OGE Energy Corp. (OGE) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Q2 2021 OGE Energy Corp. Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jason Bailey, Director of Investor Relations. Please go ahead.

Thank you, Andrea, and good morning, everyone, and welcome to OGE Energy Corp's Second Quarter 2021 Earnings Call. I'm Jason Bailey, Director of Investor Relations. With me today, I have Sean Trauschke, Chairman, President and CEO of OGE Energy Corp. Bryan Buckler, our CFO, has a cold. His voice doesn't sound great. So Chuck Walworth, our Treasurer and Head of Financial Planning, will cover our second quarter financial results. Bryan will be available for Q&A at the end of our prepared remarks. I'd like to remind you that this conference is being webcast and you may follow along on our website at 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 to date. I'll now turn the call over to Sean for his opening remarks. Sean?

Thank you, Jason. Good morning, everyone. Thank you for joining us on today's call. It's certainly great to be with you again. Earlier this morning, we reported second quarter consolidated earnings of $0.56 per share, which includes utility earnings of $0.42 per share and earnings associated with our investment in Enable of $0.16 per share, and a holding company loss of $0.02 per share. While weather was $0.03 below normal for the quarter, we remain within our previously reported guidance range. I'm proud to say we keep moving forward. I'm so proud of everyone here and we are encouraged by our exceptional utility operations and all of our employees as they focus on energizing life for our customers and our communities. Chuck will provide additional details when he discusses our financial results in just a moment. As we move ahead, I'm pleased to note that in June, OGE received its 19th EEI Emergency Response awards since 1999 for our power restoration efforts during the 2020 New Year's Eve snowstorm. We've been recognized with this highest national distinction for emergency recovery 11x for major storms affecting our system and 8x for assisting others. Additionally, for the third consecutive year, OGE has been recognized by S&P Global as having the lowest rates in the nation, demonstrating the affordability of our service. System-wide, growth in customer load is driving $75 million of increased capital investments. Investments include substation enhancements, projects at Tinker Air Force Base and upgrades of our 69 kV line to support the load of larger and growing customers. Construction on the 5-megawatt solar farm in Branch, Arkansas, and the 5-megawatt expansion of the Choctaw Nation OGE solar farm remain on track for completion by the end of the year. As we seek innovative ways to increase efficiency across the organization, yesterday, we announced that OGE will pilot utilizing artificial intelligence to inspect distribution poles for damage. This technology will allow our teams to respond more efficiently and utilize a consistent approach for repair and replacement. We will continue to leverage these results and this technology to improve the customer experience. Our grid enhancement programs in Oklahoma and Arkansas continued to deliver. The work we're undertaking on our substations and distribution circuits and other portions of our grid will have a significant positive impact on the reliability and resiliency of the grid for the benefit of our customers. On Monday, we submitted our draft integrated resource plan with both the Oklahoma and Arkansas commissions, detailing our resource needs over the next several years. As you can see on Slide 5, our resource needs are driven by expected load growth as well as the retirement of aging, less efficient, less reliable gas plants that were built more than 50 years ago. We expect to retire approximately 850 megawatts over the next five to six years. Key components of our IRP include a successful energy efficiency and demand side management program combined with replacing retired generation with a combination of solar-and hydrogen-capable combustion turbines. We plan to execute this in 100-megawatt to 150-megawatt annual increments, beginning with solar over the next five to six years to really smooth out the customer impacts. When complete, our overall carbon intensity will drop by more than 6% and the overall fleet efficiency will improve even more. This plan is a significant step forward to meet our objectives of fuel diversity and provide our customers with cleaner energy solutions while maintaining our affordable rates. We begin the stakeholder engagement process now and we'll submit the final IRP on October 1, after which we will lay out the time line for the next steps, including an RFP process. Our securitization filing in Oklahoma is on track for recovery approximately 85% of the total cost associated with February's winter storm Uri. A hearing is scheduled for October and an order is expected by the end of the year. The Arkansas securitization statute is somewhat different from Oklahoma's, and we continue to work through that process and plan to file later this year with every expectation of a positive regulatory outcome there. Speaking of Arkansas, we will file a formula rate update in October with rates going into effect in April of 2022. We will also file for a five year extension of our formula rate at the same time. We will file a rate review in Oklahoma towards the end of the year. A significant portion of this case will involve a continuation of our grid enhancement work and the recovery mechanism that has already been established. The process is working quite well, and we want to continue to work to enhance the resiliency and the reliability of the grid for the benefit of our customers. And finally, we're working with the Oklahoma Corporation Commission on a three year energy efficiency filing for the years 2022 to 2024. These efficiency programs provide energy savings and peak demand reduction for OGE customers to better manage their energy use. We expect to achieve savings of more than 100 megawatts in demand, nearly 500,000 megawatt hours of energy saved, helping us to efficiently operate our generation fleet as we grow our customer base and maintain affordability. So clearly, these are programs worthy of continuing into the future. Turning to Slide 7. Recovery of our load continues. With the first half of the year now behind us, we expect 2021 weather normalized load to be more than 2% above 2020 levels. Chuck will give more details around the load in just a moment. In addition, our strong customer growth of 1.3% reflects the combination of highly affordable rates and our ability to service commercial expansion in our markets, which leads me to our business and economic development activities. Last quarter, we discussed the additional 50 megawatts of load we will add by the end of the year due to our slate of business and economic development activities at that time. I'm pleased to say that the pace of these activities has ramped up even further, enabling us to increase that estimate up to 75 megawatts, of which 36 megawatts is already connected, and we're far from done. Again, these are larger loads and do not reflect residential or commercial impacts, and we believe we will add to this number in the months ahead. In addition to low growth, these projects also bring new jobs to our communities. Through the first half of 2021, the new projects secured by our teams have helped to add more than 4,100 new jobs, all across our service territory. One such project, Pierre Foods, is completing a 200,000 square foot regional fulfillment center in Oklahoma City, adding 10 megawatts of load and 550 jobs. The affordability of our rates is essential to our sustainable business model as the cost of electricity is a significant factor that companies consider when deciding where to relocate. And affordability remains a key competitive advantage, that is evident in our business and economic development activity as well as customer growth, which combined have us on track for sustained load growth of approximately 1% going forward with still many opportunities ahead. Turning to Enable. We expect the transaction to close later this year, subject to the satisfaction of customary closing conditions, including the HSR clearance. Our intention to prudently exit our midstream investment remains the same and we'll certainly provide information upon closing. Before I hand the call over to Chuck, I do want to take a moment to touch on three key points. First is that we continue to execute on our plan. While the weather was below normal, we remain within our previously reported guidance range, and we're going to keep moving forward. Secondly, the strength of our economies across our service territory is strong. Oklahoma's unemployment rate in June was 3.7% compared to the national average of 5.9%. In Oklahoma City, the largest metro area in our service territory, had a rate of just 3.7% in June, the third lowest from a large metropolitan series. Similarly, Fort Smith, Arkansas, had a rate of 4.4% in June. These economies are strong and continue to grow stronger. And all this leads to the third and final point of our sustainable business model of growing revenues by attracting new customers, managing our expenses by utilizing technology. This all helps us maintain some of the most affordable rates to nation, which in turn attracts more customers and grows our business. So with that, thank you very much. I'll now turn the call over to Chuck. Chuck?

Thank you, Sean, and good morning, everyone. Starting on Slide 9. For the second quarter of 2021, we achieved net income of $113 million or $0.56 per share as compared to $86 million or $0.43 per share in 2020. At the utility, OGE's second quarter results were $0.03 higher than 2020 despite mild weather, primarily driven by higher revenues from the recovery of our capital investments and improved load from customer growth, partially offset by higher depreciation on a growing asset base. OGE's core operations performed very well during the second quarter. Our natural gas midstream operation results were $0.16 per share in the second quarter compared to $0.10 in 2020. The increase in net income was primarily a result of higher commodity prices, improved gathering and processing volumes and a decrease in income tax expense, driven by the Oklahoma State corporate tax rate reductions impact on deferred taxes. Turning to our economic update on Slide 10. As Sean mentioned, we are seeing outstanding employment figures in our service territory. Once again, we are also pleased to see customer growth coming in strong at 1.3% year-over-year. Furthermore, our commercial and industrial customer classes are showing real momentum with year-over-year load growth of approximately 12% and 9% in the second quarter more than compensating for the lower residential volumes we are experiencing as employees begin to return to the workplace. Overall, we saw a 5.7% total load increase during the quarter, generally in line with our expectations. For the full-year, we still expect total weather normal load results to be more than 2% above 2020 levels. Let's move now to Slide 11, where I'd like to update you on our 2021 full-year EPS forecast. As discussed during our Q1 call, we began the year with a midpoint EPS target of $1.81 per share, but immediately faced a net headwind from the February weather event of $0.07 per share. As I'll speak to in a moment, in June, we were a net receiver of cash from the second round of SPP settlements, reducing the earnings per share impact of the Guaranteed Flat Bill program by $0.01 per share. Thus, as of June 30, the net impact to earnings from the February weather event is $0.06 per share. Second quarter was on plan with the exception of an additional headwind of mild early summer weather. When you exclude the weather impact associated with the winter storm, unfavorable weather has been approximately a $0.05 loss year-to-date. During the first and second quarters of 2021, OGE's employees have worked hard to deliver for customers and shareholders. To date, we have identified and activated $0.07 to $0.09 of mitigation initiatives, including continued O&M agility. The company's outstanding O&M reduction efforts in 2020 and 2021 will help moderate future rate increases for our customers in our upcoming rate proceedings in Oklahoma and Arkansas. Based on our progress to date, we remain within our EPS guidance range of $1.76 to $1.86 per share for full-year 2021. Looking more long term, a very solid start to 2021 for our core operations, coupled with the capital investments we are making for our customers and communities, position our company well for sustained earnings growth into 2022 and beyond. Our business fundamentals are strong, and we continue to have great confidence in our ability to grow OGE at a 5% long-term EPS growth rate through 2025. On Slide 12, I'd like to update you on the securitization process. Following the additional SPP resettlement that took place in June, the overall impact of fuel and purchase power costs incurred have been reduced by approximately $100 million. As of June 30, fuel and purchase power costs of approximately $850 million were recorded on the balance sheet. In Oklahoma, $755 million has now been deferred to a regulatory asset with the initial carrying cost based on the effective cost of debt financing. In Arkansas, the updated fuel and purchase power costs deferred are approximately $92 million. Recall in Arkansas, we have an order that allows us to recover fuel and purchase power costs associated with the winter storm over a 10-year period while we pursue securitization and filings to be made later in the year. In Oklahoma, we filed testimony in June, which supports our request to recover and securitize the cost associated with the extreme February weather event. The OCC issued the procedural schedule with the hearing to begin on October 11 and a commission order expected by the end of the year. Based on the time line in the legislation, we would expect to receive proceeds from the securitization by mid-year 2022. Before we open the line for questions, I'd like to provide a quick update on our financing plan, as shown on Slide 13. As we noted previously, we initially secured a $1 billion credit commitment agreement that provided short-term funding for our incurred fuel and purchase power costs. In May, the term loan was refinanced by issuing $1 billion of senior notes to serve as a bridge until securitization takes place. These two year notes carry an average rate of 63 basis points and are callable at par after six months, providing flexibility for early repayment depending on the timing of the securitization transactions. As we discussed on our last call, our credit metrics are expected to weaken temporarily due to the fuel and purchase power costs incurred. We believe our metrics will return to our targeted 18% to 20% level once securitization is complete. Speaking in more broad terms, our balance sheet remains one of the strongest in the industry, providing the foundation for the company to continue to make important investments on behalf of our customers and communities. Finally, we remain confident in our ability to drive long-term OGE EPS growth of 5% based off the midpoint of 2021 guidance of $1.81 per share, which, when coupled with a stable and growing dividend, offers investors an attractive total return proposition. That concludes our prepared remarks. We will now open the line for your questions.

[Operator Instructions] Your first question comes from the line of Shar Parisa of Guggenheim Partners.

Hi, good morning team. This is actually Constantine here for Shar. Congrats on a good quarter.

Hey good morning Constantine. And I have to tell you that was the best pronunciation of Shar's name. That was outstanding, operator. Tell Shar, Andrew got it just right. It was just perfect.

I certainly will. Can we start off with the IRP filing? And how are you thinking about the incremental kind of IRP CapEx that's – that might be rolling into the current plan? Are there any thoughts on the timing kind of gradual versus step-up? And there's been some roll in, in 2021 and just kind of thinking about the overall trajectory is that kind of setting the new recurring level?

Yes. I think directionally, the answer is yes. You're going to see a step-up and move forward. In my remarks, I mentioned we're going to probably begin layering in 100-megawatts to 150-megawatts primarily with solar initially each year, layering that in kind of growing into the ultimate retirement. We're trying to space out these retirements such that none of them occur in any single year and really focused on managing the impact to customers. But that would be – if you look at 850-megawatts and 100-megawatts to 150-megawatts a year over five or six years, you kind of fill that gap there. But the point I wanted to make there is you should not expect 850-megawatts in any single year, but more of a smoothing and gradual piece that would just be layered in each year.

Yes, that makes sense. And kind of following up on kind of the credit metric thresholds and kind of the post-Enable investment capacity. How are you thinking about the capital allocation there, again, in relation to the CapEx plan, whether it's a little bit more gradual or there's going to be a bit of a more of a step-up as kind of the exit or the credit rating start getting a little bit more loose? And are you thinking about kind of just organic reinvestment or any kind of return of capital dividend policy reworks, et cetera?

Yes. So I'll let Bryan take a swing and get his voice ready. But we look at earnings growth and dividend policy is both part of our total shareholder proposition. The way we're thinking about your reference to the exit of the midstream business and proceeds there, we've said repeatedly, our first preference is to reinvest in our business and grow our company. And so that's first preference. We're committed to growing the dividend as well. But that's probably the primary focus area. Bryan, do you want to add anything to that?

Yes, absolutely. Good morning Constantine, you mentioned the exit from Enable, and that's important because it certainly improves our business mix as a company we'll be a pure play electric utility, that will help our credit metrics have the best, we'll call it excellent business mix. And as you're aware, that's going to allow us to have even more headroom under our credit metrics. So you put that aside and what we focus on that utility is outstanding customer service. And as you see here in 2021, we've increased our capital plan to deliver on the great investments needed to support customer growth. And that's a trend I think you should expect going into the out years as well. And Sean's discussed our capital investment needs coming out of the IRP. So you look at those in combination, and this company has set itself up really well with a strong balance sheet, constructive regulatory regimes and a capital plan that really works for our customers. So it's an exciting time and it really dovetails nicely with our exit from midstream.

So kind of, I guess, the growing into the investment capacity that you would have from the expanded credit metrics is gradual kind of in line with the CapEx plan?

I think that's fair.

Excellent. Thanks. Will jump back on queue. Thanks for taking the question.

Have a great day Constantine.

[Operator Instructions] Your next question comes from the line of Brandon Lee with Mizuho.

Hey, Sean. Hey, Bryan.

Hi, Brandon.

Andrew, thanks. I think that's a very great pronunciation of my name too.

We're on a roll. Andrew is doing great. With a last name like mine, I notice these things. Well, good morning Brandon.

Good morning, I just had a couple of questions. What's the remaining book value on all the coal plants? And if you accelerate the – do you have plans to accelerate the retirement? And how do you plan to get recovery if you think?

Yes. So good question. So our coal plants have a pretty sizable useful life in regulatory terms. But the way we look at this, we look at – we're looking at all of our assets all the time. But the principal driver of the IRP is really the next five-year action plan. And so it's really focused on these prompt years, and we're always looking at an economic conditions change, but we've made no decisions about future generation. All of those will be, under current plans will be retired well before 2050. But you'll always look at economic conditions and operating performance and things like that. But where we're focused on right now are the next five years as it relates to the three units at Horseshoe Lake and the units at Tinker Air Force Base.

Okay. So how much coal will you have post 2027 after Tinker and Horseshoe are retired?

Yes. We'll still have the three units. We'll still have the three units.

Okay. Great. Thanks.

All right. Thanks, Brandon. Have a great day.

You too.

[Operator Instructions] And at this time, there are no audio questions. I'd like to turn it back over to Mr. Trauschke for any closing remarks.

Thank you, Andrew, and thank you all for your interest in OGE Energy Corp. I appreciate you all being with us today. All of you have a great day, and please take care of yourselves and those around you and I look forward to seeing you all very, very soon. All the best.

Thank you for your participation. This concludes today's call. You may now disconnect.