OGE ENERGY CORP. quarterly report, Q2 FY2022

OGE Energy Corp. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Amounts are in millions of dollars except per-share data. OGE Energy is the parent of OG&E, its regulated electric utility, and held a minority investment in Energy Transfer during the period.

Financial performance

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Operating revenue	$803.7	$577.4	$1,393.0	$2,208.0
Operating income	$156.6	$129.5	$239.7	$178.1
Net income	$73.1	$112.9	$352.6	$165.6
Diluted EPS	$0.36	$0.56	$1.76	$0.83
Operating margin, reported	19.5%	22.4%	17.2%	8.1%

OG&E, the electric utility, earned $100.7 in Q2, up from $85.1, and $139.7 for the first half, up from $96.3. Utility gains reflected stronger weather-driven demand and recovery of capital investment, partly offset by higher depreciation and income taxes. OGE Energy’s consolidated Q2 net income fell as a $39.6 pre-tax loss on Energy Transfer securities and the absence of Enable equity earnings outweighed the utility improvement. First-half consolidated earnings benefited substantially from a $242.7 pre-tax gain on Energy Transfer securities.

Revenue comparisons are affected by Winter Storm Uri: extraordinary fuel and purchased-power costs passed through customer recovery mechanisms raised both revenue and expense in first-half 2021. Q2 2022 fuel, purchased-power and transmission expense increased $193.3 year over year; first-half expense declined $897.8 versus the storm-affected 2021 period. These costs are generally recoverable and do not directly track earnings.

Cash flow, balance sheet and liquidity

For the six months, OGE Energy generated $8.1 of operating cash, versus cash used of $767.8 in 2021; OG&E generated $32.2, versus cash used of $782.8. The year-over-year improvement largely reflected lower vendor payments, including Uri-related costs paid in 2021.
Capital expenditures were $450.8, compared with $353.5 in the prior-year period. OGE Energy’s investing cash flow was positive $173.7, including $627.4 of proceeds from Energy Transfer unit sales.
At June 30, OGE Energy had $4.9 cash, $425.4 short-term debt and $3,547.6 long-term debt; $999.8 of long-term debt was classified as due within one year, primarily reflecting debt maturing in May 2023. Total equity was $4,256.9.
OGE Energy reported $724.2 of net available liquidity under revolving credit facilities, commercial paper and letters of credit. It had $1.15 billion of aggregate revolving commitments; the filing says both registrants were in compliance with debt agreements.
OG&E had $90.9 short-term debt, $263.8 of advances from parent, and $3,497.8 long-term debt; $499.9 was due within one year. Its cash balance was $4.9.
OGE Energy declared dividends of $0.41 per share in each quarter, or $0.82 for the first half, versus $0.805 in the first half of 2021.

Material changes and significant developments

OGE Energy began selling Energy Transfer units in April. By June 30 it had sold 57.1 million units for $645.8 pre-tax proceeds; by the end of July, total sales reached 73.3 million units and $812.6 proceeds, leaving less than 1% ownership. The remaining investment was valued at $382.0 at June 30, versus $785.1 at year-end 2021. Management intends to exit the midstream investment and become a pure-play electric utility.
On July 20, 2022, after quarter-end, OG&E received approximately $750 from Oklahoma Winter Storm Uri securitization proceeds. The transaction monetized the related regulatory asset; customer charges are to repay the bonds over 28 years. At June 30, $750.5 of Oklahoma Uri costs was classified as a current regulatory asset in anticipation of this transaction.
An Oklahoma rate-case settlement agreed June 30 provides for a $30 annual base-rate revenue increase, subject to OCC approval. OG&E implemented a $30 annual interim increase on July 1, subject to refund. The settlement followed an original request for $163.5.
OG&E’s Arkansas formula-rate-plan extension was approved for five years, with terms including a 9.5% return on equity; the capital-structure change is under reconsideration following OG&E’s rehearing request.

Outlook, risks and contingencies

OG&E’s 2022 earnings guidance remained $375–$395, or $1.87–$1.97 per diluted share. Management expected results in the top half of the range due to warmer-than-expected first-half weather. OGE Energy did not provide consolidated guidance.
Management targets 5%–7% long-term annual EPS growth at the electric utility and a 65%–70% dividend payout ratio over the next five years. Capital spending is focused on grid reliability, customer growth and generation; estimates were not significantly changed from the 2021 Form 10-K. Supply-chain disruption and inflation may delay projects or raise costs. OG&E expects to issue $300–$400 of long-term debt in late 2022 or early 2023 to fund investment.
OGE Energy recorded a $46.3 pre-tax unrealized loss on Energy Transfer units held in Q2, despite a $67.0 unrealized gain for the first half. The investment’s market value and distributions remain exposed to Energy Transfer performance, commodity-market conditions and OGE Energy’s sale timing.
A potential FERC-ordered SPP transmission-credit refund is estimated at $13.0 plus interest; the registrants reserved that amount plus estimated interest. The filing estimates $5.0 could affect the registrants’ expense, with $8.0 net impact to OG&E customers through rate mechanisms.
Oklahoma certified-territory appeals could affect plant investments of approximately $28.0 and potentially require lost-revenue reimbursement estimated at $35.6–$48.3 across five cases. Outcomes remain pending before the Oklahoma Supreme Court.
OG&E’s Arkansas Uri recovery approach is contested by intervenors; a merits hearing was expected December 2, 2022. Environmental rulemaking and possible emissions requirements, including proposed interstate NOx limits, could affect future compliance costs, but material impacts were not yet determinable.
Management said reasonably possible losses beyond accrued amounts from pending litigation or claims were not expected to be quantitatively material. It also cited inflation, rising interest rates, supply constraints, weather, fuel and power prices, regulatory recovery, and credit-market access as risks. S&P revised both entities’ outlooks from negative to stable in May and affirmed their ratings.

Investor verification priorities

Confirm the final OCC approval and implementation terms of the Oklahoma rate-case settlement, including interim-rate refund exposure.
Review the completed Uri securitization economics, customer-charge impacts and use of the approximately $750 proceeds.
Track Energy Transfer unit-sale completion, remaining investment value, realized gains and the effect on earnings and cash generation.
Assess the May 2023 debt maturity, planned $300–$400 debt issuance, available liquidity and capital-spending execution amid supply-chain pressures.
Monitor outcomes of the SPP refund matter, Oklahoma certified-territory appeals, and Arkansas Uri recovery proceedings.
Distinguish recurring utility earnings from mark-to-market gains and losses, unit-sale gains, and prior-year Uri-related comparisons when evaluating consolidated EPS.