Q2 2020 OGE Energy Corp Earnings Call
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Good morning, My name is Lisa and I will be your conference operator today.
This time I would like to welcome everyone to the Q2 2020, Oh Gee Energy earnings Conference call.
All lines have been placed on mute to prevent any background noise.
She was like after the speaker's remarks, there will be a question and answer session.
Like asking a question during this time Sip. Please press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound.
Thank you I would now like to turn the call over to Mr., Jason Bailey. Please go ahead Sir.
Thank you operator, and good morning, everyone and welcome to Oh, Gee Energy Corp. second quarter 2020 earnings call I'm, Jason Bailey director of Investor Relations and with me today I have shown Trotsky, Chairman, President and CEO, Oh, Gee Energy Corp, and Steve Merrell C.L.O.G. Energy Corp. In terms of the call today, we will first hear from Shaw.
On followed by an explanation from Steve a second quarter results and finally as always we will answer your question I'd like to remind you that this conference is being webcast and you may follow along on our website at O.G.E. energy Dot com.
In addition, the conference call in a company side will be archive following the call on that same website.
Before we begin the presentation I'd like to direct your attention to the Safe Harbor statement regarding forward looking statements.
This is an FCC requirement for financial statements and simply states that we cannot guarantee forward looking financial result.
This is our best estimate to date.
I'd also like to remind you that there's a reg g. reconciliations for gross margin and a reconciliation of ongoing earnings to GAAP earnings in the appendix.
I will now turn the call over just on for his opening comments Don. Thank you Jason Hi, Good morning, everyone. It's great to be with you today.
Before we began I want to take just a moment to recognize two key members who will be retiring at year's end. The first the Steve He's been a valuable member of our leadership team and has played an important role and strengthening the company's solid financial Foundation.
Steven I've been discussing his retirement for many months.
We are in the process of interviewing external and internal candidates with a plan to name a successor before year end.
Next I want to recognize Todd as many of you know he'll be retiring after 32 years with the company the last 20 of which.
Leading investor relations.
I like many of you are going to Miss Todd on these calls.
Im going to Miss taught out on the road and we're probably all going to Miss is invaluable facts around Oklahoma football.
I do want to welcome Jason Bailey Theres moved ended the our ROE Jason has been with US since 2002 and during that time has developed a broad range of experience and already is doing a great job and Steven Todd are going to stay with us theyre not going anywhere and they'll be around for the remainder of the year.
If I could describe the second quarter in a simple statement.
I would use Ics selling through challenging times.
The pandemic requires all of us to innovate and lead by example, and I'm pleased that are employed as always have responded to the call with outstanding performance.
The highlights of the second quarter included affirming our 2020 guidance, adding almost 10000 new customers since since this time last year.
Delivering a 5% reduction in residential fuel rates achieving quarter over quarter utility earnings growth.
Adding nearly 120 megawatts of larger projects through Q2, and all of which are slated to be online. This year, achieving zero safety incidents in the second quarter, completing two solar farms and adjusting our business to mitigate the impact of Covis and returned all employees safely to work in June.
I will go into additional detail for some of these in a moment.
But I do want to reiterate that I could not be proud of our entire team.
Earlier. This morning, we reported ongoing second quarter consolidated earnings of 51 cents per share compared to 50 cents per share in the second quarter 2019.
At the utility we reported earnings of 39 cents per share compared to 37 cents in the second quarter of 2019.
As I discussed in May our balance sheet is prepared to withstand the rigors of the marketplace remains strong as do all of our credit metrics.
Earlier this year, we accelerated the debt financing and have no plans to access the capital markets this year or not.
Steve will discuss the financial results in a moment, but before he does I'd like to spend a few minutes talking about the tremendous work that's been done at the utility our second quarter highlights and provide further details on our efforts to mitigate the effects of cobot on customers and our business.
In conjunction with reopening of the state employees, who were previously working from home are now back in the workplace.
It's a credit to our team that our health and safety processes have become best practices for others to follow.
In May we proactively worked with our customers and the Oklahoma Commission and announced on off cycle fuel reduction to help our customers save each month on the fuel portion of their bills.
The normal cycle would have had us wait until January to make a change the savings for an average residential customer is about 5% of their monthly bill.
We have help connect customers with agencies and programs like lighting with over $5 million go into customers to provide assistance.
Today, we have assisted more than 29000 customers with installment payment plans.
The Oklahoma in Arkansas commissions have both approved mechanisms that will allow for the future recovery of costs, resulting from the suspension of disconnects and other incremental costs, resulting from this pandemic.
We've worked well with our commissions during one of the most difficult times in history and we do appreciate both the Oklahoma in Arkansas commissions recognitions recognition of the importance of these mechanisms and for their timely approval.
We are pleased that the economies in our service territories are recovering.
Oklahoma, which began to open in May and was fully opened on June Onest is showing an improved unemployment rate in June of 6.6%.
Compared to a peak in April of 14.7% in Arkansas, the unemployment rate for June was 8%.
Most state unemployment rates are well below the national average and we are current encouraged by the signs of economic recovery across our service territory.
Here's a notable fact, despite the impacts of the virus, we have added nearly 10000 customers tourist system over last year.
This equates to a 1.1% growth rate. This speaks volumes about our service as speaks volumes about our rates and our economic development efforts and certainly speaks well for the future.
We continue to see several of our large manufacturing customers beginning to move back to pre co risk production schedules. For example, the automotive in food processing steel manufacturing industries has seen increased production.
While we have seen some reduction in the oil and gas industry due to commodity prices. We are seeing projects continue to move forward on the midstream side the business and our large refineries have remained strong and are currently operating at full production schedules.
This all point to an improving economy.
Looking back at the beginning of this crisis in April we saw weather normalized load for commercial customers down 15% compared to the same period in 2019.
That number has improved month over month and for June was down 5%.
We are seeing similar results with our industrial customers, who in April were down 22%, but now the loads of down 7% in June.
Oilfield, which is our lowest margin customer was also down 22% in April with June coming in down 8%.
Residential customer usage actually grew each month and June was 4% higher than 2019.
Two overall year today on a weather normalized load bases loaded down 3.2% compared to 2019.
So I provided a lot of numbers and so let me just summarize when you put this altogether year to date, whether is down two cents.
Cove and related load impacts have is down by another 2.2 cents.
And all of that is offset by the adjustments we've made to our business and I want to assure you. We're not done and we will continue to execute on our plan for the balance for the year.
It is important to note that throughout this process. Our work is continue our operations have not been impacted and in fact, our teams are continuing to deliver tremendous results during storm restoration seasonal heat and humidity and other factors all while observing enhance safety and health protocols.
This morning, we sent crews to support personnel in the east coast to assist in restoring power outages due to the tropical storm.
Our grid enhancement projects in Arkansas are performing between 70, 93% better during storms.
We are certainly excited about these results and look forward to delivering similar results to Oklahoma customers with our Oklahoma grid enhancement plan.
Our two new five megawatt solar farms, and Davis and Duran, Oklahoma were placed in service and began producing megawatts Angelou July both have been fully subscribed by our customers.
In Arkansas, we recently filed for approval to build a five megawatt solar facility.
We believe there is demand from our customers in Arkansas for solar and this is the beginning of what we see as an opportunity to offer program and Arkansas similar to what we already have in place for Oklahoma customers.
Silty is scheduled to be completed in the second half of 2021 and recovery will be included in the formula rate plan.
On the environmental front, we've stayed focused and are executing and achieving industry leading results as we've talked about previously in 2018, we laid out the expectation to be 40% below 2005, Seo two levels, we've exceeded that goal and we've also said a 2030 goal of 50% below 2005 levels.
And are on our way to achieving that goal.
These emissions reductions are consistent with the recommendation to the pairs agreement.
I think what's also equally important is we've done all this while maintaining some of the lowest rates in the nation. In fact, our retail rates in 2019 were lower than they were in 2000 Seth.
On the economic development front, our low rates act as a powerful incentive to attract new business to both Oklahoma and Arkansas.
We continue to actively work on projects in both states as I mentioned earlier, we've executed agreements for more than 120 megawatts of new load. Thus far this year and we anticipate all of the projects will be complete and online by year end.
Adding these new customers is a critical component of our utility growth strategy.
On the regulatory front in Oklahoma, we received a new procedural schedule for the Oklahoma grid enhancement plan. If you recall. The plan includes 810 million of investments over five years focused on ensuring more secure reliable resilient and efficient system for the benefit of all of our customers.
The new schedule costs were hearing in October, which should give time for an order by the end of the year.
Before I conclude my remarks, let me take a moment to discuss enable.
I know some of you may have questions regarding our investment in enable.
When recreated enable our goal was to transform our midstream investment to a standalone entity off the credit of low GE and from a user of cash toward provider of cash from that perspective. It has worked very well.
Enable as adjusted their business as a result of commodity downturn enable did report improved results on their call yesterday, which we were pleased to see we're not going to speculate on strategic alternatives for enable as this is damaging to enable employees to enable business relationships and enable unit.
Others.
Our goal has been and we will always be to maximize the value of enable for the long term benefit a view yohji shareholders.
Let me conclude where I began by reminding you of the work we've achieved.
We've seen 1% year over year customer growth expedited fuel rate reduction returned member safely to work executed agreements for over 120 megawatts of large projects completed two solar farms adjusted our business to mitigate the impacts of Covance affirmed guidance and most importantly, we had zero incidents in the second quarter.
Every single person here went home safely.
I could not be prouder of the outstanding job everyone. Here is doing thank you and now I'll turn the call over stage Dave.
Thank you Shawn and good morning, everyone for the second quarter, we reported ongoing net income of $102 million or 51 cents per share as compared to net income of $100 million or 50 cents per share in 2019.
On a GAAP basis, LG energy Corp. reported net income of $86 million were 43 cents per share.
The contribution by business unit on a comparative basis as listed on the slide.
At LG any net income for the quarter was $79 million or 39 cents per share second quarter gross margin at the utility increased $31 million, which I will discuss on the next slide.
Looking at other key drivers second quarter, LM expense was down $2 million compared to last year, but that really doesn't tell the full story. We added the river Valley plant to our fleet late in the second quarter of 2019, which the only in Wasnt in the prior year result, the impact net of the incremental plant onea would be a quarter core quarter over.
Quarter reduction afford a half percent.
Depreciation expense increased $13 million as additional assets were placed into service and depreciation expense for the Sooners scrubbers, which was previously deferred to a regulatory asset.
Interest expense increased $6 million, primarily due to additional long term debt outstanding along with it interest expense for the scrubbers that was previously deferred in the regulatory asset.
Income tax expense increased $4 million, primarily due to higher pretax income and reduced tax credit generation over.
Overall, the utility is on plan, we're managing the business to deal with any coded 19 impacts.
Turning to second quarter gross margin utility margins increased approximately $31 million in the second quarter 2020 compared to 2019.
Compared to the second quarter of 2019, the recovery of environmental assets placed into service added $28 million to margin.
We also added $11 million as cooling degree days for the quarter were 16% above last year compared to normal weather reduced margin by $1 million finally, new customer growth contributed $3 million to margin.
Partially offsetting the increase was a reduction of industrial and oil field sales along with non residential demand revenues that combined to reduce margin by $7 million.
Next I'd like to briefly touch on our balance sheet. The company has solid cash flow and stable metrics, we're maintaining strong investment grade credit ratings, both Moody's and S&P recently affirmed our stable outlook as you know at the onset of pandemic. We took quick action to increase liquidity by moving ahead of debt issuance plan for 2021 I.
We need to have no equity needs for the planning horizon.
Turning to our investment in enable natural gas midstream operations contributed earnings to OGE Energy Corp of $19 million for the second quarter 2020, compared to $27 million in the same period in 2019.
In addition to enable midstream issued cash distributions to LG of approximately $18 million in the second quarter 2020.
Enables on track to achieve the capital cost reductions announced earlier this year. They ended the quarter with the distribution coverage ratio of just over two times, which provides increased liquidity and further flexibility to execute their plans. They have also affirmed their guidance.
As Sean said earlier, we are affirming our guidance and please remember over half our earnings will occur in the third quarter. This concludes our prepared remarks, and we will now answer your questions.
At this time I would like to remind everyone. If you'd like to ask a question. Please press star and the number one on your telephone keypad.
Well Pos system all much comes out acuity roster.
Yes.
Your first question comes from the lines Shaw.
Guggenheim partners.
Let's see.
Morning, guys.
Hi, good morning sharp how are you.
Oh, not too bad How're, you doing to sound.
Well all well.
Excellent excellent so I'm going to.
Ask on couple of questions, but one I just asked a question on enable and what I'll do ill try to ask it a little bit differently here and kind of I guess to read the reason why im asking is obviously a strategic options may now be aligned on the other side of your call on counterpart right. So from a new CEO in place as a strategic review and.
Place of Centerpoint, you have new board members, let me ask it slightly differently without getting into the details.
On actual strategy is hit at least fair to assume that you're now may be more aligned with the other GP versus the prior regime that was in place at Centerpoint as you think about enable.
Well I think you know time will tell it's still I think it's still early.
You know, Dave and I have talked briefly a few times.
And I am sure as things settle down for him, we will talk more and I look forward do getting to know him.
Okay.
Capital.
Got it.
And then just stalling the the Oklahoma grid Mod it sounds like.
Youre highlighting that you can start investment in 21.
Just to remind us real quick you know what's in the plan, what's a place holder or what's the incremental on that.
I mean, it's really really incrementally it's a couple hundred million dollars of year of incremental Capex, we've actually started making those investments. This year. The investments are substantial this year and are primarily.
No.
On the back ended the year, but we'll really go full bore with it next year, especially as we get through.
The regulatory schedule.
Later this year.
Got it and then just lastly follow up on on the second quarter results from told that impacts it looks like residential load made up a large portion of industrial and all see that activity is the higher margin resi load offset pull that impacts on earnings and can you just talk about the OEM savings that you have achieved an embedded and plan.
As you reiterate in 2020 guidance.
Yeah, so residential basically does offset.
Commercial and industrial in it and I think we gave a sensitivity last time, 1% increase in residential offsets basically a 1% and all other rate categories.
So we're very fortunate that residential did did shoot up as far as cobot impacts we've seen.
Probably through the first half of the year about $11 million the savings will see something similar probably on the backend.
As we just continue to adjust the business to deal with the decreases in load as businesses were shut down for a period of time.
Got it got it thanks, guys and.
Steve entire congrats on stage two of your license I know, it's on a goodbye and I can tell you sean's going to Miss you every quarter now so that.
Thanks, Thanks sharp.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Next question comes from the line of Julian Smith with Bank of America.
Hi, Good morning. This is actually Richie air for Julian how you guys in today, Hey, good Richie are you doing.
Doing well I appreciate you taking my question here.
Just curious.
Like the with the announcement that Steve is retiring at the entered the year.
How you guys thinking about replacing him on the board of enable.
Seems like Centerpoint shows.
People at a bit in spite of playing some halliburton.
Then or is there a bad years strategy or would you look.
Pete they kind of in house and having someone from LG appointing said avoid back yes. That's a good question Ritchie.
I haven't really a made a final decision there Steve is going to stay on through the balance of the year and.
Steve came out of that business. So he knows it very well so.
I like to have people that know that business, we have some people in the company that could fill that role but.
I'm going to put best person I can on that board to continue to maximize the value of enable.
Got it thanks, a lot of that's helpful and then just separately.
You mentioned like sales are improving month to month in years service territory with the economy's reopening.
Just curious how you're thinking about your guidance range in the back half of the years, there any upward bias to that in an open and management you guys have been able to pursue as well as.
Some of the better weather trends.
I guess quarter to date.
Yes.
The way I would say that Richie is I think as Steve mentioned more than half of the earnings come in the third quarter and whether is the is the big variable more assuming normal weather and.
Thats I would point to that.
All right great that is all my questions. Thanks, a lot hi, Thanks, Rich you have a great day.
Due to.
At this time there are no further questions I would like to turn the call over to send Roski.
I do apologize we do have a question from David Peters with Royal Wolf Research.
Hey, Good morning, guys, Hey, good morning, David How're you.
No well thanks.
Sean I appreciate your comments on enable from your prepared remarks.
You addressed it in the first.
A question that United budgets, and if I could ask a little bit differently. I'm wondering if you could give just a little bit more color on kind of your latest thoughts for your ownership stake and I know historically you guys having engaged in these types of discussions like Centerpoint has but it has that changed at all in light of recent developments across the midstream space and and really just.
Trends, we've seen across the utility sector.
To move towards a more regulated and simplified business mix and have you been approached all by centerpoint throughout their process.
Yes so.
Let me I'm, not I'm not involved or familiar with the.
Other than what's been publicly announced about the centerpoint process, so I'll leave that to them to comment on that.
You know we.
We since the very beginning of enable we are always looking at our valuation. The names that has not changed that doesn't increase or decrease.
Over time.
You know the one thing that we do look at recent transactions and things like that I will tell you.
As you think about the pure play.
And.
Current sentiment we recognize.
That is.
Revland in the market right now, but the point I would make there is that.
Enable is an interest that we have it is not a wholly owned subsidiary it is not an entity that we control.
We have intentionally set that aside from our utility business. So it is just day interest that we owned versus.
Some of the recent transactions that were wholly owned embedded in in an entity.
So I my answer to this day.
David is really we're always.
Evaluating.
Our value of all of our assets, including in April we don't.
And we incorporate current transactions and so but we're not going to.
You know talked publicly.
About strategic alternatives, because that that does not help increase value.
Great. Thanks appreciate it thanks, Dave take care.
There are no further questions ill now turn the call over to Mr., Sean Taski.
Thank you Lisa will look thank you all for your interest in your time. This morning, we appreciate that and.
Have a great day.
This concludes today's conference you may now disconnect.
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