OGE Energy Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. OGE Energy is a holding company with a regulated electric utility, OG&E, and a 25.5% equity-method investment in natural-gas midstream partnership Enable. Unaudited results may not indicate full-year performance because of seasonality and other factors.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenues | $431.3 million | $490.0 million |
| Operating income | $56.3 million | $49.7 million |
| Net income (loss) | $(491.8) million | $47.1 million |
| Diluted EPS | $(2.46) | $0.24 |
| Operating cash flow | $103.9 million | $28.9 million |
| Capital expenditures | $127.2 million | $152.9 million |
| Cash and cash equivalents | $145.9 million at March 31 | $0 at December 31, 2019 |
| Short-term debt | $375.0 million at March 31 | $112.0 million at December 31, 2019 |
| Long-term debt | $3,195.6 million at March 31 | $3,195.2 million at December 31, 2019 |
The reported loss primarily reflects a $780.0 million impairment of OGE Energy’s Enable investment. Equity in unconsolidated affiliates was a loss of $746.5 million, versus earnings of $30.7 million a year earlier. The impairment was measured using a 20-trading-day volume-weighted average unit price and classified as a Level 3 nonrecurring fair value measurement. The company recorded a $234.6 million income tax benefit overall; the impairment-related tax benefit was $190.4 million.
OG&E’s gross margin, a non-GAAP measure defined as operating revenues less cost of sales, rose to $296.3 million from $277.4 million. The increase was primarily attributed to the expiration of a cogeneration credit rider and customer growth, partly offset by milder heating weather. Lower fuel and purchased-power costs reduced cost of sales by $77.6 million. OG&E net income was $19.9 million, compared with $19.6 million.
Enable’s summarized results (100% of the partnership, not consolidated OGE revenue) included revenue of $648 million versus $795 million, gross margin of $422 million versus $417 million, operating income of $146 million versus $165 million, and net income of $103 million versus $113 million.
Liquidity, capital and distributions
- Cash from operations increased year over year, mainly due to lower vendor payments and higher customer receipts. Investing cash outflow was $124.9 million; financing provided $166.9 million, mainly from increased short-term borrowing. Cash increased by $145.9 million during the quarter.
- At March 31, the company reported $524.7 million of net available liquidity under its revolving credit agreements, in addition to $145.9 million of cash. It was in compliance with debt agreements.
- In April, OG&E issued $300 million of 3.25% senior notes due 2030. OGE Energy also entered a $75 million unsecured one-year term credit agreement.
- Dividends declared were $0.3875 per share, up from $0.3650. The company paid $79.3 million in common dividends during the quarter.
- Enable announced a 50% distribution reduction on April 1. OGE expected to receive $18.3 million in Q2 distributions and approximately $93 million for 2020.
Outlook, management commentary and risks
- 2020 guidance: OG&E’s outlook was unchanged at net income of approximately $346–$357 million, or $1.72–$1.78 per diluted share. Consolidated OGE guidance changed from net income of $440–$463 million to a net loss of approximately $154–$173 million, or $(0.77)–$(0.87) per diluted share, following the Enable impairment and revised Enable outlook. Ongoing earnings, a non-GAAP measure excluding specified unusual noncash charges and related tax effects, were projected at $417–$436 million, or $2.08–$2.18 per diluted share.
- Management said the COVID-19 impact was relatively minor in Q1, but warned that extended disruption could increase customer slow payment or nonpayment and reduce commercial and industrial electricity demand. The company voluntarily suspended nonpayment disconnects beginning March 16 and said its COVID-related receivables-reserve adjustment was not material.
- The company planned approximately $575 million of 2020 capital investment and said it remained on track, while noting possible construction, equipment-delivery and permitting delays. It stated that the Enable distribution reduction did not create an expected need to access equity markets.
- OG&E’s five-year Oklahoma Grid Enhancement Plan includes approximately $800 million of proposed investment; interim cost recovery was pending OCC review. A separate Arkansas environmental-compliance rider remained pending.
- OG&E’s potential refund exposure in the SPP-sponsored transmission-upgrade proceeding was estimated at $13.0 million plus interest, with no reserve recorded. OGE estimated $5.0 million could affect the company and $8.0 million customers if refunds are required; litigation and refund timing remained unresolved.
- Other risks include COVID-19 and commodity-market volatility, reduced or further-lowered Enable distributions, access to capital and commercial-paper markets, rate recovery, environmental requirements, and pending regulatory matters. Management said reasonably possible losses above accrued amounts from pending or threatened claims were not expected to be quantitatively material.
Important facts for investors to verify
- Whether Enable’s unit value, operating outlook and reduced distributions support the carrying value of OGE’s investment and future cash flows.
- How the $780 million impairment, related tax effects and non-GAAP ongoing-earnings adjustments reconcile with reported GAAP results and full-year guidance.
- Whether COVID-19 materially changes customer collections, electricity demand, capital-project timing or regulatory cost recovery.
- The status and potential financial effects of the SPP refund proceedings, Arkansas rider and Oklahoma grid-plan application.
- Liquidity, borrowing costs and credit metrics after the April debt and credit-agreement transactions and Enable distribution reduction.