OGE Energy Corp (OGE) 2014 Q3 法說會逐字稿

Good morning and welcome to the Q3 2014 OGE Energy earnings conference call.

(Operator Instructions)

The conference call will be recorded today, Wednesday, November 5, 2014.

(Operator Instructions)

I would now like to hand the call over to Todd Tidwell. Over to you

Thank you, Gary, and good morning, everyone. And, welcome to OGE Energy's Corp.'s third quarter 2014 earnings call. I'm Todd Tidwell, Director of Investor Relations. And, with me today I have Pete Delaney, Chairman and CEO of OGE Energy; Sean Trauschke, President of OGE Energy Corp., and Steve Merrill, CFO of OGE Energy Corp.

In terms of the call today, we will first hear from Pete and Sean, followed by an explanation from Steve of third 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 OGE.com. In addition, the conference call and the 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 Reg G reconciliation for gross margin in the appendix, along with projected capital expenditures.

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

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

We're pleased to have Steve Merrill with us today. You know Steve was recently appointed to be Chief Financial Officer of OG&E. Part of our recent leadership changes, which included Sean Trauschke's move from President of the utility, and CFO of OG Energy, to President of OG Energy, the holding Company, as well as OG&E Utility. These changes allow Sean to concentrate on his expanded duties.

Steve is not new to our organization, having served in various senior management roles for both OG&E and Enogex, and having played an instrumental role in the formation of Enable Midstream Partners. Many of you have already met Steve and I am hopeful that others will get to meet him in the near future. I look forward to their contribution to the management of the Company.

Turning now to the quarter's results. We reported third-quarter 2014 earnings of $0.94 a share compared to $1.08 in 2013. On an apples-to-apples comparison, the quarter was $0.94 versus $0.98 last year, as we had a $0.10 gain associated with the formation of Enabled Partners in the third quarter of 2013. In addition, like many utilities, OG&E experienced cooler than normal summer weather, which pushed utility earnings lower.

July in Oklahoma was the third coolest on record, as statewide temperatures averaged four degrees below normal. Because of the cool July weather, we are now projecting consolidated earnings for 2014 to be at the low end of our previously issued guidance of $1.94 to $2.06 per share. Utility guidance has been lowered slightly, Enable's guidance remains unchanged.

I am pleased with our operating results, year to date, on a weather adjusted basis, and our overall forward outlook. We continue to experience customer growth and positive economic activity in our service territory. The recent announcements by Boeing and Baker Hughes to bring 900 and 450 jobs to Oklahoma City, respectively, are indicative of the type of growth we are seeing in our territory.

Unemployment remains very low in our service territory. And, Oklahoma City was recently named as twelfth fastest growing city in United States. The region appears to be poised for continued population gains.

Meeting the infrastructure needs of our territory, stemming from either growth or from upgrades, in a manner that improves the value of our product to our customers, remains a key objective. As you know, a major obstacle to that end is the regional Haze environmental compliance requirements. Sean will now spend a few moments to discuss the progress of our compliance plan, that seeks to mitigate the impact on our customers, while meeting our reliability objectives.

That's exactly right. The intent of our filing is to mitigate the customer impact by recovering these investments along the way. The commission has established the procedural schedule, which, sets the hearing for March 3, and we'd hope to receive an order shortly thereafter. But, the important point is, we're proceeding on with the environmental compliance, as we have a deadline.

Just to recap. There's a lot going on here. And, not only for Regional Haze, but with MATS, and I wanted to just summarize what all those activities are.

We will install activated carbon injection systems on our five coal units. And, we'll have that completed by 2016. We will install low NOX burners on our -- on seven units and have that completed by 2017.

We'll add scrubbers to the two Sooner coal units, and we'll have that done by 2018. And, we will convert two of the Muskogee coal units to gas, and we'll complete that by 2019. And, lastly, we'll replace the Mustang site with 400 megawatts of combustion turbines by 2018.

I'd like to provide you a little brief update on where we are in the process of each one of those. Regarding the ACI systems for MATS, we expect to finalize the contracts near the end of the first quarter of 2015, and construction will commence thereafter.

Looking at Regional Haze compliance, we actually have completed three of the seven low NOX burners already. And, the remaining installations are on schedule. We expect to finalize the contracts for the scrubbers at Sooner in the first quarter of 2015.

We've mentioned before with regard to the conversion of the Mustang units, that we anticipate running those units as coal units right up until the end of the compliance timeline. We're undertaking engineering studies and permitting applications with the Oklahoma Department of Environmental Quality right now and expect that to be on schedule as well. The bids for the Mustang plant turbines are expected by Q1 of 2015, and we'll begin the process of filing or the requisite air permits for that as well.

I also wanted to remind you that once we receive an order from the OCC on our environmental plan, we will follow it up with a general rate case in Oklahoma. And, there are a couple of reasons for that.

First is, we have an expiring wholesale contract that expires in June 2015 for approximately 300 megawatts. We need to have a rate case to put that back into rate base. That'll go to -- that'll benefit customers significantly at roughly $240 a kw.

The other point is, is at the conclusion of this year, we will have three new transmission lines energized. We had two energized last year and we need to have a case to recover the retail portion of those transmission lines. So, that'll be a part of the case.

And then lastly, as we've mentioned before, there is a provision in House Bill 1910 that provides for a rate case within two years of the rates being enacted. And, so, that'll satisfy that provision as well. So, with that.

Thanks, Sean. Apart from compliance, we are further positioning for our future by improving service in a cost effective manager -- manner, by leveraging our Smart Grid technology, to enhance the value proposition to the customer. With over 800,000 of our Smart meters deployed, and other devices now in our system, we were able to improve service at lower cost. And, in addition, transition more and more to a proactive management of grid services as opposed to reactive.

One such initiative is to implement processes and deploy technology allowing us to significantly reduce added duration times, through more accurate fault locating and more timely service outage verifications. At a capital cost much less than with historical approaches. This initiative also reduces lost revenue from outages. And, saves O&M expenses through greater productivity from reducing truck rolls and in an overall, a more effective deployment of resources.

Remember our SmartHours program with 120,000 customers now enrolled also provides an avenue for customers to control their energy usage and reduce their monthly electric bills. In amounts that will mostly offset the monthly bill impact of the price increases from the environmental compliance plan. We also have initiatives underway that'll improve the customer experience and our productivity. Ultimately, increasing the value of our product, bodes well for OG&E, our customers, and our shareholders.

We continue to compete for transmission projects at the Southwest Power Pool under FERC Order 1000, and we can expect to continue to build transmission lines below 300 kb, under the right of first refusal state laws. Looking briefly at Enable, they reported strong third-quarter results yesterday. And, have once again increased their distribution rate for the second straight quarter, in line with their 10% growth outlook. As a holder of almost 111 million LP units, this is good news for OG&E.

On an annualized basis, current distributions to us are approximately $134 million. This has considerable impact on our cash flow. Considering, we used to fund Enogex's growth with approximately $250 million of capital per year.

So, this distribution level represents an almost $400 million flip in cash flow for OG Energy. This provides the financial flexibility to forecast no additional equity needs for environmental funding and still aggressively grow our dividend.

On the subject of the dividend, as you know, the Board approved an 11% increase in September. And we announced a targeted increases of 10% per year through 2019. With Enable's forecast of distribution growth made public last quarter and our environmental plan finalized, we were able to move forward with a plan to return more cash to shareholders. At the same time, we will retain the financial wherewithal to continue to invest in business to enhance our earnings growth.

At this juncture, our approach to dividend payout is based on our utility earnings-per-share growth rate and Enable's cash distribution growth rate, as opposed to targeting a consolidated payout ratio. Enable's distribution growth rate should position us to begin receiving 60% of the GP IDR distributions by the end of the 2000 -- by the end of 2015.

And, moving up in the splits, we'll further enhance our ability to grow the dividend, or internally fund the higher level investments that offer solid returns. As a management team, we continue to focus on positioning the Company to continue to create long-term value for customers and shareholders. And, with that, I want to turn the call over to Steve, who will review our financial results for the quarter. Steve.

Thank you, Pete, and good morning. For the third quarter, we reported net income of $187 million or $0.94 per share, as compared to net income of $215 million or $1.08 per share in 2013. Year-to-date, consolidated earnings per share were $1.69 in 2014, compared to $1.66 last year. The contribution by business unit on a comparative basis is listed on the slide.

At OG&E, net income for the quarter was $157 million or $0.79 per share, as compared to net income of $172 million or $0.86 per share in 2013. Third quarter gross margin at the utility decreased approximately $1 million, which I'll discuss on the next slide.

O&M was $5 million higher for the quarter, compared to the third quarter of 2013. The increase was driven, in part, by the timing of ongoing maintenance at the power plants. The Company's on plan for the year.

Depreciation and amortization increased $7 million, compared to the third quarter of 2013, due to additional assets being placed in service. Including, two new transmission lines that Sean mentioned earlier. Finally, the increase in interest expense of $4 million was primarily due to the $250 million of long-term debt issued in March of this year.

Turning to the third quarter gross margin, utility margins were flat for the third quarter, as compared to 2013. Primarily, due to the mild summer weather. Partially offsetting the impact of weather, was an increase of wholesale transmission revenues and growth from new customers, contributing $11 million and $5 million respectively.

We added over 8000 new customers to the system, compared to the third quarter of 2013. Oilfield sales were up nearly 4% for the quarter.

Looking closer at weather, cooling degree days were well below normal, and the third quarter 2013 as well. For the quarter, this translated into $25 million of lower gross margin, compared to normal, and $15 million lower than 2013. For the third quarter of 2014, natural gas midstream operations contributed equity income to OGE Energy Corp of $28 million or $0.14 per share, compared to $46 million or $0.23 per share in 2013.

As you remember, during the third quarter of last year, we realized some accretion related to the formation of Enable. The gain amounted to approximately $0.10 per share of one-time equity earnings for that quarter. The largest adjustment was a $17 million reduction in deferred state income tax associated with the formation of Enable. Year-to-date, Enable Midstream has made distributions of approximately $110 million to OGE, and contributed equity earnings of $0.41 per share.

Before we answer your questions, I'd like to discuss our 2014 earnings guidance and current financing plan. The Company estimates 2014 consolidated earnings to be at the low end of the previously issued earnings guidance between $1.94 and $2.06 per share.

The utility is projected to be below the previously issued guidance of approximately $292 million to $303 million or, $1.46 to $1.52 per average diluted share in 2014. Due to lower revenues associated with mild summer weather. I would also like to add, within the next five months, OG&E will be issuing $250 million of long-term debt. This capital will help to fund our environmental plan.

This concludes our prepared remarks and we will now open the call for your questions.

Thank you.

(Operator Instructions)

Brian Russo, Ladenburg. Thank you.

Hey, good morning.

Good morning, Brian.

Good morning, guys. You mentioned the procedural schedules posted for the environmental tracker filing. Do you know when the staff recommendation's due?

The hearing is scheduled for the 3rd. And we'd expect the recommendations to be prior to that.

Okay. And is a settlement possible at any time, between now and the staff recommendation, or hearings?

Well, Brian, this is a bit of a unique situation because we have a compliance requirement. And so, we're proceeding down that path. So, I'm not sure what there is to settle. But that's where -- I don't want to take that off the table.

But we've spent six years fighting this. And we've spent a great deal of time working through this, and came up with what we believe is the best plan for our customers. And that's what we are prepared to move forward with. And that's what we are moving forward with.

Understood. And then, looking forward to the upcoming general rate case -- it seems like the rate increase will be fairly manageable, since you -- are you already collecting transmission revenues through tracking mechanisms? So, that mitigates the rate increase on that side. And then, adding the contract to base rate seems manageable as well. Is that how to look at it?

Yes, I think that's fair. Just a point of clarification on the transmission: We have mechanisms to recover, basically, the other members of the SPP -- their portion of the transmission expense. What we're looking to recover is just our retail portion. So, remember, we talked about the allocation of the cost there, and OG&E retail is paying roughly 15% of those costs. So, that's what we're talking about. So, I think, directionally, you're correct.

Got you, understood. Thanks. And then, so, I think you mentioned $15 million -- or $25 million weather impact versus normal. Is that right?

That's correct.

Okay, so, that's about $0.075 a share. So, if we just look at where your utility midpoint was, and subtract that $0.075, that's kind of where you get to below the lower end of the range on the utility side?

That's correct, Brian. Yes.

Yes, okay. And then on the FERC 1000 project opportunities -- can you give us a sense -- have you submitted projects, and how many, and maybe what the size or dollar amounts of those projects might be?

We did propose a number of projects. And they are -- we haven't quantified the number or the total dollar amount. But I would direct you to -- they're probably approaching the size of the previous five-year transmission expenditure program.

Okay. Great. And then, with the updated dividend policy, and while still retaining quite a bit of financial flexibility to finance your capital budget, is there potential upside to the 10% annual growth in the dividend? What if Enable accelerates the split by making an acquisition? Or is this pretty much set, and you guys have done a lot of work and feel comfortable that this is the growth rate you should have over this time period?

Brian, I'm surprised you asked that question, really. This is Pete. We were -- as I said, we -- looking at the Enable distribution, and, of course, when we target our 10% annual growth rate, we're relying on that distribution. So, we feel pretty good about their growth plan and their distribution growth plan, which allowed us to, I think, publicly step forward on that guidance. So, yes, you, I think, correctly pointed out that, in the future, if there's accretive acquisitions, if there's organic growth that exceeds our forecast, other issues that would accelerate the splits. And as you know, we have 60% of the IDRs, and that gives a lot of cash flow leverage to us -- that, under those circumstances, we would be [receiving] higher distributions than we had forecasted.

No different than what we've always done, Brian, is that we'll look and see if we have good investments with good returns that enhance the value for our shareholders. We will then have more flexibility to invest in those. But if we don't, we, I think, in my opinion, and what we would recommend to the Board, who, ultimately, has the say on this, would be to pay out in incremental cash to our shareholders. So, we understand that's the way it needs to work, and that's what our commitment and focus is.

Okay, great. Thank you very much

Yes, thank you, Brian.

Thank you. Matt Tucker.

Hey, guys, good morning.

Morning.

First question on the SPP transmission projects: If what you guys get awarded is as large as you kind of indicated it could be -- I guess that means, maybe, like a few hundred million a year in spending -- would you anticipate having to issue equity to finance for those projects?

Yes, Matt, this is Sean. I think the -- remember: Those are competitive projects that were proposed. I think the SPP received a lot of projects and a lot of ideas. I think it's going to take them a considerable amount of time to wade through that process.

So, we haven't been awarded any NTCs. So, I think the best way to think about that is: We will certainly announce when we receive an NTC, and exactly tell you what the earnings impact will be, and how we would actually go about funding that. Something like a transmission project for a couple hundred million dollars over a couple of years -- I don't think that's of the magnitude that really changes our financing plans. Okay?

Great. Thank you. I'm sorry -- so, my next question is just: How concerned are you, if at all, by the recent energy price volatility with respect to the outlook for Enable?

Enable covered a lot of this on their call yesterday. I think one of the real strengths of that business is the significant amount of fee-based business that we do have in that business, and the contractual makeup of their agreements with producers. And so, you would love to see oil higher. But, nevertheless, I think the company is very well positioned.

Great. Thanks, guys. That's it for me.

Thanks, Matt.

Thank you. Anthony Crowdell, Jefferies.

Hey, good morning, guys. I guess, two quick questions: I mean, the dividend boost was great in September. You gave us clarity out until, I believe, 2019, of 10%, I guess, dividend increases. Just from my forecast, it seems like you guys have a lot more firepower there for dividend boost than what you did. And maybe you did touch it on Brian's question.

I'm just wondering: Am I looking at it wrong? Or is that 10% really just you being conservative? And if the transmission stuff plays out, you'll have the strong balance sheet.

I guess the second question I have is more related to Enable, in that, it seems that investors could get very comfortable with the earnings growth at OG&E, 2016, 2017, 2018. But it seems that right now, maybe, the market's not pricing in the value of the GP shares for Enable. How do investors get great clarity on the distributions moving out, 2016, 2017, 2018?

Well, I think that -- this is Pete. I guess you mentioned, based on your analytics, the firepower. So, I'm not -- exactly know what your numbers, and you're referring to.

I just think the way we've managed this Company has been always with a long-term focus, and, I guess, a belief that investing -- again, our job's to find projects and investments with a good return for our shareholders. And if we're successful doing that, and maintaining the financial strength of the Company to fund those, our shareholders are going to be better off than otherwise. And I think our earnings growth rate's been 7% annually for the last -- when you look at the compound annual growth rate for the last four or five years. And, as we know, our consolidated pay-out ratio, historically, which we have looked and tracked, has been, because of our earnings growth rate, on the low end.

Yet we know we had several things ahead of us. The environmental compliance plan -- we were -- as you know -- Sean mentioned we appealed that. And so, we're looking for the resolution of that, as well as getting the Enable IPO and their distribution growth known before we stepped up and committed to distribute more cash out.

And I just want to -- probably, have to go back to the -- how we talked about Brian's question is -- those IDRs provide us a lot of leverage. We need to maintain the financial flexibility of this Company, and continue to grow shareholder value like we've done historically, which I think has worked very well. So, yes, from a firepower, I guess you -- from a financial standpoint, we can always lever up more -- don't know if that's advisable. And I think we -- we're at the -- I don't want to call it the sweet spot, but I think we're well positioned to continue to drive shareholder value.

And so, at Enable, we talked a little bit about that. But the valuation and, I guess, your thought or notion that the IDR's not fully baked in the valuation of our stock price. And we believe that -- and we've obviously talked a lot about that, and think that that'll become more into focus as the IDRs start to pay. And, hopefully, Enable's give us an indication that would be -- we start the splits in the -- toward the fourth quarter in -- at the end of the fourth quarter of 2015.

And a lot of that clarity is going to be coming from Enable and their distribution growth rates, which -- your model will tell you what kind of acceleration we'll get in the distribution. So, we really, from here, we -- going to rely on what Enable's telling us. From what they -- how they can grow their business and distributions. So, I hope that answers your question.

No, it doesn't -- just a quick follow-up. When you had mentioned, I guess, the earnings growth rate, and if my memory serves me correctly, I think the earnings growth rate that OGE has presented is -- been out there for, maybe, a couple of years, probably even before the creation of the MLP. I was wondering: Is there going to be an update of that or moving that to a -- off a base share of say, [2014], or a normalized weather [2014] or anything like that in the future?

Yes, it will. And, again, we're changing our -- you're referring our [5% to 7%], which we moved up over time -- consolidated earnings growth rate. But, again, our consolidated earnings growth rate will not be really indicative of our dividend policy going forward. But in February, we'll announce our outlook, and really be focusing again on utility earnings growth rate longer term, and then our distribution -- Enable distribution growth rate.

Great, thanks for your time, guys. I really appreciate it.

Thank you.

Sarah Akers, Wells Fargo.

Good morning.

Good morning.

Just one question on the wholesale contract: With losing the capacity contract on the wholesale side, but then adding it to rate base in the upcoming rate case, do you expect there will be a net income impact of that expiration? Or do those two drivers, kind of, offset each other from a financial standpoint?

Yes, I think -- Sarah, good question. There will be some lag there as the contract terminates in June. And until we get that through the rate case process -- when that finalizes -- they'll be some lag there.

Okay, but that's just a temporary -- ?

Yes, but, generally speaking, that [ought] to be close to offset. It's not exact, but they'll be close.

Great. That's all I had. Appreciate it.

Okay, thanks, Sarah.

Thank you. Thank you very much, ladies and gentleman; that now concludes the Q&A session for today. I would just like to turn the call back over to the management for closing remarks.

Thank you. I guess, in closing, I'd just like to, again, recognize our members for their hard work, dedication, and focus on safety. I'd like to thank you all for your continued interest in the Company. Have a great day.

Thank you very much, ladies and gentlemen; that now concludes our conference call for today. You may now disconnect. Thank you.