OGE Energy Corp. Form 10-Q Summary
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. OGE Energy is a holding company with an electric utility business, Oklahoma Gas and Electric Company (OG&E), and a 25.5% equity-method investment in Enable Midstream Partners. OG&E serves Oklahoma and western Arkansas. The quarter was materially affected by February’s extreme cold weather and unusually high fuel and purchased-power costs.
Key financial results
| Metric | OGE Energy consolidated | OG&E |
|---|---|---|
| Operating revenue | $1,630.6 million, versus $431.3 million | $1,630.6 million, versus $431.3 million |
| Operating income | $48.6 million, versus $56.3 million | $49.1 million, versus $57.0 million |
| Net income | $52.7 million, versus net loss of $491.8 million | $11.2 million, versus $19.9 million |
| Diluted EPS | $0.26, versus a loss of $2.46 | Not applicable; OG&E is wholly owned |
| Operating cash flow | $(940.2) million, versus $103.9 million | $(939.9) million, versus $89.0 million |
| Capital expenditures | $(158.4) million | $(158.4) million |
OG&E’s reported gross margin, a non-GAAP measure defined as operating revenue less cost of sales, was $283.8 million, down $12.5 million (4.2%). Revenue and cost of sales each rose sharply because fuel and purchased-power costs increased; most such costs are passed through to customers. The principal margin pressure was a $31.6 million loss in the guaranteed flat bill program during the cold-weather event.
OGE Energy’s Q1 2020 loss included a $780.0 million pre-tax impairment of its Enable investment ($589.6 million after tax). In Q1 2021, equity earnings from unconsolidated affiliates were $53.2 million, versus an equity loss of $746.5 million a year earlier. Enable reported Q1 2021 net income of $155 million, compared with $103 million.
Liquidity, debt and balance sheet
- OGE Energy had $1,278.0 million of short-term debt at March 31, 2021, up from $95.0 million at year-end 2020; long-term debt was $3,495.0 million. Cash and cash equivalents were nil.
- In March, OGE Energy borrowed the full $1.0 billion under an unsecured 364-day term loan to fund extraordinary utility fuel and purchased-power costs. It advanced funds to OG&E and contributed $530 million of capital. The companies intended to refinance the term loan with long-term debt during 2021.
- OGE Energy reported $621.6 million of net available liquidity under revolving credit agreements at quarter-end. Management said expected operating cash, financing proceeds and Enable distributions (or Energy Transfer distributions after the merger) should meet anticipated needs over the next three years.
- Operating cash flow was heavily affected by the weather-related fuel costs and working-capital movements, including a $859.9 million increase in regulatory assets and $104.9 million cash use from fuel recoveries. Financing provided $1,098.1 million, principally from increased short-term borrowing.
Material changes, outlook and commentary
- OG&E recorded an $829.4 million regulatory asset for Oklahoma fuel and purchased-power costs from the February event. It also recorded $102.4 million of Arkansas-related costs, primarily in fuel clause under-recoveries. Recovery terms, including amortization and carrying charges, remained subject to regulatory processes and true-ups.
- OG&E’s 2021 earnings guidance remained $352 million to $373 million, or $1.76 to $1.86 per diluted share, assuming approximately 200 million diluted shares and normal weather. Following Q1, management projected full-year earnings in the lower half of the range. OGE Energy did not issue consolidated 2021 earnings guidance.
- Enable agreed to an all-equity merger with Energy Transfer: Enable unitholders are to receive 0.8595 Energy Transfer unit per Enable unit. Required unitholder approval was obtained in April; antitrust approval and other closing conditions remained. Closing was anticipated in 2021. OGE Energy expected to hold approximately 3% of Energy Transfer after closing and intended to exit the midstream segment prudently.
- OGE Energy declared dividends of $0.4025 per share for the quarter, up from $0.3875 a year earlier. Capital expenditure estimates for 2021–2025 totaled $4.065 billion, excluding Enable.
- Moody’s and S&P revised both OGE Energy’s and OG&E’s outlooks from stable to negative in March, citing uncertainty over recovery timing for extreme-weather costs; S&P also cited refinancing risk from the term loan and, for OGE Energy, Enable merger execution risk.
Risks, contingencies and unusual items
- February’s cold event produced record winter electricity demand and exceptionally high natural gas and purchased-power prices. The filing describes the event as unprecedented and notes that OG&E’s February natural gas costs exceeded the total cost for all of 2020.
- OG&E sought Oklahoma securitization approval for event-related costs in April 2021. Arkansas legislation also enabled potential securitization; OG&E was evaluating that option. Recovery amounts, timing and financing costs depended on regulator decisions.
- OG&E’s appeal concerning SPP transmission-upgrade credits could require an estimated $13.0 million refund, plus interest, if the adverse FERC position stands. No reserve was recorded; the appeal remained pending.
- Five Oklahoma certified-territory complaints were on appeal. If OG&E ultimately loses, potential exposure includes evaluation of plant investments and estimated lost-revenue reimbursement of $20.1 million to $27.8 million across all cases; amounts associated with the three cases decided for cooperatives were smaller. Outcomes remained uncertain.
- OGE Energy recorded a $26.4 million pension settlement cost in Q1, primarily reflecting increased retirements and lump-sum payments. The filing says this noncash charge accelerates costs otherwise recognized in future periods.
- Other risks include environmental compliance costs, regulatory and rate-recovery uncertainty, weather and operational events, and risks related to Enable’s merger and midstream business. Management reported substantial environmental compliance and no significant change in reported risk factors; it also stated that reasonably possible legal losses in excess of accrued amounts were not expected to be quantitatively material.
Important facts for investors to verify
- Regulatory decisions on the amount, recovery period, carrying charge and potential securitization of February 2021 costs in Oklahoma and Arkansas.
- OG&E’s progress toward refinancing the $1.0 billion 364-day term loan, and the implications of negative credit outlooks and short-term borrowing levels.
- Completion timing and conditions for the Enable–Energy Transfer merger, and the resulting value, distributions and exit plan for OGE Energy’s midstream investment.
- Final outcomes and potential financial exposure in the SPP refund appeal and Oklahoma certified-territory cases.
- OG&E’s ability to achieve the lower-half 2021 guidance projection, given weather assumptions, the flat bill program impact and cost recovery timing.