OGE Energy Corp. (OGE) Q1 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Q1 2022 OGE Energy Corp. Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Jason Bailey, Director of Investor Relations. Please go ahead.

Thank you, Abigail, and good morning, everyone, and welcome to OGE Energy Corp.'s First Quarter 2022 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?

Thank you, Jason. Good morning, everyone, and thank you for joining us on the call today. Before we begin, last night, a number of our communities in our service territory were impacted by severe storms and multiple tornadoes. This was the second round of storms this week, and our thoughts and prayers are with the families and businesses impacted by these severe storms. Many of our OG&E family live in these very same communities. So we're working very safely to support our communities. So moving on to the quarter. Earlier this morning, we reported first quarter consolidated earnings of $1.39 per share, which includes utility earnings of $0.19 per share, earnings at the holding company of $0.05 per share and natural gas midstream operations of $1.15 per share. The first quarter was stable from a weather perspective and the team executed very well, setting our course for the year. Less than 10% of our annual income is derived from the first quarter, and we are confident in our guidance for this year. I'm proud of what we've accomplished for our investors, our customers and communities and I want you to know that we're not done. For 2022, critical operations, investments and our continued grid enhancement work will benefit 16% of our customer base through 27 new or upgraded substations and transmission lines. This quarter, we completed 40 distribution line circuit improvements, including automation and resiliency projects. We also improved 10 distribution substations and 5 communication technology projects. These projects will deliver improved reliability and resiliency for our growing customer base. Combined with last year's grid enhancements, now 36% of our customers will experience improvements from these investments to the grid. Turning to regulatory. Last week, we received responsive testimony in the Oklahoma rate review. As you know, this is 1 part of the overall rate review, and we appreciate the transparent and public process the Oklahoma Commission provides. You may have read the responsive testimony, which is consistent with prior reviews with regard to this point in the process. The testimony does not reflect the positions of the commission, the individual commissioners or Oklahoma regulation, and we will file rebuttal testimony later this month. On Tuesday, the Supreme Court of Oklahoma approved the issuance of bonds associated with the securitization of fuel and purchase power costs from Winter Storm Uri. In Arkansas, the settlement in our fourth formula rate filing was approved and we also received an order approving the extension of our formula rate plan. We expect an order from the commission by May 18 on the terms of the extension. Oklahoma and Arkansas continued to expand with load growth continuing at the expected pace of 3.5% to 5% in 2022. Customer growth continues to be on track as well, coming in at 1.3% for the first quarter of the year. Bryan will have more details when he discusses the first quarter results. The business and economic development remains very active in our service territory. Our affordable low rates are a significant driver of companies coming to or expanding their operations in our service territory. Three hospital systems in the Oklahoma City metro are growing. And between them, we anticipate an additional 15 megawatts over the next couple of years. Additionally, Georgia Pacific recently announced plans to stand up new production lines at their 640-acre manufacturing operation in Muskogee, Oklahoma. These efforts, while incremental 20 to 50 basis points of our overall load build on one another, demonstrating how consistent and predictable growth makes us a stronger company as we support stronger communities. In Q1 alone, we've connected 14 megawatts of new load from new large projects, and we are excited about the year ahead. We will continue to work on the many opportunities that will bring more load, more jobs and more investment to our communities. Our economies in Oklahoma and Arkansas remained strong with unemployment rates well below the national average. And 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 in maintain some of the lowest rates in the nation, which in turn attracts more customers. We've accomplished a lot in the first quarter, setting us up for a strong year. Now as we've all read, supply chain issues and reviewed by the U.S. Department of Commerce has impacted solar panel availability across the industry. We are evaluating responses we have to the active solar RFP with the understanding that solar likely will be unavailable before 2025. Last week, we released our flexible resources RFP which seeks a quick start, a quick responding resource like a hydrogen capable combustion turbine batteries or other technologies. As a reminder, our current investment plan does not include any potential investments associated with our 2021 IRP. We will be nimble as we address our future capacity needs, and we will update you as we move through the process. Inflationary pressures are also impacting certain materials and supplies as other industries are also experiencing. We will remain flexible and agile with our investment opportunities to minimize that impact on customers. In April, we began exiting out of our energy transfer unit, which Bryan will update you on shortly. Our plan remains to exit the majority of this position by the year-end, and we will continue to update you each quarter on our progress. Now I was doing some research for a talk I gave a couple of weeks ago about the future of the energy sector and wanted to talk about how technology has changed at OG&E. Right now, there are nearly 1 million communication points of devices on our system. But a decade ago, that number topped out at around 500. Our industry is undergoing a digital transformation, the likes of which we have not seen. I am biased, but I would argue that the electric grid is among the most complex machines in the world and must be flexible to deliver affordable, reliable and resilient service to our customers. As we add increasing amounts of renewables and see additional technology in homes and businesses, the energy grid must be smarter, must be stronger, more dynamic and maintain security and affordability. Achieving this bright future means we will deploy new and different technology like AI and automation to improve both grid functions and customer interactions. We are bullish on technology and while economies of scale will prevail, we're not making singular big bets, rather making technology investments continually along the curve. This technology curve is not just in our business but also in our customers' homes and businesses. This technology requires greater precision and more functionality compared to the past, and we rely on it for a multitude of uses. Our team has been on a path to transform OG&E into a customer-centric company. We're in the process of centering decisions on customer impact as we balance the needs of all stakeholders. This work is already paying off and improved customer satisfaction measures, increased internal collaboration across teams, identifying new customer programs and communication tools that we can deploy in the future. We believe this shift will help us continue to grow communities, serve customers better and improve employee experience and deliver strong shareholder returns. So with that, I'll thank you and turn the call over to Bryan. Bryan?

Thank you, Sean. Thank you, Jason, and good morning, everyone. In February, we announced OG&E's 2022 earnings guidance midpoint at 6% above 2021, while at the same time, increasing the utility's long-term earnings per share growth rate to 5% to 7% through 2026. I'm happy to share with you that we're off to a great start on this 5-year plan, thanks to the outstanding efforts of our employees across the company, which is reflected in our first quarter results. On Slide 5, you can see that for the first quarter of 2022, we reported earnings of $1.39 per share as compared to $0.26 per share in the same period in 2021. The electric utility OG&E reported earnings of $0.19 per share in the first quarter compared to $0.06 per share in the same period in 2021. The increase was primarily due to higher sales volumes from solid load growth as well as increased recoveries of capital investments. As expected, these favorable revenue trends were partially offset by depreciation on a growing asset base and a planned increase in operation and maintenance expense. As a reminder, first quarter 2021 results were impacted by losses from the Guaranteed Flat Bill program during Winter Storm Uri. Our Natural Gas Midstream segment reported earnings per share of $1.15 in the first quarter compared to $0.19 per share in the same period in 2021. The increase was primarily due to a $282 million pretax unrealized mark-to-market gain on our investment in energy transfer, while 2021 reflected equity and earnings of Enable. Holdco and other operations reported earnings of $0.05 per share compared to $0.01 per share in the same period in 2021. The increase was primarily due to a consolidating tax adjustment of $12 million that will reverse over the course of the year. Turning to our economic indicators and load results on Slide 6. Our customer growth continues at a nice clip with a 1.3% increase in the past 12 months and the underlying economies in Oklahoma and Arkansas continued to be strong as reflected in the unemployment data shown on the slide. The strength of our local economies was once again reflected in our first quarter load results, which were in line with our expectations. We continue to forecast retail load growth between 3.5% to 5% in 2022 over 2021 levels. As Sean mentioned in our fourth quarter call, we added 200 megawatts of new customer connections in 2021 and continue to see our load rates draw businesses to our service territory in 2022. For example, in the first quarter, we added 10 megawatts from data mining companies alone and expect that pace of new connections to accelerate throughout the year. Overall, commercial load growth grew 6.5% in the first quarter and we expect that growth rate to be even higher in the second half of the year with strength in many sectors, including manufacturing, food processing and distribution and other industries. Let's briefly move to Slide 7, where we are affirming our guidance issued in February. Given our strong first quarter results and expectations of solid execution for the remainder of the year, our 2022 utility guidance remains unchanged at $1.87 to $1.97 per share. As you may know, about 90% of our utility earnings are typically generated in the second, third and fourth quarters. Regarding our 5-year capital plan, as a reminder, the potential investments associated with our 2021 IRP are not in that plan. Thus, solar panel availability has no impact on our long-term guidance or our confidence in the ability to grow utility earnings per share at 5% to 7% through 2026. Let's move to Slide 8 for an update on our 2022 financing plan. We began the exit of our midstream investment in April and have sold 21.75 million energy transfer units and received $246 million in net pretax proceeds through the end of April. These sales transactions to date reflect over a 60% premium above the ET unit price when the merger agreement was announced in February 2021. We plan to utilize the proceeds for reinvestment in our core business and to pay down short-term debt at the holding company. Turning to Winter Storm Uri securitization. As Sean mentioned, on Tuesday of this week, the Supreme Court of Oklahoma approved the issuance of securitization bonds. If you recall, the Oklahoma Corporation Commission previously approved the use of securitization and found our fuel and purchase power costs from Winter Storm Uri to be prudent. The bond issuance is expected to occur this summer. Once securitization is completed, we expect FFO to debt to be in the range of 18% to 20% for 2022, 2023 and 2024. To summarize, we have one of the strongest balance sheets in the industry. providing the right foundation for our long-term OG&E EPS growth rate of 5% to 7%. With that, we will now open the line for your questions.

[Operator Instructions]. And our first question comes from the line of Shahriar Pourreza with Guggenheim Partners.

It's Constantine here for Shahriar. Congrats on a great quarter.

Thank you, Constantine, and nice to hear from you.

Starting off with maybe a bit more of a broad question. In terms of capital allocation, you're starting to see some material proceeds from the ET shares. What sort of options are you looking at in terms of completing the sales towards the tail end of the year at ATM or any kind of forward sales? And is the primary allocation still kind of equitizing the regular spend just given the strong cash and balance sheet position, does that prompt some accelerated CapEx spending in the near term?

Yes. I'll take the first part of that, and then I'll let Bryan address the use of proceeds question. But Constantine we're -- we stand by our comments, we expect to -- the majority of our position to be exited by the end of the year. And we're going to update you on a quarterly basis. We're not going to get into how we're doing it and give daily updates only because it's our belief that some may look to trade around that information and ultimately put pressure on the ET units and we want to maximize the value for all of our shareholders.

Great. Yes. So thanks, Sean. And Constantine, we're really happy with the progress we've made to date on exiting the ET shares and as we've mentioned in the past, as we complete the exit of the midstream business, we're going to be able to reduce our holding company debt. We started the year with roughly $300 million to $400 million of Holdco short-term debt. So these proceeds will allow us to bring that down close to 0. And then you're looking at -- as we mentioned back in February, we're looking at an enhanced capital plan that's $950 million per year for 5 years and very customer focused, and we have a tremendous growth opportunity in the state of Oklahoma and Arkansas with those economies, and we're going to put that capital to use for our customers.

Excellent. I think that clears it up. And in terms of the regulatory constructs and the proceedings, the rate case, obviously, is still kind of early innings, but how are the conversations with stakeholders and regulators? And is there a traction on any of the new mechanisms that you envisioned? Just then maybe any comments on potential path to settle as you've done in the past. Is that still an option?

Yes. I think everything is still on the table. Nothing has been taken off the table. It's still very early in the process. As I mentioned, we'll file our rebuttal testimony towards the end of the month. And the testimony that we received to date is very consistent with what we received in the prior case. And so we'll work through this and again, it's just early. But I feel like we have a very strong case and a good opportunity here to have a constructive outcome.

Perfect. I think that sums it up pretty well.

All right. Have a great day.

Thank you, Constantine.

[Operator Instructions]. Our next question comes from Brandon Lee with Mizuho.

Just a quick question. You guys mentioned that you received pretax proceeds of $246 million. How much is that after tax?

So yes, Brandon, the $246 million, that's net of selling fees and commissions. So that's a net number from a proceeds perspective. And when you think about our investment in energy transfer, you kind of need to look at the entirety of that investment. If you do the math today, you're going to look at gross proceeds for our entire ownership interest and energy transfer based on today's unit price and what we've sold of somewhere in the $1.0 billion to $1.1 billion area. And of course, you would pay your normal tax rates on that federal and state taxes. As a reminder, we have a negative tax basis in energy transfer of an area of $800 million. So when the dust settles, you pay the normal taxes on your gross proceeds and then you pay taxes on that negative tax basis of $800 million, which you can do the math on that, but that's roughly a $200 million tax liability. So if you do all that math together, I think what you would see is $1.1 billion of gross proceeds, a tax bill in the $450 million type range. So net proceeds of over $600 million.

Great.

Absolutely. Have a good day, Brandon.

I am showing no further questions at this time. I would now like to turn the conference back to Sean.

Great. Thank you, Abigail. As we close out today's call, I would like to leave you with a few thoughts. Already this year, we benefited from continued and expected load and customer growth implemented key projects are in service and delivering reliable and resilient service for our customers, received our fourth formula rate filing in Arkansas, begun the rate review of process in Oklahoma, issued RFPs and to address future capacity needs, released our inaugural TCFD report and begun our energy transfer exit. Our accomplishments to date this year are many. And as I mentioned earlier, we're not done. And I'm so proud of every single person who works here at the company. They take our noble purpose to energize life to hard each day and every day, incredibly serving our customers, communities and investors at the same time each other. So thank you for your interest in OGE Energy Corp. and being on the call today. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.