OGE Energy Corp

Good day, and thank you for standing by. Welcome to the OGE Energy Corp 2024 First Quarter Earnings and Business Update Call. At this time, all participants are in 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jason Bailey, Director of Investor Relations. For opening comments, Jason, please go ahead.

Thank you, Liz, and good morning, everyone, and welcome to our call. With me today, I have Son 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 would 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 Shawn for his opening remarks. Shawn?

Hey, thank you, Jason. Good morning, everyone. Thank you for joining us today. It's certainly great to be with you. The first quarter of the year delivered solid results, and we are firmly on plan for the year. This morning, we reported consolidated earnings of $0.09 per share, including $0.12 per share for OG&E, and a holding company loss of $0.03 per share. The first quarter represents less than 5% of our company's expected earnings per share for the year, and we are on plan even with the milder weather. I'm excited for this year and beyond, given the strong fundamentals of our business our outstanding team, and our commitment to reach our North Star, delivering safe, reliable, and affordable electric service to our 900,000 customers. Last quarter, I updated you on recognition the company and our team received for our culture. And today, I can add another one to that list. In addition to being named a top workplace in Oklahoma, we were recently named a national top workplace by USA Today. We operate in a highly competitive labor market and it is fulfilling to see our people and culture drive results, innovation, and a sense of belonging. I couldn't be more proud to work alongside my 2,300 colleagues. Their commitment to our purpose runs deep, and together we're driven to achieve excellence. Our people's dedication to the communities we support is unwavering. Last Saturday night, at least 25 tornadoes were spotted in Oklahoma, accompanied by high winds, lightning, and hail. You've likely seen the news footage of the devastation and heard about the tragic loss of life in a number of towns in southern Oklahoma. Since Saturday night, our team has worked around the clock to restore power to every customer who could take power. It will take months and perhaps years for those communities to recover, and we'll be right alongside our neighbors throughout the rebuilding process. As we keep these communities front of mind, let's transition to our business this morning. Today I want to touch on three topics, operational excellence for customers, activity on the regulatory front, and a preview for the rest of the year. Looking at operations, our grid and weather hardening investments continue to deliver great reliability results. Customers are experiencing fewer and shorter outages as a result of technology platforms and applications that improve communication between devices and automatically reroute power in the event of an outage. We continue to harden the grid by strengthening and replacing poles and restoring structures. And when we look at the circuits we've hardened through our grid enhancement program, safety for those circuits has improved 28% since 2020. On the generation front, our power plant operations continue to hum, supplying the grid with electricity to serve our customers. We completed our latest IRP at the end of March. identifying a five-year plan to address generation capacity needs through 2028. The IRP determined that a combination of solar and CTs are the best choice to meet the identified needs. Shortly, we will issue draft IRPs per the Commission rules, and then 30 days after that, we'll issue the final RFPs, and we'll keep you posted as we move along this process. We are reviewing the final EPA rules released last Thursday to better understand how they may impact our current and future generation plans. Timing for full implementation is uncertain, as the rules will likely be challenged in the courts. Together, the investments we make in generation and wires support the growing communities in our service area. Last month, the Wall Street Journal ranked our hometown of Oklahoma City as the fifth hottest job market in the country, due in large part to our low cost of living, of which OG&E is a significant part. And just this week, Forbes ranked Oklahoma City the second best place for small business in the country. We see growth across a broad set of industries, including healthcare, tribal enterprises, military, housing, and data centers. Speaking of data centers, we're excited about the high interest our service area garners for data center locations, given that our competitive rates make us an attractive option. We are in discussion with a half dozen or so projects in various stages of development, and we will continue to update you as we make progress on that front. For the first quarter, both load growth and customer growth were exceptional and set a strong pace for the remainder of the year, and Brian will share more of those details shortly. Yesterday, the U.S. Department of Energy's Office of Clean Energy Demonstrations awarded the Choctaw Nation of Oklahoma an ERA grant to improve resilience in Poteau, Oklahoma. OG&E will support the grant by creating a microgrid to serve seven buildings on their campus, including a health clinic, child development center, and food distribution center. We congratulate our partner, the Choctaw Nation of Oklahoma, for securing one of 19 grants in the U.S. that will benefit their members and the community at large. We are active in pursuing additional grants to further support affordability, and we were encouraged to apply for the two grant proposals currently under review. you'll recall that we've already won a grant for our Smart Grid project. Pursuing these grants means cost-effective grid reliability and resilience improvements for our customers. The investments we make to improve the grid and deliver reliable electricity to our customers must be made with an eye on affordability. To that end, today we are reducing the fuel factor again in Oklahoma. This reduction will result in lower customer bills this summer of approximately $25 per month for the average residential customer when compared to last summer. In Oklahoma, our rate review is well underway. This review is straightforward and is driven by our request to recover investments we've made over the last two years in the grid, new customer connections, and storm restorations. These investments, like the grid enhancement, are delivering improved reliability and resiliency for our customers. Earlier this year, as much of the country called for conservation and experienced outages during winter storms Jerry and Heather, our systems ran and our generation fleet performed extremely well with no need to call for conservation. Late last week, we received responsive testimony in the Oklahoma Rate Review. As you know, this is one part of the overall rate review and we appreciate the transparent and public process the Oklahoma Corporation Commission provides. We will file our rebuttal testimony later this month, and the public hearing is scheduled for June, and we expect new rates to be effective July 1st. All of this is to say the net impact of this rate review, including our back-to-back fuel decreases, is that customer rates will be lower this year than they were last summer. And in Arkansas, the 1.4% increase we implemented on April 1st associated with our final formula rate plan update was more than offset by the reduction we made to our fuel factor on the same day, which resulted in a $23.51 reduction for the average Arkansas residential customer's monthly bill when compared to last year. Constructive regulatory outcomes enable us to support community growth, serve customers, and achieve results for our shareholders. In closing, I hope you hear how bullish we are on our company and our future. The case for investment in OGE Energy is strong thanks to our sustainable business model, beginning with fantastic fundamentals with already low rates and now even lower rates, a thriving service area, a high-quality balance sheet and credit metrics, an economic development engine that drives customer and load growth, and operational excellence delivered by an incredible team dedicated to reaching our North Star. So with that, I'll turn the call over to Brian. Brian?

Thank you, Sean. Thank you, Jason. And good morning, everyone. Let's start on slide seven and discuss first quarter 2024 results. On a consolidated basis, first quarter net income was $19 million, or $0.09 per diluted share, compared to $38 million, or $0.19 per share, in the same period, 2023. In our core business, the electric company achieved net income of $25 million, or $0.12 per diluted share, compared to $40 million, or $0.20 per share, in the same period, 2023. As expected, electric company net income decreased primarily due to higher depreciation and interest expense related to our customer-centric capital investments made over the last two years. This significant regulatory lag is a primary area being addressed in our current rate relief filing in Oklahoma. The decrease in net income was partially offset by higher operating revenues from strong load growth. Stepping back a moment, the benefits The benefits to our customers from the investments we make to serve our growing service area are immense, ranging from reliability and resiliency improvements to increased capacity for economic development. In fact, the low growth we have seen since our last rate case allowed us to reduce the revenue requests in our Oklahoma rate case by approximately $70 million. To round off our discussion of Q1 consolidated results, other operations, including our holding company, reported a loss of $7 million or $0.03 per diluted share in the first quarter compared to a loss of $2 million or a penny loss per share in the same period, 2023. The increase in net loss was primarily due to higher interest expense on increased short-term debt. Regarding full-year EPS expectations, our exceptional low trends have made up for the mild weather in Q1 that impacted results by approximately $0.03. Therefore, overall, our year-to-date results are right on line with our expectations and we are firmly on plan to deliver our consolidated earnings commitment for 2024 of $2.12 within a range of $2.06 to $2.18 per share. Let's move to slide eight for a deeper look at load results. Our customer count grew at a rate of 1.1%, and that, coupled with strong economic expansion in Oklahoma and Arkansas, resulted in weather normalized load growth of 4.8% compared to first quarter 2023. Residential load growth for the quarter of 3.9% is the strongest quarterly expansion we have seen since the pandemic. And commercial sector growth at 12% continues the trends we've seen in this customer class over the last couple of years. Certainly, the residential and commercial sectors benefited the most from the vibrant nature of the economies in Oklahoma and Arkansas. But it does not stop there. Our other three customer sectors of industrial, oil field, and public authority all achieved weather normal load results better than what was budgeted for the first quarter. Sean mentioned Oklahoma City, our hometown, as having one of the hottest job markets in the country. Economic and business development efforts, enhanced by our low rates, are facilitating new businesses locating to our service area and existing customers expanding their businesses. The potential for continued outstanding load growth for many more years, including from data centers, is compelling. underscoring the dynamic economic landscapes in which we operate. All of this is our sustainable business model in action, attracting new customers with low rates and spreading costs across the larger customer and load base, with an aim to maintain some of the lowest rates in the country. Let's wrap up on slide 9 with an update on our financing plan for the remainder of the year. As discussed during our last call, in the second quarter, we plan to issue up to $350 million at the Holt Co. to term out short-term debt, And at the utility, we plan to issue $300 to $350 million in the latter half of the year. Our current capital plan requires no external equity to maintain our estimated credit metric of 17% FFO to debt each year of the five-year plan. It is worth noting that Moody's recently reaffirmed our credit ratings and stable outlook, as shown on slide 14. On a procedural note, it's hard to believe I've already been at OG&E for over three years now. And I recall telling you during my first year that we would be following a routine S3 update. Well, it's that time again, and this month we will update our standard S3 shelf registration with SEC, which allows our continued access to the public capital markets. Before we turn the call over for Q&A, let me recap today's message. First quarter financial results are right on plan and set us up well to deliver on our earnings guidance for the full year. We remain confident in our ability to achieve our long-term earnings per share growth guidance of 5% to 7%. And business fundamentals are strong, with a solid balance sheet, constructive regulatory environments, robust load growth, and a steadfast dedication of our team members. That concludes our prepared remarks, and we will now 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 will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

our first question comes from constantine lednev with guggenheim partners you are live hi good morning sean brian uh thanks for taking the questions today yeah good morning constantine yeah good morning constantine um great quarter great quarter um can you elaborate on the cadence of updates related to the rfps kind of just the timeframe that you're maybe looking at and how those updates would be layered into the CapEx plan over time? Are we waiting for next year? And do you seek to pre-fund those in your financing plan once you get clarity from the outcome?

Yeah, great question, Konstantin. And it's going to mirror very similar to what happened the last time, the last IRP. We're intentionally making sure that We dot the I's and cross the T's and following all the commission processes. So we'll issue this draft RFP 30 days after, and we'll have some stakeholder discussions. 30 days after that, we'll issue the final one. Probably later in the year, we'll have all the bids back and arrived at a decision, probably in the fourth quarter. We will file that with the commission for approval, just like we did last time. Once we get approval for our recommendations, then we'll layer that into our tables and discuss kind of timing and how we'll fund that, okay?

Okay, perfect.

Look, we're anxious to get started, but this is a process, and we're going to follow the process.

Oh, absolutely. That's abundantly clear. And maybe quickly touching on your load growth and expectations, you noted it's trailing toward the high end. And do you have enough visibility to extend that strength into 25? And how do you think that impacts your planning assumptions beyond 24 in general?

You want to cover that, Brian? Sure, sure. You can probably tell from our comments, Constantine, that we're really bullish on load growth prospects. So certainly I think there's some upside to that. our load projections here in 2024, but also in each year of our five-year plan. You know, for OG&E and really for Oklahoma, we bring several competitive advantages. First is our low rates, and we have pockets of ample transmission capacity. In our state, there's abundant and affordable land, tremendous access to renewables and natural gas. And those are all really the drivers that have kick-started load growth over the last three years. So we've got a great track record on that, and we think there's quite a bit of upside to the load numbers in 2025 and beyond. I think I mentioned in the last call we expect it to be at least 2% in 2025 in some of those out years, and there's certainly some upside to those as well.

Okay, and does that load growth potentially help you defer some of the future rate cases as you're thinking about them, or does the, I guess, new capital plan just require more serial filing?

Yeah, I think the benefit of that load growth and that customer growth Brian was talking about is it's certainly going to create headroom and create a tailwind for us to make additional investments and maintain that competitive advantage we have with rates.

Okay. Thanks. I'll jump back in the queue. Appreciate the questions today. Thanks, Constantine. Thank you.

Please stand by for our next question.

The next question comes from Durgesh Chopra with Evercore ISI. Your line is now open.

Hey, team. Good morning. Thank you for giving me time. Hey, good morning. Hey, good morning. Just maybe can you help us out with if there's a way to think about the EPS sensitivity from load growth? Obviously, this is a very strong trend, right? You're at the high end of the two to five this year, but how should we think about you know, earnings implications for maybe a percentage change in load growth, something along those lines.

Hey, Der Jess, this is Brian. You know, it gets nuanced, I guess, between customer classes when you talk about these rules of thumb. But I'll tell you, you know, for this year, we were expecting load growth to benefit earnings by around 12 cents of EPS. That was around a midpoint of around 4% load growth. So you can maybe back into some high-level math with it. You know, with our trends here in the first quarter, we think that's going to benefit us. What I mentioned in my comments is weather was negative 3 cents in the first quarter, and we think our load growth trends we're already seeing this year are going to make up for that. So I'll just tell you, we think we're going to be 3 cents to the good for – that incremental growth here in 2024.

That's excellent, Brian. That's exactly what I was looking for. Thank you. And then maybe just your strategy around, if you can, to the extent, talk about the formulaic rate plan in Arkansas. You know, obviously you have a settlement there, but as I understand, it's going to expire here soon. So maybe just what's the plan there? Is it a rate case or is it an extension or a combination of both?

Yeah, that's exactly what we're required to do. We'll go back in for a rate filing, a rate case in Arkansas, and reinstitute the five-year formula rate plan. And so we're putting that plan together right now, and we'll let you know when we get ready to file it.

Got it. So is it, Sean, thank you, is it that you have to file a rate case? Or can you seek extension under a separate process?

No, you need to file the rate case. You need to file the rate case. There needs to be a rate review. Perfect.

Thank you so much. Appreciate the time. Have a great day.

Please stand by for the next question.

And the next question comes from Paul Freema at Lattenburg, Salomon and Co. Incorporated. Your line is now live.

Thank you. Congratulations on a strong start. I was wondering since testimony, initial testimony has come in already, what your thoughts are on the possibility of a settlement and in Oklahoma,

do you need to have a unanimous uh settlement or uh do you think you can do uh uh you do you think you can do partial settlements yeah you know so paul this is sean um good to hear from you this morning you know in oklahoma we've had um non-unanimous settlements um previously um we've had some parties that just um have agreed not to contest the settlement um you know You're asking me how I feel. I never like reading intervener testimony, but nevertheless, we have a very solid case out there and we feel good about it. We'll begin having discussions once we file our rebuttal testimony and we'll go from there. I think there are a number of parties that would like or be engaged in a settlement process. I think the commission would prefer to see a settlement. But, you know, if you can't get there and you need to go another way, we're prepared to do that as well.

Great. And then I guess my other question has to do with sort of the commercial load growth that you guys experienced. How much of that is data center or AI driven?

Brian, you want to do that one? Sure, sure. Good morning, Paul. And, you know, on the commercial front, what we've seen the last couple years as the majority of the load growth has come from kind of cryptocurrency data mining companies. We're seeing that shift a bit, Paul, to even those companies that have been doing cryptocurrency mining historically are now pivoting their business models prospectively. They're still going to do some of the data mining, but they're shifting their business models more to traditional, I guess you would call it traditional data mining. center work around generative AI, for example, hosting those types of servers. A lot of our interest, a lot of the interest in our service territory currently for future years is data centers, but as we've spoken to before, we're seeing broad industries being interested in our service area, whether it's the defense industry, food and beverage distribution. Western Arkansas is is really more of your traditional manufacturing, some of the big names that you've been seeing your whole life. So it's exciting time. But to answer your question directly, we have seen quite a bit of cryptocurrency load growth. That's about one and a half percent of our margins as we sit here today.

And then that was sort of the second part of my question was going to be on margins. I mean, should we think of margins on the data centers as being more like industrial or sort of traditional commercial type margins?

I would think of them as being some of your very largest loads tariffs, which feel more like some of your industrial groups you're thinking of, Paul. So typically some of the lowest margin customers. And in fact, with some of these, they do improve over time as incentives roll off, but it's definitely a lot of load for at least initially some pretty low margins.

And then sort of last question, you know, you talked about sort of two categories. Can you give us like a percentage maybe idea? I mean, is it like 80% data centers and 20% of the more sort of traditional or just within the commercial category, you know, how much is being driven by sort of data centers and crypto miners?

Yeah, so I don't know if we've given that percentage, but it is the majority. Think of it maybe more like two-thirds, maybe a bit more than that, being your cryptocurrency. Again, it will be shifting more and more to data centers as we move.

That's it for me. Thank you so much.

All right. Thank you, Paul.

One moment for the next question.

And the next question comes from Nicholas Campanella with Barclays. Nicholas, your line is now open.

Hey, good morning, everyone. Thanks for taking my question and for all the information today.

Yeah, good morning, Nick. Good morning.

So I just wanted to follow up on one of Constantine's questions. And, you know, Brian, I know you brought up in your prepared remarks, you just got your updated outlook from the agencies. Just as you kind of layer in these RFPs to your your capital plan, if, you know, if they do result in you, you know, winning some generation or some type of ownership opportunity, just how do we kind of think about the balance sheet capacity at this point relative to your FFO minimums and, you know, the incremental financing needs, or is this just really, you know, is this capital going to replace, you know, other capital in the five-year plan to the extent that materializes?

Yeah. Nick, this is Sean. You know, like I mentioned, we're probably going to have a decision sometime next year from the commission in terms of approval for those generation items that we would own. And then we'll layer that in there. And I think we'll see where things stand when we get there, right? I think it's the best way. I mean, if load continues to grow like it is, obviously you've got a little more room and your coverage ratios. We're protective of the balance sheet. That's very important to us. But how we fund it and what regulatory compact we arrive at to recover that, those all play into that. So I think it's a bit premature not knowing exactly what's going to come out of the RFPs and what that regulatory compact would look like.

Okay. I appreciate it. All right. And then I guess, you know, just on the storm issue,

you brought up also just can you just remind us i believe you have kind of deferrals for storms in place in your territories but um can you remind us there yeah hey nick we sure we sure do there's a there's a tracking mechanism for storm costs um in oklahoma um so the first three million of costs on an annual period um go to expense and then uh the remainder on o m goes into that tracker

Okay, thank you. Have a great day.

See you, Nick. Take care, Nick.

As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by for the next question. The next question comes from Anthony Cloudwell at the Mizuho Group. Your line is now open.

Hey, good morning, guys. Brian, congrats on a wonderful three years.

Good morning, Anthony.

Good morning. I know, I know. Well, hey, you never know. Don't be so negative. The day's not over yet. Just... Just two housekeeping items. On the financing side, you talk about an issuance at the Holdco and an issuance at the Opco. Will the company provide any clarity on what the interest rate you're assuming on those offerings?

Yeah, Anthony, that's a good question. We assume kind of in that mid-fives area, for debt issuances. So at the Holdco, as you've seen the recent bond deals, it's probably a tick higher than that. But markets are dynamic. We'll see how they end up. But we're in a general area with our expectations sitting here today compared to where they were before. Maybe a tick higher under current market conditions. But I'd say our CP and our short-term debt rates have been kind of spot on. We built some conservatism into the plan, and thank goodness we did. We feel like we're in great shape. And let me just add to that, while interest expense may be a tick higher, we're seeing, as I mentioned before, some really exceptional load growth. And so we're right on plan and feel really good about the full-year projection.

Great. And then just on low growth, just a quick question, more on the residential. Customer growth, 1.1 percent, residential low growth, much higher at 3.9. Just I'm curious what the drivers are for that residential growth number.

Yeah, you know, it kind of ebbs and flows a bit, as you know, Anthony. Last year we had flattish, maybe just ever so slightly negative on the residential growth. despite having good customer growth numbers. And certainly we had a very large rate reduction in November in our fuel filing. Expect to have maybe a slight reduction again to the fuel tractor again here in May. And I think that just helps, you know, when you have low rates and the economy's good locally. We have low unemployment. The job market's really good here in Oklahoma. I think that really helps the residential class do well. But, you know, this is one quarter. We'll see how second quarter looks, and hopefully that trend continues for a bit.

Great. Thanks so much for taking the questions.

Thanks, Anthony.

I'm showing no further questions at this time. I would now like to turn the call over to Sean Trosky, Chairman, President, and CEO, for closing remarks.

Thank you, Liz. And thank you all for joining us today. Thank you for your interest in our company and for being on the call today. Please have a wonderful day. Take care.

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