OGE Energy Corp. (OGE) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the third quarter 2016 OGE Energy Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd like to introduce your host for today's conference, Todd Tidwell. Sir, you may begin.

Thank you, operator. Good morning, everyone, and welcome to OGE Energy Corp's third quarter 2016 earnings call. I'm Todd Tidwell, Director of Investor Relations and with me today I have Sean Trauschke, Chairman, President, and CEO of OGE; and Steve Merrill, CFO of OGE. 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 Web site at oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same Web site. 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 there is a Regulation G reconciliation for gross margin in the appendix along with projected capital expenditures and our rate case timing schedule. I will now turn this call over to Sean for his opening comments. Sean?

Thank you, Todd. Good morning, everyone. Thank you for joining us on today's call. As a company, OGE is doing quite well, had another solid quarter. This morning we reported third quarter consolidated earnings of $0.92 per share. Third quarter is critical to the company from an earnings perspective as it accounts for 55% of the utility earnings. Our utility OG&E contributed $0.80 per share and our ownership interest in Enable contributed another $0.11 per share. I will discuss Enable in further detail in a moment, but we have been pleased with their performance. As I stated on previous calls, we continue to push forward with the environmental projects in the Mustang modernization plan. With regards to our environmental compliance project, although one low NOx burner has been installed, the ACI systems are all in service and all of these have been on time and under budget. At Mustang, all of the site preparation work is complete. Substation transmission [tying] [ph] work is in process and these are all major projects for the company and I am pleased with the focus to complete these projects on time, under budget and in a safe manner. The utility had a solid quarter with many accomplishments. Members did a great job of operating the systems throughout our peak season. Our natural gas units once again achieved remarkably high capacity and availability factors during summer. The entire team continues to produce higher levels of [employment] [ph]. I am happy to report that for the third quarter in a row, we are in the top quartile for our safety performance and are on track to have the best safety record in our company's history. This has been a very focused effort based on the notion that every accident is preventable. Getting things done is one thing but getting them accomplished in a safe manner is critical to our company's success and key values of our organization. Briefly looking at our service territory, the latest economic statistics for the Oklahoma and Oklahoma City's unemployment rate of at 5% and 4.4%, respectively. We saw a 1.3% customer growth rate and this is an increase over historical rate of 1%. The Oklahoma economy, though impacted by the downturn in energy projects, has proven to be resilient. However, we remain focused on keeping our rates low, our service high and actively working to attract new load to our system. We have an additional 50 megawatts of load scheduled for 2017 and are working on several projects in the oil and gas sector as we are beginning to see the energy sector pickup once again. We believe we are well positioned for growth as the economics for the energy sector continue to improve. With the approval in Oklahoma of the solar [tier] [ph], we began offering community solar to our residential and small commercial customers. A customer can select after 50% of their annual usage to be produced by our Mustang solar facility. Initial demand for our solar energy has been very positive and we have subscribed over 95% of the annual output of the facility. This equates to over 5 million-kilowatt hours for solar energy. The Mustang solar facility is another generation choice we can offer customers as part of our diverse generation mix. Going forward, we are evaluating additional, strategically placed solar facilities to enhance our distribution system and provide customer choices. On the transmission side, we have energized the first 15 miles of the Windspeed 2 line and are collecting revenues on this portion. To date the project is on time and on budget and the entire line is scheduled for completion in 2018. Turning to our regulatory event. On past calls we have provided our rate case schedule for the next three years so I won't be [passing] [ph] that here. In regards for our current rate case in Oklahoma, we expect an ALJ report soon and once that report is in hand, we are hopeful the commissioner will be provide a final order as quickly as possible. In addition to this case and the environmental case, we have also secured orders in our fuel [hearing] [ph] lost net revenues in solar [tier] [ph]. So things appear to be moving again in Oklahoma. In Arkansas, our rate case hearing is scheduled for May of 2017 and as we know, it included an application for formula rate in Arkansas and expect that case to proceed smoothly and efficiently. We believe the secret to success in the regulatory arena is to do the job that the fundamentals of our business and we do. Our rates are low, in fact the average bill today including the interim rates we implemented this summer, is lower than it was five years ago. Our reliability remains high and we enjoy high customer satisfaction levels. And lastly and probably just as significant, we are key supporters of our communities we serve. These are not boasts, these are just simply facts and we work hard to achieve that level of success every day. As a company, we are very proud of this accomplishment and it illustrates our commitment of utility growth by keeping our rates low and our service territory attractive for new customers. Turning to Enable. They continue to perform well in a slowly improving commodity environment. OGE has received $105 million in cash distributions year-to-date. Yesterday Enable declared another distribution and our share will be $35 million to be received later this month. Which will bring our total for the year to $140 million. Producers remain active on Enable's gathering and processing footprint. Now with 33 rigs currently active, that are contractually dedicated to Enable. This is a 14% increase from the second quarter. In a moment, Steve will discuss Enable's financial results in greater detail but I did want to make a few key points. Enable's financial metrics are improving. Distribution coverage ratios are strong. Distributable cash flow is improving and as a sponsor, we asked Enable to focus on these metrics by managing OEM expense and allocation of capital. And they have performed very well. In addition, Enable's financial strength has both served them well in a difficult commodity environment and also allowed them to seek opportunity as prices rebound and drilling activity accelerates. We stated this many times but I want to reiterate our commitment to OGE's ownership interest in Enable. I am pleased with the direction Enable is heading and very confident in the management team there. Finally, the OGE board approved a 10% dividend increase in September. This was the third consecutive year of 10% dividend increases as we remain committed to our goal of 10% annual increases through 2019. So on closing, our business had a solid quarter and accomplished a great deal. We continue to execute our plan to move the company forward. I am proud of our members' commitment and focus on the day to day work of providing reliable and cost effective product to our customers in a safe manner. So as circumstances change, we are accomplishing what we set out to do, well on plan to achieve our long-term growth rate at the utility and continue to grow our dividend at an industry leading rate of 10% a year to 2019. We are committed to executing on our strategy to continue growing our business, growing our community and creating long-term shareholder value for all of you. So thank you for your time and now I will turn the call over to Steve. Steve?

Thanks, Sean, and good morning, everyone. For the third quarter we reported net income of $184 million, or $0.92 per share as compared to net income of $111 million or $0.55 per share in 2015. The contribution by business unit on a comparative basis is listed on the Slide. I would like to point out that last year's results were impacted by a $0.35 write-down of goodwill at Enable. Excluding the impact of these charges, the third quarter 2015 consolidated earnings would have been $0.90 per share. At OG&E, net income for the quarter was $160 million or $0.80 per share as compared to net income of $163 million or $0.82 per share in 2015. The third quarter gross margins in utility increased approximately $14 million, which I will discuss on the next Slide. O&M increased approximately $8 million due in part to acceleration of vegetation management year-to-date as well as riders with revenue offset. I do want to reiterate that O&M is on plan for the year. Depreciation increased $5 million, primarily due to additional assets being placed into service. Income tax expense also increased approximately $6 million, primarily due to higher pre-tax net income. Turning to the third quarter gross margin, utility margins increased approximately $14 million for the third quarter of 2016 compared to 2015. The primary drivers for gross margin were as follow. Weather contributed $6 million of margin as cooling degree days increased 6% compared to the third quarter of 2015. However, compared to normal weather decreased gross margin approximately $5 million for the quarter. New customer growth contributed approximately $1 million. We added 10,600 new customers to the system as compared to the third quarter of 2015, supported by the residential and commercial sectors. This was growth of 1.3%, slightly ahead of our historic growth rate of 1%. Finally, riders for customer programs that have a direct expense offset contributed approximately $6 million of gross margin. Moving on to the environmental and Mustang modernization investment. I have shown you this Slide before so I won't go into details of it. I do want to just point out that our CapEx has shifted to coincide with the major in-service dates in 2017 and 2018 for the projects. We anticipate the Mustang CT's will be in service by the end of 2017, we also expect the scrubbers and the Muskogee conversion to be in service by the end of 2018. In addition, we have included a rate case timing schedule in the appendix. Turning to our investment in Enable, for both the third quarters of 2015 and 2016, Enable Midstream made cash distributions of approximately $35 million to OGE. Year-to-date, OGE has received approximately $105 million in distribution. This Slide highlights the important of Enable as a cash [indiscernible] for OGE. Put in another way, the cash distributions from Enable year-to-date are more than twice the amount as the earnings contribution. This is free cash flow for OGE to utilize. It's important to note that Enable's financial metrics are improving. Their distribution coverage ratio is strong at 1.4 times for the third quarter as compared to 1.15 times for the third quarter of 2015. Distributable cash flow is also improving. DCF for this quarter $189 million, an increase of $35 million over the same quarter last year. Enable remains focused on controlling cost and deploying capital efficiently. We are beginning to see a turnaround in the energy sector and this can be seen in Enable's 2017 guidance. And turning to our 2016 outlook, our businesses are on plan and the outlook remains unchanged. Yesterday, Enable issued 2017 guidance, which reflects an improving commodity environment. Projections include natural gas gathered volumes being up 7.6%, natural gas process volumes up 5%, and distributable cash flow is also increasing 5.5% over their 2016 guidance. As you know, we will provide OGE's 2017 guidance on our fourth quarter call in February. This concludes our prepared remarks. We will be happy to answer your questions.

[Operator Instructions] I am not showing any questions or comments at this time.

Okay.

[Operator Instructions] I would now like to turn the conference over to Mr. Sean Trauschke for closing remarks.

Well, thank you. So in closing, thank you for your time this morning. I appreciate your interest and support of the company and I look forward to seeing you next week at EEI. Take care and have a great day.

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