OGE Energy Corp (OGE) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the OGE Energy Corp.'s Second Quarter 2022 Earnings Call. (Operator Instructions) Please be advised that today's conference call is being recorded.

I would now like to hand the conference over to your speaker today, Jason Bailey, Director of Investor Relations. Please go ahead.

Thank you, Hope, and good morning, everyone, and welcome to OGE Energy Corp.'s Second 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 today.

I will now turn the call over to Sean for his opening remarks. Sean?

Thank you, Jason. Good morning, everyone. Thank you for joining us. It's certainly great to be with you this morning. Earlier this morning, we reported second quarter utility earnings of $0.50 per share, which represents an increase of $0.08 per share over the same period last year. Overall, we reported consolidated earnings of $0.36 per share, which includes a $0.05 loss from the holding company and a $0.09 loss from natural gas midstream operations.

The second quarter was very productive and included the following. Through the end of July, we've exited 77% of our Energy Transfer investment at an average sales price of $11.09 per unit, which represents a 33% premium to where the units were when we closed the transaction last December. Interestingly, we've already received more net proceeds than the value of our investment on the transaction close date, and we haven't even completed the exit. We are pleased with the pace of our progress and the value that we've captured for our shareholders. Bryan will go into more details shortly.

Regarding the Oklahoma rate review, at the end of June, we reached an uncontested settlement to the rate review pending before the Oklahoma Corporation Commission, and the ALJ has recommended approval of the settlement. We await a final order from the commission, which will likely be this quarter.

Moving to Winter Storm Uri. In early May, the Oklahoma Supreme Court authorized the sale of bonds. The State of Oklahoma issued the bonds, and we received the proceeds 2 weeks ago.

In Arkansas, we had a productive quarter where we implemented new rates on April 1 associated with our fourth formula rate filing. We continue to work through a 5-year extension of the Formula Rate Plan in Arkansas. Also, we filed a request to recover approximately $80 million of Uri-related costs over a 10-year period at our weighted average cost of capital. This is consistent with other approvals by the Arkansas Commission.

Turning to operations. Temperatures over the last several weeks have been extremely high across the service area with 18 days above 100 degrees since June 1. Our generation fleet has performed well, supplying the grid with electricity for our customers and across the SPP.

Beyond our generation capacity, the grid is serving customers. It's not strained. And unlike other areas of the country, we have not cautioned the public of potential blackouts nor called on the public to take conservation measures. The system was designed, was built and was maintained for days like these, and our customers experience the benefits of our generation investments and enhancements to the grid.

Our investments in technology and equipment deliver improved reliability, resiliency, communication and security to energize their homes, businesses and lives as we maintain affordability for our customers.

Additionally, S&P's annual report on rates was announced in the second quarter, and OGE Energy was listed as having the second lowest rates in the nation, a reflection of our continued commitment to affordability for our customers as we invest in the grid and technology to improve reliability, resiliency and security. We have billing programs like Guaranteed Flat Bill and average monthly bill, which allow customers to manage their budget and cash flow more easily.

So to quickly recap, in the second quarter, we exited more than 3/4 of our Energy Transfer investment at a significant premium. We filed an uncontested settlement in Oklahoma rate review. We received bond proceeds from Oklahoma securitization of Winter Storm Uri expenses. In Arkansas, we implemented new rates and filed a request to recover Winter Storm Uri-related costs, and we continue to provide safe and reliable, stable electric service to nearly 900,000 customers during an extremely hot summer.

We're accomplishing what we set out to do, what we told you we would do and have great momentum for the remainder of the year. As we continue our strong operational performance, we reaffirm our utility earnings guidance for the year and expect to be in the top half of our utility earnings guidance range given the warmer-than-normal weather.

I'm really incredibly proud of every single employee, each of whom is solely focused on safely ensuring our customers have the life-enhancing and life-sustaining electricity they need to live their lives. I use that word safely for emphasis as I'm extremely proud of the level of safety excellence we exhibit here at the company.

Turning to future operations. We continue the needed investment in the grid, utilizing automation and self-healing technologies to improve reliability and resiliency. The work we're undertaking on our substations, distribution circuits and other portions of our grid will provide great benefit to our customers in terms of reliability and resiliency. To date, we've seen results from enhanced circuits following storms where customer outages were eliminated or reduced to the tunes of hundreds of thousands of minutes to date.

With a growing service area and increasing reserve margin requirements, we recognize our future capacity requirements are changing. We have 3 active RFPs for long-term generation in the market, and we'll evaluate all the proposals before making decisions with regard to how we will meet the capacity needs in our service area. We'll provide an update once we review the results from all the RFPs.

And at the same time, we have other capacity initiatives underway. We continue to offer programs that help customers manage their energy usage and their bill through smart hours, our demand response program. More than 100,000 customers are shifting their energy usage in helping achieve 90 megawatts in demand reduction this year alone.

Our energy efficiency programs continue to provide strong results for all customers. These programs provide energy savings and demand reduction and enable customers to better manage their energy use. In the current filing years, we expect to achieve savings of more than 100 megawatts in demand and nearly 500,000 megawatt hours of energy savings, helping us to efficiently operate the generation fleet as we grow our customer base and maintain affordability.

In times of economic uncertainty, these programs offer customers incredible value for home improvement with no out-of-pocket costs as well as tools to manage and understand their energy usage. We filed these extensions for programs like this every 3 years with the next filing in 2024.

Our load forecast for 2022 is outpacing 2021 and expect growth above 3.5% this year. Our long-term load forecast remains strong as our service area continues to grow. Bryan will talk about load here shortly, but our business and economic development efforts continues to pay dividends for our communities.

In the first half of '22, the new -- the 12 new projects secured and announced by our economic and business development partnerships will help add more than 1,775 new jobs across Oklahoma and Arkansas. Businesses, large and small, continue to grow from Mercy Hospital in Fort Smith to No Man's Land Beef Jerky in Enid, Oklahoma. The affordability of our rates is central to our sustainable business model as the cost of electricity is a significant factor that companies consider when deciding an expansion or relocation.

Before I hand the call over to Bryan, I just want to take a moment to touch on a few important points. First, the economies across our service area are thriving. Unemployment rates are better than the national average. Business and economic development is active, and our communities are strong and continuing to grow stronger. Our sustainable business model is designed to grow revenues by attracting new customers and managing expenses by utilizing technology. This helps us maintain some of the most affordable rates in the nation, which in turn attracts more customers, continuing the virtuous cycle and sustaining the momentum for our shareholders, employees and our customers.

So thank you, and I'll now turn the call over to Bryan. Bryan?

All right. Thank you, Sean. Thank you, Jason, and good morning, everyone. Starting with second quarter results on Slide 6, we reported consolidated earnings of $0.36 per share compared to $0.56 per share in the same period in 2021. OG&E, the electric utility, contributed earnings of $0.50 per share in the second quarter compared to $0.42 per share in the same period in 2021. The increase was primarily driven by higher sales volumes and increased recoveries of capital investments. These favorable drivers were partially offset by expected higher depreciation on a growing asset base. O&M was flat this quarter compared to the same period in 2021, reflecting our employees' continued focus on cost management.

Our natural gas midstream segment experienced a loss of $0.09 per share in the second quarter compared to earnings of $0.16 per share in the same period in 2021. The decrease in net income was primarily due to mark-to-market adjustments on our Energy Transfer units coupled with the elimination of equity and earnings of Enable.

On a year-to-date basis, however, we've seen significant appreciation in the fair value of the ET units, as I'll discuss in a moment.

Other operations, including our holding company, experienced a loss of $0.05 per share compared to a loss of $0.02 per share in the same period in 2021. The increase in net loss was primarily due to the partial reversal of the consolidating tax benefit recorded in the first quarter of the year.

Turning to our economic indicators and load results on Slide 7. Customer numbers grew 1.1% over the past 12 months and in line with our expectations, reflecting the attractiveness of our service territory in Oklahoma and Arkansas.

We continue to see our low rates draw businesses to our service territory in 2022. As of June 30, we have added 60 megawatts for the year from data mining companies alone, and those connections began to accelerate in June. We are encouraged by how this customer subgroup is methodically working through supply chain constraints. And we still expect the overall commercial customer group to grow in excess of 10% for the year.

Company-wide for all customer groups, based on year-to-date results and updated projections, we now expect to see total retail load growth of around 3.5% to 4.25% in 2022. Zooming out, when you look at the 2.4% load growth we experienced in 2021, along with the 3.5% to 4.25% we are forecasting for 2022, our confidence is growing that 2023 will be another year of load growth in excess of the historical level of 1%.

Let's move to Slide 8, where we are reaffirming our guidance issued in February. Given the favorable weather and solid operational execution by our employees in the first half of the year, we expect results to be in the top half of our 2022 utility guidance range of $1.87 to $1.97 per share.

Taking a longer-term view, our business fundamentals are strong with growing economies in Oklahoma and Arkansas and constructive regulation in these states. Furthermore, our company has prudently managed its balance sheet, putting us in a position to invest in the generation and T&D investments that our customers and communities need and keeping us on the path to 5% to 7% long-term EPS growth.

Let's move to Slide 9 for an update on our 2022 financing plan. Sean provided you with an update on the exit of our Energy Transfer position. We've been consistent with our approach to exit the shares in a dollar cost averaging manner, and that approach has proved prudent. As you can see in the chart, we are projecting total pretax proceeds of over $1 billion, which would be nearly $400 million more than the fair value as of the February 2021 announcement date. This is real value creation that will accrete to our shareholders in the form of a permanent improvement in our balance sheet strength and lower levels of holding company debt.

Turning to recovery of the Winter Storm Uri costs incurred in February 2021. The State of Oklahoma issued securitization bonds in July. The proceeds of $750 million have been received and will be used to retire the associated debt that was incurred at the time of the winter storm event.

Before we take your questions, let me make 2 points. First, we are very well positioned with respect to interest rate risk. Through prudent management of our debt maturity ladder, we have only approximately $100 million of maturing debt over the next 5 years to be refinanced. Furthermore, we have very low levels of short-term floating rate debt, thanks to the proceeds received from the Energy Transfer sales.

Secondly, our balance sheet and credit metrics are strong, positioning us to deploy the capital investments in our 5-year plan without the need to issue equity. This balance sheet will also be there for our customers to support emerging investments that will be required to continue to provide quality service to our thriving communities in Oklahoma and Arkansas.

With that, we will open the line for your questions.

(Operator Instructions) Our first question comes from Shar Pourreza with Guggenheim Partners.

It's actually Constantine here for Shar. Congrats on a great quarter.

Thank you, Constantine.

So my first question is on the progress addressing generation needs for OG&E. There's a few RFPs that are out there, including existing resources. And given some of the near-term kind of generation needs and now that you've monetized the majority of the ET shares and you have some dry powder, any thoughts on accelerating the investment in new or existing resources? And how interchangeable do you anticipate the RFPs to be just in light of the changing economics and supply chain conditions?

Yes. I think that's certainly a factor, Constantine. I mean that's why we want to get all the RFPs in and kind of stack them up and look at them all in terms of availability and cost. Obviously, I mentioned in my remarks the increased reserve margin requirements at the SPP. We're certainly watching that. We're certainly watching whether the IRA gets approved in past. That could have an impact on the RFP results and a benefit to our customers. So we want to see the results. We're going to stack all these up, and we're going to go from there. I don't think the balance sheet per se is the driver. I think what's the driver is just the availability and the economics coming out of these RFPs.

Excellent. And just a quick follow-up. Load has obviously been a very strong trend in 2Q and '22 in general, both whether normalized and in absolute terms. And well, customer accounts kind of continued around that 1%. Do you anticipate like actual C&I usage to continue growing in excess of customer accounts, especially as we're kind of looking at the oilfield segment and starting to see some activity picking up? And would that cause you to track a little bit ahead of kind of what's the assumptions that are contemplated for '23?

Yes. Bryan, do you want to tackle that?

Sure. Sure. Yes, Constantine, load results have been strong. And for this year, as expected, I would say on the commercial front, we do anticipate being around that kind of double-digit area for growth this year. As I mentioned in my comments, we have really strong momentum in that sector and believe there's a good chance that will carry over into 2023.

As you look to oilfield, you can see -- you may recall that we had about 2% year-over-year growth in the first quarter in the oilfield sector. On a year-to-date basis, that's bumped up to 3.7%. So you're seeing some improved volumes and activities in that sector. And versus 2019, we're actually still below our 2019 levels in oilfield. So that gives you a sense that there's still room to grow just from prepandemic levels. So certainly, we expect that momentum in oilfield to continue.

The industrial sector was strong in the second quarter for us from fertilizing companies and our steel manufacturers. So those 2 sectors have been strong for us. And overall, we're starting to get more and more confidence that 2023 could be another year of above 1% load growth.

Our next question comes from Julien Dumoulin-Smith with Bank of America.

It's actually Kody on for Julien. So just first following up on Constantine's question around load. Your expectation on 2022 growth looks like it stepped down at the top end. Can you talk through some of the drivers there? Maybe crypto stepping down. And just as we look forward to 2023, and this kind of gets to your point in the previous question, but just wondering if you can share a little bit more about your C&I customer sentiment on the current economic backdrop and any conversations that you've had recently?

Yes. Bryan, do you want to tackle the first part of that? And then I'll tackle the second part of that.

Yes, absolutely. So Kody, you're right. We were looking at a broader range of potential load growth for the year, up 3.5% to 5%. The delta between that and where we're currently forecasting is around the data mining companies, in particular. As I mentioned in my comments, they had some supply chain issues getting some of their mining equipment in on a timely basis. So that's come in a little slower than we thought. We did see a strong pickup towards the end of first quarter and here in July as far as connections. And we had built very little margin from those customers into our financial plan this year. So it's not really having much of an impact to this year. And in fact, as I spoke to earlier, given the recent momentum, we think this gives us some nice tailwinds going into 2023.

And Kody, I would just -- in terms of longer term, as I speak to people around the states, the economic development activity, I've never experienced the pipeline or the backlog that's out there and some of the potential projects that are coming in that are in early stages. So I think this is something -- this commercial segment and just looking at the starts and looking at certain site preparations and things like that, this is something we think is going to continue.

Great. And curious if you could share any updated thoughts on the solar RFP that's outstanding. I think you're previously pointing to new generation not being available until at least 2025. But with the tariff waiver, are you seeing resources available sooner?

Yes. We haven't seen a material change in that to the extent it's going to affect our RFP. But again, we're going to look at all 3 of the RFPs and stack them all up together and proceed down that path in terms of what's available to meet our capacity requirements. So -- but no, I haven't seen a material change in that.

Okay. And one last one, if I can just squeeze it in quickly. As it relates to the EPA's potential stricter NOx regulations, how are you thinking about accelerated retirement versus retrofitting your plants? Is that something that can be factored into analyzing the results of the ongoing RFPs?

Absolutely. And I think that's a -- we've been through Casper once before, and we've reviewed that. We'll wait to see if it is actually filed. As you remember, the last time, it went through a lot of legal hoops and delays and stages and things like that, we'll see. There's a bunch of different alternatives to be able to address that rule. You mentioned retirements, but I think your conclusion there is just spot on. That's -- we will certainly see that and factor that into our analysis of all the RFPs as well.

Our next question comes from Insoo Kim with Goldman Sachs.

I hope you guys are staying cool.

Yes. So far.

Yes.

We have a great electricity provider here. So we're going to be plenty cool.

That's right. Maybe a little too cold, right, when you're in sight? Just going back to the RFP process and the 3 RFPs that are out there, can you just give a little bit more of a color on the next set of time lines and ultimately, whether it's '23 or beyond, what type of -- when we could see that the purchase or the capital spend?

Yes. So the bid on the second 2 RFPs, the bids are due in August and September. We're going to evaluate all those, stack them up. Certainly, we'll have the benefit of if anything comes out of the Inflation Recovery Act. We'll see how that impacts things. the previous question talked about Casper. We'll certainly be cognizant of that. But we're going to go through all those.

And so the other point that I think is relevant here is just in terms of availability, when these could be slotted in and fill some of these gaps. And so availability or timing is going to be a key component. We're going to lay all that out. And then when we finish that, we'll certainly communicate to you and make any requisite filings at the various commissions based on those results. But I don't want to -- I mean, I would expect to have an idea of what we're going to do in recommendation by year-end, but we'll see.

Got it. And then whatever capital you end up spending as part of these RFPs, is it still -- is it a bit of a -- it's too early to think about the mix of financing for those incremental capital?

Yes. We certainly haven't layered those in. And I think it all goes back to that timing point I was making before in terms of availability. And -- but yes, we'll certainly -- when we make our decision, there will be an adjustment in terms of how we categorize the capital and certainly how we finance that.

Got it. And relating to that balance sheet strength, as you get these -- the better-than-expected cash flows from the ET sale, your balance sheet was already one of the better ones in the industry with FFO to debt in the high teens. Obviously, with becoming a more fully regulated utility over the next 12 to 18 months, let's say, the credit thresholds may become even looser. I'm sure -- I know you've gotten this question before, but as that balance sheet capacity continues to remain strong, besides the organic upside, utility investments that exist, what other thoughts do you have to utilize this capacity? And maybe it is just even more utility CapEx that we're not really counting above and beyond the IRP and RFP items?

Yes. I think I appreciate the question there. And I think we've not commented on strategic transactions. I think that's the distraction. But I don't think there's any wavering in our commitment to grow the company. We have a lot of investment opportunities in this company. And we've talked about that for many, many years. And I think what is unique here is we have investment opportunities that we're going to be able to spread out for many, many years. This is not a 3-year short-term peak in terms of the investment opportunities. We've got a lot of opportunities to invest in our communities.

And we also like the idea about this affordability. I mean for the last 4 years, we've either been the lowest or the second lowest rates in the country. And that's paying dividends in terms of recruiting businesses. So I am very confident and very bullish on the organic growth here at the company, and that's what we're focused on.

Got it. And just one more, if I could, maybe for Bryan. In terms of the guidance for the year in the upper half of that, the utility range, you have the $0.05 drive from the holdco and other -- for the year, how much of the holdco other maybe drag in EPS is embedded in that range, if any?

Yes, we -- our guidance is based on utility only. So when we talk about the $1.87 to $1.97, it's the utility guidance. We did, at the beginning of the year, talk about the holding company being a $0.01 to $0.02 drag. That number is still roughly in the range. Interest rates being a little higher, perhaps that looks more like $0.03 for the full year. But as we talked about, the ET unit sales have gone very well, and that exit has progressed perhaps even faster than we first anticipated. So our holding company debt levels have gone somewhere close to 0. And so that drag will go away for a bit. And then ultimately it will -- longer term, you'll see it pick back up as we grow the company. But think of that guidance range as the utility and then a very minimal drag from the holding company for the rest of this year and certainly the first half of next.

(Operator Instructions) Our next question comes from Brandon Lee with Mizuho Group.

Most of my questions have been asked. I just had a quick one. Can you just discuss whether you're seeing any inflationary pressures or supply chain issues in your capital spending this year and whether you anticipate any in the near future?

Yes. I think it's -- we are. I mean we certainly are seeing inflation in terms of some of our labor markets, some of our commodity markets, some of our materials and supplies. But what I would say is it's our job and it's our mission to mitigate this as much as possible. And I think, Brandon, the great thing about the opportunity set that we have around investment is there are not any big, singular projects or bets out there. So we're able to adapt and move investments around to really help mitigate any -- mitigate the inflationary pressures. But I think it's our job and our mission to do the best we can to mitigate it, but I think it's real, and it's out there.

Our final question comes from Gregg Orrill with UBS.

What is it that would accelerate the timing of the RFP capacity coming online? What are those things that would do that?

I think it's availability, right? I mean if -- we talked before with some of the constraints coming out of our solar RFP. That wasn't going to be as timely as we had hoped. So I think I keep coming back to, it's really about availability and how we're going to be able to layer all these in over a number of years.

At this time, I would like to turn it back to Jason Bailey for closing remarks.

Yes. Thank you for joining us on the call today, and I hope you guys have a safe day.

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