OGE Energy Corp

Good morning, ladies and gentlemen, and welcome to the QT 2021 OGE Energy Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference call, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jason Bailey, Director of Investor Relations. Please go ahead.

Thank you, Andrea, and good morning, everyone, and welcome to OGE Energy Corp's second quarter 2021 earnings call. I'm Jason Bailey, Director of Investor Relations. With me today, I have Sean Trosky, Chairman, President, and CEO of OGE Energy Corp. Brian Buckler, our CFO, has a cold. His voice doesn't sound great, so Chuck Walworth, our treasurer and head of financial planning, will cover our second quarter financial results. Brian will be available for Q&A at the end of our prepared remarks. I'd like to remind you that this conference is being webcast, and you may follow along on our website at ogeenergy.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'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'll now turn the call over to Shawn for his opening remarks.

Shawn? Thank you, Jason. Good morning, everyone. Thank you for joining us on today's call. It's certainly great to be with you again. Earlier this morning, we reported second quarter consolidated earnings of $0.56 per share, which includes utility earnings of $0.42 per share and earnings associated with our investment in Enable of $0.16 per share and a holding company loss of $0.02 per share. While weather was $0.03 below normal for the quarter, we remain within our previously reported guidance range and proud to say we keep moving forward. I'm so proud of everyone here, and we are encouraged by our exceptional utility operations and all of our employees as they focus on energizing life for our customers and our communities. Chuck will provide additional details when he discusses our financial results in just a moment. As we move ahead, I'm pleased to note that in June, OG&E received its 19th EEI Emergency Response Award since 1999. for our power restoration efforts during the 2020 New Year's Eve snowstorm. We've been recognized with this highest national distinction for emergency recovery 11 times for major storms affecting our system and eight times for assisting others. Additionally, for the third consecutive year, OG&E has been recognized by S&P Global as having the lowest rates in the nation, demonstrating the affordability of our service. System-wide, Growth in customer load is driving $75 million of increased capital investments. Investments include substation enhancements, projects at Tinker Air Force Base, and upgrades of our 69KV line to support the load of larger and growing customers. Construction on the 5-megawatt solar farm in Branch, Arkansas, and the 5-megawatt expansion of the Choctaw Nation OGE solar farm remain on track for completion by the end of the year. As we seek innovative ways to increase efficiency across the organization, yesterday we announced that OG&E will pilot utilizing artificial intelligence to inspect distribution poles for damage. This technology will allow our teams to respond more efficiently and utilize a consistent approach for repair and replacement. We will continue to leverage these results and this technology to improve the customer experience. Our grid enhancement programs in Oklahoma and Arkansas continue to deliver. The work we're undertaking on our substations and distribution circuits and other portions of our grid will have a significant positive impact on the reliability and resiliency of the grid for the benefit of our customers. On Monday, we submitted our draft integrated resource plan with both the Oklahoma and Arkansas commissions, detailing our resource needs over the next several years. As you can see on slide five, our resource needs are driven by expected load growth, as well as the retirement of aging, less efficient, less reliable gas plants that were built more than 50 years ago. We expect to retire approximately 850 megawatts over the next five to six years. Key components of our IRP include a successful energy efficiency and demand side management program, combined with replacing retired generation with a combination of solar and hydrogen-capable combustion turbines. We plan to execute this in 100 to 150 megawatt annual increments, beginning with solar, over the next five to six years to really smooth out the customer impacts. When complete, our overall carbon intensity will drop by more than 6%, and the overall fleet efficiency will improve even more. This plan is a significant step forward to meet our objectives of fuel diversity and provide our customers with cleaner energy solutions while maintaining our affordable rates. We begin the stakeholder engagement process now and will submit the final IRP on October 1st, after which we will lay out the timeline for the next steps, including an RFP process. Our securitization filing in Oklahoma is on track for recovery, approximately 85% of the total costs, associated with February's winter storm URI. A hearing is scheduled for October and an order is expected by the end of the year. The Arkansas securitization statute is somewhat different from Oklahoma's and we continue to work through that process and plan to file later this year with every expectation of a positive regulatory outcome there. Speaking of Arkansas, we will file a formula rate update in October. With rates going into effect in April of 2022, we will also file for a five-year extension of our formula rate at the same time. We will file a rate review in Oklahoma towards the end of the year. A significant portion of this case will involve a continuation of our grid enhancement work and a recovery mechanism that has already been established. The process is working quite well, and we want to continue the work to enhance the resiliency and the reliability of the grid for the benefit of our customers. And finally, we're working with the Oklahoma Corporation Commission on our three-year energy efficiency filing for the years 2022 to 2024. These efficiency programs provide energy savings and peak demand reduction for OG&E customers to better manage their energy use. We expect to achieve savings of more than 100 megawatts in demand and nearly 500,000 megawatt hours of energy savings. helping us to efficiently operate our generation fleet as we grow our customer base and maintain affordability. So clearly, these are programs worthy of continuing into the future. Turn to slide seven. Recovery of our load continues. With the first half of the year now behind us, we expect 2021 weather normalized load to be more than 2% above 2020 levels. Chuck will give more details around the load in just a moment. In addition, our strong customer growth of 1.3% reflects the combination of highly affordable rates and our ability to service commercial expansion in our markets, which leads me to our business and economic development activities. Last quarter, we discussed the additional 50 megawatts of load we will add by the end of the year due to our slate of business and economic development activities at that time. I'm pleased to say that the pace of these activities has ramped up even further enabling us to increase that estimate up to 75 megawatts, of which 36 megawatts is already connected, and we're far from done. Again, these are larger loads and do not reflect residential or commercial impacts, and we believe we will add to this number in the months ahead. In addition to low growth, these projects also bring new jobs to our communities. Through the first half of 2021, The new projects secured by our teams have helped add more than 4,100 new jobs all across our service territory. One such project, Pure Foods, is completing a 200,000 square foot regional fulfillment center in Oklahoma City, adding 10 megawatts of load and 550 jobs. The affordability of our rates is central to our sustainable business model, as the cost of electricity is a significant factor that companies consider when deciding where to relocate. And affordability remains a key competitive advantage that is evident in our business and economic development activity, as well as customer growth, which combined have us on track for sustained load growth of approximately 1% going forward, with still many opportunities ahead. Turning to Enable, we expect the transaction to close later this year, subject to the satisfaction of customary closing conditions, including the HSR clearance. Our intention to prudently exit our midstream investment remains the same and will certainly provide information upon closing. Before I hand the call over to Chuck, I do want to take a moment to touch on three key points. First is that we continue to execute on our plan. While the weather was below normal, we remain within our previously reported guidance range and we're going to keep moving forward. Secondly, the strength of our economies across our service territory is strong. Oklahoma's unemployment rate in June was 3.7% compared to the national average of 5.9%. And Oklahoma City, the largest metro area in our service territory, had a rate of just 3.7% in June, the third lowest among large metropolitan cities. Similarly, Fort Smith, Arkansas had a rate of 4.4% in June. These economies are strong and continue to grow stronger. And all this leads to the third and final point of our sustainable business model, of growing revenues by attracting new customers, managing our expenses by utilizing technology, this all helps us maintain some of the most affordable rates in the nation, which in turn attracts more customers and grows our business. So with that, thank you very much.

I'll now turn the call over to Chuck. Chuck? Thank you, Sean, and good morning, everyone. Starting on slide 9 for the second quarter of 2021, we achieved net income of $113 million, or $0.56 per share, as compared to $86 million, or $0.43 per share, in 2020. At the utility, OG&E's second quarter results were $0.03 higher than 2020, despite mild weather, primarily driven by higher revenues from the recovery of our capital investments and improved load from customer growth. partially offset by higher depreciation on a growing asset base. OG&E's core operations performed very well during the second quarter. Our natural gas midstream operation results were 16 cents per share in the second quarter, compared to 10 cents in 2020. The increase in net income was primarily a result of higher commodity prices, improved gathering and processing volumes, and a decrease in income tax expense driven by the Oklahoma State corporate tax rate reduction's impact on deferred taxes. Turning to our economic update on slide 10, as Sean mentioned, we are seeing outstanding employment figures in our service territory. Once again, we are also pleased to see customer growth coming in strong at 1.3% year over year. Furthermore, our commercial and industrial customer classes are showing real momentum. with year-over-year load growth of approximately 12% and 9% in the second quarter, more than compensating for the lower residential volumes we're experiencing as employees begin to return to the workplace. Overall, we saw a 5.7 total load increase during the quarter, generally in line with our expectations. For the full year, we still expect total weather normal load results to be more than 2% above 2020 levels. Let's move now to slide 11, where I'd like to update you on our 2021 full-year EPS forecast. As discussed during our Q1 call, we began the year with a midpoint EPS target of $1.81 per share, but immediately faced a net headwind from the February weather events of seven cents per share. As I'll speak to in a moment, in June, we were a net receiver of cash from the second round of SPP settlements, reducing the earnings per share impact of the guaranteed flat bill program by one cent per share. Thus, as of June 30th, the net impact earnings from the February weather event is six cents per share. Second quarter was on plan with the exception of an additional headwind of mild early summer weather. When you exclude the weather impact associated with the winter storm, unfavorable weather has been approximately a five-cent loss year-to-date. During the first and second quarters of 21, OG&E's employees have worked hard to deliver for customers and shareholders. To date, we have identified and activated seven to nine cents of mitigation initiatives, including continued O&M agility. The company's outstanding O&M reduction efforts in 20 and 21 will help moderate future rate increases for our customers in our upcoming rate proceedings in Oklahoma and Arkansas. Based on our progress to date, we remain within our EPS guidance range of $1.76 to $1.86 per share for full year 2021. Looking more long-term, a very solid start to 21 for our core operations, coupled with the capital investments we are making for our customers and communities, position our company well for sustained earnings growth into 2022 and beyond. Our business fundamentals are strong, and we continue to have great confidence in our ability to grow OG&E at a 5% long-term EPS growth rate through 2025. On slide 12, I'd like to update you on the securitization process. Following the additional SPP resettlement that took place in June, the overall impact of fuel and purchase power costs incurred have been reduced by approximately 100 million. As of June 30th, fuel and purchase power costs of approximately $850 million were recorded on the balance sheet. In Oklahoma, $755 million has now been deferred to a regulatory asset with the initial carrying cost based on the effective cost of debt financing. In Arkansas, the updated fuel and purchase power costs deferred are approximately $92 million. Recall, in Arkansas, we have an order that allows us to recover fuel and purchase power costs associated with the winter storm over a 10-year period while we pursue securitization and filings to be made later in the year. In Oklahoma, we filed testimony in June, which supports our request to recover and securitize the costs associated with the extreme February weather event. The OCC issued the procedural schedule with the hearing to begin on October 11th and a commission order expected by the end of the year. Based on the timeline in the legislation, we would expect to receive proceeds from the securitization by mid-year 2022. Before we open the line for questions, I'd like to provide a quick update on our financing plan, as shown on slide 13. As we noted previously, we initially secured a $1 billion credit commitment agreement that provided short-term funding for our incurred fuel and purchase power costs. In May, the term loan was refinanced by issuing $1 billion of senior notes to serve as a bridge until securitization takes place. These two-year notes carry an average rate of 63 basis points, and are callable at par after six months, providing flexibility for early repayment depending on the timing of the securitization transactions. As we discussed on our last call, our credit metrics are expected to weaken temporarily due to the fuel and purchase power costs incurred. We believe our metrics will return to our targeted 18% to 20% level once securitization is complete. Speaking in more broad terms, our balance sheet remains one of the strongest in the industry, providing the foundation for the company to continue to make important investments on behalf of our customers and communities. Finally, we remain confident in our ability to drive long-term OG&E EPS growth of 5% based off the midpoint of 2021 guidance of $1.81 per share. which, when coupled with a stable and growing dividend, offers investors an attractive total return proposition. That concludes our prepared remarks. We'll now open the line for your questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Once again, to ask a question, please press star, then the number one. Your first question comes from the line of Shar Pariza of Guggenheim Partners.

Hi, good morning, team. This is actually Constantine here for Char. Congrats on a good quarter.

Hey, good morning, Constantine. And I have to tell you, that was the best pronunciation of Char's name. That was outstanding, operator. Tell Char Andrew he got it just right. It was just perfect.

I certainly will. Can we start off with the IRP filing, and how are you thinking about the incremental kind of IRP capex that might be rolling into the current plan? Are there any thoughts on the timing, kind of gradual versus step-up? There's been some roll-in in 21, and just kind of thinking about the overall trajectory, is that kind of setting the new recurring level?

Yeah, I think directionally – The answer is yes. You're going to see a step up and a move forward. In my remarks I mentioned, we're going to probably begin layering in 100 to 150 megawatts, primarily with solar initially, each year. Layering that in, kind of growing into the ultimate retirement. We're trying to space out these retirements such that none of them occur in any single year. and really focused on managing the impact to customers. But that would be, you know, if you look at, you know, 850 megawatts and 100 to 150 a year, you know, over five or six years, you kind of fill that gap there. But, you know, the point I wanted to make there is you should not expect 850 megawatts in any single year, but more of a smoothing and gradual piece that would just be layered in each year.

Does that help? Yes, that makes sense. Following up on the credit metric threshold and the post-enable investment capacity, I How are you thinking about the capital allocation there, again, in relation to the CapEx plan, whether it's a little bit more gradual or there's going to be a bit more of a step up as kind of the exit or the credit ratings start getting a little bit more loose? And are you thinking about kind of just organic reinvestment or any kind of return of capital, dividend policy, reworks, et cetera?

Yeah, so I'll let Brian take it. take a swig and get his voice ready. We look at earnings growth and dividend policy as both part of our total shareholder proposition. The way we're thinking about your reference to the exit of midstream business and proceeds there, we've said repeatedly our first preference is to reinvest in our business and grow our company. And so that's probably our first preference. We're committed to growing the dividend as well, but that's probably the primary focus area. Brian, you want to add anything to that?

Yeah, absolutely. And good morning, Constantine. You know, you mentioned the exit from Enable, and that's important because it certainly improves our business mix as a company. We'll will be a pure plate electric utility. That'll help our credit metrics, you know, have the best, we'll call it excellent business mix. And as you're aware, that's going to allow us to have even more headroom under our credit metrics. So you put that aside and what we focus on that utility is, is outstanding customer service. And as you see here in 2021, we've, we've increased our capital plan to deliver on the, the grid investments needed to support customer growth. And that's a trend. I think you should expect going into the out years as well. and Sean's, uh, discussed our capital investment needs, uh, coming out of the IRP. So you look at those in combination and it's, this company has set itself up really well with a strong balance sheet, uh, constructive, uh, regulatory, um, regimes and, and a capital plan that really works for our customers. So it's, uh, It's an exciting time, and it really dovetails nicely with our exit from midstream.

So, Ken, I guess the growing into the investment capacity that you would have from the expanded credit metrics is gradual, kind of in line with the CapEx plan.

I think that's fair.

Excellent. Thanks. We'll jump back in the queue. Thanks for taking the questions.

Have a great day, Constantine.

And once again, to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Brandon Lee with Mizzouho.

Hey, Sean. Hey, Brian. Hey, Brandon. Hey, Andrew. Thanks. I think that was a pretty good pronunciation of my name, too.

Yeah, they're just – we're on a roll. This is – Andrew's doing great. You know, with a last name like mine, you know, I notice these things, so – Well, good morning, Brandon. Good morning.

I just had a couple of questions. What's the remaining book value on all the coal plants, and do you have plans to accelerate the retirement, and how do you plan to get recovery?

Yeah, so good question. So our coal plants have a pretty sizable – useful life in, in regulatory terms. But, you know, the way we look at this, we look at, we're looking at all of our assets all the time, but the principal driver of the IRP is really the next five year action plan. And, uh, you know, so it's, it's really focused on these prompt years and, um, we're always looking at an economic conditions change, but, um, um, We've made no decisions about future generation. All of those will be under current plans. We'll be retired well before 2050. But, you know, you'll always look at economic conditions and operating performance and things like that. But, you know, where we're focused on right now are the next five years as it relates to the three units at Horseshoe Lake and the units at Tinker Air Force Base.

Okay. And then... So how much coal will you have post-2027 after Tinker and Horseshoe are retired?

Yeah, we'll still have the three units. We'll still have the three units. Okay. Great. Thanks. All right. Thanks, Brent. Have a great day. You too.

And once again, to ask a question, please press star, then the number one. And at this time, there are no audio questions. I'd like to turn it back over to Mr. Trotsky for any closing remarks.

Hey, thank you, Andrea, and thank you all for your interest in OGE Energy Corp. I appreciate you all being with us today. All of you have a great day, and please take care of yourselves and those around you, and I look forward to seeing you all very, very soon. All the best.

Thank you for your participation. This concludes today's call. You may now disconnect.