Good day, ladies and gentlemen, and welcome to the OGE Energy First Quarter 2018 Earnings Conference Call. 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.
Thank you, Abigail. Good morning, everyone, and welcome to OGE Energy Corp. Q1 2018 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 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 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? 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 experienced 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 Q1 consolidated earnings of $0.27 per share, and both businesses performed well and accomplished a great deal. So we're off to a good start and certainly on plan for the year.
At the utility, revenues benefited from positive weather and the impact of rate design from last year's Oklahoma rate order. Steve will discuss the details in a moment, but right now, I want to highlight our Q1 achievements. Our new state of the art Mustang Energy Center is 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 1st 4 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 required numerous contractors, hundreds of workers and more than 1,400,000 work hours. A testament to the hard work and commitment, the project was executed on time, under budget and incident and injury free.
It doesn't get any better than this. Our service territory continues to grow with 7,200 new customers over the last year, and we are growing near our historical average of 1%. I should note, quarter over quarter, we experienced a 4% increase in oilfield sales and a 5% increase in industrial sales. The latest economic statistics put Oklahoma's unemployment rate at 4.1%, which is on par with the national average. Our largest load center, Oklahoma City, is below the national average, all signifying an improving economic outlook.
On the operations front, the start of 2018 has continued our success. Our combined cycle and coal units have had their best availability to the market this quarter since we entered the SPP integrated market in 2014. This is important because it demonstrates that we've been flexible, reliable and adaptable to both market and commodity changes and how our units are utilized in the market. SADI for the quarter saw a 20% improvement over the Q1 of 2017. Our Covington solar farm is in service.
The Sooner scrubber project is 82% complete, on time and on budget, and we are currently setting record performance and safety results going 209 days without an incident. Excellent performance. I have to be honest, it feels good to have the Q1 behind us with a positive benefit from weather. Albeit small, it's the first time in a number of years that we have begun the year with positive weather. Further to that point, it has been 5 years since we've had benefit from favorable weather.
I say that only to make the point that weather changes and is not something you control. What does not change is our execution and focus on getting better, another quarter of solid execution by everyone here at the company. This year, we will restart our focus on grid modernization. We plan to begin significant deployment in Arkansas with Oklahoma following in 2019. Grid modernization is the next step in our smart grid deployment.
This initiative will focus on improving, replacing existing distribution infrastructure as well as upgrading systems that allow us to respond to outages more quickly and seamlessly connect with new energy technologies in the future. We'll be able to improve the reliability and resiliency of our grid as well as reduce costs for our customers for more efficient response and operation. As we move forward, we will optimize ideas and applications across our service territory that improve reliability and provide the most benefit to our system and to our customers. This will enable us to meet customer demands and to position our infrastructure for the future. Turning to regulatory.
As you know, we filed a general rate review with the Oklahoma Commission in January. The primary purpose of that filing is recovery of the Mustang Energy Center, and we'll make our 1st Arkansas Formula 8 filing in October. We will then file another case in Oklahoma at the end of 2018 for the recovery of the Sooner scrubbers. We anticipate the 1st scrubber to be in service in June, and in fact, the work to tie in that first scrubber is currently underway. Finally, last week, a ruling was issued against the OCC, finding they did not have the authority to grant preapproval of our scrubbers at Sooner under the statute used.
This does not change the intent or the unanimous approval of the commission to the reasonableness of our plan, and we'll work with the commission to resolve this in our filing later this year. Moving on to Enable. On their call yesterday, they reported strong results for the Q1. They reported all time high quarterly natural gas gathered volumes and processed volumes supported by strong rig activity in the Arklatex and Anadarko Basins. As you know, volumes are the key to this business.
Quarter over quarter, natural gas gathered volumes increased 30% and processed volumes increased nearly 19%. Year to date, they have contracted or recontracted transportation agreements with over 375,000 dekatherms a day of capacity. And they've also updated their outlook to reflect an even stronger 2018. So as a sponsor of Enable, we continue to be pleased with their performance and what the Enable team is building. Last but not least, the Enable Board approved the quarterly distributions this week of $35,000,000 of which $35,000,000 will be distributed to OGE.
This will make distributions received by OGE since the formation of Enable totaling more than $800,000,000 This unencumbered cash has kept us out of the equity markets and supported our CapEx and dividend growth. In closing, I want to reiterate how pleased I am with the performance of both businesses. We have a long term utility growth rate of 4% to 6% and continue to grow our dividend at an industry leading rate of 10% a year through 2019. As a management team, we're committed to executing on our strategy to continue growing our business, growing our communities and creating long term shareholder value for all of our shareholders. 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. For the Q1, we reported net income of $55,000,000 or $0.27 per share as compared to net income of $36,000,000 or $0.18 per share in 2017. The contribution by business unit on a comparative basis is listed on the slide. At OG and E, net income for the quarter was $31,000,000 or $0.16 per share as compared to net income of $16,000,000 or $0.08 per share in 2017. 1st quarter gross margin at the utility increased approximately $35,000,000 which I will discuss on the next slide.
Looking at other key drivers, 1st quarter O and M expense decreased $5,000,000 primarily due to the timing of plant maintenance. O and M expense for the year is on plan. Depreciation increased $24,000,000 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 20 sixteen's depreciation adjustment approximately $20,000,000 in the Q1 of 2017. Interest expense increased approximately $4,000,000 due to the additional long term debt issued in March August 2017.
Income tax expense decreased $4,000,000 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 1st quarter gross margin. Utility margins increased approximately $35,000,000 in the Q1 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 Q1 of 2017 were under the old rates. Under the new rate design methodology, more revenue was shifted into the Q1. Another way to say this is a small smoothing of our annual revenue curve. This change accounted for $19,000,000 of margin or $0.07 per share.
The other main driver was weather. Heating degree days were 36% above last year and this accounted for $14,600,000 of margin or $0.05 per share as well. There have been impacts from the 2017 rate order for the comparative periods, but the bottom line is that we anticipated this and we're on plan for the year. Turning to our investment in Enable. For the Q1 of 2018, Enable made cash distributions of approximately $35,000,000 the same amount received in the Q1 of 2017.
Enable also contributed earnings of 24,000,000 dollars or $0.11 per share compared to $20,000,000 or $0.10 per share in 2017. Enable had a solid Q1 and their financial metrics are strong. Enable set all time quarterly records for gathering and processing volumes. Adjusted EBITDA increased by $36,000,000 and DCF increased $25,000,000 compared to the Q1 of 2017. They ended the quarter with a distribution coverage ratio of 1.4 times.
Enable increased their guidance for the year, which points to continued execution of the business and recovery in commodities. Enable remains focused on controlling costs and deploying capital effectively. Turning to 2018 outlook. As you know, the majority of utility earnings occur in the 2nd 3rd quarters. And assuming normal weather, we are comfortable with our current guidance.
In the appendix, we have updated the guidance assumptions for this year following the revenue recognition and pension accounting changes. These are income statement reclassifications and do not affect our initial guidance ranges. This concludes our prepared remarks, and we'll now answer your questions.
Our first question comes from the line of Josephine Moore with Bank of America Merrill Lynch. Your line is now open. Good morning, everyone. How are you doing?
Hey, doing well. How are you?
Good. Congrats on a very, very strong quarter.
Well, thank you. Thank you.
I just you mentioned strong sales growth on the industrial side. I was just curious, is that temporary? Or could we see that continue?
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've mentioned for a number of quarters the some of the new businesses have been relocating to our service territory.
Just last Friday, we commissioned had the groundbreaking for a new steel company that relocated and 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.
Great. I mean, with that, the strong weather in the Q1 and then enable strong guidance for the full year, do you feel comfortable coming in maybe towards the high end of the guidance? 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 Q1, it was still pretty small. And where the weather benefit will really occur to the extent 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.
Got it. And then just one last question. On the rate case underway in Oklahoma, any updates you can give us there?
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.
That's all on my end. Thank you very much.
Thank you. Have a great day.
You too. Thank you. Our next question comes from the line of Paul Ridzon with KeyBanc. Your line is now open.
Hi, Paul. Hello? Paul?
Hello, can you
hear me?
Hi, Paul.
Yes. Can we hear you? Can you hear us?
Okay. Yes, I had a
little technical difficulty there, I guess. What was the impact of
I think last year you
were booking interim rates for 2016. What was the impact of that rolling off?
In the Q1, we looked about $0.06 related to 20 16 in 2017. So that all kind of pretty much flushed through the Q1.
And it looks as though one of the things you called out was lower taxes, but you reserved against that, is that if I read the queue properly?
Well, we certainly have to refund. Currently, because we're in the middle of a rate case, we're over collecting 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.
But, you did not benefit from lower taxes in
the quarter because you reserved against that?
No, that's correct. That's correct. There's no P and L impact for us.
Got it. Thanks. That's all my questions.
Okay. Thanks.
Thank you. Our next question comes from the line of Shahriar Pourreza with Guggenheim Partners. Your line is now open.
Can you hear me? Yes. Hi, Sean.
Hey, guys. Sorry about that. This was addressed as 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 as we think about 2019 and beyond. What's 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 is the educational process going on, especially on grid mod in Oklahoma?
Yes. So, really good question. And I think you kind of laid out kind of 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. You remember, we kind of delayed it as we were going through this environmental compliance plan because of the federal requirement, but 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 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.
Got it. That's helpful. And then just on Oklahoma's sort of construct, right? Is there any sort of updates on how sort of the focus groups and everything is going as far as looking into potentially revisiting how the Oklahoma or the OCC sort of accounts for sort of their regulatory proceedings? Is there any status there?
And then just looking at sort of 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?
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 are going to release an interim report this summer. And then I think their final report is due the 8th or so 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 time frame 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's 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.
Got it. And that's that just leads me to just one 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 what the impact could be from a retail rate perspective there?
You're talking about on the scrubbers?
Correct.
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.
Terrific. Thanks, guys. Have a good morning.
Thanks. Take care.
Thank you. Our next question comes from the line of Greg Gordon with Evercore ISI. Your line is now open.
Hey, good morning guys. It's actually Durgesh on for Greg.
Hey, good morning.
Good morning. So my question is on the rate case you guys have already answered. Just on the dividend, so the target is 10% through 2019. When does that get reviewed?
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.
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?
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 grade. We would look for 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 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 put in service.
Okay. That was north of 20%?
Yes.
And that's through the through your CapEx forecast period or through 2020?
No, through the CapEx forecast period.
Awesome. Perfect. Thank you, guys. Great quarter.
Thanks. Take care. Have a great day.
Thank you. Our next question comes from the line of Zhou Hsu with Avon Capital Advisors. Your line is now open.
Hey, it's Andy Levy. How are you guys doing? Hey, good, Andy. How are you doing? I'm doing all right.
You got a few calls going on this morning. So you got people calling in for you,
Yes. You know, Joe. But you have my attention. So there you go. Just two questions.
Just on Enable and CenterPoint's bid or not bid, but acquisition of Vectren. Just any thoughts on how that may or may not affect Enable and also your thinking on Enable?
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.
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?
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.
Okay. And that again, that includes staff?
Yes. Yes, it does.
Okay. And so just to understand the process from here, I guess,
the gentleman
conference takes place in the 1st week of June or something like that?
That's correct. It's set for June 8.
And are you able
to But Andy, that's a procedural schedule. That doesn't we'll evaluate where everything comes in at. And to the extent that there's an opportunity to have productive discussions, we will.
Before June 7, you're talking? Yes. 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 sit down and talk. Is that fair?
Yes.
Okay. And I guess, we're fairly optimistic hopefully that you guys will settle something.
No, no, good. I agree. Keep going.
And that's it. That was it.
All right.
Okay. Thank you very much.
Take care, Andy. Good talking to you. Yes.
Thank you. And we have a follow-up from the line of Paul Ridzon with KeyBanc. Your line is open.
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?
Well, the
$0.06 was in the Q1 of 2017. You did see the impact of rate design in this current quarter.
I got it, I
got it.
And since the range was the normal
quarter, last year was unusual.
Yes, that's right. That's exactly right. Okay,
got it. And when how do you see that $0.07 kind of reversing out over the course of the year?
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 Q1.
Okay. So a couple of pennies each quarter?
That's probably not too far off, yes.
Okay. Thanks again.
Thank you. We have a follow-up in the line of Josephine Moore with Bank of America Merrill Lynch. Your line is open. Hey, just one very quick follow-up here. On a run rate basis, your O and M seems to come in pretty significant or your total OpEx come in below guidance.
Are we expecting a meaningful uptick there in the later quarters or?
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 you're outages tend to occur in the summer months and the fall.
Got it. And then the sooner coming online too, is that also a driver there?
Sure. Yes, absolutely. There'll be some OpEx associated with that.
Okay, great. That's all. Thank you very much.
You're welcome.
At this time, I'm showing no further questions. I would like to turn the call back to Sean Chalsky for closing remarks.
Thank you, Abigail, and thank you all for your interest in OG Energy Corp. And for being on the call today. Have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Have a great day.