Oge Energy Corp. Q3 FY2022 Earnings Call

Thank you, Eric, and good morning, everyone, and welcome to OGE Energy Corp's third quarter 2022 earnings call. With me today, I have Sean Trauschke, our Chairman, President, and CEO; and Bryan Buckler, our CFO. In terms of the call today, we will first hear from Sean, followed by an explanation from Bryan of financial results, and finally, as always, we will answer your questions. I'd like to remind you that this conference is being webcast and you may follow along at oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same website. Before we begin the presentation, I'd like to direct your attention to the Safe Harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date. I'll now turn the call over to Sean for his opening remarks.

Thank you, Jason. Good morning, everyone. Thank you for joining us today. I want to take a moment to acknowledge the economic and inflationary pressures we are all facing. We understand our customers are concerned about rising household costs and that the increase in fuel prices for electricity generation contributes to their worries about higher energy bills. I will outline the specific actions we are taking after discussing the quarterly results. Now, regarding our financial performance, we reported third-quarter consolidated earnings of $1.31 per share, which includes utility earnings of $1.26 per share, a holding company loss of $0.03, and earnings from natural gas operations of $0.08. This quarter's strong performance is attributable to our team's exceptional execution, as they worked diligently to maintain energy supply during a particularly hot summer with many days exceeding 100 degrees across our service area. Unlike other regions, we did not see a need for public conservation to protect the grid, due to the resilience and design of our systems, and I commend our team for their tireless efforts to keep the power on for our customers. The third quarter was quite productive and demonstrated the results of our substantial investment in preparation. Additionally, we completed the exit from our midstream investments with the sale of our Energy Transfer units. While this marks the end of our discussions on midstream financial results, it reflects the conclusion of a decade-long journey to shift our focus. We are committed to fostering business and economic growth in our service area, while ensuring we maintain reliability and affordability for our customers. Our work on grid reliability, resiliency, and security is ongoing, including a multi-year project to bury lines running over major roads. This year, we plan to underground around 30 lines, and we expect to have buried over 100 by the end of 2023. This effort enhances both reliability and safety for customers and emergency crews during adverse weather events. We’re continuing to upgrade and build new substations to cater to our expanding service area despite supply chain challenges. The enhancements to distribution circuits have led to significant reductions in outages, benefitting our customers and improving our restoration efforts. We are also investing in our infrastructure to support local economic advancement. An example of this is the new transmission facilities we are building at the Port of Muskogee, which will accommodate about 900 megawatts of new load for local customers. We have reissued our solar RFP in light of favorable opportunities following the Inflation Reduction Act. As our service area grows and reserve margin requirements increase, we will evaluate the active RFPs for long-term generation collectively to ensure our strategy meets those demands and continues to provide dependable generation. We will update you once we have assessed the results of all RFPs. Despite the economic challenges facing our nation, our communities are growing in Oklahoma and Western Arkansas, backed by lower-than-average unemployment and competitive electric service rates. Even with high fuel prices, we are securely managing reliability within our region, as our infrastructure investments ensured reliable service during the summer and will keep providing for our customers moving forward. We are dedicated to assisting our customers during this challenging economic period. As inflation continues to rise, we are enhancing our communication with customers about managing their energy use and bills. Our weatherization program offers substantial home upgrades at no cost to customers earning $60,000 or less; our silver energy initiative supports customers aged 60 and above with options to decrease their bills and energy usage. Additional energy efficiency programs for both residential and commercial customers provide significant energy savings and help mitigate future generation needs. Our billing programs, including average monthly billing and Guaranteed Flat Bill for Oklahoma customers, are designed to offer predictability in billing and have seen increased participation this last quarter. Our team is actively connecting customers to bill assistance; this year, OG&E customers have received $30 million in support through various programs. We recognize the macroeconomic challenges our customers face, and we are dedicated to keeping their bills as low as possible. Affordable rates and excellent service define who we are, and we maintain our focus on providing essential and beneficial electricity for our customers. Our load forecast for 2022 indicates we are on track with the growth we saw last year, anticipating around 3% growth for the full year. Our long-term load forecast remains robust as our service area expands. Our economic development initiatives are yielding positive results in the first half of 2022, with 24 new projects leading to nearly 3,000 new jobs across our territory. This expansion is evident throughout our service area, including developments like the fertilizer plant in Oklahoma and the Cold Compass Storage expansion in Mulberry, Arkansas. The cost of electricity is a vital consideration for businesses contemplating expansion or relocation, and we continue to provide competitive rates. We are also collaborating with communities to foster innovation and technology in Oklahoma and Arkansas, such as assisting rural and low-income schools in applying for the EPA clean school bus program, which recently awarded $18 million for electric school buses. In closing, I want to highlight the positive economic growth across our service area, with unemployment rates better than the national average and active business development. Our employees are our greatest asset, and our safety performance has been exceptional, with 2022 poised to be one of our safest years on record. Our crews’ commitment was evident through their support in Florida following Hurricane Ian. I received a letter from a resident whose power was restored by our team, highlighting their dedication and professionalism, which reflects our strong customer relationships. Furthermore, Forbes Magazine recognized OGE Energy as the second-best employer in Oklahoma. While we may not be the largest employer, our workforce is deeply woven into the community, and I'm proud of their dedication to our customers and our mission to energize life. More families and businesses are moving to our area, and this continual growth, along with our commitment to investing in reliability and resilience, sets us on a path for sustained success while prioritizing affordability for our customers. We’ve worked diligently to foster this growth for our communities, and we plan to maintain that momentum. I’ll now turn the call over to Bryan.

Thank you, Sean. Thank you, Jason, and good morning, everyone. Starting with third quarter results on Slide 5, we reported consolidated earnings of $1.31 per diluted share, compared to $1.26 in the same period in 2021. OG&E, the electric utility, contributed earnings of $1.26 per share in the third quarter compared to $1.12 in the same period in 2021. The increase was primarily driven by higher sales volumes from strong load growth and warmer weather, as well as increased recoveries of capital investments. These favorable drivers were partially offset by expected higher depreciation on a growing asset base, as well as revised depreciation rates that became effective in July consistent with the Oklahoma general rate review order from the commission. Our Natural Gas Midstream segment contributed earnings of $0.08 per share in the third quarter, compared to earnings of $0.15 in the same period in 2021. The decrease in net income was primarily due to the elimination of equity earnings of Enable, partially offset by a gain on our Energy Transfer units. I will discuss the completion of our exit from Energy Transfer in a moment. Other operations, including our holding company, experienced a loss of $0.03 per share compared to a loss of $0.01 in the same period in 2021. The increase in net loss was primarily due to the partial reversal of an interim period consolidating tax benefit that was recorded in the first quarter of 2022. For full-year 2022, we now expect earnings at the electric utility to be in the range of $2.08 to $2.12 per diluted share and holding company earnings to be a loss of approximately $0.02 per share. Turning to economic indicators and load results on Slide 6. Our customer count grew 1.2% over the past 12 months, in line with our expectations and reflecting the attractiveness of our service territory in Oklahoma and Arkansas. Our year to date weather normalized load growth remained strong at 2.4%, supported by the commercial, public authority, and oilfield classes. Weather normalized residential volumes were below expectations with a decline of 1.1%, which we believe was impacted by customer conservation to reduce usage during the unusually hot weather. Taking a closer look at the commercial class, our service territory is experiencing especially strong business growth. For the third quarter, weather normalized growth for the commercial class was 11.6% higher than in 2021, driven by many industries, including data mining, agriculture, and manufacturing. For all customer groups, we are adjusting our full-year total weather normalized retail load growth forecast to be approximately 3%. This outstanding 2022 growth drives ever-increasing confidence that 2023 load will again exceed the 1% load growth we've historically experienced even before consideration of potential upside from incremental load from data mining companies. Moving to Slide 7. As Sean mentioned, we completed the exit of the remainder of the Energy Transfer units in the third quarter. We are very pleased with our prudent, measured sell-down of the shares during the year. We no longer have an interest in midstream operations, which should allow our investors to better focus on the true value of what we believe is a premium electric utility business. Let me now briefly update you on a topic garnering a lot of attention in our industry, interest rate risk. First, we have less than $200 million of floating rate debt. Secondly, with respect to refinancing risk, we have no fixed rate debt maturities through 2026, and in 2027 that maturity is only $125 million. Accordingly, we believe we are positioned very well in our industry. Shifting gears, similar to what other utility companies across the country are experiencing, I wanted to provide an update on our fuel regulatory asset balance months. While fuel under recoveries are typically recovered in 12 months or less, we have proposed longer recovery periods to help mitigate impacts on the customers' monthly bills. In Arkansas, we implemented new fuel rates effective November 1 that will recover the $40 million balance over 17 months. In Oklahoma, we're looking at a recovery balance as of August month-end of $424 million, and we have begun recovery based on a 24-month recovery period. While I've provided you with a fair amount of financial information today, I want to remind you that we will provide official 2023 EPS guidance during our fourth quarter call, as well as an updated financing and capital investment plan, a refreshed look at load and other key financial assumptions. Let me wrap up by summarizing where we stand. Our service territories in Oklahoma and Western Arkansas continue to grow, and we continue to plan for and make important infrastructure investments to support the growth of these communities, backed by one of the strongest balance sheets in the industry. As we approach 2023, we continue to have confidence in our ability to drive a long-term OG&E EPS CAGR of 5% to 7%, which when coupled with our plans for a stable and growing dividend offers investors an attractive total return proposition. With that, we will open the lines for your questions.

Operator, we are ready for questions.

Hey, good morning team. It's Julien here. Thanks for taking the time and the questions and appreciate the update. So, if I may, just pivoting here to the fuel conversation, I appreciate the remarks, can we just talk at the outset here about how you think about fuel procurement hedging strategies? I know there's some conversation in the state. How do you think about maybe looking and reevaluating longer-term opportunities there to avoid this? You talk about longer-term amortization, can you be a little bit more specific on that? And then related, earlier in the comments, you talked about the solar RFP that was reissued in light of IRA, how does the renewable opportunity here coincide with hedging and fuel practices in light of this rapid uptick in the fuel balance?

Yes. Julien, thanks for the question. It's good to hear from you again. A couple of things. On the hedging discussion, we've certainly had that discussion and we have that discussion a lot with the commission about the hedging. What we have done is, we've taken on a much larger storage position, so we've got the physical supply. That was really one of the key factors coming out of Winter Storm Uri. It was the physical supply of natural gas in that case. So, we're continually looking at. We've changed some of our procurement practices already to see if we can better mitigate the impact there. So, the hedging discussion will be a continuing discussion. We'll see where that plays out. As I think about the RFPs we have out there, and you're correct, appreciate you mentioning that about the solar RFP. So, we're going to get all those back and we're going to look at all those and see how they fit our need. As you recall, we don't have a need all at once. It's spread out over a number of years, but certainly to the extent that we have an opportunity to reduce some of that fuel volatility, that would be helpful. I think the IRA provides some opportunity there in terms of credits that could be beneficial to our customers, but then again, we've also got to make sure that we have that reliability that we rely on. And my intent to own these assets has not changed. I think if anything has probably been more resolute in terms of that we must own these because one of the points we've recognized coming out of Uri and coming out of this summer as hot as it was is, we are good operators and we know how to run our plants and at the end of the day we're accountable to making sure that energy is flowing to all of our customers. And we want to control that. We want to make sure that we're in charge of that. We don't want to rely on others to support us. So, I hope that was helpful there. Did I get your points Julien? Or do you have questions?

Yes, I think so. I'll leave it there. And then if I can squeeze in one more question here, I mean, the commentary on loan growth, if I may, at 3% here for the year still and sticking with the exceeding 1% in the 2023, again, I get the economy dynamic here, but maybe you could add a little bit granularity here on exceeding 1%. I mean, that's just an exceptional trend here year to date. You must be having conversations with some of your larger loads to be zeroing in on some of that conversation? I know you said you could provide more formal guidance here next quarter, but just perhaps add a little bit of the clarity that you have on where that may land here in the year ahead?

Yes. I don't know that we've got the crystal ball to see where exactly it's going to land sitting here in November when we announced this in February. But I think Bryan's remarks and what we've seen, there's a lot of activity and it's new development, it's expansion in the existing facilities. We see it. We see the population growth coming. We see it certainly on the commercial side of new businesses. I think that probably the hesitancy we have of anything is just, kind of really pinpointing when that next year that's going to hit, right? We're very confident in the development pipeline. I was just in some discussions here in the city last week, some very exciting opportunities. And so, there's a lot of things going on there. And so, it's difficult to pinpoint that sitting here today whether something's going to come online in May versus November of next year, but I think your thesis is absolutely correct, Julien. It's growing. And it's a validation of what we've been really focused on for a number of years here in terms of really creating this economic engine in our service territory.

Yes, pretty remarkable here versus many of your peers. So, I just wanted to follow-up there. Thank you guys. Appreciate it.

Hey, good morning Sean and Bryan. Just a quick question.

Good morning, Brandon.

Good morning. I know you briefly mentioned data mining load. How do you view that load in your service territory? Is it transient load? And is it dependent on kind of bitcoin prices or kind of crypto prices? Thanks.

Yes. Thanks Brandon for the question. I'm going to let Bryan tackle that one. He's knee-deep into this. So, Bryan, go ahead.

Hey Brandon, good morning. Yes. And just to add a little bit on Julien's question as well, you look at residential, we're seeing that strong population growth that Sean mentioned. I'll come back to commercial, industrial, and oil field have been reasonably good this year, but we've seen several outages on those sectors that give us great confidence that that growth will bounce back some next year. And public authority growth has been really strong. That includes the school systems and casinos and things like that in the state. On the commercial front, it's a lot of different business types, but on the data mining topic in particular, that's been a nice balance in load growth here in the third quarter, less so in the first half of the year, but the biggest customer we have there is an Oklahoma-owned and managed company. Their warehouses are kind of your traditional brick and mortar; the data mining equipment is housed in there with state-of-the-art cooling systems. So, it's an Oklahoma company. We will have some other potential data mining companies that come in that may not be as rooted into the state as they are, but the growth we've seen so far to date is more anchored in what perhaps you've seen in some other states. Does that answer your question? But it’s right, just to finish off your question, Bitcoin pricing does matter to their economics. We've been told it's anywhere from $8,000 to $10,000 of Bitcoin or above. They're running and they're profitable. So, that's just an indicator for you to watch, but that is not what's given us our enthusiasm for 2023; we're looking at a 1% or higher growth rate next year, completely excluding incremental growth from data mining. So, I just want to be clear on that point too.

Great. That's perfect. That's all I had. Thanks a lot.

Thank you.

Yes. Thanks for the question. I was wondering if you have an after-tax number on the proceeds from Energy Transfer and any additional uses? Thanks.

Yes. Bryan, you want to answer that?

Yes, absolutely. Hey, Gregg, good morning. As you're modeling that, we've given you the per unit price that we settled our transactions and exiting in ET and the slide deck, kind of just as a reminder, we had a negative tax basis on the ET shares. So, when you consider the negative tax basis plus just kind of your normal tax rate on the gross proceeds, the effective tax rate played out to be kind of net 40% to 45% area from a cash perspective. So, hopefully that helps you with your modeling. And so, on proceeds, we've of course used that to pay down some short-term holding company debt. And so, we're in a good position on the balance sheet.

Okay. Sounds good. Thank you.

Thank you. Good morning, Sean. Good morning, Bryan.

Hey, good morning.

Good morning. Just first, on the 5% to 7% growth rate, I noticed that you'll sort of change the way you'll express this from an annual utility earnings growth rate to a CAGR. Does that – is your utility earnings growth still relatively linear or should we now think of the shape as not being linear? Just want to make sure I'm not kind of overeating into that.

You shouldn't overthink anything in that at all. We've been pretty consistent that the growth rate is 5% to 7% and that's what we're working to achieve each year. Yes. I would 100% agree with that. So, we had a $1.81 base in 2021. You saw us hit the $1.92 mid-point in our guidance this year, which is a 6% growth. And you should expect us to be trying to achieve that 5% to 7% every year throughout the future.

Got it. Thank you. And I guess my second question, I know you will give formal 2023 guidance at Q4, but if we just sort of add the last four quarters of your utility earnings, that gets us to sort of above your current range. Should we assume you're sort of pulling forward some O&M from 2023 into 2022 or taking any other steps to de-risk 2023 a little bit? If you could just add some color on that?

Yes. I think it's fair to say, we're always moving things around, and we've certainly had years in the past where we haven't had the benefit of weather, but I think it's safe to say, we were intent on growing our business, but I would just caution you, don't – when we move things around, we move things around for the long term. So, very likely we could be pulling things in from 2024 or other years to do them in 2023 as well. So, we're managing this business for long-term, and we're still laser-focused on identifying the efficiencies and technologies and opportunities to reduce some of those costs too. So – but I think your thesis is right. We're moving some things around.

That's helpful. Thank you. And just one last question, if I can squeeze that in. So, just intravenous testimony on sort of like the, you know the Show Cause investigation in Oklahoma regarding your fuel cost came in a few days ago with most interveners recommending longer amortization periods than 24 months. Just how are you thinking about potential implications of that on your cash flow? And just credit metrics, if you've had any conversations with the credit rating agencies. And again, I understand that your balance sheet is extremely strong and you've had great FFO to debt numbers, but just how should we be thinking about that?

Yes, I think you're as you're aware the hearings are scheduled for this afternoon, I think at 1:30. And I'm sure there's probably some interested parties listening on this call. So, I don't want to say anything that may prejudice the outcome for sure, but I think it's safe to say, we expect to be treated fairly by the commission. We are all very sensitive to the impact on customers and we expect this to get resolved pretty quickly.

Hi, good morning, Sean, Bryan, and team. Congrats on a great quarter.

Good morning. Thank you.

Good morning, Constantine.

I think you had some very comprehensive remarks and a lot of questions have been answered. I just wanted to maybe follow-up a little bit on how you're thinking about the availability of the generation resources playing a factor in the RFP process. There were some potential delays across the supply chain, previously, but curious how you see that playing out in your view?

Well, we haven't received the bids back on the solar RFP. So, time will tell on that. Those are due in the coming weeks, but I think that is a very real parameter that we've got to deal with because we have windows or slots where we need generation to complete our portfolio and we've got to match that up with availability. And I don't know how many times in our remarks we've talked about affordability. That matters too. And we also talked about reliability. We've got to make sure that it touches all those points, but Constantine. I think availability as we saw earlier in the year was a bit of a problem. We're hopeful that we're going to be able to spot some things in and get a better result for our company.

Excellent. And maybe at a higher level on what kind of load and interconnections in new business across the service area, just any detail that you can provide on any pullback or pull forward on any specific sector as you're kind of looking out for the future?

No, not a particular sector. And I think Bryan mentioned, we are seeing it across the board and we're seeing some manufacturing facilities pop up. And so that creates new homes and new businesses, new residential customers. And then that also has a compounding benefit of new commercial establishments, whether it's a restaurant or grocery store or something like that. So, hopefully, you heard from us, we're bullish on the growth of our service territory.

You'll love this. One of the new manufacturing facilities Sean mentioned that is opening up late this year is an electronics or electric industry supplier. They provide equipment materials for our own industry, and we are thrilled to have them just miles away from our warehousing, especially considering the supply chain dynamics in the country. This is really exciting for us, but John’s right, it's happening across the board.

Yes, very familiar with that one. And maybe just a quick follow-up in terms of oil and gas activity, kind of where commodities, where they are? Are you seeing a bit more of a pickup in that sector or kind of the supporting services?

Maybe slight, you know just in conversations with people, there's certainly more volume flowing, but I'm not sure that's the driver either. We're not counting on that as the real driver.

Hey, thank you, Eric, and thank you everyone for your interest in OGE and please have a safe day.

Very good. That concludes our session. You may disconnect.