OGE ENERGY CORP. quarterly report, Q1 FY2023

OGE Energy Corp. Form 10-Q Summary

Reporting period: Three months ended March 31, 2023. This combined filing covers OGE Energy Corp. and its wholly owned regulated electric utility, Oklahoma Gas and Electric Company (OG&E). OGE Energy sold all Energy Transfer limited partner units by September 2022; its results therefore no longer include a natural gas midstream reporting segment in 2023.

Financial performance and condition

OGE Energy consolidated	Q1 2023	Q1 2022
Operating revenue	$557.2 million	$589.3 million
Operating income	$76.5 million	$83.1 million
Net income	$38.3 million	$279.5 million
Diluted earnings per share	$0.19	$1.39
Operating cash flow	$147.8 million	$58.9 million
Capital expenditures	$286.0 million	$220.1 million

• OG&E earned $39.8 million, compared with $39.0 million a year earlier. Utility operating revenue was $557.2 million and operating income was $76.8 million.
• OGE Energy’s operating margin, calculated as operating income divided by operating revenue, was approximately 13.7%, versus 14.1% in Q1 2022. The large decline in reported net income primarily reflects the absence of the prior-year $282.3 million pre-tax unrealized Energy Transfer investment gain.
• OGE Energy’s investing cash outflow was $287.7 million and financing cash inflow was $358.8 million. Cash and cash equivalents were $307.0 million at quarter-end, up from $88.1 million at year-end. Operating cash flow exceeded the prior-year quarter, while capital spending also increased.
• At March 31, OGE Energy reported $1.0 billion of debt due within one year and $3.994 billion of long-term debt. OG&E reported $500 million due within one year and $3.944 billion of long-term debt. OGE Energy had $1.150 billion of revolving credit commitments, of which $0.4 million was outstanding as a letter of credit, and $307.0 million cash.
• OGE Energy’s current assets of $1.401 billion were below current liabilities of $1.666 billion. Fuel-clause under-recoveries were $370.1 million, down from $514.9 million at December 31, 2022.
• OGE Energy declared dividends of $0.4141 per share for the quarter, compared with $0.4100 in Q1 2022. Debt agreements were in compliance at March 31.

Material changes and management commentary

• OGE Energy’s net income fell $241.2 million year over year, largely because of the 2022 Energy Transfer gain and related segment activity. OG&E net income increased modestly by $0.8 million.
• OG&E revenue declined $32.1 million, while fuel, purchased power and direct transmission expense declined $55.1 million; these costs are generally recoverable through regulatory mechanisms. Lower fuel costs and a $15.3 million favorable price variance were among the revenue and expense drivers.
• OG&E’s other operation and maintenance expense rose $16.0 million, depreciation and amortization rose $13.8 million, and interest expense rose $7.5 million. Management cited payroll and benefits, vegetation management, higher depreciation rates and assets placed in service, and debt issued in January.
• OGE Energy’s 2023 earnings guidance was unchanged: $387 million to $416 million, or $1.93 to $2.07 per diluted share. OG&E guidance is $400 million to $421 million, or $1.99 to $2.09 per diluted share. Guidance assumes approximately 201 million diluted shares and normal weather; the company notes material seasonal weather effects on earnings.

Outlook, risks and contingencies

• OG&E issued $450 million of 5.40% senior notes in January 2023 and, after quarter-end, $350 million of 5.60% senior notes in April. The proceeds support general corporate needs, capital investment and repayment of OG&E’s $500 million notes due May 26, 2023. OGE Energy also has $500 million of senior notes due that date; the filing says both issuers intend to repay their respective notes.
• Management said inflation, rising interest rates, supply-chain disruption and component shortages may increase costs or delay construction; impacts had not been material to operations at the filing date, but remained uncertain. Capital plans are focused on grid, generation and reliability investments and may change with generation capacity requirements.
• OG&E is evaluating a possible Oklahoma rate review filing in the second half of 2023. Arkansas regulators approved an annual $9.6 million electric revenue increase, effective April 1, 2023. Oklahoma regulators also approved a settlement finding OG&E’s 2021 fuel procurement practices prudent.
• A potential SPP transmission-upgrade refund remains pending. OG&E estimated a possible $13.0 million refund plus interest and had reserved that amount plus estimated interest. The filing estimates $5.0 million would affect the Registrants and $8.0 million would affect customers through rate mechanisms.
• Oklahoma’s planning reserve margin requirement increased from 12% to 15% for summer 2023; OG&E secured short-term capacity contracts for the 2023 requirement and is evaluating longer-term needs under a proposed generation accreditation methodology.
• Environmental rules and proceedings create uncertain future compliance costs, including the EPA’s Oklahoma NOx-related federal implementation plan and proposed rules on air emissions and water discharges. Management could not determine potential material impacts for several pending actions. The company reported substantial compliance with current environmental standards.
• An Oklahoma Supreme Court ruling largely favored OG&E’s ability to serve certain large loads in another supplier’s territory; one statutory interpretation issue remained. The company said potential investment or lost-revenue consequences in that case were not expected to be material.
• Management stated that reasonably possible losses above accrued amounts from pending or threatened claims were not expected to be quantitatively material. The filing identifies no significant change in risk factors from the 2022 Form 10-K.

Important facts for investors to verify

• How the $1.0 billion of May 2023 maturities was repaid or refinanced, and the resulting borrowing costs and liquidity.
• Progress in recovering the $370.1 million fuel-clause under-recovery and the timing and customer impact of fuel-factor updates.
• Whether OG&E files an Oklahoma rate case, and any resulting rate relief relative to increased operating, depreciation and financing costs.
• Developments in the SPP refund proceeding and the final cost allocation, including interest.
• OG&E’s capacity plans, related capital spending and recovery through regulated rates, alongside potential environmental compliance costs.
• Actual full-year earnings versus guidance, especially the effects of weather, load growth, inflation, interest rates and construction delays.