OGE Energy Corp (OGE) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the OGE Energy Corp. First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference 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, Jason.

Thank you, Hope, and good morning, everyone, and welcome to the 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 would 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 will now turn the call over to Sean for his opening remarks. Sean?

Thank you, Jason. Good morning, everyone. Thank you for joining us on today's call. We're off to a really strong start for the year. As you know, the first quarter typically represents less than 10% of the electric company's earnings. However, this quarter does provide momentum for the year, and I really like what I see.

Earlier this morning, we reported consolidated earnings for the quarter of $0.19 per share, with $0.20 per share from OG&E and holding company loss of $0.01. I'm pleased with the overall performance of the electric company with results up year-over-year, and Bryan will discuss our financial results in more detail shortly.

Our plan for the future is strong when you consider increased demand for electricity to support our growing communities. Business expansion is broad, representing many sectors, including manufacturing, defense, tribal enterprises and health care in both Arkansas and Oklahoma.

Some of these expansions include significant job growth, including 900 new military personnel who will be stationed at ebbing Air National Guard Base in Fort Smith, Arkansas, along with Pratt & Whitney's announcement last month of a new sustainment center associated with its operations near Tinker Air Force Base in Oklahoma.

Our customer initiatives have gained steam, particularly in the digital experience. One quarter after launching our new mobile app, more than 10% of our customer base has downloaded the app, and more importantly, they're using it from bill payment to outage reporting. We're making it easier for customers to self-serve online, enrolling in programs, enrolling in services to help them manage their energy usage and monthly bill. These efforts pay off in a multitude of ways from improving our customer experience, driving cost out of our business.

Our grid and weather hardening investments are also paying off for customers and helping us achieve strong operational performance. Something that's really important when you know that Oklahoma is a top 5 state for federally declared storms. These investments are eliminating and reducing outages during severe weather.

Two weeks ago, severe storms hit our service area with 2 communities highly impacted, Shawnee and Cole, Oklahoma. That night, there were 18 tornadoes. And what struck Shawnee left more than a mile wide path of destruction and people without power. And yet, within 48 hours, 75% of our customers were back online. And by Monday, that number was 95%. The total customer impact to our system on the night of the storms was less than 0.5 of 1% of our customer base. You just don't see those results following severe storms in other parts of the country. The folks in those towns have a long road ahead to rebuild and we'll be right there with them all along the way.

I'm proud to work alongside our team every day and it's times like these that I'm in awe of the dedicated men and women who understand our obligation to serve and don't stop until the work is done. We continue to invest in the grid, improving distribution circuits, substations and structural resiliency to mitigate the impact of severe weather like the storms I mentioned earlier.

We're excited about the opportunities through the IIJA to advance our reliability and resiliency work for our customers while grounding our work in affordability with a 50% cost share through the federal grant supporting a growing customer base and thriving communities translates to a growing need for generation capacity.

As you know, we are actively working through multiple RFPs to meet our capacity needs, and we're making progress on finalizing an agreement and plan to file for approval this summer. Not all the RFP responses delivered the value we were looking for, so we will be issuing a new IRP later this year with updated planning assumptions as well as exploring how opportunities in the IIJA and IRA to advance clean energy for the future might fit into the overall plan.

Our goal is to implement a generation plan that supports our customers and the business, smoothing investments in a steady incremental way without large spikes or bumps. We'll deal with all of these factors in the most cost-effective way, ensuring we lead with affordability. And I've mentioned the IIJA a couple of times, and we continue to pursue opportunities through the act with 2 full proposals under review, one for good resiliency and one for storm protection.

Last month, we also submitted 2 concept papers under the energy improvement in rural or remote areas program. With 3/4 of our service area considered disadvantaged or tribal communities, we will relentlessly pursue every opportunity to improve reliability and resiliency for those customers.

Along with these programs, we are excited to be part of the HALO hydrogen hub, a 3-state partnership between Arkansas, Louisiana and Oklahoma, which is applying for the regional clean hydrogen hubs program allocated through the IIJA. The full application is for $1.25 billion in federal funding and was submitted just last month.

We were also pleased the Oklahoma Corporation Commission approved our 2021 fuel prudency audit last month. And given the robust growth of our communities and the capital investments required to ensure reliable and resilient electricity, we're evaluating the timing of our next rate review, which could file -- which could be filed during the second half of this year. In March, the Arkansas Public Service Commission approved a settlement in the annual formula rate plan review and new rates went into effect April 1. We'll file the last formula rate plan update later this year.

And as I close, I want to share a few thoughts on where we are headed. This is an exciting time to be part of this industry and work at this company, especially when you do business in the service area that is growing. We are truly in an opportunity-rich environment. Our significant investment opportunities correlate directly to our economic development engine that drives community growth and business expansion in our service area. This widens the competitive advantage we have in adding customers to the cities and towns we serve.

As we ground our plans and affordability for our customers and maintaining our low rates, the future of OGE Energy is bright. Our investments are delivering results with a 99.96% uptime. Our service area is thriving, our business, our customer base is growing. Our business fundamentals are excellent, and our team, I think, is the very best in the business and are focused on delivering premium electric company results. So we're operating from a strong base and are confident in delivering our commitments to you and as well to our customers. Now I'll turn the call over to Bryan. Bryan?

Thank you, Sean. Thank you, Jason, and good morning, everyone. Let's start on Slide 5 and discuss first quarter 2023 results. On a consolidated basis, first quarter net income was $38 million or $0.19 per diluted share compared to $280 million or $1.39 per share in the same period 2022. Earnings for the first quarter of last year included $1.15 per share from natural gas midstream operations, which we fully exited in 2022 through the sale of our energy transfer units.

The electric company achieved net income of $40 million or $0.20 per diluted share in the first quarter compared to $39 million or $0.19 per share in the same period 2022. The increase in electric company net income was primarily due to increased recoveries of capital investments and strong load growth, partially offset by higher O&M, unfavorable weather and increased depreciation on a growing asset base.

Other operations, including our holding company, reported a loss of $1.5 million or $0.01 loss per diluted share in the first quarter compared to net income of $10 million or $0.05 per share in the same period 2022. The decrease in net income was primarily due to a consolidating interim tax benefit of $12 million in the first quarter of 2022 related to OG&E's investment in energy transfer that reversed over the course of the year.

Turning to customer growth and load results on Slide 6. Our customers grew at a rate of approximately 1%, and weather-normalized load grew at a rate of 3.9% compared to first quarter 2022. This trend of strong growth in customers and load is a testament to the vibrancy of the economies in Oklahoma and Arkansas and our sustainable business model of economic and business development enabled by OG&E's low customer rates. While residential load was lower as more and more of our customers returned to the office, oilfield and public authority had very solid growth and the commercial sector turned in its third straight quarter of double-digit year-over-year increases in weather normal load.

As Sean alluded to, the pipeline of prospective business expansions continues to be as robust as the company has seen in many years, coming from data mining, manufacturing, defense, health care and tribal enterprises, among others. The economic situation in Oklahoma and Arkansas is outstanding. And for the full year, we continue to forecast total weather normal load growth of 4% to 5% compared to 2022.

Now let's move to Slide 7 for an update on our 2023 financing plan. As you know, OGE Energy is fortified by one of the strongest balance sheets in the industry with no need to issue equity for our current capital forecast. Furthermore, our projection of FFO to debt metrics of 17.5% to 18% throughout the 5-year forecast period is one of the best in the industry.

At the electric company, we issued $350 million of 5.6% notes in April and have now completed our planned long-term debt issuances for the year. Later this month, we will pay off the $500 million of senior notes at the electric company and $500 million of senior notes at the holding company that were issued in 2021 after Winter Storm Uri. With these repayments, we will be in a short-term debt position at the holding company and expect to end the year with a balance of approximately $300 million.

Accordingly, our relative holding company debt position will be one of the lowest in the industry at well less than 10% of consolidated debt. As a reminder, we have no additional fixed rate maturities through 2026.

Before transitioning to our final slide, let me provide an update on our fuel under recovery status. At the end of March, our fuel under-recovery balance was approximately $370 million, a reduction of $145 million since year-end. While we still have several months before we will catch up on the recovery of last year's fuel cost, we are hopeful these fuel price trends continue and ultimately lead to lower bills for our customers.

Let's wrap up on Slide 8. In summary, our first quarter EPS came in as expected, and I have great confidence in our employees' ability to execute on our plan for the full year 2023 and to deliver financial results consistent with our earnings guidance. Simply said, I really like where we stand for 2023, and that allows us to focus on achieving our longer-term commitments to customers, communities, employees and shareholders.

As Sean mentioned, the fundamentals of OG&E's business are encouraging, including strong economics, infrastructure and load growth with the foundation of a solid balance sheet, all of which underpin our confidence in a 5% to 7% long-term earnings per share growth rate at the electric company. We believe this projected earnings trajectory, coupled with an expected stable and growing dividend, offers our investors an attractive total return proposition. With that, we will open the line for your questions.

(Operator Instructions) Our first question comes from the line of Shahriar Pourreza with Guggenheim Partners.

Sean and team, congrats on a great quarter. It is actually Constantine here for Shar. Starting off on the quarter. Obviously, weather was unfavorable. Can you talk about some of the offsets that you're embedding in the reiterated guidance? I think the slides are showing some strong normalized load growth. So how much is that contributing to the expectations for the remainder of the year or any other offsetting factors?

Sure, Constantine. You're right, the quarter had about a $0.01 to $0.02 negative impact compared to normal when it comes to margins and the mild weather. Constantine, I would just point you to the fact we have so many tailwinds for this company this year, sprinkled all throughout, I guess, the revenue areas when you think about load growth, sales mix and various items. So we're really bullish on 2023, and we're in a position where we can, pardon the pun, but weather the mild weather. So we're in really good shape for 2023.

And on the financing side, as you mentioned, you have a very strong balancing sheet -- balance sheet and financing for this year is effectively done. So just for the near term, maybe some thoughts around kind of using the cash convertible debt that some peers have been using for some near-term benefits and kind of locking in against your 5-year funding needs? And maybe prospectively, just interest rates have come down a bit this year. So especially at the tail end of the curve, is that giving you some headroom versus your long-term guidance?

Constantine, this is Bryan. I'll take that one as well. You're correct. We are completed with our debt issuance plans for this year. We definitely are monitoring what other utilities and holding companies have issued. I think is the latest term maybe for this hybrid instrument you're mentioning is cash convertible debt. And that's something we'll study. We don't have a holding company debt issuance need in the near term, and we'll continue to evaluate it.

As far as interest rates, we do plan conservatively as we look out to future years on interest rates. And we're certainly optimistic that rates -- short-term rates, especially will trend down in years ahead, which will just be overall beneficial to our company.

So would that -- is that something that's already embedded in the kind of 5% to 7%?

No, no. We're using that 5%-plus expectation on short-term rates this year and into the future. So that's not embedded yet.

(Operator Instructions) Our next question comes from Julien Dumoulin-Smith with Bank of America.

This is Heidi Hauch on for Julien. So just first question is, can you provide more details on your common carry on the latest round of solar RFPs? And why this kind of -- the RFP fell short of your expectations or your watermark to move forward there? And then also, what changes or developments or you need to see to move forward more meaningfully on utility scale solar procurement?

Yes. Thank you, Heidi. Great question. And so as you know, we had a number of different RFPs. We had 3 out there, 3 distinct RFP processes going on. And so we're in the middle of a lot of negotiations, and it's active. It's very fluid right now, and so we're rounding those out. I would think -- we didn't say that we do not have bids out of a particular RFP. We're going to continue to add generation to our fleet.

We do want to make sure -- smooth those out, make sure we don't have the big blips. I've said previously that I would expect as we fill this capacity need in the future, it's going to be a combination of gas and solar. Maybe if batteries get more economic, we'll look at those as well. but that's where we see it going. Obviously, these negotiations, obviously, cost is a big factor. You've also got timing and deliverability. Availability is a big factor. And then you've just got the normal terms around risk, risk transfer and what you're accepting in terms of a risk and what you're not willing to accept as a risk.

And so it is taking a little longer than I anticipated, but we do intend to file this summer our results. And then we will -- as I said, we're going to go through another integrated resource planning process really to make sure we incorporate the benefits of the IIJA and IRA opportunities. And hopefully, we see a little more relief from some of the inflationary pressures and the time frames that are out there.

Okay. Great. That's very helpful. And then just a quick follow-up. So given that kind of summer time frame for filing the new RFPs, I believe you mentioned, can you confirm what solar CapEx is included or embedded in the near-term plan, if any, that would be helpful.

Yes. Yes. We do not have any solar specific plans -- CapEx in our plans or gas.

Got it. Okay. Great. And then secondly, the latest 4% to 5% loan growth forecast is very strong. How do you perceive the sustainability of that 4% to 5% load growth trajectory into 2024 and beyond.

Yes. I think that's a great question. And obviously, 4 to 5 is robust. And we've been talking about this for a while, and that's on top of what we did in the prior year. The challenge is it's very difficult to really pinpoint whether growth in the subsequent years is going to be 4.5%, 3.5%, 6.5%. It's very difficult once you get beyond 12 months because it depends a whole lot on what happens in the current year and then the timing of in-service dates for some of those developments.

So we will lay that out as we move forward, but we are very bullish. And I think you've heard it from Bryan, you've heard it from me that we've built something here that this engine is really moving down the track, and we intend to keep it going for many, many years. And it's really the foundation of our company that we're going to continue to see load growth and customers come to us.

We're going to continue to increase the capital to support them. We're going to spread that over more customers and thereby widening that competitive advantage we have in economic development. So again, we think this engine is going to go for many, many years.

Great. Great. Totally understood that one. And then kind of lastly here, can you provide an update on your efforts in terms of complying with the latest iteration of EPA's good neighbor rule? And maybe just an update overall on how this policy should impact your portfolio prospectively.

Yes. Yes. I think between the good neighbor rule, and we've seen that and we certainly expect the GHG rules to be out here shortly. We've been through this before, right? And this will go through many iterations. It will probably get litigated. I think that's always been factored into our longer-term planning and how we think about our generation mix. And none of that is in our plans today because the rules aren't necessarily final. And so we'll evaluate those and make the right decision for our customers.

Our next question -- our next question comes from Alex Mortimer with Mizuho.

I was hoping -- can you provide any color on if there's any time line or internal thought on when we may get the EPS CAGR on a consolidated basis and not just at the utility?

Yes. I think that's -- it's our intention to do that in February. The logic there was we are very bullish on our utility. And as we were exiting the midstream business, and Bryan mentioned the retirement of some debt there from Winter storm Uri, we're letting all that work itself out. And then we're going to provide a consolidated growth rate when we get to February.

Okay. Understood. And then I know you're obviously very bullish on load growth, but a lot of it is tied to commercial as well as it looks like some oilfield. With oil prices kind of declining in recent weeks, potential economic slowdown, people are predicting second half of this year. How do you think of your exposure to kind of both of these factors?

Yes. Certainly, we've seen the tailwind from oil field, but if you go back a year ago, it wasn't a tailwind, and load growth was still robust. And Bryan alluded to this, and I referenced it in my remarks, the growth is pretty diverse and not just in oilfield, but if you look at a lot of what we're seeing around the defense industry, it's really growing. And what sneaks up on you really quickly there are the residential numbers. There's just a lot of residential customers, but as you see these new industries come in and you're adding 90, 100 people at a time, that adds residential accounts, too. So I think there's a lot of solid base there for that continued growth, and we're not necessarily tied to a particular industry.

Okay. Understood. And then to just round out load growth, is there any good way that you quantify your impact of load growth on earnings for, like, for example, every 10 basis points of load growth is worth $0.01 or sort of something along those lines that we should be thinking about?

Yes. I think we're all smiling here because we'd love to be able to do that. It has a lot No, it really has a lot to do with the segment itself. They have a margin contribution that's different based on the segment. The other thing that's important too is when those new load serving entities come on the system. So whether it's at the end of the year and the middle of the year, the beginning of the year. And so that has a different impact from year-to-year as well. So we're keenly focused on the sensitivity there, but we haven't come up with a good 10 basis point sensitivity that we could really crisply give you.

Please stand by for our next question. (Operator Instructions) our next question comes from Aditya Gandhi with Wolfe Research.

Sean and Bryan, can you hear me?

Yes, we can.

My first question, just on the outstanding RFPs. Could you just clarify the time line. So you're going to file for approval sometime in the summer. And then what -- after you do that, what milestones should we be watching or looking at? And to the extent that you can address, can you give us some sense of what percentage of your generation need would be fulfilled from this current round of RFPs versus sort of like your next IRP or RFPs?

Yes. So we're going to file this summer in both states. And Oklahoma under the provisions there, you have up to 240 days to receive approval for that. So that would be one milestone. I also mentioned that we are going to start the integrated resource plan, we're going to reissue that again to incorporate the IIJA and IRA opportunities. But also Bryan spent a lot of time talking about the load growth. So our loan growth projections are changing as well. In terms of what percentages and what we're going to file for, while we're still in negotiations, we're probably not in a position to kind of comment on that right now.

Okay. No, I understand that. And then just moving on to sort of the timing for your -- the timing for your next rate review. You mentioned that it could potentially be filed in the latter half of this year. But just when we're thinking about -- when we're thinking about the level of the rate increase, just given the high fuel cost last year, how are you thinking about the level of the rate increase? And then could you also comment on whether the next rate review could potentially include recovery for the generation investments? Or is that going to be through a separate process?

Yes. That -- so we're going to file in Oklahoma through a separate process for approval mechanism we have in statute here. We're going to go through that for the generation. And then in terms of the rate review, your point is spot on. I mean we are focused on affordability, and that's the key pillar of our growth engine. We've got to keep our rates attractive so we can continue this growth story. So we are -- since that -- this is not a large rate case, and we have a goal of staying current and making sure that everything is timely. Our customers have communicated us. They like the smoothening effect that we're trying to ensure. And no one wants to see any big spikes, and we don't intend to see that going forward.

Perfect. And just one last question, if I may. Bryan, I just wanted to clarify. So after you pay off the $1 billion of your related debt, $500 million each of the utility in the holdco. You mentioned that, that would be a short-term debt balance at the holdco and that would be sort of around the $300 million range by the end of the year that's consistent with your messaging from the prior quarter?

Yes, that's right. I just want to reiterate, when you think about our company in totality, as Sean mentioned in the fourth quarter call and we both have discussed today, we're really bullish on utilities, growth prospects with a lot of tailwinds from load growth, emerging investments in the grid in generation.

So we feel really, really good about the utility over the next 5 years. And as utility grows, that means the holding company has to pay less and less of the dividend going forward. So when you think about that, that should give you some comfort that our holding company interest costs as that grows each year, we'll grow less and less. And so just to add more color to my comments from the last call.

Thank you. Please stand by for our last question. Our last question comes from Shahriar Pourreza with Guggenheim Partners.

It's me again. Just had a couple of quick follow-ups. Just to kind of confirm on the RFPs. You mentioned that there's no near-term CapEx that's affected by just thinking about if there's some delays in kind of the magnitude versus your original thinking, are you planning to kind of offset or flex somewhere else in the CapEx plan?

Yes. Constantine, is your question, make sure I understand it correctly, but is your question, where is the capital expenditures associated with these RFPs?

Yes. And if the delays and the refiling of the IRP would impact the existing capital plan at all?

Yes. No. I think what we said is we have a lot of opportunities. This is opportunity rich, and we're allocating capital and just really fueling this growth engine we have. And so it -- the timing of these RFPs and the results and that sort of thing doesn't really impact or change our plans because we have tremendous opportunities to invest and continue to grow our company.

Excellent. And you mentioned that kind of some of the outcomes and the economics that you've seen weren't necessarily palatable to your kind of original request. Just curious if you can share how has the commodity volatility in both directions, especially on the positive side this year impacted your thinking on preferred mix?

Yes. So we're certainly pleased that we've seen a pullback in natural gas prices. That certainly helped and relieve some of the pressure from fuel cost to our customers. So we like that. When we're evaluating this and making our decisions while we're cognizant of the current commodity price environment, we're taking a long-term view. And we're factoring in a long-term view of prices and taking a long-term view of what we think potential regulations could be as well around from the EPA. So it's a very thorough analysis.

Thank you. At this time, I would now like to turn it back to Sean for closing remarks.

Thank you, Hope, and thank everybody for joining us this morning. Thank you for your interest in the company, and I hope everyone has a wonderful day.

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