Q4 2023 OGE Energy Corp Earnings Call

Thomson Reuters StreetEvents

Thu, Feb 22, 2024, 2:24 AM33 min read

In this article:

Participants

Jason Bailey; Director of IR; OGE Energy Corp.

Robert Sean Trauschke; Chairman, President & CEO; OGE Energy Corp.

W. Bryan Buckler; CFO; OGE Energy Corp.

Aditya Darshan Gandhi; Analyst; Wolfe Research, LLC

Anthony Christopher Crowdell; Executive Director; Mizuho Securities USA LLC, Research Division

Durgesh Chopra; MD and Head of Power & Utilities Research; Evercore ISI Institutional Equities, Research Division

Gregg Gillander Orrill; Executive Director & Equity Research Analyst of Utilities; UBS Investment Bank, Research Division

Julien Patrick Dumoulin-Smith; Director and Head of the US Power, Utilities & Alternative Energy Equity Research; BofA Securities, Research Division

Nicholas Joseph Campanella; Research Analyst; Barclays Bank PLC, Research Division

Paul Basch Michael Fremont; Research Analyst; Ladenburg Thalmann & Co. Inc., Research Division

Shahriar Pourreza; Senior MD & Equity Research Analyst; Guggenheim Securities, LLC, Research Division

Travis Miller; Director of Utilities Research and Strategist; Morningstar Inc., Research Division

Presentation

Operator

Good day, and thank you for standing by. Welcome to the OGE Energy Corp. 2023 Fourth Quarter Earnings and Business Update Call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Jason Bailey, Director of Investor Relations. Please go ahead.

Jason Bailey

Thank you, (inaudible), and good morning, everyone, and welcome to OGE Energy Corp.'s Fourth Quarter 2023 Earnings and Business Call Update. 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 today.
I will now turn the call over to Sean for his opening remarks. Sean?

Robert Sean Trauschke

Thank you, Jason. Good morning, everyone. Thank you for joining us today. It's certainly great to be with you. I'm excited about our message to you this morning as our results for 2023 were top of guidance, and we are updating our 5-year plan, including a consolidated earnings growth rate based on the strong fundamentals of our business. It's truly a great time to be here at the company.
Before we get into the plan, I do want to take a moment to talk about our people here at Big Orange. In 2023, the team delivered results for our customers, our communities and shareholders by providing reliable energy at some of the lowest rates in the nation every day.
Once again, our safety results were very strong with the last 8 years being the safest in our 121-year history even as we continue to face some of the most extreme weather in the country, like Winter Storms Gerri and Heather in January where our plants ran generating electricity to the grid to ensure our customers could continue to live their lives and run their businesses.
Our team achieved recognition for our culture in 2023. I mentioned last quarter that we've been named the #1 [State] Employer in Oklahoma by Forbes Magazine. And later in the year, we were also named a Top Workplace in Oklahoma following the feedback our employees gave in our annual workplace survey.
And just last week, Forbes named OGE Energy the 16th best midsized employer in the country, achieving the highest rank in our sector and the highest ranking of any company in Oklahoma. These results are not happenstance. They come from a dedicated commitment to fostering a culture grounded in our values and our beliefs and operationalized with a focus to deliver safe, reliable and resilient electricity combined with outstanding customer experiences every single day.
I'm so proud of everyone here at the company, and it's because of them that we are discussing great financial results. This morning, we reported consolidated earnings at the top end of our guidance of $2.07 per share for the year, including $2.12 per share for OG&E and a holding company loss of $0.05 per share.
Our sustainable business model provides opportunities to drive load growth while simultaneously investing in the grid and generation for many years to come in a way that is mindful of ensuring a smooth customer impact and delivering consistent financial returns.
Last year, my message to you was we've got this. The plan we introduced to you this morning is an extension of that message and is consistent with the growth we've delivered in the past. Over the next 5 years, we expect to grow consolidated earnings per share at 5% to 7%. Looking back at the 10-year period before we exited our midstream natural gas segment, we delivered over 6% of consolidated earnings per share growth.
The difference now is that we've simplified our business mix and removed the volatility that was associated with that business segment. Our plan going forward, which Bryan will detail, is based on a pure-play electric model with premium fundamentals, including a strong financial base and credit metrics, excellent load and customer growth and a lower risk investment plan focused on delivering a safe, reliable, resilient electric service that our customers expect.
Today, I want to talk to you a bit more about 3 key aspects of our work that drive our results, reliability, growth and affordability. Our grid and weather hardening investments continue to deliver great results for our customers. Our grid reliability investments benefited customers in 2023, saving over 320 minutes of interruption for the average impact to customer. And from a [SAIDI] perspective, automated restorations saved our customers more than 7.5 minutes of SAIDI or 6.2 million customer minutes of interruptions.
We also built or upgraded 21 substations to serve our growing service area, and we will continue making these types of investments in the grid that directly benefit our customers. This foundation powers our growing communities and economic development engine that has delivered 11 new projects in our service area that are projecting to create thousands of jobs and garner billions of dollars in additional investment.
This type of growth is not by accident. We set the stage for these results more than 5 years ago when we began investment and growing the local economy in cities and towns all across our service area. Our communities maintain strong unemployment rates and continue to attract expanding in new businesses that our low rates help secure.
For example, just last month, Stardust Power announced its plans to build a new battery-grade lithium refinery in Oklahoma, bringing hundreds of jobs to the community as well as community infrastructure development. Oklahoma's central location, access to multiple transportation routes, highly skilled workforce and low-cost energy were all reasons noted for the site selection, and we look forward to serving Stardust as they get up and running.
Our load forecast for 2024 continues to keep pace with the outstanding growth we've experienced over the last 3 years, and our long-term load forecast remains as strong as our service area continues to grow. Turning to the regulatory front. Constructive regulatory outcomes enable us to support growth, serve customers and achieve results for our shareholders.
We've released the draft IRP that will lead to RFPs later in the year for additional generation to meet the needs of our growing service area. We will be disciplined with regard to customer impact and expect the combination of gas, solar, along with energy efficiency and DSM programs to meet the identified needs.
In Oklahoma, we have filed a rate review and expect new rates to be in place by July 1. In Arkansas, we've achieved a settlement under the Formula Rate Plan for a 1.4% increase in rates effective April 1. Today's macro environment continues to -- macroeconomic environment continues to create pressure on our customers, and we remain committed to affordability and keeping bills low.
As I mentioned in our last call, we reduced the average fuel charge by $21 per month in November, which had an immediate impact on customer bills. We have doubled down on connecting customers to programs and services to help them manage their energy used in monthly bill, enrolling nearly 20% of our customers (inaudible) programs in 2023, including energy efficiency and home weatherization as well as connecting our customers to billing assistance when they need it.
Additionally, our team continues to innovate energy efficiency programs that will help customers reduce their bill and increase reliability, including making low-cost repairs to qualify customer homes for weatherizations, piloting solar and battery storage technology at schools and piloting managed flexible load technology.
As we celebrate the impact of those programs, I want to close with a few important thoughts. We are committed to growth for our communities, for our customers and to financial growth for our shareholders and our employees. The case for OG&E is strong, and I'm bullish on our future.
We're leveraging the economic development engine we built that drives load growth. Our excellent execution is driven by fully engaged employees. We are determined to reach our North Star of delivering safe, reliable and affordable electricity to our customers. We operate and construct the regulatory jurisdictions, and we've created a competitive, credible, lower-risk financial plan backed by a strong balance sheet. All of which leads to a long-term plan where we address system growth and customer needs, which are at the center of our decisions.
Next week, OG&E turns 122 years old. And as we celebrate that milestone, we look ahead to the future, where our deep, diverse [set of] investment opportunities allows us to meet customer expectations and achieve investor commitments. Keeping customer bill impact in mind, we will invest alongside growth in our communities to keep the momentum going for many, many years to come.
Thank you. I'll turn it over to Bryan. Bryan?

W. Bryan Buckler

Thank you, Sean. Thank you, Jason, and good morning, everyone. I am pleased to review our 2023 results with you and provide our 2024 outlook as well as details on our long-term consolidated EPS guidance. Let's start on Slide 6 and discuss full year 2023 results.
On a consolidated basis, 2023 net income was $417 million or $2.07 per diluted share compared to $666 million or $3.32 per share in 2022. Earnings for last year included $1.16 per share for natural gas midstream operations, which we fully exited in 2022 through the sale of our Energy Transfer units.
We had a great year of execution. OG&E Energy's 2023 consolidated earnings reflect results at the high end of our original and revised guidance. In our core business, the electric company exceeded expectations, achieving net income of $426 million or $2.12 per diluted share compared to $440 million or $2.19 per share in 2022. The year-over-year decrease in electric company net income was primarily due to milder weather compared to the prior year.
As you may recall, Oklahoma and Arkansas experienced an exceptionally hot summer in 2022. Milder weather in 2023 was partly offset by the benefits of strong load growth of 2.7% (inaudible) year. Other drivers of current year results compared to the prior year were depreciation and interest expense related to our capital investments, increased operation and maintenance expense, higher revenues from recovery of capital investments and allowance for equity funds used during construction related to our 2023 capital investments.
Other operations, including our holding company, reported a loss of $10 million or $0.05 per diluted share in 2023 compared to a loss of $5 million or $0.03 per share in 2022. The increase in net loss was primarily due to higher interest expense related to increased short-term debt and Q4 results included an approximate $0.02 tax benefit related to our former natural gas midstream business.
As I mentioned, 2023 weather normalized load growth came in at 2.7%, led by the commercial sector, which grew electricity usage by a remarkable 11%. We have now experienced back-to-back-to-back annual total retail load growth of 2.4% or greater.
As you will see in a moment, we expect 2024 load to continue this enviable trend, which highlights the economic vibrancy of Oklahoma and Arkansas enhanced by our [low] rates. Please see the appendix for more information regarding fourth quarter 2023 results.
Turning to Slide 7. For 2024 on a consolidated basis, we are forecasting earnings of $2.12 per share with a range of $2.06 to $2.18 per share. This represents a consolidated growth rate of 6% from our original 2023 guidance of $2 per share. And as I'll discuss in a moment, we expect consolidated EPS to continue to grow 5% to 7% throughout our 5-year forecast period.
2024 consolidated EPS expectations incorporate electric company earnings of $2.22 per share. The electric company has consistently delivered results in line with our commitments. Its earnings growth profile has the foundation of strong load growth in 2024 that looks similar to the past 3 years as well as an investment plan that is focused on our ability to serve our growing customer base with a reliable, resilient and safe power system.
At the holding company in 2024, we are forecasting a loss of $0.10 per share, consistent with the expectations I shared with you on prior calls. Let's now move to Slide 8. As Sean mentioned, today, we are introducing a long-term and annual consolidated EPS growth rate guidance of 5% to 7% based off of our 2024 consolidated earnings midpoint estimate of $2.12 per share.
We believe OG&E Energy has one of the most credible 5-year financial plans in the entire industry. It starts with the service area with favorable business prospects. In fact, we project load growth of 3% to 5% in 2024 and expect 2025 to be well above our historic 1% load growth with emerging trends that indicate continued strength in years beyond 2025.
Our balance sheet is one of the strongest in the industry, supporting the $6 billion 5-year capital investment you see in today's materials. Consolidated FFO to debt is forecasted to remain strong throughout the 5-year forecast period with no big dips and instead a consistent performance of approximately 17% each year.
We continue to target a dividend payout ratio of 65% to 70% and expect earnings per share growth to exceed dividend growth over the 5-year period. In short, we believe our 5-year plan is tremendous, and it will be implemented by a proven team with a track record of operational excellence.
Now let me take a moment to discuss our future investment plans. Our growing operations will require a substantial level of infrastructure to support the reliability of our transmission and distribution system. Our future plans will be flexible, and annual level of capital spending in our T&D system could vary depending on the amount and timing of potential new generation capacity investments.
Our deployed capital will address our customers' requirements for a safe and reliable power system while maintaining our competitive advantage of low rates and delivering on our commitments to shareholders in a lower-risk fashion. In essence, this is all a continuation of the execution of our sustainable business model.
Before I hand the call back to Sean, let me summarize today's message. Our team has once again delivered exceptional results in 2023 at the high end of our original and increased EPS guidance range. Looking ahead, we have developed an operational and financial plan spending 5 years, aiming to bring substantial value to customers and OG&E's power system, supporting economic development in our communities and providing a compelling investment thesis for our shareholders.
Our future outlook is based on this lower-risk investment strategy, backed by exceptional load growth, a solid financial position, constructive regulatory jurisdictions and consistent executions from our employees.
With that, we will open the line for your questions.

Question and Answer Session

Operator

(Operator Instructions) And our first question comes from Shar Pourreza of Guggenheim Partners.

Shahriar Pourreza

Congrats, Sean, on the results. Sean, maybe just starting off on the recently filed IRP update, there's obviously over gigawatt capacity that's within the 5-year time frame. It's not in plan. I guess how quickly would you look to update that portion of the CapEx needs after the IRP? So what's the cadence of updates? And could that incremental spending kind of crowd out some of the base spending as you manage customer rates?

Robert Sean Trauschke

Yes. I think that's a great question. And so we'll handle this process just like we did with the last one. And so what we'll do is we'll finalize that IRP. We'll go through the RFP process where we go to an extensive review. There's a lot of stakeholder discussions.
We follow all of the commission rules, and then we'll negotiate some agreements. And we'll file that at the commissions. And once we get approval, then we'll layer that into our forecast. A couple of points about that. I think your point there was that crowd out.
I'd probably use a different word than crowd. But what I would say to that, Shar, is that we have a lot of flexibility around our investments, and we can move some things around. So yes, we will be very flexible and move some things around and really smooth that impact out the customers as much as we can.
And then I've said repeatedly, our preference, our very strong preference is to really smooth these generation additions out over a number of years. And so not to create a situation where we have a very large asset going into service over a couple of years. Does that help?

Shahriar Pourreza

Yes, totally. And then just lastly, just a balance sheet question. I mean, obviously, there's incremental spending, this is one of the key things on the call today, right? As you're getting to that 17% FFO to debt metric, would you look at further equity support in line with the [Opco] authorized cap structure of roughly 50-50 or something different or not at all, actually?

Robert Sean Trauschke

Yes. Thanks for that. And what I would say, Shar, is I think Bryan was very clear, there's really no equity needs in our plan. I think what I would offer for you, though, is that we're managing this business for the long term. And when we have the opportunity with our investments and our growth down the road, and we need to issue the equity, we'll issue it.

Operator

And our next question comes from Nicholas Campanella of Barclays.

Nicholas Joseph Campanella

So yes, thanks for the increase in the CapEx plan and all the details there. I guess, just simplistically, what is rate base growth on this new plan as you see it?

Robert Sean Trauschke

Bryan, do you want to cover that one?

W. Bryan Buckler

Sure. Sure. And yes, in the appendix, we've given our best current estimate of our 5-year capital expenditures and we've also provided our starting rate base number as filed in our recent rate case filing as well as an annual depreciation expense trend line during the 5 years. So maybe I'll punt to Jason maybe after the call to help with kind of the annual rate base number across the 5-year plan, but from a 5-year CAGR perspective, it's roughly 7.5%.

Nicholas Joseph Campanella

7.5%. That's helpful. Okay. And then, I guess just holdco was $0.05 in '23. You have another $0.05 of drag in '24 from probably just new debt issuances. Just -- how do you kind of see your holdco drag progressing through the plan here? Does it remain consistent at that $0.10? Or does it grow through '25 and beyond?

W. Bryan Buckler

Yes. Nick, it's Bryan again. As I've spoken to the last few quarters, the utility and holding company are lining up very well for 2024 and beyond. You've heard us speak to the many tailwinds at utility. And we spoke about a lot of them today, namely the very strong load growth and a host of incremental infrastructure investment needs. And so we're expecting utility to grow very meaningfully during the 5-year period.
And the holding company really is there to help to finance the business as we go along the way. So you have the capital plan numbers. And today, we're providing this consolidated view of OG&E Energy Corp., and we have a lot of confidence in achieving that 5% to 7% consolidated EPS growth rate throughout the 5-year period, Nick.
So we're looking at it as a consolidated view. And certainly, you'll see the holding company tick up a little bit each year. But in total, when you look at the whole package, we feel very confident and strongly about our ability to deliver that 5% to 7% consolidated CAGR and annual growth rate.

Operator

And our next question comes from Durgesh Chopra of Evercore ISI.

Durgesh Chopra

Happy 122nd birthday in advance.

Robert Sean Trauschke

Thank you. Thank you. That will be a big day.

Durgesh Chopra

It sure is. Just maybe can you help us bridge, obviously, a very steep increase in capital plan, and it's nice to see load growth is supporting a lot of that. But just can you help us bridge what big projects, big generation projects are in the plan now? Obviously, I think Horseshoe Lake is in the plan now. But just any big projects that you can call out, which helps us bridge going from $4.75 billion to $6 billion, please?

Robert Sean Trauschke

Yes. Really, Horseshoe Lake is the single big project in the 5-year capital plan. Really what is driving a lot of that is load growth. We are investing a lot in connecting new customers and building infrastructure to support them all the while improving the reliability and resiliency of our assets. But other than Horseshoe Lake, there's not a big project in there that's really driving that.

Durgesh Chopra

Got it. Excellent. Okay. That's what I was expecting. I just wanted to check. Okay. That's perfect. And then maybe just any updates on the Oklahoma rate case here? Any feedback or initial feedback from stakeholders or discussions with regulators and others that you can share with us?

Robert Sean Trauschke

Not at this time. I mean, it's still early in the process and testimony hasn't been filed for all the parties yet. And so we'll go through that, and we'll get this resolved and continue executing on our business.

Operator

And our next question comes from Julien Dumoulin-Smith of Bank of America.