OGE Energy Corp (OGE) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Q1 of 2015 OGE Energy earnings conference call. My name is Sandra I'm your operator today. (Operator Instructions) As a reminder this call is being recorded for replay purposes, and now I would like to turn this call over to Todd Tidwell. Please go ahead, sir.

Thank you, Sandra. Good morning everyone and welcome to OGE Energy Corp's first quarter 2015 earnings call. I'm Todd Tidwell and with me today I have Pete Delaney, Chairman and CEO of OGE Energy, Sean Trauschke, President of OGE Energy, and Steve Merrill, CFO of OGE Energy. In terms of the call today we will first hear from Pete, followed by a regulatory update from Sean and an explanation from Steve of first 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 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 red 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 comments. Pete?

Thank you Todd. Good morning everyone, and thank you for joining us on today's call. We reported first quarter utility earnings at $0.09 a share which down slightly from $0.10 per share in 2014, but in line with our 2015 full year guidance for utility. While these results are in line with plan the vast majority of our earnings (inaudible - background noise) we must always remember in the next two quarters. Consolidated earnings for the quarter were $0.22 per share compared to $0.25 in 2014, also in line with our previous guidance for the year.

Compared to consolidated earnings our cash distributions from Enable are really a more important metric to us as regards to our financial plan. Enable quarterly distributions were $34 million the first quarter up about $0.09 -- 9% from the initial distribution rate at the time of the Enable IPO last April. Despite the impact of lower commodity prices on the gathering and processing business, we do expect distribution growth from Enable to continue this year.

While the economy -- Oklahoma economy has been impacted of course by falling commodity prices our service area appears to remain on sound footing. The (inaudible) sector seen job losses of about 8% since the start of 2015, however, unemployment rate as of March 2015 for Oklahoma city and the state remains well below 4%, one of the lowest in the nation, and the utility continues to add customers at a rate consistent with our historical growth rate of 1%, and that's about more than 800,000 -- 8,000 customers having added to the system since the first quarter of 2014.

At the utility the focus is on executing our environmental compliance plan and our activities related to leveraging our smart grid infrastructure to improve work processes continue to drive operational improvements and enhancing the customer experience. [Please] report recent polling by JD power indicates that our customer satisfaction remains one of the highest in the nation.

Our compliance path to the Regional Haze regulations has been a long one. We, along with the Attorney General, as you know chose to fight for the Oklahoma state implementation plan for Regional Haze we believe is far preferable from a customer standpoint and is more in line with Congress's original intent compared to the EPAs federal implementation plan. Although we ultimately were unsuccessful in our appeals through the court system all the way to the United States Supreme Court, our efforts along the way were supported by many in Oklahoma.

We are now actively involved in the next step which is recovery of our mandated environmental compliance cost before the Oklahoma Corporation Commission, a process that brings other parties, including our previous supporters, to [opine] on these plans. We believe that this is the first proceeding of under the filing at the commission under House bill 1910 that Oklahoma legislature unanimously passed a few years ago to specifically facilitate the recovery of costs associated with state or federal environmental mandates.

Our efforts to mitigate customer impact continues and that is the primary driver behind our filing under house bill 1910 that allows for pre approval of mandated environmental costs and [clip and rate base] spreading out the recovery of these items over several years as opposed to a one time much higher increase.

For the most part, our compliance plan consisting of adding scrubbers to our coal units at the Sooner power station and converting two of our coal units at Muskogee while heavily scrutinized in the hearing process, had a few detractors.

More concerns were expressed during the hearing process over our Mustang modernization plan. Part of our filing at the Oklahoma Corporation Commission utilized the provision of House bill 1910 that provides for pre approval of new generation capacity.

In this case we are seeking to replace a 1950s generating units at our Mustang site with new highly efficient responsive CTs. While replacement of the old units is not mandated by the Federal Government, we believe that the replacement is mandated by their age and current usage and the date to market.

The changes in the SBP market are having a profound impact on the operation of this early 1950s era plant. These units, for example, cycled 114 times in 2014 compared to 33 times during the previous five years.

This exerts a lot of wear and tear on the units originally designed for base load operations. Furthermore in adding new units at the Mustang site we will be able to utilize the existing air permits. In today's regulatory environment it would be very difficult to get new air permits for a comparable facility near the Oklahoma city metropolitan area.

The regulatory environment in Arkansas appears to be improving with the passage of this legislative session of two constructive regulatory bills. We are very encouraged by the recent enacted environmental recovery statute and the formula rate-making plan. We will file for recovery of our environmental costs in Arkansas early this month and look to file a generate case in the near future. As you know we have been under earning in Arkansas for quite some time, but we are optimistic that the new governor and commission will provide mechanisms for us to close that gap.

I continually highlight our efforts to leverage our smart grid investment in order to facilitate continuous improvement in our operations and drive even better customer experience. Operationally this means restoring power faster and reducing the frequency and duration of outages. As we saw from last month's storm restoration efforts smart meter data is providing more accurate device location, allowing us to send teams to specific locations for damage assessments versus sweeping entire circuits. Smart meter data also provides accurate real time view of the current state of the system. From this information we have been able to make process changes that allow for swifter more accurate deployment of material restoration, and assessment resources.

In addition our new technologies allow for increasing power quality improving the breadth of our connectivity with customer side devices and increasing levels of customer engagement. Our smart hours program is an example that's been a great start. We've great made great progress on delivering the right customer experience but we're making further improvements through deployment of the technology and the work processes that I talked about earlier. We are optimistic about improving the value proposition of our product electric service which should better position us to deliver value for our shareholders.

We're off to a strong start in 2015 both operationally and financially we know that the environmental case certainly creates an overhang for our investors. Our members have put forward a great effort and demonstrated great technical expertise in environmental compliance regulatory case in Oklahoma. Reliable operation of our system depends on us being able to apply that expertise in making the tough investment decisions needed for the long term benefit of our customers.

Our environmental compliance plan will position our generating fleet well for the uncertainties of the future. From energy -- OGE energy perspective the enabled distributions contribute significantly to our cash flow to support financing, the environmental capital program, and to accomplish our goal of growing the dividend 10% per year to 2019. Increasing distributions from Enable while expected is not required for us to meet our 10% dividend growth rate. Now I'd like to turn the call over to Sean to dig a little bit deeper into our regulatory.

Thank you, Pete and good morning. Before we get into the environmental compliance effort, I think it is important to acknowledge the storms which hit our communities last night. Multiple tornados, high winds, significant rainfall, causing property damage, road closures, and flooding. And our thoughts and prayers go out to those communities impacted. We are busy on the restoration efforts and I'm proud of the men and women who have been working safely through night to restore the system and help the communities in which we serve. This is what we do.

Pete gave a good overview on the history of the case and now I want to update you on what has happened recently. Closing arguments for the hearings on our environmental compliance plan took place yesterday, and there were no surprises as the parties reiterated their final positions.

We feel like our case is strong and non compliance is not an option. Now, the proceeding goes to the ALJ and we hope to receive his report in June and after that it goes to the commissioner for final approval. We he feel like we have a very strong case presented by our very own experts. We are a company with a strong track record of success as we've been in business for 113 years. Our system is highly reliable. We have rates well below the national average, numerous customer satisfaction awards, and a strong environmental track record.

Turning to Arkansas, we will file for recovery next week with the Arkansas Commission under Act 310 and hope to begin recovery as early as the June billing cycle. Our filing will include our environmental expenditures to date with the ability to refile every six months as additional expenditures occur.

As you know, Arkansas recently amended Act 310, accelerating recovery for mandated environmental compliance expenditures. We have not yet determined the timing of a general rate case in Arkansas but are encouraged by the recent approval of formula rate making legislation which could greatly reduce the under earning in that jurisdiction. We were just in Arkansas a few weeks ago and met with the new governor, the new attorney general staff, two of the commissioners and the director of the public utility division and I'll tell you we were encouraged. I'm happy to report I heard a consistent pro business climate being voiced in every meeting.

Now I will provide you with an update on our compliance progress to date. Regarding the ACI systems for mass compliance we expect to finalize installation contracts this summer and construction will commence in the second half of this year to meet the April 2016 compliance deadline.

Looking at the Regional Haze compliance plan, installation of the low nox burners now complete on all of the coal units. We are in the permitting process for the remaining three units at Seminole, and installation will begin on those units this fall and be completed in the spring of 2017. The equipment and installation vendors for the two dry scrubbers at Sooner have been selected and the schedules and budgets are on plan.

Engineering studies for the conversion of the two coal units at Muskogee are ongoing and expected to be complete by the middle of this year with permit applications submitted to the Oklahoma Department of Environmental Quality in the second half of 2017. Recall, our plan is to continue to run those coal units as long as possible to maximize the benefit to our customers.

Bids for the Mustang plant turbines have been received and we expect to finalize our selection this month. The turbine selection is important because it is needed for the air permit application we plan to file shortly. Before I turn the call over to Steve I'd like to summarize by saying we presented a very strong case in Oklahoma and we are encouraged by what we see in Arkansas and operationally we're on plan. With that I'll turn the call over to Steve who will discuss the first quarter results. Steve?

Thanks, Sean, and good morning. For the first quarter we reported net income of $43 million or $0.22 per share as compared to net income of $49 million or $0.25 per share in 2014. You will notice that the holding company had earnings of $0.02 per share. This is primarily due to a gain from the deferred compensation plan and we are not projecting this to continue.

The contribution by business unit on a comparative base is listed on the slide. At OG&E net income for the quarter was $17 million or $0.09 per share as compared to net income of $21 million or $0.10 per share in 2014. First quarter gross margin at the utility increased approximately $2 million which I'll discuss on the next slide.

Looking at other key drivers for the quarter, O&M is on plan for the year. The first quarter variance was $3 million lower, in part due to the timing of scheduled power plant maintenance. Depreciation increased $10 million primarily due to three large transmission lines that were added in the last 12 months, part of the over $800 million of plants placed into service in 2014. Interest expense increased $3 million due to the $250 million debt issuances that is occurred in both March and December of last year.

Turning to first quarter gross margin, utility margins were up approximately $2 million for the first quarter of 2015 compared to 2014 despite significantly less favorable weather. Looking at the three primary drivers for the change in gross margin, first was new customer growth contributing $5 million, which did include one time customer rate migration of approximately $1 million dollars. We added over 8,000 new customers to the system as compared to the first quarter of 2014, growing at our historical rate of 1%.

Second, changes in sales and customer mix added an additional $5 million. Finally this growth was partially offset by mild winter weather as compared to the first quarter of 2014. This translated into $11 million of lower gross margin as heating degree days were 11% lower compared to the same time last year. Compared to normal, heating degree days were 2% higher and contributed $3 million of gross margin.

For the first quarter of 2015, Enable Midstream made cash distributions of approximately $34 million to OGE and contributed earnings of $23 million or $0.11 per share compared to $29 million or $0.15 per share in 2014. The decrease is primarily due to lower commodity prices.

Despite the current commodity price environment, Enable continues to grow their quarterly distribution rate. The second quarter rate recently announced with a 1.2% raising the distribution to $0.3125 per unit. Overall, Enable has raised its quarterly distributions 9% since its IPO in early 2014.

Turning to the 2015 outlook, guidance remains unchanged and is based on assumptions set forth on our 2014 10-K for the midstream business we're projecting to receive approximately $140 million in cash distributions. Our cash flow position for 2015 remains strong and is key it our value proposition, which is growing utility earnings per share and utilizing our cash flow receipt from Enable to fund our capital expenditures and grow our dividend at 10% annually. This concludes our prepared remarks and we will now answer your questions.

(Operator Instructions). Your first question comes from Matt Tucker from KeyBanc Capital Market. Pease go ahead.

Hey good morning

Good morning

Could you provide a little more color on the environmental costs you plan to file for in Arkansas and also if you could elaborate a little bit on what you like about the new rate making process there

Sure, Matt. This is Sean. So the filing that we're going to make next week in Arkansas is really to pick up the low nox burners that are in service. To put it in perspective. It's pretty small. It's roughly $0.16 to the average residential customer's bill, per month so it's really small. We haven't got too far down but I think it's a good way to begin that process.

You know, what we really like about the Arkansas legislation was two fronts. One, on their Act 310, which is the environmental mandates, they've expanded that to actually have a looking forward component to that where you actually -- these planned expenditures you could begin to file for that as well. We're not including that in this filing right now. The one we are going to make next week we are planning to make this one but we will pick that up on the next filing that we make six months from now. The other piece of that was the formula rate legislation and where they really tried to articulate a more prescriptive formula for not only determining the ROE but determining the recovery of items, and more of a formula plan to help reduce some of that lag. And we view this as positive there as well but we also view the opportunity for us to address our -- the hypothetical capital structure that is in Arkansas as well that causes us the most issue.

Okay. Thanks. And then switching gears a little bit, it looks like from Enable, within the contribution there, between the amortization and the basis difference and the elimination of the (inaudible - technical difficulties) fair value, those items total about $8 million versus I think about $5 million last year. Is this a good run rate to assume for these items for the rest of this year?

Yes, It's about $0.02 a quarter. So the run rate sticks around the $8 million is the better number so it's about $0.02 a quarter is what you ought to assume.

Great. Thanks. And then finally, sorry to hear about the storms that hit your service territory last night. Is this something that we should expect to create unusually large storm restoration costs for the second quarter or is this kind of consistent with, you know, these types of things are kind of common for the second quarter there

Yes. Unfortunately, it is -- it is pretty common for the April, May time frame. And so I don't see any wild variance from previous years.

Got it. Thanks, guys. That's all from me.

Okay.

Thank you. And your next question comes from Brian Russo from Ladenburg Thalman. Please go ahead.

Hey, good morning

Hey, good morning, Brian

Just curious how much are you under earning in Arkansas and what percent of your rate base is attributable to Arkansas?

You know, rate base attributable to Arkansas is only about 7%. We're probably earning slightly below 7% at this time so we definitely are under earning at that point but it's again only about 7% of our rate base. Okay. And, Pete, earlier you commented on customer growth and the unemployment rate and the economy. What's your outlook given what we've seen in the energy sector?

Yes. You know again, the numbers came out and we, obviously, especially in the more rural areas opposed to our metro with the field services and the contractors and the servicing companies got hit, you know, more so than the companies or have been some layoffs in the metro area but what we've seen is that a recycling, in other words, what we -- we -- our employment rate's been so low.

There's been businesses -- their number one issue has been able to hire people because of the low unemployment rate here and what we've been seeing is that these businesses, the people that are not -- no longer in the energy industry are finding jobs in other areas. We're also seeing our customer growth remains the same. We're seeing a lot of potential growth in some bigger loads. And so we haven't seen any real -- on a net basis we haven't seen any real big drops in specific plants. And if there's been one or two, we've got new plants coming in.

So everything, you know, really appears to -- from the economy, I think we maybe expected at this point to see a little bit more softness than we have so it's been holding -- I'm very pleased to see how the economy's holding in there. So it's a little bit more diversified it seems and I'd say pent up demands in other areas seems to be keeping us on track.

Okay. And then it seems -- House bill 1910, the language ask somewhat vague and there seems to be a lot of differing interpretations of it, you know, with the testimonies filed in this compliance filing. And I'm just curious why should Mustang get a rider and why should a rider be granted outside of the context of a rate case if you don't mind?

You know, sure. So Brian, this is Sean. You know, on Mustang, what we -- what we decided there is we've gone through this. We send -- see this opportunity there to preserve this vital site for the state.

And these units we talked before how old they are. They were nearing retirement. Pete talked about their current cycling that's actually accelerating the -- their retirement state -- retirement dates as well.

You know, as far as the rider, the point is this. What we try to do in our filing is we filed this with the commission to provide the opportunity. We suggested they should look strongly at CWIP with the idea to minimize the rate impact. We also wanted to propose this rider for Mustang. From a transparency sake. They knew exactly where we were headed, what we were doing and give them the opportunity to begin a glide path on the recovery of those items as well.

The other point is from your perspective, you know, as we go out and raise capital, you look at that. You value that risk proposition so if we were going to go out and sell securities to help fund that, you know, that helps. And so we thought that was a good way to lower the overall costs to customers and that's what we were focused on and we think it's appropriate. It's allowed under the statutes, and we think it's a good idea.

Brian, we didn't know if you were referring to there are different parts of the statutes and one part was for recovery of state and federal environmental. And the other was for pre approval of clearly spelled out for new generation to be pre approved by the commission. And, you know, again, the legislature I think unanimously passed that bill at the time that people viewed, it made a lot of sense and so we're taking -- we're going down that path.

Great. thank you very much.

Thank you we have another question for you and this one's from Charles Fishman from Morningstar. Please go ahead.

Thank you. I notice the capital expenditures for environmental scrubbers are projected to -- I can't tell if it's the total amount has changed or it's just an acceleration of the project and maybe you're refining some of the costs. Could you just explain what's going on there?

Yes. This is Steve. Nothing's changed. That's just a timing difference moving some dollars in from 2016 into 2015. It's about a $15 million change, so that's all that's going on there, but our projections haven't changed

Okay. Thank you and the second question I had was you referred to some of the increase in gross margin was rate migration. I was wondering if you could give a little more color to when exactly happened there.

Sure. It's really just customers changing rate plans that can have an impact on margin. It's difficult to estimate and project what they'll do but it's just movement back and forth within the different rate designs.

Is that typically residential or commercial or...

Commercial.

Okay. Thank you very much

You're welcome.

Thank you. We have another question for. This one comes from Michael [Bondurant] and he's from Goldman Sachs. Please go ahead

Hey guys, congrats on a good quarter. I think most of my questions have been asked already but just on your outlook for 2015, it's a pretty good quarter but, obviously, it's early in the year do you guys typically provide updates throughout the year and if so, when would that be in reference it guidance?

We would when -- if there's a significant change. Typically, it would be the third quarter. Keep in mind we've only earned about 3% of our earnings per share for the year up to this point. A second and third quarter are where our significant earnings come into play, in typically late second quarter and mainly in the third quarter

Okay. Got it. That's all I have.

Thank you we have another question for you. This one's from [Jay] Dobson, and he's from Wunderlich Securities. Please go ahead.

Hey good morning (multiple speakers) How are you Sean, Steve? Quick question on Oklahoma probably throw this to Sean and you can figure out who should answer it. So we're waiting on the environmental decision, hopefully this summer. Talk about rate case outlook when that might be filed on the heels of and sort of how, what that might look like in rough terms.

Sure. So, you know, Jay, the way we're going to approach that is this. Is when we finally implement the -- the rate impact for the environmental compliance plan we get that implemented in rates, depending on when that is, then we'll proceed with filing the Oklahoma case. And so what I want to make sure of, though, is if we receive an order, I want to make sure that we incorporate the latest completed quarter of financial information and then take the six month look forward from that point on.

So if we received an order in, you know, late -- late June or early July and we finally got in the rates, I want to incorporate the second quarter actuals as the basis for the filing. And so we want to true that up as real time as we can. So the rate case will just be as long as it takes us to close the books for the quarter and make the necessary filings.

Remember, the -- the rate case had three -- three components to it. It has one we have the statutory requirement in House bill1910 to file a case within 24 months. That's we're going to check that box with this case.

The other piece was we have that expiring wholesale contract with one of the co-ops that expires in June of this year so we need to get that back and ready. So to your point there, that's about 300 megawatts with embedded costs about $240 a KW. So that's real value to our customers.

And then the other piece of that, Steve mentioned in his prepared remarks the transmission recovery of the retail component of those transmission lines that are in service so we want to pick those up. And that was about oh, roughly $100 million of assets.

That's great. No that's perfect. And then to Arkansas, understanding it's early days and asking you to go out here and hypothesize a little bit. But if we were to assume a reasonable outcome in the rate case you might file, would the regulatory mechanisms established under recent legislation allow you to stay out in Arkansas, I guess this is as much a CapEx question as much as anything.

Yes. It really goes with your forecast. But -- and where you are. Our goal is not -- our goal is to make sure that we earn -- earn our allowed return there. And so considering we've got a lot of balls in the air so I don't think it's -- we're not approaching it from a stay out or come in perspective. We're approaching it from making sure we've got the right recovery mechanisms to earn our allowed return.

Gotcha. I guess maybe then asking it a different way. Do you anticipate -- and again I'm asking you to assume a reasonable outcome. Can you get to something close to your allowed return in a single case

You know, Jay, the largest component or issue we have in Arkansas is the use of the hypothetical capital structure. And, you know, we look at our actual capital structure that's closer to 5347 and the hypothetical structure that's used in Arkansas is significantly lower than this. So right out of the gate, you know, we're 60, 70 basis points below our allowed. So once we address that, I believe we have a very strong opportunity there to earn our allowed return.

That's super. And then last question, Steve, on the whole code was it the entire $0.02 that was sort of the non recurring element on the deferred comp?

Yes. That could be -- yes. Just consider that the whole thing yes.

Perfect. Thank you very much for the time.

Thanks, Jay.

Thank you we have another question from you this one is from Anthony Crowdell, and he's from Jefferies. Please go ahead

Hey good morning. Sorry, I jumped in late, I wasn't sure if you address it earlier, but it seems like there's opposition with Mustang. If Mustang is not included in this environmental plan, can you add that in that -- you know, the rate filing, the subsequent rate filing that you would have at OG&E

Sure. Sure. And again, what we asked for was pre approval of Mustang. And so if in your scenario there if they elected not to pre approve it, you know, there would be other opportunities, yes.

And I guess really getting ahead of myself, if you think about, you know, the utility over the last several years, you guys had a tremendous transmission buildup -- really fortified the grid there. You're now going through a period of really fortifying your generation. If I looked, you know, 2018, 2019 as you're winding that go down you're giving us clarity on the dividend also 2019, what is the next leg of CapEx for the utility?

You're getting us out beyond our five-year window there

Right. Yes.

But I -- let me just say that that is something that we are spending a great deal of time thinking about, and considering a lot of different options today in anticipation of what exactly are we going to do in 2019 and 2020 and what that looks like. And so as we move forward, we're going to talk more about that. But I want to convey to you that that's exactly what we're spending a lot of our time on is, you know, from a strategic standpoint, what does that look like?

Great. Thanks for taking my questions. I really appreciate it.

Thanks, Anthony.

Thank you we have a final question from you this one is from Chris Shelton from Millennium Partners. Please go ahead.

Hey, good morning guys.

Good morning Chris

Quick follow-up question just on the modeling on the environmental CapEx. It looks like (inaudible - background noise) -- it looks like some of the CapEx (inaudible - background noise) -- just wanted to see what was kind of driving that.

It's really just timing of the spend. So the total really hasn't changed but it's just a timing issue of -- of when we expect the payments to occur.

We've been moving along signing contracts, procuring equipment, so that will tend to move around a little bit but that's all that is timing

Got it. Just a product of selecting vendors things like that.

Correct.

And then as far as presuming you don't get a rider and you have to -- and you recover this through kind of a normal rate making process, would you be able to include kind of a partial plan into known immeasurables into the cases, I guess, or --

And you mean into -- are you talking about in the rate case?

Yes. In the upcoming rate case you'll spend X amount of dollars on the environmental -- (inaudible - background noise)

No. I think we would just be accruing (inaudible) and it probably wouldn't be part of a rate case activity, but we haven't made that filing but we don't view that as something that would be in there.

Okay. All right. That was it. Thanks, guys. Appreciate it.

Thanks, Chris.

Thank you. I have no more questions so I'll hand the call back to Pete Delaney.

Thank you, operator. I'd like to take a moment to thank all of our members for their commitment to safety at all times especially during storm season, and I want to thank all of you for your continued interest in the Company. We're adjourned. Have a great day. Thank you.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.