OGE Energy Corp. (NYSE:OGE) Q2 2020 Earnings Conference Call August 6, 2020 9:00 AM ET
Jason Bailey – Director, Investor Relations
Sean Trauschke – Chairman, President and Chief Executive Officer
Steve Merrill – Chief Financial Officer
Conference Call Participants
Shar Pourreza – Guggenheim Partners
Richie Ciciarelli – Bank of America
David Peters – Wolfe Research
Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2020 OGE Energy Earnings Conference Call. [Operator Instructions]
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 OGE Energy Corp.’s second quarter 2020 earnings call. I’m Jason Bailey, Director of Investor Relations. And with me today, I have Sean Trauschke, 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, the second quarter results. And finally, as always, we will answer your questions. I’d like to remind you that this conference is being webcast and you may follow along on our Web site at ogeenergy.com. In addition, the conference call and accompanying slides will be archived following the call on that same Web site.
Before we begin the presentation, I’d 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’d also like to remind you that there is a Reg G reconciliation for gross margin and a reconciliation of ongoing earnings to GAAP earnings in the appendix.
I will now turn the call over to Sean for his opening comments. Sean?
Thank you, Jason, and good morning, everyone. It’s great to be with you today.
Before we begin, I want to take just a moment to recognize two key members who’ll be retiring at year’s end. The first is Steve. He’s been a valuable member of our leadership team and has played an important role in strengthening the company’s solid financial foundation. Steve and I have 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. I’m going to miss Todd out on the road. And we’re probably all going to miss his invaluable facts around Oklahoma Football.
I do want to welcome Jason Bailey, who has moved into the IR role. Jason has been with us since 2002. And during that time, he has developed a broad range of experience and already is doing a great job. And Steve and Todd are going to stay with us. They’re 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 excelling through challenging times. The pandemic requires all of us to innovate and lead by example. And I’m pleased that our employees, as always, have responded to the call with outstanding performance.
Some of the highlights of the second quarter included affirming our 2020 guidance, adding almost 10,000 new customers 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 0 safety incidents in the second quarter, completing two solar farms and adjusting our business to mitigate the impacts of COVID 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 $0.51 per share compared to $0.50 per share in the second quarter of 2019.
At the utility, we reported earnings of $0.39 per share compared to $0.37 in the second quarter of 2019. As I discussed in May, our balance sheet is prepared to withstand the rigors of the marketplace and remain 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 next. 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 COVID 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 an 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 the change. The savings for an average residential customer is about 5% of their monthly bill. We’ve helped connect customers with agencies and programs like LIHEAP with over $5 million going to customers to provide assistance. To date, we have assisted more than 29,000 customers with installment payment plans.
The Oklahoma and 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 worked well with our commissions during one of the most difficult times in history. And we do appreciate both the Oklahoma and Arkansas Commissions’ recognition of the importance of these mechanisms and for their timely approval.
We are pleased that the economies in our service territories are recurring. Oklahoma, which began to open in May and was fully opened on June 1, 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%. Both states, unemployment rates are well below the national average and we are 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 10,000 customers to our system over last year. This equates to a 1.1% growth rate. This speaks volumes about our service; it 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-COVID production schedules.
For example, the automotive and food processing, steel manufacturing industries have 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 of the business and our large refineries have remained strong and are currently operating at full production schedules. This all points 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 load is down 7% in June.
Oil field, 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. So overall, year-to-date, on a weather-normalized load basis, load is down 3.2% compared to 2019.
So I’ve provided a lot of numbers and so let me just summarize. When you put this all together, year-to-date, weather is down $0.02, COVID-related load impacts have us down by another $0.02 and all of that is offset by the adjustments we’ve made to our business. And I want to assure you we are not done, and we will continue to execute on our plan for the balance of the year. It is important to note that throughout this process, our work has continued. 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 enhanced safety and health protocols.
This morning, we sent crews to support personnel on the East Coast to assist in restoring power outages due to the tropical storm. Our grid enhancement projects in Arkansas are performing between 70% and 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 5-megawatt solar farms in Davis and Durant in Oklahoma were placed in service and began producing megawatts in July. Both have been fully subscribed by our customers.
In Arkansas, we recently filed for approval to build a 5-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 our program in Arkansas similar to what we already have in place for our Oklahoma customers. Facility 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 have talked about previously, in 2018, we laid out the expectation to be 40% below 2005 CO2 levels. We have exceeded that goal. And we have also set a 2030 goal of 50% below 2005 levels and are on our way to achieving that goal. These emissions reductions are consistent with the recommendations of the Paris agreement. But 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 2007. 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 5 years, focused on ensuring a more secure, reliable, resilient and efficient system for the benefit of all of our customers. The new schedule costs we’re 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 we created Enable, our goal was to transform our midstream investment to a stand-alone entity off the credit of OGE and from a user of cash to a provider of cash. From that perspective, it has worked very well. Enable has 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 are not going to speculate on strategic alternatives for Enable as this is damaging to Enable employees to Enable business relationships and Enable unit holders. Our goal has been and will always be to maximize the value of Enable for the long-term benefit of you, the OGE 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, return members safely to work, executed agreements for over 120 megawatts of large projects, completed two solar farms, adjusted our business to mitigate the impacts of COVID, affirmed guidance and most importantly, we had zero incidents in 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 to Steve. Steve?
Thank you, Sean. And good morning, everyone.
For the second quarter, we reported ongoing net income of $102 million or $0.51 per share as compared to net income of $100 million or $0.50 per share in 2019. On a GAAP basis, OGE Energy Corp. reported net income of $86 million or $0.43 per share. The contribution by business unit on a comparative basis is listed on the Slide.
At OG&E, net income for the quarter was $79 million or $0.39 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 O&M 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 O&M wasn’t in the prior year results. The impact net of the incremental plant O&M would be a quarter-over-quarter reduction of 4.5%.
Depreciation expense increased $13 million as additional assets were placed into service and depreciation expense for the Sooner Scrubbers, which was previously deferred to a regulatory asset. Interest expense increased $6 million, primarily due to additional long-term debt outstanding, along with 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. Overall, the utility is on plan and we’re managing the business to deal with any COVID-19 impacts.
Turning to second quarter gross margin. Utility margins increased approximately $31 million in the second quarter of 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 oilfield 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 the pandemic, we took quick action to increase liquidity by moving ahead of debt issuance plan for 2021. We continue to have no equity needs in 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 of 2020 compared to $27 million in the same period in 2019.
In addition, Enable midstream issued cash distributions to OGE of approximately $18 million in the second quarter of 2020. Enable is on track to achieve the capital and cost reductions announced earlier this year. They ended the quarter with a distribution coverage ratio of just over 2x 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.
[Operator Instructions] Your first question comes from the line of Shar Pourreza with Guggenheim Partners.
So I’m going to ask a couple of questions, but one, I do have to ask a question on Enable. And what I’ll do is, I’ll try to ask it a little bit differently here. And kind of, I guess, the reason why I’m asking is obviously strategic options may now be aligned on the other side of your co-owner counterpart, right?
So you have a new CEO in place, there’s a strategic review in place at CenterPoint, you have new Board Members. Let me ask it slightly differently without getting into the details on actual strategy. Is it at least fair to assume that you are now maybe more aligned with the other GP versus the prior regime that was in place at CenterPoint as you think about Enable?
Well, I think time will tell. I think it’s still early. Dave and I have talked briefly a few times. And I’m sure as things settle down for him, we’ll talk more. And I look forward to getting to know him.
Got it. And then just on the Oklahoma Grid mod. It sounds like you’re highlighting that you can start investment in 2021. Just remind us real quick, what’s in the plan, what’s the placeholder and what’s incremental on that?
I mean it’s really incrementally it’s a couple of 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 on the back end of 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, a follow-up on the second quarter results and COVID impacts. It looks like residential had made up a large portion of industrial and oilfield activity. Does the higher-margin resi load offset COVID impacts on earnings? And can you just talk about the O&M savings that you have achieved and have embedded in plan as you reiterated 2020 guidance?
Yes. So residential basically does offset commercial and industrial. And I think we gave a sensitivity last time, a 1% increase in residential offsets, basically a 1% on all other rate categories. So we’re very fortunate that residential did shoot up. As far as COVID impacts, we’ve seen probably through the first half of the year about $11 million of savings. We’ll see something similar probably on the back end as we continue to adjust the business to deal with the decreases in load as businesses were shut down for a period of time.
Got it. Thanks guys. And Steve and Todd, congrats on phase two of your life. And I know it’s not a good bye. And I can tell you, Sean is going to miss you every quarter now.
[Operator Instructions] Your next question comes from the line of Julien Smith with Bank of America.
This is actually Richie here for Julien. Just curious with the announcement that Steve is retiring here at the end of the year. How are you guys thinking about replacing him on the Board of Enable? It seems like CenterPoint shows to keep a little distance by appointing some Halliburton members there. Is that your strategy or would you look to keep it kind of in-house and have someone from OGE appointed to the Board there?
Yes. That’s a good question, Richie. I haven’t really 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 the best person I can on that Board to continue to maximize the value of Enable.
Got it. Thanks a lot. That’s helpful. And then just separately, you mentioned like sales are improving month-to-month in your service territory with the economies reopening. Just curious how you’re thinking about your guidance range in the back half of the year. Is there any upward bias to that given the O&M management you guys have been able to pursue as well as some of the 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 weather is the big variable. We’re assuming normal weather and I would point to that.
[Operator Instructions] At this time, there are no further questions. I would like to turn the call over to Sean Trauschke. I do apologize. We do have a question from David Peters with Wolfe Research.
Sean, I appreciate your comment on Enable from the prepared remarks and I know you addressed it in the first question in the Q&A. But just maybe if I could ask it 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. I know historically, you guys have engaged in these types of discussions like CenterPoint has. But has that changed at all in light of recent developments across the midstream space 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 at all by CenterPoint throughout their process?
Yes. So I’m not involved or familiar with other than what’s been publicly announced about the CenterPoint process. So I’ll leave that to them to comment on that. We since the very beginning of Enable, we are always looking at our valuation of Enable. That has not changed and it doesn’t — increased or decreased over time.
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 the current sentiment, we recognize that is prevalent 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 an interest that we own versus some of the recent transactions that were wholly-owned, embedded in an entity.
So my answer to this, David, is really, we’re always evaluating our value of all of our assets, including Enable. We don’t incorporate current transactions. But we’re not going to talk publicly about strategic alternatives because that does not help increase value.
There are no further questions. I’ll now turn the call over to Mr. Sean Trauschke.
Thank you, Lisa. Well, look, thank you all for your interest and your time this morning. We appreciate that and have a great day.
This concludes today’s conference. You may now disconnect.