Business context and reporting period
OGE Energy Corp. filed its Form 10-K for the fiscal year ended December 31, 2019. It operates through OG&E, a regulated electric utility serving Oklahoma and western Arkansas, and a 25.5% equity-method investment in Enable Midstream Partners, which gathers, processes, transports and stores natural gas and other hydrocarbons. The filing reports annual results; fourth-quarter figures are identified separately below.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $2,231.6 million | $2,270.3 million |
| Operating income | $504.3 million | $489.6 million |
| Net income | $433.6 million | $425.5 million |
| Diluted EPS | $2.16 | $2.12 |
| Cash from operating activities | $681.5 million | $951.1 million |
| Cash used in investing activities | $624.7 million | $576.0 million |
| Dividends declared per share | $1.505 | $1.395 |
- OG&E’s non-GAAP gross margin rose to $1,444.7 million from $1,377.8 million. The company attributed the increase mainly to the expiration of the cogeneration credit rider and favorable summer weather effects.
- OG&E generated $350.2 million of net income, up from $328.0 million. OGE Holdings’ net income, principally reflecting Enable earnings, fell to $81.4 million from $108.8 million.
- Enable’s 2019 net income was $360 million versus $485 million in 2018, including an $86 million goodwill impairment. Its gross margin increased to $1,681 million from $1,612 million, while total revenue declined to $2,960 million from $3,431 million.
- Fourth-quarter consolidated revenue was $472.5 million and net income was $35.4 million, or $0.18 diluted EPS, compared with $511.8 million, $54.7 million and $0.27, respectively, in fourth-quarter 2018.
- Operating cash flow declined 28.3%, which management attributed primarily to lower customer receipts at OG&E and higher vendor payments. Capital expenditures were $635.5 million.
- At year-end, cash was zero, short-term debt was $112.0 million and long-term debt was $3,195.2 million. Net available liquidity under revolving credit agreements was $787.7 million. Stockholders’ equity was $4,139.5 million; capitalization was 56.4% equity and 43.6% long-term debt.
- The company paid $144.0 million in distributions from Enable in 2019. Enable’s common-unit distribution was $0.33050 per quarter as of its February 2020 announcement.
Changes, outlook and management commentary
- Consolidated net income increased $8.1 million year over year. OG&E’s improvement was partly offset by lower Enable-related earnings and higher pension settlement charges associated with employees seconded to Enable.
- OG&E acquired the River Valley and Frontier power plants in 2019, replacing capacity previously supplied under cogeneration contracts. The acquisitions and newly placed assets contributed to higher depreciation and operating costs.
- Management’s 2020 consolidated earnings guidance is $440–$463 million, or $2.19–$2.31 per diluted share. OG&E’s projected contribution is $346–$357 million, or $1.72–$1.78 per diluted share; its outlook assumes approximately 1% weather-adjusted sales growth and normal weather. Management expects the Enable contribution near the lower end of its $94–$106 million estimate and approximately $147 million of Enable cash distributions.
- The company’s stated long-term objective is 4–6% annual weather-normalized earnings growth for OG&E. Its 2020–2024 capital plan totals $3.51 billion for the company’s businesses, excluding Enable. Enable separately estimated 2020 expansion capital of $160–$240 million and maintenance capital of $110–$130 million.
- OG&E’s board approved a 6% increase in the quarterly common dividend to $0.3875 per share beginning October 2019. Moody’s downgraded OG&E’s senior unsecured rating in May 2019, citing debt-financed environmental investment and cash-flow pressures; S&P upgraded OG&E’s long-term issuer rating in October. Both outlooks were stable.
Risks, contingencies and unusual items
- OG&E’s earnings depend on regulatory approval and timely recovery of operating costs and capital investment. Arkansas proceedings remained pending for a proposed $5.2 million annual revenue increase and an environmental compliance rider; the company was also seeking approval for an approximately $800 million, five-year Oklahoma grid enhancement plan.
- A disputed SPP transmission-credit matter could require OG&E to refund an estimated $13.0 million, including interest. The company had not accrued a refund at year-end and stated it intended to appeal the FERC’s February 2020 decision requiring refunds. The ultimate outcome and timing were unresolved.
- Enable is not controlled by OGE Energy, and its results and distributions are exposed to commodity prices, producer drilling activity, contract renewals, customer concentration, competition and financing needs. Enable reported material customer concentration, including dependence on major counterparties for gathered volumes and transportation revenues.
- OG&E’s fuel adjustment clauses permit recovery of fuel and certain purchased-power costs, subject to regulatory review. Coal supply agreements cover only specified periods; OG&E disclosed no coal supply agreements beyond May 2021.
- Environmental regulation, potential emissions requirements, severe weather, cyber incidents, pension funding and changes in interest rates are among the disclosed risks. Management said environmental-control capital expenditures were not expected to be material in 2020 or 2021, while acknowledging future requirements and costs were uncertain.
- The company said reasonably possible losses on pending or threatened claims beyond accrued amounts were not expected to be quantitatively material. A termination of the employee seconding arrangement with Enable could trigger an estimated $17.3 million pension and retiree-health settlement or curtailment charge not reimbursable by Enable.
Important facts for investors to verify
- Whether OG&E obtains timely recovery of its grid, environmental and generation investment through pending or future regulatory decisions.
- The outcome and possible customer or company cost of the SPP transmission-credit refund dispute.
- Whether Enable’s earnings, cash generation and distributions support OGE Energy’s outlook, particularly following Enable’s goodwill impairment and amid its customer and commodity exposure.
- How 2020 operating cash flow and liquidity compare with capital spending, dividend payments and debt requirements.
- Whether the assumptions underlying 2020 guidance—including normal weather, sales growth and Enable distributions—are achieved.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The audit identified regulatory assets and liabilities as a critical audit matter because their measurement depends on judgments about future regulatory recovery or refunds.