Oge Energy Corp. Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Third Quarter 2025 OGE Energy Corp. Earnings Conference Call. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Bailey. Please go ahead.

Thank you, Kevin, and good morning, everyone. Welcome to our call. Joining me today are Sean Trauschke, our Chairman, President and CEO, and Chuck Walworth, our CFO. Today, we will first hear from Sean, followed by Chuck, who will explain our financial results. As always, we will conclude by answering your questions. I want to remind you that this conference is being webcast, and you can follow along at oge.com. The conference call and the accompanying slides will also be archived on that website after the call. Before we begin the presentation, I would like to draw your attention to the safe harbor statement concerning forward-looking statements. This is a requirement by the SEC for financial statements and simply indicates that we cannot guarantee future financial results, but this is our best estimate currently. I will now turn the call over to Sean for his opening remarks. Sean?

Thank you, Jason. Good morning, everyone, and thank you for joining us today. It's certainly great to be with you. We again delivered strong results in the third quarter, and we remain on track to deliver on our commitments. This morning, we reported consolidated earnings of $1.14 per share, including electric company earnings of $1.20 per share and a loss at the holding company of $0.06. Our solid performance is driven by continued operational excellence, laser-like focus on the customer, and constructive regulatory outcomes. As we head into the remaining two months of 2025, we remain confident in our plans to deliver in the top half of our earnings guidance range. As you know, on the regulatory front, we have a preapproval request in Oklahoma and expect an order in a few weeks. This will allow us to move forward with building 450 megawatts of natural gas generation, which should be operational by 2029. As a reminder, we have approximately 550 megawatts of combustion turbines under construction now, which will be operational next year on time and on budget. When Horseshoe Lake Units 13 and 14 come into service in 2029, we will have added approximately 2,000 megawatts over an 11-year period, and we anticipate more to come. When filing the preapproval case, we indicated that this was the first step of many. In the filing, we updated our integrated resource plan, which showed we are still solving for our customers' future generation needs. We are now negotiating with existing bidders from the remaining from the last RFP, and we anticipate issuing more RFPs in future filings to address our customers' needs. We notified Oklahoma customers this week that they will see a decrease in their monthly bill with a reduction in the fuel cost adjustment beginning November 1. The average residential customer bill will be approximately $6.75 lower per month. Our customers benefit from OG&E having some of the lowest rates in the nation. We understand the competitive advantage our low rates offer, and it's one reason our demand has grown so consistently year-over-year. We do everything we can to ensure our rates remain low in the future so that we can sustain the growth of the company and the communities we serve. While the electric power industry is entering an exciting new era, OG&E is uniquely positioned at the forefront. We've been experiencing load growth that far surpasses national trends, and data center load will certainly be incremental to our already strong load growth. At the heart of that growth for OG&E is affordability. It's not a new concept to us; it's key to our community success and central to our planning as we move ahead. Over the past decade, we've delivered a 6% EPS CAGR, which is great news for our investors. Equally important for our customers, it's worth highlighting that our nonfuel rates have increased at less than half the rate of inflation during this time. In a period when the cost of living continues to rise, we focused on what we can control, helping our customers and communities manage costs while supporting growth and reliability. As we build on our strong growth and performance, we experienced growing interest in our service area from data centers. Negotiations and conversations are progressing, and we hope to have something to share in the near future. Turning to economic development, we continue to see diversified business growth, including commercial and industrial. And just a couple of weeks ago, we celebrated the grand opening of a major expansion project for a plastics manufacturer, which added 4.5 megawatts of load and created hundreds of jobs in Shawnee, Oklahoma. Our economies remain strong with unemployment in Oklahoma and Arkansas continuing to outpace the national average. For the 48th straight month, the Oklahoma City unemployment rate is below 4% and Oklahoma's overall job growth is driven by gains in education, health care, and construction. The Council for Community and Economic Research ranked Oklahoma City as the most affordable among large cities in the U.S., a competitive advantage for continued growth. And our rates are a factor in keeping Oklahoma and Arkansas consistently ranked high for affordability. As I close, I want to emphasize that the business is doing very well. We've just completed another strong quarter, and I'm excited about the future. We remain confident in our ability to deliver on our commitments while continuing to grow the business. And as I mentioned, we have many positive updates to share in the quarters ahead. Thank you. I'll now turn the call over to Chuck. Chuck?

Thank you, Sean, and thank you, Jason, and good morning, everyone. We're three quarters through the year, and our steady execution positions us to deliver results in the top half of our 2025 earnings guidance range. It's our execution that will lead us to continued long-term success. I'm excited to review our financial performance with you today. Starting on Slide 5. For the third quarter, consolidated net income was $231 million or $1.14 per diluted share compared to $219 million or $1.09 per share last year. In our core business, the electric company achieved net income of $243 million or $1.20 per diluted share compared to $225 million or $1.09 per share last year. The main driver of the year-over-year increase in net income was increased recovery of capital investments. Milder weather this summer compared to last year and higher O&M and income taxes partially offset the increase. The holding company reported a loss of $12 million or $0.06 per diluted share compared to a loss of $6 million or $0.03 per share last year. The change was primarily attributed to higher interest expense partially offset by an income tax benefit. Let's turn our attention to our 2025 financial plan update on Slide 6. Year-over-year customer growth continued its healthy multiyear pace and was just under 1% in the third quarter. Our weather-normalized load growth was historically strong once again at 6.5% through the third quarter compared to the same period last year. We expect total retail normalized load growth of approximately 7.5% in 2025. Our execution keeps us firmly on plan to deliver on our consolidated earnings commitment. We continue to expect to be in the top half of 2025's earnings guidance range. Sean discussed how our local economies and communities are strong and our intentional efforts around economic and business development provide important support for growth. In each quarterly update, we highlight how our sustainable business model works by attracting new customers to our service area with low rates and reliable electric service, helping our communities to grow and prosper. We've updated our capital plan to include the Fort Smith to Muskogee transmission line, which will address reliability and capacity issues in the Fort Smith, Arkansas area. This $250 million project is planned to go into service in three phases in 2027, 2028, and 2029. This higher voltage line will be primarily recovered through our FERC formula rate, and we have received approval to utilize CWIP recovery during construction of the project. The updated capital plan is included in the appendix. Our financial position remains strong. Our balance sheet is one of the strongest in the industry and is an important competitive advantage, one we are committed to maintaining. We have requested CWIP recovery on Horseshoe Lake Units 13 and 14. The use of CWIP has important dual customer benefits: first, by reducing the long-term cost to customers; and second, by supporting the balance sheet during the construction phase of projects. As I close, let's review our guiding financial objectives. As we grow the company, we will maintain our competitive low rate advantage by focusing on our cost structure, minimizing the time between investments and the return and recovery, and growing the company by maintaining a highly credible total return proposition for our shareholders. We've made great progress so far this year. Our steady execution keeps us on track to deliver in the top half of this year's guidance range. Our load growth remains historically strong. We've reached a settlement with a number of parties in the Oklahoma preapproval request. If approved, we will move our planned Oklahoma rate review from the end of this year to the second half of next year, and we will continue to assess the timing of the next rate review in Arkansas. We've updated our capital plan for the Fort Smith to Muskogee transmission line. Additional updates to our capital and financing plans will follow a determination in the preapproval case. And finally, our results keep us as confident as ever in our ability to achieve a consolidated earnings growth rate of 5% to 7% based on the midpoint of our 2025 guidance. The strength of the current year's plan allows us to focus on the future, address our customers' expectations of a safe and reliable system, and deliver power at some of the lowest rates in the nation. As always, the foundation of our success is grounded on the dedication of our employees and their ability to get the job done. That concludes our prepared remarks, and we'll now open the line for your questions.

Our first question comes from Shahriar Pourreza with Wells Fargo.

It's actually Constantine here for Shar. That's great to be back. Maybe starting off on the CapEx needs. We have the $250 million update today. And as we're building to the fourth quarter update, kind of with the pre-approval settlement out there and another 800 megawatts in the IRP, how quickly do you think those elements start rolling into plan? And is there kind of any acceleration in the RFP process that you're seeing kind of to address some of those needs?

Thank you, Constantine. This is Sean. I appreciate your description of rolling. That’s how we’re approaching it. We expect the approval for the preapproval in a couple of weeks, and then we'll integrate that into our plans. Additionally, as I mentioned earlier, we'll be making some more filings related to the last RFP. Once we receive approval for that, we’ll add it into our plans as well. We will likely initiate a new RFP to keep progressing. So, I think you can view it as a continuous flow of updates.

Okay. So versus kind of the fourth quarter that we've typically seen, we should expect more periodic updates, right?

Yes. In the fourth quarter, you can expect the usual updates that will enhance the approval of the last filing, along with the regular updates we provide. Additionally, as we receive approval, we will incorporate these generation additions.

Okay. Perfect. And in terms of the new regulatory constructs that are in place now, how significant is the impact on that ROE lag, if you can quantify it at all? And do you anticipate including some of these benefits in '26 planning assumptions?

Yes, Constantine, I believe we have consistently maintained a strong record in reducing lag on earned return on equity. This will certainly contribute positively to that. You can observe some of the impacts as outlined in our 10-Q today regarding these benefits, and we will make sure to clarify that when we provide guidance for next year.

And just the last one related to kind of that '26 update, kind of given the ramp schedules for that C&I load, do you see the '26 load growth being higher than your planning assumptions as you roll into that year?

We'll bring you a full update in February. But clearly, we don't see any changes in the fundamentals that are driving the results that we see in our service area. But we'll address that fully in our February call.

Next question comes from Julien Dumoulin-Smith with Jefferies.

It's Brian Russo, on for Julien. Just it's nice to see you add the SPP project to the CapEx. Could you maybe talk about the upcoming 2025 SPP ITP plan? I think there are expectations that it could be nearly double the 2024 plan. And I was just curious, it seems as if Oklahoma is one of the faster-growing states in SPP. So I'm just wondering what your competitive position is there to pursue more projects like the one you just added to CapEx.

Yes. Brian, this is Chuck. It's obviously something that we're very closely involved with our team at the SPP in that process. Yes, you're right. I think that they're looking at a pretty robust plan, but there's still a couple of milestones, a couple of SPP Board meetings that, that's got to go through before we really have something that we can give you a firm idea as to what the opportunity set really looks like. So it's an exciting area, I think, but more to come.

Okay. Great. And then I think as part of the pre-approval settlement filing, you plan to file a large load tariff with your next rate case. I was just curious, I assume that the contract negotiations are still going on with the Google Stillwater project.

Yes. I think that was the requirement in the settlement to file that large load tariff. But to the extent that we've finalized an agreement before then, we'll file it then.

Okay. Great. And then lastly, is the new load growth outlook of 7.5% for 2025 now at the low end of your prior range? Just wondering what's driving that.

Yes, you're correct. As we've mentioned previously, some of these loads we have are somewhat irregular, and the timing is quite difficult to pin down, whether it's at the start of this quarter or the beginning of the next. We are experiencing some timing fluctuations. One customer, in particular, is coming in about a quarter later than we originally expected. So, it's primarily a timing matter.

Our next question comes from Stephen D’Ambrisi with RBC Capital Markets. I apologize.

That's all good. That's all good.

We're going to enjoy that one for a while.

I know you will, Sean. I know it couldn't happen on a better call. I'm not going to lie.

Welcome back. Good to hear from you.

Good to hear from you too. I appreciate you letting me speak. I would like to ask a follow-up regarding how you plan to address the 850-megawatt shortfall or capacity requirement that you anticipate by 2030. I understand that some of the RFP results are still pending, but they seem a bit outdated at this point. I am aware that discussions are still ongoing. Do you believe it is feasible to acquire substantial capacity from the previous RFPs, or will we need to initiate new RFPs to address the majority of that capacity deficit? Additionally, how long does it typically take to conduct a new RFP? What is the expected timeline for announcements?

Yes, that’s a great question. To answer your first question, we believe there are capacity opportunities in the current RFP. We will also file a new RFP to address this need. The 800 megawatts you mentioned largely depends on the ramp rate of the customer we disclosed in the IRP. This number can vary based on how quickly or slowly we reach it by 2030. In summary, yes, we expect to gain some capacity from the last RFP, and we will be filing a new one. I anticipate that the second RFP will progress more quickly now that we have everything clarified and understood.

That makes a lot of sense to me. You covered the sales growth well. I figured it was timing. Looking at your year-to-date performance, I see sales growth is 6.5%, while you're still guiding for 7.5%. This suggests a significant acceleration heading into the fourth quarter. How does this position us for sales growth into 2026? Since you're effectively delaying customers, this should drive higher year-over-year sales growth into next year.

Yes, Steve, I think your points are right. I mean we've seen this chunky growth before and how that can impact any particular quarter on an outsized manner. And obviously, you can kind of do your own math as to how that plays in the future years. But again, we'll be prepared to thoroughly discuss that with you at the next call.

Our next question comes from Chris Hark with Mizuho. Yes, Steve, I think your points are right. I mean we've seen this chunky growth before and how that can impact any particular quarter in an outsized manner. And obviously, you can kind of do your own math as to how that plays into future years. But again, we'll be prepared to thoroughly discuss that with you at the next call.

I just had a question regarding the dividend growth rate. Should we be expecting that to be in line with the EPS CAGR?

Yes, Chris. So we've been very intentional about the dividend growth rate really in relation to the opportunity set that we've had for investments. So the past several years, we have kind of bifurcated the rates of those two with the dividend growing a little lower, and we're basically targeting growing into a 65% to 70% payout ratio. And so we're well on our way to getting to that target. And once we get to that target, we'll kind of reassess where we are versus, again, the opportunities that we have out there and make that capital allocation decision at that time.

Okay. Awesome. And then next question I had was really just around the cadence of rate filings. So if you push that back to the second half of '26, should we be expecting that kind of similar time of year for the next two years through the two-year period off the forecast period?

Yes, I would say that nothing has changed. Our philosophy remains the same as it has been. This was part of the negotiations for the settlement agreement. If approved, we would implement that moving forward according to the terms of the settlement agreement. However, from that point on, we would continue to operate under the same philosophy that we have maintained.

Our next question comes from Aditya Gandhi with Wolfe Research.

Can you hear me? Just maybe starting with the CapEx increase to your plan, the $250 million. Chuck, you've been clear that any capital increases will have an equity component to it and recognize that you'll sort of communicate your financing plans with the Q4 update. But are you willing to share sort of a rough rule of thumb for this $250 million? Should we assume it's 50-50, lesser than that? Just any color there?

Yes, Aditya, the plan remains unchanged. We believe it is appropriate to move forward with this project now since it is signed. However, with the largest portion of the increase still pending, we will wait for approval on that before providing the clarity we've mentioned previously.

Got it. And then maybe just one on the data center front. Sean, you mentioned in your prepared remarks that you sort of hope to share updates soon or sort of in the coming quarters. Can you maybe give us more color on sort of what stage of discussions you're in? Is it reasonable to say that the discussions are at advanced stages now? And then can you just remind us how any potential announcement you make on the data center front would interplay with a special contract or data center tariff filing at the commission? And then how you sort of serve the capacity needs associated with any potential data center customer?

Yes. There's a lot in there. I think it's fair to characterize that we are in very serious negotiations. And I think my prepared remarks were optimistic that we would be in a position to announce something soon. In terms of the filing, yes, there would be some sort of announcement, and we would certainly follow that up with some sort of filing with the commission for approval of all that. So I think that's normal and customary. In terms of your question about the capacity and how we'll fill that need, in our last IRP, we did provision for that and been thinking about that. Again, a lot of that goes back to kind of how the counterparty contemplates a ramp rate and what they're thinking in terms of that, in terms of meeting that capacity obligation, but I feel confident we're going to be able to meet that.

Our next question comes from Nicholas Campanella with Barclays.

I just have one question. If you roll in the pre-approval generation and data center and the possible data center deal, how would that really increase your long-term EPS CAGR? Or are you just more confident in the 5% to 7% range?

Yes, I think all along, we've been looking at our 5% to 7% as solid shape regardless of this deal or any other deal. And our philosophy really is that we take a good look at where we are every year before we put guidance out. And kind of like this year, we might choose to alter the trend line from the previous year, so to speak, and address it in that manner. So I think that's really more indicative of the philosophy that we have and the way that we've treated it in the past. So hopefully, that gives you a little color as to how we're thinking about it.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Sean for any further remarks.

Okay. Thank you, Kevin. Well, thank you all for joining us today. I hope everyone has a great day and look forward to seeing everyone soon.

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect and have a wonderful day.