OGE Energy Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. OGE Energy is a holding company whose principal businesses are its regulated electric utility, OG&E, and its 25.5% equity-method investment in Enable Midstream. Results for this seasonally affected quarter are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Operating revenue | $490.0 million | $492.7 million |
| Operating income | $49.7 million | $66.6 million |
| Net income | $47.1 million | $55.0 million |
| Diluted EPS | $0.24 | $0.27 |
| Operating cash flow | $28.9 million | $167.0 million |
| Capital expenditures | $152.9 million | $137.4 million |
OG&E gross margin, a company-defined non-GAAP measure, was $277.4 million, down from $282.2 million. The filing attributes lower earnings mainly to reduced OG&E margin, higher operation and maintenance costs and depreciation, and lower equity earnings from Enable. Long-term debt was $2.897 billion and short-term debt was $366.4 million at quarter-end; cash was zero. Net available liquidity under revolving credit agreements was $533.3 million. Total assets were $10.762 billion and stockholders’ equity was $3.976 billion. The quarterly dividend declared was $0.365 per share, versus $0.3325 a year earlier.
Material changes and unusual items
- Net income fell $7.9 million year over year. OG&E net income declined $11.7 million; OGE Holdings’ net income declined $2.3 million, partly offset by a $6.1 million increase in other operations’ net income.
- OG&E gross margin declined $4.8 million, primarily from lower rates reflecting tax-related rate design changes; favorable weather and customer growth partly offset the decline. Operating and maintenance expense rose $6.7 million, and depreciation and amortization rose $3.6 million.
- Enable’s net income increased to $113 million from $105 million, but OGE Energy’s reported equity earnings fell to $30.7 million from $33.9 million, reflecting basis-difference amortization and dilution effects.
- Q1 included a $19.7 million noncash pension settlement charge following increased retirements and lump-sum payments. A portion was deferred through regulatory mechanisms.
- Operating cash flow fell substantially, mainly due to lower customer receipts and higher vendor payments. The company used $250 million of cash to repay senior notes due in January and increased short-term borrowing.
- The company adopted lease accounting guidance in Q1, recognizing $44.1 million of right-of-use assets and $48.8 million of lease liabilities at quarter-end; the income-statement impact was not material.
Outlook, regulation and risks
Management maintained 2019 net income guidance of $412–$442 million, or $2.05–$2.20 per diluted share, assuming approximately 201 million average diluted shares and normal weather. The company’s stated long-term OG&E weather-normalized earnings growth objective is 4%–6% annually; it also targets dividend increases of approximately 10% annually through 2019.
- OG&E’s Oklahoma rate filing seeks a $77.6 million annual increase, principally for environmental projects and conversion of Muskogee units to natural gas. A hearing was scheduled for May 29, 2019. Arkansas regulators approved a $3.3 million revenue increase, effective April 1, 2019.
- OG&E sought regulatory approval to acquire two generating plants for $53.5 million to replace expiring power-purchase capacity. Required state and federal approvals were pending at filing.
- A FERC proceeding concerning SPP sponsored transmission upgrades could require a $21.0 million refund, plus interest, if the reversal of a prior order stands. The company had recorded no reserve; the estimated allocation is $5.5 million to OGE Energy and $15.5 million to customers through rate mechanisms.
- A separate FERC complaint seeks to reduce OG&E’s transmission return on equity from 10.60% to 7.85%; OG&E was reserving amounts within the requested range and related tax adjustments while the matter remained pending.
- Management cited risks including rate-recovery timing, weather and generation reliability, commodity and midstream market conditions, Enable contract and producer activity, environmental requirements, financing access, and pending regulatory and legal proceedings. Management said reasonably possible litigation losses beyond accrued amounts were not expected to be quantitatively material.
Investor verification priorities
- Track outcomes and timing of the Oklahoma rate case and approvals for the proposed plant acquisitions, including whether requested cost-recovery mechanisms are authorized.
- Monitor the FERC transmission-upgrade refund proceeding and potential exposure, including customer versus company impacts.
- Assess the company’s cash conversion, capital spending, short-term borrowing and available liquidity, given zero quarter-end cash and materially lower operating cash flow.
- Review Enable’s distributions and operating trends, and how its results and ownership/basis adjustments affect OGE Energy earnings.
- Compare full-year results with unchanged guidance, accounting for weather, rate changes, pension items and the quarter’s seasonal effects.