OGE Energy Corp. (NYSE:OGE) Q3 2023 Earnings Call Transcript

OGE Energy Corp. (NYSE:OGE) Q3 2023 Earnings Call Transcript November 2, 2023

OGE Energy Corp. beats earnings expectations. Reported EPS is $1.2, expectations were $0.92.

Operator: Good day, and thank you for standing by. Welcome to the OGE Energy Corp. Third Quarter Earnings Conference Call. [Operator Instructions] 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.

Jason Bailey: Thank you, Andrea, and good morning, everyone, and welcome to OGE Energy Corp.’s third quarter 2023 earnings call. With me today, I have Sean Trauschke, 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 Bryan of financial results. 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 oge.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’ll now turn the call over to Sean for his opening remarks. Sean,

Sean Trauschke : 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 of the holding company of $0.02. Our solid performance this quarter is due to operational excellence delivered by our team who work to keep energy flowing to the grid during a hot summer. While setting a new hourly peak on August 21, and without calling for public conservation that was seen in other areas of the country. I’ve shared before that our system was designed, built, and operated for conditions like we saw this summer, and I’m proud of our team for always meeting our customer’s need for reliable and safe electricity, and always keeping affordability top of mind.

The 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’re raising guidance. Ryan 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 OG&E 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 OG&E 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 project will deliver reduced outages and outage time for our customers and it have the cost. We have two additional grant proposals under review department and we 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 was collaborating closely, with school districts in our service areas to apply for federal funds, for districts to acquire electric school buses. Just last month, Shawnee Public Schools in Eastern Oklahoma was the first school district to take delivery of five EV school buses that were awarded to them through the grant program. In total, 28 buses were awarded to eight communities in our service area, and we are working closely with the school districts to ensure their success in adding EV buses into their fleets, furthering the electrification in our service territory.

Our customer centered efforts continue. As we announced a significant reduction in the cost of fuel on our customer’s bill just yesterday, to the $221 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 was sectors as diverse as healthcare, defense, tribal development, manufacturing and retail to ensure healthy economies for the future and job growth across the board. Our 2023 load forecast delivers robust year-over-year growth well-above our historical growth rate. Our long-term load forecast remains 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 IIJA approved and now await a final order from the Oklahoma Corporation Commission. We also received approval from the Arkansas Public Service Commission to begin its 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 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 important sense of belonging showing these results. Our team is purpose-driven, energizing life for our nearly 900,000 customers every day. I am so very proud of the men and women, who work for OG&E 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 179-mile circuit drives our team to success.

And stability, we continue to build our business for today and to continue to build it for the future by delivering reliable and affordable electricity 24 hours a day, 7 days a week. And with these priorities in mind, we will evaluate all of the investment opportunities before us and we will execute the projects and make investments that support our focus on reliability and affordability to help us to manage the low growth we have coming. Thank you. And I’ll now turn the call over to Bryan. Bryan?

Bryan Buckler: Thank you, Sean. Thank you, Jason, and good morning, everyone. Let’s start on Slide 7 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 $0.08 per share from natural gas midstream operations, which we fully exited in 2022 due the sale of our energy transfer units. Poor 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 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 $0.02 per diluted share in the third quarter compared to a loss of 6 million or $0.03 per share in the same period 2022. Now let’s turn to Slide 8 for our refresh 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 207 per diluted share. The midpoint of this refresh guidance is about $0.05 higher than our initial forecast, driven by outstanding performance at our electric company and holding company results reflecting the current interest rate environment. As I’ve indicated to you in previous quarters, the tailwinds at 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 9. OG&E 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 at 3% to 3.5%, 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 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 Sean mentioned, our pipeline of business customer expansion includes many industries, and when you consider a significant reduction in fuel rates referenced earlier, we believe business interest in OG&E 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, a projected FFO 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 T&D 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 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 30, which stood at 53 million compared to the beginning of the year balance of 515 million. The sustainable 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 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 of 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, and place OG&E in a highly competitive position as we compete for business expansion opportunities in the region. With our eye 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 years to come. With that, we will open the line for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Nicholas Campanella with Barclays.

Nathan Richardson: It’s actually Nathan Richardson on for Nick. I was just wondering how you’re 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.

Sean Trauschke : You want to take that, Bryan?

Bryan Buckler : So I’m really glad you asked that question. The utility and holding company are lining up very well for 2024 and beyond, and you’ve heard us speak to many tailwinds at the utility, namely very strong load growth and a host of infrastructure investment needs. So I’m 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 view it as a drag. We view it as all an incorporated business there. So again, tailwinds are really strong and we’ll provide a concise, consolidated view of OG&E’s financial prospects on our February call. And to be clear, we’re really excited to do so. So again, more to come in February.

Operator: Our next question comes from Shar Pourreza with Guggenheim Partners.

Constantine Lednev : This is actually Constantine for Shar. Congrats on a good quarter. Maybe just a follow-up on the prior question, the update on the 4Q for CapEx. There seems to be more tailwinds from a 2023 run rate basis of $880 million year-to-date? And just maybe, how are you thinking about the different kind of options? Especially in light of kind of what Nate mentioned, the interest rate volatility that we’ve seen, is dividend policy up for reconsideration? And maybe just as we think about the cadence of the major rate case, does that factor into what goes into the 4Q update or — versus something that comes after the outcome?

Sean Trauschke : Constantine, this is Sean. I think all those points that you raised are considerations we factor into our decision-making all the time. And so those aren’t new developments or anything like that. We’ve 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 are around the distribution network, so those are very quick investments we’re making. They’re 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.

But we’re going to remain current on our regulatory filing. And our dividend policy hasn’t 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 — just continue what we’ve been doing, just executing and delivering results.

Constantine Lednev : Excellent. Good to have that 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 ’23? Is there any margin impact that you see? And ultimately, as we’re getting to the tail end of the ’23, how does that translate into ’24 expectations and some of the load shifting in ’24?

Sean Trauschke : Bryan, do you want to cover that one?