Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 OGE Energy Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Mr. Todd Tidball.
Please go ahead, sir.
Thank you, operator, and good morning, everyone, and welcome to OGE Energy Corp's Q1 2020 earnings call. I'm Todd Tidwell, Director of Investor Relations. And with me today, I have Sean Croskey, 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 ogeenergy.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 Reg G reconciliation for gross margin and reconciliation of ongoing earnings to GAAP earnings in the appendix. I will now turn the call over to Sean for his opening comments. Sean?
Thank you, Todd. Good morning, everyone, and thank you for joining us on today's call. I want to begin by recognizing the severity of the COVID-nineteen crisis and the impact it has had and is continuing to have on our communities. Public service is a core value that underscores all of our efforts throughout communities we serve. In this unusual time, caring for each other is more important, I believe, than ever.
We believe our company is only as strong as the communities we serve, and it's the shared responsibility to ensure our communities remain strong that will help us all navigate through this unprecedented crisis. From the outset, we took decisive action to help our customers by suspending disconnects for non payments and making flexible payment arrangements for residential and small business customers financially impacted by this extraordinary situation. The Arkansas Commission has allowed accounting mechanisms and processes that will allow for future recovery of costs resulting from the suspension of disconnects. The Oklahoma Commission will hear a similar request today. We are certainly appreciative of both commissions for their partnership and collaborative efforts during this difficult time.
We continue to engage with our communities and provide support. One example is our recent donation to the Meals on Wheels program, which basically enabled local restaurant owners to bring back their employees to provide nutritious meals and then to utilize the Meals on Wheels infrastructure to deliver those meals to homebound seniors and other families impacted by job losses during the crisis. We'll continue to monitor the crisis as it evolves and take additional actions for our customers and communities as appropriate. Of course, we also took definitive action with the health and safety of our members. We were prepared and we executed our plans by establishing a situation room for our employees to contact with any COVID-nineteen questions or concerns.
This was staffed complete with an on staff physician who has provided invaluable advice and assistance through this crisis. We implemented work from home procedures, health screenings, cleanings and other measures. Members in critical operations are practicing shift change separation and observing social distancing guidelines. We restricted access to visitors for all of our facilities and require contractors to follow enhanced safety protocols. These are just a few of the precautions we've implemented to ensure the health and safety of our employees and that of the public we serve.
Because of these actions, today, I am grateful to report we've had no positive test for COVID-nineteen in our work force. I'm incredibly proud of everyone here and how they have continued to excel in this challenging environment. Their efforts and hard work during a truly difficult time cannot be understated. We all hear about the efforts of health care workers and first responders and rightfully so. They've just been outstanding.
But I think we also should give a shout out to the line workers and power plant control room IT and virus response workers, not just at OG and E, but across the nation who kept the lights on and energy flowing. They've done a truly remarkable job. Moving on to our quarterly earnings. Earlier this morning, we reported ongoing Q1 consolidated earnings of $0.23 per share compared to $0.24 per share in
the Q1
2019. The utility is making the appropriate adjustments and is on plan for the quarter the year, while Enable is flat year over year. Steve will discuss the details in a moment. But before he does, I'd like to spend a few minutes talking about our Q1 highlights and provide further details on our efforts to mitigate the effects of the COVID-nineteen crisis on our customers and our business. 1st and foremost, our balance sheet remains strong as do all of our credit metrics.
We purposely built our balance sheet to withstand the rigors of the marketplace and for unprecedented events like what we've experienced in the past couple of months. We have a clear path forward because of the work we've done in the past and the swift and decisive action we've continued to take in ensuring our long term financial health. For example, on April 1, we completed a 10 year $300,000,000 debt offering with a coupon of 3.25. This was an acceleration of a planned financing in 2021. This action improved liquidity and negated any need to access the capital markets this year or next.
Moving on to operations. Last quarter, we announced our grid enhancement plan. The plan focuses on the installation of new technology equipment, communication systems that promote a self healing grid, further strengthening our system, making it more secure, reliable, resilient and efficient for the benefit of all of our customers. Initial construction of these projects began in April and are progressing according to plan. Prior to the COVID shutdown, the commission issued a procedural schedule with the July 7 hearing date.
To date, no change to that schedule has been communicated. And of course, we will continue to work closely with the commission on the best way forward. In Arkansas, we received a final order from the commission rates taking effect on April 1 this year. We've also begun work on the next round of grid enhancements on our Arkansas circuit. It's important to note that despite the COVID-nineteen crisis and all that it entails, our operational metrics continue to improve as we build on prior successes.
Moreover, we have maintained our strategic project calendar and all projects remain on time and on budget. No one really knows when things will get back to normal or how prolonged the economic downturn will last, but rest assured we have plans in place to mitigate those. The economy is the key. Our load growth was up for the Q1 year over year on a weather adjusted basis. Oklahoma and Arkansas are now both opening up for business.
We've spoken with many of our large commercial accounts who will be starting up over the next several weeks. And based on what we're seeing and based on what we're hearing from them and assuming normal weather for the remainder of the year, we expect to meet our utility guidance. Keep in mind, more than 90% of utility earnings are ahead of us. During this difficult time, we do have one key area that differentiates our utility business. Nearly half of our margin comes from the residential sector.
Said another way, a 5% increase in residential sales would almost completely offset a 5% margin decline in all other customer classes combined. We will continue to monitor this situation and if our view changes, we will let you know, but for now, we continue to stay the course. Turning to Enable. We incurred a $700,000,000 equity write down of our investment. This was due to the significant fall in the unit price in the market compared to the value on our books and is not a reflection on the cash flow generated by these assets.
From a cash generation standpoint, Enable has solid assets and poised to deliver strong results as energy prices normalize. Enable has strengthened their already sound financial position. The steps they are taking to increase their annualized retained cash flow by roughly 450,000,000 only serves to make them stronger. Before turning the call over to Steve, I want to restate a few key points. The first is our financial strength.
We do not need equity during our planning horizon. Secondly, I want to make it clear how pleased I am with the performance of the utility during this crisis. There have been no disruptions to the safe and reliable service our customers receive. And third, the economies of both Oklahoma and Arkansas are opening for business. Our balanced approach of ensuring our customers, communities and employees are at the center of everything we do, and it enables us to energize life for all of our stakeholders.
Thank you. And I'll now turn the call over to Steve.
Thank you, Sean, and good morning, everyone. For the Q1, we reported ongoing net income $45,000,000 or $0.23 per share as compared to net income of $47,000,000 or $0.24 per share in 2019. On a GAAP basis, OGE Energy Corp. Reported a loss of $2.46 per share due to a $780,000,000 impairment charge of the equity value of our Enable units. We saw a significant drop in the trading value of the units in the Q1 from our book value of just over $10 per share and determined that an impairment charge to $3.13 per share was necessary.
The contribution by business unit on a comparative basis is listed on the slide. As a result of the impairment, the holding company's earnings includes a tax benefit due to a consolidating tax adjustment related to the interim period that will reverse over the course of the year. At OG and E, net income for the quarter was $20,000,000 or $0.10 per share. 1st quarter gross margin at the utility increased almost $19,000,000 which I'll discuss on the next slide. Looking at the other key drivers, 1st quarter O and M expense was essentially flat despite adding the River Valley plant to our fleet.
Depreciation increased $12,000,000 as additional assets were placed into service and the depreciation expense for the Sooner Scrubbers, which was previously deferred to a regulatory asset. Interest expense increased $5,000,000 primarily due to additional long term debt outstanding, along with interest expense for the scrubbers that was previously deferred in the regulatory asset. Overall, the utility is on plan and off to a good start. We are managing the business to deal with any COVID-nineteen impacts. Turning to Q1 gross margin, utility margins increased approximately $19,000,000 in the Q1 of 2020 compared to 2019.
There were a couple of drivers for the increase, including the recovery of environmental assets placed into service, adding $23,000,000 to margin as well as new customer growth that contributed $6,000,000 Partially offsetting the increase was weather, which reduced margin by $11,000,000 as heating degree days were 21% below last year. Compared to normal, weather reduced margin by $3,000,000 Turning to our investment Enable. Natural Gas Midstream Operations contributed ongoing earnings to OGE Energy Corp. Of $22,000,000 or $0.11 per share for the Q1 of 2020, consistent with the same period in 2019. In addition, Enable Midstream issued cash distributions to OGE of approximately $37,000,000 in the Q1 of 2020 compared to $35,000,000 in 2019.
Turning to 2020 guidance, the utility is on plan. We believe we will be able to offset the impacts of COVID-nineteen with cost control measures. Assuming normal weather, we affirm our current utility guidance. As a result of the revised guidance by Enable and the equity method investment impairment recorded by the company, OGE Holdings projects a net loss between $2.59 to $2.55 per average diluted share. Ongoing earnings are projected to be between $0.36 $0.40 per average diluted share.
Additionally, OGE Energy consolidated earnings guidance for 2020 has changed from $440,000,000 to $463,000,000 of net income or $2.19 to $2.31 per average diluted share to a net loss of approximately $173,000,000 to 154,000,000 dollars or a loss of $0.87 to $0.77 per share. Ongoing earnings are projected to be $417,000,000 to 430 $6,000,000 of net income or $2.08 to $2.18 per share. One more point before we move on to your questions. As you know related to our investment in Enable, the basis difference that we have is being amortized over the average life of the assets, which is approximately 30 years. The impairment we recorded this quarter resulted in an additional layer of basis difference for the company's investment in Enable that will be amortized over the average life of the assets, which is approximately 30 years.
The ongoing total of these adjustments is a combined $49,500,000 for 2020. This concludes our prepared remarks. We will now answer your questions.
Your first question comes from the line of Julien Dumoulin Smith from Bank of America. Your line is now open.
Hey, good morning. This is Richie here for Julien. Hope everyone is safe and healthy.
Yes. Good morning, Richie. All safe and healthy here and I hope you are as well. All
right. Good. That's great to hear. Just wanted to ask a question around your you reaffirmed your guide for the utility, which implicitly implies confidence in the outlook. Just wondering what you're sort of seeing with sales trends in April and what you're expecting through the year?
Was the commentary around the 5% increase in resi and 5% decline elsewhere kind of what you're expecting for the year? And how are you thinking about the O and M efforts to offset that impact?
Okay. All right. Let me kind of take those in pieces here. Maybe dealing with L and M first. We were very fortunate to really have a low growth plan in front of us, and we've been very fortunate to have growth in our service territory.
And over the years, we've been diligent in making sure that our O and M per customer does not increase. And so we've been really cost conscious in reducing our O and M costs. At the same time, we've been trying to expand our customer base. And when this came on and we saw that, we had built plans for roughly something greater than a 1% growth. I mean, we were talking about that.
We recognized that probably wasn't going to happen immediately. So we did not execute on those resources that we were planning to accommodate that new growth. So we've already taken those actions and revised our business plans to minimize any of that increased growth. As far as on what we're seeing in sales, I mentioned to you in my remarks that we actually did see positive growth on a weather normalized basis in the Q1. April is probably the lowest load month we have.
It's just a shoulder season pretty calm, but it confirmed a lot of the things that we expected to see, I. E, we'd expect residential sales to increase. We'd expect some deterioration in commercial and industrial sales. What's given us that confidence is the fact that what a lot of these large commercial and industrial customers are telling us is they do have plans to start back up over the next several weeks. So the last point, we mentioned that 5%, that was just a sensitivity we were trying to give you.
Residential sales represent almost 50% of the margin. So it's a large component. And so what we're trying to share with you though there was as residential sales increase, it covers a large percentage of any deterioration in load from the other classes all combined.
Got it. That is very helpful. I appreciate all the color. And congrats on the keeping the guidance for the utility. That's quite impressive.
Just curious if you can potentially comment on your any initial reaction to your peers' strategic review process?
Probably no comment. I saw that right before I walked in here, Richie. So I'm reading at the same time you are.
Got it. Okay. Thanks a lot. Thanks again for all the time. I'll jump back in the queue.
Thanks, Richie. Have a great day.
All right. You too. Bye.
Your next question comes from the line of Insoo Kim from Goldman Sachs. Your line is now open.
Good morning. Glad to hear that you guys are all doing well and staying safe.
Good morning, Insoo. I hope you are as well. Everybody there healthy?
We are doing okay right now. Thank you. My first question is on the deferral filing that's currently before the Oklahoma Commission. I know I believe you said that there are hearings slated for today on the release or 10 Q. When is the expected decision for such a deferral?
And could you detail a little bit of what would be embedded in that if or included if that is approved?
Sure. So we would hope that the approval is today. We expect that. Just a little color around that into this is for deferral of those bad debts and all the COVID related expenses that were occurring. But a piece I want to make sure is clear.
This is not an OGE filing. We certainly led the effort, but we created a coalition of all the utilities, gas utilities included in Oklahoma. And so this is a utility filing that was made over at the Oklahoma Corporation Commission and it's going to be heard this morning and we would hope to have an order this morning.
So it would be bad debt expense and
I guess COVID related O and M costs?
Yes. Yes. And I mean that's not a yes, that's true.
Got it. And nothing in there that includes any COVID related sales impact? No, no. Understood. And then just on the grid enhancement plan adopted, it seems like the schedule that you laid out is pretty much in line.
Any logistical delays that you're seeing because of COVID?
Not at this time. I mean, we've the commission is still they're going to have this hearing today virtually. They're still conducting business as usual. And we're in constant dialogue, but no change at this point.
Understood. Thank you very much and stay safe everyone.
You too.
Your next question comes from the line of Anthony Carleo from Mizuho. Your line is now open.
Hey, good morning, Sean. Good morning, Steve.
Hey, good morning, Anthony.
Good morning, Anthony.
Everybody well at home? Are you A little
crowded, but everyone's healthy. How about yourself?
Likewise, likewise.
We're making the best of it. I just if I could jump on one of Insoo's question, you said it was a group effort filing for the COVID related expenses and maybe bad debt expense. Has the company quantified what their forecast of bad debt expense is to be in 2020 or 2021?
No. No, we haven't. There's a slight tick up at this stage, but nothing material. And as you know, we're already allowed $3,000,000 of bad debt expense in base rates and we're not there.
Is there any chance you know what was the number that utility had hit in 2008, 2009 crisis? Is that something that you'd have handy?
Yes. So we had 3,100,000
dollars
And we're again, we have $3,000,000 recoverable in base rates.
If I could shift to the write down, I think you spoke about the ability to amortize that maybe it's a $49,000,000 impact annually. Is that something that now has to be funded with $49,000,000 of additional equity?
No. No. It's really an accounting adjustment. So a way to think about it, Anthony, is we just wrote down our book value and Enable because their cash flows are strong didn't have a write down. So they're recording higher depreciation than effectively we would pass through to us.
So we're now accreting that back up to equalize what they are to basically eliminate the depreciation that they're passing through to us for the write down that we took and that creates that accretion event. But it has really no cash implications whatsoever.
Got it. And lastly, I know it's a really small part of your business, but decline or anything in drilling activity or anything you could read through to the utilities business?
Surprisingly through 4 quarters it's held up. We do expect some deterioration there, but of all of our between residential, commercial, industrial and oilfield, oilfield is the smallest sector and the smallest contributor to margin. It's less than 8%. It's important to jobs and things like that, but it's not a big driver in the long run for us.
Great. Thanks for taking my questions and I hope everyone stays healthy out there.
Thank you, Anthony. Appreciate your support and you take care of your family and stay healthy yourself.
Thank you.
There are no questions from participants online. I will now turn the call over to Mr. Sean Trosky for closing remarks.
Okay. Thank you for that. Thank you all for joining us today. Thank you for your interest in OGE. Please take care of yourselves and those around you and stay healthy.
All the best and have a great day.