OGE Energy Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. OGE Energy is a holding company with a regulated electric utility, OG&E, and a 25.5% equity-method investment in natural gas midstream operator Enable.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $503.5m | $513.7m | $934.8m | $1,003.7m |
| Operating income | $125.4m | $110.0m | $181.7m | $159.7m |
| Net income (loss) | $85.9m | $100.2m | ($405.9m) | $147.3m |
| Diluted earnings (loss) per share | $0.43 | $0.50 | ($2.03) | $0.73 |
- Margins: OG&E’s non-GAAP gross margin was $366.1m in Q2, up from $335.0m, and $662.4m for the first half, up from $612.4m. The filing attributes the improvement mainly to expiration of the cogeneration credit rider and, in Q2, higher cooling-related usage. Enable’s gross margin fell to $338m from $418m in Q2 and to $760m from $835m for the first half.
- Cash flow: First-half operating cash flow was $263.3m, versus $128.8m; investing cash outflow was $282.3m, versus $317.7m; financing cash inflow was $86.5m, versus $94.6m. Cash at June 30 was $67.5m.
- Debt and liquidity: At June 30, short-term debt was $75.0m and long-term debt was $3,493.4m, compared with $112.0m and $3,195.2m, respectively, at year-end 2019. The company reported $899.7m of net available liquidity under its revolving credit facilities. It issued $300m of 3.25% senior notes due 2030 and drew a $75m one-year term loan at 1.25% weighted-average interest.
- Dividends: Quarterly dividends declared were $0.3875 per share, compared with $0.3650 a year earlier. Enable reduced its quarterly distribution by 50% beginning April 2020.
Material changes and drivers
- First-half GAAP results included a $780m non-cash impairment of OGE Energy’s Enable investment, recorded in March after a severe decline in value and deterioration in the midstream industry outlook. The impairment drove the reported first-half net loss; the filing reported a related $190.4m tax benefit in OGE Holdings.
- Q2 net income declined $14.3m year over year. Higher OG&E gross margin and earnings were more than offset by lower Enable-related earnings and a higher holding-company tax expense associated with the interim tax adjustment.
- OG&E’s first-half net income rose to $98.8m from $94.1m. Higher gross margin was partly offset by increased depreciation, taxes and interest expense.
- Enable’s Q2 revenue declined to $515m from $735m and net income to $35m from $115m. The filing cites lower gathered and processed volumes, commodity prices and activity, particularly in gathering and processing.
Outlook, risks and contingencies
- 2020 guidance unchanged: OG&E net income of approximately $346m–$357m, or $1.72–$1.78 per diluted share; consolidated GAAP net loss of approximately $154m–$173m, or ($0.77)–($0.87) per share. The company’s non-GAAP ongoing earnings outlook is $417m–$436m, or $2.08–$2.18 per share. Ongoing earnings exclude the Enable impairment and related tax effects.
- Management said it remained on track for approximately $575m of 2020 capital investment. Construction or equipment-delivery delays related to COVID-19 could defer spending. The company said cash from operations, financing and Enable distributions should meet anticipated needs over the next three years, while cautioning that capital-market disruption could make financing more difficult.
- COVID-19 risks include customer payment delays or nonpayment, lower commercial and industrial load, business-partner disruption and adverse effects on energy demand and Enable’s customers. OG&E deferred certain COVID-related costs and incremental bad debt to regulatory assets, but future recovery remains subject to regulatory review. The company adjusted its receivables reserve by $1.1m.
- OG&E’s proposed approximately $800m, five-year Oklahoma Grid Enhancement Plan remained pending, with a hearing scheduled for October 2020. A potential FERC/SPP transmission-credit refund remains unresolved: OG&E estimated a possible $13m refund, including $5m affecting the company and $8m affecting customers; no reserve had been recorded.
- On July 31, 2020, after quarter-end, the Arkansas commission rejected OG&E’s environmental compliance rider request; OG&E said it would return $5.1m reserved for customers and seek recovery through a future formula-rate filing. Other risks include environmental regulation, rate recovery, Enable’s commodity and contract exposure, and possible further reductions in Enable distributions.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting. The CFO notified the company of his intention to retire at year-end 2020.
Important facts for investors to verify
- How Enable’s operating performance, unit value and reduced distributions affect OGE Energy’s earnings, cash flow and impairment risk.
- Whether the company achieves 2020 consolidated and OG&E guidance, and how the non-GAAP ongoing-earnings reconciliation compares with GAAP results.
- Regulatory decisions on COVID-19 cost recovery, the Oklahoma grid plan and the potential $13m transmission-credit refund.
- Customer collections, load trends and any changes in the $1.1m receivables-reserve adjustment as pandemic effects develop.
- Capital spending, debt and access to financing, including the maturity of the $75m term loan in April 2021.