Q3 2023 OGE Energy Corp Earnings Call

November 2, 2023

Yeah.

Okay.

Good day and thank you for standing by welcome to the O G Energy Corp, third quarter earnings Conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

I'll ask a question during the session you will need to press star one on your telephone you will.

And then here an automated message advising your hand is raised.

To withdraw your question. Please press star one again please.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Jason Bailey Director of Investor Relations. Please go ahead.

Thank you Andrea and good morning, everyone and welcome to <unk> Energy Corp, third quarter 2023 earnings call with me today, I have Sean <unk>, our chairman, President and CEO and Brian Butler, our CFO.

In terms of the call today, we will first hear from Sean followed by an explanation from Brian Our financial results and finally as always we will answer your questions.

I'd like to remind you that this conference call is being webcast and you may follow along at GE 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 to date.

I will now turn the call over to Sean for his opening remarks, Sean. Thank you Jason Good morning, everyone. Thank you for joining US today, it's certainly great to be with you earlier. This morning, we reported third quarter consolidated earnings of $1 20 per share, including electric company earnings of $1 22 per share and a loss at the holding company.

<unk> our solid performance this quarter is due to operational excellence delivered by our our team who work to keep energy flowing through the grid during a hot summer offsetting a new hourly peak on August 21, and without calling for public conservation that was seen in other areas of the country are shared before that our <unk>.

<unk> was designed built and operated for conditions like we saw this summer and I'm proud of our team for always meeting our customers' need for reliable and safe electricity and always keeping affordability top of mind.

Third quarter was highly productive and reflects the work we've undertaken to operate as a premium electric utility company with exceptional execution, a constructive regulatory environment and one of the strongest balance sheets in the industry. We are operating ahead of plan. This year and as a result, we are raising guidance, Brian will share a few more details on that in just a bit.

We have a wide variety of investment opportunities before us and with the recent announcement that <unk> was awarded a federal grant from the department of energy for our adaptable grid project, we look forward to improving the reliability and resiliency for customers living in more than 100 communities.

The total project cost is $102 million and <unk> was one of 34 companies awarded grants under this program and one of only six to receive the maximum grant amount of $50 million. This.

<unk> will deliver reduced outages and outage time for our customers and at half the cost.

We have two additional grant proposals under review with the Department and look forward to hearing back on those before the end of the year.

You may recall last year at this time I shared that our team is collaborating closely with school districts in our service area to apply for federal funds for districts to acquire Electric school buses just last month Xiaomi public schools in Eastern Oklahoma was the first school district to take delivery of five <unk> school buses that were awarded.

To them through the grant program and totaled 28 buses were awarded to eight communities in our service area and we are working closely with the school districts to ensure their success and adding EV buses into their fleet further furthering electrification in our service territory.

Our customer centered efforts continue as we announced a significant reduction in the cost of fuel on our customers' bills just yesterday to the tune of $21 per month for the average residential customer.

That relentless focus on affordability results in some of the lowest electric rates in the country for our customers, which just got even lower and continues to pay off as our service area continues to grow broad business expansion with sectors as diverse as healthcare defense tribal development manufacturing and retail.

And sure healthy economies for the future and job growth across the board.

Our 2023 load forecast delivered robust year over year growth well above our historical growth rate or long term load forecast remained strong as our service area continues to grow.

On the regulatory front, we finalized an uncontested settlement with stakeholders to add new generation to our Horseshoe Lake facility, which the ALJ approved and now await a final order from the Oklahoma Corporation Commission.

We also received approval from the Arkansas Public Service Commission to begin construction on these units and we filed our final formula rate plan update in Arkansas.

Looking forward, we will file a rate review in Oklahoma by the end of the year and also we will submit an integrated resource plan in the first quarter of 2024 outlining a plan to meet our capacity needs over the next several years.

We expect continued constructive regulatory outcomes in both Oklahoma and Arkansas.

Turning to our internal operations, we know our employee experiences drives our customer experience and we were delighted to be named the number one employee employer in the state of Oklahoma by Forbes magazine, We were number two last year and our continued efforts to nurture a culture, where employees learn develop succeed and feel that import.

[noise] sense of belonging showing these results our team is purpose driven energizing life for our nearly 900000 customers every day.

So very proud of the men and women, who work for <unk> and their continued dedication to our purpose.

And finally I want to leave you with a few thoughts number one service our obligation to equally serve each customer whether a large industrial operation or a single residential customer at the end of the 179 mile circuit drives our team to success and stability, we continue to build our business for today.

Continue to build it for the future by delivering reliable and affordable electricity 24 hours a day seven days a week and with these priorities in mind, we will evaluate all of the investment opportunities before us and we'll execute the projects and make investments that support our focus on reliability and affordability to help us manage the load growth.

We have come thank you and I'll now turn the call over to Bryan Bryan.

Thank you Sean Thank you, Jason and good morning, everyone, let's start on slide seven and discuss third quarter 2023 results on a consolidated basis net income was $242 million or $1 20 per diluted share compared to $263 million or $1 31 per share in the same period 2022.

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

Core electric utility operations performed well this quarter. The electric company achieved net income of $246 million or $1 22 per diluted share compared to $253 million or $1 26.

<unk> per share in the same period of 2022 the decrease in electric company net income was primarily due to fewer cooling degree days compared to the third quarter of last year as well as expected increased depreciation and interest expense related to our capital investments.

Offset by solid weather normal load growth and higher operating revenues from recovery of capital investments.

Other operations, including our holding company reported a loss of $4 million or <unk> <unk> per diluted share in the third quarter.

<unk> to a loss of $6 million or <unk> <unk> per share in the same period of 2022.

Now, let's turn to slide eight for our refreshed EPS forecast for full year 2023. It has been an excellent year, thus far for the company from a consolidated basis. We now expect to earn 202 to $2 seven per diluted share. The midpoint of this refresh guidance is about <unk> higher than our initial forecast driven by outstanding performance.

At our electric company and holding company results, reflecting the current interest rate environment as.

As I've indicated to you in previous quarters, the tailwind that the electric company continue to outpace interest cost expectations, setting us up very well for 2024 and beyond.

Turning to electricity usage factors on slide nine <unk> continues to experience solid growth in weather normalized load, which increased approximately 2% compared to the third quarter 2022, we are forecasting full year weather normalized load growth of three to three 5% and are on track for two consecutive years of at least 3% growth.

And three years of better than 2% growth.

We are proud of the sustained level of tremendous economic development and load growth until we are just getting started for.

For example, looking forward to 2024, we continue to refine our estimates and are becoming more and more confident in our ability to once again deliver load growth in excess of 1% we had historically experienced as.

As Sean mentioned, our pipeline of business customer expansion includes many industries and when you considered a significant reduction in fuel rates referenced earlier, we believe business interests in <unk> service area will continue to be robust for the next several years.

I'll wrap up on slide 10 for an update on our financial position our balance sheet continues to be one of the best in the industry with no need to issue equity for our current capital forecast.

Projected <unk> to debt metric of 17, 5% to 18% and relatively low interest rate risk with no fixed rate maturities until 2027.

Our balance sheet places us in a position of strength as we evaluate a broad spectrum of incremental investment opportunities related to TNT and generation investments and with our eyes on the north star of a reliable resilient and safe power system.

We look forward to providing 2024 and long term consolidated earnings guidance and an updated five year capital and financing plan during our fourth quarter call fourth quarter call in February.

It is a privilege to be part of a company with significant potential for growth in both load and critical infrastructure positioning us to support our customers and to sustain economic expansion, while delivering strong earnings growth for years to come.

Before we open the call for your questions. Let me speak to you regarding the fuel recovery balance as of September 30th which stood at $53 million compared to the beginning of the year balance of $515 million.

The sustained lower prices of natural gas during the last few months allowed us to lower residential and business customer rates substantially and many months ahead of schedule as Sean mentioned all of our customers in Oklahoma, We will see a very meaningful reduction in the rates. Beginning. This month for example, residential customers will experience an average reduction on their monthly bills.

15% or $21 and the rate reduction for business customers ranges from 14% to 36%.

These reductions in customer rates firmly position the company as having some of the lowest rates in the nation in place <unk> in a highly competitive position as we compete for business expansion opportunities in the region with our eyes set on the future. We are proud of our employees accomplishments in 2023, and we look forward to delivering for our customers communities and shareholders for <unk>.

Ours to come.

With that we will open the line for your questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Our first question comes from Nicholas Campanella with Barclays. Please go ahead.

Hey, everybody its actually Nathan Richardson on for Nick.

Hi, good morning.

Good morning.

Just wondering if.

How youre thinking about parent drag for 24 based on funding for the upcoming Capex, which could move a little bit higher.

If you could give any more color on the parent drag that'd be great.

I'll take that Brian sure good morning Nathan.

So I'm really glad you asked that question that utility and holding company are lining up very well for 2024 and beyond.

And you've heard us speak to the many <unk> at the utility, namely very strong load growth and a host of incremental infrastructure investment needs.

So I am expecting utility to grow near the top end of that range and the whole company will be there to finance the business along the way.

So we don't we don't view it as a drag we view it as all incorporated business. There. So again <unk> were really strong in.

We will provide a concise consolidated view of <unk> financial prospects on our February call and to be clear, we're really excited to do so so again more to come in February.

Got it that's all I had thank you very much.

Thank you.

One moment for our next question.

Okay.

Our next question comes from Shar <unk> with Guggenheim Partners. Please go ahead.

Hi, Good morning team is actually positive.

Congrats on good quarter.

Hey, Thank you good.

Good morning, <unk> glad to hear from you this morning.

Thank you. Thank you.

Maybe just a follow up on the prior question on the update on the <unk> for Capex, there seems to be more tailwind summer 2023 run rate basis.

<unk> hundred 80 year to date.

And just maybe how are you thinking about the different kinds of options, especially in light of kind of what.

Nick mentioned the interest rate volatility that we've seen is dividend policy up for reconsideration in may.

And maybe just as we think about the cadence of the major rate case does that factor into what goes into the fourth you update or versus something that comes after the outcome.

Yes Constantine.

This is Sean I think all of those points that you raised.

Our considerations we <unk>.

Factor into our decision, making all the time and so those arent new developments or anything like that.

We said previously we have a lot of flexibility in terms of the investment opportunities we have.

We've conducted a lot of engineering and planning for these opportunities and we're able to move a lot of things around the majority of our investments around the distribution network. So those are very quick.

Investments, we're making there not long tenured.

Over multi years it is our intention to continue to.

File rate reviews, we have the formula rate plan in Arkansas, and we're working on that in Oklahoma.

<unk> remained current on a regulatory filing and our dividend policy Hasnt changed in terms of targeting a payout ratio of 65% to 70%. So.

We're going to continue to manage the business for the long term and we're going to we've got the flexibility to draw different investments in and move things around to.

Continue that.

To continue what we've been doing just executing and delivering results.

Excellent.

Flexibility.

And maybe also touching on the load growth and the visibility for economic development can you comment on the drivers for the slightly lower forecast in 2003.

Any margin impact it and see.

Ultimately as we're getting to the table.

Tail end of the 23, how does that translate into 'twenty four expectation some of them look at shifting into 'twenty four.

Brian you want to cover that one sure sure good morning Constantine.

On <unk>, we're really proud of our 2023 results, it's phenomenal to be 3% growth again on top of the 3% growth we had in 'twenty two and the two 5% growth we had in 2021 and our two largest customer segments residential commercial or early in line with what we had for expectations, which are.

Were really high.

So.

That's been a it's been a great year for us.

Our pipeline of business expansion.

Isn't just going into 2024, but we see it.

Adding incrementally 'twenty four 'twenty five all the way throughout our five year forecast period.

We have good vision to it really through 2028.

I mentioned this on the last call, but our our head of customer sales.

Continues to reiterate to me that our pipeline is as expansive in our strongest <unk> ever seen it perhaps.

As strong as our company has ever seen so so a great story, there and we look forward to give you more details in February but.

We expect it to be.

Above 1% again.

Excellent I appreciate the time today.

<unk> have a great day take care.

Thank you one moment for our next question.

Our next question comes from Travis Miller with Morningstar. Please go ahead.

Thank you good morning, everyone.

Morning.

I'll ask a follow up to the follow up if you don't mind and maybe even simpler.

No you're not giving 2020 for guidance here, but could you lay out simply the bullet points either quantitatively, if you will or qualitatively.

That would be the year over year types of drivers, obviously, you've talked about load growth what else is kind of in the mix.

Well I think primarily it's going to be driven by load growth and we will invest around that load growth.

<unk>.

I mentioned before that we will file it make a filing in Oklahoma and we've made a filing under our formula rate plan in Arkansas, So I would point to those three drivers for you.

Okay.

What's the timing in terms of rates.

Adjustments in your thoughts around getting the Oklahoma case, none in terms of 2020 for earnings.

Typically that's about 180 days, so you would think mid summer.

Okay, Okay, great and then on the hold co level.

What's your sensitivity to interest rates that we have plus or minus 100 basis points or 50 basis points.

What is that an impact on earnings.

Sure Good morning Travis.

On the holding company interest what we've what we've pointed to is an expectation that.

That could grow three four into next year, but we need to refresh all of that that's the only guidance we've given.

Still on the guidance front, but that's not a bad rule of thumb.

So we will continue to refine that estimate but again.

It's just one part of a of a really strong business model for us which is.

Mostly inclusive of our utility in.

We feel as I mentioned before variable ish on utilities gross prospects for all the reasons, we've talked about today.

So give us a little more time, and we're going to lay out all of this on a consolidated basis for you in February.

Sure thing no Thats very helpful. I appreciate it that's all I have have a great day.

Sue.

Thank you one moment for our next question.

Our next question comes from Tanner, James with Bank of America. Please go ahead.

Good morning.

Good morning, good morning.

Just following up on constant teens question on load growth within the commercial loan bucket. What are you seeing relative to when you issued expectations at the beginning of the year and are there any items, perhaps on the data center for our other large customers that we could look at as potentially providing extended upside relative to your <unk>.

Spectation.

Brian.

Hey, good morning Tanner.

Our initial expectations for the commercial segment and 23 was a growth of 11% to 15%, which is really high growth rate, but also a range there.

It was pretty expansive given it is hard to estimate when some of these large loads are the exact month theyre going to come in for example, and now we're kind of right on it were 13, 5% year to date, we are not and have 10% in the third quarter year over year.

So, we'll probably land somewhere around 12% to 13% and commercial for the full year, which is which is right in the range we expected as.

As you look to 'twenty four and beyond.

It's easy to see that that's going to be.

Really strong growth in 2000 and for again for commercial just.

The extension of the growth we started in 'twenty two carried over into 'twenty three it should carryover in 'twenty four as well some of that is bitcoin data mining as you mentioned, but we do have other industries that are expanding Sean mentioned those on the call.

Data centers that are more around the generative AI.

Which is as we've all seen is impacting every industry and this company in this country sorry.

So every industry across the United States.

Are using data centers to do work that they've never used before.

And quite honestly the big companies that have that are.

Do this in the United States have ran out of.

They've run out of capacity, so we're seeing tremendous.

Request for.

For load in our system tapping into our grid and as we look forward to serving that in a responsible way going forward.

Great. Thank you then.

And then lastly, I just had a more of a procedural type question regarding the Horseshoe Lake in Arkansas.

The formal CPC and filing occur.

Basically at the level when construction is completed.

The precedent in typical timeline for the Commission review in this situation.

Yes, typically we go to them and we've we've already received the approval to begin construction. So thats the requirement in Arkansas and then when it is complete we will file that in our subsequent filings for recovery.

There are allocated portion of it.

Alright, great. Thanks, Thats, all I had.

Okay.

Thank you one moment for our next question.

Our next question comes from Alex <unk> with Mizuho Securities. Please go ahead.

Hi team good morning.

Good morning, good morning.

So as you look for you to file your rate case in Oklahoma next year I was hoping you could touch a little bit on the Oklahoma regulatory environment. I know you mentioned a potential increase in your Capex plan in the coming years. So maybe just a little bit more color on the support received from regulators as you look to continue to expand your spending in the coming years.

As this has to work its way into rates.

Yeah I think.

We find the Oklahoma Commission very constructive.

Evidenced by the number of settlements and agreements and constructive orders we've received over the last number of years.

As I look at things affordability is front and center and so when you have that leading the charge and we will.

Spoke to that on our comments here about the fuel reduction that's a big tailwind.

And.

We're going to make this filing here.

At the end of the year and that's going to give us a lot of flex building gives us a lot of confidence heading into this rate filing so.

See no change in the constructive nature.

And constructive outcomes we received.

Okay wonderful. Thanks, so much look forward to the <unk> update.

Take care.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

One moment for our next question.

Our next question comes from Paul Fremont with Ladenburg. Please go ahead.

Okay.

Thank you very much.

How should investors look at potential construction of new generation opportunities.

And of course, you Lee so in other words.

Would it.

Would it more likely be gas would it be renewables can you give us a sense of what.

What the possible mix of of additional generation might look like.

Yes. Thanks, Paul This is Sean will certainly.

Run through a lot of scenarios and our next <unk> filing.

I believe in looking at a lot of different scenarios, obviously, you have a lot of EPA.

<unk> regulations that are in various stages of development and so you want to incorporate different scenarios for that but what I've said in the past is going forward until there is a dispatch will economic long duration.

Generation resource available I think youre going to see our generation mix.

Of new generation look like gas and solar.

Got it.

And would that be would it be safe to assume 50 50.

In terms of percentages.

Yes, I think that's that's.

TBD, but I think thats, a good way to think about it.

Great.

Then longer term.

You're obviously in an extremely strong <unk> to debt level today longer term.

How should we think about your <unk> call.

Brian you want to take that sure yes.

Good morning, Paul and as we mentioned our metrics stand today at 17, 5% to 18%.

And we're a company that wants to always take care of our balance sheet and make sure. We keep the company in a good solid position. So you are never going to see us living on the edge at 13% 14%.

So we're going to be mindful of that as we build out our capex plan into the future. Obviously, we do have some room to add some capital.

Without the need to issue equity, but we will we'll continue to refine those estimates.

We will take care of this balance sheet in balance at all whether it's capital investments affordability, our credit metrics all of those matter and we will continue to balance it in the right way.

And maybe as a follow up to that.

What.

On incremental Capex, that's not sort of currently in your budget.

<unk>.

What percent of equity should investors.

Assume will be used to.

To support incremental investment.

Yes.

Yes, Paul we'll lay all that out at the appropriate time and I think Brian was really clear there that we've got a plan to meet our earnings objectives and it doesn't require any any equity and anything we do above and beyond that.

That'll be growth equity, but I don't think that needs to.

Don't want to get ahead of ourselves in terms of.

Rolling all of this out in February.

Great. Thank you so much and congratulations on a strong quarter.

Okay. Thanks, Paul I have a great day.

Thank you I'm showing no further questions at this time I would now like to turn it back to Sean <unk> for closing remarks.

Thank you Andrea and thank you all for being with US today and your interest in <unk> Energy Corp, and.

Our <unk> have a great day.

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

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Q3 2023 OGE Energy Corp Earnings Call

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