Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019, Oh Gee Energy earnings Conference call. At this time, all participants are in listen only mode.

Speaker presentation, there will be a question answer session to ask a question during the recession your ability to press star one on your telephone. Please be advised that todays conference is being recorded if your for any further assistance. Please press star Zero I would now like to have the conference over to your host Todd Tidwell, Sir please.

Thank you Latino good morning, everyone and welcome to OTI Energy Corp's fourth quarter 2019 earnings call I'm talking said, well director of Investor Relations and with me today I have shown Croskey, Chairman, President and CEO Bogey Energy Corp, and Steve Merrell CFO a bogey.

The energy Corp.

Turning to the cold today, we we'll first hear from Sean followed by an explanation from Steve of year end and fourth 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 might follow along on our website at O.G.E. energy Dot 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 financial statements.

This is an FCC requirement for financial statements and simply state.

We cannot guarantee forward looking financial results, but this is our best estimate today.

I would also like to remind you that there's a reg g. a reconciliation for gross margin in the appendix I will now turn the call over to show on Croskey for his opening comments Sean.

Thank you Todd good morning, everyone and thank you for joining us on todays call.

Earlier. This morning, we reported 2019 consolidated earnings of $2.16 per share.

Compared to $2.12 last year.

This includes earnings at the utility of $1.74 well above our initial 2019 midpoint of the dollar 58 per share.

Steve will discuss the details of our full year earnings in the fourth quarter in a moment.

But first I'd like to spend a few minutes talking about our 2019 accomplishment in areas of focus for 2020.

I do want to begin by congratulating everyone at the company on another successful year around safety.

Our members consistently demonstrate their commitment to a culture of excellence as they work towards achieving an internet injury free workplace.

Our efforts in 2019 continued our trend of the last four years being the for safe disappears and our company's history well done.

Speaking of the history, we're celebrating our 118th anniversary today.

As we begin this new year and new decade, we honor those who came before us as we embark on a new chapter in our company's history.

Emerging from the completion of our decade long journey of environmental compliance investments, we now look to the future growth of our company through the lens of three priorities growing our business growing our communities and growing the capabilities of our employees.

The integration of our River Valley and Frontier power plants continues at an excellent pace.

These plants are saving our customers money, they're having a positive economic impact on the communities, where they're located and we continue to enhance operations improve efficiencies and lower emissions at these planes.

No we grow our business by enhancing the customer experience. We do this in a variety of ways most important of wages to combine premier functionality with competitive customer right.

We have been a leader in smart technology for years being a bone among the first in the country to deploy a customer driven demand response technology and programs.

We leveraged this technology to expand and enhance the customer experience, while improving efficiencies throughout organization.

Over the past nine years, we've invested more than 6 billion and technological environmental enhancements to our system.

The total company rate base grew during this period at a compound annual growth rate of over 6%.

While our but while our average retail rate in Oklahoma actually decline.

There are many factors in managing customer bills. One example is one m. expense arlon and M. expense per customer will actually be lower in 2020. After adjusting for these two new plant.

This year, we will begin our grid investment plan in Oklahoma to further enhance our system, making it more reliable more resilient more secure and more efficient for the benefit of our customers.

Our plan focuses on the installation of new technology equipment, and communication systems that promote I still feeling grid.

System improvements like these create value for our business by reducing service interruptions for our customers <unk>.

<unk>, preventing truck rolls improving efficiencies in reducing costs.

2020 will begin work on 55 critical circuits 40 associated Substations in Oklahoma.

We filed our application with the Oklahoma Corporation Commission this week for recovery of cost associated with these system improvements.

Filing speaks recovery on 800 million these grid enhancing investments and the same time minimizing revenue impacts to customers.

Based on calculation using the deal we interruption cost estimate rice calculator tool. These investments will benefit customers by more than 1.9 billion over a 30 year period, while the average year over year increased the retail rates for the five year program will be less than 1%.

Other words for every dollar investment made towards these grid enhancements customers will have $2.35 and benefits.

In Arkansas, we reached a unanimous settlement and our second formula rate filing and are anticipating a final order by mid March.

We also expect to conclude our second year grid enhancements this quarter and quickly began the next phase of that.

We're also expanding our solar portfolio and 2020 by adding two new five megawatt universal solar energy centers in southeast Oklahoma.

The company owned solar energy centers will help meet the renewable energy needs of the Chickasaw nation and the chalked on nation, who will purchase approximately 50% of each farms solar energy output.

Both projects are expected to be completed in August.

An important point I want to make here is that as we invest in our system for the benefit of our customers. We will always work to ensure our rates remain among the lowest in the country. Our rates today are more than 30% below the national average, which is a significant competitive advantage as we seek to attract new businesses to our region and service territory.

We continue to grow our service territory and contain continue to see higher sales growth as well, which when combined with our low rates and the emphasis we put on economic development efforts as a positive impact on logo. We added 8300, new customers in 2019, which was well above what we added in 2018.

The Oklahoma City Metro ended 2019, with an average unemployment rate for the year of approximately 3.1%.

Well the population of just over one point Fourmillion. The metro area is grown by nearly a quarter million people.

Long term growth trends continue to be positive in the importance of economic development efforts to recruit new businesses and help existing companies grow cannot be overstated.

Population gains follow job growth and list. This leads to another area priority for us which has grown our communities Weve always said there were only strong as a communities. We serve we invest in the future of these communities by partnering with our community leaders in the areas of economic and community development in 2019. This partnership.

Led to more than 5400, new jobs 1.5 billion and capital investment.

And 175 megawatts of new load within our service area.

We will continue to strengthen our partnerships with community leaders working together, we will help define that support the needs of our cities and towns.

Turning to enable last week, they reported solid results for the fourth quarter and full year, despite ongoing commodity price pressure.

Naval distributions tow GE were 144 million for the year, putting total distributions to us over a billion dollars in cash since enables inception.

This is cash that is supported and continues to support our dividend growth utility investments.

However, we continue to be disappointed on valuation and that enables lumped in with other midstream businesses that don't have similar quality assets balance sheet and coverage ratios.

We maintain our belief that there is upside to the enabled valuation ultimately benefiting the O.G. shareholder.

I invest in the future of our company through the growth of our business our communities and our employees, we deliver value to our shareholders in 2019, we increased our annual dividend by 6%.

This following five consecutive years of 10% increase.

Looking forward, we expect dividend growth remain inline with our long term earnings growth rate at the utility of 4% to 6%, while ensuring our financial credit Brett metrics remained strong across the board.

Before turning the call over to Steve I want to reiterate reiterate how pleased I am with the performance of the businesses. Our company has never been stronger and I'm confident that our balanced approach to investing in new opportunities will continue to fuel our growth now and then the future. Thank you I'll now turn the call over to Steve to review our financial result.

Sales for the fourth quarter and for the full year, Steve Thanks, Sean and good morning, everyone for the fourth quarter. We reported net income of $35 million were 18 cents per share as compared to net income of $55 million were 27 cents per share in 2018, the contribution by business unit on a comparative basis is listed on the slide.

The full year 29 team, we reported earnings of $434 million or $2.16 per share as compared to net income of $426 million for $2.12 per share in 2018.

At LG any net income for the quarter was $29 million or 15 cents per share as compared to net income of $21 million or 10 cents per share in 2018.

For the quarter gross margin increased $28 million, primarily due to the addition of environmental assets River Valley and the frontier plants, resulting in considerable savings to our customers.

I want to almost flat for the quarter and actually down on a per customer basis.

Initiation expense increased by $13 million for the quarter due to additional plants service service, primarily associated with generation assets.

Net other income decreased $8 million due to lower AFUDC and the tax gross up related to the completion of the environmental projects.

Finally income tax expense decreased $2 million, primarily due to an increase in the amortization of net refundable deferred taxes and higher tax credits.

Now turning to the full year at LG any net income for the year was $350 million or $1.74 per share as compared to net income of $328 million or $1.64 per share in 2018.

Gross margin for 2019 increased $67 million, which I'll discuss on the next slide.

Looking at the key drivers for the year, they're very similar to the quarter when Im increased $19 million, primarily due to new expenses related to the River Valley power plant, which has a margin offset increased depreciation and lower AFUDC are result of new assets being placed into service.

Turning to 2019 gross margin utility margins increased $67 million in 2019 compared to 2018.

Margin was higher due to the following.

The addition of environmental assets River Valley, and frontier increased margin by $44 million as compared to 2018.

As you'll recall, we purchased two power plants that were under legacy purchased power contracts. We're now earning on these investments while simultaneously saving customers millions of dollars.

Whether increased margin $18 million for the year as the service territory expansion spirits higher cooling degree days for certain summer months during the year compared to normal weather increased margin by nearly $5 million.

Natural gas midstream operations receive cash distributions from enable midstream up $144 million and contributed earnings of $81 million or 41 cents per share compared to $109 million or 54 cents per share in 2018.

The enable board approved a limited partner distribution of just over 33 cents per unit that was paid February 25th.

In 2019, the total cash distributions received from enable cross the 1 billion dollar Mark said another way. This is a billion dollars have avoided equity issuances.

Enables fourth quarter and full year 2019 was impacted by a noncash goodwill impairment charge of $16 million or eight cents per share. The impairment was driven by the partnerships in appropriately low valuation in a pullback in commodity prices.

2019 was a challenging year for the energy industry. Despite the landscape enable performed well setting records for annual gathering processing and transportation volumes. The enable management team continues to focus on cost discipline, a capital efficiency. They ended the year with a strong balance sheet and a distribution coverage at 1.38 times.

As Sean mentioned in his comments, we filed our grid enhancement filing with the Oklahoma Corporation Commission earlier this week.

The five year plan includes strategic data driven investments covering grid resiliency grid automation communication systems, and technology platforms and applications investments totaled $810 million to propose mechanisms will provide recovery of the revenue requirement of projects that are placed in service revenue requirement.

Will include a return on rate base, depreciation and AD valorem taxes.

Each quarter Ogone will submit to the Oklahoma Corporation Commission a report detailing the projects that had been placed in service and included for perspective recovery in the mechanism only projects placed in service will be subject to recovery.

Turning to 2020 guidance at the utility and assuming normal weather, we project earnings per share to be between $1.72 and $1.78 per share.

For the midstream business, we're projecting the earnings contribution to be at the lower end of their guidance between 47 cents and 53 cents per share.

We're projecting consolidated earnings between $2 or 19 cents and to $32.31 per share.

Looking for further into our utility outlook you can see the detailed assumptions on the slide it's important to remember that Ogone has significant seasonality in its earnings and typically shows the majority of earnings in the second third quarters due to the seasonal nature of air conditioning demand.

That concludes our prepared remarks today, and we'll now I answer your questions.

As a reminder to ask a question you will need to press star one in your telephone to withdraw your question press the pound.

And that's star wanting you've touched on telephone to ask your question. Please.

Please standby, we compile the Q and a roster.

First question comes from a line of Julien Dumoulin Smith of Bank of America. Your line is open.

Hello.

Hi. This is rich you can you hear me Hey, rich it's done good morning, how are you today, Hey morning doing well.

Good just just had a quick question for you.

You're pointing to the low end now for unable guidance.

Enables management recently came out with saying.

Essentially they needed to see like a rebound in commodity prices to get to the midpoint.

Their guidance range I was just curious how you're feeling about the enable distribution now.

And if there was any potential hi, and distribution how would that impact your balance sheet.

I could you would absorb any potential cash flow impact or would you look pension plan.

FFO to debt metric, yet, but thanks ritu. Thanks for the question you know there their guidance supports a one three coverage ratio. So if you back into do the math, that's roughly 160 million of cash cushion. There. So there's we feel very good about the distribution in that regard.

You know as far as a distribution cut you know we don't we don't see it but we've said many times if if enable cut the distribution, 10% that'd be $14 million to us that's not going to move the needle.

In our credit metrics.

As not asked that Thats very helpful. Yes, but there's no debt that one three coverage is is really strong and that could cash cushion. They have that's why when we create enable we built the balance sheet to be strong to kind of weather environment like this and.

There are built for the long term.

Got it makes a lot of sense.

And then separately.

Just curious on the utility growth outlet, 4% to 6%.

Should we be using the new 2020 guy that ogone or are still the 2019 based after you adjust out weather and.

Normalize that for for other onetime items, yes, Ritchie clean number for 2019 that we would uses our base for growth is $1.65, so given where our midpoint of our guidance is at 6% growth rate from 19 to 20.

Got it Thats very helpful and then.

Just last one on the.

The grid model rider or excuse me, the enhanced recovery mechanism and Oklahoma.

I'm just curious how much.

Regulatory lag that could that potentially mitigate if if that were to be approved.

Yes, basically mitigate all of it because these projects are short term in nature and we would go in each quarter with those projects that had been encompass completed and then rates would go into place within 30 days. After Commission review so at the most 30 days a lag associated with each quarters completed investments.

All right. Thank you.

Thanks, right to have a great day, you too okay.

Thank you once again to ask a question press Star one thing I touched on telephone.

Our next question comes from the line of the do Love Archie of Avon Capital. Your line is open.

Hi, Good morning, Sean Hi, good morning, the Dula how are you.

Hi, I'm okay.

Oh, Okay can you just so I understand this regulatory mechanism.

Has has this been has this been approved or is this already part of.

Some statute that already exists that you'll be you know you applying these expenditures to can you explain to me a little bit more and whether there's any.

Regulatory steps that need to occur prior to.

Initiating this.

Yes, so good question so.

This is been a.

On the very constructive and thoughtful process a partnership really that we've had with the commission and customers and staff.

Laying out this framework. So we made this filing they will we will go through the normal customer hearings.

And we filed testimony.

Weve.

Commission.

Held a public meeting where we could kind of talk about the attributes of these investments were talking about here.

So we would expect an order later this year to approve this.

This mechanism for us.

And so your other question, we're not expecting we don't need any other regulatory approvals.

Or anything like that this is just.

What I'd characterize as normal course.

So this will be principally a 2021 and ongoing Oh effect.

Yeah. This is this has a bigger Pat impact in 21, we certainly want to get this done this year and get starting at mobilized but yes. There is a 21 impact.

Are there is there a procedural schedule in terms of hey, not at this time nation, Okay not at this time.

Yes.

Okay.

Thank you.

Thanks, Bill have great day.

Thank you. My next question comes from Anthony Crowdell Mizuho. Your line is open.

Hey, good morning, Sean Good morning, Steve.

Hi, Good morning, good morning, Anthony.

Hopefully easy question, just if I wanted to high I guess dig deeper into the write down what is your including that in your operating number while you're on your not any chance why you didnt. Excluding I believe that some of the reason you wrote it down was lower commodity prices if commodity prices rebound you then mark that back up.

You don't this was really goodwill at enable which the way the accounting rules work now there's no you don't amortize goodwill at just sits there. So now that it's been written off its gone ill have no future impact on a go forward basis. So there is not a ride up that would occur if commodities rebound.

Any reason guys back that out of your out of your.

Turning somebody can ongoing number well, we called it out but the fccs really cracking down on non gap items and Thats considered a non-GAAP bottom when we backed that out. So we just chose to at least highlighted but not report that as a special item.

Great. Thanks for taking my question.

Thanks Anthony.

Thank you at this time I like to turn the call back over to Sean trustee for.

Closing remarks, Sir.

Thank you Dave.

Thank you all for your interest in OGE energy Corp. and for being on the call today have a great day.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

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