OGE Energy Corp

Good day and welcome to the Q2 2023 OGE Energy Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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, Mr. Jason Bailey, Director of Investor Relations. Please go ahead, sir.

Thank you, Sheree, and good morning, everyone, and welcome to OGE Energy Corp's second quarter 2023 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 today. I will now turn the call over to Sean for his opening remarks.

Sean? Thank you, Jason. Good morning, everyone, and thank you for joining us on today's call. It's certainly great to be with all of you. Earlier this morning, we reported second quarter consolidated earnings of $0.44 per share, including $0.46 from the electric company and a $0.02 loss from the holding company. To begin, we've never been in a better position to meet our customers' needs and grow our company into the future. We're on target for 2023, and I'm very bullish on what the future holds for OG&E. Since 2015, we've delivered on our commitments to grow the utility. We've increased the utility EPS by 51%, and we've more than replaced the earnings contribution from the midstream segment over that period. We continue to grow earnings as we execute on our long-term plan that offers a long runway of diverse investment opportunities to help us reach our North Star, delivering reliable, affordable, and safe electricity to the nearly 900,000 customers each and every day. Overall, the second quarter was very productive and included the following. Filing for our new generation approval with the Oklahoma Corporation Commission, we requested approval of two new combustion turbine units at our Horseshoe Lake power plant, These units would replace two of the oldest units in our fleet, having served our customers for more than 60 years. We've also filed in Arkansas for approval to begin constructions on these two units. These units are a great first step in meeting the future generation capacity needs of our company. We have now submitted four IIJA applications to the Department of Energy and believe our proposed projects are very strong, benefiting our customers and communities alike. We should receive word on these applications later this year, and we will continue to pursue additional opportunities through the IAJA and IRA. This quarter, we experienced a number of significant weather events from the April 20th tornadoes that devastated Shawnee, Oklahoma, to the string of weakly and damaging wind and thunderstorms that began on Father's Day. Through it all, our team responded quickly and safely to restore service. As you know, we get more than our fair share of severe weather. Let me share an example that illustrates what that really looks like. The National Weather Service categorized winds during one-third of the month of July in our service territory as meeting or exceeding severe storm levels. And yet, 98% of our customers never experienced an outage, and those who did quickly had service restored. Our reliability investments are providing significant benefits to our customers, and I'm so very proud of our team's response. And switching gears, most recently as high temperatures arrived across the nation and in our service area with many days above 100 degrees, our generation fleet has performed well, supplying OG&E customers with electricity. Beyond generation, the grid is delivering electricity to our customers and is not strained, as you hear occurring in other parts of the country. We put reliability for our customers first, always grounded in affordability, knowing that our grid and generation investments must make financial sense for our customers. Nothing illustrates the strength of our company better than our safety journey. Eight years ago, from a safety perspective, we were just average. But since that time, OG&E's OSHA injury rate has improved by 38%, significantly outpacing the SCE, and we've experienced an even more dramatic improvement when you look at DART, with an overall 49% improvement. and we will continue to ensure safety is at the center of every job, every storm, day in and day out. Turning to future growth, our load forecast for 2023 continues to outpace 2022 and we expect growth above 4% for the year. Our long-term load forecast remains strong as our service area continues to grow. From increased electrification to wide-ranging business expansion, Our business and economic development efforts continue to pay dividends for our communities. Through the first half of 23, our economic development and business partnerships continue to secure new projects in our service area that will add thousands of new jobs in Oklahoma and Arkansas in the coming years. The growth we are experiencing is driven by a diverse group of industries from tribal development, non-crypto data centers, manufacturing, healthcare, and defense. And within our existing customer base, we are seeing increased electrification of tribal enterprises, oil, field, manufacturing, and service sectors, all contributing to our positive low forecast as well. 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 expansion or relocation. We continue to ground our plans for the future with a focus on affordability for our customers. And on the topic of affordability, our unrecovered fuel balance was a headwind going into this year, and I'm pleased to share that we've made significant progress on that front, which will be a great benefit to our customers in the future. Another catalyst for affordability has been continued expansion of technology and use of AI in our business to drive efficiency in operations and customer engagement. We've successfully deployed several AI and machine learning technologies, in both the corporate and operational environments and are building the proper governance mechanisms to mitigate any risk associated with emerging and new technologies. As you can see, we've got a lot of great things going on in the company. And as I look forward to the balance of the year, you can expect us to update you on our IIJA applications, file our Arkansas formula rate plan, file a rate review in Oklahoma at the end of the year, and certainly provide you an update on our Horseshoe Lake generation approval process. And then early next year, we'll submit an IRP in both Oklahoma and Arkansas, and then we'll consolidate all of this on our February call. So as you can see, with all of these opportunities, the high-class opportunity before us is to allocate capital in a manner that continues to fuel this economic engine and low growth. And as we continue our strong operational performance, we reaffirm our earnings guidance for the year. You know, we're accomplishing what we set out to do, and importantly, we're accomplishing what we said we were going to do. And we have great momentum for the remainder of the year, but more importantly, we have great momentum for the years to come. Thank you, and I'm going to turn the call over to Brian. Brian? Thank you, Sean.

Thank you, Jason, and good morning, everyone. Let's start on slide eight and discuss second quarter 2023 results. On a consolidated basis, second quarter net income was $88 million, or $0.44 per diluted share, compared to $73 million or $0.36 per share in the same period 2022. Earnings for the second quarter of last year included a loss of $0.09 per share from natural gas midstream operations, which we fully exited in 2022 through the sale of our energy transfer units. OG&E's core utility operations performed well during the quarter. The electric company achieved net income of $92 million or $0.46 per diluted share in the second quarter, compared to 101 million or 50 cents per share in the same period 2022. Weather negatively impacted second quarter year-over-year results by approximately 7 cents per share, primarily due to fewer cooling degree days. As expected, current quarter results also reflect increased depreciation and interest expense related to our capital investments made over the past year, as well as higher O&M, mostly reflecting the timing of operational activities. Our results benefited from continued strong retail load growth, as well as rate adjustments related to recovery of our capital investments in Oklahoma and Arkansas. Year-to-date results through June at the electric company were 66 cents per diluted share and continue to track on plan for the full year. Other operations, including our holding company, reported a loss of 4 million or 2 cents per diluted share in the second quarter, compared to a loss of 9 million or 5 cents per share in the same period 2022. Current year results have come in within our forecast, while the prior year results included a tax expense adjustment related to the midstream business that we exited in 2022. Turning to electricity uses factors on slide 9, OG&E continues to experience exceptional growth in weather normalized total load, coming in at 3.5% compared to the second quarter of 2022, setting up 2023 to be the third consecutive year of load growth, well in excess of 2%. Residential load has been solid despite seeing the expected effects of workers returning to offices, and the commercial sector has once again delivered remarkable growth, with a 16.5% year-over-year increase. These positive trends showcase the strength of our two largest customer groups and the success of our business and economic development efforts. All told, we are on pace to deliver total load growth in 2023 in excess of 4%. Robust load growth and a thriving economic landscape demonstrate the strength and resiliency of the communities we serve in Oklahoma and Arkansas. These factors provide us confidence in the future success of our sustainable business model, which is centered around our customers and includes investing in infrastructure to ensure a strong, reliable grid for the long-term economic vibrancy of the states we serve. Now let's move to slide 10 for an update on our financing plan. As I discussed in our first quarter results call, we have completed our debt issuance activity for the year. Our balance sheet continues to be one of the best in the industry, with no need to issue equity for our current capital forecast, and a projected FFO to debt metric of 17.5% to 18% throughout our five-year forecast period. Given 2023 is in great shape, we have turned our attention to 2024, 2025, and beyond, assessing the wide range of reliability investments opportunities and best capital allocation decisions for our customers. It is an exciting time to be at OG&E, and the load and investment growth opportunities of this company are truly remarkable, placing us on a path to support continued economic growth while delivering on our earnings commitments to shareholders for years to come. Before we move to our final slide, I would like to share an important update on the fuel under recovery balance, which, as Sean mentioned, has improved significantly since the end of last year. Our total fuel under recovery balance is $198 million as of June 30th, which is lower by $317 million since the beginning of the year. We are on pace to fully recover last year's fuel costs in the coming months, and assuming commodity prices stay near current levels, our customers should experience a meaningful reduction in their electricity bills when new fuel factors are implemented. Let's briefly move to slide 11. Given our solid start in the first half of the year and expectations of continued sound execution for the remainder of the year, we are reaffirming our guidance issued in February. As a reminder, approximately 65% to 70% of electric company earnings are typically generated in the second half of the year, and accordingly, we are right on plan. We are proud of our track record, and our company and its great employees look forward to delivering for our customers, communities, and shareholders for years to come. With that, we will open the line for your questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. Please stand by while we compile the Q&A roster. And our first question will come from the line of Char Pereza with Guggenheim Partners. Your line is open.

Hi, good morning, team. It's actually Constantine here for Char. Thanks for taking the question.

Good morning, Constantine. We're glad you're here. We suspected when she said Char we were going to have you, so glad you're here.

Thanks. So your CapEx year-to-date is tracking well relative to the original plan 580 versus 450 last year. Can you comment on some of the drivers there, and how does that impact your annual CapEx run rate going forward, and does it require any adjustments in terms of regulatory mechanisms for timely recovery or anything beyond the rate case and so forth?

Yeah, so great question, Constantine. I think the way to think about that is, you know, what is fueling our growth is really this load growth and this economic growth that we're seeing, and, you know, as we've said before, it's difficult sometimes to really forecast exactly when some of these new projects are coming into service and when they're going to come online. And so it's not necessarily a linear investment. But I think that speaks to the health and vibrancy of the economy, that we're seeing more load growth come through and we're making those investments. And like we said, in Oklahoma, we're going to file at the end of the year. That case is not going to be a A large case, it's going to pick up our investments since the end of the first quarter of 22. So, you know, and that just speaks to our strategy in terms of staying current with our regulatory filings and smoothing out. We hear that from our customers. We want to make sure, you know, impacts to customers are smooth. So I don't foresee any changes in our regulatory timing or strategy or anything like that either. We're on plan.

In terms of regulatory activity, do you have any specific views on the recent PBR transmission roper docket that was opened in Oklahoma?

Yeah, I'm very supportive of it. I think it shows great leadership by the commission. We think it's good policy, and we're going to be very involved in that docket. And, you know, that's one of the things that we've heard from a number of our customers that, You know, they like the consistency of what their bills are going to look like, and this would be one way to achieve that. So we think it's a positive move and good policy, and I'm encouraged by the action. Great.

And last quick one. The slides are showing some continued kind of normalized load growth, but industrial sales are down a bit, and we've seen some moderation across the U.S. more broadly. What are you seeing in terms of sales mix going forward? And especially as we look at load growth kind of rolling into 24, how does that roll into the prior five to seven guidance?

Yeah. Well, Brian, you want to take that one? Sure, sure. Good morning, Constantine. You know, we're really, really proud of the load results that we're seeing year to date. Our two largest customer groups, residential and commercial, are doing great. And, you know, with respect to industrial and public authority and some of those other classes, the pipeline of our expansion, customer expansions and new customer entrance into our service territory and speaking with our business development teams, that pipeline is as good as it's ever been. So what does that mean for 2024 and beyond? I feel feeling more and more confident in 2024. You're going to, again, see us be able to to beat 1%, you know, our historical low growth rate. And so I'm really bullish on 2024 and 2025 and beyond. We continue to forecast and plan conservatively with that 1% assumption, but there's clearly some great tailwinds when it comes to low growth for us.

And one moment for our next question. That will come from the line of Paul Zimbardo with Bank of America. Your line is open.

Good morning, team. Thank you. Good morning, Paul. Good morning. I was hoping you could give a little bit more color and detail on the new disclosure around the EPA potential compliance costs around Good Neighbor, the $2.7 billion. I know you said $100 to $300 million potentially in 12 to 18 months. after implementation. But if you could kind of break out how much is that capital, if you could avoid some of that with running the plans differently, just any additional disclosures would be helpful.

Yeah. And so first thing I would say, you know, just last week we were granted a stay from the 10th Circuit with respect to CASPER. So, you know, the federal implementation plan is not in effect for us. But that being said, that is primarily all capital. I mean, obviously there will be some things that you would look at to, you know, change the operations and the dispatch of certain units, but primarily that's capital.

Okay. And is there any sense on potential timing? I know we're kind of caught in the courts right now, but when you need to start making some of those investments?

Well, it's not effective for us. So we have the stay from the 10th Circuit, so we are not proceeding down that path. So that'll make its way through the courts. But, you know, as part of our overall planning, I mean, that's just prudent planning to begin with. And we've experienced this round of regulations previously. And, you know, we plan accordingly. And we'll make our decisions with With that in mind, and not just CASPER, but you have greenhouse gas rules that have come out. You have mats and regional haste. So you need to look at it in total. And when we need to comply, we will comply. But nothing is imminent. OK.

Understood. Thank you. And then switching gears a little bit, I know in the past you gave some details around expected holding company issuances to finance the rate-based growth. And you quantified that in EPS terms before. Just with the latest move in interest rates, is there any refresher? Is there still a good guidance assumption to be thinking of for the holding company in the future?

Hey, Paul, it's Brian. Good morning. You know, when we look out, you know, for the remainder of this year and 2024 and beyond, Paul, I do want to bring in the utility. We're seeing exceptional growth at utility, trending very nicely for 2023, and we'll finalize our plan for 2024 and beyond here in the coming months, but 2024 is shaping up really well. A lot of tailwinds at the utility. The holding company is just a part of the whole puzzle of how we finance the company, so no change in message at all with respect to the holding company. If anything, I just think we're seeing more and more tailwinds for our core business at the electric company. So we're really bullish on that. And we'll provide a comprehensive update on a consolidated EPS growth rate in February.

Thank you. And one moment for our next question. That will come from the line of Anthony Crowdell with Mizuho. Your line is open.

Hey, good morning, Sean. Good morning, Brian. Good morning, Jason.

Hey, good morning, Anthony. It's been a while. How are the girls doing?

Everyone's healthy but getting more expensive, but I think that's what happens, right?

I understand. I understand. Well, good to hear from you.

I never had dreams of retiring rich, and they're going to make my dreams come true. But if I could just jump on one of Paul's last questions. I think, Brian, you had said that you're looking to give a more – You're looking to give a consolidated update, maybe an EPS growth rate on the fourth quarter call. I just want to check. I know you're making the filings in Oklahoma and some other filings more towards the end of this year. That update will come on the fourth quarter call, or will we have to maybe for the completion of that filing to get an update?

Anthony, this is Sean. I think you should expect that on the February call.

Okay, great. And then if I could just move to the last question, I know we want to keep it tight here. You give some great detail on slide nine on the load growth. I'm just curious if you could go more into what drove that, you know, 16 or 16.5%. load growth in commercial um and was it a was it like one certain project or i i know you talk about there's a uh very you know deep uh or long like runway of commercial activity going on in your territory just what drove that maybe i'm just trying to think of what happens in 2024 i know year over year don't or maybe i should i expect another 16 next year yeah hey anthony good morning uh you know on the commercial load it there as we've talked about in the past a big driver of

the increased double-digit load growth in commercial is the data mining companies that came online late last year and expanded again early this year. They're an Oklahoma-based corporation with Oklahoma ownership and Oklahoma management. And so that's a really strong data mining customer for us. But that's just part of the puzzle. There's a lot of other industries within the commercial sector that are supporting that growth as well. We see a lot of food and beverage manufacturers and facilities in this part of the country. When you're in the central U.S., they need to be able to get to both coasts, and we're seeing great expansion on that front. Manufacturing is really starting to take off in Arkansas in particular. And, you know, EVs, EV manufacturers as well as EV charging stations across automobile dealerships and delivery companies have really helped the commercial load as well. So it's wide-ranging, but the single biggest entity by far was the data mining company that I mentioned.

And that's a trend you're expecting. I don't want to run ahead of your 24 guidance, but as you said, you're expecting a strong year-over-year going to 24, especially in the commercial sector?

Yeah, in 2024, we still feel good about continued growth across residential. We believe industrial and public authority will be positive again in 2024. And then you look at commercial, I do expect it to be well ahead of the 1% growth rate that we would typically see in past years in commercial. It's a little too early to say if we're talking double digits again. We need more time to see how the economy plays out and how the business projects of these customers come to fruition.

Thank you. And one moment for our next question. And that will come from the line of Paul Fremont with Ladenburg Salmon. Your line is open.

Thank you very much. Wanted to follow up on a Paul Zimbardo question. Any light that you can shed on potential cash flow offsetting potential need for borrowing at the holding company obviously the fuel cost recovery you know looks like that would be beneficial to cash flow anything else that we should be thinking about in terms of in terms of cash generation

Hey, Paul, it's Brian. Good morning. You know, I don't know that there's any particular items I would point to, Paul, other than what you've already mentioned. Again, I would come back to the utility. EPS growth rate is going quite well the last several years with the load growth we're seeing in our state and just a general economic expansion. So we are really bullish on the utility, both here in 2023 and beyond. certainly have the ability to earn deeply into that 5% to 7% growth rate at the utility. So that's beneficial all the way across, as you might imagine, including our corporate structure.

And should we think of incremental borrowing at the holding company as most likely being linked to investment opportunities, especially incremental to what's in your current CapEx budgets?

You know what, Paul, I'll just say our messaging on that hasn't changed at all. We do have some other investments at our holding company that are unrelated to the electric company, but obviously the vast majority of our business is OG&E, the electric utility. And so those cash flows, when you think about our dividend at the holding company, all that messaging is unchanged.

Great. I appreciate it. Thank you very much.

Thank you, Paul. Thank you, Paul.

Thank you. One moment for our next question. And that will come from the line of Travis Miller with Morningstar. Your line is open.

Thank you. Good morning, everyone. Hey, good morning, Travis. Going back to that storm discussion at the beginning, apologies if I missed this, but what was the impact from storms in the quarter or year to date, either one that you have?

Brian, did we quantify the storm or?

Yeah. Hey, Travis. Good morning. And, you know, just operationally, I'll go back to what Sean mentioned earlier. We certainly had an unprecedented level of wind storms that came through our service territory in mid through late June and then again through the middle of July. You know, many days of 60-mile-an-hour to 80-mile-an-hour winds. And while we did have some outages, overall our system was performed very well and our response from our teammates across the company was extraordinary. So you didn't notice any issuances of us talking about multiple days of outages. So we're really proud of our operational performance. As far as cost incurred on storms, you can take a look at our regulatory asset footnote and that'll give you the detail you need.

Okay, great. And then kind of more higher level on just the extreme hot weather seen a lot in that region. Are there operational issues that you have to deal with when you have some of that extreme hot weather that might offset some of the benefit that you would get from that extra weather-related load?

You know, sure. Obviously, you know, I'm... Travis, I made some remarks with regard to safety. Obviously, in extreme heat like that, you need to take precautions with the workforce in terms of heat stress, things like that. Obviously, higher temperatures puts more stress on the system, but what I would tell you and what we were trying to convey in my remarks was, you know, we build and design the system for those days, and we were not strained. Yes, we have to take additional precautions. We have to manage things a little bit different when you do have prolonged periods of extreme heat, but that's our business, and we've managed it and designed it that way, and it's performing beautifully.

Okay, great. Thanks so much.

Thanks, Travis.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Sean Troschke for any closing remarks.

Well, great. Thank you, Cherie. And I want to thank all of you for your interest in OGE and for being on the call today. Have a great, safe day.

Thank you all for participating. This concludes today's program. You may now disconnect.