OGE Energy Corp

Hey, and thank you for standing by. Welcome to the Q4 2022 OGE Energy Corp 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 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 1 1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Bailey, Director of Investor Relations. Please go ahead.

Thank you, Rivka, and good morning, everyone, and welcome to OGE Energy Corp's fourth quarter 2022 earnings call. With me today, I have Sean Trotsky, our Chairman, President, and CEO, and Brian Buckler, our CFO. In terms of the call today, we will first hear from Sean, followed by an explanation from Brian of financial 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 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 will now turn the call over to Sean for his opening remarks. Sean? Thank you, Jason.

Good morning, everyone. Thank you for being with us this morning. Before we get started on our financial results, I want to take some time to highlight our team who safely delivers reliable, resilient, secure energy at low rates to our customers every day. Once again, in 2022, our team delivered results for our customers, our communities, and our shareholders, even as continued economic and inflationary pressure impacted all of us. I have confidence in our team and the company to deliver a great future for all of our stakeholders. We are pleased with the financial plan that we are presenting to you this morning and proud to extend our long-term earnings guidance another year into 2027 without the need for any additional equity. Let me be clear. The plan we've put together for 2023 is exactly in line with the commitment we made to you to consistently deliver 5% to 7% earnings per share growth at the electric company based off 2021's original midpoint. Brian will discuss more in a moment, but my message to you is this. We've certainly got this, and our sustainable business model provides numerous opportunities from driving load growth to grid investments and generation for many years to come. We are mindful of ensuring a smooth customer impact and delivering consistent growth. Turning to 2022's financial results, this morning we reported consolidated earnings of $3.32 per share for the year, including $2.19 per share for OG&E, a holding company loss of $0.03 per share, and earnings from natural gas midstream operations of $1.16. Now this will be the last time we report results from natural gas midstream operations as we have fully exited that business. We are pleased with how that investment has helped transform our company. Over the years, we've utilized cash from the midstream segment to reinvest in our core business. And in fact, the utility earnings today are larger than the entire company's earnings were just seven years ago. Today, I want to talk to you about four key aspects of our work that drive our results. safety, reliability, resilience, and affordability. Our solid performance this year is due to exceptional execution by our team who continually focused on safety and kept the energy flowing to the grid during a very hot summer. I am certainly proud of this superior safety performance while maintaining rates that are 13% below the regional and 21% below the national average. We've done our part too. I'm pleased to report our O&M per customer is 4% lower and 22% than just three years ago. There's been a lot of industry discussion about winter storm Elliott in December. Our fleet ran, and our customers experienced no impact thanks to the weather hardening and preparation we undertake. Again, I'm very proud of our team's work every day, particularly during the weather extremes we experience here in Oklahoma and Arkansas. We continue our grid and weather hardening investments that deliver great results for customers. Our grid enhancement investments benefited nearly 150,000 customers in 2022. And from a SADI perspective, over 20 automated restorations saved our customers more than 4 million customer minutes of interruptions. We built seven new substations, upgraded another nine, added 65 miles of transmission line, all to better serve our customers. This foundation powers our growing communities and economic development engine that has delivered 81 new projects in our service area that are projected to create more than 10,000 jobs and garner $4.2 billion in additional investment. This type of growth is not by accident. We set the stage for these results five years ago when we said investing in our communities would pay dividends for all stakeholders, customers, and shareholders alike. Our communities maintain strong unemployment rates and continue to attract expanding and new businesses that our low rates help secure. Our load forecast for 2023 continues to keep pace with the outstanding growth we've experienced over the last two years, and our long-term load forecast remains strong as our service area continues to grow. Today's macroeconomic environment continues to create pressure on our customers, and we remain committed to affordability and keeping bills low. We've doubled down on connecting customers to programs and services to help them manage their energy use. enrolling 100,000 customers in new-to-them programs in 2022. Let me just highlight a few. Our energy efficiency programs delivered 238,000 megawatt hours of savings in 2022 alone, weatherized another 3,000 homes, and our team connected OG&E customers to $41.5 million in bill assistance through federal, state, and local agencies, as well as our own company-sponsored programs. We're excited about the future and advancing innovation in Oklahoma and Arkansas. And recently, the Department of Energy encouraged the Halo Hydrogen Hub, a three-state partnership to build hydrogen infrastructure in the U.S., of which OG&E is a stakeholder, to apply for funding through the Investment in Infrastructure and Jobs Act. Additionally, OG&E is competing for two DOE grants as part of the IIJA for grid resilience and smart grid. After assessing our initial submissions, DOE encouraged us to submit full applications. Our investment plan gives us confidence in our ability to grow electric company earnings per share at a consistent rate of 5% to 7%. The investment opportunities I outlined earlier will serve to extend that level of consistent growth with a dedicated focus on reliability and affordability for our customers. We will release our inaugural corporate stewardship report next week, which highlights how we live our values, beliefs, and center our decisions on customer impact, support communities, steward the environment, and develop our employees to meet the energy needs of the future. We are excited about our story and how this report helps us tell it. I do want to close with a few important thoughts. We've accomplished a great deal over the last five years, particularly how nearly $4 billion in capital investments have produced significant results in reliability and resiliency with a 99.96% 6% system uptime. Technology has improved both operations and security. These achievements are underpinned by a continuous focus on safety and keeping affordability front and center for our customers with rates well below the regional and national averages. We are committed to growth for our communities, to serve our customers, and to financial growth for our shareholders and employees. All these pieces are really coming together. We built the economic development engine that's really driving this load growth. We've built one of the strongest balance sheets to fund this growth. And we've simplified our business by exiting the natural gas midstream business, all of which support our 5% to 7% growth level. Our team, and I'm biased, is the best in the business, focused on safety, taking care of each other and our communities, and delivering results for all stakeholders. I'm proud of each of them and the results they deliver. With that, I'll turn it over to you, Brian.

Thank you, Sean. Thank you, Jason. And good morning, everyone. Let's start on slide seven and discuss full year 2022 results. On a consolidated basis, net income was $666 million, or $3.32 per diluted share, compared to $737 million, or $3.68 per share in 2021. The electric company achieved net income of $440 million, or $2.19 per diluted share, compared to $360 million or $1.80 per share in 2021. The increase in electric company net income in 2022 was primarily due to increased recoveries of capital investments, as well as higher sales volumes, primarily driven by strong economic growth and a 26% increase in cooling degree days. These favorable drivers were partially offset by expected higher O&M and increased depreciation on a growing asset base. With respect to our natural gas midstream operation segment, we reported net income of $231 million or $1.16 per diluted share compared to net income of $385 million or $1.92 per share in 2021. The decrease in net income was primarily due to the prior year's gain on the Enable merger transaction in 2021 and the subsequent elimination of equity and earnings of Enable, partially offset by gains on the sale of energy transfer equity securities in 2022. As we discussed during the third quarter earnings call, we have completed the exit of the natural gas midstream segment, simplifying our story and enabling our investors to have a more clear line of sight into our core business, the regulated electric company. Other operations, including our holding company, reported a loss of $5 million or $0.03 per diluted share compared to a loss of $8 million or $0.04 per share in 2021. The decrease in net loss was primarily due to higher other income partially offset by an increase in interest expense. Please see the appendix for details on fourth quarter 2022 results. Turning to our 2022 customer growth and load results on slide eight, our customers continue to increase at a robust rate of 1.1%. Our weather normalized retail load growth in 2022 was very strong at 3.1%, coming on the heels of a 2.4% increase in 2021. This back-to-back expansion of load is remarkable and indicative of its economic strength in Oklahoma and Arkansas. The biggest driver of load growth is coming from the business sector, with a variety of companies contributing, including those in data mining, agriculture, and manufacturing. In 2022, the commercial class load was 12.2% above 2021 levels. Sean often speaks to the pent-up demand in Oklahoma that was set to take off going into 2020, and that is playing out as commercial sector load is now 15% above 2019's pre-pandemic levels. Our 2022 load results provide evidence that our sustainable business model works where we grow our communities with reliable, resilient, and affordable service enhanced by a focus on economic and business development. Turning to 2023, as shown on slide nine, we forecast total retail weather normalized load growth to be between four to 5% above 2022. Even if we were to take a very conservative approach, and assume the load from data mining customers at the end of 2022 just stayed flat throughout 2020-23 with no additional growth, then total retail load growth would be between 2.5% to 3.5%. In other words, the fundamentals of our customer base are strong and expected to expand across the board. Turning to slide 10. In 2023, at the regulated electric company, we expect earnings of $1.99 to $2.09 per share with a midpoint of $2.04 per share. This OG&E earnings guidance midpoint is consistent with the commitment we've made and represents a compound annual growth rate of 6.2% from the midpoint of our 2021 guidance of $1.81. The drivers of expected EPS growth in 2023 are very similar to the drivers we executed upon in 2022, reflecting the predictable growth you expect from our company. Furthermore, we are extending our utility 5% to 7% annual EPS growth forecast through 2027 reflecting our confidence in the long-term financial prospects of the company. On a consolidated basis, in 2023, we are forecasting EPS of $1.93 to $2.07 with a midpoint of $2 per share, which includes a holding company loss of approximately $0.04 per share. Thus, over the period of 2021 through 2023, on a combined utility and holdco basis, this would be an approximate 6% compound annual growth rate. Let's turn to financing considerations on slide 11. As you know, one of our company's core strengths is the balance sheet. This is illustrated by our forecast that includes no need to issue equity under our current five-year 4.75 billion investment plan, which has now been rolled forward an additional year through 2027. We forecast FFO to debt metrics of approximately 17.5% to 18% throughout this five-year period, supportive of our current credit ratings at S&P, Fitch, and Moody's. As Sean mentioned, there are ample emerging investment needs, and we look forward to addressing these capital projects in a manner that balances affordability while sustaining our strong credit metrics and lengthening the earnings growth prospects of the company. With respect to the 2023 capital forecast, we plan to issue up to an additional $400 million of long-term debt at OG&E in the second quarter of 2023 to fund our customer-centric investments. To wrap up on the slide, here are a couple additional updates. First, we are making progress on our fuel under recovery balance, which was $515 million at the end of 2022. As of year-end, in Oklahoma, we have $474 million remaining to be recovered over 21 months. We submitted new fuel factors in December, and those were implemented in January. In Arkansas, as of year-end, we have $41 million remaining to be recovered over 15 months. Lastly, we are well-positioned with respect to interest rate risk. For example, we have low levels of floating rate debt and no fixed rate debt maturities through 2026, excluding URI-related debt that matures in May. Before I turn the call back over to Sean, let me summarize where we stand. Our employees have built a strong foundation for this company and they delivered outstanding results again in 2022. Looking forward, we have put together an operational and financial plan for 2023 through 2027 intended to deliver great value to our customers drive economic development in our communities, and meet our commitments to our shareholders. We expect strong earnings per share growth of 6% in 2023 over our 2022 utility guidance midpoint. And lastly, our 5% to 7% long-term earnings per share growth rate at the utility, coupled with a stable and growing dividend, offers our investors an attractive total return proposition. With that, we will open the line for your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Zimbardo of Bank of America. Your line is now open.

Hey, good morning, team.

Hey, good morning, Paul.

Nice to see the update. First question was, could you please walk through some of the changes in the CapEx plan just within the categories? I noticed other moved up in the near term, transmission moderated a little bit in the later period of the plan. If you could just walk through some of those changes, that'd be helpful.

Yeah, Brian, you want to tackle that one? Sure. Good morning, Paul. You know, Paul, we do have a... ERP system we're implementing in 23 and 24. That was part of our regulatory filing in the last rate case where we were granted a deferral treatment on O&M related to that project. So, that's what you see in the other categories. So, a lot of our IT projects fall in there. As those investments are completed at the end of 2024, you can see that we then We then turn back to the transmission and distribution investment plan for some of those critical projects. So we're looking at that kind of steady $950 million investment plan per year over the five-year period. And Sean mentioned some of the other investment opportunities that we have coming as well.

Okay. That's helpful. Thank you. Another, I know you talked a lot about the data mining load and conservative keeping it basically flat from December 2022. I know that the margin profile there can be a little dynamic. So could you help unpack what a sensitivity is on that or even just what the contribution was in 2022 in terms of earnings?

Yes, sure, Paul. I'll take that one as well. And, you know, in 2022, just to give you a feel for the total earnings, impact of the data mining load. It's a little under a half percent of our margins in 2022. And you're right, it's a customer class that has a much lower margin profile. They do have load reduction requirements where we're able to take their load down on peak days of load. And so they have a discount in their bill for that. And some of the newer projects also receive some economic incentives. So that is lower margin. We tried to give you a feel for the potential impact of the crypto load on our 2023 load forecast. You can see even without that load, we're still expecting overall growth to be at least two and a half to three and a half percent. So really strong load and that incremental to take you to four and a half, sorry, four to 5% rather has a very, minor impact to our EPS in 2023.

Okay. Great. That's helpful. And then last, quick if I can, just I know very strong weather in 2022. And you talked about expected O&M increases, just the normal factors for 2022. Did you use any of that favorability to pull forward some spending into 2022, perhaps out of 2023?

Sure. I mean, just in normal course of managing the business, you know, we pulled some stuff in early and took care of that late in the year.

Okay. Excellent. Thank you all very much. All right. Thanks, Paul. Take care.

As a reminder, to ask a question, please press star one one on your telephone. Please stand by for our next questions.

Our next question comes from the line of Adita Gandhi of Wolf Research.

Your line is now open.

Hi. Good morning, Sean, Brian, and Jason. Can you hear me?

Yeah, we can. Good morning.

Good morning. So you reaffirmed your 5% to 7% utility EPS growth target through 2027. With midstream now gone, how should we think about consolidated earnings over the forecast period and I guess more specifically what I'm asking is how should we think about the parent drag beyond 2023? Could you give any color on how much parent debt needs to be raised in the outdoors?

Yeah, so we'll take this maybe in two parts. I'll address the consolidated, and then maybe, Brian, you can tackle the holding company. So we wanted to be very clear, you know, One of the messages we heard a lot, it wasn't about our company, but we heard a lot when we were out on the road about a lot of discussion around rebasing and changing growth rates and changing start points and all that. We wanted to be very clear that we're maintaining the same starting point, and we actually rolled forward the growth rate an additional year. And on top of that, we said we do not require any equity. And so I wanted to make sure that there was absolutely no confusion around that. And I hope it's coming through that we are very bullish on the growth prospects that we have here and absolutely confident in our ability to execute on those. So that was going on there. My belief or my expectation is I do believe we will consolidate all of this and provide a consolidated growth rate at some point. But I want to be very clear with regards to the utility business and the growth prospects we have there. So with that, Brian, you want to maybe talk about what's going on at the holding company? Yeah, absolutely.

And so maybe just to help you model, Adita, so we've given you the utility guidance this year and for the five-year plan. Our holding company number is in the area of $0.04 of expected drag here in 2023. As Sean mentioned, we really are bullish on the utility going forward. You've seen us deliver a little bit above the 6% growth rate midpoint for the last couple of years and have great optimism going forward. For a holding company, you should expect the debt levels to grow, you know, in 2024, 2025, as the utility invests, reinvests in its business. So think of the 4 cents this year. Maybe that goes up roughly in the neighborhood of 5 cents. next year so you know in that kind of nine cent area in 2024 uh we'll we'll firm all this up um over time and as sean mentioned give you a consolidated kegger at a future date but hopefully that's enough for you to model for now um and again really uh strong optimism at the utility level with some of this level of holding company drag got it that's helpful thank you just

I just wanted to confirm one. Brian, did you say it goes up another $0.05 in 2024, so sort of like a $0.09 drag in 2024? Is that what you said?

Yeah, that's a really rough early estimate, but that's something to get you going for your modeling.

Okay, got it. And just one last question on the – I have one more question, but it's just before that. One last question on the parent drag in 2023. Is that because of higher interest rates? I don't believe you have much parent debt really except the URE debt. Where exactly is that coming from?

Yeah, so you should think of our holding company data being in the neighborhood of $300 million as the dust settles here at the end of 2023 and kind of growing roughly in that area each year thereafter. And you're right, interest rates are a lot higher than what we were thinking they would be a year ago. But I think you know how the holding company would price on the interest rate front. But if you need some additional help modeling that, Jason can help you after the call.

Okay, got it. Super helpful. Thank you. And just last question. Could you maybe give us a quick update on the kind of the big set of comment here RFPs maybe just some color on the approval filing that you will make. When exactly will we get a sense of the investment opportunity and when will that be baked into your CapEx plan?

I'm smiling here because I think we're all interested in closing the book on this one for sure. So just remember, we have three different RFPs and each one of them We are following to the T all of the Commission rules and procedures and timelines and notifications and all that. We've completed all that. We are negotiating the agreements right now. And so once we conclude the negotiations of the agreement, we will file with the Commission for approval. I expect that to be very, you know, shortly, but, you know, we're negotiating those. When we file that, we'll submit that in both states. Once we get the approval, you know, we will layer that in, you know, to our plans going forward. And we'll see how all that plays out. But we are in the middle of negotiating those agreements. And, you know, the amount and the timing are negotiable items. And so we're working through that right now.

Does that help? Super helpful. Okay. Super helpful. Thank you so much.

All right. Have a good day.

Please stand by for our next question. Our next question comes from the line of Brandon Lee of Mizuho.

Your line is now open.

Hey, Sean. Hey, Brian. Hey, Jason. Hey, good morning, Brandon. Good morning. Just a quick question for me. So in your five to 7% targeted utility EPS growth rate, is there a bias towards the midpoint, the upper end or the lower end? And I guess we'll get you to the high end and the low end as you, as you go move on through the years.

Yeah, I, Brandon, this is Sean. I don't think we have a particular bias. We're just going to, we have a commitment to hit it. And yeah, You know, I think, you know, obviously from year to year, if we see some surprises there in terms of load growth, a little higher, it could be higher. Weather certainly plays a role in that. But, you know, I kind of envision this, that we're committed to hitting the number. And probably the variable you should be thinking about is more around weather. Okay, great.

All my other questions have been answered. Thanks for that. All right. Thanks, Brent. Have a good day.

Thank you. At this time, I would like to turn the call back over to Sean Trotsky for closing remarks.

Thank you, Rivka. Well, thank you all for your interest in OGE Energy Corp. Appreciate your engagement, and please have a great day, and we are adjourned.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.