Earnings Labs

OGE Energy Corp. (OGE)

Q1 2018 Earnings Call· Sun, May 6, 2018

$47.43

-0.34%

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the OGE Energy's First Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Todd Tidwell, please go ahead.

Todd Tidwell

Analyst

Thank you, Abigail. Good morning, everyone, and welcome to OGE Energy Corp's First Quarter 2018 Earnings Call. I'm Todd Tidwell, Director of Investor Relations. And with me today I have Sean Trauschke, Chairman, 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 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 Regulation G reconciliation for gross margin in the Appendix. I will now turn the call over to Sean for his opening comments. Sean?

Robert Trauschke

Analyst

Thank you, Todd, and good morning, everyone, and thank you for joining us on today's call. Well, it is May in Oklahoma and that usually means storms and extreme weather. And yesterday and through the night our service territory expands tornadoes and rain, hail, high winds just the full complement. But our crews did a great job, as usual, working through the night and I'm happy to report all customers will be back in service this morning. So turning to the quarter. Earlier this morning, we reported first quarter consolidated earnings of $0.27 per share. And both businesses performed well and accomplished a great deal. So we're off to a great start and certainly on plan for the year. At the utility, revenues benefited from positive whether and the impact of rate design from last year's Oklahoma rate award. Steve will discuss the details in a moment. But right now, I want to highlight our first quarter achievements. Our new state-of-the-art Mustang Energy Center is in operation serving our customers. We're proud to usher in a new era of generation technology at a location that's been powering our communities and facilitating a critical role in the region's growth and economic development. The Mustang Energy Center is more efficient, more sustainable and more responsive, and it maintains its legacy of providing affordable and reliable power to our communities. The new units with their staggered market availability dates have already seen close to 500 starts and produced more megawatts through the first four months of this year than the legacy units did all of last year. From an emission standpoint with the new units, we are experiencing a 62% decrease in our NOx emission rates. This further validates their importance in the SPP footprint. This was a project of substantial scale that…

Stephen Merrill

Analyst

Thank you, Sean, and good morning. For the first quarter, we reported net income of $55 million or $0.27 per share as compared to net income of $36 million or $0.18 per share in 2017. The contribution by business unit on a comparative basis is listed on the slide. At OG&E, net income for the quarter was $31 million or $0.16 per share as compared to net income of $16 million or $0.08 per share in 2017. First quarter gross margin at the utility increased approximately $35 million, which I will discuss on the next slide. Looking at other key drivers, first quarter O&M expense decreased $5 million, primarily due to the timing of plant maintenance. O&M expense for the year is on plan. Depreciation increased $24 million. The primary driver for the variance is timing related to last March's Oklahoma rate order. As you will recall, we booked 6 months of 2016's depreciation adjustment, approximately $20 million, in the first quarter of 2017. Interest expense increased approximately $4 million due to the additional long-term debt issued in March and August of 2017. Income tax expense decreased $4 million due to the reduction of the corporate federal tax rate and an increase in state tax credits generated, partially offset by higher pretax income. Turning to the first quarter gross margin. Utility margins increased approximately $35 million in the first quarter of 2018 compared to 2017. There are 2 main drivers for the increase. First is the impact of the Oklahoma rate order. You'll recall that we implemented new rates in May of 2017, therefore, margins in the first quarter of 2017 were under the old rates. Under the new rate design methodology, more revenue was shifted into the first quarter. Another way to say this is the small smoothing of…

Operator

Operator

[Operator Instructions]. Our first question comes from the line of Josephine Moore with Bank of America Merrill Lynch.

Josephine Moore

Analyst

You mentioned strong sales growth on the industrial side. I was just curious, is that temporary? Or could we see that continue?

Robert Trauschke

Analyst

I think this is a good inflection point for an improving economic outlook here in our service territory. We saw an increase in oilfield sales, Todd and Steve both mentioned about the rig count at Enable. They have a lot of pipeline assets in our service territory. And we have mentioned for a number of quarters the -- some of the new businesses have been relocating to our service territory. Just last Friday, we commissioned and had the groundbreaking for a new steel company that relocated who is manufacturing rebar in the southern part of our service territory. So we're hopeful that there'll be more to come. But I think this is a very good inflection point for an improving economy.

Josephine Moore

Analyst

Great. I mean with that, the strong weather in the first quarter and then Enable's strong guidance for the last quarter, do you feel comfortable coming in maybe towards the high-end of the guidance?

Robert Trauschke

Analyst

Yes, as Steve mentioned, the majority of our earnings, specifically at the utility, come in the second and third quarter. And while the weather benefit was favorable in the first quarter, it was still pretty small. And -- where the weather benefit will really occur to the extent that it is favorable will be in the second and third quarter. So we'll get through those quarters before we make any pronouncements about guidance. But we feel very confident that we're on plan.

Josephine Moore

Analyst

And then just 1 last question. On the rate case underway in Oklahoma, any updates you can give us there?

Robert Trauschke

Analyst

Really no updates at this point. The intervenor testimony was due last night, so we will certainly go through that and evaluate that and proceed accordingly.

Operator

Operator

Our next question comes from the line of Paul Ridzon with KeyBanc.

Paul Ridzon

Analyst · KeyBanc.

What was the impact of -- I think last year you were booking interim rates for '16, what was the impact of that rolling off?

Stephen Merrill

Analyst · KeyBanc.

In the first quarter, we booked about $0.06 related to 2016 and 2017. So that all kind of pretty much flushed through the first quarter.

Paul Ridzon

Analyst · KeyBanc.

And it looks as though one of the things you called out was lower taxes -- but are you reserved against that? Is that -- if I read the queue properly?

Stephen Merrill

Analyst · KeyBanc.

Well, we certainly have to refund currently because we're in the middle of a rate case, we're over-collecting from where tax rates are now. So we're reserving that over-collection to begin to give that back once we get an order from the commission. We don't have a mechanism to do that until they give an order to do so.

Paul Ridzon

Analyst · KeyBanc.

But you did not benefit from lower taxes in the quarter because you reserved against it?

Stephen Merrill

Analyst · KeyBanc.

That's correct. That's correct.

Robert Trauschke

Analyst · KeyBanc.

There's no P&L impact for us.

Operator

Operator

Our next question comes from the line of Shar Pourreza with Guggenheim Partners.

Shahriar Pourreza

Analyst · Guggenheim Partners.

Can you hear me?

Stephen Merrill

Analyst · Guggenheim Partners.

Yes.

Shahriar Pourreza

Analyst · Guggenheim Partners.

Sorry about that, it's -- this was addressed, there're a couple of calls going on this morning. Just on sort of your grid mod filings. Can you just remind us -- it's a big piece of, sort of, your CapEx when you think about '19 and beyond. What sort of the podium as far as how you're thinking about recovery? Is it within the FRP that's, sort of, happening in Arkansas? Would it necessitate another filing in Oklahoma. And sort of, I guess, more importantly, how's the educational process going on, especially on grid mod in Oklahoma?

Robert Trauschke

Analyst · Guggenheim Partners.

So a really good question. And I think you kind of laid out our game plan. In Arkansas, we will use the FRP. We'll be making those filings on an annual basis and so that's how we'll recover that. And we'll begin as we restart this program. Remember, we, kind of, delayed it as we were going through this environmental compliance plan because of the federal requirement. But -- and we'll begin this in Arkansas, we'll pick this up after the Mustang and Sooner projects are complete in Oklahoma. And you're exactly right, we will probably have a lot of dialogue and discussion with the Oklahoma commissioners and staff to make sure that they recognize the full benefits of that. And then see if we can't develop a constructive pathway to see that recovery, whether that includes a rider, whether that includes formal rate-making process, we'll cross that bridge when we get there. But I think your point is exactly right. It's our job to make sure that we educate them beforehand.

Shahriar Pourreza

Analyst · Guggenheim Partners.

Got it, that's helpful. And then just on Oklahoma's, sort of, construct, right. Is there any sort of updates on how the focus groups and everything is going as far as looking in and potentially revisiting how the Oklahoma or the OCC sort of accounts for their regulatory proceedings? Is there any status there? And then just looking at the rate case that we have with interim rates that are -- should be, I guess, implemented sometime in the middle of this year. What is sort of your viewpoint as far as a potential settlement?

Robert Trauschke

Analyst · Guggenheim Partners.

Sure. So good question. So as it relates to the task force that was initiated by the Governor last year, I know they're conducting interviews and I think the plan is they're going to release the interim report this summer and then, I think, their final report is due the 8th-or-so of November after the elections. And so we'll see where that comes out at. So I think that process is proceeding. As far as this case we have before us on Mustang, you're right, I guess you're referring to the 180-day timeframe that we could implement rates this summer, that's exactly right. I would be hopeful that we would not get to that point. As you recall, we delayed the filing of this Mustang case to incorporate the benefits of tax reform. There is going to be no impact for this investment to our residential or industrial customers. And so we think this is teed up very nicely to get resolved. And I'm hopeful that it can get done before we have to implement rates.

Shahriar Pourreza

Analyst · Guggenheim Partners.

And that just leads me to just 1 last question. On the upcoming rate filing as far as the -- from the Scrubbers and the conversion, is there -- do you have any indication preliminary of what the impact could be from a retail rate perspective there?

Robert Trauschke

Analyst · Guggenheim Partners.

You're talking about on the Scrubbers?

Shahriar Pourreza

Analyst · Guggenheim Partners.

Correct.

Robert Trauschke

Analyst · Guggenheim Partners.

So we're working through that right now. And it's probably a bit premature to, kind of, put that number out there too soon. But I do not view that as a large impact.

Operator

Operator

And your next question comes from the line of Greg Gordon with Evercore ISI.

Unidentified Analyst

Analyst · Evercore ISI.

This is actually [indiscernible] on for Greg. So my questions on the rate case you guys have already answered. Just on the dividend, so target is 10% through '19. Is that -- when does that get reviewed?

Stephen Merrill

Analyst · Evercore ISI.

I mean, we're already taking a look at that, but we certainly want to get through the Mustang filing, have some early indications on Sooner and then it would be something we would address sometime next year.

Unidentified Analyst

Analyst · Evercore ISI.

Perfect. And then just on the -- so you guys increased your CapEx in the last call. Just wanted to get an understanding at a high level, where does that put you in terms of either CFO-to-debt metric? And what are you targeting? So I'm trying to get to how much excess balance sheet capacity you may have now that you've increased your CapEx?

Stephen Merrill

Analyst · Evercore ISI.

Sure. I think what you'd see with that CapEx is our FFO-to-debt staying in line with where we've been historically, strong investment rate. We would look to that not to have any impact on our credit metrics and that's kind of how we manage the company to -- keep a strong FFO to debt consistent with where we've been. Yes, obviously, north of 20%. Last year was kind of our highest CapEx, so that put a little stress on our FFO-to-debt, and we'll be working through that as we start to get recovery for these assets we've put in service.

Unidentified Analyst

Analyst · Evercore ISI.

It goes north of 20%?

Stephen Merrill

Analyst · Evercore ISI.

Yes.

Unidentified Analyst

Analyst · Evercore ISI.

And that's through your CapEx forecast period? Or through 2020?

Stephen Merrill

Analyst · Evercore ISI.

No, through the CapEx forecast period.

Operator

Operator

Our next question comes from the line of Joe Zhou with Avon Capital Advisers.

Andrew Levi

Analyst · Avon Capital Advisers.

It's Andy Levi. Just two questions. Just on Enable and CenterPoint's bid -- not bid, but the acquisition of Vectren. Just any thoughts on how that may or may not affect Enable? And also your thinking on Enable?

Robert Trauschke

Analyst · Avon Capital Advisers.

Well, it doesn't change our thinking on Enable. We are very comfortable with Enable, we like that business, we understand that business, so it doesn't change our thinking on Enable. I think in fairness, Andy, I do agree with you. It probably does bring back to the forefront the exposure to CenterPoint's process with regard to the Enable units. But as far as what actually happens there, you need to ask CenterPoint. That's their decision, and it's their responsibility to communicate that.

Andrew Levi

Analyst · Avon Capital Advisers.

Okay. And then just on the current rate case, so you said last night intervenor testimony was filed, does that include staff as well or just intervenor?

Robert Trauschke

Analyst · Avon Capital Advisers.

Yes, yes, so it was all -- as soon as it's made public, we'll go through it all and figure out what happens, what everyone said. But yes, that was the deadline was late yesterday afternoon and so I think they're loading it and putting it on the system right now.

Andrew Levi

Analyst · Avon Capital Advisers.

Okay, and that again -- that includes the staff?

Robert Trauschke

Analyst · Avon Capital Advisers.

Yes, yes, it does.

Andrew Levi

Analyst · Avon Capital Advisers.

And so just to understand the process from here, I guess settlement conference takes place in the first week of June or something like that?

Robert Trauschke

Analyst · Avon Capital Advisers.

That's correct. It's set for June 8. But Andy that's the procedural schedule, that doesn't -- we'll evaluate where everything comes in at and to the extent that there is an opportunity to have productive discussions, we will.

Andrew Levi

Analyst · Avon Capital Advisers.

Before June 7, you're talking?

Robert Trauschke

Analyst · Avon Capital Advisers.

Yes.

Andrew Levi

Analyst · Avon Capital Advisers.

I understand, that makes sense. Okay, so basically now since the testimony has been filed and everyone knows each other's positions for no better way to put it, it's a good time if the parties want to, to sit down and talk, is that fair?

Robert Trauschke

Analyst · Avon Capital Advisers.

Yes.

Andrew Levi

Analyst · Avon Capital Advisers.

Okay. And I guess we're fairly optimistic hopefully that you guys will settle something.

Robert Trauschke

Analyst · Avon Capital Advisers.

No, no, I agree, keep going.

Operator

Operator

And we have a follow-up from the line of Paul Ridzon with KeyBanc.

Paul Ridzon

Analyst

Just wanted to go back to the interim rates. So does that imply that we really saw the $0.07 you mentioned plus the $0.06 of rate design shifting throughout the year?

Stephen Merrill

Analyst

Well, the $0.06 was in the first quarter of 2017. You did see the impact of rate design in this current quarter.

Paul Ridzon

Analyst

I got it. This is a normal quarter and last year was [indiscernible].

Stephen Merrill

Analyst

Yes, that's right, that's exactly right.

Paul Ridzon

Analyst

Okay, okay, got it. And how do you see that $0.07 kind of reversing out over the course of the year?

Stephen Merrill

Analyst

I mean it really will be -- AFUDC will kind of play out through the year. But you really wouldn't need to adjust probably what you have for second, third and fourth quarters, this is just a slight shifting into the first quarter.

Paul Ridzon

Analyst

Okay, so a couple of pennies each quarter?

Stephen Merrill

Analyst

That's probably not too far off, yes.

Operator

Operator

[Operator Instructions]. We have a follow-up from the line of Josephine Moore with Bank of America Merrill Lynch.

Josephine Moore

Analyst

Just one very quick follow-up on here. On a run rate basis, your O&M seems to come in pretty -- or your total OpEx comes in below guidance. Are we expecting a meaningful uptick there in the later quarters or...?

Stephen Merrill

Analyst

Yes, it's really just a timing issue. We're actually on plan with what we put out for guidance, it's really just timing of expenditures, particularly plant maintenance. Your outages tend to occur in the summer months and in the fall.

Josephine Moore

Analyst

Got it. And then Sooner coming online too, is that also a driver there?

Stephen Merrill

Analyst

Sure. Yes, absolutely.

Robert Trauschke

Analyst

There will be some OpEx associated with that.

Operator

Operator

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

Robert Trauschke

Analyst

Thank you, Abigail. And thank you all for your interest in OGE Energy Corp. and for being on the call today. Have a great day.