about the substantial rate increased to customers due to regional Haze compliance.

We originally planned to provide details on this call about our compliance plan, but we did not anticipate that a stay of the Federal Implementation Plan would be in place at this time. The 10th Circuit Court ruled that the stay of the EPA's FIP is in place until the process at the Supreme Court appeal has run its course. Once the stay is lifted, we will have 55 months to comply with the regional Haze order.

On January 30 we joined the Oklahoma Attorney General in asking for the US Supreme Court to review the ruling issued by the 10th Circuit Court rejecting Oklahoma's authority to implement its state plan versus the more costly EPA Federal Implementation Plan. We will wait for the Supreme Court decision before providing further guidance on our compliance plan.

Counsel has indicated that we should expect a decision on whether the Supreme Court will hear our case by the beginning of the second quarter. If we are unsuccessful before the Supreme Court, we will probably file a recovery of the associated environmental costs under House Bill 1910. Passed in 2005, the law allows utilities in the state to recover mandated environmental expenditures.

Regardless of the outcome, we will be compliant under the 55-month timeline. Our plan will represent, based on our analysis, the best option for customers using a lowest risk-adjusted approach across a range of future scenarios. As stated before, we are a big believer in fuel diversity as part of addressing the future risk to our customers associated with fuel price volatility and operational reliability. Our compliance strategy will also contemplate our generation portfolio operating in the SPP Day 2 Markets with ever-increasing amounts of intermittent energy.

Turning to the health of our service territory, the Oklahoma economy continues to sustain its first-quartile economic performance. Oklahoma City continues to have one of the lowest unemployment rates for large metropolitan areas at about 4.8%. And the state as a whole is just over 5%.

New customer growth continues as in the past. We added nearly 9,000 customers in 2013.

At the utility we continue to focus on the customer through a number of initiatives geared towards improving the value of our service. Our rates are currently more than 20% below the national average, and we intend to keep that advantage. It's an important component of attracting businesses to and retaining businesses in our service territory.

As I mentioned earlier, tight management of utility O&M is a part of these efforts, as 2013's expenses were down compared to 2012. While we expect next year will require higher expenses to deal with planned power plant outages, long-term cost performance remains a key part of management's focus. Our members are fully engaged in driving productivity improvements, and I appreciate their great work for our customers.

In the area of improving our customer experience, we now have over 81,000, or about 10% of our customer base enrolled in our Smart Hours program, which provides real-time price signals to our customers' thermostats. It is important for couple of reasons.

First, it is critical to our plan of not adding baseload fossil fuel and increasing our capacity until after 2020, helping to keep our rates low. And secondly, it allows our customers more control over their bill and their usage, which creates additional cost savings for them, and, of course, improved customer satisfaction.

The last of our large transmission projects will be completed by the end of this year. These investments have been one of the largest drivers of our utility earnings, with $81 million of margin in 2013 compared to $39 million the prior year, and we are projecting $115 million of margin in 2014.

We have some smaller projects scheduled in 2016 and beyond for approximately $230 million. These investments will allow us to operationally integrate wind more effectively and realize the benefits from the SPP Day 2 Market. With the advent of FERC Order 1000 implemented in 2015, we will continue to work to position ourselves for additional transmission opportunities.

In addition, we expect to receive smaller seam projects in our service territory that will be below the 300 kv level. Oklahoma law provides for the right of first refusal for transmission owners on projects of 300 kv and below. Our focus will be on the SPP territory, partnering with transmission owners and others to bid for additional projects in the Southwest power pool.

Turning to Enable Midstream Partners, as you know, in January the Enable Board named Lynn Bourdon as President and CEO of the Partnership. Under his leadership, his team has focused on the integration of legacy operations, optimization of the systems, and growth of the business. Of course, all of this while moving forward with an IPO targeted for the end of this quarter.

Enable's amended S-1 was filed on February 21, incorporating a 12 months ended March 31, 2015 forecast. Compared to previous forecasted period, volumes and distributable cash flow have increased, primarily due to continued volume growth in wet gas basins' higher commodity prices and the realization of operational synergies.

Performance of the business in 2013 was in line with our expectations. Volumes continue to grow in the Granite Wash and SCOOP plays, while volumes declined in the dryer gas basins. Volume identification for the majority of gathering volumes in the dry gas basins helped offset the financial impacts of much of the volume decline.

In the transportation and storage segment, margin was down due to lower basis differentials in storage spreads, decreasing revenues of the intrastate pipelines. The 200 million a day McClure facility became fully operational in January, and the 200 million a day Bradley plant is on schedule for completion in early 2015.

The Partnership's first Bakken project is operational, with over 1,000 barrels per day flowing and ramping up to 9,500 barrels per day by the end of the year. Also, Enable has a second Bakken crude gathering project in development, with an open season continuing through early March. A lot of hard and good work is going on at Enable.

Without a doubt, 2013 was another year of accomplishments at OGE Energy for our shareholders and customers. The Enable transaction, at the top of the list, was a major platform item, positioning OGE Energy for future earnings growth and cash flow accretion.

Another favorable outcome of the transaction was the upgrade in the ratings of both OGE Energy and OG&E by S&P and Moody's. OG&E also won the EEI Edison Award, our industry's highest award, for its work in improving customer experience through the Smart Hours program.

J.D. Power recognized us once again for being tops in residential customer satisfaction among large southern utilities. And the pension fund is now virtually fully funded.

In December, furthermore, the Board increased the annual dividend by nearly 8%, and that marked four consecutive years the dividend growth rate has been increased. Of course, we would have liked to have put in the win column a success in our legal appeal of the EPA Regional Haze Federal Implementation Plan. However, as opposed to the alternative, appealing was the best option for our customers and ultimately will be for our shareholders.

With that, I'd like to turn the call over to Sean, who will review our financial results for the fourth quarter and the full year 2013 in greater detail. Sean?

Thank you, Pete, and good morning. For the fourth quarter we reported net income of $58 million or $0.29 per share as compared to net income of $39 million or $0.19 per share in 2012. The contribution by business unit on a comparative basis is listed on the slide.

And for the full year 2013 we reported net income of $388 million or $1.94 per share as compared to net income of $355 million or $1.79 per share in 2012. I would like to point out that the loss at the Holding Company is primarily due to the costs associated with the formation of the Enable Midstream Partnership.

At OG&E, net income for the quarter was $29 million or $0.15 per share as compared to net income of $28 million or $0.14 per share in 2012. For the quarter gross margin came in stronger, as we saw an increase of $18 million or 7%, primarily due to transmission revenues and positive weather. Heating degree days were 25% above last year and 13% above normal.

Now, looking at some of the other key drivers, O&M increased $8 million, primarily due to the timing of planned power plant maintenance for the quarter as compared to last year. Interest expense increased $2 million, primarily due to additional long-term debt issued in May of 2013.

And finally, income tax expense increased $4 million due to a higher tax rate and a higher pretax net income. Our tax rate was 28% in the fourth quarter compared to 22% in 2012.

Now turning to the full year at OG&E, net income for the year was $293 million or $1.47 per share as compared to net income of $280 million or $1.41 per share in 2012. Gross margin for 2013 came in stronger as we saw an increase of $34 million or 3%.

Weather, though positive compared to normal, was less of a factor compared to 2012. I will discuss gross margin on the next slide, but looking at some of the key drivers, our operating expenses decreased $8 million or 2% for the year and was lower primarily due to lower employee costs.

Taxes other than income increased by $6 million, attributable to higher property taxes. Interest expense increased by $5 million due to the additional long-term debt issued in May 2013. And again, finally, income tax expense increased $19 million or 20%, primarily due to higher pretax income and a reserve related to a portion of the Oklahoma investment tax credits we discussed earlier this year. The effective income tax rate increased to 28% from 25%.

Utility margins were up for 2013. There were four primary drivers impacting gross margin. First, our SPP transmission projects increased gross margin by $45 million. Second, growth from new customers added an additional $11 million in gross margin. We added nearly 9,000 new customers to the system compared to 2012. These were partially offset by lower average prices due to changing sales and customer mix as well as milder weather compared to 2012.

Looking closer at weather, cooling degree days were 1% above normal compared to 2012, which was 22% above normal. The margin impact from fewer cooling degree days in 2013 compared to 2012 was approximately $6 million. Compared to normal, weather contributed $4 million of gross margin for 2013. Overall utility margins were up for 2013, despite a weather impact that was lower than 2012.

For 2013, Natural Gas Midstream Operations reported equity income to OGE Energy Corp. of $100 million or $0.50 per share in 2013 compared to $74 million or $0.38 per share in 2012. The increase was primarily due to accretion and positive accounting adjustments resulting from the formation of the Enable Midstream Partnership.

Enable Midstream Partners's results for 2013 were consistent with management's expectations in light of lower natural gas liquids prices and low seasonal geographic price differentials. Enable Midstream continued to increase processing volumes through system expansions.

As we mentioned on the third-quarter call, the formation of the Enable Partnership created a remeasurement of deferred state tax liabilities. Basically, the new partnership operates in several states; and when you take into account the various state income tax rates, the impact is our deferred state tax liabilities decreased $21 million. This is a one-time, nonrecurring adjustment.

And finally, looking at distributable cash flow for the eight months of Enable Midstream -- made distributions of approximately $52 million to OGE.

Before answering your questions, I did want to discuss our guidance for 2014, which on a consolidated basis is between $1.94 and $2.06 per share. Looking at the utility and assuming normal weather, we project earnings per share to be between $1.46 and $1.52 per share.

For the Midstream business, our equity earnings are projected to be between $0.49 and $0.55 per share. And at the Holding Company, we are projecting a loss of $0.01.

I do want to point out that our equity earnings from Enable does not include any dilution from the issuance of new units, nor does it include any gains recognized each time Enable sells units, representing the difference between our book value and the unit sales price. Once the IPO occurs, we will update you with those impacts.

Now I want to look closer at some of the key assumptions for the utility. The primary drivers for the earnings growth at the utility are going to come from the investment in the SPP projects and the 1.2% projected sales growth. On an incremental basis, the transmission projects and sales growth are projected to increase gross margin by approximately $33 million and $16 million, respectively.

As you know, we have not disclosed our Regional Haze compliance plan due to the proceedings at the US Supreme Court. We expect to hear something regarding our petition in the second quarter of this year and will disclose our plan and any impacts to our forecast once we have resolution on this issue.

Our current financing plan is to issue $250 million of long-term debt at the utility in the first half of the year and to retire $100 million of debt at the Holding Company that matures in November of this year.

This concludes our prepared remarks, and we will now open it up for your questions.

(Operator Instructions) Matt Tucker, KeyBanc Capital Markets.

Congrats on a nice year. First question: does your Enable guidance reflect the forecasts that were provided in the S-1 yesterday, or something different?

It does represent what was submitted in the S-1 yesterday. Keep in mind, that forecast in the S-1 that went out yesterday is for -- basically, for March 31 of this -- it is first quarter to first quarter. It is not a full calendar 2014. So there are some adjustments there, but it does reflect an updated S-1 filing. Does that make sense?

Got it. Thanks. The amortization of the basis difference that you recorded in 2013 -- if we annualize that, is that, like, a good annual run rate going forward?

Yes, it is. And so I think we said on last call, that is roughly $2.5 million a month or something like that.

And does that get remeasured when the IPO occurs, or was that kind of locked in when it was formed?

That is kind of locked in.

Got it, thanks. And then the $10.4 million fair-value adjustment -- does that recur at all?

Yes.

That does. Is it the same level next year? Sorry, this year?

Matt, let me make sure we say this correctly. Both of those items combined are just shy of $2.5 million a month. And those go on for 30 years. And those will be recurring.

Got it. Thank you. And what tax rate are you assuming on equity earnings for 2014?

38%.

38%. Thanks. And then of the state deferred tax benefit that you recorded in 2013, how much of that hit the fourth quarter?

Oh, very little. Most of it was in the third quarter. I think we indicated there was a $17 million adjustment in the third quarter, and I think year end was $21 million. And that is a pre-tax number -- I mean, yes -- after-tax number.

Great. Thanks a lot, guys.

Brian Russo, Ladenburg Thalmann.

On the CapEx at the utility in the slide presentation, just on the environmental CapEx -- I realize you will update that after the Regional Haze conclusion, but don't you also have MACT-related spending?

Yes, we do.

And how much is that? And why isn't it in the CapEx table?

Well, it is in the CapEx table there. If you look at our CapEx table there, down under other projects, we have activated carbon injection. Do you see that?

Yes.

Yes. Okay, so we do have some capital in there for activated carbon injection. We were -- obviously, with our Regional Haze process, the opportunity we have on the utility mats for particulate matter is -- we're certainly looking at DSI, but that also is impacted that we ultimately decide to do relative to our Regional Haze strategy. And so that is why it's not in there.

Okay, understood.

Fair enough?

Yes. And just in terms of the House bill that allows for recovery of environmental compliance costs, would you seek a tracker for recovery rather than file a general rate case? And then, also, did you get cash recovery on that tracker, or was it just AEFUDC?

Brian, it is a pretty wide open -- the statute, as I recall, does provide for cash earnings. In other words, it allows the Commission to grant CIP and rate base. It does not mandate that.

So it is actually pretty open in terms of how that recovery would go. We are -- of course, we all know that, you know, we're concerned about the impact on customers, and that the greater the cash earnings on our construction, the lower cost, ultimate cost, to customers. So we will strongly make that argument. We would think that was in the best interest of our customers. But it can take a lot of different forms, whether it is a tracker or we do a separate rate case filing.

So it is pretty far -- it is open. And as you said, when we find out what the Supreme Court does in the United States, we will announce our plan and then provide greater details on our filing strategy.

Okay, so just to clarify, you can -- you are allowed to do, like, a single-issue filing for a tracker; it doesn't have to be in the context of a general rate case?

That is correct.

Okay. And in that context of filing for a tracker, are the return parameters consistent with the last general rate case? Or can the OCC adjust the returns?

They could do either. They can do either.

Okay. And then the Bradley processing plant at Enable: can you talk about what the ramp-up period on the utilization -- generally speaking, how long does it take from when the plant becomes operational, and then how long does it take to ramp up to full capacity?

Brian, this is Sean. Just so we can be very careful here, I think our expectation is it is going to ramp up just like the previous plants have done -- like McClure has done, like the others have done.

We have typically said it is roughly an 18-month process from begin to end to get it started. Those typically are the most efficient units, so they run first.

Okay, so maybe could you talk a little bit more about the McClure plant? When was construction completed, and when did it become at the optimal utilization?

It began in kind of the end of this year -- beginning of 2014. So it was kind of December of 2013/January of 2014. And we have talked before as far as the processing capacity, since we have been adding new units, those are obviously the most efficient. So those typically are full first, and maybe some of our less efficient units aren't as full.

Okay, great. And then, lastly, any commentary on the common dividend policy?

I think we -- as I mentioned in my comments, we increased the growth rate again to 8% in December. As you know, the environmental compliance plan is a pretty big item for us. We would -- in terms of impacting our cash flow going forward.

We are looking to get resolution, to provide some clarity. As you do know, as I have talked about, our earnings growth rate since 2010 has been about 7%; we just increased it to 8%.

We do -- as you know, our pay-out ratio is below 50%. And we do have, obviously, financial flexibility. And we will be taking a hard look at that after we get clarity on our environmental plan.

As well as we would like to get this IPO done. We will get the IPO done. And that is on track. So all of that is pretty important in terms of its financial impact on us and what the forecast looks like longer term. And we think it is prudent to get that behind us. And then see what we want to do from a dividend perspective.

Okay. So it seems that if all goes according to plan, you will probably be in a position to discuss the dividend and the environmental CapEx in more detail on, say, your second-quarter conference call?

You know, we are particularly going to talk about our environmental compliance plan. As you know, we -- typically it is our practice is to -- December to review those with the Board. And whether we would depart from that practice I can't say at this point in time.

But I think we're going to focus, really, on discussing what our plans are on the compliance. And we will hopefully, obviously, have the IPO behind us, and we can talk about that. But it may be a little premature at the same call to talk about dividend policy.

So I -- that is sort of the timeframe, I guess, if you want to think about it. We may stick with December. That is obviously a Board discussion, a very important one. And we will have those discussions with the Board throughout the year.

Okay, great. Thank you.

Andy Bischof, Morningstar.

I was hoping you could provide a little more clarity on that 1.2% sales growth in your 2014 guidance. How much of that is attributed to new customers versus base load growth?

Andy, could you say that -- did I understand your question?

Sure. In your 1.2% sales growth guidance, how much of that is attributed to new customers?

Yes, most of it is.

Okay. And then in terms of the material -- or the hours affecting on them, could you provide a little more clarity on that?

Yes, so kind of two things are going on here. And we made two references to that in our comments.

We had said during the course of 2013 we were under-running our operating expense targets relative to our initial guidance, but we had said all along that we had some planned outages for the fourth quarter. And we have proceeded with those and completed those. And so that was what was the driver for quarter-over-quarter variances.

As I look forward to 2014, we have more planned work and our plants than we did in 2013 in total. So that is what is going on. This is just -- as you go through your maintenance cycle, we have more this year than we did last year.

Excellent, thanks.

Okay?

Excellent. Thanks so much.

(Operator Instructions) Anthony Crowdell, Jefferies.

Just wanted to look at the guidance that you have for the utility for 2014. What ROE are you assuming -- if I just take the midpoint there, what ROE are you assuming? And, I guess, on what rate base?

We are assuming, in Oklahoma, we are earning close to our allowed return there. Arkansas is obviously below the 9.95% we are allowed. It is probably closer to 7%. And obviously, on the FERC jurisdictional rate base, we're earning the 11.1%.

As far as the rate base goes, Oklahoma is -- by year end will be roughly $4.1 billion. Arkansas, Anthony, is $370 million. And I expect FERC will be close to about $700 million.

And Oklahoma, the allowed return -- is it 10 1/8% or a 10.2%? Something around there?

10.2%.

10.2%, great. Thank you very much, guys.

There are no more questions in the queue.

Thank you, operator. Well, I'd like once again to recognize our members for their focus on safety and for all their hard work that led to the accomplishments that I mentioned earlier in the call.

I'd like to thank you for your continued interest in the Company. Please have a safe day. We are adjourned. Thank you.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.