Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 OGE Energy Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, Todd Tidwell. You may begin.
Thank you, Tawanda, and good morning, everyone, and welcome to OGE Energy Corp's third quarter 2019 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 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 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 Regulation G reconciliation for gross margin and projected capital expenditures 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. Earlier this morning, we reported third-quarter consolidated earnings of $1.25 per share compared to $1.02 per share in 2018. The utility reported earnings of $1.13 per share and our portion of Enable's earnings were $0.14 per share. Steve will discuss the details in a moment, but right now I want to highlight our third-quarter achievements. Our service territory is growing. During the quarter, new customer growth was 1.1% as we added a record 9,100 customers compared to the third quarter last year. We are also continuing to see higher sales growth. Our low rates and economic development efforts are paying dividends. All of this comes together in terms of load growth. As I've previously mentioned, we are closely watching these positive trends, which could increase load growth above our historical 1%.
The latest economic statistics put Oklahoma's unemployment rate at 3.2%, which is on par with the national average. In our largest load center, Oklahoma City, unemployment rate is 3.1%. Since 2001, we've invested more than $6 billion in our system and customer rates today are lower today than they were eight years ago. This year, an S&P Global article highlighted OG&E as having the lowest rates in the nation. This level of performance requires a continuous improvement culture throughout the company and a positive partnership with our customers and regulators alike. One example of this stewardship we're excited to share is how we're lowering the operational costs at the newly acquired River Valley facility. This plant previously had a 65% minimum requirement under the terms of the PURPA contract. Today, we operate the unit when it is most economical for our customers without constraints.
We're maximizing the fuel savings by introducing natural gas and optimizing the mix of Oklahoma and Wyoming coal with natural gas. With the current natural gas infrastructure in place, we're able to operate the boilers with a blend of 40% gas and 60% coal. NOx and SO2 are reduced by approximately 45% and 40%, respectively, and we lowered CO2 by 20% on top of our previous reductions. By operating the plant differently, limestone and ash production reduce as well, decreasing our overall cost of production by almost $3 million per year for these items alone. These efficiencies create headroom for continued investment while maintaining reliable, low-cost generation for our customers. We've also successfully integrated the newly acquired Frontier plant into our fleet, and for the first megawatt of load into the SPP, the Southwest Power Pool, on September 10th. We've added operational flexibility at the plant as well.
It was previously not offered over the weekends and only dispatched at specific contract output levels. Now that the units are in our fleet, we'll be utilizing their full dispatchable ranges to capture additional market value for our customers' benefit. I'm also pleased to announce that we will be adding two five-megawatt solar projects in Oklahoma under our Utility Solar Program Tariff. These projects are scheduled to be completed by the fall of next year. We expect these to be 100% subscribed before completion. Finally, we've just completed our first year of grid investments on a third of our circuits in Arkansas. The results are outstanding and exceeding our own internal modeling. For example, the SAIDI performance of the upgraded circuits was 69% better than the three-year average and 47% better than what we'd modeled.
Additionally, we've seen a 47% improvement in momentary disruptions as compared to our three-year average. The results are significant and provide great confidence for us as we pursue the second phase in Arkansas and begin similar work in Oklahoma, all benefiting our customers. Turning to regulatory, we received the final order approving the settlement in our most recent Oklahoma rate review. The order provides for full recovery of our environmental investments in the Sooner and Muskogee plants. We're pleased this decade-long journey of environmental compliance investments is complete. With the approval of the federally mandated expenditures now behind us, we remain forward-looking and firmly committed to providing customers with products and services in the most reliable and cost-efficient manner. Toward that end, we're working with our commission and customers to build awareness of the need to further secure, strengthen, and automate the electrical grid.
We're eager to share the successes from our Arkansas investments and present our plans for Oklahoma in a public meeting requested by the Public Utility Division of the Oklahoma Corporation Commission next week. Speaking of Arkansas, we filed a new rate request under the formula rate plan and requested a $5.9 million increase with new rates in place by April 1st, 2020. This is our second update to the formula rate plan, and we're excited about the streamlined process in Arkansas that expedites recovery, increases transparency, and enhances the utility planning process. I did want to briefly discuss our financial position. On October 25th, S&P raised the credit rating of OG&E to A-minus, recognizing the strength of the credit profile at the utility. We increased the 2019 guidance at the utility to be between $1.74 and $1.78 per share.
At the end of September, the OGE board approved a 6% increase in the dividend. Going forward, you should expect a dividend growth in line with our long-term earnings growth rate of 4%-6%. Additionally, we've updated our capital investment forecast. We have a large backlog of reliability and resiliency projects that will benefit customers. As we've done in the past, we'll continue to provide updates on additional value-creating opportunities. Moving forward, we'll continue to work with the Oklahoma commissioners, staff, and key parties to ensure timely recovery for our distribution investments. Moving to Enable. On their call Wednesday, they reported solid results for the third quarter despite lower commodity price environment. They ended the quarter with a strong 1.4 times distribution coverage ratio. In addition, they provided 2020 guidance, and their financial metrics are projected to remain strong during this low commodity price environment.
For 2020, Enable is projecting a 1.3 times distribution coverage ratio and an adjusted debt to EBITDA ratio of four times. Enable remains well-positioned with a strong balance sheet, ample liquidity, and significant firm fee-based cash flows. As we've said many times in the past, you build a strong balance sheet for the difficult times, and they've done just that. As you know, Enable is and will continue to be a cash story for OGE. Later this month, OGE will have received more than $1 billion in distributions since the formation of the partnership. We will continue to use this unencumbered cash to support dividend growth and invest in the utility. In closing, I want to reiterate how pleased I am with the performance of both businesses. We are committed to executing on our strategy to continue growing our businesses and growing our communities and creating long-term shareholder value.
Thank you. I'll now turn the call over to Steve to review our financial results for the quarter. Steve?
Thank you, Sean, and good morning, everyone. For the third quarter, we reported net income of $251 million, or $1.25 per share, as compared to net income of $205 million or $1.02 per share in 2018. The contribution by business unit on a comparative basis is listed on the slide. Turning to gross margin. Gross margin at the utility was $67 million higher for the quarter due to the following. Weather contributed approximately $36 million of margin as cooling degree days increased 17% compared to the third quarter of 2018. Compared to normal, weather increased margin approximately $15 million for the quarter. Year to date, weather has contributed $10 million of margin compared to normal and approximately $16 million compared to last year. Higher average prices contributed $26 million of margin compared to the third quarter of 2018.
This was primarily due to the recovery of the Sooner Scrubbers, the Muskogee natural gas conversion, offset by the expiration of Oklahoma's cogeneration credit rider. Finally, new customer growth contributed approximately $4 million. We added over 9,000 new customers to the system as compared to the third quarter of 2018, supported by our commercial and oilfield sectors. At OG&E, net income for the quarter was $227 million or $1.13 per share in 2019 as compared to net income of $184 million or $0.92 per share in 2018. O&M increased approximately $9 million, primarily due to the new expenses related to our plant purchases in primarily River Valley. Depreciation increased approximately $13 million, primarily due to additional plant being placed into service, including the Sooner Scrubbers. AFUDC also decreased nearly $6 million as we are seeing lower construction work in progress balances with projects being completed.
Finally, income tax expense decreased $9 million, primarily due to the amortization of excess deferred taxes and higher tax credits, partially offset by additional taxes on higher income.
Turning to our investment Enable, they made cash distributions to us of approximately $37 million compared to $35 million received in the third quarter of 2018. Enable also contributed earnings of $0.14 per share in both the third quarters of 2019 and 2018. They ended the quarter with a distribution coverage ratio of 1.4 times. Turning to the 2019 outlook, we're increasing our utility guidance to between $1.74 and $1.78 per share. The earnings contribution from OGE Holdings' ownership in Enable Midstream is projected to be at the low end of previously issued guidance between $0.52 and $0.58 per share. The consolidated guidance projection has increased to between $2.24 and $2.30 per average diluted share. The increased guidance at the utility includes approximately $0.11 of weather and various rider adjustments. This concludes our prepared remarks, and we'll now answer your questions.
Ladies and gentlemen, as a reminder, to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Julien Dumoulin-Smith with BofA Merrill Lynch. Your line is open.
Hey, morning. This is actually Richie here for Julien.
Hey, good morning, Richie. How are you today?
Hey, doing well. Just had a question around your capital refresh. You guys had a pretty sizable increase of about $150 million on average per year. Just curious how you think about the utility growth rate and executing within the 4%-6% range, given the increase in the CapEx.
Yeah, Richie, this is Sean. We feel really good about the growth range. As we've done in the past, we'll continue to evaluate that. As we see opportunities to invest additional dollars for our customers' benefit, we'll do that. What we've tried to do here is keep it simple and adjust our growth rate based on last year's results. We're not picking the starting point or anything like that. I think the third point I'd say is, as we've done in the past, we are going to deliver this growth rate.
Got it. That makes a ton of sense. Just curious, you alluded to discussions with the OCC around strengthening and automating the grid. Just curious how you think about the potential for a grid modernization rider, given the one afforded to PSO, although commentary from the settlement seemed to be a bit opposed for a rider. Just curious how you're thinking about that.
Richie, great question. We've had a lot of constructive and very productive conversations with the commissioners and staff and customers. That really what produced the staff wanting to have a public meeting next week for us to come forward and talk about all this. We're going to take that feedback, we will be filing after discussions with the staff and the commissioners on what the actual mechanism would look like. I don't think the other riders that you're referencing there really have a whole lot of merit on what we're going to do.
Got it. That's very helpful. That's all I had. Thank you.
Okay. Thanks, Richie. Take care.
Thank you. Our next question comes from the line of Shahriar Pourreza with Guggenheim. Your line is open.
Hi, good morning. It's actually Constantine here for Shahriar. Congratulations on a great quarter.
Hey, thank you. Good morning.
Good morning. Yeah, the big story seems to be the CapEx update. Just to kind of follow on to some of those questions. Just in a high-level view, are the programs that you're planning to expand into kind of understanding that they're driven by the success of the previous program? Is it going to be just more of the same and kind of incremental in Oklahoma? To kind of rephrase it a little bit differently is, on a longer-term sense, how do you plan around kind of the regulatory requirements and the lag, kind of given the conversations are just starting with the OCC?
Yeah. Good question. If your question was, are we going to do a lot of the similar activities we've done in Arkansas? Yes. Through that process, we're beginning the second round in Arkansas, and we've learned a lot already, and we're going to implement those learnings into what we do in Oklahoma. This is something that I think just gets that build on previous success. As far as the recovery, we're going to work through that with the Commission. Do keep in mind that these are not large construction projects, so you're not going to have a lot of delay between the beginning and in-service implementation. What we'd like to have is some sort of contemporaneous recovery mechanism, and we'll certainly work through that with the Commission.
Wonderful. Just without kind of moving into kind of 2020 or anything beyond there, can you talk from a high level of how kind of these programs contribute to the kind of long-term kind of view there. Just kind of thinking about the runway for a lot of these resiliency programs and what do you see there?
Constantine, I'm not sure I'm following. Is the question, what sort of runway beyond 2020 do we see as far as investment opportunities?
Right.
Yeah
the resiliency programs and.
Yeah
what's the kind of system needs that you're seeing?
Yeah. I would characterize it as it's system opportunities. We see a lot of opportunities to really enhance the value of the product we provide. I'm also sensitive and I like the fact that our rates are lowest in the nation. That's really helped us increase demand on our system, and as I mentioned in my remarks, we're closely watching this low growth. There is some upward momentum there. We've said before, we have a pretty big inventory of opportunities we see, and it's going to be a combination of how the regulatory mechanism works and how successful we are implementing those. We're very confident that we have a long runway here.
Perfect. That sounds great. Thanks.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Insoo Kim with Goldman Sachs. Your line is open.
Thank you. Good morning. Just one question. Given the increased CapEx forecast in the outer years, just do you have a rough sense of when we could expect the next rate case filing in Oklahoma?
Yeah. We're going to have this public meeting next week. We'll take that feedback and input. You should expect us to be filing a few months after that.
Got it. In terms of the dividend growth, again, I don't think you guys guide to a specific payout ratio target range. Is that something more on a growth basis with the 6% than the 4%-6% EPS, you'll be somewhere within, in line or close to the EPS growth range going forward for dividend growth?
Yeah. I think what's more important to us is our FFO to debt ratio-
Right
from a rates perspective versus a payout ratio. Something in line with our earnings growth rate of 4%-6% is a fair place to be.
Got it. Thank you very much, and congrats on earnings.
Hey, thanks. Take care. See you next week.
Yep.
Thank you. Our next question comes from the line of Anthony Crowdell with Mizuho. Your line is open.
Hey, good morning. Hopefully this is a quick question?
Good morning, Anthony.
Sean, are you okay there? You seem like you're battling a little winter cold.
Well, thank you, Anthony, for your concern about me. I appreciate that. That's very kind. I think it just turned cold here, so I think it is starting to come on. Yeah, I'm all right. Thank you for asking.
We're counting on you. Just remember that. Just, is the CapEx increase rider dependent? If for some reason a rider doesn't get approved or something, does the level of CapEx change in your forecast?
Yeah. Anthony, we've had very constructive and productive discussions. Based on those discussions, that's why we felt comfortable adding this CapEx out there. Okay? I don't want to get ahead of myself in prejudicing the future outcomes and things like that, but it's safe to say that I'm very encouraged by the discussions we're having and the outlook we have.
If I could tie it on, and it may be a similar answer. If I followed up on Insoo's question on dividend growth, does the growth rate of dividend change, or is that driven at all by the approval of a rider, of like a rate rider?
I think again, we've kind of targeted the dividend growth rate to be in line with the earnings growth rate. To your specific point, the FFO to debt from a credit rating perspective is an important metric for us. We'll watch both of those. Those are the big drivers more than it is the outcome of any individual rate activity.
Great. That's all I had. I hope you feel better, and looking forward to seeing you in Orlando.
Hey, thanks, Anthony. Take care. Appreciate your concern.
Thank you. Our next question comes from the line of Charles Fishman with Morningstar. Your line is open.
Thank you. Hey, Todd, this public meeting next week, was that just a precursor to the rate filing, or is that something special, or what is your expectations for that, and what drove that meeting to be scheduled?
Yeah. Charles, In our discussions, I think it was the staff's idea that it would be good to have a public meeting. That, if you want to call it a precursor for a filing, sure, it is. I think this is extremely positive, encouraging others to communicate and make any suggestions or observations they may have. I think this is an entirely positive step initiated by the Public Utility Division and the commissioners.
Okay. With the CapEx increase, still no equity in the three-year or five-year plan?
No, Charles, this is Steve. No, there's no equity needs in the planning horizon. Okay. That's all I have. Thank you.
Thank you. Our next question comes from the line of Paul Patterson with Glenrock Associates. Your line is open.
Hey, how you doing?
Hey, good morning, Paul.
I apologize. I didn't fully get the increase in sales growth that you guys are now expecting.
We didn't indicate that, but this year we've had north of 2% in sales growth, which is really strong. We've had customer growth of 1.1% year-over-year. As we've talked before, we're watching this to see how all of this translates into load growth. We do believe that there's some upward momentum there, and when we're comfortable, we'll update that for you as well.
Okay. I apologize for being a little confused. You guys see something north of the 1%, as I heard on the call, correct?
Yes. That's correct.
You haven't fleshed out what that would be if I understood you correctly.
That's correct, Paul. Our historical rate's been at 1% of load growth, and we've been talking for the last four or five quarters that there is some upward momentum there. There's a lot of modeling that goes on to forecast load growth, and we're zeroing in on something.
How should we think about this CapEx increase in relation to your forecasted sales growth? I apologize for being a little bit slow on this.
Yeah. No, I think that's a really good question. I think to the extent that we continue to see growth, and we're able to continue to attract customers and new businesses and have increased sales growth, it gives you the opportunity to spread the cost over a larger base and therefore minimizing the customer impact. I think this is a huge positive.
Okay. Well, thanks so much. Have a good one.
All right. Take care. Thank you, Paul.
Thank you. I'm not showing any further questions. I would now like to turn the call over to Sean Trauschke for closing remarks.
Thank you, Tawanda. Thank you all for your interest in OGE Energy Corp and for being on the call today. Have a great day. Take care.
Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.