OGE Energy Corp (OGE) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter OGE Energy earnings conference call. (Operator Instructions.) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Todd Tidwell. Please go ahead.

Thank you, Catherine, and good morning, everyone, and welcome to OGE Energy Corp.'s third-quarter 2015 earnings call. I'm Todd Tidwell, Director of Investor Relations, and with me today I have Sean Trauschke, 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 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 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 and ongoing earnings in the appendix, along with projected capital expenditures.

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

Thank you, Todd. Good morning, everyone, and thank you for joining us on today's call. This morning we reported third-quarter results in our utility. OG&E contributed $0.82 per share compared to $0.79 per share last year. Looking forward to the full year, the Company projects 2015 utility earnings to be at the low end of the earnings range of $1.41 to $1.49 per average diluted share. This is primarily due to mild summer weather as compared to normal and environmental compliance assets placed into service that have not yet been included in rates.

Earnings from the Enable Midstream for the third quarter of 2015 include a pension settlement and goodwill impairment charges of $0.35 per share. Ongoing earnings on a consolidated basis, which exclude these non-cash charges, were $0.90 for the third quarter compared to $0.94 per share for the same period in 2014. Steve will discuss the financial results and impairment in more detail in just a moment.

That being said, the Enable impairment does not change our plans for OGE. We are on plan to achieve our utility long-term growth rate of 3% to 5% and to continue to grow our dividend through 2019. We continue to believe our businesses are strong and well positioned for long-term growth and value creation.

In September the Board of Directors approved a 10% increase in the quarterly dividend, bringing the dividend to $1.10 per share annually. This was the tenth consecutive year of dividend growth and reaffirms our commitment to growing the dividend 10% a year through 2019.

We have received approximately $104 million in distributions from Enable year to date. With the quarterly distribution they just announced, distributions to OGE will be approximately $140 million for the year. And as we've said before, cash distributions received is the key metric we are using for Enable. Distributions from Enable will continue to help fund our dividend and utility investments.

Turning to the utility, our service territory remains strong despite the continued pressure from the current commodities cycle. The latest economic statistics put Oklahoma's unemployment rate at 4.5%, with Oklahoma City just under 4%. Although these rates have increased, we are still well below the national average. As expected, we are seeing pullbacks in the industrial and oilfield sector, but growth from the commercial sector, particularly chain accounts, has offset those losses. This is a testament to our region's growing economic diversity.

Our operations team did a great job of maintaining the fleet and the grid this summer. Our combined-cycle plants achieved best-in-class reliability of nearly 99% and capitalized on lower gas prices to bring the best value to our customers. Our coal units demonstrated reliability of 91%, and during the summer months, 9% of our total generation came from renewable resources.

On the cost side, we continue to focus on controlling costs and increasing efficiency and productivity. As a point of reference, our O&M cost per customer is lower today than it was in 2011. This is really good news for our customers.

Attracting customers with not only competitive rates but additional products and services is a key component of our strategy. Last month our customers saw improved functionality with the implementation of our estimated time of restoration project. This technology allows customers access to outage issues and estimates for when they can expect service restoration. We continue to look for ways in which technology will improve our customer experience.

Next, I would like to provide an update on our regulatory events in Oklahoma and Arkansas. In Oklahoma, we are still waiting on an order for environmental case. We plan to file a general rate case in Oklahoma later this month with a test year ending June 30, 2015. The case, as we've said previously, will focus on two main issues.

First, we have terminated a large wholesale contract and several smaller contracts and will now seek to place into rates approximately 300 megawatts of that capacity previously used to meet those obligations. The second focus will be to recover the retail portion of several in-service transmission lines that OG&E has constructed at SPP's direction over the last few years.

Also in Oklahoma, we've filed a distributed generation tariff with the Commission. Oklahoma Senate Bill 1456 was signed into law last year, requiring us to have a tariff by the end of 2015. This tariff is to ensure that distributed generation customers are not being subsidized by other customers. Our proposed tariff enables an individual adding distributed generation to experience reductions in their utility bills, while ensuring that they pay for their fair share for the grid, as the law requires. While the number of DG customers on our system is very small today, this prepares us for accurate cost recovery in the future should the adoption of DG devices become more prevalent.

Moving to Arkansas, we have filed under Act 310, which provides a constructive way to file and begin the recovery of environmental expenditures for assets placed into service. We made our first filing in May and put the rates into effect in June. The settlement hearing was in October, and we're awaiting the Commission's final order. We anticipate making our second filing later this month, and we will update the filing every six months as additional compliance investments are placed into service. We are very pleased with this process in Arkansas.

We also plan to file a general rate case in Arkansas in early 2016. We intend to utilize the formula rate provision in the recently passed legislation. And our biggest issue in Arkansas continues to be the imputed capital structure utilized. We plan to work with the Arkansas Public Service Commission on this issue. Proper resolution of this issue will improve our ability to enhance the customer experience in Arkansas and to make investments that will help attract new businesses to the state.

Turning to the environmental compliance plan, regardless of the delays we experience on the regulatory side, we must move forward to meet our compliance deadlines. Regarding the activated carbon systems for MATS compliance, we are on budget, and construction has begun to meet the April 2016 compliance deadline.

Looking at the Regional Haze compliance plan, four of the seven low-NOx burners are complete and in service, and installation will begin on the remaining units this winter and will be completed by 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.

For the Mustang Plant, full notice to proceed has been issued to the turbine manufacturer. Permit applications have been filed with the Oklahoma Department of Environmental Quality, and we anticipate the final permit will be issued by the end of the month. Engineering studies for the conversion of the two coal units in Muskogee have been completed, and we have issued an RFP for gas supply. And recall our plan is to continue to run these coal units as long as possible to maximize the benefit to our customers.

Finally, the EPA issued its Clean Power Plan in August, and the plan seeks to reduce CO2 emissions in Oklahoma from 24% to 32%, depending on the format of the compliance plan, the MATS or versus rate-based plan, by 2030. As you know, Oklahoma's Attorney General has begun the legal proceedings against the EPA in regard to the Clean Power Plan, stating that it threatens the reliability and affordability of power generation across the nation. Similar to Regional Haze litigation, we will be supportive of the AG's efforts on behalf of the State of Oklahoma.

In the meantime, we're in the process of reconfiguring our fleet with the addition of Mustang and the conversion of the Muskogee units. In addition, we are 18 months into the SPP day-ahead market, and the decisions other generators in other states make could impact our fleet. As a result, we'll continue the evaluation of our units, our role in the state, and our role in the broader Southwest Power Pool while continuing our active discussion with the State regarding various options of compliance.

Finally, last week Rod Sailor was announced as CEO of Enable. And as you know, Rod joined us in April of 2014 and has been an instrumental part of the Company. Since June, Rod has been leading the development and execution of the business strategy. And I'm comfortable that Rod brings the familiarity with the Company, customers, and the market, providing that stability and consistency we're looking for. I'm confident that he's the right person to lead Enable's growth strategy going forward.

So in summary, this is an exciting time for us at OGE. As the management team, we're committed to executing on our strategy to continue growing our business. I'll now turn the call over to Steve to review our financial results. Steve?

Thanks, Sean, and good morning, everyone. For the third quarter, we reported net income of $111 million, or $0.55 per share as compared to net income of $187 million, or $0.94 per share, in 2014. The contribution by business unit on a comparative basis is listed on the slide. I would like to point out that the loss from Enable is due in part to a $0.35-per-share write-down of goodwill and a pension charge. Excluding the impact of these charges, third-quarter 2015 earnings would have been $0.90 per share as compared to $0.94 per share for 2014. I will discuss the goodwill impairment on a later slide.

The holding company loss is primarily attributable to changes in our deferred compensation plan. The holding company is on plan and is expected to be flat for the year.

At OG&E, net income for the quarter was $163 million, or $0.82 per share, as compared to net income of $157 million, or $0.79 per share, in 2014. Third-quarter gross margin at the utility increased approximately $11 million, which I'll discuss on the next slide.

O&M is on plan for the year. The decrease of $4 million is primarily due to lower maintenance costs at our power plants and our continual focus to control costs. Depreciation increased $7 million, primarily due to large transmission lines that were added in the last 12 months, part of the over $800 million of plant placed in service in 2014. Income tax expense also increased approximately $4 million due to higher pre-tax net income and a reduction in federal tax credits recognized.

Turning to the third-quarter gross margin, utility margins increased approximately $11 million for the third quarter of 2015 compared to 2014. The primary drivers for gross margin were new customer growth, which contributed $9 million. We added over 9,000 new customers to the system as compared to the third quarter of 2014. We continue to see about 1% growth supported by the commercial sector.

Weather contributed nearly $9 million of margin, as cooling-degree days increased 6% compared to the third quarter of 2014. However, compared to normal, weather decreased gross margin approximately $11 million for the quarter.

Partially offsetting this growth was wholesale transmission revenues, which decreased $4 million compared to the third quarter of 2014, primarily due to an adjustment of the SPP formula rate to reflect a continuation of bonus depreciation. Finally, on June 30, we had a wholesale power contract that expired, reducing margin by nearly $8 million for the quarter. As we've said before, this is an item that will be included in the general rate case we are filing this month in Oklahoma.

For the third quarter of 2015, Enable Midstream contributed ongoing earnings of $0.10 per share compared to $0.14 per share in 2014. Cash distributions increased by 6%, to $35 million from $33 million in 2014. Year to date, OG&E has received approximately $104 million of distributions from Enable.

Before I explain the impairment charge, I would like to point out that cash flow in the form of distributions, not the earnings from Enable, are what is important to OGE. Though commodity prices are low, Enable is performing as planned in regards to allowing us to fund environmental CapEx and to grow our dividend by 10% per year through 2019.

Turning to the impairment, Enable Midstream recorded a goodwill impairment of approximately $1.1 billion in the third quarter of 2015. OGE's portion of Enable's goodwill impairment is approximately $108 million. The reason our share is less than the pro rata shares is because at the formation of Enable, we received a higher level of LP interest as compared to the assets that were contributed. However, we were required to report our investment at historical cost, thus creating a basis difference.

Turning to 2015 outlook, the Company projects 2015 utility earnings to be at the low end of the earnings range of $1.41 to $1.49 per average diluted share, primarily due to mild summer weather as compared to normal and environmental compliance assets placed into service that have not been included in rates. For the midstream business, we are projecting to receive approximately $140 million in cash distributions.

The utility is on track to achieve its long-term growth rate of 3% to 5%. Our cash flow position for 2015 remains strong and is key to our value proposition, which is growing utility EPS and utilizing our cash flow from Enable to fund our capital investments and grow our dividend at 10% annually.

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

(Operator Instructions.) Anthony Crowdell, Jefferies.

Just two questions. The first question's related to, I guess, the delay in the approval of your Regional Haze CapEx. Do you think that the Clean Power Plan or the Oklahoma Attorney General fighting the Clean Power Plan is what's causing the delay of the Regional Haze approval?

No, no, I don't. I think those are totally independent issues. And the ruling on the Regional Haze is with the three commissioners right now. The AG's not part of that.

If I remember correctly, you guys had, I think, a 55-month window to comply. Is this eating into the time of that 55-month window to comply? Like is the clock running and you're just waiting to start executing once you get approval on it?

Yes, no, very good question, Anthony. You're exactly right. We have a deadline to comply. By law, we have to comply. So we are actually in that process of complying. I mentioned in my comments we've got four of the seven low-NOx burners already in service. We're well down the path at Sooner on the scrubbers. We've made a commitment, or we're doing an RFP right now for the gas supply at Muskogee for the conversion. So we've got to move ahead. We did not -- we could not -- wait for Commission approval to begin this. We have to comply. And so that's what's going on; we're moving forward.

Let me say it differently. Noncompliance is not really an option.

Right. But I guess I'm just thinking out loud. If you did not get approval for Regional Haze, does that create a more challenging regulatory environment?

Yes, while we're surprised or disappointed that it's taken this long to get the order, we do believe that we're going to receive approval for these required expenditures.

Great. And moving to the easy part of the business, Enable (laughter), I think on Enable's second-quarter call or whatever, they spoke about when they thought they'd hit maybe the Tier II distributions, which then also, I think you begin the GP to start getting some distributions. When does OGE forecast that they start receiving some of the GP distributions?

Sure. At the present time, with the guidance that Enable put out yesterday, we would anticipate starting to receive those in 2017.

And is it like a -- I don't want to use the word trickle -- but a small amount, and then 2018 to get a gradual step up, or -- ?

That's correct. I mean, at the current growth that's out there right now, it would be a gradual step up.

Great. Guys, thanks for taking my question, and I'll see you at EEI.

Matt Tucker, KeyBanc Capital Markets.

I was hoping you could elaborate a little bit on what's changed in terms of the utility outlook, if you could maybe quantify how much of the headwind is weather versus the recovery of environmental investments. And is that latter drag just related to the delay in the environmental case approval?

Yes, that's correct. If you look at weather, it's about $0.03, and then the environmental drag's a couple of cents at this point. And yes, it's just timing of the rider. That will go away as soon as we get the rider.

Got it, thanks. And then thinking about you've maintained that the long-term outlook, despite Enable reducing its distribution growth guidance for the next couple of years -- and I know that you've built a lot of cushion into your longer-term assumptions -- could you talk a little bit about how stress tested those are? If Enable were to hypothetically hold its distributions flat for the next couple of years or beyond, would you still be okay in terms of the dividend growth guidance and lack of equity needs?

Yes, we would.

Okay, great. That's all I had, guys. Thanks.

Brian Russo, Ladenburg Thalmann.

I'm just curious. How much environmental spend is not in base rates?

Right now, that's about $39 million.

Okay, great. And I realize the delay in the OCC order, I think previously you had conveyed that they indicated they were going to try to make a decision by September, and we're probably six weeks past September. Any reason for the delay?

None that we're aware of, Brian, to be perfectly blunt. There was that public hearing. They did allude to they thought they were going to try to get an order within 30 days. We've not seen the order, and we're talking to them and anxious to receive the orders as quickly as you are.

Okay, so it's basically any day, is how we should look at it?

Yes. But I wouldn't characterize that "any day" any differently from September.

Understood. And if you don't get the ECT, or the tracker order, by the end of the month and you file your rate case, does not having that tracker or a decision on the order, does that complicate this rate case at all? Or is it because your environmental spend is so back-end loaded, you're able to manage it?

Yes, you're correct in your assumption there. I think the complication that arises with this filing is that under 1910, there's a provision there that you file a rate case every two years after the rider goes into place. And our goal and objective was we wanted to run our business, and we didn't want to get tangled up in rate cases every couple of years, and just because of the time, energy and money you spend going through that process.

In your scenario there, we would file a rate case and not -- we potentially could not have rates, the rider in place. And so it may give rise to another rate case. But we'll cross that bridge when we get there. I think the thinking there, Brian, just to be perfectly honest, we've said all along we were going to file this rate case this year, and this is to recover those items that Steve's mentioned to that are not being recovered today that would be good value for customers. The transmission lines are in service, and we're going to bring 300 megawatts back to our utility customers at around $2.30 a kW. So that's good value for the customers, and we ought to be doing it. But we've got to run our business for our customers and not get bogged down with the regulatory timeline.

Okay. And the June 2015 test year, what's like the true-up period, or the known and measurable date?

Six months.

Okay. And what's the statutory deadline for the Commission to issue a final order in a rate case?

Well, after 180 days from that filing in the rate case, we can implement rates.

Okay, got it. So we should feel -- rest assured or comfortable -- that new rates would go into effect prior to your summer third-quarter peak period?

Yes, sir.

Okay, great. Thank you.

Jay Dobson, Wunderlich.

Hey, a couple of questions, if I can. Operating cost trends obviously have been moving in the right direction, and you spent a little time highlighting them. Just talk a little bit about what's going on there and the durability of those controls or reductions.

Yes, I think -- good question. So we're actually quite proud of this. And philosophically, this is not a one-time project that we have these initiatives or teams out there. This is every day. This is just grinding away, looking for opportunities. We've seized opportunities around supply chain, around our maintenance of our facilities, engineering systems. We've had a number of opportunities as people have retired, how we've retooled the workforce and brought new people into the Company. So there's no singular item, Jay, is what I would tell you, and I think that speaks to the durability or the sustainability of what we're doing here. And it's just a daily effort, and we're keenly focused on keeping our own costs low -- in this case, actually reducing them. But I expect that to continue.

Is it something we'd measure in quarters or years?

I think it's probably something that you'd do on an annual basis, a lot of things going to your O&M expense. But I think that's more of an annual trend. And we've been trending that. We've been watching that since 2011, and I'm really proud of the effort the entire Company has put forth on this, and I don't expect it to cease. The expectation is we continue going forward.

No, that's great. So the reductions to date, or whenever the rate case is filed, you'd be handing those back in a rate proceeding. But looking forward, post-rate case, we should assume that costs could continue to decline at a measurable pace?

Well, I think, let me clarify that a bit. So we are very fortunate to see load growth on our system. So we're adding customers. And so what we've been able to do is absorb that and not see incremental costs go up, okay? So I don't think you're going to see O&M reductions go down if you're thinking in terms of rate case activity or anything like that. What we're saying is that we're absorbing this additional load with productivity and efficiency gains in our system.

Nope, that's perfect. It's like you read my mind. So commercial trends, you indicated? What exactly is going on there? Is there new customers coming in? Is this expansion economically related? What's going on there?

Yes and yes. And so we're seeing a number of the chain accounts build box stores and restaurants and things like that coming in. We are beginning to see a bit of a slowdown in the oilfield sector, as you'd expect. But it does not seem to be slowing down on the commercial side, the retail side.

Got you. That's great. And then Enable, I assume they'd be in the running to serve the Muskogee conversion and Mustang gas needs?

Yes. I think we'll conduct a competitive bid process, like we do with everything we procure in this Company. And if they're successful, they'll get it; if they're not, somebody else will get it. But yes, they would certainly be a viable candidate, but they will not receive any kind of special treatment.

Do they serve other facilities on your system currently?

Yes, they do. So Enable serves the Mustang Plant currently and Horseshoe Lake and Seminole. And then some other suppliers serve Red Bud and McClain.

Got you. And then two last ones. Tax rate, so with the rate down, maybe more for Steve, I imagine, not that you're a big taxpayer, but that will reduce the actual taxes paid, so cash flow benefit? Am I thinking about that right from the goodwill impairment you recorded?

Yes, you are. We won't be a full taxpayer until 2018.

Perfect. And then last one, just to tag onto the -- I think it was the last question, Sean. So you can implement rates 120 days if you don't have a decision, but am I remembering historically, you haven't actually done that?

Yes. So it's actually 180 days, and so have we done that? I believe we've done it way, way back in the past, but not in recent history.

Okay, got you. Awesome. Thank you so much. Look forward to seeing you in a couple of days.

Paul Patterson, Glenrock Associates.

With respect to the -- back to this Regional Haze thing -- I guess it was asked, and I guess if you could just elaborate a little bit. I mean, there's no sense as to why this is being delayed?

Well, they are deliberating right now. This is, I think, the top item on their plate. In fairness to the Commission, they've got a heavy caseload. They've been very involved in some of the -- you know, there's been a lot of earthquakes here, so they've been involved in that analysis. And in fairness to Commissioner Hiett, he walked into this. He didn't have the benefit of the history that had gone on the previous four years with this, so he's quickly getting up to speed as well.

So I don't really have any, Paul, any more insight than that. And we're as anxious as you are to get this resolved. I will tell you that we have had some discussions, not complaining or anything about this case, but more about prospectively, we've got to come up with solutions. What can we do on our side to make this process faster in the future? So we're looking forward in terms of how we can improve this process to make it more timely.

But the record's been closed for some time. There was a deliberation statement from Anthony, right?

Right.

So it isn't like -- I assume it's got nothing to do with you guys at this point, correct? I mean, you guys can't do anything to -- I mean, am I right? So in general, really, you --

I think your thesis is exactly right. I mean, we have asked if they're looking for any more information, if they need anything from us. I think your thesis is right. It's sitting there on their desk. They're deliberating right now.

So we're really not going to be in the situation where you're going to be doing things to address the Regional Haze issue before we get this? Or at least nothing that would be controversial, potentially. Correct?

No, we -- are you talking about as far as taking actions to comply?

Yes.

No, Paul, we are taking actions to comply. We have a deadline, we have compliance dates between Regional Haze and MATS, and we are taking actions. We could not wait -- go ahead.

But is there anything that, like, I guess, in terms of -- is there any risk that you'll be taking actions that these guys might say, "Hey, well, that's not what we really thought you were going to do."

No, no. The actions we're taking is exactly what we spelled out in our testimony, exactly what we communicated well in advance of our filing, and our plan of attack is exactly what we've been communicating for a couple of years now.

Okay. And so if these guys come up with a decision that's different than that?

When you say a decision different than that, what do you mean?

I mean if they go with the ALJ recommendation, right? With that?

The ALJ -- I think the ALJ was primarily speaking about various components of how you'd recover that. But the Commission is not -- it's our job to design and operate this system and make these decisions on how the business is going to operate. And so I don't believe that they're going to get into making decisions about what assets we should be utilizing. And besides, remember, the ALJ did indicate all of this was prudent, and the legislation provides for that as well, in that this was a mandate, a requirement, and that's what this legislation that was put in place was to address, was timely recovery for environmental mandates. And this is a mandate.

But the monetization plan and stuff like that? I mean, how do we think about that, I guess. Do you follow what I'm saying?

Yes. So on Mustang, our point there on Mustang was we wanted to be upfront and transparent with the Commission, let them know where we were going with how we are going to reconfigure our fleet. We had a window of opportunity there to be able to site new generation closest to the largest load center. It serves a very critical piece of our 345 transmission loop around the city. And we made that case to the Commission, and whether they account for that in a rider, or whether they want to deal with that later in a rate case, that's fine. We'll deal with that.

Okay. Okay. And then just in terms of goodwill -- I'm sorry to be a little slow on it -- just with the accounting, and back to Jay's question, what was the tax impact -- I apologize; it's been a busy morning -- associated with your write-off?

Yes, it's really just a timing issue as it relates to a tax impact. That write-off will actually flow through our corporate tax calculation and impact our effective rate accordingly.

As opposed to being amortized? Is that how we should think about it?

That's correct. It accelerates any amortization of that. And you don't really amortize goodwill, anyway. It just sits there until (inaudible).

Not on a GAAP basis. Not on a GAAP basis, but on a tax basis? Was there any amortization of it?

No.

Okay. Okay, just wanted to check on that.

Okay.

Thank you.

Thank you, and I'm showing no further questions. At this time, I would like to turn the call back to Sean Trauschke for any closing remarks.

Well, once again, I want to thank our members for their hard wok and dedication and commitment to safety, and thank all of you for joining us on this call, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.