Q2 2023 OGE Energy Corp Earnings Call

August 9, 2023

One.

Good day and welcome to the Q2 2023 O G Energy Corp Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then.

We're an automated message advising your hand is right to withdraw your question Press Star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. Jason Bailey director of Investor Relations. Please.

Please go ahead Sir.

Thank you Sherry and good morning, everyone and welcome to O G Energy Corp, second quarter 2023 earnings call with me today, I have Sean <unk>, 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 Brian a financial result.

And finally as always we will answer your questions.

I'd like to remind you that this conference is being webcast and you may follow along at <unk> Dot Com. In addition, the conference call and accompanying slides will be archived following the call on that same website.

Before we begin the presentation I'd like to direct your attention to the Safe Harbor statement regarding forward looking statements.

This is an SEC requirement for financial statements and simply states that we cannot guarantee forward looking financial results, but this is our best estimate today.

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

Jason Good morning, everyone and thank you for joining us on today's call. It's certainly great to be with all of you.

Earlier. This morning, we reported second quarter consolidated earnings of 44 per share, including 46 cents from the electric company and a <unk> <unk> loss from the holding company.

Again, we've never been in a better position to meet our customers' needs and grow our company into the future. We are on target for 2023, and I am very bullish on what the future holds for G&A since.

Since 2015, we've delivered on our commitments to grow the utility we've increased the utility EPS by 51% and we have more than replaced the earnings contribution from the midstream segment over that period.

We continue to grow earnings as we execute on our long term plan that offers a long runway of diverse investment opportunities to help us reach our northstar delivering reliable affordable and safe electricity to the nearly 900000 customers each and every day.

Overall, the second quarter was very productive and included the following.

<unk> filing for our new generation approval with the Oklahoma Corporation Commission, we requested approval of two new combustion turbine units at our Horseshoe Lake power plant.

These units would replace two of the oldest units in our fleet, having served our customers for more than 60 years we've.

We've also filed in Arkansas for approval to begin construction on these two units.

These units are a great first step in meeting the future generation capacity needs of our company.

We have now submitted for IAA applications to the department of energy and believe our proposed projects are very strong benefiting our customers and communities alike.

We should receive word on these applications later this year and we will continue to pursue additional opportunities to the IHA in IRI.

This quarter, we experienced a number of significant weather events from the April 20th tornadoes that devastated shiny, Oklahoma to the string of weekly and damaging wind and Thunder storms that began on father's day through it all our team responded quickly and safely to restore service.

As you know, we get more than our fair share of severe weather.

Let me share. An example that illustrates what that really looks like the national weather service categorized wins.

During one third of the month of July in our service territory as meeting or exceeding severe storm levels and yet.

98% of our customers never experienced an outage and those who did quickly had service restored our reliability investments are providing significant benefits to our customers and I am so very proud of our team's response.

And switching gears most recently as high temperatures arrived across the nation and in our service area with many days above 100 degrees. Our generation fleet has performed well supply and O Genie customers reflector city.

Beyond generation, the grid is delivering electricity to our customers and theres not strained as you hear occurring in other parts of the country.

We put reliability for our customers first always grounded in affordability, knowing that our grid and generation investments must make financial sense for our customers.

Nothing illustrates the strength of our company better than our safety journey.

Eight years ago from a safety perspective, we were just average but since that time <unk> Osha injury rate has improved by 38% significantly outpacing the SCE and we've experienced an even more dramatic improvement when you look at dark.

With an overall, 49% improvement and we will continue to ensure safety is at the center of every job every storm day in and day out.

Turning to future growth our load forecast for 2023 continues to outpace 2022, and we expect growth above 4% for the year.

Our long term load forecast remained strong as our service area continues to grow.

From increased electrification to wide ranging business expansion, our business and economic development efforts continue to pay dividends for our communities.

Through the first half of 'twenty, three our economic development and business partnerships continued to secure new projects in our service area that will add thousands of new jobs in Oklahoma, and Arkansas and the coming years.

The growth we are experiencing is driven by a diverse group of industries from tribal development non crypto Datacenters manufacturing health care and defense and within our existing customer base. We are seeing increased electrification of tribal enterprises oilfield manufacturing and service sectors, all contributing to our positive low <unk>.

Cast as well.

The affordability of our rates is central to our sustainable business model as the cost of electricity is a significant factor that companies consider when deciding expansion or relocation.

We continue to ground our plans for the future with a focus on affordability for our customers and on the topic of affordability. Our unrecovered feel balance was a headwind going into this year and I am pleased to share that we've made significant progress on that front, which will be a great benefit to our customers in the future.

Another catalyst for affordability has been continued expansion of technology and use of AI in our business to drive efficiency in operations and customer engagement, we successfully deployed several AI and machine learning technologies in both the corporate and operational environments and are building the proper governance mechanisms to mitigate.

Any risks associated with emerging and new technologies.

As you can see we've got a lot of great things going on in the company and as I look forward to the balance of the year you can expect us to update you on our Iga applications file our Arkansas Formula rate plan file a rate review in Oklahoma at the end of the year and certainly provide you an update on our Horseshoe Lake generation approval.

Process.

And then early next year, we'll submit an IRB in both Oklahoma and Arkansas and then we will consolidate all of this on our February call.

So as you can see with all of these opportunities the high class opportunity before us is to allocate capital in a manner that continues to fuel this economic engine and logo.

And as we continue our strong operational performance, we reaffirm our earnings guidance for the year.

No we're accomplishing what we set out to do and importantly, we're accomplishing what we said we're going to do and we have great momentum for the remainder of year, but more importantly, we have great momentum for the years to come. Thank you and I'll turn the call over to Bryan Bryan. Thank.

Thank you Sean Thank you, Jason and good morning, everyone, let's start on slide eight and discuss second quarter 2023 results on a consolidated basis second quarter net income was $88 million or <unk> 44 per diluted share compared to $73 million or <unk> 36 per share in the same period 2022.

Earnings for the second quarter of last year included a loss of <unk> <unk> per share from natural gas midstream operations, which we fully exited in 2022 through to sell of our energy transfer units.

<unk> core utility operations performed well during the quarter. The electric company achieved net income of $92 million or <unk> 46 per diluted share in the second quarter compared to $101 million or <unk> 50 per share in the same period 2022 weather negatively impacted second quarter year over year results by approximately <unk> <unk> per share primarily.

Due to fewer cooling degree days.

As expected current quarter results also reflect increased depreciation and interest expense related to our capital investments made over the past year as well as higher O&M, mostly reflecting the timing of operational activities.

Our results benefited from continued strong retail load growth as well as rate adjustments related to recovery of our capital investments in Oklahoma and Arkansas.

Year to date results through June at the Electric company was <unk> 66 per diluted share and continue to track on plan for the full year.

Other operations, including our holding company reported a loss of $4 million or <unk> <unk> per diluted share in the second quarter compared to a loss of 9 million or <unk> <unk> per share in the same period 2020 to.

Current year results have come in within our forecast while the prior year results included a tax expense adjustment related to the midstream business that we exited in 2022.

Turning to electricity usage factors on slide nine Oh, G&A continues to experience exceptional growth in weather normalized total load coming in at three 5% compared to the second quarter of 2022, setting up 2023 to be the third consecutive year of load growth well in excess of 2%.

Residential load has been solid despite seeing the expected effects of workers returning to offices and the commercial sector has once again delivered remarkable growth with a 16, 5% year over year increase these.

These positive trends showcase the strength of our two largest customer groups and the success of our business and economic development efforts.

All told we are on pace to deliver total load growth in 2023 in excess of 4%.

Robust slowed growth in the thriving economic landscape demonstrate demonstrate the strength and resiliency of the communities, we serve in Oklahoma and Arkansas.

These factors provide us confidence in the future success of our sustainable business model, which is centered around our customers.

And includes investing in infrastructure to ensure a strong reliable grid for the long term economic vibrancy of the states we serve.

Now, let's move to slide 10 for an update on our financing plan as I discussed in our first quarter results call. We have completed our debt issuance activity for the year, our balance sheet continues to be one of the best in the industry with no need to issue equity for our current capital forecast and our projected <unk> to debt metric of 17, 5% to 18% throughout our five year forecast.

Past period.

Given 2023 is in great shape, we have turned our attention to 2020 for 2025 and beyond assessing a wide range of reliability investments.

Opportunities and best capital allocation decisions for our customers. It is an exciting time to be at or G&A, and the load and investment growth opportunities of this company are truly remarkable placing us on a path to support continued economic growth, while delivering on our earnings commitments to shareholders for years to come.

Before we move to our final slide I would like to share an important update on a few under recovery balance, which as Sean mentioned has improved significantly since the end of last year.

Our total fuel under recovery balance is $198 million as of June 30, which is lower by $317 million since the beginning of the year. We are on pace to fully recover last year's fuel costs in the coming months and assuming commodity prices stay near current levels, our customers should experience a meaningful reduction in their electricity bills with new <unk>.

Fuel factors are implemented.

Let's briefly move to slide 11, given our solid start in the first half of the year and expectations of continued sound execution for the remainder of the year, we are reaffirming our guidance issued in February .

As a reminder, approximately 65% to 70% of electric company earnings are typically generated in the second half of the year and accordingly, we are right on plan.

We are proud of our track record and our company and its great employees look forward to delivering for our customers communities and shareholders for years to come.

With that we will open the line for your questions.

Thank you and as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.

To withdraw your question Press Star one again due to time restraints, we ask that you. Please limit yourself to one question and one follow up question. You May then return to the queue. Please standby, while we compile the Q&A roster.

And our first question will come from the line of Shah <unk> with Guggenheim Partners. Your line is open.

Hi, Good morning team is actually Comping pain here for sure and thanks for taking the question.

Good morning constant <unk>, we're glad you're here, we suspected wound she said Shar, we were going to have you. So glad you are here.

Thanks.

So your capex year to date are tracking well relevance of the horizontal plan 580 versus $4 50 last year can you comment on some of the drivers there and how does that impact your annual Capex run rate going forward and does it require any adjustments in terms of regulatory mechanisms for timely recovery or anything beyond the rate cases.

Yes, so great question casting it I think the way to think about that is what is fueling our growth is really this load growth and this economic growth that we're seeing and as we've said before it's.

Difficult, sometimes to really forecast exactly when some of these new projects are coming into service and when theyre going to come online and so it's not a necessarily a linear linear investment, but I think that speaks to the health and vibrancy of the economy that we're seeing more load growth come through.

And we're making those investments and like we said in Oklahoma, we're going to file at the end of the year.

That case is not going to be a.

A large case, it's going to pick up our investments since the end of the first quarter of 'twenty two so.

That just speaks to our strategy in terms of staying current with our regulatory filings and smoothing that we hear that from our customers we want to make sure.

<unk> to customers or smooth, so I don't see I don't foresee any changes in our regulatory timing or strategy or anything like that either were on plan.

In terms of regulatory activity do you have any specific views on the recent PBR transmission ROE for docket that was opened in Oklahoma.

Yes.

Very supportive of it I think it's.

Is.

It shows great leadership by the Commission, we think it is good policy and we're going to be very involved in that docket and that's one of the things that we've heard from a number of our customers that.

They like the consistency of.

What their bills are going to look like and this would be one way to achieve that so we think it's a positive move in good policy and I am encouraged by the action.

Great.

Last quick one the flagler showing some continued kind of normalized load growth in industrial sales are down a bit and we've seen that some moderation across the U S.

Probably.

What are you seeing in terms of sales mix going forward and especially as we look at load growth kind of rolling into 'twenty four.

Does that roll into the prior five years to seven guidance yes.

Brian do you want to take that one sure sure good morning Constantine.

We're really really proud of the load results that we're seeing year to date.

<unk> largest customer groups residential and commercial are doing.

Doing great and with respect to industrial and.

Public authority and some of those other classes.

The pipeline of our.

Expansion customer expansions and new customer entrance into our service territory.

And speaking with our business development teams that pipeline is as good as it's ever been.

So what does that mean for 2024 and beyond I feel going more and more confident in 2024, youre going to again CSP able to.

To beat 1%.

Historical load growth rate.

So I'm really bullish on 2024, and 2025 and beyond we continue to.

Forecast and plan conservatively with that 1% assumption, but there's clearly some great tailwind when it comes to load growth for us.

One moment for our next question.

That will come from the line of Paul Zimbardo with Bank of America. Your line is open.

Hi, good morning team. Thank you.

Good morning, Paul.

Yes. Good morning, I was hoping you could give a little bit more color and detail on that new disclosure around the EPA potential compliance costs are on good neighbor, the $2 7 billion just.

I know, you said $100 million to $300 million potentially in 12 to 18 months.

After implementation, but if you could.

Breakout how much is that capital.

Can avoid some of that with running the plants differently, just any additional disclosures that would be helpful.

Yes, and so first thing I would say.

Just last week, we were granted a stay from the 10th circuit with respect to Casper. So.

The federal implementation plan is not in effect for us.

But that being said.

That is primarily all capital I mean, obviously there'll be some things that you would look at too.

Change the operations and the dispatch of certain units, but <unk>.

Primarily that's capital.

Okay and is there any sense on potential timing I know, we're kind of caught in the courts right now, but what you'd need to start making some of those investments well, it's not effective for us. So we have the stay from the 10th circuit. So we are not proceeding down that path.

So that will make its way through the courts.

But as part of our.

Overall planning I mean thats.

That's just prudent planning to begin with and we've we've.

Experienced this round of regulations previously and.

We plan accordingly, and we'll make our decisions.

With with that in mind, and not just kasper, but you have.

Greenhouse gas rules that have come out of mats and regional high So you need to look at it in total.

And.

When when we need to comply we will comply.

But nothing is imminent.

Okay understood.

Understood. Thank you.

And then switching gears a little bit I know in the past you gave some details around expected holding company issuances to finance that rate base growth.

<unk> quantified that in EPS terms before just with the latest move in interest rates is there any refresher.

A lot of good guidance assumption to be thinking about for the holding company in the future.

Hey, Paul it's Brian Good morning.

When we look out.

For the remainder of this year in 2024 and beyond Paul.

I do want to bring in the utility we're seeing exceptional growth at utility.

Trending very nicely for 2023.

We will finalize our plan for 2024 and beyond here in the coming months by 2024 is shaping up really well a lot of tailwind at the utility the holding company is just a part of the whole puzzle of how we finance the company.

So no no no change in message at all with respect to the holding company.

If anything I think we're seeing more and more tailwind for our core business at the electric company. So we're really bullish on that and I will provide a comprehensive update on our consolidated EPS growth rate in February .

Thank you and one moment for our next question.

That will come from the line of Anthony <unk> with Mizuho. Your line is open.

Hey, good morning, Shawn Good morning, Brian Good morning, Jason.

Hey, good morning, Anthony.

While the girls doing.

Everyone's healthy, but getting more expensive, but I think thats what happens right.

I understand I understand well good good to hear from you I never had dreams of retiring rich and they're going to make my dreams come true, but if I could just jump on.

One of Paul's last question I think Brian you had said that youre looking to give them more.

We're going to give a consolidated update.

Maybe an EPS growth rate on the fourth quarter call I just wanted to check.

I know youre, making the filings in Oklahoma and <unk>.

Some other filings more towards the end of this year.

That update will come on the fourth quarter call. We have maybe for the completion of that filing to get an update.

Anthony This is Sean I think you should expect that on the February call.

Okay, Great and then if I could just move to the last question I know, we want to keep it tight here you gave some great detail on slide nine on the load growth.

I'm just curious if you could go more into what drove that.

16, or 16, 5% load growth in commercial.

And was it was it like one certain project or I know you've talked about this.

Very deep or long like runway of commercial activity going on in your territory, just what drove that and maybe I'm just trying to think of what happened in 2024, I know year over year, Don maybe I should I expect another 16 next year.

Yes, Hey, Anthony good morning on.

On the commercial load.

As we've talked about in the past a big driver of the increase.

Double digit load growth and commercial is the data mining companies that came online late last year and expanded again early this year. There are Oklahoma based corporation with Oklahoma ownership in Oklahoma management.

And so that's a that's a really strong data mining customer for us.

But that's just part of the puzzle Theres a lot of other industries within the commercial sector that are supporting that growth as well.

A lot of food and beverage manufacturers in facilities in this part of the country when youre in a central Ust and need to be able to get to to both coasts and we're seeing great expansion on that front.

Manufacturing is.

Really starting to take off in Arkansas in particular in Evs.

EV manufacturers as well as EV charging stations across.

<unk> Bill dealerships and delivery companies have really helped the commercial load as well so its wide ranging but the single biggest.

Entity by far was the data mining company that I mentioned.

Great and Thats, a trend you're expecting I don't want to run ahead of your 'twenty guidance, but.

As you said youre expecting.

Strong year over year going into 'twenty for especially in the commercial sector.

Yes in 2024, we still feel good about continued growth across residential we believe industrial in.

And public authority.

Would it be positive again in 2024, and then you look at commercial I do expect it to be well ahead of the 1% growth rate that we would typically see in past years in commercial.

Little too early to say, if we're talking double digits again, we need more time to see how the economy plays out and how the business projects of these customers come to fruition.

Thank you and one moment for our next question.

And that will come from the line of Paul Fremont with Ladenburg Thalmann. Your line is open.

Thank you very much.

I wanted to follow up on Paul's embargo question.

Any.

Light you can shed on potential <unk>.

Cash flow offsetting potential need for borrowing at the holding company obviously the.

Fuel cost recovery looks like that would be beneficial to cash flow.

Else that we should be thinking about in terms of.

In terms of cash generation.

Hey, Paul it's Brian Good morning.

I don't know that Theres, any particular items I would point to fall other than what you've already mentioned again I would come back to the utility.

EPS growth rate is is going quite well the last several years with the load growth, we're seeing in our state and just general economic expansion.

We are really bullish on the utility both here in 2023 and beyond certainly have the ability to.

To earn deeply into that 5% to 7% growth rate at the utility so.

Thats beneficial all the way across as you might imagine, including our our corporate structure.

And should we think of incremental borrowing at the holding company is as most likely being linked to.

Got.

Investment opportunities.

Especially incremental to what's in your current Capex budget.

Paul I would just say our messaging on that Hasnt changed at all we do have some other investments at our holding company that are unrelated to.

The electric company.

Obviously, the vast majority of our business is <unk> the electric utility and so those cash flows when you think about our dividend at the holding company all of that messaging is unchanged.

Great.

I appreciate it thank you very much.

Thank you Paul Thanks, Paul.

Thank you one moment for our next question.

And that will come from the line of Travis Miller with Morningstar. Your line is open.

Thank you and good morning, everyone.

Hey, good morning Travis.

Going back to that storm discussion at the beginning apologies if I missed this but what was the impact from storms in the quarter or year to date, either one that you have.

Brian did we quantify the storm or yeah, Hey, Travis good morning.

Just operationally I will go back to what Sean mentioned earlier, we certainly had an unprecedented level of wind storms that came through our service territory in mid to late June and then again through the middle of July .

Many days, a 60 mile an hour to 80 miles an hour winds.

<unk>.

While we did have some outages overall, our system performed very well and our response from our our teammates across the company was extraordinary so you didn't notice any.

Any.

Issuances of us talking about multiple days of outages. So we're really proud of our operational performance.

R R.

As far as cost incurred on storms you can take a look at our regulatory asset footnote and that will give you the detail you need.

Okay great.

And then kind of more higher level on just the extreme hot weather sitting a lot in that region are there operational issues that you have to deal with when you have some of the extreme hot weather that might offset some of the benefit that you would get from that extra weather related.

Load.

Sure obviously.

I'm <unk>.

Travis I made some remarks with regard to safety, obviously in extreme heat like that you need to take precautions with the workforce in terms of heat stress things like that obviously higher temperatures puts more stress on the system, but what I would tell you and what we were trying to convey in my remarks was we build and design.

System for those days and we were not strained yes, we have to take additional precautions, we have to manage things a little bit different when you do have prolonged periods of extreme heat, but that's our business and we've managed it and designed it that way and is performing beautifully.

Okay, great. Thanks, so much.

Thanks Travis.

Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Sean <unk> for any closing remarks.

Thank you Shari and I want to thank all of you for your interest in <unk> and for being on the call today have a great safe day.

Thank you all for participating. This concludes today's program you may now disconnect.

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Q2 2023 OGE Energy Corp Earnings Call

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