OGE Energy Corp. — 2019 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. OGE Energy is a holding company whose principal businesses are OG&E, a regulated electric utility serving Oklahoma and western Arkansas, and a 25.5% equity investment in Enable Midstream Partners. Results are unaudited; utility earnings are seasonal, with a majority typically earned in the third quarter.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $755.4M | $698.8M | $1,759.1M | $1,758.5M |
| Operating income | $274.3M | $227.3M | $434.0M | $431.6M |
| Net income | $250.9M | $205.1M | $398.2M | $370.8M |
| Diluted EPS | $1.25 | $1.02 | $1.98 | $1.85 |
| OG&E gross margin (non-GAAP) | $521.4M | $454.4M | $1,133.8M | $1,094.9M |
Q3 net income rose $45.8M; nine-month net income rose $27.4M. OG&E drove most of the improvement: its net income increased $43.3M in Q3 and $14.1M over nine months. Management attributed stronger utility gross margin chiefly to favorable summer weather and expiration of the cogeneration credit rider; lower income tax expense also helped. Higher depreciation, operating and maintenance costs, and lower construction-related allowances partly offset gains.
Enable contributed equity earnings of $38.3M in Q3 and $104.8M for nine months, versus $40.1M and $103.3M, respectively. Enable’s nine-month net income increased to $351M from $320M, while reported revenue fell to $2,229M from $2,481M, reflecting lower natural gas and NGL costs and associated sales. OGE Energy’s share is accounted for under the equity method.
Cash flow, debt and liquidity
- Operating cash flow: $418.0M for nine months, down from $711.7M. The company cited lower customer receipts and increased vendor payments; working-capital movements included higher receivables and fuel under-recoveries.
- Investing cash flow: $482.4M used, including $476.5M of capital expenditures, compared with $413.1M used in the prior period. The increase also reflected acquisitions of the River Valley and Frontier plants.
- Financing and cash: $16.7M used in financing; cash declined to $13.2M from $94.3M at year-end 2018. Dividends paid were $221.7M.
- Debt at September 30: $168.8M short-term debt and $3,194.7M long-term debt; no long-term debt was due within one year. OG&E issued $300M of 3.30% senior notes due 2030 in June. The company reported $730.9M of net available liquidity under revolving credit agreements, in addition to cash.
- OG&E’s $135.4M of pollution-control bonds are puttable by holders during the next 12 months but are classified as long-term debt; the company said it had liquidity and refinancing capacity to meet the obligation.
Changes, outlook and notable items
- OG&E acquired the River Valley and Frontier generating plants for a combined approved purchase price of $53.5M, replacing expired cogeneration power contracts. Both plants entered service in 2019.
- 2019 consolidated earnings guidance increased to $449M–$461M, or $2.24–$2.30 per diluted share, from prior guidance of $412M–$442M, or $2.05–$2.20. OG&E guidance rose to $349M–$357M, or $1.74–$1.78 per share. Enable contribution guidance was unchanged at the low end of its prior $104M–$117M range. Guidance assumes normal weather for the remainder of the year.
- OG&E’s 2019 capital expenditure estimate is $635M; the company’s 2019–2023 estimate totals $3.42B, excluding Enable. Management expects operating cash flow, debt financing and Enable distributions to fund anticipated needs over the next three years.
- OG&E’s Oklahoma rate-review settlement was approved in September 2019. It provides full recovery of specified environmental investments, but no base-rate change, partly reflecting lower cogeneration costs and accelerated return of certain deferred tax savings. An Arkansas environmental rider remains interim and subject to refund; a hearing was scheduled for December 2019. An Arkansas filing seeks a $5.9M annual revenue increase, with rates, if approved, effective April 2020.
- A potential FERC refund related to SPP sponsored transmission upgrades remains unresolved. OGE had not reserved for it; estimated refund exposure is $13M including interest, with an estimated $5M company expense and $8M customer impact if repayment is required.
- The company recorded $23.8M of pension settlement charges in the first nine months due to employee retirements and lump-sum payments. Management said the charge was noncash and accelerated costs otherwise recognized in future periods. It contributed to higher reported benefit expense.
- Moody’s downgraded OG&E ratings in May 2019, citing debt-funded environmental spending and lagging cash flow. After quarter-end, S&P upgraded OG&E’s long-term issuer rating from BBB+ to A-; outlook remained stable. Management reported compliance with debt agreements.
Risks and contingencies
Key exposures include regulatory timing and recovery of utility investment and costs; pending FERC and state proceedings; environmental rules and possible future compliance costs; weather, generation availability, fuel and purchased-power costs; and Enable’s commodity, contract-renewal and producer-activity risks. OGE stated it could not determine the material financial impact of certain pending environmental and regulatory matters. It believes reasonably possible litigation losses beyond accrued amounts are not expected to materially affect consolidated results. The filing reported no significant changes in risk factors or market risks from the 2018 Form 10-K. Disclosure controls were assessed as effective.
Investor verification priorities
- Track whether OG&E achieves its raised 2019 guidance, particularly given seasonal earnings concentration and the assumption of normal fourth-quarter weather.
- Monitor operating cash conversion, capital spending, short-term borrowing and available revolver capacity as investment needs continue.
- Check resolution and financial treatment of the potential $13M SPP upgrade refund and the Arkansas environmental rider subject to refund.
- Verify rate recovery and prudence treatment for the acquired plants and environmental projects, including the pending Arkansas rate proceedings.
- Assess Enable’s cash distributions and earnings contribution against its commodity exposure, operating trends and the company’s dependence on the equity-method investment.