OGE Energy Corp. (OGE) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the OGE Energy Corp. 2024 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.

Thank you, Didi, and good morning, everyone, and welcome to our call. With me today, I have Sean Trauschke, Chairman, President and CEO; and Chuck Walworth, CFO and Treasurer. In terms of the call today, we will first hear from Sean, followed by an explanation from Chuck of our 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. Thank you for joining us today. It's certainly great to be with you. 2024 was an outstanding year for the company, for our customers, for our employees and for our shareholders. I'm excited about our message to you this morning as our consolidated earnings results for 2024 were above guidance. The momentum we've built continues to accelerate, establishing a higher base for growth going forward. Some of our top accomplishments for the year, including adding more than 10,000 customers, continuing to see drop in our SAIDI numbers as our grid strengthening efforts deliver value for our customers, replacing one of our largest substations ahead of schedule, relieving congestion in one of the SPP's most congested areas. We have nearly 450 megawatts under construction at Horseshoe Lake, which incidentally also celebrated centennial this year, as did Muskogee. We have another 100 megawatts under construction for Tinker Air Force Base coming online next year to coincide with the base expansion in 2028. We've continued to enhance the self-service tools like our mobile app and website, so customers can do business with us 24/7. We continue to use automation and AI to gain efficiencies and reduce costs, further improving that customer's experience. And finally, another incredibly strong safety year. Our safety culture underpins our entire organization, and I couldn't be more proud of our team for putting safety first. Turning to 2024's financial performance. This morning, we reported consolidated earnings exceeding the top end of our guidance of $2.19 per share for the year, including $2.33 per share for the electric company and a loss at the holding company of $0.14. Our sustainable business model continues to provide opportunities to drive load growth while simultaneously strengthening grid for many years to come in ways that smooths the customer impact and delivers consistent financial returns. We're laser-focused on reliability, growth and affordability. And I know sometimes I sound like a broken record, but history proves that we do what we say we'll do. The investments we make deliver results, build these communities and present a deep and diverse set of opportunities for us to pursue. Chuck will detail our financial plan going forward as we build on our strong financial base and credit metrics and the momentum of our excellent load and customer growth to deliver the safe, reliable, resilient electric service that our customers expect. On the regulatory front, our constructive regulatory environment enables us to support growth, serve customers and achieve results. And by midyear, in Oklahoma, we will file for both recovery of our plans to meet generation needs and a general rate review. And at year-end, in Arkansas, we will file for a general rate review and a formula rate plan as we have in the past. The advantage of our low rates, combined with the overall economic strength of the communities we serve led to the exceptional load growth of 7.6% for 2024. Today, Oklahoma City and Fort Smith unemployment rates beat the national average and our hometown Oklahoma City's unemployment rate of 2.8% clocks in as the sixth best for large metropolitan areas. And the strength of these communities drove our 1.2% increase in customer growth. On the commercial side, load growth is diversified among a number of industries, including multiunit housing, defense, manufacturing and tourism. And I can't overstate these projects are the result of our multiyear effort to drive economic growth in both Oklahoma and Arkansas, partnering with communities to land new business relocations and expansions. Alongside the commercial growth comes the people who support those businesses, and our residential load grew by 2.4% in '24. I understand there's a lot of excitement about data centers and rightly so. And we are very excited about this opportunity, but I want to be clear that our load growth in '24 and forecasted for '25 is without any data centers. While we remain optimistic about these opportunities, and we're still in discussion with a number of potential projects, and we'll certainly update you when we can. We remain committed to growth for our communities and for our customers and the case for OG&E is strong, and I'm certainly bullish on our future. We're leveraging the economic development engine we built that's driving this load growth. Our excellent operational execution is driven by a fully engaged set of employees who are determined to reach that North Star of delivering safe, reliable, safe and affordable electricity for our customers. And we operate in constructive regulatory jurisdictions. We've created a competitive and credible financial plan backed by a balance sheet that's one of the strongest and all of which leads to a long-term plan where we address system growth and customer needs. And today, we are setting a guidance midpoint for 2025 that is 7% higher than a year ago because of the proven and anticipated load growth. We expect to continue to grow 5% to 7% annually from this new midpoint. And next week, OG&E will celebrate its 123rd birthday, and we'll celebrate by investing in the grid and generation in ways that allow us to meet customer demand for electricity grounded in improving reliability and maintaining those load rates as we achieve our commitments to you. Thank you. And I'll now turn the call over to Chuck. Chuck?

Thank you, Sean, and thank you, Jason, and good morning, everyone. I'm pleased to review our outstanding 2024 financial results with you, introduce our 2025 financial outlook and discuss our long-term earnings growth guidance. Let's start on Slide 6 and discuss full year '24 results. Consolidated 2024 net income was $442 million or $2.19 per diluted share compared to $417 million or $2.07 per share in '23. 2024 was yet another year of great execution by our dedicated members and a reflection of the health of our growing communities and the constructiveness of our regulatory jurisdictions. We began the year expecting consolidated earnings of $2.12 per share. Throughout the year, we experienced stronger than forecasted load growth as well as warmer-than-normal summer. We updated our expectations by pointing to the top of '24's EPS guidance range. We exceeded expectations and closed the year $0.07 above our original midpoint. In our core business, the electric company achieved net income of $470 million or $2.33 per share compared to $426 million or $2.12 per share in '23. The main drivers of the year-over-year increase in net income were exceptional load growth and higher operating revenues driven by the recovery of capital investments. The holding company reported a loss of $28 million or $0.14 per diluted share in '24 compared to a loss of $10 million or $0.05 in '23. The increase in net loss was primarily due to higher interest expense and lower net other income. You can find fourth quarter results in the appendix. Now let's review our '24 load results by turning to Slide 7. Our customer growth was strong, finishing at 1.2% as we continue to attract new business to our service area. Our weather-normalized load growth was truly exceptional at 7.6%, the largest annual weather-normalized load growth in my almost 25 years at the company. The strength was across all customer classes with commercial leading the way with an extraordinary 21.4% annual growth. I'm especially excited to see the 2.4% growth in the residential class as it follows and reinforces all the growth we are experiencing across our system. As you will see, we expect our total load to continue this trend into 2025. Stepping back for a moment, our performance in '24 isn't new, and we expect it to continue. We charted a path years ago when we focused on growing the electric company by growing our load with attractive lower rates and higher quality service, building an economic development engine and focusing on our cost structure. Since then, we've built a track record of performance. If you look where we plan to be at the end of '25 compared to the past 10 years, we will have managed to keep O&M per customer growth at less than 1%, rates at some of the lowest levels in the nation, load growth at a compound annual 2.2% all while investing more. Our 5-year capital plan has more than doubled. Our balance sheet is strong. Our dividend has grown at a compound annual rate of 5% and our consolidated earnings per share, excluding midstream results, has grown at a compound annual rate of approximately 6%. These are real results. Let's turn our attention to the details of our '25 plan on Slide 8. Building on the load growth tailwinds in '24, we have developed a financial plan that sets consolidated earnings at $2.27 per share with a guidance range of $2.21 to $2.33. We are setting the 2025 midpoint 7% higher than '24's original midpoint. In addition, we are now basing our long-term annual EPS growth rate of 5% to 7% off of this higher '25 midpoint and extending it through '29. We are pleased to be able to deliver results for our customers and base future earnings expectations off a higher level. Looking at load quarter-to-quarter or near-term forecasting can be challenging, especially when dealing with larger loads that may accelerate or delay coming online. That being said, we expect '25 to be another year of exceptional weather-normalized growth of 8.5% by year-end, adding to the last 4 years of historically strong load growth. We believe '25 sets up well, and we can achieve our goals based on the operational execution of each one of our members. Our financial plan objectives include maintaining our competitive low rate advantage by focusing on our cost structure, managing the regulatory process by minimizing the time between investments and the return and recovery of the investments and growing OGE by maintaining a highly credible total return proposition for our shareholders. Turning to Slide 9. The strength of our balance sheet, which is one of the strongest in the industry, remains a competitive advantage for us. We continue to forecast FFO to debt of approximately 17% throughout the forecast period with no need for external equity issuances other than a modest annual DRIP. We have no fixed rate maturities until 2027. We anticipate a long-term debt issuance at the electric company of up to $350 million in the first half of the year. We rolled forward our 5-year investment plan in '29, increasing the plan by $250 million. Sean spoke to the important items we will work on in '25, including generation capacity associated with the 2024 IRP and system projects. We will communicate our plans, including financing with you after we receive the appropriate approvals. In my closing remarks today, I would like to leave you by expressing my confidence in our financial plan. We believe we have built a credible 2025 financial plan that exceeds the expectations set out just a year ago when we introduced our first pure-play consolidated growth rate guidance. Our confidence in the financial plan extends beyond '25, and that is reflected in basing our 5% to 7% expected annual growth rate off of a higher '25 EPS midpoint. The strength of our plan this year allows us to continue to focus on the future and address the investments required to meet the electric demand of our growing communities. Our confidence remains based on the belief in the dedication of our employees and their ability to get the job done. That concludes our prepared remarks, and we'll now open the line for your questions.

[Operator Instructions] And our first question comes from Durgesh Chopra of Evercore ISI.

I'm impressed. I get the first question. Chuck, congrats. This is your first earnings call as officially appointed as CFO. I look forward to working with you. Two questions for me. First, Sean, great update today. There's a lot of debate in the market on what this data center opportunity might mean for you. We've certainly tried to put our kind of megawatts that we think might come out of this. Maybe can you address that? Just any color you can share around the megawatts needed? I understand it's going to be over a long period of time, but what you're seeing in the pipeline, just high level? And then in particular, talk to the Stillwater opportunity and what could that mean? And just what to look for there?

Yes. Very good. Thank you for the questions there, Durgesh. So a couple of things. Unfortunately, we are prohibited from talking specifics about the Stillwater opportunity. And so that has not changed. So I need to pass on that one. As we think about the data center set, we've characterized it as probably opportunities in the 250 to 500-megawatt range across half a dozen or so opportunities that we're in discussions around.

Awesome. And just to be clear, that's 250 to 500 megawatt each opportunity, right? In your context half a dozen of...

Yes, I think that's what we've said previously and recognize that that's not a forecast. We could -- we can't guarantee we're going to get all of those, but we may get more. So...

I certainly agree...

That's what we're dealing with right now.

Excellent. Just one housekeeping question. You didn't address the dividend. I'm sorry if I missed it, but just how should we think about dividend growth in the context of your EPS growth? If you could just talk to that, and I apologize if I missed it and you did.

Yes. So really no change in messaging there on the dividend. We've been pretty consistent in terms of the growth that we've addressed with that over the past couple of years. And again, just I'll point you to the language in our 10-K around dividend payout. So that remains our goal to be in that 65% to 70% payout area.

Our next question comes from Shar Pourreza of Guggenheim Partners.

It's actually Constantine here for Shar again. Congrats on great '24.

Thank you. Hope you're well. And please pass along to Shar that Didi nailed his name.

We'll do. Just maybe starting off on the 2025 expectations and guidance. You noted the 7.5% to 9.5% load growth, which is a step-up versus kind of the prior long-term assumptions that you had of greater than 1%. So that would point to some level of accretion. But maybe can you refresh us on the EPS sensitivity versus load growth and maybe any other offsets that you're embedding in '25, like regulatory lag or any other?

Sure. Chuck, do you want to do that one?

Yes, Constantine, we really are hesitant to give out sensitivity on load growth to EPS and just given the wide composition of rates within that. But that being said, if you look at Slide 8 on the deck that we put out today, you can see how much that we're attributing to load growth across all classes. And so then you can kind of do the math between that and the 7.5% to 9.5%. So that kind of should give you an idea. But again, I feel only appropriate to put a little caveat on that. And then your other question on regulatory lag, I believe it was -- so we do plan on going in for a rate case, as Sean said, by the -- by midyear of this year. And obviously, this load growth is doing a lot to help mitigate any lag in between cases.

Okay. Perfect. Understood. And kind of with the -- just more broadly with the second tier of high single-digit load growth, how does that compare versus the IRP assumptions? And does the load growth require any interim solutions from an energy and resource adequacy standpoint? And any urgency in '25 as we see kind of the reserve margins start seeing some pressure?

Yes. Great question. And we're in pretty good shape. But certainly, we're continuing to -- as we're negotiating the results of the RFP process and working through that process, we're updating that for current results. And so we'll certainly consider that, but nothing of concern right now.

Okay. And any cadence of updates there beyond RFP time frame that you put out in terms of putting any kind of numbers behind that.

Yes. So yes, we're going to file what we said, we're going to file midyear for recovery of that for our generation plans. And under Oklahoma, the statute allows for a 240-day period of time. So when we get the requisite approvals there, we will layer that in, in terms of the capital expenditures and our financing plan, how we will finance that. Just to kind of reiterate what we've said previously, it is our intent to own these assets. We may have to bridge a little bit of it for a year or 2 just to kind of get through as we're constructing these, but it is our intent to own the majority of these assets. And I'll tell you, walking into this call, it's 1 degree here in Oklahoma City with the minus 18 windchill and schools are closed. There's ice and snow all over the roads, but the lights are on. And I have a lot of confidence in the men and women in our company to kind of do that, and that drives a lot of our thinking around owning these assets.

Our next question comes from Nicholas Campanella of Barclays.

It sounds like you got some Northeast weather down there. So I hope you're staying warm.

Yes. We got to get tougher here about this winter weather.

Well, I appreciate the time. Just wanted to ask, when you think about serving these potential data center customers, the capital requirements that are going to come from that and the potential to invest in new generation, how are you kind of thinking about your position within the supply chain? It just seems like there's been just general tightness across turbines and general availability there. So I just wanted to see if -- do you have visibility to be able to kind of deliver on a generation solution for new customers that are outside of the plan within this decade?

I think that's certainly what we're looking at. We were fortunate to have this RFP process underway. So we've got a good visual of what is available and certain timings. So we feel pretty good about that. And you -- what we see today, we feel pretty good about. If we were fortunate to get a lot more, we'd have to take another look at that. But what we see in front of us and what we're anticipating, we feel pretty good about.

Okay. And then just putting just a finer kind of time line on when we can expect the next updates, just when do you think we would expect to hear about whether or not you'd win one of these new data center customer contracts? Is it just going to be a one-off press release? Are you trying to deliver something by the back half of this year? How would you kind of frame the time line?

Yes. Great question. And my expectation is this may not be our press release. This may be somebody else's. And obviously, we would communicate about that then. And then where we -- so we're not trying to time anything, if that was your question. And then the second point is, obviously, we would have some sort of capacity to satisfy that new load, and you should expect us to kind of make the requisite filings with the commissions and get that cleared up and then Chuck will explain exactly how we're going to finance all those as well.

Okay. And that's something that -- sorry, that's something that would -- you think happens in the first half of this year? Or you're just not putting a time line on it at this point?

Well, we are going to -- so 2 comments or 2 pieces of this. We're going to file the results of our generation RFP that are out there. We're going to do that by midyear. And we would certainly -- it would be nice if we had something if there was going to be a data center inclusion in that, that we had that in there, too. If it doesn't work out, we've got to move forward with these RFP results. We'll file that. We may have to come back later and do a subsequent filing for data center.

Does that help?

Our next question comes from Julien Dumoulin-Smith of Jefferies.

And maybe just to pick it up from where Nick was -- left it off there, frankly. Can you speak a little bit to what you're seeing in terms of the total quantum of RFP activity there? I mean, if you were to pick up incremental megawatts out of that RFP, whether in sort of coincident with the initial RFP update or in the back half at some point, how do you frame the sort of the total scope of what that RFP was able to procure, i.e., I know when you launched this whole process, you weren't anticipating because you have this quantum of data center. Can you speak or and/or other load, can you speak to what like a max size on the RFP could be realistically or kind of any framing of sensitivities there?

Yes. Are you -- Julien, are you looking for the kind of the high end there? Are you contemplating this data center?

Well, look, I'm trying to understand, obviously, the load growth itself is dynamic. I understand that you can't necessarily get everything at the same time. I understand that when you launched this IRP/RFP, you didn't necessarily contemplate this. So just obviously, you can scale up the quantum of the RFP. But I imagine there's going to be some realistic frictions of what is palatable for you guys to procure.

Yes. I think fair point, and I get it. Also recognize we're kind of in the middle of negotiating those. So I don't really want to tip my hand in any way, shape or form. What I would say, though, is we've been able -- and we anticipated this load growth. We've been able to kind of manage this within our current capacity constructs. I'd also mentioned to you on previous calls where we had doubled down on our energy efficiency and demand response programs. That has created a significant benefit. I also mentioned that some of the crypto load that we have, they do not really have a net addition to our capacity needs because they're on direct load control. So we have that benefit. And then the last point is, we're also continuing to evaluate and do upgrades to our existing facilities where we're squeezing 100 megawatts or so of additional capacity there. So we're attacking this on all fronts to make sure that when we do finalize the RFP, Julien, we're getting the very best deal. But I want to be really careful there because we are in the middle of negotiating those agreements, and I don't want to jeopardize that.

Yes. I understand it's a very dynamic situation. I got to try at least to ask. Maybe just to speak on the other side of that -- we're always going to try, right? Maybe on a timing perspective, right? Do you have to go back and issue another RFP because, again, the scope of this RFP just didn't contemplate the total megawatts ultimately. How do you think about like a subsequent RFP filing? How do you think -- what that would lead to, to reconcile with some of the time lines? I mean, I'll note, for instance, this Stillwater dynamic, for instance, could be kind of a '27 time frame when I can tell. Like could you swiftly issue another RFP? Are you guys getting ready for that here potentially?

Yes. I mean I think we've got to be prepared to do that. I think that's a very real situation there as things develop and you use the word dynamic. It's dynamic. And to the extent that we have significant changes in how we see the future, we would do a new IRP. And I think we should be prepared to do that.

Got it. And then lastly, just quickly on the legislative front, given how dynamic the situation is and given the scope of what would be contemplated here, how about any conversations this year in terms of formula rates or otherwise, if you can speak to that a little bit.

Yes. So on the legislative side in terms of formula rates or performance-based rate making or something like that, we achieved our objective there in terms of education. I think everyone is fully aware and educated now. We always recognize that all roads lead through the commission. And so we're going to -- we've got a heavy agenda this year, but we're going to find the opportunity to make a filing there for formula rates at the commission.

Our next question comes from Anthony Crowdell of Mizuho.

Again, congrats, Chuck, on, I guess, your first, I guess, I don't know if it's full time or non-interim call. Hopefully, a little easier than Julien's question. I don't know where that was headed. But I guess if I could ask about the 24% commercial load growth that you're calling for, I'm wondering if you could give any clarity or indication of just what percentage of your gross margin, if I think of it in '25 or if you like another year, what percent of your gross margin will come from commercial load?

Jeff, do you want to tackle that one?

Yes, sure. Maybe just take a step back and look at the results of 2024, where we really saw strong results across all categories. And really, I can't overemphasize how important that is to me that we're seeing growth across all those categories, really showing the underlying strength of our service area. Within commercial, that is -- a lot of that is crypto load, as Sean spoke to before, that is really beneficial and that it doesn't require much incremental investment for us. On the generation side is that's all on direct load control, where we've got the proverbial button, so to speak. So really beneficial for our customers as a whole to have that low cost to serve kilowatt hours in there.

Great. And then just one follow-up, and I apologize if I didn't hear correctly, but I believe that you're forecasting filing an Oklahoma rate case later this year. Just with the strong load growth, obviously, the load growth should help spread out the cost per kilowatt hour. Just if you could just indicate or directionally point to type of percentage increase. I mean, I guess with this great load growth you have, my guess would be that the amount of increase would be a lot lower and should the load not be here.

I think what you said is absolutely correct. You should expect the load growth to mitigate this, and that's what we're trying to do. We're trying to keep these impacts small, and not do anything that disrupts the overall load growth or viability of the economy. And so depending on when we time -- when we make the filing and what is in that test year, but -- so I don't have an exact percentage for you today, but safe to say you are exactly right that the load growth is going to mitigate the impact to customers.

And our next question comes from Aditya Gandhi of Wolfe Research.

Just to start off maybe on load growth. Can you just remind us what you're baking in for long-term load growth beyond 2025? Is it still at least 2%? And relatedly, on data center, Sean, I appreciate you said you can't comment on Stillwater, but any color you can give us on the core Scientific data center near Muskogee at this point?

So I'll start off on the long-term load growth, I mean, again, we mentioned last year was the fourth year of historic load growth that we've had. And we're essentially rolling that forward into this year with really our strongest load growth guidance ever. So that's really super exciting. Going forward, though, we don't expect really a change in the backdrop, the fundamentals that are leading to where we are today. So I think we're comfortable continuing to say that we're in that 2%, 2% plus on a long-range area. But to the extent that we have events that move us upward from that, that kind of gets to those -- some of those press releases that Sean spoke about earlier. and we can give more color and flavor at that time. But I think for now, you should take away very positive message around the fundamentals of where we have been for many years now.

And Aditya, just to be clear, there's really not anything to add around the opportunity set in Muskogee in terms of data centers. That's an active dialogue. And when we have something to communicate, we're certainly going to communicate that.

Okay. That's clear. Maybe a lot of questions on the RFP, but I wanted to ask on another potential CapEx upside that you all mentioned last quarter. regarding SPP ITP transmission. Could you just clarify whether that's included in the revised CapEx plan or not? And if not, when we can sort of expect to see movement around that CapEx?

Yes, that is not in there. That will be included when we finalize the notice to construct later this year.

Okay. And one last question for me. I appreciate all your comments around rebasing higher off of '25 guidance. Sean, you also mentioned that you want to be consistent in how you grow. But do you, at this point, feel comfortable sort of guiding within your 5% to 7% growth rate, just given the exceptional load growth that you're seeing?

Aditya, I'm not sure I got all of that. Could you restate the question?

Sorry, yes. I appreciate all the color around the updated 5% to 7% growth rate that you already are higher of '25 guidance. Just given the exceptional load growth at this point, do you feel comfortable sort of commenting on where you see the company tracking within that 5% to 7%?

Yes. Look, I think we're very comfortable through the 5-year forecast period to grow at 5% to 7%. And I'm really focused on that 5 years and then years beyond that, continuing to grow at this clip. I don't want to get into kind of pointing to one end or the other end for any particular year. I think what you're going to see from us is a consistent achievement of 5% to 7% over a number of years. And so we're going to continue to run the business, Aditya. And we're -- this thing has been rolling for a number of years, and we want to keep going.

[Operator Instructions] And I'm showing no further questions. I'd like to turn it back to Sean Trauschke for closing remarks.

Thank you, Didi, and well done today, Didi. You did a great job with everyone's names. So thank you for that. And for everyone on the call today, thank you. Thank you for your interest and your time this morning. And take care of yourselves and be safe out there.

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