Oge Energy Corp. Q3 FY2023 Earnings Call

Thank you, Andrea, and good morning, everyone, and welcome to OGE Energy Corp.’s third quarter 2023 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. Sean.

Thank you, Jason. Good morning, everyone. Thank you for joining us today. It's certainly great to be with you. Earlier this morning, we reported third quarter consolidated earnings of $1.20 per share, including electric company earnings of $1.22 per share and a loss of the holding company of $0.02. Our solid performance this quarter is due to operational excellence delivered by our team who worked to keep energy flowing to the grid during a hot summer. While setting a new hourly peak on August 21, and without calling for public conservation that was seen in other areas of the country. I've shared before that our system was designed, built, and operated for conditions like we saw this summer, and I'm proud of our team for always meeting our customer's need for reliable and safe electricity, and always keeping affordability top of mind. The third quarter was highly productive and reflects the work we've undertaken to operate as a premium electric utility company with exceptional execution, a constructive regulatory environment, and one of the strongest balance sheets in the industry. We are operating ahead of plan this year, and as a result, we're raising guidance. Ryan will share a few more details on that in just a bit. We have a wide variety of investment opportunities before us, and with the recent announcement that OG&E was awarded a federal grant from the Department of Energy for our adaptable grid project, we look forward to improving the reliability and resiliency for customers living in more than 100 communities. The total project cost is $102 million, and OG&E was one of 34 companies awarded grants under this program and one of only six to receive the maximum grant amount of $50 million. This project will deliver reduced outages and outage time for our customers and improve costs. We have two additional grant proposals under review by the department and we look forward to hearing back on those before the end of the year. You may recall last year at this time, I shared that our team was collaborating closely with school districts in our service areas to apply for federal funds for districts to acquire electric school buses. Just last month, Shawnee Public Schools in Eastern Oklahoma was the first school district to take delivery of five EV school buses that were awarded to them through the grant program. In total, 28 buses were awarded to eight communities in our service area, and we are working closely with the school districts to ensure their success in adding EV buses into their fleets, furthering the electrification in our service territory. Our customer-centered efforts continue. As we announced a significant reduction in the cost of fuel on our customer's bill just yesterday, to $221 per month for the average residential customer. That relentless focus on affordability results in some of the lowest electric rates in the country for our customers, which just got even lower, and continues to pay off as our service area continues to grow. Broad business expansion was seen in sectors as diverse as healthcare, defense, tribal development, manufacturing, and retail to ensure healthy economies for the future and job growth across the board. Our 2023 load forecast delivers robust year-over-year growth well above our historical growth rate. Our long-term load forecast remains strong as our service area continues to grow. On the regulatory front, we finalized an uncontested settlement with stakeholders to add new generation to our Horseshoe Lake facility, which IIJA approved and now await a final order from the Oklahoma Corporation Commission. We also received approval from the Arkansas Public Service Commission to begin construction on these units. And we filed our final formula rate plan update in Arkansas. Looking forward, we will file a rate review in Oklahoma by the end of the year. We will also submit an integrated resource plan in the first quarter of 2024, outlining a plan to meet our capacity needs over the next several years. We expect continued constructive regulatory outcomes in both Oklahoma and Arkansas. Turning to our internal operations. We know our employee experience drives our customer experience, and we were delighted to be named the number one employer in the State of Oklahoma by Forbes Magazine. We were number two last year and our continued efforts to nurture a culture where employees learn, develop, succeed, and feel that important sense of belonging are showing these results. Our team is purpose-driven, energizing life for our nearly 900,000 customers every day. I am so very proud of the men and women who work for OG&E and their continued dedication to our purpose. And finally, I want to leave you with a few thoughts. Number one, service. Our obligation to equally serve each customer, whether a large industrial operation or a single residential customer at the end of a 179-mile circuit drives our team to success. And stability, we continue to build our business for today and to keep building it for the future by delivering reliable and affordable electricity 24 hours a day, 7 days a week. With these priorities in mind, we will evaluate all of the investment opportunities before us and we will execute the projects and make investments that support our focus on reliability and affordability to help us manage the low growth we have coming. Thank you. And I'll now turn the call over to Bryan.

Thank you, Sean. Thank you, Jason, and good morning, everyone. Let's start on Slide 7 and discuss third quarter 2023 results. On a consolidated basis, net income was $242 million or $1.20 per diluted share compared to $263 million or $1.31 per share in the same period 2022. Earnings for the third quarter of last year included net income of $0.08 per share from natural gas midstream operations, which we fully exited in 2022 due to the sale of our energy transfer units. Our electric utility operations performed well this quarter. The electric company achieved net income of $246 million or $1.22 per diluted share compared to $253 million or $1.26 per share in the same period of 2022. The decrease in electric company net income was primarily due to fewer cooling degree days compared to the third quarter of last year, as well as expected increased depreciation and interest expense related to our capital investments, offset by solid weather-normal load growth and higher operating revenues from recovery of capital investments. Other operations, including our holding company, reported a loss of $4 million or $0.02 per diluted share in the third quarter compared to a loss of $6 million or $0.03 per share in the same period 2022. Now let's turn to Slide 8 for our refreshed EPS forecast for full year 2023. It has been an excellent year thus far for the company. On a consolidated basis, we now expect to earn $2.02 to $2.07 per diluted share. The midpoint of this refreshed guidance is about $0.05 higher than our initial forecast, driven by outstanding performance at our electric company and holding company results reflecting the current interest rate environment. As I've indicated to you in previous quarters, the tailwinds at the electric company continue to outpace interest cost expectations, setting us up very well for 2024 and beyond. Turning to electricity usage factors on Slide 9. OG&E continues to experience solid growth in weather-normalized load, which increased approximately 2% compared to the third quarter of 2022. We are forecasting full year weather-normalized load growth at 3% to 3.5%, and are on track for two consecutive years of at least 3% growth and three years of more than 2% growth. We are proud of the sustained level of tremendous economic development and load growth and we are just getting started. For example, looking forward to 2024, we continue to refine our estimates and are becoming more and more confident in our ability to once again deliver load growth in excess of 1% that we had historically experienced. As Sean mentioned, our pipeline of business customer expansion includes many industries, and when you consider a significant reduction in fuel rates referenced earlier, we believe business interest in the OG&E service area will continue to be robust for the next several years. I'll wrap up on Slide 10 for an update on our financial position. Our balance sheet continues to be one of the best in the industry with no need to issue equity for our current capital forecast, a projected FFO to debt metric of 17.5% to 18%, and relatively low interest rate risk with no fixed-rate maturities until 2027. Our balance sheet places us in a position of strength as we evaluate a broad spectrum of incremental investment opportunities related to T&D and generation investments, with our eyes on the North Star of a reliable, resilient, and safe power system. We look forward to providing 2024 and long-term consolidated earnings guidance and an updated five-year capital and financing plan during our fourth quarter call in February. It is a privilege to be part of a company with significant potential for growth in both load and critical infrastructure, positioning us to support our customers and sustain economic expansion while delivering strong earnings growth for years to come. Before we open the call for your questions, let me speak to you regarding the fuel recovery balance as of September 30, which stood at $53 million compared to the beginning of the year balance of $515 million. The sustainable lower prices of natural gas during the last few months allowed us to lower residential and business customer rates substantially and many months ahead of schedule. As Sean mentioned, all of our customers in Oklahoma will see a very meaningful reduction in the rates beginning this month. For example, residential customers will experience an average reduction on their monthly bills of 15% or $21, and the rate reduction for business customers ranges from 14% to 36%. These reductions in customer rates firmly position the company as having some of the lowest rates in the nation, and place OG&E in a highly competitive position as we compete for business expansion opportunities in the region. With our eye set on the future, we are proud of our employees’ accomplishments in 2023 and we look forward to delivering for our customers, communities, and shareholders for years to come. With that, we will open the line for your questions.

It's actually Nathan Richardson on for Nick. I was just wondering how you're thinking about parent drag for ‘24 based on funding for the upcoming CapEx, which could move a little bit higher? If you could give any more color on the parent drag, that'd be great.

You want to take that, Bryan?

So I'm really glad you asked that question. The utility and holding company are lining up very well for 2024 and beyond, and you've heard us speak to many tailwinds at the utility, namely very strong load growth and a host of infrastructure investment needs. So I'm expecting utility to grow near the top end of that range and the holding company will be there to finance the business along the way. So we don't view it as a drag. We view it as an incorporated business there. So again, tailwinds are really strong, and we'll provide a concise, consolidated view of OG&E's financial prospects on our February call. And to be clear, we're really excited to do so. So again, more to come in February.

This is actually Constantine for Shar. Congrats on a good quarter. Maybe just a follow-up on the prior question, the update on the 4Q for CapEx. There seems to be more tailwinds from a 2023 run rate basis of $880 million year-to-date? And just maybe, how are you thinking about the different kinds of options? Especially in light of what Nate mentioned, the interest rate volatility that we've seen, is dividend policy up for reconsideration? And maybe just as we think about the cadence of the major rate case, does that factor into what goes into the 4Q update or something that comes after the outcome?

Constantine, this is Sean. I think all those points that you raised are considerations we factor into our decision-making all the time. So those aren't new developments or anything like that. We've said previously, we have a lot of flexibility in terms of the investment opportunities we have. We've conducted a lot of engineering and planning for these opportunities, and we're able to move a lot of things around. The majority of our investments are around the distribution network, so those are very quick investments we're making. They're not long tenured over multi-years. It is our intention to continue to file rate reviews. We have the formula rate plan in Arkansas, and we're working on that in Oklahoma. But we're going to remain current on our regulatory filings. Our dividend policy hasn't changed in terms of targeting a payout ratio of 65% to 70%. So we're going to continue to manage the business for the long term, and we've got the flexibility to draw different investments in and move things around to continue that – just continue what we've been doing, just executing and delivering results.

Excellent. Good to have that flexibility. And maybe also touching on the load growth and the visibility for economic development. Can you comment on the drivers for the slightly lower forecast in '23? Is there any margin impact that you see? And ultimately, as we're getting to the tail end of '23, how does that translate into '24 expectations and some of the load shifting in '24?

Bryan, do you want to cover that one?

Sure, sure. Constantine, we're really proud of our 2023 results. It's phenomenal to be at 3% growth again on top of the 3% growth we had in '22 and the 2.5% growth we had in 2021. Our two largest customer segments, residential and commercial, are early in line with what we had for expectations, which were really high. So that's been a great year for us. Our pipeline of business expansion isn't just going into 2024, but we see it adding incrementally in '24, '25, all the way throughout a 5-year forecast period. We have good vision to it really through 2028. And I mentioned this on the last call, but our head of customer sales continues to reiterate to me that our pipeline is as expansive and as strong as he's ever seen it, perhaps as strong as our company has ever seen. So a great story there, and we look forward to giving you more details in February, but definitely expect it to be above 1% again.

I'll ask the follow-up to the follow-up, if you don't mind, and maybe even simpler. I know you're not giving 2024 guidance here. But could you lay out simply the bullet points, either quantitatively, if you will, or qualitatively, that would be the year-over-year types of drivers? Obviously, you talked about load growth. What else is kind of in the mix?

Well, I think primarily, it's going to be driven by load growth, and we will invest around that load growth. I mentioned before that we will file a filing in Oklahoma, and we've made a filing under our formula rate plan in Arkansas. So I would point to those three drivers for you.

Okay. What's the timing in terms of rate adjustments and your thoughts around getting the Oklahoma case done in terms of 2024 earnings?

Typically, that's about 180 days. So you would think mid-summer.

Okay. Great. And then on the holdco level, what's your sensitivity to interest rates? If you have plus or minus 100 basis points or 50 basis points, about what is that impact on earnings?

Bryan?

Sure. Travis, on the holding company interest, what we've pointed to is an expectation that could grow $0.03 to $0.04 into next year. But we need to refresh all that. That's the only guidance we've given. That's a little stale on the guidance front, but that's not a bad rule of thumb. So we'll continue to refine that estimate. But again, that's just one part of a really strong business model for us, which is mostly inclusive of our utility. We feel, as I mentioned before, very bullish on utility's growth prospects for all the reasons we've talked about today. So give us a little more time, and we're going to lay out all of this on a consolidated basis for you in February.

Just following up on Constantine's question on load growth. Within the commercial load bucket, what are you seeing relative to when you issued expectations at the beginning of the year? And are there any items perhaps on the data center front or other large customers that we could look at as potentially providing extended upside relative to your expectations?

Bryan?

Our initial expectations for the commercial segment in 2023 were for growth of 11% to 15%, which is quite a high growth rate and a broad range since it's difficult to predict when some of these large loads will come in. Currently, we're at 13.5% year-to-date. In the third quarter year-over-year, we were at 9.5% or 10%. Therefore, we anticipate finishing the year with commercial growth around 12% to 13%, aligning with our expectations. Looking ahead to 2024 and beyond, it's evident that we can expect strong growth again for commercial. The growth we initiated in 2022 has continued into 2023 and should persist into 2024 as well. Part of this includes Bitcoin data mining, but other industries are also experiencing expansion, as Sean pointed out. Data centers focusing on generative AI are having a significant impact across every industry in the country. Major companies have hit their capacity limits, leading to a considerable demand for load from our system as they connect to our grid. We are eager to meet this demand responsibly moving forward.

I have a procedural question regarding Horseshoe Lake in Arkansas. Will the formal CPCN filing take place once construction is completed? What is the typical timeline for the commission's review in this situation?

Typically, we go to them and we've already received the approval to begin construction. So that's the requirement in Arkansas. When it's complete, we will file that in our subsequent filings for recovery, their allocated portion of it.

So as we look for you to file your rate case in Oklahoma next year, I was hoping you could touch a little bit on the Oklahoma regulatory environment. I know you mentioned a potential increase in your CapEx plan in the coming years. So maybe just a little bit more color on the support you see from regulators as you look to continue to expand your spending in the coming years as this has to work its way into rates.

I think we find the Oklahoma Commission very constructive, evidenced by the number of settlements and agreements and constructive orders we've received over the last number of years. As I look at things, affordability is front and center. When you have that leading the charge, and we spoke to that in our comments here about the fuel reduction, that's a big tailwind. We'll make this filing at the end of the year, which will give us a lot of flexibility and confidence heading into this rate filing. I see no change in the constructive nature and outcomes we've received.

How should investors look at potential construction of new generation opportunities beyond Horseshoe Lake? In other words, would it be more likely to be gas? Would it be renewables? Can you give us a sense of what the possible mix of additional generation might look like?

Yes. Thanks, Paul. We'll certainly run through a lot of scenarios in our next IRP filing. I believe in looking at a lot of different scenarios. Obviously, you have a lot of EPA regulations that are in various stages of development, and so you want to incorporate different scenarios for that. What I've said in the past is going forward, until there is a dispatchable economic long-duration generation resource available, I think you're going to see our generation mix of new generation look like gas and solar.

And would it be safe to assume a 50-50 in terms of percentages?

I think that's to be determined, but I think that's a good way to think about it.

Great. And then longer term, you're obviously at an extremely strong FFO-to-debt level today. Longer term, how should we think about your FFO-to-debt goal?

Sure, yes. Paul, as we mentioned, our metrics stand today at 17.5% to 18%. We're a company that wants to always take care of our balance sheet and keep the company in a solid position. You're never going to see us living on the edge at 13% or 14%. We're going to be mindful of that as we build out our CapEx plan into the future. Obviously, we do have some room to add some capital without needing to issue equity. But we’ll continue to refine those estimates, and we'll take care of this balance sheet and balance it all, whether it's capital investments, affordability, and our credit metrics, all those matter, and we'll continue to balance it in the right way.

And maybe as a follow-up to that, on incremental CapEx that's not currently in your budget, what percent of equity should investors assume will be used to support incremental investments?

Yes. Paul, we’ll lay all that out at the appropriate time. Bryan was clear there that we have a plan to meet our earnings objectives, and it doesn’t require any equity. Anything we do above and beyond that will be growth equity. I don’t want to get ahead of ourselves in terms of rolling all this out in February. Thank you, Andrea. And thank you all for being with us today and your interest in OGE Energy Corp., and we are adjourned. Have a great day.

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