Q2 2019 Earnings Call
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At this time I would like to turn the conference call over to Mr., Todd Tidwell, you may begin.
Thank you operator, good morning, everyone and welcome to OGE Energy Corp's second quarter 2019 earnings call I'm talk Ted Brown director of Investor Relations.
And with me today, I have Sean Trotsky, Chairman, President and CEO of Energy Energy Corp, and Steve Merrill CFO , Although GE Energy Corp.
In terms of the cold today, we will first hear from Sean followed by an explanation from Steve of second 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 O.G. 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 statements.
This is an STC 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 regulation G reconciliation for gross margin in the appendix I will now turn the call over to Sean Trotsky for his opening comments John .
Thank you Todd good morning, everyone and thank you for joining us on today's call.
Earlier. This morning, we reported second quarter consolidated earnings of 50 cents per share compared to 55 cents per share in 2018.
The utility earnings of 37 cents per share and our portion of enables earnings were 13 cents per share.
Both businesses continue to perform well and are on plan for the year.
Steve will discuss the details in a moment right now I want to highlight our second quarter achievements.
During the quarter, we added more than 8000, new customers compared to the second quarter last year.
New customer sales growth was approximately 2%.
This is the fifth quarter, we've seen new customer additions around this 2% Mark.
Obviously this is positive and helps offset energy efficiency.
It does appear our rates and economic development efforts are paying dividends.
All of this comes together as you know in terms of logo.
As I've mentioned on previous calls we are clearly we are clearly in closely watching these positive trends, which could increase load growth above our historical 1%.
The latest economic statistics put oklahomas unemployment rate at 3.2%, which is on par with the national average and our largest slowed center, Oklahoma City unemployment is below 3%.
Overall, our service territories strong from an economic standpoint.
For example, Pratt and Whitney just announced a multimillion dollar expansion to operation to Tinker Air Force base.
In addition, there are over a dozen other companies that have announced new investment or expansion of existing facilities and our service territory.
Our rates and high reliability are often cited as primary factors in their decision making process.
Operationally, we continue to perform very well in the second quarter, Despite historic flooding in mild weather.
The mild weather affected earnings by six cents per share compared to normal.
For the year compared to normal weathers reduced earnings by three cents.
The good news is we continue to deliver for our customers and are on plan to achieve our 2019 financial objectives.
I'm proud of everyone here for continuing to deliver these results in fact, our own m. cost per customer had been flat for five years.
The second quarter in Oklahoma, and Arkansas is typically impacted by severe weather and this year was no different.
Many parts of our service territory experienced record rainfall the cost historic flooding in some areas.
Particularly hard hit was the city Muskogee, including Muskogee power plant. We also had more than 20, substations, partially or fully submerged and floodwaters.
Our members work tirelessly to restore power quickly and safely.
In Arkansas, we saw first hand, the benefits of investing in enhanced grid technology.
We've upgraded about a third of our circuits there and on May 18th the major storm hit or Arkansas service territory with wins approaching 80 miles per hour.
The resiliency the resiliency of these upgrades circuits was dramatic we saw no structural damage the minutes of customer interaction were 89% less than the legacy circuits.
Armed with this demonstrated levels improved performance, we look forward to making similar investments across our entire footprint.
A few other highlights for the quarter, we successfully integrated the newly acquired River Valley plant into our fleet in the first megawatts flowed in June .
At our sewer Pat at our sooner power plant, we've completed our testing on the scrubbers and they are operating as planned.
Turning to regulatory we reached a settlement in our most recent Oklahoma rate review that provides for full recovery of our environmental investments and the sooner in Muskogee plants.
We're pleased the administrative law judge also recommended approval to the FCC.
And once the final orders issued this decade long journey of environmental compliance investments will be complete.
His journey required not only hundreds of millions of investment dollars, but also many millions of workout. Many millions of workers, we continually advocate on behalf of our customers to maintain reliable low cost generation to fuel diversity.
I believe we accomplished I have accomplished that goal with this settlement.
In fact since 2011, we've invested more than $6 billion in our system and customer rates are lower today than they were eight years ago.
So it comes as no surprise that a recent standard and Poor's article highlighted Oh Genie is having the lowest rates in the nation.
We have many partners that share in this achievement, but no greater credit goes to the hard working men and women of our company make no mistake that make this level of performance possible.
Moving forward, we will continue to work with the commissioners staff in key parties to develop a recovery mechanism for distribution investments.
As I've stated in the past we have many customer enhancing projects that are not included in the capital investment forecast as we move forward, we will continue to update our investment plans.
Turning to enable on their call earlier. This week they reported solid results increased their distribution rate to unit holders by 4%.
Compared to the second quarter of last year financial and operational measures are up across the board.
Enable currently has 54% of the rigs operating in the scoop and stack dedicated to them.
By the end of 2019, Oh, GE will have received more than $1 billion and distribution center since the formation of the partnership.
You've heard me say before that our core solid with a lot of momentum and to me that as most important.
Do you have good people to carrier customers invest in your communities and manage your assets that is what drives success, we've come a long way from where we were just a few years ago.
Customers are joining enjoying higher reliability, along with the lowest rates in the nation. We've added new generation, we've upgraded our system, we've achieved industry, leading emissions reductions and the balance sheet and financial metrics are strong.
So in closing I want to reiterate how pleased I am with the performance of both businesses. We are committed to executing on our strategies to continue growing our business growing our communities and creating long term shareholder value.
Thank you and ill now turn call over to Steve to review the financial results for the second quarter Steve.
Thanks, Sean and good morning, everyone for the second quarter, we reported net income of $100 million or 50 cents per share as compared to net income of $111 million or 55 cents per share in 2018, the contribution by business unit on a comparative basis is listed on the slide.
At LG any net income for the quarter was $75 million or 37 cents per share in 2019 as compared to net income of $92 million or 46 cents per share in 2018.
Second quarter gross margin at the utility decreased approximately $23 million, which I will discuss on the next slide.
Looking at the other key drivers second quarter OEM expense increased approximately $3 million, primarily due to the timing of work performed when compared to last year, our NIM expense for the year is on plan.
Depreciation expense increased $3 million in equity AFUDC decreased approximately $5 million as certain projects were completed and assets were placed into service.
Interest expense decreased $6 million, primarily due to lower average debt cost.
Finally income tax expense decreased $7 million due to the low pretax lower pre tax income.
Turning to the second quarter gross margin utility margins decreased approximately $23 million for the quarter largely due to mild weather.
Compared to the second quarter of 2018 cooling degree days were 38% lower reducing margin by $24 million compared to normal mild weather reduced margins by $17 million for the quarter.
Partially offsetting the mild weather new customer growth increased gross margin by approximately $3 million.
Before we move on to enable I want to touch on the regulatory schedule.
For the Oklahoma rate review as Sean mentioned, we received the Lj report in July that recommended approval of the stipulation.
The hearing on exceptions was held this week and we expect an order soon.
In Arkansas, we received conditional approval of our capacity acquisition finally discovery is ongoing.
We made the act 310 filing on May 31st you'll recall that this is the rider mechanism used for environmental compliance investments.
And finally, we will file the second evaluation report for the Formula rate plan on October Onest of this year.
Theres been a lot of regulatory activity. This year as we work to bring many of our proceedings to a conclusion.
Turning to our investment in enable enable had a solid second quarter and their financial metrics are strong. They continue to see solid growth in the gathering and processing segment in part due to the velocity acquisition, which increased crude gathering volumes.
In addition, enable made midstream made cash distributions of approximately $35 million. The same amount received in the second quarter of 2018.
This week enable announced a 4% increase to their quarterly distribution. This will increase our annual distribution by five and a half million dollars, bringing the total on an annual basis to approximately $147 million going forward.
This is unencumbered cash that supports utility investments and dividend growth.
Turning to 2019 outlook, both consolidated and utility guidance remain unchanged as you know over half of our earnings will occur in the third quarter. This concludes our prepared remarks, and we will now answer your questions.
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One moment for office question.
And our first question coming from the line of Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, Good morning can you hear me.
Hey, Great Jualin area. This morning, great absolutely. Thanks for taking the time, hey, listen so.
Well first off great progress on the regulatory front I'd be curious how do you think about.
Evaluating prospects are further capital investment and just refreshing that budget.
Given the significant progress you all have seen of late especially this year.
Yeah, So I think the.
Yes. The short answer is is we're working with our customers and everyone over at the Commission staff about how to proceed forward with this plan we are going to come up with an arrangement there and then as we've done in the past we will continue to update.
Our investment outlook there.
But first things first we want to get the order in hand for the sooner projects and then we'll we'll follow that up with.
Subsequent filings and updates to our capital expenditures.
And I suspect that would the spreads we have a focus on grid month absolutely.
I think we've said before.
While we were going through this environmental compliance plan, we probably we slowed down a lot of our leading technology advancements that we were adopting we were one of the first out there to put the smart meters out there we've slowed that down so in my mind, while we're still probably a little bit ahead of others.
We're behind and I want us to kind of catch back up and we think Theres a lot of.
Good things, we can do that will actually benefit.
Our customers and I think the other point I'd make here just from a regulatory perspective I think these are different.
Different filings before we were making large investments.
That were lumpy that were to comply with the federal government mandates. These are things that people are going to be able to recognize the real benefit for in terms of their operational savings.
Excellent and perhaps if I can pull that up pretty in brief we've seen some of your regional peers talk.
And have good success with respect to some of these voluntary renewable tariffs.
Where are you in that thought process at all if at all.
We're probably where we are right now is we're in really good shape from a from a generation standpoint and.
Really focused on more customer facing activities then.
Tariffs or kind of a bad word [laughter] no no, but sorry, a bit like a voluntary program for those who opt to pursue renewables as for their own merit.
Yes, well, okay I misunderstood your question that's exactly how we've set up.
Our solar program, it's a subscription.
Arrangement, where customers that want to subscribe and.
Take their energy from solar farm, we're building those solar farms for them on a community basis on the distribution system, where they can have access to it and that seems to be working pretty well.
Got it but that's not a meaningful driver it sounds like of your capital outlook for the time no I mean, it's going to be it's going be incremental as we go it'll all be incremental.
It's not in there now, but will all be incremental as we build up customer subscriptions.
Alright excellent hey, Thank you all for the time and best of luck.
So Julie.
Our next question coming from the line of Greg Gordon with Evercore ISI. Your line is open.
Hey, good morning.
Hi, good morning, Greg.
How you doing so so.
Looking at the guidance for the year I know that it looks like enable.
Is it going to be at the low end of the earnings guidance range and look I'm.
Hi of empathy for the fact that you guys focus more on the cash flow that.
Right that enable generates for you rather than the earnings any given year.
That being said just doing doing math.
It would seem like you'd have to get to the high end of the guidance range for the utility business to hit.
The midpoint of guidance for this fiscal year. So can you give us a sense of.
Within the guidance range for the utility given that the summer is almost but not completely behind us.
What the drivers are and where do you think you'll be on the utility guidance range for the year.
Sure Greg I mean, what what we said is we are affirming our guidance at the utility and consolidated keep in mind that approximately 70% of our earnings occur in the second half of the year. So I'm I'm not of the opinion summers over a 55% of that happens in the next few months.
So we've got a lot of year ahead of us, but we feel really good about where we are at the utility and on a consolidated basis.
Okay.
Just a little bit concerned gets consensus is at $2.14 of that.
Given that.
You've said enable would likely be at the low end of the range you'd have to.
Be towards the high end of the range to the utility to get to that number.
Notwithstanding the fact that your guidance range compensates for a lot of that uncertainty right.
That's correct, but I'll just affirm we feel very good about where we are at the utility on a consolidated basis.
Okay and then the second question is.
You've obviously done a yeoman's work over the last several years getting to a good place with the regulator in.
Homa.
As evidenced by your last rate decision and the pending.
Decision.
And just to dovetail on Juliens question your guidance for the utility is 4% to 6% rate base and earnings growth.
In part because enables such a robust cash flow generator, you'll need to issue equity.
Do you see as you think about the deployment of all these.
New technologies, which I agree with you or.
Having very very significant customer benefits the ability to perhaps.
Grow faster than 6% while still.
Delivering good bill outcomes for customers or is there just a practical limit.
How much you can spend in any given year and that the alternative is just it gives us some comfort and longevity of your capital spend or is it some combination of both.
Yes, So I think that's a great question, Greg and let me let me.
Kind of try to I think the last the latter part of your question was was really spot on.
We're very comfortable and we have a long list of objectives. So we're not short on investment opportunities that we see.
So the real the real issue, we're dealing with and we're going to work with our customers and the commission and staff and everybody is.
Over what period, we have these opportunities. Okay. So we certainly could do a lot more sooner or we could spread that over four or five years.
It really is going to boil down to the the Ics.
Recovery mechanisms and the customer benefits and the timing of that but I don't think there is a shortage of investment opportunities. We're very bullish on that element I think what we're working through now with all the interested parties is.
How we spread that over the investment horizon.
And last question before I cede the floor.
What do you think that the timeline is.
And are the milestones might be for us.
To get a sense of how that is shaking out and when we might get an update from you given the negotiated the conversations you're having with all the other.
Relevant parties as to where we shake out and that sort of the duration of the spend and the size of the spend.
Right and I think you're going to see us be more.
Forthcoming after we get the final order for the sooner Muskogee plans, we're going to begin talking more and more about what's next.
Thank you guys have a good morning. Thanks.
And as a reminder, ladies and gentlemen to ask question. Please press. The Star then the number one key on your Touchtone telephone.
Our next question coming from the line of Kim with Goldman Sachs. Your line is open.
Yes.
And so.
Hello.
Hello removed himself from the queue.
Next question coming from the line of shoppers are with Guggenheim partners.
Hey, good morning, guys.
Hi, good morning sharp.
Can you just most of my questions were answered, but just around the grid Mod in Oklahoma and how you guys sort of think about your four to six and incremental capital can you just remind us if there is any amount of place holder Capex you guys have in that growth rate in Oklahoma around grid Mod. So when you guys could sort of present your plan.
And you bring it forward is there an amount that you guys have already kind of sort of reserved in that number.
Yes, so sure the way the way I'd answer that is we aren't we aren't necessarily solving for the capex that's necessary to meet that growth rate. What we're focused on is those projects that bring the maximum customer benefit.
I think those projects are more than adequate to hit our growth rate.
Okay, and I think you can just do the math and know what that Delta is on that we have we have actually greater opportunities and that we just want to ensure that we're bringing results for our customers. That's our focus.
Got it but just just to make sure the when you guys.
Is there a place holder for grid model ready and yes. There is some grid minus capex plans are worthy.
Yes, I think what I want to make sure. So when you sort of announce whatever plan. There is there is a net amount that you've already included in your plan for at Correnso grid. Okay. Thank you. That's that's one question and then how is the weather so far in July .
Weather weather was good it was basically normal for July end. The heat index is about 105 today. So August is August is heating up.
Excellent all right guys that was that was really a thanks. So much thanks art take care.
Hi, guys.
Our next question coming from the line of David Peters with Wolfe Research. Your line is open.
Hey, good morning.
Hi, Good morning, David.
Yeah, just just curious now with some enable starting to grow its distribution again.
I'm just curious if you guys. Thanks, I think thats sustainable and maybe when you might expect to see some some realization of the value in the I'd ours, and then just related kind of any updated thoughts now with centerpoint opting to kind of maintain their investment in the partnership.
Sure so.
We certainly were pleased to see the distribution increase.
Enable has done a very good job of managing through a difficult cycle.
On their distribution coverage ratio has grown significantly.
And.
To the major I'd say.
Overhangs or headwinds that enable it had.
Our gone I mean, there was a lot of concern about arclights ownership, they've exited the position that's positive for enable.
Certainly the Centerpoint 13D that was previously out there was a was a bit of a headwind for enable that's gone that's a positive developments though.
Enable felt like the time was right to grow the distribution.
Kind of future distribution growth im going to leave that to enable to speak to that growth. We're certainly.
Excited about this distribution growth, we'd like to see more as you pointed out.
It's not going to take much more to step into the IDR.
And Thats real value.
As you know, we have 60% of those ideas and I want to see that value realized.
For the benefit of though GE shareholders and so that's what that's what really were focused on.
I can't really speak to the future direction of enable distributions right now.
Thats better serve for enable but.
We're we're hopeful that.
Distributions will.
We will continue to grow we want to see that value realized.
That helps thanks, yeah, absolutely. Thank you.
Our next question.
Coming from the line of Kim with Goldman Sachs. Your line is open.
Thank you and apologies earlier I actually.
Hung up the phone while trying to Unmute myself.
[laughter] I can't I can't say I've never done that.
At the end of earnings season so.
A little of it out there.
Just I don't know if this was covered walls out but in terms of the dividend just.
Getting on the back of the.
Upcoming maybe growth forecast that you guys will be giving post this rate case or would we get an updated dividend growth and or payout us forecast in tandem with the rate base growth assumptions. Yeah. Yeah. I think you should expect that we're as we said before we're targeting kind of an 8% 8% to 10% total return and you know with kind of a capex outlook that coincides with the dividend outlook as well.
Understood and then in your utility jurisdiction I know.
The business end customer exposure to those in the oil and gas industry is more limited probably less than 10% of of your customer base, but just given some of the more recent headwinds faced by the industry in that area are you seeing any indications of growth slowing down or customers moving away.
No we really havent.
And I think your assessment there it's less of a.
Component of our overall customer mix than it once was.
So the economy is much more diversified.
But.
We've actually seen positive.
Movement in that sector only from if nothing more from electrification of compression and things like that so we're actually seeing positive results out of that business.
I understood. Thank you very much.
Thank you take care.
And at this time I am showing no further questions I would like to turn the conference call back over to Mr., Sean Koski for closing remarks.
Okay. Thank you.
And thank you to all of you for being on the call today and most importantly, thank you for your interest in NRG energy have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program you may all disconnect everyone have a great day.