OGE Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 10 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the OGE Energy Corp. 2024 Second Quarter Earnings and Business Update Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

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. Please go ahead.

Speaker 1

Thank you, Hope, and good morning, everyone, and welcome to our call. With me today, I have Sean Choske, 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.

Speaker 1

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?

Speaker 2

Thank you, Jason. Good morning, everyone, and thank you for joining us today. It's certainly great to be with you. The Q2 of the year delivered solid results, and we are ahead of plan for the year. This morning, we reported consolidated earnings of $0.51 per share, including $0.54 per share for OG and E and a holding company loss of $0.03 per share.

Speaker 2

Before we get underway, I do want to recognize our team. We have experienced our share of severe weather this spring summer and as they always do, our team's response was quick and it was safe. We do that for our customers every day and we answer the call for mutual assistance to restore electricity to other companies' customers when we travel away from home. Our team stay focused on our North Star to generate, transmit, distribute reliable and affordable electricity every day and I'm proud of all of them. With that, let's move on to the business at hand.

Speaker 2

Our 2nd quarter delivered solid operational, customer and financial results. With weather normalized demand for electricity up 5.8% year to date, we are confident in our guidance for the year and expect to be in the top half of the range. With regard to the Oklahoma rate review pending before the Oklahoma Corporation Commission, That process is moving forward. Last week, the ALJ recommended our uncontested settlement for approval and we anticipate a final order in the coming months. A number of factors in the settlement benefit our customers, including an increase in our Smart Hours discount for seniors, additional funds for forestry and vegetation management, which our customers regularly ask us to prioritize.

Speaker 2

In this time last year, our rates were 40% below the national average and the lowest in both states. And then in May of this year, we reduced the Oklahoma fuel factor, meaning year over year impact to customer summer bills would be $25 less per month, creating even more headroom. We've issued RFPs in support of our current integrated resource plan and look forward to working through those. And our plan is incrementally layer in generation capacity through a combination of new generation, continued plant upgrades and energy efficiency and demand response. Speaking of energy efficiency and demand response, our new energy efficiency filing in Oklahoma last month reflects increased support for energy efficiency and demand response programs to economically drive 3 37 megawatts of energy and demand savings over the next 5 years.

Speaker 2

This doubles the contribution to capacity reductions from these programs. Our strong load growth is driven by consistent customer growth exceeding 1%. This momentum is driven by continued economic growth and expansion in communities across our service area. Recent announcements reflect both geographic diversity from Van Buren, Arkansas to Seminole, Oklahoma, and industries as diverse as manufacturing, aerospace and defense. Each expansion brings new residential and small business customers as well.

Speaker 2

Our low rates continue to make Oklahoma and Western Arkansas attractive to a number of industries, including data centers. While we don't have anything to announce today, as we continue discussions with several potential projects, we continue to work through generation and transmission capacity and availability as we determine the right regulatory construct to support these projects. All the success we experienced today is underpinned by our commitment to drive economic expansion. We put a stake in the ground years ago and we continue to see dividends from those investments. So far this year, the 10 new projects our team announced represent nearly 20,000 new jobs.

Speaker 2

And the nation is watching and recognizes the benefits of expanding and relocating to our service area. And just in the last year, the Wall Street Journal recognized Oklahoma City as the 5th hottest job market. Forbes ranked Oklahoma City as the 2nd best metro for young professionals. U. S.

Speaker 2

News and World Report listed Oklahoma City as the 3rd most resilient housing market. And unemployment in both Oklahoma and Arkansas remains well below the national average. Our customer growth aligns well with our efforts to deepen relationships with our customers, offering them new self-service technologies and providing them additional tools and resources to manage their energy usage and monthly bills. Investments in affordability and reliability provide direct benefit to our customers and improve our overall performance. Our new self-service technology in our mobile app, online and in the IVR have driven customer calls down 19% year over year, lowering costs and improving the experience.

Speaker 2

Grid enhancements we're making provide more reliable and resilient electric service for customers with fewer and shorter outages. So as I wrap up my comments, I hope you'll take away that our sustainable business model that begins with low rates as the foundation to attract new customers, which leads to revenue growth, technology expansion and efficiencies across our business. This virtual cycle sustains momentum, sustains momentum for our customers, it sustains momentum for our communities, momentum for our employees and momentum to you, our shareholders. With that, thank you. And now I'll turn the call over to Brian.

Speaker 2

Brian? Thank you, Sean.

Speaker 3

Thank you, Jason, and good morning, everyone. Let's start on Slide 6 and discuss Q2 2024 results. On a consolidated basis, 2nd quarter net income was 102,000,000 dollars or $0.51 per diluted share compared to $88,000,000 or $0.44 per share in the same period 2023. In the core business, the electric company achieved net income of $109,000,000 or $0.54 per diluted share compared to $92,000,000 or $0.46 per share in the same period 2023. The increase was primarily driven by exceptional load growth and warmer than normal weather.

Speaker 3

These favorable drivers were partially offset by expected increased depreciation related to our capital investments. Other operations including our holding company reported a loss of $7,000,000 or $0.03 per diluted share in the 2nd quarter compared to a loss of $4,000,000 or $0.02 per share in the same period 2023. The increase in net loss was primarily due to higher interest expense. I will discuss our updated expectations for full year 2024 consolidated EPS in a moment. Let's move to Slide 7 and look at load results.

Speaker 3

When we came into this year, we felt our actual results for the full year could indeed outpace the projected robust assumption of 3% to 5% weather normalized growth we shared with you in February. And with exceptional year to date load growth through June of 5.8%, we are now confident in increasing our full year load growth projection range to 4% to 6%. We consistently talk about our sustainable business model where we leverage our low rates, reliable service and business and economic development activities to attract new businesses to our service area. Our low rates are a significant driver of load expansion when compared to other electric companies across the country. We envision our low rates continuing to drive this great growth to our service area for years to come.

Speaker 3

I will now go over some details related to our 2nd quarter load results. Our customer count continued to expand nicely at a 1.2% clip in the 2nd quarter. And this combined with robust economic expansion in Oklahoma and Arkansas led to extraordinary load growth of 6.7% compared to the Q2 of 2023. This marks one of the largest year over year growth rates in our company's history and each customer class is contributing. A key data point to underscore the strength of these results is that each class showed year over year growth this quarter of over 2%.

Speaker 3

Now let's address our full year's earnings expectations on Slide 8. We are reaffirming our consolidated EPS guidance previously issued in February. Given our remarkable load results in the first half of the year, we now expect EPS to be in the top half of our 2024 consolidated range of $2.06 to $2.18 per share. Okay. Let's wrap up on Slide 9.

Speaker 3

Our only financing transaction to be completed for the remainder of the year is at the Electric Company, where we plan to access the debt capital markets for $350,000,000 in the 3rd quarter to fund our previously disclosed capital investment plan and for general corporate purposes. Zooming out, we remain confident in our company's ability to deliver 5% to 7% consolidated EPS growth each year of our 5 year plan and we continue to be pleased with our financial position. We have one of the strongest balance sheets in the industry. Our current 5 year capital plan requires no external equity to maintain our estimated credit metric of 17% FFO to debt each year of the plan. And as a reminder, we have no fixed rate maturities until 2027.

Speaker 3

Before we open the line for Q and A, let me summarize today's message. The first half of this year's financial results are ahead of plan. And given our excellent load growth, this allows us to point to the top half of our 2024 EPS guidance range. The pillars of our business are formidable with dynamic load growth, prospering communities and constructive regulation, all backed by a strong balance sheet and the relentless dedication of our employees. That concludes our prepared remarks and we will now open the line for your questions.

Speaker 1

Hope, are you with us? Hope. Can you hear us? Participants if you'll just wait a moment and see if we can reestablish connection.

Operator

Hello everybody. I'm so sorry that just went down. At this time, we will conduct the Q and A session. Our first question comes from Shahriar Pourreza with Guggenheim Partners. Your line is now open.

Speaker 2

Hey guys, good morning. Hey, good morning.

Speaker 4

Good morning, Sean. Just

Speaker 5

congrats on

Speaker 4

the results, obviously pointing to the top half. Are you seeing any strong July, August weather component there? And just kind of more importantly, does that kind of imply a level of O and M contingency going back into the back half of the year, so potential tailwind for next year?

Speaker 2

Sure. So great question. So here in Oklahoma and Arkansas in July August, it's hot, right? So there's not a ton of upside there to be quite honest with you, but it's hot. And so as we've said consistently, we're managing the business for long term.

Speaker 2

We're going to deliver on our earnings commitments and we've got a lot of flexibility in our plan and we move things around all the time. But I want you to hear me that we're doing that for the long term. We're not doing it for a particular quarter, but we're in really good shape for the year and our confidence really doesn't have anything to do with July August.

Speaker 4

Okay. Got it. And just on the O and M side, maybe just a question for Brian there, obviously, but like just on the O and M side, Brian, are you kind of pulling some O and M forward just given the strong start and how you're going to end the year? So should we be thinking about the potentially a tailwind on the O and M side as we're bridging from this year to 2025?

Speaker 3

Hey, Shar, good morning. Hey, Brian. First of all, for 2024, it is in excellent shape. And as we pointed to in our comments, it's primarily driven by this exceptional load growth we're seeing. We're going to stay focused on operations and the reliable care of our system.

Speaker 3

When it comes to 2025, there may be a little bit of room there to move some O and M around Shar. But what we're really focused on is, as Sean mentioned, the long term hitting 25%, 26%. We're in a great position for 2024. It allows us to go ahead and plan ahead across the board. And we look at capital investments as well and all the other areas we stay focused on.

Speaker 3

And so I think 2025 is in great shape more based on the fundamentals of the business, the load growth, the strong balance sheet. And so we're really not in need, if you will, of pulling forward O and M.

Speaker 4

Okay, perfect. And then just on obviously, you raised your load growth expectations. I guess maybe a little bit of a top level, but I guess how are these higher expectations maybe changing the calculus for the existing generation RFPs and kind of near term needs? Do you see kind of an opportunity to shift between kind of preferred technology? So CCGT versus simple GT, any need to potentially recast the net of the IRP?

Speaker 4

Thanks.

Speaker 2

Yes. Thanks, Shar. I don't think that anything we've seen is a surprise to us. We've been consistent in saying this backlog that we see of potential growth coming for many, many years is robust. But it's not necessarily linear.

Speaker 2

And so it's difficult to forecast exactly what you're going to see in terms of load growth increases more than a year out because it matters on what quarter it comes in and things like that. But nothing is we anticipated this load growth. And I don't think at this point in time, it changes kind of our direction.

Speaker 4

Got it. Perfect. And then just lastly, Sean, for me, just congrats on the rate case settlement. That's fantastic. But like obviously, with the higher load growth and higher CapEx kind of run rate environment that we're going to be seeing, just talk a little bit about the rate case cycle.

Speaker 4

Do you need more frequent cases? And would you look to maybe go back to propose any kind of incremental interim mechanism to reduce the lag, especially given that the CapEx needs are probably accelerating? Thanks.

Speaker 2

Sure. No, great question. Thanks for that. I am a I think it's important that we stay current with our investments and we recover those. So we're going to have a consistent cadence in terms of rate activity in both states.

Speaker 2

And your second question there in terms of more real time tracking mechanisms, yes, we are going to pursue that as well.

Speaker 4

Okay. That was crisp. Thanks guys. Appreciate the call. Thanks.

Speaker 3

Thanks, Shar. Thanks, Shar.

Operator

Our next question comes from Nicholas Campanella with Barclays. Your line is now open.

Speaker 6

Hey, good morning.

Speaker 3

Good morning. Hey, good morning, Nick.

Speaker 6

Hey. So, thanks for all the updates today. I think in the past you've commented on having maybe 6 or so different customer discussions with data centers. And I just wanted to kind of level set on where you stand in those discussions. How

Speaker 7

real is it

Speaker 6

that we can maybe potentially see something come to your service territory or just an announcement in your service territory by year end? And then just what how can that affect your current load forecast as it stands today? Because I know that there's been some things that are happening right now, which is causing you to revise it higher, but I assume getting a large data center customer could even be further pressure higher on this low growth forecast? Thanks.

Speaker 2

Yes. I think that's clearly upside. And you listen very well. You're right. We have kind of more than half a dozen or so in various stages of development.

Speaker 2

I wouldn't put a timeline on it by the end of this year or anything like that. But I think what's quite remarkable and Brian went through that in his comments is all of this growth we're seeing doesn't include any of the data center work. And so, I don't want to take away for the underlying strength of the business itself. And so we're working through some of those. Certainly, we have to incorporate transmission and generation availability and think about that and make sure that we have the right regulatory construct for those.

Speaker 2

And if we get one that we're satisfied with that supports everything we're trying to do, we'll be glad to announce

Speaker 6

Just as a follow-up to that, what is the size of your current system versus the maybe average request of

Speaker 2

load load requirements or?

Speaker 6

Yes, load requirements, peak demand, however you want to frame it. Thank you.

Speaker 2

Yes. So we're peaking in the mid-six thousand. And you could imagine any of these requests could be anywhere between 2 50 500 Megawatts.

Speaker 6

Got it. That's helpful. And then I also just wanted to follow-up, what are your kind of thoughts on a formula rate or a PBR framework for next year as you kind of get out of this case? And just any updated thoughts around that? That's it for me.

Speaker 6

Thank you.

Speaker 2

Yes. You should expect us to continue to pursue some formula rate mechanism in both states. We need to renew that in Arkansas as well. All right.

Operator

Thank you. Our next call comes from Alex Mortimer with Mizuho Securities. Your line is now open.

Speaker 8

Hey, good morning team.

Speaker 3

Hey, good morning. Good morning.

Speaker 8

Given the strong weather tailwinds this year, the constructive load growth backdrop expected to continue in the coming years and then as well the potential increase in CapEx coming in the New Year, Is it possible at the base of the 5% to 7% EPS CAGR eventually gets changed in the coming years either to be based off of actual results or some other number?

Speaker 2

Brian, you want to take that one?

Speaker 3

Sure. Hey, Alex, good morning. And when we think about this 5% to 7%, call it 6.6% of growth at the midpoint, we're looking at this as a meeting that commitment every year. So we're planning 25%, 26%, 27%, 28% to hit those numbers. And you're right, we have just exceptional load growth.

Speaker 3

This is the 4th year in a row. So it's not just something we're projecting. We're kind of in the middle of a nice wave, if you will, of load growth. It's been from 2.5% to 3% the last 3 years. This year, we expect it to be maybe even over 5%.

Speaker 3

I think you should expect that to continue to be strong in 2025 and beyond. I've pointed to at least 2% load growth in 2025 through 2018 in past calls. I think there's momentum that we can even beat that. So it's a great question. Capital investments are strong.

Speaker 3

We got to meet the growth of our customers. So you're right on all those points. So is there upside on the long term EPS forecast potentially, but we're continuing to work through that and we look forward to having a nice update for you in February.

Speaker 8

Wonderful. And then just kind of wrapping up the load growth conversation, obviously continues to look impressive. Are there any factors that you can point to that maybe in your view make your load growth unique compared to others in the industry?

Speaker 2

We're looking at each other. Who's going to do? Alex, I would just say, what is really remarkable, what we're seeing is it's not just some of this manufacturing that we're seeing come to our service area because of our rates, but the multiplier effect for the ancillary small businesses and residential customers we're seeing. I mean, we're seeing real customer growth occur in our service territory and it's real. And we've been talking about it and we're seeing it materialize.

Speaker 2

And as these businesses continue to prosper, they're expanding. And so this is solid, solid growth.

Speaker 8

Great. Thank you

Speaker 9

so much.

Speaker 8

I'll leave it there.

Speaker 3

Thanks, Alex.

Operator

Our next question comes from Julien Dumoulin Smith with Jefferies. Your line is now open.

Speaker 9

Hi, good morning. It's actually Brian Russo on for Julien.

Speaker 2

Hi, good morning, Brian. Good morning, Brian.

Speaker 9

Good morning, Sean. Good morning, Brian. Hey, just to follow-up on the regulatory strategy. With the incremental load growth forecast, do you think the cadence of rate cases will still be kind of annual with low to mid single rate increases or like the last case you were able to offset quite a bit of the initial revenue request with about $60,000,000 $70,000,000 I think of offsetting revenue from historical load. How should we think about this strategy going forward?

Speaker 2

I think you said it very well. I think you should expect us to have a consistent cadence of every year or 18 months with where we've invested into the load growth and so we're able to offset the impact to customers with this load growth and continue to improve the reliability of our system. So I think we're in great shape.

Speaker 9

Great. And then just to segue into the RFP, are there any opportunities to increase your CapEx outside of the generation needs with maybe additional headroom from the accelerating load growth?

Speaker 2

Yes. I think there's in terms of the capital expenditures, it's really driven by the load growth and customer growth we're seeing in our service territory. And like I said, we're investing against that. And that will be the driver for a lot of our activities. And the way we think about it is we're committed to delivering that earnings growth rate we've committed to year after year and for many, many years.

Speaker 2

And we're committed to the ratings and the balance sheet and we're committed to this affordability and reliability momentum we've created in our service territory because that's generating the growth. And so we're going to keep all of those in balance. But with this growth we're seeing and the growth that we're anticipating, it's significant. And we're going to have a lot of opportunities to make investments.

Speaker 9

Okay. And then just lastly, are there any large projects being considered in your regional transmission footprint that we should maybe even monitoring?

Speaker 2

We're always looking at transmission opportunities to see if they produce any value to our service territory, but nothing that is imminent that we're ready to announce yet.

Speaker 9

Great. Thank you very much.

Speaker 2

Thanks, Brian.

Operator

Thank you. Our next question comes from Travis Miller with Morningstar Inc. Your line is now open.

Speaker 5

Good morning. Thank you.

Speaker 3

Good morning. Morning.

Speaker 5

Yes, sticking on the load growth, popular subjects here. Can you remind us what is the load growth or long term load growth in that 5% to 7% earnings growth outlook?

Speaker 3

Sure. Hey, Travis, it's Brian. Good morning. It's a great question because obviously 6% load growth year to date is remarkable and it's certainly a testament to the business friendly environment in Oklahoma and Arkansas and the dedication of our employees to drive that economic development and our T and E employees and generation employees to connect it and keep the lights on. So we're very excited about it.

Speaker 3

What we had in our base plan, the 5% to 7% and Alex asked a question earlier, we're going to continue to target 5% to 7% and with the tailwinds, we hope to hit somewhere towards the higher end of that range. But with respect to load growth, I pointed to greater than 2% is what we've said for 2025 and beyond. Obviously, there's tailwinds there to beat 2% potentially substantially in some years. But as Sean mentioned, it's some of these large loads are a little unpredictable in timing and can be a bit spiky. But I think in all those years 2025 through 2028, we feel sitting here today, we feel really confident in beating that 2%.

Speaker 3

So give us a couple more quarters and we'll provide a more full update in February.

Speaker 5

Okay. Got it. And then just sticking on that real quick. If you were to go to 3% or 4% and saw that as a sustainable load growth, what does that do to earnings in general, earnings growth in general? What's that kind of link?

Speaker 5

Even if you can't quantify it qualitatively, at this 2% move earnings growth 1%, long term earnings growth 1%, stuff like that?

Speaker 3

Yes. Kind of the way I think about it and a good sensitivity to carry around in your pocket maybe is that a 1% incremental load across the board equates to about $0.05 of EPS. And perhaps even more importantly, that equates to about a 0.5% reduction in customer rates. So that's just really helpful as we go into our rate cases. It frees up of course more capital to deploy in the T and D business or on generation assets.

Speaker 3

But those are some rough numbers that I hope help you.

Speaker 5

Yes, that's great. Thanks a lot. And then one quick high level question. What do you see right now is the biggest hurdle to connecting some of these large loads, whether it's manufacturing or data centers? Is it regulatory?

Speaker 5

Is it system access? What's the big hurdle that you're seeing as you're trying to hook up more of this, especially the C and I load?

Speaker 2

Yes. I think as you think about some of these significant load opportunities,

Speaker 5

obviously,

Speaker 2

these large loads, these large facilities, they have similar supply chain lead times that the rest of us have, right? So there's just trying to forecast this, plan this, and then do it in a thoughtful way. Obviously, making sure that you've got access, capabilities and capacity from a generation and transmission standpoint to serve that. That takes time to create. And then I would say the last point is to make sure that you've got the right regulatory construct such that all the costs and expenses are shared equitably across your rate classes.

Speaker 5

Okay, great. That's very helpful. Thanks so much.

Speaker 8

Take care, Travis.

Operator

Our next question comes from Paul Fremont with Ladenburg Thalmann and Co. Your line is now open.

Speaker 7

Hey guys, congratulations. I guess my first question is the energy efficiency filing that you guys just made, is that reflected in the DSM numbers that you provided in the last IRP or is that incremental to that?

Speaker 2

That's reflective of those numbers as well. That's consistent.

Speaker 7

Okay. And then, I guess if I look at the IRP and the deficiency in terms of capacity, in the past, you guys have indicated that you've got concerns in terms of bill inflation and that you're looking to do maybe sort of 100 megawatts of additional construction per year. Has that changed at all? Or do you expect that you would end up building a significantly higher portion of the capacity shortfall that you were projecting in your 2024 IRP?

Speaker 2

Yes. Thanks, Paul. This is Sean. I think I was expressing that 100 megawatts to 150 megawatts a year. That was my wishful thinking.

Speaker 2

I was really trying to make the point that our strategy is going to be to layer in these capacity additions continually over a number of years versus having it all come in, in one very large investment and create that immediate impact from a customer standpoint. So that was really I was trying to just draw the distinction between we're going to do this incrementally over time. So obviously, the energy efficiency and demand response efforts we're making not just in this new filing, but what we've done this year is incremental is helpful. We're always looking at our existing fleet for whether there's an economic opportunity for turbine upgrade or things like that where you can get incremental megawatts. You've got repowering opportunities.

Speaker 2

So we're looking at all of those things in addition to adding new generation. But the goal is not to get in a position where we've got to make a very, very large investment in any one particular year.

Speaker 7

Okay. So does that I mean does that mean that we should assume that some of that shortfall that's been identified in your IRP will go to 3rd parties and not to OGE or am I misunderstanding that?

Speaker 2

I don't think you should assume that at all. It's my preference that we own this and that we operate One of the big learnings we took out of winter storm Yuri is where we had difficulty was where we were relying on others. And so we think we're pretty good at this and it's our intent to own those and operate those. What I would suggest to you, there's a lot of assumptions in the IRP, some were conservative, some were probably, as we look back, maybe too aggressive. Nevertheless, when we complete the RFPs, we'll communicate all that and you'll see it.

Speaker 2

But what I'm trying to convey is we're not waiting on the IRPs. We're being proactive. We're working on these capacity reductions in terms of energy efficiency and demand response, and we're continually looking to get additional megawatts out of the existing assets we own today.

Speaker 7

So I mean, so if I look at the 600 megawatts of shortfall that were identified in your IRP that were incremental to the projects that you've identified so far, is it safe then to assume that you would expect to construct all of that yourself?

Speaker 2

We would expect to own all of that ourselves.

Speaker 7

Yes.

Speaker 5

Yes.

Speaker 7

Okay. Great. Thank you very much.

Speaker 2

All right. Thank you, Paul.

Operator

I'm showing no further questions at this time. I would now like to turn it back to Sean Trotsky for closing remarks.

Speaker 2

Well, thank you, Hope. And I just want to thank everybody for your interest and your engagement on the call today. And I hope you all have a wonderful day. Thank you.

Operator

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

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Earnings Conference Call
OGE Energy Q2 2024
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