OGE Energy Corp

Ladies and gentlemen, thank you for standing by and welcome to the OGE Energy Corp third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Jason Bailey, Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Natalia, and good morning, everyone, and welcome to OGE Energy Corp's third 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, and Brian Buckler, CFO of OGE Energy Corp. In terms of the call today, we will first hear from Sean, followed by an explanation from Brian of third 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 website at oge.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 Sean for his opening remarks. Sean?

Thank you, Jason. Good morning, everyone. It's great to be with you again this morning, and thank you for joining us on the call today. Earlier this morning, we reported third quarter consolidated earnings of $1.26 per share, which includes utility earnings of $1.12 per share and earnings associated with our investment in Enable of $0.15 per share and a holding company loss of a penny. The teams worked hard on behalf of our customers and shareholders, and on our February call after winter storm Yuri, I told you we were going to work to get back to our original guidance. and I'm pleased to announce we've done just that and narrowed our guidance range to $1.79 to $1.83. We remain encouraged by our exceptional utility operations and all of our employees as they focus on energizing life for our customers and our communities. This morning, I want to provide a few updates, and then Brian will discuss our financial results in more detail. First, our grid enhancement programs in Oklahoma and Arkansas continue on pace, The work we're undertaking on our substations, distribution circuits, and other portions of our grid have already had a significant positive impact on the reliability and resilience of the grid for the benefit of our customers. Our solar subscription program continues to grow. Construction on the 5-megawatt solar farm in Branch, Arkansas is now complete. The 5-megawatt expansion of the Choctaw Nation solar farm will be completed in the coming weeks. and customers will soon have an opportunity to purchase electricity from this facility. These two projects increase our total solar capacity to 32 megawatts. In 2022, we have plans for an additional 5-megawatt solar farm in Billings, Oklahoma, with two additional solar farms in the planning stages. Our securitization filing in Oklahoma is on track, covering nearly all of the fuel and purchase power costs associated with February's winter storm URI. We reached a joint settlement with key parties and an order is expected by the end of the year. Earlier this month, we submitted our final Integrated Resource Plan with both the Oklahoma and Arkansas Commissions, detailing our resource needs over the next several years. Key components include replacing retired generation with a combination of solar and hydrogen-capable combustion turbines. We plan to annually add 100 to 150 megawatts of solar over the next several years. This plan is a significant step to meet our objectives of reliability, resiliency, fuel diversity, and provide our customers with cleaner solutions while maintaining our affordable rates. In Arkansas, we filed our fourth formula rate evaluation report in October, with rates going into effect April of 2022. At the same time, we also filed for a five-year extension of the formula rate plan. We plan to file a rate review in Oklahoma towards the end of this year. A significant portion of this case will involve future grid enhancement investments and a continuation of the established recovery mechanism. The process is working quite well, and we want to continue the work to enhance the resiliency and reliability of the grid for the benefit of our customers. Arkansas securitization is expected to be filed in early 2022. As the Arkansas statute is somewhat different from the Oklahoma statute, We continue to work through that process with every expectation of a positive regulatory outcome. Our strong customer growth continues at 1.3% compared to the third quarter of 2020, reflecting the combination of our highly affordable rates and the ability to service commercial expansion in our markets. You may recall that prior to the pandemic, we were pointing to higher load growth than our historical 1% growth rate. With the first nine months of the year now behind us, we expect 2021 weather normalized load to be approximately 2.2% above 2020 levels and also expect this level of load growth to continue into 2022. Last quarter, we discussed the addition of 75 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 continues to increase. We now estimate 200 megawatts of new connections by the end of 2021, again with these trends continuing into 2022. In addition to the low growth, these projects also bring new jobs and increased economic activity to our communities. To date this year, the 40 new projects secured by our economic and business development partnerships will add nearly 6,000 new jobs across our service area and $27 billion in capital investments. Affordability remains a key competitive advantage for OG&E and is evident in our economic development activity and customer growth, which combined have us on track for sustained low growth. Quickly turning to Enable, we expect that transaction to close 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 we will provide information upon closing. And our exit of this business will positively impact our ability to grow earnings and dividends into the future. Our focus on our customers and key stakeholders has never been stronger. We continue to engage customers directly through media, social media, and community engagement. And just last week, we refreshed our website at OGE.com The site is much easier to navigate and allows us to directly tell our story to both customers and stakeholders. We'll continue telling our compelling story to deliver the information customers and stakeholders need in the way they need us to deliver. One of the efforts I've discussed with a number of you is our disclosures, specifically around all of the great things we're accomplishing on the ESG front. As we continue to tell the OG&E story, watch for our latest SASB report at the end of the month, an upcoming TCFD report in early 2022. Before I hand the call over to Brian, I just want to touch on a few important points. The first is the strength of the economies across our service territory. Oklahoma's unemployment rate in September was 3% compared to the national rate of 4.8%. And Oklahoma City, the largest metro area in our service territory, has a rate of just 1.9%, the best among large metropolitan areas. Our hometown of Oklahoma City grew by more than 100,000 residents in 2010, one of only 14 cities to do so, jumping to the 22nd largest city in the country. In addition to Oklahoma City, Fort Smith, Arkansas, had an unemployment rate of 2.7%. These economies are strong, growing, and continue to grow stronger. Secondly, our business and economic development efforts are driving low growth. with even greater potential ahead. And all this leads to the third and final point of our sustainable business model of growing revenues by attracting new customers, managing expenses by utilizing technology, and this helps us maintain some of the most affordable rates in the nation, which in turn attracts more customers. So with that, I'll turn the call over to Brian. Brian?

All right. Thank you, Sean, and good morning, everyone. Let me start with a focus on our utility operations. OG&E's third quarter results were 12 cents higher than 2020, driven by favorable weather compared to the prior year quarter, strong load results, and increased revenues from the recovery of our capital investments, partially offset by higher depreciation from our growing asset base. In summary, our core utility operations performed very well during the third quarter. On a consolidated basis, for the third quarter of 2021, and inclusive of our natural gas midstream segment, we achieved net income of $252 million, or $1.26 per share, as compared to $177 million, or $0.89 per share, in 2020. Midstream results were $0.15 per share in the third quarter compared to $0.05 in 2020. The increase in income was primarily a result of improved margins and higher natural gas gathering and processing volumes at Enable. Let's turn to our economic update on slide nine. we experienced strong load growth again in the third quarter with total retail load up 2.3%. Our commercial customer class is especially healthy with year-over-year load growth of 4.7% in the third quarter and 6% year-to-date. For the full year 2021, we continue to expect total weather normal load results to be approximately 2.2% above 2020 levels. Importantly, as Sean mentioned, A strategic advantage for our company is the affordability of our rates. This year, our team has signed contracts with new and expanding CNI customers that total approximately 200 megawatts of load that has or is expected to come online by the end of this year. As we look to the future, we believe the recent trends in total retail load growth will continue in 2022. Let's move now to slide 10. where I'd like to update you on our 2021 full-year utility EPS forecast. As discussed during our prior calls, we began the year with a midpoint EPS target of $1.81 per share, but immediately faced a net headwind from the February weather event of 10 cents per share. Since February, our employees across the company have banded together to achieve excellence in operations, driving initiatives that benefit our customers while allowing us to deliver on our commitments to our shareholders. Our efforts are expected to result in 10 to 14 cents of favorability, including benefits from cost discipline and our customer programs. The company's outstanding O&M reduction efforts in 2020 and 2021 will help moderate future rate increases for our customers and our upcoming rate proceedings in Oklahoma and Arkansas. We are thus raising our expectations for 2021 and narrowing our OG&E utility EPS guidance range to $1.79 to $1.83 per share for full year 2021. As Sean stated, it is a testament to the performance of our great employees that we have been able to overcome 12 cents of negative weather in a year to arrive back at the midpoint of original guidance. Looking ahead, the solid performance in 2021, along 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. Before we open the line for your questions, I'd like to provide a quick update on our financing plan, as shown on slide 11. We expect the securitization of the Oklahoma portion of the February fuel costs to occur in mid-2022, restoring our credit metrics to their pre-URI weather event levels. As a reminder, we have the financial strength to support substantial infrastructure investments without the need to issue equity. Additionally, as our infrastructure investment opportunities continue to expand, we look forward to providing an updated five-year capital plan during our fourth quarter call. Let me finish by summarizing where we stand. Our utility operations are on plan to deliver on our 2021 EPS target after a very strong third quarter. Our service territories in Oklahoma and Arkansas are growing, and we will make the necessary infrastructure investments to support these communities, backed by one of the strongest balance sheets in the industry. All of this provides us great confidence in our ability to drive long-term OG&E EPS growth of 5% based off the midpoint of 2021 guidance of $1.81, which, when coupled with a stable and growing dividend, offers investors an attractive total return proposition. That concludes our prepared remarks, and we will now open the line for your questions.

At this time, if you would like to ask a question, please press star and the number one on your telephone keypad. Again, that's star one. To withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Char. Perez with Guggenheim Partners.

Hi, good morning. It's actually Constantine here. Congrats on a good quarter.

Hey, good morning, Constantine.

Thank you. As we kind of get closer to the end of 21 and you narrowed the guidance and kind of we're moving towards the tail end, How are you thinking about inputs into 21 planning, just in terms of load and customer connections, trying from 21 kind of being repeatable in 22? Is it kind of a 2% level? And any implied targets for cost reductions and kind of maintaining the trajectory there?

Yeah, I think great question. And, you know, in my remarks and Brian's as well, we talked about we don't see the load growth – declining. We actually continue, we expect it to continue to grow. You saw what's transpired just in this past quarter where our original estimate for the year was to add 75 megawatts of new load and we moved it to 200. And so it's growing by the quarter. We'll certainly update that in February, but we are very positive about the load growth that has returned and is on the cusp of connecting in the future. So I think that's just more to come. And anything we said today will be updated in February because our expectations are that it's going to continue to grow. As far as the L&M reductions, that's going to continue. I mean, our view of the work we do benefits our customers and helps us redeploy more investments in our business. and mitigate that impact to customers. I don't have any specifics for you, Constantine, but you should expect us to continue on both those fronts going into the future. Brian, do you have anything to add to that?

Hey, Constantine. Good morning. Just to add to what Sean said, the broad economy here in Oklahoma and western Arkansas is really doing well. We were just at a Chamber of Commerce event this week where the mayor spoke, and it's pretty amazing all the great economic factors you're able to point to in this region. There's a lot of pride in this state, and things are going very well for the state, and it's playing out in our load growth. And that all kind of intertwines with this sustainable business model Sean speaks to. Load growth helps us to invest for our customers. That plays out in rate cases to help not only on spreading our revenue requirement across higher load, but also these O&M reductions keep rates very affordable, which just brings more investment into the state. So it's a really good place we are right now in the state of Oklahoma.

That actually takes me to my second question on customer bill headroom, and that's obviously a factor that kind of helps customers just kind of seeing the commodity cost increases and potentially that running through the customer bill. Just as you balance the affordability aspect, where else do you see potential offsets to bill pressure? And does that put any kind of pressure on the other side of, like, CapEx? And is that a governing factor for you?

Well, I think affordability is always something you ought to be aware of. And it ought to be part of your thinking. But as we've said repeatedly, we are fortunate to be in a growing economy. And we've worked really hard to attract businesses to our service area. And the ability for us to spread those costs over more people actually creates headroom for that bill. And that, in combination with a lot of the work we've done in our company, to continue to just drive out or drive efficiencies in our business and reduce our costs just creates more headroom. So I think the combination of just the operating excellence that we've demonstrated here over the last number of years and a growing service territory that we are actively engaged in. I mean, we are at the front recruiting these businesses, bringing them here. They are wanting to be in our service territory. That's creating a lot of headroom. So I think those are two very big catalysts for us.

So no pressure on CapEx, I assume?

Yeah. No, that's correct.

Thanks. I'll jump back in the queue. Congrats on a great quarter, guys.

Thanks, Constantine. Thank you.

Your next question is from the line of Julian DeMolin-Smith with Bank of America.

Hey, it's actually Cody Clark on for Julian. Thanks for taking my questions and congrats on the update. Hey, good morning, Cody. So first, if I can, on energy transfer, I'm wondering if CenterPoint's announcement to fully exit at stake by the end of 22 has changed how you're thinking about your cadence of exit. Does it kind of clear the way for a faster exit than perhaps you were previously contemplating? And I understand that we'll get some more clarity here soon, but wondering if you have any thoughts.

Yeah, I don't have anything to comment on necessarily the cadence, but I think the transaction that they announced certainly removed some of the headwind that would have been in our way, and so glad to see that happen.

Got it. Okay. And then just my second question on how you're thinking about the long-term 5%. EPS growth target as we think about some of the upside to CathX, obviously the IRP that's been filed and you mentioned in your prepared remarks around grid mod and the grid enhancement program there. Just thinking about that and pairing it with some of the strong low growth that you're seeing as well as no equity needs, if there's any color that you can provide.

Yeah, I think good question, and we're certainly going to update our forecast and our guidance in terms of investment opportunities in February. But I hope you're taking from our prepared remarks we're very bullish on the company and the prospects we have. And, you know, we're watching very closely this growing load. And, you know, that's a good indicator for us because, again, you know, it really drives a lot of that capital investment. So, you know, we're continuing to deliver, and we feel pretty good, Cody. I think I'll just leave it at that, and we'll update all this as we get closer.

Got it. Thanks so much for taking my questions.

See you. Thanks, Cody. Look forward to seeing you guys down in Florida at the EI conference.

Your next question is from the line of N2 Kim with Goldman Sachs.

Yeah, thank you. My first question, Sean, when we look at the proposed items in the Biden infrastructure bill and the reconciliation package, who knows if and when some version of that will go through. As it relates to clean energy and renewables there, could that potentially change the long-term generation plan or the cadence or timing of anything that you've laid out in the recent IRP?

Well, I think, you know, I love your assessment there of if and when. We've been all waiting for this for a while now. But in a way, I would say, you know, we're certainly cognizant of the – PTCs, particularly around the solar investments, obviously you've got some potential there around transmission and storage. We're pleased about the potential extension of those. Obviously, as you get to the end of that term, if they were going to expire, you would accelerate some things towards the back end. If they were going to only be good for eight years or ten years or something, you would want to make sure that you maximize all of those opportunities. But I don't think it necessarily changes anything in the near term.

Got it. That makes sense. And then could you just give us a little bit of a preview of, you know, some of the items that we should expect in the Oklahoma rate case? Is it just more blocking and tackling of items that you've been spending money on, or is there anything, I guess, that we may not be thinking of that we should?

Yeah, so Brian will be quick to say we've got to go in there and recover all of our investments that we've already made, certainly offset by load growth and some of the O&M savings that we've created. But the two primary issues in this case are to really set up the mechanism, to continue the mechanism we have around these grid enhancement investments we're making. They're they are delivering huge results. We've done this in Arkansas. We started this in Oklahoma. We had this program already, and that's going to be the key component there will be the recovery of those investments and continuing the mechanism we have going forward.

Got it. And lastly for me, just any – You know, as we look to see you down in Florida, any updates in terms of capital or other items that we should expect at EI? It seems like the language is more in the February timeframe for any major items.

Yeah, that's correct. February will be the time we do that. We're watching this, again, we're watching this low growth by the day.

Right. Definitely. I'm very curious how much of that is more transitory in terms of what's been going on the past 18 months, but it seems like definitely a portion of it is not, so that will be interesting to monitor. All right. Thank you so much.

Thanks, Intu. Take care, Intu.

Your next question is from the line of Travis Miller with Morningstar.

Good morning. Thanks for taking my questions. Good morning. You just answered my one question, the high-level thoughts on the Oklahoma rate case elements, but I'll continue on that. The grid enhancement program, obviously you have a history here of settling cases. Is that program something that you've gotten buy-in from enough parties that that could be a part of a settlement package come next year? Or do you think it's going to be more contentious, I guess, being the opposite?

You would hope that we could reach agreement with interested parties. I mean, the results are pretty obvious, and people can really see the benefits of what you're doing in terms of reliability and resiliency. And so, you know, I think this is a lot different than, you know, take for comparison purposes. If you were building... a new generation facility that was 1,000 megawatts. You know, it's hard for customers and constituents to really see the benefit of that. But here, this is really touching each and every one of them. So I think this should be something everybody could get their arms around. Okay, great.

And then on your CapEx plan, just thinking about the last two bullet points there in terms of upside for the IRP and upside for additional grid investments. What's a sense of the magnitude of that upside? We're talking something like 5% off of your base budget here that you've put out or 10 or 15. What's kind of involved in that upside potential?

Hey, Travis, it's Brian. You know, we're still working through our five-year capital plan, which we'll update in February. A couple of data points we've pointed to on this call and in the second quarter call were the IRP that was finalized here in October. Sean mentioned that we're looking to deploy 100 to 150 megawatts of solar per year in the future, which is really addressing some retirements of legacy gas plants that were built in the 50s, 1950s, and 1960s. And this, of course, are needed investments to keep our generation system reliable. And you've also seen us look at the grid investments here in 2021. You can kind of look at where we started the year and where we're ending the year on our grid investments. Really being driven by large customers coming into the state and expansion of customers, but also additional grid reliability work. to address some of the major ice storms that have hit the state in the past several years and seem to be becoming more intense. So there's additional grid reliability work we'd like to do on that front going forward. So, you know, directionally up, but too early to give you an exact number, but it's something we're continuing planning with an eye always to customer service, of course.

Okay. I understand. Thanks so much. Let's all head. Thanks.

Your next question is from the line of Brandon Lee with the Mizuho.

Hey, Sean and Brian. Congrats on a great quarter. Good morning. Just have a quick question on enable and energy transfer. Is there a way for you to hedge or monetize the run-up in price before the transaction closes?

Well, you know, you certainly could. You know, I think our view of all of this is we want to make sure that we optimize the exit in a very prudent way. And, you know, as I mentioned, we expect this to close this year. So we – there's two months left in the year.

Okay. Yeah. And then I guess another quick question. Can you compare your load growth today to – I guess, pre-pandemic or 2019, how does it fare in relation to that year?

Yeah. Brian, you want to take that one? Yeah, absolutely. You know, Brandon, thanks for the question. And, you know, this is my coming up towards the end of my first year with the company. But Jason Bailey did run the load growth numbers back 10 years ago through 2019. And, you know, therefore, while we were bumping around, you know, half percent to one percent. But then as you got to 2018, 2019, you started seeing load growth more around one and a half percent. So over a 10-year period, it was a little over one percent kind of load growth CAGR. And you're right, you know, I think the gentleman before mentioned, you know, the last 18 months has made load, following the load line, it's almost like a roller coaster, but it's back to being a steady growth pace. So you're seeing us, we fully recovered to the 2019 levels now. So on a year-to-date basis here in 2021, our total load is right on where it was in 2019 cumulatively. So we're passing back that 2019 line two years later. But, you know, the growth we're seeing here in 2021, we do expect to continue into 2022 and beyond that for a while. And it's really driven by, you know, the affordability of customer rates. A lot of these large commercial customers that are in, you know, across a lot of different industries, they're pulling out a map of the United States and they're looking at where's a good place to live and raise families and where are utility rates really low. And their finger often lands on Oklahoma or Arkansas. And so we're getting a lot of interest from these large commercial customers that come into the state. You're starting to see that play out in our load numbers, and it's exciting for the state and for us as a company.

You know, Brandon, one piece I'd add to that is we do have a lot of interest of new entrants, but there's also a lot of pent-up demand from our existing customers who were looking at expansions and things like that pre-pandemic, and we're beginning to see that come back as well. So as Brian mentioned, We've crossed over from 2019, and again, we're pretty excited about the future growth opportunities we've got in the community.

Great. I'll leave it there, and I look forward to seeing you next week at EES.

See you, Brandon.

Thank you, Brandon. Thanks.

There are no further questions. I will turn the call over to Sean for closing remarks.

Thank you, Natalia. Thanks to the thriving economies in our service area and the operating excellence of our team, our growth trajectory is on track with a very bright future ahead of us. I do want to thank all of you for your interest in OGE Energy Corp and for being on the call today. Please take care of yourselves, and I look forward to seeing many of you next week. All the best.

This concludes the OGE Energy Corp. Third Quarter 2021 Earnings Conference Call. Thank you for your participation. You may now disconnect.