Q2 2021 OGE Energy Corp Earnings Call
Yeah.
At this time all participants are in a listen only mode. Later, we will conduct the question and answer session and instructions will follow at that time, if anyone should require assistance during the conference call. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. Jason Bailey Director of Investor Relations. Please go ahead.
Thank you Andrea and good morning, everyone and welcome to O G Energy Corp, second quarter 2021 earnings call I'm, Jason Bailey Director of Investor Relations with me today, I have Sean <unk>, Chairman, President and CEO of O G Energy Corp Bryan.
Bryan Buckler, our CFO has the cold is voice doesn't sound great. So Chuck Walworth, our treasurer and head of financial planning will cover our second quarter financial results for.
Brian will be available for Q&A at the end of our prepared remarks.
I'd like to remind you that this conference is being webcast and you may follow along on our website at O G energy Dot com in.
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 isn't the 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'll now turn the call over to Sean for his opening remarks, Sean.
Jason Good morning, everyone. Thank you for joining us on today's call. It's certainly great to be with you again.
Earlier. This morning, we reported second quarter consolidated earnings of <unk> 56 per share, which encourage utility earnings of 42 per share in earnings associated with our investment in enable of <unk> 16 per share and our holding company loss of <unk> <unk> per share.
While weather was <unk> <unk> below normal for the quarter, we remain within our previously reported guidance range I'm proud to say, we keep moving forward.
So proud of everyone here and we are encouraged by our exceptional utility operations in all of our employees as they focus on energizing line for our customers and our communities Chuck will provide additional details when he discusses our financial results in just a moment.
So as we move ahead I am pleased to note that in June of <unk> received its 19th EI Emergency response Ward since 1999 for our power restoration efforts during the 2020, New year's Eve Snow storm, we've been recognized with this highest the highest national distinction for emergency recovery of 11 times.
For major storms affecting our system and 8 times for assisting others. Additionally.
Additionally for the third consecutive year <unk> has been recognized by S&P global is having the lowest rates in the nation demonstrating the affordability of our service.
System wide growth in customer load is driving $75 million of increased capital investments.
The investments include substation enhancements projects at Tinker Air Force base and upgrades of our 69 kv line to support the load of larger and growing customers.
Construction on the 5 megawatt solar farm in branch, Arkansas, and the 5 megawatt expansion of the chalk combination of GE Solar farm remain on track for completion by the end of the year.
As we seek innovative ways to increase efficiency across the organization yesterday, we announced that <unk> will pilot utilizing artificial intelligence to inspect distribution poles for damage.
Of this technology will allow our teams to respond more efficiently and utilize the consistent approach for repair and replacement.
We will continue to leverage these results and this technology to improve the customer experience.
Our grid enhancement programs in Oklahoma, and Arkansas continued to deliver the work we're undertaking on our substation and distribution circuits in other portions of our growth will have a significant positive impact on the reliability and resiliency of the grid for the benefit of our customers.
On Monday, we submitted our draft integrated resource plan with both of the Oklahoma and Arkansas commissions.
Detailing our resource needs over the next several years.
As you can see on slide 5 our resource needs are driven by expected load growth as well as the retirement of aging less efficient less reliable gas plants that were built more than 50 years ago.
We expect to retire approximately 850 megawatts over the next 5 to 6 years.
Key components of our RFP include a successful energy efficiency and demand side management program combined with replacing retire generation with the combination of solar and hydrogen capable combustion turbines.
We plan to execute this and of 100, the 150 megawatt annual increments beginning with solar over the next 5 to 6 years to really smoothed out the customer impacts when complete our overall carbon intensity will drop by more than 6% and the overall fleet efficiency will improve even more.
This plan is of significant step forward to meet our objectives of fuel diversity and provide our customers with cleaner energy solutions, while maintaining our affordable rates will.
We began the stakeholder engagement process now and we'll submit the final RFP on October 1.
After which we will lay out the timeline for the next steps, including an RFP process.
Our securitization filing in Oklahoma is on track for recovery of approximately 85% of the total cost associated with February as winter Storm Yuri.
A hearing is scheduled for October and an order is expected by the end of the year.
The Arkansas secure securitization statue to somewhat different from Oklahoma, and we continue to work through that process and plan to file later this year with every expectation of a positive regulatory outcome there.
Speaking of Arkansas, we will file formula rate update in October with rates going into effect in April of 2022.
We will also file for a 5 year extension of our formula rate at the same time.
We will file a rate review in Oklahoma towards the end of the year of.
The significant portion of this case will involve the continuation of our grid enhancement work and the recovery mechanism that has already been established the.
The process is working quite well and we want to continue the work to enhance the resiliency and the reliability of the grid for the benefit of our customers and.
And finally, we're working with the Oklahoma Corporation Commission on a 3 year energy efficiency filing for the years 2022 to 2024.
These efficiency programs provide energy savings and peak demand reduction for <unk> customers to better manage their energy use.
We expect to achieve savings of more than 100 megawatts in demand nearly 500000 megawatt hours of energy savings, helping us to efficiently operate our generation fleet as we grow our customer base and maintain affordability. So clearly these are programs worthy of continuing into the future.
Turning to slide 7 recovery of our load continues with the first half of the year now behind US, we expect 2021 weather normalized load to be more than 2% above 2020 levels chunk.
Chuck will give more details around the load in just a moment.
In addition, our strong customer growth of 1.3% reflects the combination of highly affordable rates and our ability to service the commercial expansion in our markets, which leads me to our business and economic development activities.
Last quarter, we discussed the additional 50 megawatts of load we will add by the end of the year due to our slate of business and economic development activities at that time.
I am pleased to say that the pace of these activities has ramped up even further enabling us to increase debt estimate up to 75 megawatts of which 36 megawatts is already connected and we're far from done again. These are larger loads and do not reflect residential or commercial impacts and we will we believe we are.
We'll add to this number in the months ahead.
In addition to load growth of these projects also bring new jobs to our communities through the first half of 2021, the new projects secured by our teams have helped to add more than 4100, new jobs all across our service territory.
1 such project pure foods is completing a 200000 square foot regional fulfillment center in Oklahoma City, adding 10 megawatts of load and 550 jobs.
The affordability of our range is central to our sustainable business model as the cost of electricity is a significant factor the companies consider when deciding where to relocate.
And affordability remains a key competitive advantage that is evident in our business and economic development activity as well as customer growth, which combined have us on track for a sustained load growth of approximately 1% going forward was still many opportunities ahead.
Turning to enable we expect the transaction to close later this year subject to the satisfaction of customary closing conditions, including the HSR clearance our intention to prudently exit our midstream investment remains the same and we'll certainly provide information upon closing.
Before I hand, the call over to Chuck I do want to take a moment to touch on 3 key points first is debt we continue to execute on our plan.
The weather was below normal we remain within our previously reported guidance range and we're going to keep moving forward.
Secondly, the strength of our economies across our service territory is strong.
The offset by higher depreciation on the growing asset base.
These core operations performed very well during the second quarter.
Our natural gas midstream operation results were 16 cents per share in the second quarter compared to 10 and.
In 2020 the.
The increase of net income was primarily of result of higher commodity prices improve gathering and processing volumes and the decrease in income tax expense driven by the Oklahoma state corporate tax rate reductions impact on deferred taxes.
Turning to our economic update on slide 10, as Sean mentioned, we are seeing outstanding employment figures in our service territory.
Once again, we are also pleased to see customer growth coming in strong at 1.3% year over year.
Furthermore, our commercial and industrial customer classes for showing real momentum.
With year over year load growth of approximately 12% and 9% in the second quarter more than compensating for the lower residential volumes were experiencing as employees begin to return to the workplace.
Overall, we saw of 5.7 total load increase during the quarter generally in line with our expectations.
For the full year, we still expect total whether normal load results to be more than 2% above 2020 levels.
Let's move now the slide 11, where I would like to update you on our 2021 full year EPS forecast.
As discussed during our Q1 call we began the year with the midpoint EPS target of $1.81 per share, but immediately faced of net headwind from the February weather event of 7 per share.
As I'll speak to the moment in June we were a net receiver of cash from the second round of Spp's settlements, reducing the earnings per share impact of the guaranteed flat Bill program by 1 per share.
Thus as of June 30th the net impact earnings from the February of weather event is 6 cents per share.
Second quarter was on plan with the exception of an additional headwind of mild early summer weather when you exclude the weather impact associated with the winter storm unfavourable weather has been approximately a 5 cent last year to day.
During the first and second quarters of 21, <unk> employees of worked hard to deliver for customers and shareholders.
The date, we have identified and activated 7 to 9 of mitigation initiatives, including continued O&M agility the.
The company's outstanding O&M reduction efforts and 20, and 21 will help moderate future rate increases for our customers and our upcoming right proceedings in Oklahoma and Arkansas.
Based on our progress to date, we remain within our EPS guidance range of $1.76.2.86 per share for full year 2021.
Looking more long term the very.
Very solid starts 21 for our core operations, coupled with the capital investments, we're making for our customers and communities physician, the our company well for sustained earnings growth into 2022 and beyond.
Our business fundamentals are strong and we continue to have great confidence in our ability to grow Oh, Jeanie and a 5% long term EPS growth rate through 2025.
On slide 12, I'd like to update you on the securitization process.
Following the additional SPP resettlement that took place in June the overall impact of fuel and purchase power costs incurred have been reduced by approximately $100 million.
As of June 30th fuel and purchase power costs of approximately $850 million were reported on the balance sheet.
And the Oklahoma $755 million has now been deferred to of regulatory asset with the initial carrying costs based on the effective cost of debt financing.
And the Arkansas, the updated fuel and purchase power costs differed are approximately $92 million for <unk>.
Call in Arkansas, we have an order of that allows us to recover fuel and purchase power costs associated with the winter storm over a 10 year period, while we pursue securitization and filings to be made later in the year.
In Oklahoma, We filed testimony in June which supports our request to recover and securitise the costs associated with the extreme February weather event.
The OCC issued the procedural schedule with the hearing the begin on October 11th and the Commission order expected by the end of the year.
Based on the timeline in the legislation, we would expect to receive proceeds from the securitization by mid year 2022.
Before we open the line for questions I'd like to provide a quick update on our financing plan as shown on slide 13.
As we noted previously we initially secured a 1 billion dollar credit.
Commitment agreement that provided short term for net funding for our incurred fuel and purchase power costs.
And may the term loan was refinanced by issuing $1 billion of senior notes to serve as a bridge until securitization takes place.
These 2 year notes carry an average rate of 63 basis points and are callable at par after 6 months, providing flexibility for early repayment, depending on the timing of the securitization transactions.
As we discussed on our last call our credit metrics are expected to we can temporarily due to the fuel and purchase powder cost incurred we believe our metrics will return to our targeted 18% to 20% level once securitization is complete.
Speaking of more broad terms, our balance sheet remains 1 of the strongest in the industry, providing the foundation for the company. The continue to make important investments on behalf of our customers and communities.
Finally, we remain confident in our ability to drive long term, Oh, Jeanie EPS growth of 5% based off the midpoint of 2021 guidance of of $1.81 per share, which when coupled with the stable and growing dividend offers investors and attractive total return.
Non proposition.
That concludes.
Clues are prepared remarks will now open the line for your questions.
The pharmacy, you would like to ask a question. Please first time then the number 1 on your telephone keypad once again for asking questions. Please pass dog on the number 1 you have.
First question comes from the line of Sharp arena of good partners.
Hi, Good morning team. This is actually Constantine here for higher congrats on a on a good quarter.
Hey, good morning, Constantine and I have to tell you that was the best pronunciation of charged name that was outstanding operator, [laughter] Telsar sales chart.
Andrew got it just right. It was just part of I certainly well.
Can we start off of of the IRL filing and how are you thinking about the increment of oral kind of of Iowa, Capex, that's sort of have that might be rolling into the current plan of those are there any thoughts on the timing kind of gradual of our it's a step up.
And it has been some role in in 21, and just kind of thinking about the overall trajectory of that kind of setting the new.
The recurring level.
Yeah, I think I think.
Directionally.
The answer is yes, you're going to see a step up and.
The move forward.
And my remarks, I mentioned, we're going to probably begin layering in 100.150 megawatts, primarily with solar initially each.
Each year.
Layering net and kind of growing into the ultimate retirement.
We're trying to spaced out these retirement such that none of them of current any single year and really focused on managing the impact of customers, but that would be if you look at 850 megawatts in the 100.150 year.
Over 5 or 6 years, you kind of kind of fill that gap there but.
The point I wanted to make their is you should not expect.
850 megawatts in any single year, but more of of smoothing and gradual piece that would just be layered in each year.
The head.
Yes, how does that make sense on the.
Kind of following up on the kind of the credit of metrics thresholds I'm kind of the post the naval investment capacity.
How are you thinking about the capital allocation of there.
Then in relation to the Capex plan.
Whether it's a lot of a more gradual or on the a bit of of more of a step up as kind of the exit or the credit rating start getting all of them are loosening are you thinking about kind of just the organic reinvestment or.
Any kind of return of capital dividend policy of rewards et cetera.
Yeah. So.
I'll I'll, let Brian take a take a swig and get his voice ready but.
[laughter].
We look at <unk>.
Earning the growth and dividend policy is.
Both part of our total shareholder proposition.
The way the way we are thinking about your reference to.
The action of the midstream business and proceeds there we've said repeatedly our first preference as to.
Reinvest in our business and grow and grow our company and so thats. Prior first preference, we're going to we're committed to growing the dividend as well, but that's probably the primary focus there and Brian.
Or you want to add anything to that.
Yeah, absolutely and good morning Constantine.
You mentioned that the exit from enable and that's important because it certainly improves our business mix as the company will will be of pure play electric utility.
That will help our credit metrics.
Have the the best the most we'll call it excellent business mix.
As you are aware of that is going to allow us to have even more headroom under a credit metrics. So you put that aside and what we focus on that utility is outstanding customer service and as you see here in 2021 for Ya.
We've increased our capital plan to deliver on.
The current investment's needed to support customer growth and that's the trend I think you should expect going into the out years, as well and and Sean's discuss our capital investment needs coming out of the day or a P. So you look at those in combination and it's disgusting of set itself up really well with the strong balance sheet.
Constructive of regulatory.
Regimes in in the capital of the plan that really works for our customers. So it's it's an exciting time and it really does that sales nicely with our except for the midstream.
Okay I guess the.
Growing into the investment capacity that you would have from from the expand the credit Patrick's of of gradual kind of in line with the Capex plan.
I think that's fair.
Excellent thanks for.
Jump back in the queue. Thanks for taking the questions I have great day of Constantine.
And once again the ask a question. Please press Star then the number 1 on your telephone keypad. Your next question comes from the line of randomly with Lindsay Huh.
Hey, Sean Hey, Brian.
A brand new Andrea Thanks for.
I think that was a pretty good pronunciation of my name too.
We're just we're on the road.
Dangerous the Andrew is doing great [laughter].
Last name like mine I notice these things so [laughter].
Well good morning, Brandon.
Good morning, I just had a couple.
A couple of questions, what's the remaining book value on all of the coal plants.
And the.
You accelerate the.
Do you have plans to accelerate the retirement and how do you plan to get recovery.
Yeah, Yeah. So good question, so our our coal plants have.
A pretty sizeable.
Useful life in regulatory terms, but the way we look at this we look at we're looking at all of our assets all the time, but the principal driver of the RFP is really the next 5 year action plan.
And.
So it's really focused on these prompt years and.
We're always looking at an economic conditions change but.
We've made no decisions about future generation all of those will be.
On the current.
Plans will be retired web for 2050, but.
You always look at economic conditions, and operating performance and things like that but we're we're focused on right now are the the next 5 years as it relates to the 3 units and Horseshoe Lake and the unit to Tinker Air Force base.
Okay and then.
So how much call of you have post 2027 after.
Take care of and Horseshoe are retired.
We will still have the 3 units.
We'll still have the 3 units.
Okay.
Great. Thanks.
Alright, Thanks, Brent have a great day.
You too.
And once again to ask a question. Please that's fine then the number 1.
And at this time there are no audio questions I'd like to turn it back over to Mr. Trotsky for any closing remarks.
Hey, Thank you Andrea and thank you all for your interest in Oji Energy Corp. I appreciate you all being with us today.
All of you have a great day and pleased take care of your sales and those around you and look forward to seeing you all very very soon all of the best.
Thank you for your participation. This concludes today's call you may now disconnect.
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