Q3 2020 OGE Energy Corp Earnings Call

[music].

Looking financial results, but this is our best estimate to date.

I'd also like to remind you that there is a Reg G reconciliation for gross margin and a reconciliation of ongoing earnings GAAP earnings in the appendix.

I will now turn the call over to Sean for his opening comments Sean Thank.

Thank you Jason Hey, good morning, everyone. Thank you for joining us on today's call.

Right to be with you as some of you may be aware, we are finishing up a very large restoration effort in our service territory.

I think we're gonna talk a lot about whether today uhm on Monday October 26, an ice storm moved into our service area.

Over the next three days, we experienced three separate waves asleep freezing rain and even for us uncharacteristically high winds.

The service.

Early season storm brought about a significant accumulation device on leaves and trees and lay down lines and infrastructure, causing an extraordinary number of outages and damage to the system.

When it was all said and done we've found our sales facing the worst storm in the company's history, causing over 400000 outages at its peak.

And a strong balance sheet and continually view our balance sheet is key to handling situations like this that arise.

Steve will discuss the detailed financial.

To results and guidance in a moment, but before he does I'd like to spend a few minutes to update you on the economic recovery and our service territory and our third quarter operational accomplishments before offering some closing remarks.

In the last quarter I described are performance. This year is excelling through challenging times and that continues as we operate at a high level, while dealing with the impacts of Covid.

Interestingly enough, we've continued to add customers at a 1% annualized rate and the Oklahoma and Arkansas economic recoveries are moving forward in September.

U S Bureau of Labor Statistics reported that Oklahoma City was tied for first with the lowest unemployment rate for large metropolitan areas at four 9% the.

Year to date weather normalized commercial load is down three 7%, which is an improvement from being down five 6% back in June.

Industrial load continues to show month over month improvement year today, industrial loads down 666, 6% compared to 2019, where it was seven 6% below 2019 back in June.

And finally, our oilfield load remains down but each month of the third quarter wasn't improvement to the second quarter and year to date. It is down five 3% compared to 2019.

We believe the economy is coming back load is returning and whether we will find its way back to normal.

Positive working relationship with the commissioners and staff.

Our practice of smaller more straightforward filings on more frequent cadence we believe is working.

In addition to those reductions we've avoided that another 3% of Cotwo emissions with our very successful demand response and energy efficiency programs.

We continue to look for more opportunities to reduce or offset our seo to footprint and advanced technology.

Oh Genie was the first to bring renewables, both wind and solar to Oklahoma.

We built for for solar farms already we're adding our fifth.

Next year and we've done all of this and still have lowest rates in the nation.

As we continue to recovery, let me point out how I believe our sustainable business model has the company and our service territories poised to grow.

So when looking at rates across all classes S&P global as reported that Ogone had the lowest rates in the nation in 2018 and 19.

And will we believe those low rates are the key to economic development in both Oklahoma and Arkansas.

And just the third quarter, we've seen nine new economic development announcements seven in Oklahoma tuned Fort Smith.

So as we look to next year, we have several key items to execute on.

In addition to grid enhancement will complete the new Arkansas Solar farm as well and continue to look for additional opportunities.

New rates will go into effect in April for the Formula rate plan in Arkansas, We will file our fourth fr update in October where we will likely request an extension for an additional five years in that program.

The F. RP has been a productive mechanism that strikes the right balance between enabling investment improving customer experiences.

In closing I'd, just like to be clear that from the initial shock wave of the coated pandemic earlier this year to what is now essentially become the new normal employees at Ogone continue to perform at a high level safely energizing life for customers and our communities.

Three $6 million as additional assets replace them to service inter.

Interest expense increased $2 million, primarily due to additional longterm that outstanding.

Income tax expense increased $10 million, primarily due to reduce tax credit generation, an amortization of that unfunded deferred taxes. All included in our original plan for the year.

Our O&M expenses down $20 million compared to last year as we've mentioned before O&M reductions have covered the covid impacts.

Incremental interest in Abu arm expense and part of the impact of our mild summer weather.

Our earnings guidance is now projected to be between $1.68 and $1.70 per average diluted share now.

Narrowed and adjusted for mild summer weather from the previously issued guidance of $1.72 to $1.78 per average diluted share. This assumes normal weather for the remainder of the year as Sean mentioned earlier below normal weather has reduced earnings by nine cents. This year.

Well to the equity method investment impairment recorded by enable energy energy projects ongoing earnings for the natural gas midstream operations to be between 32, and 36 cents per average diluted share.

Additionally, LG energys consolidated ongoing guidance is projected to be between $2 and $2.06 per average diluted share.

At the holding company guidance remains flat for the year.

Losses, we have seen our turnaround of the interim tax adjustments.

This concludes our prepared remarks, and we'll now answer your questions.

Thank you, ladies and gentlemen, as a reminder, if you have a question at this time. Please press the star and the number one key on your Touchstone telephone. If your question has been answered or you wish to move they stop from the queue. Please press the hash key.

First question comes from Brian Gillian Smith from Bank of America. Your line is now open you may ask your question.

Hey, good morning, this is absolutely rich year for Julian.

Hey, good morning, Richie how are you.

I'm doing well thanks for taking my question here.

I guess setting enable aside for a moment, how you think about your business mix going forward is there any interest in staying in the gas business through sales gas only fees I know there are some adjacent assets in Oklahoma, and Arkansas, and then given where some of those multiples are firming up some sector could that be a way to unlock additional growth.

Sure.

Yeah, I mean were you know.

I think I'd answer this two ways, we're focused on kind.

Kind of our utility business.

We have a bias towards electric.

That being said.

We're our focus is continuing to try to grow our company, but electric is where we're at.

Okay got it that's helpful.

And then separately can you just remind us on the tax basis on enable.

Yes.

Richie I think at the end of 19 2019, it was about $850 million negative 850 million about that.

All right perfect that is very helpful. That's all I had all right. Thanks have a great day Ritchie.

All right you too.

Thank you next question comes from the line of Shoppers me, that's something that enhances your line is now open you may ask your question.

Hi, Good morning, guys, it's actually Constantine here for sure. Thanks for the opportunity here Yeah. Good morning constant thing give our regards to stars well.

Absolutely, we'll do I'm, just kind of a couple of questions to round out of some of the stuff that you've covered.

Just thinking about the low dynamics and kind of recovery going into 21 kind of how are some of your assumptions starting to build up what are you kind of seeing as we kind of get past the crisis sales and.

Maybe in terms of kind of load mix going forward. The anticipate that some of the increase and the residential load could be kind of sustained we've kind of been hearing about employers kind of looking to reduce real estate footprint things one way or another.

Yeah I think.

I would I would characterize it I agree with that thesis I think you're going to see some of that residential load be sustained I'm just from more and more people working from home we have more people working from home, so and we figured out of them opportunities to do more of that for the benefit of our business. So I think you're going to see more of that.

You know as we as we survey our segments and talk to various people.

Does look like to us that a lot of the industrial and commercial businesses are you know I mentioned that we provided some detail there. They are improving there is momentum there you know the the area that that we just while we've seen improvement haven't seen as much improvement has really been around.

And our public authority area, which is really schools a lot of schools have not been in operation and things like that I.

I think we all would agree we need to educate our children and so those schools will come back from I think thats positive momentum there and then on oil field on that is that's a relatively smaller and smaller piece of our overall margin contribution.

And believe it or not that seems to be improving so we're watching this very very closely we look at this monthly.

Actually more than that but.

You know, we forecasted out that we think the total would be only down 1.6% by year end and we would expect continued improvement in 2021, and we will update all that in February what.

What those growth projections are for us.

I will point out this is.

This is.

Really something that I think is going to be unique for us because we do see the momentum building in our service territories remember pre pandemic, we were actually talking about load growth greater than 1% in so we're excited to get back there and.

So we're watching that very close we'll update all this in February but I think that is a is a.

Good catalyst for us for next year.

And then that's great color and one kind of follow up to that in a similar kind of line.

Talk about kind of the offsets to own and that you have this here around 10 cents I'm, just curious to kind of how you're thinking about the kind of recurring thing of sustainable cost levers coming out of 2020, and the 21 kind of how should we think about that yes, great. Great question. I. Appreciate you asking that question. So you know Steve talk.

About $20 million of reductions and thats going to flow through that's going to carry through through to 21.

Obviously in addition to that we went through the year recognizing the pandemic.

We deferred some things didn't make a lot of sense from a health standpoint to have a lot of people and working on a plant outage or things like that so we've deferred that I'm as we've gone through the year. We've actually brought some of that back end to 2021, I mean 2020 so.

Two points I'd make to you is.

Yes, we have some deferrals it will pick up into 21 that we didn't do in 20, but the 20 million that.

We have addressed in our business because of the changes in load that's going to carry forward into 21.

Perfect. Thanks, Thanks for the time.

Hi, Thanks have a great day constituting.

Thank you we have the next question comes from the line of agile Lizzie from Hite hedge. Your line is now open you may ask your question.

Gentlemen, how are you.

Hi, Andrew how are you doing today and do you as family good everybody gets show and its importance good Charlotte and very good.

Good.

First Todd.

It's been a good run and you've been in good stead. So I really appreciate that number one.

And Steve has been a great CFO, we don't know each other as long, but I'm sorry to interrupt you there job but.

You guys, both have done a great job and.

I'm really sorry, you broke up actually any calls.

[laughter].

[laughter] so.

[laughter] anyway does that add that to the questions.

Just I know you're not answering anything on enable but.

But just can you just talk about because that you have kind of made public is just the alignment with centerpoint.

You know in your words, what what does that really mean.

Yeah I.

Yes, I think what I'm going to just say is I really don't want to comment about that my focus is because that.

That that gets.

Taken out of context and creates more speculation and rumor. So Amy I would just defer that to say no comment and just reiterate.

My focus and our focus has consistently we've been you know resolute about the idea that we look at enable in terms of how do we maximize value for the oji shareholder I'm not focused on anybody else, but the LG shareholder so.

But I'm not going to comment on.

Anybody else okay.

Okay, and then kind of the only be on the shareholder part.

I guess you know we've had discussions in the past how you know in the past you created shareholder value. When you get the addition enable deal can you maybe just talk about that.

As a shareholder or hotel.

Potential shareholder whats, how should we think about.

With that context.

And beyond that.

Yes.

Can you can you help me out a little bit here I'm not sure I'm. Following it will get will basically you know you I think you've talked about in the past how you've always been very focused on the shareholder and and that how when you did the initial enable.

Transaction that created a lot of shareholder value.

I think in the past.

Dollar amounts of that how much value created so as you as you kind of contemplate.

Yes.

Possible changes, whether its ownership or or strategy or whatever it may be at.

As a shareholder how should we think about how you you will think affordable.

When it comes to do something whether kind of the pluses minuses.

Thinking about.

As you contemplate.

Got it.

I'm I'm.

I'm not.

Yes.

Okay. Okay. That's fine that's fine I'm trying to get pregnant committed generic at best.

And then.

Well, we'll just leave it at that and then the last question is just more on the industries are getting off of enable and looking at like.

A negative carbon type environment going forward well.

Whether it's on the oil side and maybe to a lesser degree of.

The Nat gas side and then.

The the.

The country, whether it's abided administration or Trump administration is clearly going to move towards electricity, which will be a big transformation within in the sector over the next decade can you, maybe just talk about guidance and how.

Oh, Gee management or the board is kind of looking at what the opportunities are over the next decade as you.

The company's becomes more electrified maybe today.

Yes, Andy and.

I appreciate it I understand this question now so I got this one.

No I think you know and we've had this discussion may not I think your your thesis and you're thinking about this is really quite insightful.

The way, we think about it is it goes back to that fundamental point about.

Economic development, because you know.

I think if we can continue to operate our business as with affordability and reliability in mind, we can attract more people to our service territory.

We're able to compound that idea that you have because I agree with you I think theres going to be much more electric electrification.

Whether in home and vehicles and processes things like that and manufacturing.

And then you compound that with a growing service territory.

You get that multiplier effect. So we we think this idea of actual load growth today that is separate and aside from electric electrification is huge and.

And so we believe we are very very well position now as you think about you know any kind of see you too.

Tax or things like that.

We're not waiting as I've mentioned to 2050, we're plowing through that and we've made huge inroads already.

And we've been able to do that without affecting the economic vitality of our communities and so on.

You should expect us to continue to March down that path as well and those are investment opportunities on everything you are talking about our investment opportunities whether its de carbonization, whether it's because of economic development or as you as you profess.

Just more electricity sales.

I think Brian.

Okay. Thank you.

Hi, Amy Great tell me the name of your from again.

H.I.E. edge.

Well, we'll talk though not all the best Amy take care. Thank you talk to.

Thank you next question comes from the line of Charles Fishman from Morningstar. Your line is now open you may ask your question.

Good morning, Oh, I sort of lost.

Well track of your settlement agreement I might.

And I just want to make sure that what is on the agenda today.

Mission is the full five year 809.

$900 million grid enhancement plan I am I correct, yes.

Yes, Steve you want to kind of put.

But the details on that.

Yeah, So what what what we got through on the settlement was not the full Capex plan.

We're kind of capped at a revenue requirement around seven.

$8 million.

First couple of years and then we've got to file a rate case by the end of 2022 and then we can take the the the mechanism back up in <unk> and in a general rate case, I think that was really what was preferred is to try to deal with this.

And then overall.

Review of costs. So we felt like we made great inroads in getting this mechanism in place and we can build from there.

Okay. So do you think that.

Does that give you any room or upward trajectory.

On your most recent rate base guidance for Ogone.

Yes, well, we'll address any any any change to our capex plans in February so.

So at this point our plan is just to continue to execute the plan as laid out that.

That we've already laid out for you.

Okay.

Look forward to that thank you that's all I have thanks.

Thanks Charles.

Thank you. The next question comes from the line of David Peters from Wolfe Research. Your line is now open you may ask your question.

Hey, good morning, guys.

Good morning.

Just just in a scenario, where you say you have a 100% regulated earnings profile when thinking about the balance sheet, what would be the appropriate credit metrics to target.

Just to kind of maintain the ratings you currently have today.

Yeah, probably if you're talking about FFO to debt probably mid teens.

The teams okay.

That's all right. Thank you okay. All right. Thanks have a good day.

Thank you next question comes from the line of Brandon Lee from you. All your line is now open you may ask your question.

Hey, good morning, Sean Good morning, Congrats Steve.

Even Todd on your retirement in the next phase of your life.

First question is.

Of the.

The decrease in outlook, how much of that is attribute to weather and how much or other factors.

Yeah.

Good question and.

So it's almost all weather right I mean, Steve remark that we've had nine cents of weather impact for the year.

You add that to our revised outlook, we'd be at the top end of our guidance.

Were we operated very very well and and I'm not making excuses for the weather.

It happened and it's our job as management to address as much of that is we could we took a lot of that Unfortunately, you know late.

Late August early September is where this hit and you're just not really able to kind of do enough things to overcome that and this was a big one right I mean nine cents for the year seven cents for the quarter.

That's a lot to overcome and so it's all weather again not.

Thats, our job to kind of address and not making any excuses or anything like that but we covered about a third of that weather impact with what we've got.

Hopefully you know just one one other point.

You know July was so so August was worse and then September was really bad, but and Oklahoma October is actually a summer summer rate month, because it usually gets hot here in October two and says he we had an ice storm so hopefully we.

Consolidated all of this.

Bad weather flow entities for months, and we'll have great weather into the future. It's a.

I was looking all around all around our service territory and everyone was reporting record cooling degree days and we were in this in this bubble there where it just didnt get hot and so.

Yes.

I think that bodes well for the future because I do believe all things will even out and we'll get there we'll get there. So thanks, Brian for the question you have another one.

Yeah, just on rate base growth is there an ability to get to maybe a higher rate base growth more.

More in line with the average of like 7%.

Or.

Do you think that states that you operate in will not permit like more aggressive capex plan.

Yes. Good question you know I think what we're focused on is the earnings growth, we're making sure that we earn our allowed returns and we grow earnings and we don't necessarily focus on the rate base growth.

That being said.

You know, we've got a very solid plan and as you've seen over the years. We usually are we will layer in additional opportunities as we go forward. So.

I would I would view our plan is kind of the base case with.

Going through the execution phase with upside.

Great and then I guess, just one last one.

Should you decide to exit enable what do you see as the all possible alternatives.

Alternative.

Sure.

For the proceeds.

Oh.

I think on minimum.

I am going to no comment on that and just say that.

No whatever we would do would be focused on the energy shareholder.

Okay, great. Thanks, a lot Thats all I had.

Thank you.

Okay again, if anyone would like to ask a question you May Press Star then the number one on the telephone keypad.

We don't have any questions from the Q as of the moment discontinue percentish.

Okay. Thank you now.

Thank you all for your interest to know GE energy Corp. and for being with US on the call today, everyone stay safe and.

I look forward to seeing many of you very soon all the best take care Bye bye.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you all participating you may now disconnect.

[music].

[music].

[music].

[music].