Good day, ladies and gentlemen, and welcome to the Q1 2019 OGE Energy Corp. Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference, Mr. Todd Tidwell. Please begin, sir.
Thank you, Norma. Good morning, everyone, and welcome to OGE Energy Corp's Q1 2019 Earnings Call. I'm Todd Tidwell, Director of Investor Relations. And with me today, I have Sean Trostke, Chairman, President and CEO of OGE Energy Corp. And Steve Merrill, CFO.
In terms of the call today, we will first hear from Sean, followed by an explanation from Steve of Q1 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 along with other information in the appendix. I will now turn this 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 Q1 consolidated earnings of $0.24 per share compared to $0.27 for the Q1 of 2018. As I reflect on the Q1, I am pleased with the progress our members have made regarding the execution of our plan. On our last call, I noted 2018 was one of the most accomplished years in our 117 year history. It is now the benchmark for us as we look to build on that success in 2019 beyond.
Steve will discuss the details of the Q1 in a moment, but I'd like to give you a few updates on the Q1. Our service territory is strong. Quarter over quarter, we saw new customer growth of nearly 9,000 customers, which is above our historical growth rate of 1%. As I mentioned last quarter, we are closely watching population growth, economic development successes and other positive trends, which could push our load growth even higher. Obviously, this is good for our communities and good for our company.
Oklahoma, as a state is performing well with a low unemployment rate of 3.3%. Oklahoma saw a 5.5% increase in GDP. Fort Smith continues to see positive economic growth with an unemployment rate now at 3.5% And over the last few years, Fort Smith has secured over $700,000,000 in capital investment and created over 6,000 new jobs, and we're certainly pleased to be part of that growth. Our economic development efforts continue to pay dividends. New manufacturing facilities and expansions occurred during the Q1 in the southeast part of our service territory.
Oklahoma City also was selected for a new aircraft production center and a new maintenance facility as our aerospace segment of the economy continues to expand. Electricity costs and reliability continue to be important criteria for these site selections. Grid modernization has become a catch all phrase in our industry, so let me define what it means to us. These are primarily investments in our distribution system that include hardening the circuits and leveraging our smart meters and investments in technology to increase reliability and reduce outage response and restoration times. These investments ultimately enhance the customer experience.
The first phase of our distribution investments, which we made in Arkansas, is complete and is actually exceeding our expectations. Through April of 2019 compared to the same period last year, we've seen a 19% improvement in saving and a 58% reduction in momentaries. The formula rate mechanism in Arkansas allows customers to see the benefits of these investments and for us to receive recovery in a timely fashion. Based on this success, we're moving forward with the second phase there in Arkansas. We are embracing technology to improve the efficiency of operations.
In March, we opened a new state of the art operating center, which will support the ongoing digital transformation of our business. Data driven analytics is integral to our next generation distribution management system. This new system will better enable technology deployment and further improve service quality. In addition, we realigned our operations organization to focus on grid innovation and advanced analytics. More and more customers want enhanced solutions and these new systems and tools will help us partner with them to provide just that.
On the regulatory front, we made pre approval filings in Oklahoma and Arkansas for the 2 plant purchases. In late March, we reached a non unanimous settlement in Oklahoma for the recovery of the 2 plants. Administrative law judge report recommends approval and the hearing is scheduled for next Wednesday. Late last year, we filed our latest rate review in Oklahoma to recover investments in Sooner and Muskogee projects. Each of these projects came in significantly under budget and are operating as we designed.
As a result of these investments and our overall plant emissions are significantly lower from 2,005 levels. Sulfur dioxide emissions are nearly 90% lower, nitrogen oxide emissions are 75% lower and CO2 is down by 40% and we're not done. We fully expect our CO2 reduction to be at 50% by 2,030. We have received intervener testimony last week and almost all the parties recommended approval of our environmental investments. We look forward to bringing this case to a favorable conclusion.
After more than 10 years of court cases and regulatory filings, it will be nice to have this one behind us. In Arkansas, we concluded our 1st formula rate filing with rates taking effect on April 1 this year and we'll make our 2nd filing in October of this year. Before moving to Enable, I would like to discuss our total return proposition. Over the past 5 years, we've delivered an average annual total return near 9%. In fact, over this time frame, customer rates have not increased even though we've invested over $3,000,000,000 into our system.
In fact, our rates today are lower than they were 8 years ago. Going forward, our investment thesis will not change. We plan to invest approximately $600,000,000 per year and these investments will be committed to the continued improvement in the customer experience, maintaining the competitive advantage of our rates, which are 31% below the national average and continuing to attract businesses to our service territory. We project this will deliver a long term earnings growth rate at the utility of 4% to 6% and when combined with our dividend yield, produce an average annual total return of 8% to 10% to shareholders. As a result of our balance sheet strength and the enabled cash flow, we do not foresee any requirements for equity.
We will continue to focus on economic development and service territory growth by providing highly reliable service combined with low rates. Given our track record, I firmly believe that our long term investment thesis is realistic, achievable and sustainable. We are creating shareholder value and growing our communities. Turning to Enable, the Natural Gas Midstream business posted another solid quarter of operational and financial results and distributed $35,000,000 in cash to OGE during the quarter. Volumes were up across all business segments, most pronounced were processing volumes and natural gas liquids produced.
They were up 14% 25%, respectively. There were 52 rigs operating across Enable's footprint. These higher volumes drove an increase in distributable cash flow. In addition, FERC recently approved Enable's request to initiate the Commission's pre filing process for the Gulf Run pipeline project, and this was an important milestone for the project. The Midstream business continues to perform well by expanding its footprint, maintaining a strong balance sheet and providing unencumbered cash to OGE.
Before turning the call over to Steve, I want to reiterate that our businesses are on plan through the Q1. We will continue to invest in our system, stay involved with our communities and create value for customers and shareholders alike. Thank you. And 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 Q1, we reported net income of $47,000,000 or 0 point dollars comparative basis is listed on the slide. The holding company had earnings of $0.03 per share.
This is primarily due to an income tax benefit prevalent in the Q1 because it is a low revenue quarter and will levelize throughout the year. We project holding company results to be in line with guidance. At OG and E, net income for the quarter was $20,000,000 or $0.10 per share as compared to net income of $31,000,000 or $0.16 per share in 2018. First quarter gross margin at the utility decreased approximately $5,000,000 which I'll discuss on the next slide. Looking at other key drivers.
1st quarter O and M increased approximately $7,000,000 primarily due to the timing of work performed when compared to last year. O and M expense for the year is on plan. Depreciation increased $4,000,000 as additional assets were placed into service. Equity AFUDC also decreased approximately $6,000,000 due to the completion of certain environmental projects. Interest expense decreased $5,000,000 primarily due to less long term debt resulting from the maturity of $250,000,000 in senior notes in January.
Overall, we're on plan and off to a good start. Turning to the Q1 gross margin. Utility margins decreased approximately $5,000,000 in the Q1 of 2019 compared to 2018. The change was primarily driven by the implementation of new rate design. Partially offsetting the changes in rates was weather, which contributed $3,000,000 in margin as heating degree days were 11% above last year.
Compared to normal, weather contributed $9,000,000 to margin. New customer growth also contributed $2,000,000 of margin. Before we move on to Enable, I want to touch on this year's regulatory schedule. For the capacity acquisition, we have filed for preapproval in Oklahoma, Arkansas and with FERC. We received a positive ALJ recommendation in Oklahoma and expect decisions in all jurisdictions this month.
For the recovery of the scrubbers and the gas conversion, the hearing in Oklahoma's the hearing in the Oklahoma General Rate case in May is May 29, and we expect a decision this summer. We will make our 3 10 filing in Arkansas by June 1. Recall that this is the rider mechanism for recovery of environmental compliance investments. As you can see, there will be a lot of activity over the next couple of months as we bring many of our proceedings to a conclusion. Turning to our investment in Enable.
Enable had a solid Q1 and their financial metrics are strong. Their revenues, gross margin, adjusted EBITDA and distributable cash flows were higher compared to the Q1 of 2018. In addition, Enable Midstream made cash distributions of approximately $35,000,000 the same amount received in the Q1 of 2018. Turning to our 2019 guidance. Both businesses are off to a good start.
And assuming normal weather, we affirm our current guidance. This concludes our prepared remarks, and we will now answer your questions.
Thank you. Our first question comes from Julien Dumoulin Smith of Bank of America Merrill Lynch. Your line is open.
Hey, good morning. This is actually Richie here for Julien.
Can you
hear me?
Hey, Richie. Good morning. All
right. Just curious how settlement negotiations are going in the scrubber rate case following the positive intervener testimony?
Yes. I think discussions are ongoing all the time, and there's really nothing more to add to that other than to comment on what Steve said earlier. We expect a positive resolution of these cases by the summer.
Okay, got it. Thanks. And just wondering if you do receive a constructive outcome there, when we can expect a decision around capital allocation opportunities given the excess cash on the balance sheet?
Yes. So as we've mentioned at the beginning of the year, I want to make sure that we get through these 2 Oklahoma filings, these 2 Arkansas filings, continue to receive the distribution from Enable. And as we as these outcomes are realized, we'll further refine our capital allocation and investment thesis for you towards the end of the year.
Got it. Great. Thanks a lot. That's all I have.
All right. See you, Rich. Take care.
Thank you. And our next question comes from Charles Fishman of Morningstar Research. Your line is open.
Thank you. Sean, you indicated in your service territory growth is the economic growth is solid. Do you have have you given any indications of what load growth and customer growth are recently?
Yes. So we've been tracking that growth some really close to 1%. We've been watching it very closely, Charles. The last couple of quarters, we are seeing some increases there. A lot of our economic development efforts have produced a lot of results.
So we're cautiously watching this to make sure it's a sustainable increase in load growth, but 1% is where we're at today. We're paying very close attention to it and we're optimistic.
So 1% is the load growth?
Yes.
Okay. And customer growth is roughly the same or a little
higher? Yes.
Okay.
Little higher, but load is important.
And then, one other question for Steve. Steve, you indicated on when you were talking about Slide 6, the gross margin variance, the price variance due to rate design. Will that normalize over the rest of the year?
Yes, it does. Yes, just with new rates in place, basically squeezes everything to the summer months. There's some other issues that go on as it relates with tax reform. We actually recover less from customers in the 1st and fourth quarters due to the seasonality of our revenues, and we recover more in the second and third quarters.
Okay. That's all I had. Thank you very much.
Thank you. Our next question comes from Phil Covello of ExodusPoint. Your line is open.
Hey, good morning, guys.
Hey, good morning.
Just a couple of quick questions and I apologize if this was already asked of juggling a couple of calls. But can you just comment on the prospects for successfully reaching a settlement in this Oklahoma rate case?
Well, I think the prospects for a good outcome are really good, and we expect to get that done this summer. Whether it comes about as part of the settlement or comes about just from a commission ruling, we do expect a positive outcome here.
Okay, great. And then just on the scrubber investments, can you frame for us the impact of regulatory lag to date on those investments not having it in rate base through Q1, I guess?
Right. So, recall in the last rate case we had, the commission had awarded us to when those came into service, we put that on the balance sheet as a regulatory asset. So we're not really incurring lag on those investments from a depreciation standpoint, recognizing we're not earning a return on those yet, but nevertheless, we're not depreciating those assets. And Steve?
Yes. If you wanted to quantify the impact of that equity return for 2019 is about 0
point
And our next question comes from Vedula Murti of Avon Capital. Your line is open.
Hey, Sean. Hey, good morning Vedula.
How are you?
I'm doing great, doing great. How are you doing?
I'm doing fine. Thank you. If we had an outcome in the case that's within your expectations and everything like that. Would you foresee being able to then avoid the rate arena for a few years based on the current CapEx plan? And given the various mechanisms you may have available to you, when you update the capital program as part of capital allocation late this year for next year.
Can you give us a sense as to if you're running I think numbers like 500 or something like that, I think is the run rate right now that if at what level do you think that if you were to elevate capital program that that may require kind of going to the commission and as part of all this have you kind of telegraphed to them in some fashion post this case kind of beyond what you have out there, potential incremental capital?
Yes. So I think the first things first, we're focused on these cases at hand. We have had some discussions trying to begin thinking longer term as we close the book on a lot of these environmental projects. The $600,000,000 of CapEx that we have in our budget, we can certainly move that around. We're really focused on that customer benefit.
We've historically and we expect to continue to be prudent allocators of capital. But the recovery mechanism is important. And as we work through that with the commission and staff, if we were to have some sort of rider mechanism that certainly allows you to stay out a lot longer. And but if you didn't have rider mechanism, we would proceed very cautiously and probably go through the traditional regulatory arena. But there again, Vedula, I appreciate the question, but we want to make stay focused on the current case at hand and get those behind us.
Okay. And then I guess perhaps one other thing. Enable, do you foresee any opportunities or milestones where perhaps the existing relationships and structures could be altered?
Yes. I don't see any milestones. Enable has done a great job strengthening that balance sheet. We're proud of what they've accomplished over there. And like we've talked about, we're really focused on the cash flow that comes into us.
And we want to see that grow. And we like that business over there.
Okay. I just want to make sure also I understand from your previous answer. But with your commentary earlier about load growth and economic growth, is it reasonable to think though that if we kept capital if we just looked at the existing capital program that an acceptable outcome in the rate case would support that CapEx on a go forward basis without necessarily returning back to the rate arena?
Yes. I mean, you'll have to get there eventually, but I think that's I think directionally, you're right.
Okay. Thank you.
All right. Have a great day.
Thank you. And our next question comes from Greg Arell of UBS. Your line is open.
Yes. Thank you.
Good morning, Greg.
Good morning. What drove the change in the amortization of the basis adjustment related to Enable?
Yes. They issued some shares earlier this year, and it's just a dilution loss that offsets that.
Is that a one time
difference? I mean it is as it relates it's coincident with any shares that they potentially issue that would be there. But I don't see anything in the foreseeable future this year that would cause that to occur again.
You can annualize that impact?
Well, it was a charge in the Q1. But yes, I mean, yes, that will levelize out over the year.
Okay.
I didn't quite get what was the $0.06 that you referred to with Phil's question?
Yes, that's just the lack of equity return on the Sooner scrubbers. We have a regulatory asset, so we're picking up the O and M and the depreciation, but we are not currently getting an equity return on that investment. And those units have been in service for quite some time. The first unit went in service in the Q2 last year.
Okay. And then the environmental rider filing June 1, What's involved there?
That's the Act 310 filing in Arkansas, which is a rider mechanism to recover our investments for environmental compliance. So that's really the Sooner Scrubbers and the Muskogee gas conversion, and we can begin collecting on those when we make that filing.
Okay. Thank you.
You're welcome.
Thank you. And our last question comes from David Peters of Wolfe Research. Your line is open.
Yes. Hey, good morning, guys.
Hey, good morning.
Just wondering if you all have had any initial conversations with the new CFO at CenterPoint and kind of how those discussions have gone with respect to the shared investment in Enable, specifically if she has any differing views from the prior CFO?
Well, yes, we've met her last week, and it was good to meet her and look forward to working with her. I think it's way too early to identify if there's any difference of opinion, but I do look forward to working with Shaw.
Time. I'd like to turn the call back over to Mr. Sean Trosky for further comments.
Thank you, Norma, and thank you all for joining us this morning. Thank you for the interest in our company. We're off to a great
Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Everyone have a wonderful day.