OGE Energy Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. OGE operates a regulated electric utility, OG&E, and holds a 25.5% equity-method interest in natural gas midstream partnership Enable.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $702.1 million | $755.4 million | $1,636.9 million | $1,759.1 million |
| Operating income | $258.0 million | $274.3 million | $439.7 million | $434.0 million |
| Net income (loss) | $177.4 million | $250.9 million | ($228.5) million | $398.2 million |
| Diluted earnings (loss) per share | $0.89 | $1.25 | ($1.14) | $1.98 |
| Operating cash flow | Not separately presented for quarter | $525.3 million | $418.0 million | |
| Capital expenditures | Not separately presented for quarter | $419.7 million | $476.5 million |
- OG&E gross margin, a non-GAAP measure, was $493.0 million in Q3, down from $521.4 million; for nine months it was $1,155.4 million, up from $1,133.8 million.
- At September 30, cash was $32.0 million, long-term debt was $3,493.9 million, and short-term debt was zero. Revolving facilities totaled $900 million, with $899.7 million of net available liquidity. The company reported compliance with debt agreements.
- Common dividends declared were $0.4025 per share in Q3, versus $0.3875 a year earlier. Nine-month dividends paid were $234.4 million.
Material changes and drivers
- Q3 net income fell $73.5 million year over year. OG&E earnings declined $27.7 million, mainly from lower weather-sensitive sales and COVID-19-related impacts, partly offset by lower operating and maintenance expense. OGE Holdings earnings fell $18.4 million, reflecting weaker Enable results and its SESH investment impairment. Holding-company results also worsened, partly due to interim tax adjustments.
- Nine-month consolidated results shifted to a $228.5 million loss, principally because OGE recorded a $780 million impairment of its Enable investment in March. The impairment was non-cash; management’s non-GAAP ongoing earnings exclude it. Nine-month ongoing earnings were $354.3 million, or $1.78 per diluted share.
- OG&E’s nine-month gross margin increased despite lower revenue, helped by recovery of assets placed in service and expiration of a cogeneration credit rider. Lower weather-driven volumes, industrial and oilfield sales, and non-residential demand weighed on results. Depreciation, interest and income tax expense increased.
- Enable’s Q3 revenue was $596 million versus $699 million, and it reported a $173 million net loss versus $123 million net income. Its gathering and processing volumes and gross margin were lower. OGE’s investment in Enable declined to $376.8 million from $1,151.5 million at year-end 2019, including the impairment.
Outlook, commentary and risks
- OGE reduced 2020 consolidated GAAP net-loss guidance to $178–$190 million, or a loss of $0.89–$0.95 per diluted share, from a prior loss range of $154–$173 million. It projected ongoing earnings of $400–$412 million, or $2.00–$2.06 per share; this non-GAAP measure excludes the Enable impairment and associated tax effects.
- OG&E’s 2020 earnings outlook was reduced to $336–$340 million, or $1.68–$1.70 per share, from $346–$357 million. The company expected approximately $575 million of 2020 capital investment.
- Enable cut its quarterly distribution by 50% effective April 2020. OGE projected approximately $93 million of Enable cash distributions for 2020 and stated it did not foresee needing equity-market access because of the reduction.
- COVID-19 risks include customer payment delinquency, weaker commercial and industrial electricity demand, commodity-price volatility, disruption to suppliers and construction, and reduced demand for Enable’s services. Regulators authorized deferral of certain pandemic-related costs, but future recovery remains subject to review. Arkansas’s disconnection moratorium remained in effect at filing.
- An October 2020 ice storm, after quarter-end, caused approximately 422,000 outages. OG&E said restoration costs would be deferred to a regulatory asset and submitted for future rate recovery.
- OG&E estimated a potential $13 million refund, plus interest, in the pending SPP/FERC sponsored-transmission-upgrade dispute; no reserve had been recorded. Separately, Oklahoma certified-territory cases could involve approximately $13–$20 million of lost-revenue reimbursement across five cases, plus review of related plant investments. Outcomes remain uncertain.
- OG&E’s proposed five-year grid-enhancement plan included approximately $800 million of investments. A settlement proposed limited interim recovery, subject to OCC approval and later true-up. Environmental rules, rate recovery, Enable’s industry outlook, and access to financing are additional risks.
Most important facts for investors to verify
- Whether the $780 million Enable impairment and subsequent Enable performance indicate further risk to the carrying value or future distributions.
- Actual 2020 results against revised GAAP and ongoing-earnings guidance, including the assumptions behind the non-GAAP reconciliation.
- Regulatory recovery and timing for COVID-19 costs, grid investments, storm restoration costs, and environmental-related spending.
- Developments in the SPP refund dispute and Oklahoma certified-territory cases, including possible customer or company exposure.
- OG&E’s customer-payment trends and demand recovery, and Enable’s volumes, contract renewals, commodity exposure and cash distributions.