OGE Energy Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. OGE Energy is a holding company whose principal businesses are OG&E, a regulated electric utility serving Oklahoma and western Arkansas, and a 25.5% equity-method investment in Enable Midstream Partners.
Financial performance
Amounts are in millions of dollars except per-share data. Margins are calculated from reported figures.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Operating revenue | $513.7 | $567.0 | $1,003.7 | $1,059.7 |
| Operating income | $110.0 | $137.7 | $159.7 | $204.3 |
| Operating margin | 21.4% | 24.3% | 15.9% | 19.3% |
| Net income | $100.2 | $110.7 | $147.3 | $165.7 |
| Diluted EPS | $0.50 | $0.55 | $0.73 | $0.83 |
| Operating cash flow | — | — | $128.8 | $354.2 |
| Capital expenditures | — | — | $314.5 | $273.8 |
- OG&E’s gross margin (a company-defined non-GAAP measure) declined to $335.0 million in Q2 from $358.3 million, and to $612.4 million for the first half from $640.5 million.
- Enable contributed $35.8 million of equity earnings in Q2 versus $29.3 million, and $66.5 million for the first half versus $63.2 million. Enable’s reported net income was $115 million for Q2 and $228 million for the first half.
- At June 30, total assets were $10,886.2 million and stockholders’ equity was $4,007.2 million. Short-term debt was $207.5 million and long-term debt was $3,193.6 million; cash was zero. Net working capital was negative $247.1 million, based on current assets of $455.6 million and current liabilities of $702.7 million.
- Revolving credit facilities totaled $900 million, with $692.2 million of net available liquidity reported. OGE Energy was in compliance with its debt agreements.
- Dividends declared were $0.365 per share in Q2 and $0.73 per share for the first half, compared with $0.3325 and $0.665, respectively, in 2018.
Changes versus prior comparable periods
- Q2 revenue fell 9.4%, net income fell 9.5%, and diluted EPS declined from $0.55 to $0.50. For the first half, revenue fell 5.3%, net income fell 11.1%, and diluted EPS declined from $0.83 to $0.73.
- OG&E’s lower gross margin was principally attributed to unfavorable weather and lower rates, including rate-design changes reflecting lower income-tax expense. Cooling degree days were approximately 39% lower. Higher depreciation and operating and maintenance costs also weighed on utility earnings.
- Lower utility earnings were partly offset by stronger Enable earnings, supported by increased gathering and processing activity, higher gathering fees and volumes, and commodity-derivative gains. Enable’s results remain exposed to commodity prices and operating factors.
- First-half operating cash flow declined $225.4 million, mainly due to lower customer receipts and increased vendor payments. Investing outflows increased with higher utility capital spending and the River Valley plant acquisition.
- OG&E issued $300 million of 3.30% senior notes due in 2030 in June. First-half financing also included $207.5 million of increased short-term debt and repayment of $250 million of notes that matured in January.
Outlook, developments and risks
- 2019 consolidated earnings guidance remained $412–$442 million of net income, or $2.05–$2.20 per diluted share, assuming approximately 201 million diluted shares and normal weather. The expected Enable contribution was at the lower end of its previously stated $104–$117 million range because of lower forecast commodity prices.
- OG&E acquired the AES plant in May 2019, now called River Valley, and expected to close on the Oklahoma Cogeneration LLC plant in Q3 2019. Both acquisitions were approved by the OCC and FERC; Arkansas approval was conditional.
- OG&E’s Oklahoma rate-review settlement remained subject to OCC approval. It provides for recovery of specified environmental investments without a base-rate increase, alongside cost reductions and accelerated return of certain deferred tax savings. Interim rates implemented July 1 were subject to refund. Arkansas environmental rider collections were also interim and being reserved pending approval.
- A May settlement of a FERC transmission-rate complaint was pending approval; interim rates were being applied. Separately, a potential refund of $13 million related to SPP sponsored-upgrade credits had not been reserved. OGE estimated $5 million could affect the company and $8 million customers if a refund were required.
- OG&E had invested $512.4 million in Sooner dry scrubbers and $57.0 million converting Muskogee units to natural gas. Recovery and regulatory treatment remained important; environmental rules, future compliance costs, and regulatory decisions could affect results.
- A $20.6 million pension settlement charge was recorded in the first half after increased retirements and lump-sum payments. The filing states it required no cash outlay and accelerated costs otherwise recognized in future periods.
- Moody’s lowered OG&E’s senior unsecured rating from A2 to A3 and commercial-paper rating from P-1 to P-2 in May, citing debt-financed environmental investment and lagging cash flow. Company ratings were unchanged; outlooks for both were stable.
- Management identified risks including weather, fuel and power costs, rate recovery, capital-market access and ratings, environmental regulation, and Enable’s commodity, contract-renewal and producer-activity exposures. Management said operations were substantially compliant with current environmental standards and did not expect reasonably possible legal losses beyond accruals to materially affect consolidated results.
Key facts for investors to verify
- Progress and final regulatory decisions on the Oklahoma rate review, interim rates, Arkansas rider, plant acquisitions and FERC transmission-rate settlement.
- Whether SPP sponsored-upgrade credits must be refunded, and the ultimate company and customer exposure.
- OG&E’s ability to restore operating cash flow while funding capital investment, dividends and debt obligations; also monitor credit ratings and borrowing costs.
- Whether the 2019 earnings guidance assumptions, especially normal weather and Enable’s lower-end contribution, remain achievable.
- Enable’s operating performance and sensitivity to commodity prices, derivative valuations, gathering volumes and contract renewals.