Q4 2020 OGE Energy Corp Earnings Call
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What do you think insulin and takeaway standby and welcome to the fourth quarter, 'twenty and 'twenty earnings and business update conference call. At this time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time and if anyone should require assistance during the conference. Please press <unk>.
Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the call Jason Bailey Director Investor Relations. Please go ahead Sir.
Yeah. Thank you operator, and good morning, everyone and welcome to O G Energy Corp, fourth quarter 2020 earnings call I'm, Jason Bailey director of Investor Relations and with me today I have Sean Trotsky, Chairman, President and CEO of O G Energy Corp, and Bryan Buckler CFO of <unk> Energy Corp, and <unk>.
Turning to the business over the course of a couple of weeks the region, including in our service territory experienced and unprecedented prolonged cold spell that disrupted natural gas supplies, resulting in extreme natural gas prices.
Cold spell also resulted in a record winter peak demand for electricity.
While our service territory experienced record snowfall and record temperatures are customers experienced minimal disruptions due to the efforts of our employees. Our generation fleet performed admirably over the course of the week and so that our customers heating the call to conserve natural gas and electricity so they're more serious shortages could be avoided.
And every day, we add generation online at each of our power plants.
Our fuel and purchase power costs for this event alone where more than all of our fuel and purchase power costs and 2020.
We anticipate the regulatory asset that will be created as a result of this storm to be in the range of approximately $800 million to $1 billion. We have secured a $1 billion of additional bank financing or liquidity to cover these costs.
We certainly understand the pressure that this event will have on our customers and we will work with our commissions to help mitigate the impact to our customers bills to that and yesterday, we filed an application at the Oklahoma Corporation Commission.
Investment return perspective enables been very successful far shareholders. Since enables formed and 2013, we've turned a modest investment and do over $1 billion after tax benefit to shareholders, which is equivalent to a two and half times after tax return.
When the merger closes we will on approximately 3% of the much more liquid limited partnership units of energy transfer.
Energy transfer will acquire the general partner interest from US and 10 point for $10 million and aggregate cash consideration and also centerpoint will pay us $30 million, we expect the transaction and closed later this year the strength of our balance sheet allows us to be thoughtful on how and when we exit taken and consideration taxes distributions and mark.
Considerations, but let me be clear, we will exit are midstream investment and we will do sell and responsible way that does not create overhang to the energy transfer units and <unk>.
How's us to achieve our goal of lowered credit downgrade thresholds from the rating agencies.
Turning to our financial results earlier. This morning, we reported 2020 ongoing earnings of $2.08 per share. We also reported earnings of $1.70 at the high end of our revised guidance and ongoing earnings from OJ Holdings, a 37 per share.
Of 2021 utility guidance range is $1 76 to $1.86 per share mid.
Mid point of this guidance as $1 81 per share and is based off 2.4% normalized low growth from 2020 and is equivalent to a 5% EPS growth rate.
Additionally, we are announcing this morning that are long term earnings growth rate is 5% based off the midpoint of 2021 guidance and $1.81.
So let me take a moment to discuss and items from the February weather event that does impact 2021.
Obviously due to the extreme temperatures kilowatt hour sales were higher however, offsetting this is one of our customer programs. The guarantee flat Bill program, which is a voluntary annual program and is largely subscribed by senior citizens and lower income class holes and provide some certainty around their monthly bill we will incur the income.
Mental fuel expense under this program.
We are certainly thankful that these customers had the benefit of the program. During this on President and then we've been proactive and are working with the Commission's and Oklahoma and Arkansas to mitigate the impact of increased fuel costs to customer bills, Brian will go into more details. When he discusses are 2020 results and 2021 guidance.
Turning to our economy, we continued our impressive customer growth rate and our customer base grew by 1.1%.
Go home and Arkansas economic recovery remains strong and December the USPS of Labor and statistics reported that force Smith, Arkansas and unemployment rate of four 4%, Oklahoma City and the seventh lowest unemployment rate for large metropolitan areas at four 8% and while the state of Oklahoma's unemployment rate came in.
Five three per cent, showing the strength and resilience the economy's across our service territory.
Our economic development efforts are certainly paying off and 2020.
Had 25 projects 8000, additional jobs and our service territory and $725 million of capital investment by businesses and our service territory.
Turning to our accomplishments and 2020 Covid was certainly non anything the world was expecting but we adjusted our way of life and quickly setup processes to support our customers and communities and protect our employees.
The weather played a crucial role last year, and how we energized life of our customers from and unusually mild summer weather to the most destructive ice storm and the company history and late October to New Yours Eve snowstorm to close out the year effects of whether this year were unmistakable, we did not Mister B. However, as our teams continue to ask.
Sales through the challenges recording the number.
Significant accomplishments.
The company recorded it's second safest year history, and 2020, making each of the last five years or safest ever we kicked off our great enhancement projects, and Oklahoma, and including securing and mechanism for recovery of our investments, which will provide and more resilient from reliable system for our customers.
With these great enhancements, we expect to provide our Oklahoma customers, who sang positive results that we've seen and Arkansas, including pure outages much faster restoration times and Arkansas, We filed our third formula right play and last year, we successfully negotiated a constructive settlement in that case that allowed for the maxima <unk>.
Kris permitted and are waiting and final order by the commission and these new rates are expected and in April.
Looking ahead to 21, we have several exciting items and and work, including the continuation of our Oklahoma and Arkansas, Great enhancement projects will file and integrated resource plan and both Oklahoma and Arkansas. Later this year, we will file our fourth Formula right plan, and Arkansas, and we'll plan our filing for our next Oklahoma General rate review.
Which has to be filed no later than the first quarter of 22.
We are constructing our first solar farm and Arkansas and expect it to be operational later this summer.
We have a lot and I want to make sure. We you understand that we have a lot of really exciting projects that we've been working on for some time working in and around our communities and we'll certainly announced these as they are finalized over the next couple of months.
Some proud of what we've accomplished and last five years and what lies ahead for our company and.
We've invested three 3 billion and our system our.
O&M cost per customers lower now than it was at the end of 2015. If you look at our 21 guidance from and Am approximately 29 million below our original guidance and 2020 at real long term structural savings that will benefit our customers. We return one 4 billion of cash per share shareholders and form of dividends.
And delivered a 5% compound annual growth rate at detailed and.
And on top of that we have some some of if not the lowest rates and the nation and they're lower now than they were and 2000 and we've cut our C. O two emissions by greater than 40% and those are real consistent results delivery to our shareholders. What we said we would deliver year over year, we're more active and advancing are ESG objective.
And initiatives, we're deeply embedded in our communities and our key driver of growth and economic development for the communities. We serve we've always been committed to.
To be responsible stewards, we'll be sure and these stories more regulate going forward.
We have a solid and compelling investment thesis backed by a track record of performance whether you look over the last 510 years, we've delivered compounding and annual growth rates between five and 6% and we expect to keep true to our commitment to deliver on and earnings growth target of 5% by investing and lower risk investments they improve our customers and <unk>.
Appearance, we have on on the strongest balance sheets, and the industry, which protects our dividend and we operating jurisdictions that our experienced and real load and customer growth and have delivered increasingly supportive regulatory outcomes. You are shareholders should be confident and your decision to own and invest and OJ before.
Before I close <unk>.
<unk> celebrated and it's 119th anniversary this month's bill.
By honoring honoring our frontline healthcare heroes are health care workers, who have earned the title hero, especially throughout the last year and we're proud to make $100000 donation this month to support their critical efforts.
And think of no better way to Mark. This occasion, we're proud of our accomplishments and 2020 and poised to continue to deliver those results and 2021.
While COVID-19 has impacted all of this and I want all of you to be confident that we're not focused on winning the downturn the winning the recovery. Thank you and now turn the call over to Bryan Bryan.
Right. Thank you, Sean and good morning, everyone.
Starting on slide 10, and before we discuss 2020 results and this year's outlook I'd like to update you on the financial effects from the extraordinary February 2021 weather events, which will likely have a negative impact to our <unk> our to our current year and Orange is.
As Sean mentioned in order to keep life sustaining power on for our customers year on 11 days when temperatures were between 23 and 45 degrees below average the company incurred and the range of 800 million to $1 billion and fuel and purchase power costs and.
We will be able to firm up these estimates once once we received settlement statements from the southwest powerful and and coming weeks from.
From a from a funding standpoint, while we already have a 900 million dollar credit facility and place, we felt and important to obtain and incremental funding source and this week. We closed on a 1 billion dollar credit commit that agreement that will allow for ample liquidity.
With respect to cost recovery and the company is fueled tracker mechanisms and.
Oklahoma and Arkansas.
And Oklahoma, we are allowed to file for entry year adjustments Suda cause once fuel and purchase power costs exceed $50 million and under or over collections and a year.
Thus this week is Sean mentioned, we found on application and Oklahoma requesting and entry year fuel adjustment for a portion of the weather events fuel costs.
We expect this revised tariff to kind of effective and rates this spring providing support to our credit metrics.
For the remaining costs are filing and Oklahoma Six commission approval the place the deferred costs and a regulatory asset accruing net are weighted average cost of capital and we will work with the commission to obtain and order as quickly as possible.
Switching gears to 2020 results on <unk> and and you can see that for the full year 2020, we achieved ongoing net income of 416 million or $2 and eight per share as.
As compared to net income of 434 million or $2 and 16 per share and 2019.
On a gap basis, OGA Energy Corp reported a loss of $174 million or 87 per share, reflecting the impairment charge recorded on on our enable midstream investment and the first quarter of 2020.
Oh, Jean is ongoing 2020 results were four cents lower than 2019 as unfavorable late summer weather lowered earnings compared to the prior year by 11.
And mitigate the headwinds of mild weather and the economy, our employees were relentless and pursuing cost reductions and work deferrals, resulting and significant O&M savings compared to 2019 and our original plan.
Results were also favorably affected by a full year of new rates from the Oklahoma right review that was implemented and July of 2019.
We also continued to see steady earnings growth from our Arkansas Formula right plan, which contributed <unk> of earnings and 2020.
On our third quarter call, we revised our 2020 O G&A utility guidance to a narrowed range of $1.60 $821 70 per share.
And due to strong Owen and management and the fourth quarter, we were able to hit the top and a that range are strong finished and 2020 sets us up nicely for 2021 and beyond.
Turning to load on slide 12 on our third quarter call, we and indicated and expectation a full year low declines and one 6% and we finished year at about that level.
Over the last four months of 2020, we continue to see month over month improvements and all customer classes.
The residential class are most profitable remained resilient at levels, we've seen throughout the pandemic.
Importantly, customer growth was one 1% and 2020, providing a solid foundation for load growth and 2021.
On Slide 13, we look ahead to 2021 about expectations and forecast customer load to be two 4% about 2020 levels and about a half a percent about 2019 levels.
Residential load is expected to exceed 2020 levels early and a year.
But it's and forecasted to be below 2021 below 2020 levels for the full year as more residential customers returned to the workplace.
For a commercial industrial and public authority customers, we expect load growth and the second half of 2021 to be strong as vaccinations become commonplace and net economy continues his recovery.
Overall, we believe load will have a positive contribution to 2021 earnings in comparison to 2020 as illustrated on the next line.
As we headed and of February we had great confidence and our ability to deliver $1 81 of earnings per share. It Oh, G&A, which is in line with our previous guidance of a 5% growth annually off of our 2019 baseline of $1 65.
We continue to have confidence and our ability to grow a five per cent long term and expect 2022 EPS to be in line with the 5% growth from the mid point of our 2021 guidance on $1 81.
Our initial dollars and 81 EPS guidance for 2021 assumes normal weather.
Solid growth as I just discussed.
And with earnings contributions from our great enhancement and other recovery mechanisms and Oklahoma.
We also expect to see the steady earnings contribution from revised formula rates and Arkansas.
Lastly, we will build on our O&M cost reduction achievements and 2020.
Now when we finalized our initial 2021 plan and we did not foresee this unprecedented february whether that there.
There are three primary earnings impacts that we are evaluating.
First we expect higher retail volumes will contribute to earnings during the month.
But those will be more than offset by fuel costs associated with the guaranteed flat Bill program approximately 3% of our load is associated with this program, whereby variability and fuel and purchase power costs are knotroot up.
And net effect on margins for the month of February is expected to be and unfavorable <unk> and EPS.
Lastly, we expect to incur approximately three to four cents of incremental financing and costs associated with the aforementioned $1 billion that facility.
We will refine these estimates and to come and weeks, while also exploring ways to mitigate this 10 cents of EPS headwind and.
And will provide and update on 2021 guidance during our first quarter call.
For the midstream business enable has not issued earnings guidance for the year, giving new pending merger. Therefore, we will not be providing consolidated guidance at this time.
Turn into future growth on slide 15, and you will see our updated capital plan through 2025.
The investment needs of our system continue to grow and the October 2020 ice storm highlighted the importance of investing and our grid for not only enhancing technology and communications.
But for the grid resiliency and reliability our communities absolutely count on.
And while our five year capital plan is 15% higher than one we shared with you a year ago, driven by the infrastructure needs of our communities.
We expect to see additional investment opportunities evolve over the planning period.
Are growing customer base, and constructive regulatory framework provide us confidence and our ability to to achieve a 5% ogn EPS growth rate through 2025.
Before I turn the call back over to Sean I would like to provide and update on our financing plan. Our balance sheet continues to be one of the strongest and the industry and we remain confident that there is no equity needed to find our five year investment plan.
Our credit metrics are estimated to be between $18, 5% and 20% over the next three years and we believe we will receive constructive regulatory treatment on the fuel and purchase power cost recently incurred and that the results and credit matic metrics will remain strong.
And finally, we remain committed to maintaining and prudently grow into current dividend, which alongside earnings growth from our utility will drive and attractive risk adjusted total return propositioned for shareholders.
Now, let's open the line up for your questions.
And.
Please and gets in and if you had the question at this time, please press and the star and and and the one key on your Touchtone telephone.
Question has been and Saint will you wish to remove yourself from the queue. Thanks dependency.
First question concerned the line net Julian Gumlands net leg Bank of America on line.
A good morning, guys, it's actually Richie average alien surprise surprise.
Hey, good morning, and ready the surprise surprise I was.
Richie demand Smith has that.
[laughter].
Yeah, and I'll add that and that works I guess.
And.
Yes, yes, a quick line.
And I am karaoke you guys gave a lot of color on.
And and 10-Q.
Treatment on these fuel costs carry it and.
The financing costs can be potentially to prioritize a regulatory asset as well.
And how that kind of slipped.
Your long term EPS.
Growth of five per cent get and the night, you raise capex by 15% and.
Prevent on the largely unchanged there but is that it.
Financing drag from a saw and wise or other black and calculations without recently assuming.
Yeah. So a couple of different pieces in there now and ill.
Take a shot at this so yes, we would expect all of those.
The names cause we just wanted to what we're seeing today. The results from February we wanted to just be upfront and share all those with you and we're going to work with our commissions to recover all of those events as Brian mentioned, what we've proposed is a basically a 10 year amortization program that.
Wood on.
So include a weighted average cost capital so you would pick that up there.
As far as the capital plan.
There.
I'm not sure I understood. Your question about the five year plan.
Could you repeat <unk>, sorry, I was just saying and ray and jet Capex.
Tiny that amount hedging resent.
And it looks like the EPS growth.
Larger and change and at 5%.
I'll just carry on that day.
Financing dragged some that storm and bed and got that are and that and.
Mental regulatory lag at that we should be assuming.
And have you had a offset a great day 12, and I will take the EPS.
Yes, I think there's a certainly there is the timing of regulatory recovery that's in there as well, but I think the other thing.
Richie that don't lose sight of.
We have a higher expectation so Brian talked about the the low growth.
We're only seen we're only expecting 5%.
Increase and low growth from 2019 levels recall, we were well above 1% per.
Free Covid, so we haven't we haven't quite.
Return to that free Covid low growth.
State So that's got something to do with as well does that help.
Yes, that's very helpful.
And then just a question around the midstream.
Enable on how you guys are thinking about the timeline for the exit there and then I guess around the eventual use the price scene, giving you and you do have such a strong balance sheet would it be and for incremental capex opportunity and especially with this upcoming <unk> filing or would you consider other forms of capital allocation hedges share repurchase day Etsy.
Sarah.
Yeah No great question. So first things first we want we want this to close right. So it's.
And we will certainly.
And get cross that bridge first and then and the way we're thinking about it is certainly we want to.
Be very prudent and thoughtful about how we transact here.
We've got the balance sheet to make sure that we really optimize execution and Brian and his team and we're going to be keenly focused on that but the and the thing that's important to US is you know.
And we're having those discussions with the agencies now obviously with the winter storm, that's that's been kind of pushed back to.
Second chair, but we're having that discussion in terms of at what point would we receive a lower credit threshold in terms of SFO today. So that's and discussion that we're going to have and that's going on that we're interested in having a lower lower downgrade threshold, so Brian and his team will pick that.
<unk> with the agencies and so that's going to be a key determinant for.
The timing and the.
The amount that we do.
Does that help Richie and as far as per.
Proceeds.
I believe we're going to be reinvesting on back into our utility business, we're not <unk>.
Constrained or limited in any way in terms of the opportunities, we see and are growing service territory and we will see what we're what we're focused on those making sure that will continue to take costs out of our business to minimize that impact our customers at the same time.
Yeah that that's very helpful. Appreciate it on the car that's that's all I have for today.
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Hi Tech day.
Your next question concerned the line and can keen blade Goldman Sachs. Your line and we will be.
And.
And you. Thank you. My first question is on back to the storm. So just to clarify for this year out of that 10 cents you do have about three to four track from the short term financing night, you too, but the expectation and Ted I guess, starting next year any.
Replacement that with department and financing will be chewed up over that proposed 10 year amortization program through right.
Yes, yes.
Yeah, hey into its bry and we.
We believe the the financing costs for the for the storm ultimately the deferral.
We we have seen our filing.
We've requested a whack so depending on the recovery period of the regulatory asset if it ends up being a multiyear regulatory recovery, we certainly believe a whack or return is appropriate but.
That should cover our financing costs, two and a short term.
Got it and then when we think about that recovery over time from all of this and.
The timeline it.
Needed to I guess balance the potential impact of customer bills, while still allowing you to continue with the.
The Capex plan.
Have you done that initial analysis and do you think that will have the quarter. The regulator. So you will get to continue to invest in the system at the rate that you're proposing.
Yes, and your eyes.
And that's that's a great question and the answer for US is yes.
And.
If you if you look that's why we're proposing this program to kind of minimize the impact of customers and.
And smoothed this and we've got the balance sheet kind of manage that and that's what we're trying to do.
The real the real catalyst to our businesses is economic development and we believe it's driven by our low rates and so we're starting from a position where our rates are already some if not the lowest.
Some of the lotion country and the other thing and and don't lose sight of this we've structurally removed a lot of O&M added a business. So we're already again and make sure that customers get that benefit as well and then I think the.
And the last point I would make is.
And.
From from from our perspective.
This is gone and if.
We're in a load growth and customer growth.
Area.
And so this is going to.
Be less and less of an impact going forward.
Got it.
And may and one more question and apply it may.
And I guess, so let me think about the updates to the long term generation clan, whether it's you guys are just other utilities and the state do you think.
Has there been any initial conversations with regulators on legislators about what the right generation mix day is given what what just transpired and Oklahoma.
Yes, and no I think.
No discussions at this point on on generation fleet, but I'll tell you from my my seat.
A lot of credit goes to our commissions.
It's our responsibility to design and plan and operate maintain that generation fleet. We made a number of <unk> and efforts on our combined cycle planes of three or four years ago and.
And the commission supported.
What we were doing they supported with what we were doing with the conversion of our coal units. They supported what we were doing with the scrubbers it sooner they supported.
And what we did with the new combustion turbines at Mustang and I'll tell you. During this event into that those Mustang units and.
In terms of controlling and managing voltage across the largest loads and around Oakland City, where critical and that's why there were minimal disruptions across our service territory.
And all of our all of our units did very very well through the storm. So from my from my perspective, there haven't been a lot of discussions and what we ought to be doing going forward.
I think this is really a validation.
Of the plane and we've done and the support we received that the commission and.
And and and really the faith and confidence ahead, and us and making the right decisions. It was it was just validated right here.
Now that that definitely makes sense.
That's all I have thank you so much and congrats on on getting care, that's crazy that all.
Hi, Thank you and should take care. Thank you.
Again, ladies and gents and and if you had a question at this time, please strength to start the day number one key on new touchdown and telephone and your next question comes from the line get banned and Lee.
Oh your line team will be.
Hey, Sean Hey, Brian Day, Good morning radio and 12.
And I Hope I hope you are.
Yeah.
Just had a quick question around.
Payout ratio and if I look at your current annual dividend.
And I look at your 2021 utility EPS your payout ratio is around 90%, which is about above the average of 60% to 70% for the industry and is there a payout ratio that you guys are targeting.
Or are you comfortable with that well, yeah, and that's on it and that's on a utility only basis and.
And you look at on and consolidate basis significantly lower obviously with the transaction we've announced are supported with enable.
We are going to.
Is that approaches closing, we are going and transition there and we will be monitoring net but the dividend is absolutely safe you should expect utility earnings too clearly out.
Will outpace did.
No dividend increases going forward, but.
The.
And very good shape year, and we're committed to the dividend.
Great.
Yes, that's all I had thanks.
Alright, Thanks brand take care and have good day.
You too.
Once again, if you would like to ask a question. Please press it.
And.
And the number one key on your Touchtone telephone.
And plugging the percentage fee had new so I get a question at the Sun and May continue.
Okay, well. Thank you all for your interest and O J Energy Corp, and for being on the call today and.
And wish you all well take care of yourselves and take care of those around you.
Alaska.
Please and get some and this concludes today's conference call. Thank you for participating gaming and disconnect.
And and.
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