OGE Energy Corp. (OGE) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to First Quarter 2021 OGE Energy Earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-session, and instructions will follow at that time [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jason Bailey.

Thank you, May, and good morning, everyone, and welcome to OGE Energy Corp., first quarter 2021 earnings call. I'm Jason Bailey, Director of Investor Relations, and with me today, I have Sean Trauschke, Chairman, President and CEO of OGE Energy Corp; and Bryan Buckler, CFO of OGE Energy Corp. In terms of the call today, we will first hear from Sean, followed by an explanation from Bryan of first quarter 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 on our website at ogeenergy.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 comments. Sean?

Thank you, Jason, and good morning, everyone. It's great to be with you this morning. Earlier, we reported first quarter consolidated earnings of $0.26 per share, which includes utility earnings of $0.06 per share, earnings associated with our investment in Enable of $0.19 per share, and earnings at the holding company of $0.01 per share. We've accomplished a lot, and I'm pleased to report that we've made great progress in mitigating the impacts of Winter Storm Uri. We are back within the guidance range we reported last quarter, and we are not done. We are one quarter into the year, and we're focused on a great year. Our efforts to mitigate the impacts of Uri are ongoing as we work consistently to deliver shareholder value. Bryan will provide additional details when he discusses our financial results. We've had a productive and busy first quarter, starting the year off by announcing our support of the merger between Enable and Energy Transfer. And as we work to finalize that merger agreement in February, our service territory experienced Winter Storm Uri. And I'm pleased to say that our operational performance during the storm was strong. Our employees and our generation fleet performed admirably, and our customers experienced minimal disruptions. Importantly, we performed our work safely, improving our year-over-year first quarter safety results by 60%, which is a great accomplishment when you consider that 2020 was our second safest year on record. And particularly when you consider that our members worked in some of the most difficult winter conditions imaginable during the storm. Then we quickly got to work on legislative and regulatory solutions to address the financial impacts of Uri. We now have a regulatory asset for the recovery of the winter storm cost in Oklahoma and in Arkansas. We now have securitization legislation in Oklahoma and in Arkansas. We have filed for securitization in Oklahoma and in Arkansas. Turning to other positive regulatory outcomes in the first quarter, in March, the Arkansas Public Service Commission approved the settlement in our third formula rate and new rates were implemented April 1. In Oklahoma, under our grid enhancement mechanism, the work is going well. We file regulatory reports each quarter as projects are placed in service. And I'm pleased to say that the entire program is going smoothly. On the last call, I mentioned that we have a lot of really exciting projects in and around our communities in various stages of development. The two projects I'm sharing today are only the first, and there are more to come. We announced an innovative deal with Dobson Fiber to upgrade the resiliency and capacity of our utility communications network to accommodate new grid automation and mitigate the risk of wireless interference. This is part of our continued grid enhancement efforts to deploy increased automation, monitoring and operational technologies. This initiative enables us to essentially future-proof our communications network while saving more than 60% of our standard capital deployment and O&M costs. Those are just real savings for our customers. We also announced an expansion of the Choctaw Nation/OG&E Solar Energy Center. And we're proud to continue our work with the Choctaw Nation and expand our commitment to renewable energy. This commitment is based off customer-driven demand for our renewable energy offerings. We now have included $25 million to our 2021 capital investment forecast to reflect the inclusion of these two projects in the first quarter. These are just two examples of the kinds of innovative projects you can expect from us in the future. Turning to load, we are seeing the recovery we anticipated at the beginning of the year. Last quarter, we stated our expectations for 2021 weather-normalized load being 2.4% above 2020 levels. After the first quarter, we still expect full year 2021 weather-normalized load to be at that level. Adding to our confidence around the return of load is the fact that even during the pandemic, we've continued our trend of strong customer growth, which is up 1.4% over the same period in 2020, driven primarily in our residential and commercial classes. Add to this, the fact that in Oklahoma, gross receipts are up 38% for the month of April, adding to the confidence we have in our business. Today, as I've said before, our electric rates are lower than they were in 2011. And let me share an interesting data point. When adjusted for inflation, our rates are actually 14% below what they were in 2011. Business and economic development is active in our service territory. These low rates are a significant driver of companies coming to or expanding their operations, including electrification in our service territory. So far, this year, those efforts expect to bring an additional 50 megawatts of load by the end of 2021. This combination of strong customer growth and outstanding business and economic development activity puts us on track for sustained load growth of at least 1%. We will continue to work on the many opportunities that will bring more load, more jobs and more investment to our communities in Oklahoma and Arkansas. So let me put all of this into perspective. We've continued to achieve positive regulatory outcomes. We've added new innovative projects, we see strong customer growth. We have some of, if not the lowest rates in the nation, combined with annual load growth and better unemployment rates than most of the nation. This is all part of our great story that further supports our sustainable business model of growing revenues by attracting new customers, managing expenses by utilizing technology and becoming more efficient. This helps us maintain the low rates, which in turn attracts more customers. This virtuous cycle continues. Our results this year will rest on our operational execution, and I'm very confident in our ability to achieve that. For the remainder of the year, we will achieve final regulatory approval of cost recovery plans for Winter Storm Uri, submit integrated resource plans in Oklahoma and Arkansas, file our fourth formula rate in Arkansas, including a request for an extension of its term, finish construction of the two solar farms, continue our grid enhancement investments in Oklahoma, which are on track to deliver results to our customers. And finally, we continue to prepare for our next Oklahoma rate case, which we plan to file later this year. So we've accomplished a lot already in the first quarter, but we're still going. And this all sets us up for a great year and years to come. Turning to Enable, we expect the transaction to close in 2021, 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 will provide information upon closing of the transaction. On our last call, we talked about our solid compelling investment thesis, supported by a track record of performance. We put in motion our vision to become a pure-play utility, targeting 5% earnings growth, based off lower risk investments that will enhance our customers' experience. We have some of the most affordable rates in the nation helping to drive economic growth in our communities. We've made great progress toward getting back to our 2021 guidance. Our ability to meet guidance rests on our operational execution, and I'm confident in our ability to do so. Our company is strong, and while COVID and extreme weather have presented challenges, it's important to understand that we have always been determined to more than simply manage the downturn and set our sights on excelling through the recovery. With that, thank you very much, and I'll now turn the call over to Bryan. Bryan?

Thank you, Sean, and good morning, everyone. Starting on slide 9. For the first quarter of 2021, we achieved net income of $53 million or $0.26 per share as compared to a loss of $492 million or $2.46 per share in 2020. The loss in 2020 was driven by the impairment charge recorded on our Enable midstream investment. At the utility, OG&E's first quarter results were $0.04 lower than 2020, primarily driven by the previously disclosed losses that occurred during the extreme winter weather from the Guaranteed Flat Bill program. As I discussed during our fourth quarter call, the GFB program represents approximately 3% of our load, whereby variabilities in fuel and purchase power costs are not trued up. The financial impacts of the weather event are consistent with the estimates we provided you on the fourth quarter call. Excluding the impact of the extraordinary fuel costs and our GFB program, OG&E's core operations performed very well during the first quarter, including strong cost management. I'll speak to our updated full year 2021 projection in a moment. Our natural gas midstream operations had income of $0.19 per share in the first quarter compared to a loss of $2.84 in 2020. The increase in earnings was primarily due to the 2020 impairment of our investment in Enable. The current quarter was also marked by higher net income from Enable's transportation and storage business resulting from higher natural gas prices. Turning to our economic update on slide 10. As Sean mentioned, we are seeing strong employment figures in our service territory, and we are especially pleased with the customer growth of 1.4% year-over-year, illustrating the attractiveness of living and working in Oklahoma and Arkansas. Furthermore, our commercial segment is showing encouraging strength, with year-over-year load growth of approximately 6% in the month of March alone, leading to the 1.8% quarterly load increase figure you see on the slide. For the full year, we continue to expect total weather normal load results to be approximately 2.4% higher than 2020 levels. Let's move to slide 11. We've made outstanding progress in the quarter toward mitigating the aforementioned GFB program impacts, and currently project OG&E full year 2021 results within the lower half of our original guidance range of $1.76 and to $1.86 per share. On the fourth quarter call, we outlined our initial estimate of approximately $0.10 of headwinds associated with the weather event. As I mentioned earlier, our estimates continue to come in at approximately this level. Included in the $0.10 of headwinds was estimated financing costs associated with the incremental fuel and purchased power, which is no longer an earnings headwind as we were recently able to obtain regulatory orders in Oklahoma and Arkansas for the deferral of the financing cost. The OG&E team has worked hard during the quarter to further mitigate these impacts and already has line of sight to $0.03 to $0.04 of favorable mitigations, including strong O&M management. Thus, our current estimate of 2021 full year earnings per share is back in the lower half of guidance with three quarters in front of us. Looking more long term, the very solid start to 2021 for our core operations, coupled with the capital investments we are making for our customers and communities in 2021, position our company well for sustained earnings growth into 2022 and beyond. As I mentioned to you on our fourth quarter call, our business fundamentals are strong, and we have great confidence in our ability to grow OG&E at a 5% long-term EPS growth rate through 2025 off the midpoint of our 2021 guidance of $1.81. On slide 12 and 13, I'd like to update you on the fuel and purchase power costs, the status of our regulatory filings and the securitization path in Oklahoma and Arkansas. As of March 31, fuel and purchased power costs of approximately $930 million were recorded on the balance sheet, consistent with the initial estimates. In Oklahoma, approximately $830 million has been deferred to a regulatory asset with the initial carrying charge based on the effective cost of debt financing. In Arkansas, we have incurred approximately $100 million of cost with the case pending that allows interim recovery of these costs over a 10-year period, including an initial carrying cost that approximates the effective cost of financing. As Sean mentioned, both Oklahoma and Arkansas have passed securitization laws. And some of the key parameters of those laws are shown on the slide. In Oklahoma, we filed an application on April 26, seeking authorization from the OCC to securitize the costs associated with the extreme February weather. Based on the timeline outlined in the legislation, we would expect to receive proceeds from the securitization by mid-2022, which would restore our credit metrics to the levels we expected prior to the weather event. In Arkansas, on May 4, we made a filing indicating OG&E's intention to pursue securitization of the fuel and purchased power costs. As a reminder, the Arkansas legislation dictates that a carrying charge equivalent to a WACC is appropriate from the date of cost occurrence to the issuance date of the securitization bonds. If securitization is pursued in Arkansas, it will replace our open docket that is requesting a 10-year recovery period with a carrying charge at our weighted average cost of capital. Before I turn the call back over to Sean, I'd like to provide an update on our financing plan, as shown on slide 14. As we noted on our fourth quarter call, we closed on a $1 billion credit commitment agreement that provided short-term funding for our incurred fuel and purchase power costs. We intend to refinance this short-term loan by issuing longer-term debt in 2021, likely with the call feature that coincides with the expected timing of the securitization of the fuel and purchased power cost. Our balance sheet continues to be one of the strongest in the industry, and our equity plans have not changed. While our credit metrics are expected to weaken temporarily due to the fuel and purchase power costs incurred, we believe the metrics will return to the targeted 18% to 20% level once the securitizations are complete. Separately, as a procedural matter, later today, we will update our standard S-3 Shelf filing with the SEC, which ensures our continued access to the capital markets. Finally, we remain confident in our ability to drive long-term OG&E EPS growth of 5%, which when coupled with a stable and growing dividend, offers investors an attractive total return proposition. That concludes our prepared remarks, and we will now open the line for your questions.

[Operator Instructions] First question is from the line of Shar Pourreza from Guggenheim Partners your line is now open.

Hi good morning, actually Constantine here for Shar. Thanks for taking our questions.

Hi good morning Constantine and tell Shar hello as well.

I will absolutely do that. We're just spread a little bit tight. But I just had a quick question on Enable. It's not directly related to the transaction, but maybe just a little bit more on the strategic side curious to kind of how you envision the options to - that you would utilize kind of for the exit that you talked about? And is it just as straightforward as a market sell down so if you don't really have equity financing needs? Is there a business mix that you're targeting for '21, '22? And is the timing of the exit dictated by the ability to reinvest effectively?

Yes. Good question, Constantine. And I think the - we don't have a targeted business mix per se in '21 or '22. But we've been clear. We are going to exit the midstream business and our ownership and I think you hit on the key point. We've got the balance sheet to do it prudently and to really optimize that. Bryan and his team are looking at a lot of different things and have been very thoughtful. But I think a lot can happen between now and closing in that space for sure. And so we certainly have the growth opportunities at the utility but line of sight to the recovery of those are very important to us. So we'll continue to be good allocators of capital. But I think you should expect us as we've said many times just to really be prudent about this. And we would own roughly 3% of the Energy Transfer units. So we're not burdened by a big move. We'll be able to do this on our own terms, and without creating any kind of unnecessary overhang on the energy transfer units. Bryan, do you have anything to add to that or --?

I think that's exactly how we're thinking through it, of course. And the reinvestment opportunities in the utility are shown through the strong customer growth that we're seeing in our jurisdiction. And so that business mix over time is important to us to become more of a pure electric utility, and we would expect that to provide us an even stronger balance sheet capacity with the credit rating agencies as well.

That's great color. It actually also takes us to my second question, which was just in line of the upcoming IRPs as the resource costs start shifting and we have seen this more and more with solar and wind displacing fossil resources through cost savings. Do you feel your jurisdictions are well-positioned for that transition? And is anything currently being reflected in the 5% long-term growth rate that you're envisioning?

Yes. So what we've laid out in our five-year capital forecast does not include any generation needs as a result of the integrated resource plan. So that would all be incremental. As far as what you're seeing - what you're pointing to in terms of trends and where things are going. I would say that we've been on that trend for a while. We built the first wind farm and first solar farm, and we've been very active in the transmission front. And I think you should expect us to be engaged in all those fronts going forward. As we look at our IRP, yes, I don't think there's any new information there that we do see prices come down. The economics are certainly changing. And our view is we're going to be focused on affordability, reliability and resiliency. And that's how we think about a lot of our investments, and I don't see any reason generation would be any different.

Perfect, I think that sums it up pretty well. Thanks for taking the questions.

Thanks Constantine

Thank you

Next question is from the line of Insoo Kim from Goldman Sachs. Your line is now open.

Hi good morning guys. How are you?

Hey, good morning, Insoo.

Good morning. My first question is just from a - coming out of Winter Storm Uri and thinking about resiliency and reliability in the state going forward to mitigate this from happening, whether it's from OGE's perspective or just your conversations with various stakeholders in the state. What are some of the conversations that are taking place now on, whether it's on the T&D side, generation side, what potential investments may be needed?

Yeah. Insoo, great question. And I'm actually really pleased you asked this question because it gives me the opportunity to maybe brag a little bit. I think what's important here, well, every single one of our plants generated megawatts every day during this event. So we had put the winterization packages on the Mustang Energy Center when we built that. We put - we winterized our two big combined cycle plants. And our customers had minimal disruptions. And so coming out of this, you always have lessons learned. I do think that we're certainly going to take a hard look at our supply chain, specifically, if you think about gas, to make sure that we understand where the gas is coming from. And as that facility is winterized such that it can be ready in events like this. But we certainly saw some things with that extreme weather, how we - in the event that we were going to receive a notice from the SPP to shed load, how we would do that. And we've - there's always learnings there. But I would tell you that the fleet performed just great. And we were prepared. We had made those investments. And I think when you live, work and play in the community, you kind of have a higher calling to make sure that you're accountable and ready to go. And I'm really proud of the team here because they work.

Got it. Thanks for that color. My other question is just with guidance for this year. What are some puts and takes or opportunities that could help you improve within the range for 2021?

Insoo, it's Bryan good morning and you know two points on the - going back to your question on investments, too, Sean was speaking to the February weather event and was right on. We're also looking at T&D investment needs around the October 2020 ice storm. We really had 100-year storms in October and again in February, it's pretty amazing. So we're always looking for ways to invest to improve our system for our customers and communities. And going to your point on your - your question on the guidance range for 2021, we're really proud of the progress we've made to-date. When we discussed this with you back in February, we were looking at $1.81. I've built a very strong financial plan to achieve that and immediately had the February weather event that put $0.10 of headwind on us. So we're pointing to $1.71, but we also indicated that we were not done, that we were going to work hard to operationally and with the regulatory teams to get earnings back inside the guidance range of $1.76 to $1.86. So we're proud of the progress we've made to-date. You can see on the slide that we've made about $0.06 to $0.08 of progress that gets you in range of about $1.78 in 2021. We have three quarters ahead of us. Cost management is an area that this company has excelled at for years. We continue to explore O&M agility to help mitigate earnings impacts year-to-year. But we have a lot in front of us with nine months and our - I believe it's 75% of our earnings come from June through September. So that's a lot of time for us to work through and operate the plants and the grid as well as we can and continue to explore opportunities to get us all the way back to $1.81. But right now, we're at $1.78. We're proud of our progress, and we'll keep working it.

Understood. That's all I have. Thank you and I hope you enjoy some of the warm weather.

Thanks Insoo.

Next is Brandon Lee from Mizuho. Your line is now open.

Hey Sean, hey Bryan, thanks taking my question.

Hey, good morning Brandon.

Good morning, how are you?

We're doing well, doing well. Things are good, really good.

I just had a quick question. So the 5% EPS growth rate at the utility, how do you guys view that? I guess some utilities defer O&M cost, if they have a really good weather year and then maybe pull forward - or sorry, pull forward some to keep it within that 5% range or whatever their range is, or they defer if they're having a tougher year. Do you view that as like your target, your goal for that 5%? Or are there going to be ups and downs?

Well, I think we're going to deliver 5%. And I think we're hopeful that we have more ups than downs. And that's certain what you referenced there, that's certainly a lever as a company that we will pull. But more importantly, I want to hear - I want you to hear from us that we've got a robust capital plan. We're not - for many, many years, and we're very confident in the 5%.

Okay great. That's all I had. Thanks.

Thanks Brandon.

No further question. I'll turn the call back over to Mr. Sean Trauschke.

Okay, thank you. Thank you all for your time this morning and your interest in OGE Energy Corp. And I wish you all the very best. Please take care of yourselves and those around you, and I look forward to seeing you all very soon. Take care.

This concludes today's conference. You may now disconnect.