OGE Energy's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: OGE Energy (OGE)

OGE Energy Corp. (NYSE:OGE)

Q1 2014 Results Earnings Conference Call

May 01, 2014, 9:00 AM ET

Executives

Todd Tidwell - Director, IR

Pete Delaney - President & CEO

Sean Trauschke - CFO & President of OG&E

Analysts

Matt Tucker - KeyBanc Capital

Anthony Crowdell - Jefferies

Brian Russo - Ladenburg Thalmann

Andy Bischof - Morningstar Research

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 OGE Energy Earnings Conference Call. My name is Emily and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Todd Tidwell, Director of Investor Relations. Please proceed.

Todd Tidwell

Thank you, and good morning, everyone, and welcome to OGE Energy Corp.’s first quarter 2014 earnings call. I’m Todd Tidwell, Director of Investor Relations and with me today I have Pete Delaney, Chairman, President and CEO of OGE Energy; 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 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 today.

I would also like to remind you that the presentation of our results reflects the 2-for-1 stock split, which was effective July 1 of last year. There is a Regulation G reconciliation for gross margin in the appendix along with projected capital expenditures. In addition, Enable Midstream held their first quarter earnings call yesterday and mentioned that they were still in the post-IPO quiet period. And because of this, we are limited regarding what we can say on this call regarding Enable, and we will not be taking any questions regarding Enable on our call today.

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

Pete Delaney

Thank you, Todd. Good morning, everyone, and thank you for joining us. This morning, we reported first quarter 2014 earnings of $0.25 per share, compared to $0.12 per share in 2013 with, once again, both of our businesses reporting higher earnings for the quarter. As in past periods, the primary driver of increased consolidated earnings was higher profitability from our LP ownership interest in the Enable Midstream partnership and higher transmission earnings at the utility.

Our 2014 consolidated earnings guidance of $1.94 to $2.06 per average share remains unchanged. That is with much of 2014 earnings still ahead of us. Perhaps, as important as increased earnings in the first quarter was the successful IPO of Enable Midstream Partners in mid-April. We were pleased with the success of the transaction, which was a confirmation of the value build-up over the years by our team in the midstream business.

As you know, we began working to reposition Enogex as a major midstream player years ago. With the ArcLight partnership in late 2010 is perhaps the first structural step towards that transition. Creating Enable Midstream Partners through a combination with CenterPoint Energy midstream business has provided great path towards accomplishing that objective. We remain excited about Enable’s growth prospects and the associated value creation from the LP and 6% of the IDR rights holdings.

Similar to the past several quarters, our FERC transmission projects continue to drive utility earnings growth. Two transmission lines with a capital investment totaling about $280 million were recently completed on time and on budget. And that is with zero safety incidents over 300,000 man hours, great work by our members.

We are projecting $115 million of gross margin from our transmission investments in 2014, an increase of approximately $34 million in margin over 2013. Utility results for the first quarter also benefited from cold weather and customer growth in OGE’s service territory. Sean will discuss the earnings drivers for the utility in more detail while my remaining comments will address issues ahead of us.

We expect a decision from the United States Supreme Court late next month regarding our regional haze appeal. While we are hopeful the Court will hear our case and continue to stay EPA's Federal Implementation Plan for Oklahoma, we understand that only a small percentage of such appeals get accepted for consideration.

Meanwhile, a lot of planning and preparation for implementation of our compliance plan has been underway, and we will be ready to move forward quickly. A benefit of the continued EPA stay is that we will likely get a look at the proposed EPA CO2 emission limits on existing power plants in the near future. We want to ensure our compliance plans contemplate realistic scenarios providing for a reasonable risk-adjusted cost impact on customers.

The first step from a regulatory process standpoint will be the filing of our integrated resource plan in June that will provide the foundation behind our recommended compliance plan. We will have 55 months to comply after the Supreme Court finishes with our case, which we estimate would be the spring of 2019 if the Supreme Court does not hear our case.

As I mentioned in the last call, once the appeal outcome is known, we will make our compliance plan public and file for the recovery methodology with the Oklahoma and Arkansas Commissions. You’ll recall that Oklahoma state law allows for the recovery of mandated environmental expenditures. Speaking of the Oklahoma Corporation Commission, the now Vice Chair, Patrice Douglas, has announced her decision to step down to run for the U.S. Congress and Commissioner, Bob Anthony, had stepped in as Chair in her place.

Mr. Douglas will remain at the Commission until she takes office in Congress or her replacement is elected. Both candidates for the seat are Republicans, one is a current State Senator and the other is a former House Speaker, both are qualified for the job. The primary is on June 24 which will decide the election. We look forward to working constructively with the old commission- Republican Commission.

OGE members continue to do a great job executing their plans in the backdrop of a stable regional economy and a strong state economy. Unemployment rates for the state of Oklahoma City are approximately 5%, both are among the lowest nationally. We now have over 810,000 customers on the system as we continue to add almost 8,500 customers per year. This provides revenue growth to enable us to manage the cost increases in our business without a rate increase.

Our last state rate base case was based on the 2010 test year. At the same time, the quality of our service has improved as our Smart Grid investments and related programs are helping sustain our customer satisfaction scores in the first quartile while improving reliability. We are focused on continuing to increase the value of our grid to the customer.

We continue to build our capabilities and to position utility for additional earnings growth opportunities beyond our environmental compliance plan. We’re looking for ways to leverage our Smart Grid investment in the new product and service offerings that our utility is in an excellent position to provide.

We’re also preparing to pursue additional transmission opportunities outside of our footprint under FERC Order 1000 as we have demonstrated a successful track record of building high-voltage transmission lines both on time and on budget.

Another milestone during the quarter was the company’s transitioning over to the Day 2 Southwest Power Pool Market on March 1. The company did a great job transitioning over a week and that was marked by extreme weather conditions. And only it is relevant for the benefit it brings to our customers, but understanding the performance of our existing plants in the Day 2 Market with a growing element is a key component of generation complaining in our environmental compliance economics.

Environmental compliance aside, our near-term plant retirement and the shifting role of our units provide opportunities for us to reposition the portfolio to ensure reliability at a reasonable cost to our customers.

Before turning the call over to Sean, a few words about our dividend growth. As we have stated in the past, we’re committed to growing earnings and dividends at OGE Energy as an important part of the total shareholder return equation. We are well aware that our payout ratio is lower than the utility average despite increasing dividend growth rate in recent years. Our top quartile total return the past years has been driven primarily by earnings growth, reflective of our reinvestment of funds without dilution to shareholders. I’m pleased to say our last underwritten public equity offering was in 2003.

The Enable IPO was an important part of our establishing an equity funding vehicle for the growth cap on that business as well as providing a source of equity funding for environmental compliance at the utility. From an investment standpoint, the capital outlays associated with our regional haze plan and recovery of those costs are important elements to grow earnings.

We do expect to be able to fund our environmental compliance through cash retention even as our cash taxes increase over the next few years. This funding strategy should bring us higher earnings in the long run and should not preclude management from recommending, once again, as we have in the last four years, an increase in the dividend growth rate when the Board reviews the dividend policy in December.

With that, I’d like to turn the call over to Sean who will review our financial results for the first quarter in greater detail. Sean?

Sean Trauschke

Thank you, Pete, and good morning, everyone. For the first quarter, we reported net income of $49 million or $0.25 per share as compared to net income of $23 million or $0.12 per share in 2013. The contribution by business unit on a comparative basis is listed on the slide.

At OG&E, net income for the quarter was $21 million or $0.10 per share for 2014, compared to $13 million or $0.07 per share last year. First quarter gross margin at the utility increased approximately $25 million, which I’ll discuss on the next slide.

Turning to O&M, the first quarter variance was $12 million higher, reflecting the timing of our scheduled plant outages. We are on plan and fully expect to meet our annual target for O&M. Other income decreased $3 million primarily due to lower margin recognized in the Guaranteed Flat Bill program. As you recall, the GFB program is a hedge against weather. To the extent weather is stronger, the customer save money as they did this year.

Interest expense increased approximately $3 million primarily due to an increase in interest on long-term debt related to the debt issuances made in May of 2013 and March of this year. Compared to the first quarter of last year, income tax expense decreased by approximately $4 million. This reduction was due to the one-time reserve for Oklahoma investment tax credits that occurred in 2013, partially offset by an increase in tax from higher pre-tax income during the first quarter of 2014, as compared to the same period in 2013.

Turning to the first quarter gross margin, as I mentioned earlier, utility margins were up approximately $25 million for the first quarter of 2014, compared to 2013. There are three primary drivers for the increase in gross margin. First was an increase of wholesale transmission revenues contributing $12 million. Second, the weather created a positive gross margin variance of $10 million as heating degree days were 15% higher, compared to 2013. Compared to normal, weather contributed $16 million to the gross margin in the first quarter of 2014. And finally, customer growth added another $2 million in gross margin. We added over 8,000 new customers to the system as compared to the first quarter of 2013. And on a weather normalized basis, megawatt hour sales grew 1.3% with the largest growth coming from the commercial and oilfield sectors.

For the first quarter of 2014, natural gas midstream operations, Enable, contributed after-tax equity income to OGE Energy Corp. of $29 million or $0.15 per share, compared to $12 million or $0.06 per share in 2013. The results for the first quarter reflect the accretive effect of the Enable transaction as well as increases driven by higher natural gas prices and higher natural gas liquids sales. During the first quarter, Enable Midstream made distributions of approximately $33 million to OGE.

Before moving on to your questions, I would like to discuss our 2014 outlook for earnings guidance. On a consolidated basis, our projection of $1.94 to $2.06 per share is unchanged and based on the assumptions set forth in our 10-K. The guidance assumes normal weather for the remainder of the year and includes the impact from OGE Energy’s equity interest in Enable Midstream Partners.

With the completion of the Enable IPO and the benefit from weather at the utility, we’re off to a good start. As a reminder, the majority of the utility earnings occur in the second and third quarters.

This concludes our prepared remarks. And now, we’ll open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matt Tucker for KeyBanc Capital Markets. Please proceed.

Matt Tucker - KeyBanc Capital

I have some questions on the environmental compliance side. I guess, you said that you plan to -- or that you need to file your resource plan in June and that would include your environmental compliance plans. I guess, I’m curious if the Supreme Court makes a decision on whether to take up the case before then, would you be able to almost immediately discuss what your plans are going to be? And then, I guess, conversely if the Supreme Court still hasn’t made a decision on that by June, how then would you approach that resource plan?

Pete Delaney

The resource plan, the integrated resource plan filing itself will not contain our compliance plan per se, but it shows -- basically it lays out our latest view on various issues of low growth, fuel costs and a portfolio based on environmental regulations to show what -- under various scenarios what the cost would be, and those assumptions are, of course, important when evaluating our environmental compliance plan, and so our process would be to file the integrated resource plan.

And then after that, we would, after that filing, we would then file our compliance case would be a separate filing from that and with its own testimony and things of that nature. So, those two are really separate. One relates to the foundation for that in the PSO case. One of the requests from the regulatory commission and the staff was that an IRP would be filed and they prefer that to be updated prior to compliance filings. So, we are, in fact, taking the time to make sure we provide them the information that they feel is necessary to do the -- to sit down and look to the case and do it in a timeline that we’re requesting, which is again given the 55-month time compliance, we are asking the commission to look at our compliance filing once made and prosecute that and work it through the system as quickly as they can.

So, with the Supreme Court we think it is, as I said in the comments, probably a highly likely that we may not be successful there given just the nature and how much of these cases are heard. Of course, you recently saw what the Supreme Court did in CSAPR, which may not portend well for our appeal. And so we fully expect that -- we’re moving ahead pretty quickly here. If in fact they do here, we will continue to be in the position we’re in today with us holding back our compliance filing until we find the -- this stay will be in place until the Supreme Court adjudicates that case.

Matt Tucker - KeyBanc Capital

As a follow-up to that, could you -- have there been any changes to your estimates for complying with the EPA’s plan or to your estimates for your own plan, can you remind us what the estimates currently are and did the CSAPR ruling or could the CSAPR ruling change those plans at all?

Sean Trauschke

Matt, this is Sean. No, our estimates haven’t changed. We’re still in that $1 billion to $1.5 billion range there. As it relates to the CSAPR ruling, in the event that we had to pursue this compliance plan under regional haze that would address a lot of the implications related to CSAPR.

We do have one unit, Muskogee Unit 6, that is not part of the regional haze compliance plan, and so it may require low NOx burners or something like that, but that’s on a relative basis, a much smaller investment.

Pete Delaney

And then Matt, if the EPA stays on the timeline, they will issue their proposed regs on CO2 emission for existing power plants and of course we are very interested to get a look at that in June.

Matt Tucker - KeyBanc Capital

And then just do you have any kind of expectation for when the Supreme Court might make a decision?

Pete Delaney

End of May.

Matt Tucker - KeyBanc Capital

End of May. Okay. Thanks a lot guys.

Operator

Your next question comes from the line of (indiscernible).

Unidentified Analyst

Questions around regional haze. Assuming that the appeal with the Supreme Court doesn’t go through and you’ll be forced to spend the money, when would you anticipate making the filing for HB 1910, the recovery? And when would you expect the decision as to what type of recovery you would get whether it would be quick or filing rate cases? And last, how would that impact the way you look at the dividend and when would you be able to kind of guide us on that dividend based off of that?

Sean Trauschke

This is Sean. So, Pete mentioned that we would file this integrated resource plan in early June, that’s roughly -- that may take a couple of months. And then on the heels of that, probably early August, we would be making that filing that you referred to with respect to 1910.

We’ll also be filing a request in Arkansas as well commensurate with that. And so just thinking about that in terms of five or six months you should think about early ‘15 as far as a resolution or a ruling on that. As it relates to the dividend, we’ve said before we had two gating items there on our dividend and the impact of our dividend policy, one was the Enable IPO, that is done.

The other one was kind of the recovery mechanisms around what this compliance plan ultimately turns out to be. Obviously, we don’t - Pete mentioned historically we’ve addressed the dividend in December. Our plan is to continue to try to grow earnings and dividends. And so that would be our plan recognizing that, once we get this compliance plan around us, we’re always evaluating what our dividend looks like.

Unidentified Analyst

You mentioned that you were looking for transmission investments maybe outside of your service territory with FERC 1000, first, can you kind of tell us where you would be targeting those type of investments? And second, what’s the likelihood that you’ll be able to pull in some of these projects given that there is incumbent utilities there? And would you try to partner up or what are your best chances to win some incremental transmission opportunities?

Pete Delaney

Well, I’ll take the first of that part. I guess the -- what we’re really focusing on in outside of our service area but within the Southwest Power Pool, that’s where we have demonstrated expertise and a lot of knowledge as well as in Arkansas and around the seams between the power pools or maybe opportunities for us there.

We have -- we’re talking to a lot of different players out there. There is different criteria which the SPP has proposed criteria which of them to award and so based on some of that criteria we think we’re well qualified again given the track of what we’re being able to do and the various paths and processes and we do have -- we are preparing to submit ideas for new projects as others are I’m sure and we have been exploring partnerships. Sean, I don’t know if you want to expand on the partnership.

Sean Trauschke

No, I think that’s exactly right. I mean when we think in terms of partnerships, I think we would be looking to partner with other folks to build some of these new lines and we like to participate in that and not constrained by our current service territory. Does that help?

Unidentified Analyst

Yes. That’s great. Thank you.

Operator

Your next version comes from the line of Anthony Crowdell for Jefferies.

Anthony Crowdell - Jefferies

Two questions, I guess or two topics, one topic being what’s your earned ROE in Oklahoma and when do you guys think you’ll file again for a rate increase?

Pete Delaney

In Oklahoma, we’re earning right around our allowed return of 10.2. And as far as a rate case, I think the attention and focus is really around this environmental compliance plan. I think that’s what we’re focused on as a company and I’m sure that’s what the Commissions in both Oklahoma and Arkansas are going to be focused on as well.

Anthony Crowdell - Jefferies

And I guess I just wanted to maybe just -- I know you more on your dividend policy, so is it possible that if the Supreme Court decision or the Supreme Court decides not to hear the case and you guys do have to, I guess, comply, can we expect or is it possible also dividend change and fund that with all -- [without using] (ph) equity?

Pete Delaney

In my comments what I was trying to address was the fact that when we look at our compliance plan, assuming that we do lose the appeal and we’re looking at our cash flow, one of the things is that I mentioned cash taxes, our NOLs, our -- rolling off and so the cash taxes and we’re looking at that as well.

We do want to, of course, avoid dilution. And the reinvestment opportunity will result in the longer-term enhanced earnings power for the corporation which we want to achieve and that we do believe -- I guess over the last four years we’ve increased our dividend growth rate. And we think that now that the IPO is done we’re looking at Enable and the distributions from Enable.

We are looking at the capital associated with the compliance plan and we’re again believe that we still will be able to internally fund and as we have in the last four years recommend to the Board in December, which is normally where we do this, is that we again increase our growth rate.

Operator

Your next question comes from the line of Brian Russo for Ladenburg Thalmann. Please go ahead.

Brian Russo - Ladenburg Thalmann

Most of my questions have been asked and answered, but I’m just curious you mentioned a prior dividend growth rate, can you remind us what that growth rate is or was?

Pete Delaney

I didn’t mention a particular growth rate. So we’ve increased our growth rate the last four years -- last four years in a row up to $0.07, primarily priced [out of three] (ph).

Brian Russo - Ladenburg Thalmann

Okay. Understood. So, it’s not a specified growth rate projection, it’s just the increase in the dividend. Got it. On FERC, with FERC Order 1000 opportunities, is there any way to maybe quantify what type of dollars of investment that could potentially lead to?

Pete Delaney

Brian, not right now. The process is opening up where people will be proposing projects to the SPP over the next couple of months. Those will be evaluated and be awarded at year end. And so it’s a two-step process, one, people will be proposing projects, two, the SPP will evaluate those and then award those orders at a later date.

Brian Russo - Ladenburg Thalmann

And then just assuming you lose your appeal at the Supreme Court, you have 55 months to comply on the environmental regulations. How should we look at the kind of the CapEx ramp up in the context of the 55 months?

Pete Delaney

Brian, we’ll certainly have to lay that out for you. I think the way you should think about it though is the ramp up the first year so to speak is obviously not as great as you begin mobilizing crews and ordering equipment. But as far as the timing of that, we’ll have to lay that out the time there is a bit of a timing associated with when we will do these tie-ins to these particular units.

Obviously, we don’t want to have any of these affected units down during the summer months, that is the peak season. And so we’re working through our implementation schedule to kind of line-up with what the needs of our customers as well as try to minimize that impact.

So, we’ll have to lay that out for you Brian, but my guess is, is that the first year is probably lighter than the subsequent years just in general.

Operator

Your next question comes from the line of Andy Bischof from Morningstar Research. Please proceed.

Andy Bischof - Morningstar Research

Most of my questions have been asked and answered, but if you just remind us a little bit on the timing of the O&M, anything there would be appreciated?

Pete Delaney

Would you repeat that question? The timing of O&M --.

Andy Bischof - Morningstar Research

Of the O&M for the year.

Pete Delaney

So, Andy that was a -- there was a $12 million variance year-over-year and what we had done last year is based on some other outage planning we had in 2013, we would actually lose some outages from the first quarter of 2013 to later in the year. Then we came to 2014, and we actually had those we had plant outages in 2014 in the first quarter, so it’s really just the timing of our scheduled plant outages on our fleet and have no adjustments to our plan, we’re on plan and expect to meet our target for the year.

Operator

Thank you for your question. I would now like to turn the call over to Pete Delaney for closing remarks.

Pete Delaney

Thank you, operator, and I would like to take this time to thank our members for their hard work, their focus on safety and their accomplishments. Thank you again for your continued interest in OGE Energy. We’re adjourned. Have a great day.

Operator

Thank you for joining in today’s conference. This concludes the presentation. You may now disconnect, and have a good day.

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