OGE Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 9 speakers on the call.

Operator

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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr.

Operator

Jason Bailey, Director of Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Sherry, and good morning, everyone, and welcome to OGE Energy Corp. 2nd quarter 2023 earnings call. With me today, I have Sean Troskie, 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.

Speaker 1

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.

Speaker 1

Sean?

Speaker 2

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 2nd 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.

Speaker 2

We're on target for 2023 And I'm very bullish on what the future holds for OG and 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 Q2 was very productive and included the following: filing for our new generation approval with the Oklahoma Corporation Commission, We requested approval of 2 new combustion turbine units at our Horseshoe Lake power plant.

Speaker 2

These units would replace 2 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 4 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 IHAA and IRA.

Speaker 2

This quarter, we experienced a number of significant weather events from the April 20 tornadoes that devastated Shawnee, Oklahoma To the string of weekly 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 1 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.

Speaker 2

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 and 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.

Speaker 2

8 years ago from a safety perspective, we were just average. But since that time, OG and 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.

Speaker 2

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 twenty twenty three, 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 The Tribal Enterprises, oilfield, 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 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.

Speaker 2

And on the topic of affordability, our unrecovered fuel balance was a headwind going into this year, 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 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.

Speaker 2

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. Now we're accomplishing what we set out to do And importantly, we're accomplishing what we said we're 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.

Speaker 2

Thank you. And I'll turn the call over

Speaker 3

to Brian. Brian? Thank you, Sean. Thank you, Jason, and good morning, everyone. Let's start on Slide 8 and discuss On a consolidated basis, 2nd quarter net income was $88,000,000 or $0.44 per diluted share compared to $73,000,000 or $0.36 per share in the same period 2022.

Speaker 3

Earnings for the Q2 of last year included a loss of $0.09 per share from natural gas mid operations, which we fully exited in 2022 through the sale of our energy transfer units. OGE's core utility operations performed well during the quarter. The electric company achieved net income of $92,000,000 or $0.46 per diluted share in the 2nd quarter compared to $101,000,000.50 per share in the same period 2022. Weather negatively impacted 2nd quarter year over year results by approximately $0.07 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 and M, mostly reflecting the timing of operational activities.

Speaker 3

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 $0.66 per diluted share and continue to track on plan for the full year. Other operations, Including our holding company reported a loss of $4,000,000 or $0.02 per diluted share in the 2nd quarter compared to a loss of $9,000,000 or $0.05 per share in the same period 20 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 usage factors on Slide 9. OG and E continues to experience general growth in weather normalized total load coming in at 3.5% compared to the Q2 2022, Setting up 2023 to be the 3rd consecutive year of load growth, well in excess of 2%.

Speaker 3

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 2 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 in the 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 strong reliable grid for the long term economic vibrancy of the states we serve.

Speaker 3

Now let's move to Slide 10 for an update on our financing plan. As I discussed in our Q1 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 5 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 and 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.

Speaker 3

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 $198,000,000 as of June 30, which is lower by $317,000,000 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.

Speaker 3

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.

Operator

Thank you. And our first question will come from the line of Shar Pourreza with with Guggenheim Partners. Your line is open.

Speaker 4

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

Speaker 2

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

Speaker 4

Thanks. So your CapEx year to date is tracking well relative to the original plan $580,000,000 versus $450,000,000 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 time load recovery or anything beyond the rate case in 2024?

Speaker 2

Yes. So great question, Costin. I think the way to think about that is What is fueling our growth is really this load growth and this economic growth that we're seeing. And 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.

Speaker 2

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 large case. It's Going to pick up our investments since the end of the Q1 of 2022. So, 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.

Speaker 2

We want to make sure impacts to customers are smooth. I don't foresee any changes in our regulatory timing or strategy or anything like that either. We're on plan.

Speaker 4

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

Speaker 2

Yes. 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 that's one of the things that we've heard from a number of our Customers that 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.

Speaker 4

Great. And last quick one, the slides were showing some continued kind of normalized load growth and 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?

Speaker 4

And especially as we look at load growth kind of rolling into For kind of how does that roll into the prior 5% to 7% guidance?

Speaker 2

Yes. Well Brian, you want to

Speaker 3

take that one? Sure, sure. Good morning, Konstantin. We're really proud of the load results that we're seeing year to date. Our 2 largest customer groups, residential and commercial are Doing great.

Speaker 3

And 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 beat 1%, our historical load growth rate. And So I'm really bullish on 2024 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 load growth for us.

Operator

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

Speaker 5

Hi, good morning team. Thank you.

Speaker 2

Hi, good morning, Paul.

Speaker 5

Yes, good morning. And 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 $2,700,000,000 just if you I know you said $100,000,000 to $300,000,000 potentially in 12 to 18 months after implementation. But if you could kind of break out how much is that capital and if you could avoid some of that with running the plants differently, just any additional disclosures would be

Speaker 2

Yes. And so first thing I would say, just last week, we were granted a stay from the 10th Circuit with respect The Casper. So, 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 Change the operations and the dispatch of certain units, but primarily that's capital.

Speaker 5

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?

Speaker 2

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 will make its way through the courts. And but 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 We plan accordingly and we'll make our decisions. With that in mind and not just Casper, but you have Greenhouse gas rules that have come out, you have Mats in regional hay.

Speaker 2

So you need to look at it in total. And Well, when we need to comply, we will comply, but nothing is imminent.

Speaker 5

Okay, 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 base growth, and you quantified that in EPS terms before. Just With the latest move in interest rates, is there any refresh or is there still a good guidance assumption to be thinking of for the holding company in the future?

Speaker 3

Hey, Paul, it's Brian. Good morning. When we look out for the remainder of this year in 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.

Speaker 3

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 So we're really bullish on that and we'll provide a comprehensive update on a consolidated EPS growth rate in February.

Operator

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

Speaker 6

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

Speaker 2

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

Speaker 6

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

Speaker 2

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

Speaker 6

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 Looking to give a consolidated update, you don't want to maybe an EPS growth rate on the Q4 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 Q4 call or will we have to maybe for the completion of that filing to get an update.

Speaker 2

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

Speaker 6

Okay, great. And then if I could just move to the last question, I know we want to keep it tight here. You gave some great detail on Slide 9 on the load growth I'm just curious if you could go more into what drove that 16% or 16.5% Load growth in commercial, and was it like one certain project or I know you talk about there's a very deep 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 happened in 2024. I know Year over year don't or maybe should I expect another 16 next year?

Speaker 3

Yes. Hey, Anthony, good morning. On the commercial load, As we've talked about in the past, a big driver of the increased double digit load growth And commercial is the data mining companies that came online late last year and expanded again early this year. They're Oklahoma based corporation with Oklahoma ownership and Oklahoma Management. And so That's a really strong data mining customer for us.

Speaker 3

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 the both coasts and we're seeing great expansion on that front. Manufacturing is really starting to take off in Arkansas in particular.

Speaker 3

And EVs, As well as EV charging stations across automobile dealerships and delivery companies That 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.

Speaker 6

And that's a trend you're expecting. I don't want to run ahead of your 2024 guidance, but As you said, you're expecting a strong year over year going to 2024 especially in the commercial sector?

Speaker 3

Yes. 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.

Operator

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

Speaker 7

Thank you very much. I 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 looks like that would be beneficial to cash flow. Anything else that we should be thinking about in terms of cash generation?

Speaker 3

Hey, Paul, it's Brian. Good morning. 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 over 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 beyond, certainly have the ability to earn deeply into that 5% to 7% growth rate at the utility.

Speaker 3

So That's beneficial all the way across as you might imagine, including our corporate structure.

Speaker 7

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 budget?

Speaker 3

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 and E, the electric utility. And so those cash flows, when you think about our dividend at the holding company, all that messaging is unchanged.

Speaker 7

Great. I appreciate it. Thank you very much.

Speaker 5

Thank you, Paul. Thank you, Paul.

Operator

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

Speaker 3

Thank you. Good morning, everyone.

Speaker 2

Hey, good morning, Travis.

Speaker 8

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?

Speaker 3

Brian, did we quantify the storm or Yes. Hey, Travis. Good morning. And just operationally, I'll go back to what Sean mentioned Earlier, we certainly had an unprecedented level of windstorms that came through our service territory in Mid through late June and then again through the middle of July, many days of 60 mile an hour to 80 mile an hour winds. And while we did have some outages, overall our system performed very well and our response from Our teammates across the company was extraordinary.

Speaker 3

So you didn't notice any issuances of us Talking about multiple days of outages. So we're really proud of our operational performance. On our As far as cost incurred on storms, you can take a look at our regulatory asset footnote and that will give you the detail you need.

Speaker 8

Okay, great. And then kind of more higher level on just the extreme hot weather, we've 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?

Speaker 2

Sure. Obviously, 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 It was we build and design the system for those days.

Speaker 2

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 and designed it that way and it's performing beautifully.

Speaker 8

Okay, great. Thanks so much.

Speaker 2

Thanks, Travis.

Operator

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 Troshky for any closing remarks.

Speaker 2

Well, great. Thank you, Sherry. 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.

Operator

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

Powered by Quartr
Earnings Conference Call
OGE Energy Q2 2023
00:00 / 00:00