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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission File Number: 1-12579
OGE ENERGY CORP.
(Exact name of registrant as specified in its charter)
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Oklahoma | | 73-1481638 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
321 North Harvey
P.O. Box 321
Oklahoma City, Oklahoma 73101-0321
(Address of principal executive offices)
(Zip Code)
(Registrant's telephone number, including area code): 405-553-3000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | OGE | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☑ | Accelerated filer | ☐
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Non-accelerated filer | ☐
| Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
At March 31, 2020, there were 200,169,431 shares of common stock, par value $0.01 per share, outstanding.
OGE ENERGY CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
TABLE OF CONTENTS
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Part I - FINANCIAL INFORMATION | |
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Part II - OTHER INFORMATION | |
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GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations that are found throughout this Form 10-Q.
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Abbreviation | Definition |
2019 Form 10-K | Annual Report on Form 10-K for the year ended December 31, 2019 |
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APSC | Arkansas Public Service Commission |
ArcLight group | Bronco Midstream Holdings, LLC and Bronco Midstream Holdings II, LLC, collectively |
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ASU | FASB Accounting Standards Update |
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CenterPoint | CenterPoint Energy Resources Corp., wholly-owned subsidiary of CenterPoint Energy, Inc. |
CO2 | Carbon dioxide |
Company | OGE Energy Corp., collectively with its subsidiaries |
COVID-19 | Novel Coronavirus disease |
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Dry Scrubber | Dry flue gas desulfurization unit with spray dryer absorber |
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Enable | Enable Midstream Partners, LP, a partnership between OGE Energy, the ArcLight group and CenterPoint Energy, Inc. formed to own and operate the midstream businesses of OGE Energy and CenterPoint |
Enogex Holdings | Enogex Holdings LLC, the parent company of Enogex LLC and a majority-owned subsidiary of OGE Holdings, LLC (prior to May 1, 2013) |
Enogex LLC | Enogex LLC, collectively with its subsidiaries (effective July 30, 2013, the name was changed to Enable Oklahoma Intrastate Transmission, LLC) |
EPA | U.S. Environmental Protection Agency |
FASB | Financial Accounting Standards Board |
Federal Clean Air Act | Federal Clean Air Act of 1970, as amended |
Federal Clean Water Act | Federal Water Pollution Control Act of 1972, as amended |
FERC | Federal Energy Regulatory Commission |
FIP | Federal Implementation Plan |
GAAP | Accounting principles generally accepted in the U.S. |
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MATS | Mercury and Air Toxics Standards |
MBbl/d | Thousand barrels per day |
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MW | Megawatt |
MWh | Megawatt-hour |
NAAQS | National Ambient Air Quality Standards |
NGLs | Natural gas liquids |
NOX | Nitrogen oxide |
OCC | Oklahoma Corporation Commission |
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OG&E | Oklahoma Gas and Electric Company, wholly-owned subsidiary of OGE Energy |
OGE Energy | Holding company |
OGE Holdings | OGE Enogex Holdings, LLC, wholly-owned subsidiary of OGE Energy, parent company of Enogex Holdings (prior to May 1, 2013) and 25.5 percent owner of Enable |
Pension Plan | Qualified defined benefit retirement plan |
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Regional Haze Rule | The EPA's Regional Haze Rule |
Restoration of Retirement Income Plan | Supplemental retirement plan to the Pension Plan |
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SIP | State Implementation Plan |
SO2 | Sulfur dioxide |
SPP | Southwest Power Pool |
System sales | Sales to OG&E's customers |
TBtu/d | Trillion British thermal units per day |
U.S. | United States of America |
FORWARD-LOOKING STATEMENTS
Except for the historical statements contained herein, the matters discussed within this Form 10-Q, including those matters discussed within "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "believe," "estimate," "expect," "intend," "objective," "plan," "possible," "potential," "project" and similar expressions. Actual results may vary materially from those expressed in forward-looking statements. In addition to the specific risk factors discussed within "Item 1A. Risk Factors" in the Company's 2019 Form 10-K and within "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1A. Risk Factors" of "Part II - Other Information" herein, factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:
•general economic conditions, including the availability of credit, access to existing lines of credit, access to the commercial paper markets, actions of rating agencies and their impact on capital expenditures;
•the ability of the Company and its subsidiaries to access the capital markets and obtain financing on favorable terms as well as inflation rates and monetary fluctuations;
•the ability to obtain timely and sufficient rate relief to allow for recovery of items such as capital expenditures, fuel costs, operating costs, transmission costs and deferred expenditures;
•prices and availability of electricity, coal, natural gas and NGLs;
•the timing and extent of changes in commodity prices, particularly natural gas and NGLs, the competitive effects of the available pipeline capacity in the regions Enable serves and the effects of geographic and seasonal commodity price differentials, including the effects of these circumstances on re-contracting available capacity on Enable's interstate pipelines;
•the timing and extent of changes in the supply of natural gas, particularly supplies available for gathering by Enable's gathering and processing business and transporting by Enable's interstate pipelines, including the impact of natural gas and NGLs prices on the level of drilling and production activities in the regions Enable serves;
•business conditions in the energy and natural gas midstream industries, including the demand for natural gas, NGLs, crude oil and midstream services;
•competitive factors, including the extent and timing of the entry of additional competition in the markets served by the Company;
•the impact on demand for our services resulting from cost-competitive advances in technology, such as distributed electricity generation and customer energy efficiency programs;
•technological developments, changing markets and other factors that result in competitive disadvantages and create the potential for impairment of existing assets;
•factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages, unusual maintenance or repairs; unanticipated changes to fossil fuel, natural gas or coal supply costs or availability due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline system constraints;
•availability and prices of raw materials for current and future construction projects;
•the effect of retroactive pricing of transactions in the SPP markets or adjustments in market pricing mechanisms by the SPP;
•federal or state legislation and regulatory decisions and initiatives that affect cost and investment recovery, have an impact on rate structures or affect the speed and degree to which competition enters the Company's markets;
•environmental laws, safety laws or other regulations that may impact the cost of operations or restrict or change the way the Company operates its facilities;
•changes in accounting standards, rules or guidelines;
•the discontinuance of accounting principles for certain types of rate-regulated activities;
•the cost of protecting assets against, or damage due to, terrorism or cyberattacks and other catastrophic events;
•creditworthiness of suppliers, customers and other contractual parties;
•social attitudes regarding the utility, natural gas and power industries;
•identification of suitable investment opportunities to enhance shareholder returns and achieve long-term financial objectives through business acquisitions and divestitures;
•increased pension and healthcare costs;
•the impact of extraordinary external events, such as the current pandemic health event resulting from COVID-19, and their collateral consequences, including extended disruption of economic activity in our markets;
•costs and other effects of legal and administrative proceedings, settlements, investigations, claims and matters, including, but not limited to, those described in this Form 10-Q;
•difficulty in making accurate assumptions and projections regarding future revenues and costs associated with the Company's equity investment in Enable that the Company does not control; and
•other risk factors listed in the reports filed by the Company with the Securities and Exchange Commission, including those listed within "Item 1A. Risk Factors" in the Company's 2019 Form 10-K and "Item 1A. Risk Factors" of "Part II - Other Information" herein.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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(In millions, except per share data) | | | 2020 | 2019 |
OPERATING REVENUES | | | | |
Revenues from contracts with customers | | | $ | 420.4 | | $ | 477.4 | |
Other revenues | | | 10.9 | | 12.6 | |
Operating revenues | | | 431.3 | | 490.0 | |
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COST OF SALES | | | 135.0 | | 212.6 | |
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OPERATING EXPENSES | | | | |
Other operation and maintenance | | | 120.0 | | 119.0 | |
Depreciation and amortization | | | 94.4 | | 82.4 | |
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Taxes other than income | | | 25.6 | | 26.3 | |
Operating expenses | | | 240.0 | | 227.7 | |
OPERATING INCOME | | | 56.3 | | 49.7 | |
OTHER INCOME (EXPENSE) | | | | |
Equity in earnings (losses) of unconsolidated affiliates | | | (746.5) | | 30.7 | |
Allowance for equity funds used during construction | | | 1.3 | | 1.5 | |
Other net periodic benefit expense | | | (0.5) | | (7.0) | |
Other income | | | 7.4 | | 6.7 | |
Other expense | | | (6.1) | | (5.7) | |
Net other income (expense) | | | (744.4) | | 26.2 | |
INTEREST EXPENSE | | | | |
Interest on long-term debt | | | 36.6 | | 32.6 | |
Allowance for borrowed funds used during construction | | | (0.5) | | (1.0) | |
Interest on short-term debt and other interest charges | | | 2.2 | | 3.0 | |
Interest expense | | | 38.3 | | 34.6 | |
INCOME (LOSS) BEFORE TAXES | | | (726.4) | | 41.3 | |
INCOME TAX BENEFIT | | | (234.6) | | (5.8) | |
NET INCOME (LOSS) | | | $ | (491.8) | | $ | 47.1 | |
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BASIC AVERAGE COMMON SHARES OUTSTANDING | | | 200.2 | | 199.9 | |
DILUTED AVERAGE COMMON SHARES OUTSTANDING | | | 200.2 | | 200.5 | |
BASIC EARNINGS (LOSS) PER AVERAGE COMMON SHARE | | | $ | (2.46) | | $ | 0.24 | |
DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE | | | $ | (2.46) | | $ | 0.24 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.
OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | |
| | | Three Months Ended March 31, | |
(In millions) | | | 2020 | 2019 |
Net income (loss) | | | $ | (491.8) | | $ | 47.1 | |
Other comprehensive income (loss), net of tax: | | | | |
Pension Plan and Restoration of Retirement Income Plan: | | | | |
Amortization of deferred net loss, net of tax of $0.3 and $0.2, respectively | | | 0.8 | | 0.7 | |
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Settlement cost, net of tax of $0.0 and $2.2, respectively | | | — | | 6.6 | |
Postretirement benefit plans: | | | | |
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Amortization of prior service credit, net of tax of ($0.2) and ($0.1), respectively | | | (0.4) | | (0.5) | |
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Other comprehensive loss from unconsolidated affiliates, net of tax of ($0.4) and $0.0, respectively | | | (1.3) | | — | |
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Other comprehensive income (loss), net of tax | | | (0.9) | | 6.8 | |
Comprehensive income (loss) | | | $ | (492.7) | | $ | 53.9 | |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.
OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | |
| Three Months Ended March 31, | |
(In millions) | 2020 | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES | | |
Net income (loss) | $ | (491.8) | | $ | 47.1 | |
Adjustments to reconcile net income (loss) to net cash provided from operating activities: | | |
Depreciation and amortization | 94.4 | | 82.4 | |
| | |
Deferred income taxes and investment tax credits, net | (254.7) | | (0.5) | |
Equity in (earnings) losses of unconsolidated affiliates | 746.5 | | (30.7) | |
Distributions from unconsolidated affiliates | 33.5 | | 35.3 | |
Allowance for equity funds used during construction | (1.3) | | (1.5) | |
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Stock-based compensation expense | 2.0 | | 3.0 | |
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Regulatory assets | 0.3 | | (7.3) | |
Regulatory liabilities | (11.7) | | (7.0) | |
Other assets | 2.6 | | (3.8) | |
Other liabilities | (9.4) | | 15.9 | |
Change in certain current assets and liabilities: | | | | |
Accounts receivable and accrued unbilled revenues, net | 16.2 | | 19.2 | |
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Fuel, materials and supplies inventories | (5.0) | | 9.1 | |
Fuel recoveries | 50.3 | | (22.8) | |
Other current assets | 3.6 | | (11.0) | |
Accounts payable | (32.8) | | (42.6) | |
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Other current liabilities | (38.8) | | (55.9) | |
Net cash provided from operating activities | 103.9 | | 28.9 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Capital expenditures (less allowance for equity funds used during construction) | (127.2) | | (152.9) | |
Investment in unconsolidated affiliates | (0.9) | | (1.0) | |
Return of capital - unconsolidated affiliates | 3.2 | | — | |
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Net cash used in investing activities | (124.9) | | (153.9) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
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Increase in short-term debt | 263.0 | | 366.4 | |
Payment of long-term debt | — | | (250.0) | |
Dividends paid on common stock | (79.3) | | (75.5) | |
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Cash paid for employee equity-based compensation and expense of common stock | (7.1) | | (10.2) | |
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Purchase of treasury stock | (9.7) | | — | |
Net cash provided from financing activities | 166.9 | | 30.7 | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | 145.9 | | (94.3) | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | — | | 94.3 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 145.9 | | $ | — | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.
OGE ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | |
| March 31, | December 31, |
(In millions) | 2020 | 2019 |
ASSETS | | |
CURRENT ASSETS | | |
Cash and cash equivalents | $ | 145.9 | | $ | — | |
Accounts receivable, less reserve of $1.1 and $1.5, respectively | 143.4 | | 153.8 | |
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Accrued unbilled revenues | 58.9 | | 64.7 | |
Income taxes receivable | 0.8 | | 10.9 | |
Fuel inventories | 45.5 | | 46.3 | |
Materials and supplies, at average cost | 97.2 | | 90.6 | |
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Fuel clause under recoveries | — | | 39.5 | |
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Other | 30.8 | | 24.4 | |
Total current assets | 522.5 | | 430.2 | |
OTHER PROPERTY AND INVESTMENTS | | |
Investment in unconsolidated affiliates | 367.5 | | 1,151.5 | |
Other | 79.9 | | 82.7 | |
Total other property and investments | 447.4 | | 1,234.2 | |
PROPERTY, PLANT AND EQUIPMENT | | | | |
In service | 12,862.4 | | 12,771.1 | |
Construction work in progress | 149.5 | | 141.6 | |
Total property, plant and equipment | 13,011.9 | | 12,912.7 | |
Less: accumulated depreciation | 3,920.9 | | 3,868.1 | |
Net property, plant and equipment | 9,091.0 | | 9,044.6 | |
DEFERRED CHARGES AND OTHER ASSETS | | | | |
Regulatory assets | 300.0 | | 306.0 | |
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Other | 10.0 | | 9.3 | |
Total deferred charges and other assets | 310.0 | | 315.3 | |
TOTAL ASSETS | $ | 10,370.9 | | $ | 11,024.3 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.
OGE ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
| | | | | | | | |
| March 31, | December 31, |
(In millions) | 2020 | 2019 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | |
CURRENT LIABILITIES | | |
Short-term debt | $ | 375.0 | | $ | 112.0 | |
| | |
Accounts payable | 157.2 | | 194.9 | |
Dividends payable | 77.6 | | 77.6 | |
Customer deposits | 83.2 | | 83.0 | |
Accrued taxes | 34.9 | | 41.9 | |
Accrued interest | 36.1 | | 37.9 | |
Accrued compensation | 26.9 | | 40.6 | |
| | |
Fuel clause over recoveries | 15.6 | | 4.8 | |
Other | 48.7 | | 65.2 | |
Total current liabilities | 855.2 | | 657.9 | |
LONG-TERM DEBT | 3,195.6 | | 3,195.2 | |
DEFERRED CREDITS AND OTHER LIABILITIES | | | | |
| | |
Accrued benefit obligations | 217.1 | | 225.0 | |
Deferred income taxes | 1,129.0 | | 1,375.8 | |
Deferred investment tax credits | 7.1 | | 7.1 | |
Regulatory liabilities | 1,216.1 | | 1,223.5 | |
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Other | 198.1 | | 200.3 | |
Total deferred credits and other liabilities | 2,767.4 | | 3,031.7 | |
Total liabilities | 6,818.2 | | 6,884.8 | |
COMMITMENTS AND CONTINGENCIES (NOTE 13) | | | | |
STOCKHOLDERS' EQUITY | | | | |
Common stockholders' equity | 1,116.8 | | 1,131.3 | |
Retained earnings | 2,465.0 | | 3,036.1 | |
Accumulated other comprehensive loss, net of tax | (28.8) | | (27.9) | |
Treasury stock, at cost | (0.3) | | — | |
| | |
| | |
Total stockholders' equity | 3,552.7 | | 4,139.5 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 10,370.9 | | $ | 11,024.3 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.
OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | | | | | |
(In millions) | Shares | Value | Shares | Value | Premium on Common Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance at December 31, 2019 | 200.1 | | $ | 2.0 | | — | | $ | — | | $ | 1,129.3 | | $ | 3,036.1 | | $ | (27.9) | | | $ | 4,139.5 | |
Net loss | — | | — | | — | | — | | — | | (491.8) | | — | | | (491.8) | |
Other comprehensive loss, net of tax | — | | — | | — | | — | | — | | — | | (0.9) | | | (0.9) | |
Dividends declared on common stock ($0.3875 per share) | — | | — | | — | | — | | — | | (79.3) | | — | | | (79.3) | |
Stock-based compensation | — | | — | | (0.2) | | 9.4 | | (14.5) | | — | | — | | | (5.1) | |
Purchase of treasury stock | — | | — | | 0.2 | | (9.7) | | — | | — | | — | | | (9.7) | |
Balance at March 31, 2020 | 200.1 | | $ | 2.0 | | — | | $ | (0.3) | | $ | 1,114.8 | | $ | 2,465.0 | | $ | (28.8) | | | $ | 3,552.7 | |
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Balance at December 31, 2018 | 199.7 | | $ | 2.0 | | — | | $ | — | | $ | 1,125.7 | | $ | 2,906.3 | | $ | (28.9) | | | $ | 4,005.1 | |
Net income | — | | — | | — | | — | | — | | 47.1 | | — | | | 47.1 | |
Other comprehensive income, net of tax | — | | — | | — | | — | | — | | — | | 6.8 | | | 6.8 | |
Dividends declared on common stock ($0.3650 per share) | — | | — | | — | | — | | — | | (75.6) | | — | | | (75.6) | |
Stock-based compensation | 0.5 | | — | | — | | — | | (7.2) | | — | | — | | | (7.2) | |
Balance at March 31, 2019 | 200.2 | | $ | 2.0 | | — | | $ | — | | $ | 1,118.5 | | $ | 2,877.8 | | $ | (22.1) | | | $ | 3,976.2 | |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.
OGE ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Summary of Significant Accounting Policies
The Company's significant accounting policies are detailed in "Note 1. Summary of Significant Accounting Policies" in the Company's 2019 Form 10-K. Changes to the Company's accounting policies as a result of adopting ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Information" are incorporated within "Allowance for Uncollectible Accounts Receivables" below and discussed in Note 2 in this Form 10-Q.
Organization
The Company is a holding company with investments in energy and energy services providers offering physical delivery and related services for both electricity and natural gas primarily in the south-central U.S. The Company conducts these activities through two business segments: (i) electric utility and (ii) natural gas midstream operations. The accounts of the Company and its wholly-owned subsidiaries are included in the Condensed Consolidated Financial Statements. All intercompany transactions and balances are eliminated in consolidation. The Company generally uses the equity method of accounting for investments where its ownership interest is between 20 percent and 50 percent and it lacks the power to direct activities that most significantly impact economic performance.
The electric utility segment generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. Its operations are conducted through OG&E and are subject to regulation by the OCC, the APSC and the FERC. OG&E was incorporated in 1902 under the laws of the Oklahoma Territory and is a wholly-owned subsidiary of the Company. OG&E is the largest electric utility in Oklahoma, and its franchised service territory includes Fort Smith, Arkansas and the surrounding communities. OG&E sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution business.
The natural gas midstream operations segment represents the Company's investment in Enable through wholly-owned subsidiaries and ultimately OGE Holdings. Enable was formed in 2013, and its general partner is equally controlled by the Company and CenterPoint, who each have 50 percent management ownership. Based on the 50/50 management ownership, with neither company having control, the Company accounts for its interest in Enable using the equity method of accounting. Enable is primarily engaged in the business of gathering, processing, transporting and storing natural gas. Enable's natural gas gathering and processing assets are strategically located in four states and serve natural gas production in the Anadarko, Arkoma and Ark-La-Tex Basins. Enable also owns crude oil gathering assets in the Anadarko and Williston Basins. Enable has intrastate natural gas transportation and storage assets that are located in Oklahoma as well as interstate assets that extend from western Oklahoma and the Texas Panhandle to Louisiana, from Louisiana to Illinois and from Louisiana to Alabama.
Basis of Presentation
The Condensed Consolidated Financial Statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to prevent the information presented from being misleading.
In the opinion of management, all adjustments necessary to fairly present the consolidated financial position of the Company at March 31, 2020 and December 31, 2019, the consolidated results of its operations for the three months ended March 31, 2020 and 2019 and its consolidated cash flows for the three months ended March 31, 2020 and 2019 have been included and are of a normal, recurring nature except as otherwise disclosed. Management also has evaluated the impact of events occurring after March 31, 2020 up to the date of issuance of these Condensed Consolidated Financial Statements, and these statements contain all necessary adjustments and disclosures resulting from that evaluation.
Due to seasonal fluctuations and other factors, the Company's operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any future period. The Condensed Consolidated Financial Statements and Notes thereto should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in the Company's 2019 Form 10-K.
Accounting Records
The accounting records of OG&E are maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the OCC and the APSC. Additionally, OG&E, as a regulated utility, is subject to accounting principles for certain types of rate-regulated activities, which provide that certain incurred costs that would otherwise be charged to expense can be deferred as regulatory assets, based on the expected recovery from customers in future rates. Likewise, certain actual or anticipated credits that would otherwise reduce expense can be deferred as regulatory liabilities, based on the expected flowback to customers in future rates. Management's expected recovery of deferred costs and flowback of deferred credits generally results from specific decisions by regulators granting such ratemaking treatment.
OG&E records certain incurred costs and obligations as regulatory assets or liabilities if, based on regulatory orders or other available evidence, it is probable that the costs or obligations will be included in amounts allowable for recovery or refund in future rates.
The following table is a summary of OG&E's regulatory assets and liabilities.
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| March 31, | December 31, |
(In millions) | 2020 | 2019 |
REGULATORY ASSETS | | |
Current: | | |
Generation Capacity Replacement rider under recovery (A) | $ | 4.6 | | $ | 3.7 | |
Fuel clause under recoveries | — | | 39.5 | |
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Other (A) | 8.2 | | 5.5 | |
Total current regulatory assets | $ | 12.8 | | $ | 48.7 | |
Non-current: | | | | |
Benefit obligations regulatory asset | $ | 165.2 | | $ | 167.2 | |
Deferred storm expenses | 63.9 | | 65.5 | |
Sooner Dry Scrubbers | 20.4 | | 20.6 | |
Smart Grid | 16.6 | | 18.4 | |
Unamortized loss on reacquired debt | 10.4 | | 10.6 | |
Arkansas deferred pension expenses | 7.8 | | 8.0 | |
Pension tracker | 0.9 | | 2.3 | |
Other | 14.8 | | 13.4 | |
Total non-current regulatory assets | $ | 300.0 | | $ | 306.0 | |
REGULATORY LIABILITIES | | | | |
Current: | | | | |
Fuel clause over recoveries | $ | 15.6 | | $ | 4.8 | |
Reserve for tax refund and interim surcharge (B) | 4.8 | | 12.7 | |
Oklahoma demand program rider over recovery (B) | 4.4 | | 2.0 | |
SPP cost tracker over recovery (B) | — | | 2.6 | |
Other (B) | 5.6 | | 6.9 | |
Total current regulatory liabilities | $ | 30.4 | | $ | 29.0 | |
Non-current: | | | | |
Income taxes refundable to customers, net | $ | 890.9 | | $ | 899.2 | |
Accrued removal obligations, net | 319.7 | | 318.5 | |
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Other | 5.5 | | 5.8 | |
Total non-current regulatory liabilities | $ | 1,216.1 | | $ | 1,223.5 | |
(A)Included in Other Current Assets in the Condensed Consolidated Balance Sheets.
(B)Included in Other Current Liabilities in the Condensed Consolidated Balance Sheets.
Management continuously monitors the future recoverability of regulatory assets. When in management's judgment future recovery becomes impaired, the amount of the regulatory asset is adjusted, as appropriate. If OG&E were required to
discontinue the application of accounting principles for certain types of rate-regulated activities for some or all of its operations, it could result in writing off the related regulatory assets or liabilities, which could have significant financial effects.
Allowance for Uncollectible Accounts Receivable
Customer balances are generally written off if not collected within six months after the final billing date. The allowance for uncollectible accounts receivable for OG&E is calculated by multiplying the last six months of electric revenue by the provision rate, which is based on a 12-month historical average of actual balances written off and is adjusted for current conditions and supportable forecasts as necessary. To the extent the historical collection rates, when incorporating forecasted conditions, are not representative of future collections, there could be an effect on the amount of uncollectible expense recognized. Also, a portion of the uncollectible provision related to fuel within the Oklahoma jurisdiction is being recovered through the fuel adjustment clause. The allowance for uncollectible accounts receivable is a reduction to Accounts Receivable in the Condensed Consolidated Balance Sheets and is included in the Other Operation and Maintenance in the Condensed Consolidated Statements of Income.
New business customers are required to provide a security deposit in the form of cash, bond or irrevocable letter of credit that is refunded when the account is closed. New residential customers whose outside credit scores indicate an elevated risk are required to provide a security deposit that may be refunded based on customer protection rules defined by the OCC and the APSC. The payment behavior of all existing customers is continuously monitored, and, if the payment behavior indicates sufficient risk within the meaning of the applicable utility regulation, customers will be required to provide a security deposit.
The Company considered COVID-19 pandemic impacts when calculating its reserve on accounts receivable as of March 31, 2020, as further discussed in "Item 2. Management's Discussion and Analysis - Recent Developments."
Investment in Unconsolidated Affiliates
The Company's investment in Enable is considered to be a variable interest entity because the owners of the equity at risk in this entity have disproportionate voting rights in relation to their obligations to absorb the entity's expected losses or to receive its expected residual returns. However, the Company is not considered the primary beneficiary of Enable since it does not have the power to direct the activities of Enable that are considered most significant to the economic performance of Enable; therefore, the Company accounts for its investment in Enable using the equity method of accounting. Under the equity method, the investment will be adjusted each period for contributions made, distributions received and the Company's share of the investee's comprehensive income as adjusted for basis differences. The Company's maximum exposure to loss related to Enable is limited to the Company's equity investment in Enable at March 31, 2020 as presented in Note 12. The Company evaluates its equity method investments for impairment when events or changes in circumstances indicate there is a loss in value of the investment that is other than a temporary decline. When indicators exist, the fair value is estimated and compared to the investment carrying value, and if any impairment is judgmentally determined to be other than temporary, the carrying value of the investment is written down to fair value.
The Company determined, in connection with the preparation of the financial statements for the three months ended March 31, 2020, that an other than temporary decline in the value of the Company's investment in Enable had occurred. Further information detailing the results of the impairment analysis and fair value measurement can be found in Notes 4 and 5.
The Company considers distributions received from Enable, which do not exceed cumulative equity in earnings subsequent to the date of investment, to be a return on investment and are classified as operating activities in the Condensed Consolidated Statements of Cash Flows. The Company considers distributions received from Enable in excess of cumulative equity in earnings subsequent to the date of investment to be a return of investment and are classified as investing activities in the Condensed Consolidated Statements of Cash Flows.
Accumulated Other Comprehensive Income (Loss)
The following tables summarize changes in the components of accumulated other comprehensive income (loss) attributable to the Company during the three months ended March 31, 2020 and 2019. All amounts below are presented net of tax.
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(In millions) | Pension Plan and Restoration of Retirement Income Plan | | | | Postretirement Benefit Plans | | | Other Comprehensive Loss from Unconsolidated Affiliates | | | | Total |
Balance at December 31, 2019 | $ | (35.1) | | | | | $ | 7.8 | | | | $ | (0.6) | | | | | $ | (27.9) | |
Other comprehensive income (loss) before reclassifications | — | | | | | — | | | | (1.3) | | | | | (1.3) | |
Amounts reclassified from accumulated other comprehensive income (loss) | 0.8 | | | | | (0.4) | | | | — | | | | | 0.4 | |
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Balance at March 31, 2020 | $ | (34.3) | | | | | $ | 7.4 | | | | $ | (1.9) | | | | | $ | (28.8) | |
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(In millions) | Pension Plan and Restoration of Retirement Income Plan | | | | Postretirement Benefit Plans | | | | | | Total |
Balance at December 31, 2018 | $ | (38.8) | | | | | $ | 9.9 | | | | | | | $ | (28.9) | |
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Amounts reclassified from accumulated other comprehensive income (loss) | 0.7 | | | | | (0.5) | | | | | | | 0.2 | |
Settlement cost | 6.6 | | | | | — | | | | | | | 6.6 | |
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Balance at March 31, 2019 | $ | (31.5) | | | | | $ | 9.4 | | | | | | | $ | (22.1) | |
The following table summarizes significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items in net income (loss) during the three months ended March 31, 2020 and 2019.
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Details about Accumulated Other Comprehensive Income (Loss) Components | | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | Affected Line Item in the Consolidated Statements of Income |
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(In millions) | | | 2020 | 2019 | |
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Amortization of Pension Plan and Restoration of Retirement Income Plan items: | | | | | |
Actuarial losses | | | $ | (1.1) | | $ | (0.9) | | (A) |
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Settlement cost | | | — | | (8.8) | | (A) |
| | | (1.1) | | (9.7) | | Income (Loss) Before Taxes |
| | | (0.3) | | (2.4) | | Income Tax Expense (Benefit) |
| | | $ | (0.8) | | $ | (7.3) | | Net Income (Loss) |
| | | | | |
Amortization of postretirement benefit plans items: | | | | | |
Prior service credit | | | $ | 0.6 | | $ | 0.6 | | (A) |
| | | | | |
| | | | | |
| | | 0.6 | | 0.6 | | Income (Loss) Before Taxes |
| | | 0.2 | | 0.1 | | Income Tax Expense (Benefit) |
| | | $ | 0.4 | | $ | 0.5 | | Net Income (Loss) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Total reclassifications for the period, net of tax | | | $ | (0.4) | | $ | (6.8) | | Net Income (Loss) |
(A)These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (see Note 11 for additional information).
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation.
2.Accounting Pronouncements
Recently Adopted Accounting Standards
Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Information." The amendments in this update require entities to measure all expected credit losses of financial assets held at a reporting date based on historical experience, current conditions and reasonable and supportable forecasts in order to record credit losses in a more timely manner. ASU 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company adopted this standard in the first quarter of 2020 utilizing a modified-retrospective approach and determined the only financial instrument that the Company currently holds and is required to measure under ASU 2016-13 is its trade receivables. Under this standard, the Company considers forecasts of future economic conditions in addition to the historical data utilized prior to ASU 2016-13 when measuring the reserve for trade receivables. The Company evaluated its reserve for trade receivables in light of the new guidance and determined that no adjustment was necessary to the amount recorded as of January 1, 2020.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted and prospectively applied the new guidance in the first quarter of 2020, which did not have a material effect on the Condensed Consolidated Financial Statements upon adoption. Beginning in the first quarter of 2020, the Company records capitalized implementation costs incurred in a hosting arrangement that is a service contract in Other Current Assets and records the related amortization expense in Other Operation and Maintenance in the Company's Condensed Consolidated Balance Sheet and Statement of Income, respectively.
Disclosure Framework. In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" and ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The new guidance removes, adds, modifies or clarifies disclosure requirements that impact all levels of the fair value hierarchy, as well as investments measured using the net asset value practical expedient, and disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans, respectively. The Company adopted these standards in the first quarter of 2020 and applied the new guidance either retrospectively or prospectively, depending upon the specific disclosure change. ASU 2018-13 and ASU 2018-14 did not have a significant impact on the Company's financial statement disclosures.
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The new guidance provides optional expedients and exceptions, if certain criteria are met, for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Contracts modified between March 12, 2020 and December 31, 2022 as a result of reference rate reform are eligible for these expedients and exceptions. The Company adopted ASU 2020-04 in the first quarter of 2020 and does not expect this standard to have a material impact on the Company's consolidated financial statements.
3.Revenue Recognition
The following table disaggregates the Company's revenues from contracts with customers by customer classification. The Company's operating revenues disaggregated by customer classification can be found in "OG&E (Electric Utility) Results of Operations" within "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
| | | | | | | | | | | |
| | | | | |
| | | | Three Months Ended March 31, | |
(In millions) | | | | 2020 | 2019 |
Residential | | | | $ | 166.9 | | $ | 191.2 | |
Commercial | | | | 91.3 | | 95.4 | |
Industrial | | | | 41.5 | | 52.3 | |
Oilfield | | | | 38.2 | | 49.4 | |
Public authorities and street light | | | | 34.7 | | 40.1 | |
System sales revenues | | | | 372.6 | | 428.4 | |
Provision for rate refund | | | | (0.6) | | (0.1) | |
Integrated market | | | | 7.2 | | 6.7 | |
Transmission | | | | 34.2 | | 36.1 | |
Other | | | | 7.0 | | 6.3 | |
Revenues from contracts with customers | | | | $ | 420.4 | | $ | 477.4 | |
4.Investment in Unconsolidated Affiliates and Related Party Transactions
At March 31, 2020, the Company owned 111.0 million common units, or 25.5 percent, of Enable's outstanding common units. On March 31, 2020, Enable's common unit price closed at $2.57. The Company recorded equity in losses of unconsolidated affiliates of $746.5 million for the three months ended March 31, 2020 compared to equity in earnings of unconsolidated affiliates of $30.7 million for the three months ended March 31, 2019. Equity in earnings (losses) of unconsolidated affiliates includes the Company's share of Enable's earnings adjusted for the amortization of the basis difference of the Company's original investment in Enogex LLC and its underlying equity in the net assets of Enable, as well as any impairment the Company records on its investment in Enable. The basis difference is being amortized, beginning in 2013, over the average life of the assets to which the basis difference is attributed, which is approximately 30 years. Equity in earnings (losses) of unconsolidated affiliates is also adjusted for the elimination of the Enogex Holdings fair value adjustments. These amortizations may also include gain or loss on dilution, net of proportional basis difference recognition. For more information concerning the formation of Enable and the Company's accounting for its investment in Enable, see Note 5 within "Item 8. Financial Statements and Supplementary Data" in the Company's 2019 Form 10-K.
The Company evaluates its equity method investment for impairment when factors indicate that a decline in the value of its investment has occurred and the carrying amount of its investment may not be recoverable. An impairment loss, based on the excess of the carrying value over estimated fair value of the investment, is recognized in earnings when an impairment is deemed to be other than temporary. Considerable judgment is used in determining if an impairment loss is other than temporary and the amount of any impairment. At March 31, 2020, the Company estimated the fair value of its investment in Enable was below the book value and concluded the decline in value was not temporary due to the severity of the decline and the recent rapid deterioration, as well as the near term future outlook, of the midstream oil and gas industry. Accordingly, the Company recorded a $780.0 million impairment on its investment in Enable for the three months ended March 31, 2020, which is included in Equity in Earnings of Unconsolidated Affiliates in the Company's 2020 Condensed Consolidated Income Statement. The impairment resulted in an additional layer of basis difference for the Company's investment in Enable that will be amortized over the average life of the assets to which the basis difference is attributed, which is 29 years. Further information concerning the fair value method used to measure the impairment on the Company's investment in Enable can be found in Note 5.
Summarized unaudited financial information for 100 percent of Enable is presented below at March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019.
| | | | | | | | |
| March 31, | December 31, |
Balance Sheet | 2020 | 2019 |
(In millions) | | |
Current assets | $ | 333 | | $ | 389 | |
Non-current assets | $ | 11,784 | | $ | 11,877 | |
Current liabilities | $ | 391 | | $ | 780 | |
Non-current liabilities | $ | 4,374 | | $ | 4,077 | |
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
Income Statement | | | 2020 | 2019 |
(In millions) | | | | |
Total revenues | | | $ | 648 | | $ | 795 | |
Cost of natural gas and NGLs | | | $ | 226 | | $ | 378 | |
Operating income | | | $ | 146 | | $ | 165 | |
Net income | | | $ | 103 | | $ | 113 | |
The following table reconciles the Company's equity in earnings (losses) of unconsolidated affiliates for the three months ended March 31, 2020 and 2019.
| | | | | | | | | | |
| | | | |
| | | Three Months Ended | |
| | | March 31, | |
(In millions) | | | | 2020 | 2019 |
Enable net income | | | $ | 103.0 | | $ | 113.3 | |
OGE Energy's percent ownership at period end | | | 25.5 | % | 25.5 | % |
OGE Energy's portion of Enable net income | | | $ | 26.3 | | $ | 28.9 | |
| | | | |
| | | | |
| | | | |
Amortization of basis difference and dilution recognition (A) | | | 7.2 | | 1.8 | |
Impairment of OGE Energy's equity method investment in Enable | | | (780.0) | | — | |
Equity in earnings (losses) of unconsolidated affiliates | | | $ | (746.5) | | $ | 30.7 | |
(A) Includes loss on dilution, net of proportional basis difference recognition.
The following table reconciles the difference between OGE Energy's investment in Enable and its underlying equity in the net assets of Enable (basis difference) from December 31, 2019 to March 31, 2020.
| | | | | | | | |
(In millions) | | |
Basis difference at December 31, 2019 | | $ | 652.5 | |
Amortization of basis difference (A) | | (8.2) | |
Impairment of OGE Energy's equity method investment in Enable | | 780.0 | |
| | |
Basis difference at March 31, 2020 | | $ | 1,424.3 | |
(A) Includes proportional basis difference recognition due to dilution.
On April 1, 2020, Enable announced a 50 percent reduction to its quarterly distribution in order to strengthen its balance sheet and increase its annualized retained cash flow. See "Item 2. Management's Discussion and Analysis - Recent Developments" for further discussion of the Company's response.
On May 5, 2020, Enable announced a quarterly dividend distribution of $0.16525 per unit on its outstanding common units, which is a decrease from the previous quarter's dividend distribution of $0.33050 per unit. If cash distributions to Enable's unitholders exceed $0.330625 per unit in any quarter, the general partner will receive increasing percentages, up to 50 percent, of the cash Enable distributes in excess of that amount. The Company is entitled to 60 percent of those "incentive distributions." In certain circumstances, the general partner has the right to reset the minimum quarterly distribution and the target distribution
levels at which the incentive distributions receive increasing percentages to higher levels based on Enable's cash distributions at the time of the exercise of this reset election.
Distributions received from Enable were $36.7 million and $35.3 million during the three months ended March 31, 2020 and 2019, respectively.
Related Party Transactions
The Company charges operating costs to OG&E and Enable based on several factors, and operating costs directly related to OG&E and/or Enable are assigned as such. Operating costs incurred for the benefit of OG&E are allocated either as overhead based primarily on labor costs or using the "Distrigas" method, which is a three-factor formula that uses an equal weighting of payroll, net operating revenues and gross property, plant and equipment.
The Company and Enable
The Company and Enable are currently parties to several agreements whereby the Company provides specified support services to Enable, such as certain information technology, payroll and benefits administration. Under these agreements, the Company charged operating costs to Enable of $0.1 million during both the three months ended March 31, 2020 and 2019.
Pursuant to a seconding agreement, the Company provides seconded employees to Enable to support Enable's operations. As of March 31, 2020, 80 employees that participate in the Company's defined benefit and retirement plans are seconded to Enable. The Company billed Enable for reimbursement of $6.4 million and $12.4 million during the three months ended March 31, 2020 and 2019, respectively, under the seconding agreement for employment costs. If the seconding agreement was terminated, and those employees were no longer employed by the Company, and lump sum payments were made to those employees, the Company would recognize a settlement or curtailment of the pension/retiree health care charges, which would increase expense at the Company by $17.0 million. Settlement and curtailment charges associated with the Enable seconded employees are not reimbursable to the Company by Enable. The seconding agreement can be terminated by mutual agreement of the Company and Enable or solely by the Company upon 120 days' notice.
The Company had accounts receivable from Enable for amounts billed for support services, including the cost of seconded employees, of $3.8 million as of March 31, 2020 and $0.8 million as of December 31, 2019, which are included in Accounts Receivable in the Company's Condensed Consolidated Balance Sheets.
OG&E and Enable
Enable provides gas transportation services to OG&E pursuant to an agreement that grants Enable the responsibility of delivering natural gas to OG&E's generating facilities and performing an imbalance service. With this imbalance service, in accordance with the cash-out provision of the contract, OG&E purchases gas from Enable when Enable's deliveries exceed OG&E's pipeline receipts. Enable purchases gas from OG&E when OG&E's pipeline receipts exceed Enable's deliveries. The following table summarizes related party transactions between OG&E and Enable during the three months ended March 31, 2020 and 2019.
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
(In millions) | | | 2020 | 2019 |
Operating revenues: | | | | |
Electricity to power electric compression assets | | | $ | 3.7 | | $ | 3.8 | |
Cost of sales: | | | | |
Natural gas transportation services | | | $ | 4.7 | | $ | 14.8 | |
| | | | |
Natural gas purchases (sales) | | | $ | 0.7 | | $ | (1.0) | |
5.Fair Value Measurements
The classification of the Company's fair value measurements requires judgment regarding the degree to which market data is observable or corroborated by observable market data. GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to quoted prices in active markets for identical unrestricted assets or liabilities (Level 1), and the lowest priority given to unobservable inputs (Level 3). Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement. The three levels defined in the fair value hierarchy are as follows:
Level 1 inputs are quoted prices in active markets for identical unrestricted assets or liabilities that are accessible at the measurement date.
Level 2 inputs are inputs other than quoted prices in active markets included within Level 1 that are either directly or indirectly observable at the reporting date for the asset or liability for substantially the full term of the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 inputs are prices or valuation techniques for the asset or liability that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). Unobservable inputs reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company had no financial instruments measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019. The following table summarizes the carrying amount and fair value of the Company's financial instruments at March 31, 2020 and December 31, 2019.
| | | | | | | | | | | | | | | | | |
| March 31, | | December 31, | | |
| 2020 | | 2019 | | |
(In millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Classification |
Long-term Debt (including Long-term Debt due within one year): | | | | | |
OG&E Senior Notes | $ | 3,050.7 | | $ | 3,240.1 | | $ | 3,050.3 | | $ | 3,500.4 | | Level 2 |
OG&E Industrial Authority Bonds | $ | 135.4 | | $ | 135.4 | | $ | 135.4 | | $ | 135.4 | | Level 2 |
Tinker Debt | $ | 9.5 | | $ | 9.7 | | $ | 9.5 | | $ | 10.0 | | Level 3 |
| | | | | |
Nonrecurring Fair Value Measurements
As further discussed in Note 4, the Company recorded an impairment on its investment in Enable at March 31, 2020. The nonrecurring fair value measurement consisted of calculating a 20-trading day volume weighted average price for Enable's common units through March 31, 2020. This method of valuation was determined to be representative of the fair value of Enable's common units as it incorporates market prices during the period and reduces the impact of volatility that a single day could represent. The Company concluded that this valuation method resulted in a Level 3 nonrecurring fair value measurement.
6.Stock-Based Compensation
The following table summarizes the Company's pre-tax compensation expense and related income tax benefit during the three months ended March 31, 2020 and 2019 related to the Company's performance units and restricted stock units.
| | | | | | | | | | |
| | | Three Months Ended March 31, | |
(In millions) | | | 2020 | 2019 |
Performance units: | | | | |
Total shareholder return | | | $ | 1.7 | | $ | 2.2 | |
Earnings per share | | | 0.2 | | 0.5 | |
Total performance units | | | 1.9 | | 2.7 | |
Restricted stock units | | | 0.1 | | 0.3 | |
Total compensation expense | | | $ | 2.0 | | $ | 3.0 | |
| | | | |
| | | | |
Income tax benefit | | | $ | 0.5 | | $ | 0.8 | |
During the three months ended March 31, 2020, the Company purchased 255,000 shares of its common stock at an average cost of $38.04 per share on the open market, and 247,073 of these shares were used during the same period to satisfy payouts of earned performance units and restricted stock unit grants pursuant to the Company's Stock Incentive Plan. The Company records treasury stock purchases at cost. Treasury stock is presented as a reduction of stockholders' equity in the Company's 2020 Condensed Consolidated Balance Sheet.
During the three months ended March 31, 2020, the Company granted 201,552 performance units (based on total shareholder return over a three-year period) and 67,193 restricted stock units (three-year cliff vesting period) at $38.03 and $43.69 fair value per share, respectively.
7.Income Taxes
The Company files consolidated income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal tax or state and local examinations by tax authorities for years prior to 2016. Income taxes are generally allocated to each company in the affiliated group based on its stand-alone taxable income or loss. Federal investment tax credits previously claimed on electric utility property have been deferred and will be amortized to income over the life of the related property. Additionally, OG&E earns federal tax credits associated with production from its wind facilities. Oklahoma production and investment state tax credits are also earned on investments in electric and solar generating facilities which further reduce the Company's effective tax rate.
8.Common Equity
Automatic Dividend Reinvestment and Stock Purchase Plan
The Company issued no shares of common stock under its Automatic Dividend Reinvestment and Stock Purchase Plan during the three months ended March 31, 2020.
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss) attributable to the Company by the weighted-average number of the Company's common shares outstanding during the period. In the calculation of diluted earnings (loss) per share, weighted-average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. Potentially dilutive securities for the Company consist of performance units and restricted stock units. The following table calculates basic and diluted earnings (loss) per share for the Company.
| | | | | | | | | | |
| | | Three Months Ended March 31, | |
(In millions except per share data) | | | 2020 | 2019 |
Net income (loss) | | | $ | (491.8) | | $ | 47.1 | |
Average common shares outstanding: | | | | |
Basic average common shares outstanding | | | 200.2 | | 199.9 | |
Effect of dilutive securities: | | | | |
Contingently issuable shares (performance and restricted stock units) | | | — | | 0.6 | |
Diluted average common shares outstanding | | | 200.2 | | 200.5 | |
Basic earnings (loss) per average common share | | | $ | (2.46) | | $ | 0.24 | |
Diluted earnings (loss) per average common share | | | $ | (2.46) | | $ | 0.24 | |
Anti-dilutive shares excluded from earnings per share calculation | | | — | | — | |
9.Long-Term Debt
At March 31, 2020, the Company was in compliance with all of its debt agreements.
OG&E Industrial Authority Bonds
OG&E has tax-exempt pollution control bonds with optional redemption provisions that allow the holders to request repayment of the bonds on any business day. The bonds, which can be tendered at the option of the holder during the next 12 months, are included in the following table.
| | | | | | | | | | | | | | |
Series | | | Date Due | Amount |
| | | | (In millions) |
1.00% | - | 5.35% | Garfield Industrial Authority, January 1, 2025 | $ | 47.0 | |
1.00% | - | 4.31% | Muskogee Industrial Authority, January 1, 2025 | 32.4 | |
1.00% | - | 5.35% | Muskogee Industrial Authority, June 1, 2027 | 56.0 | |
Total (redeemable during next 12 months) | | | | $ | 135.4 | |
All of these bonds are subject to an optional tender at the request of the holders, at 100 percent of the principal amount, together with accrued and unpaid interest to the date of purchase. The bond holders, on any business day, can request repayment of the bond by delivering an irrevocable notice to the tender agent stating the principal amount of the bond, payment instructions for the purchase price and the business day the bond is to be purchased. The repayment option may only be exercised by the holder of a bond for the principal amount. When a tender notice has been received by the trustee, a third-party remarketing agent for the bonds will attempt to remarket any bonds tendered for purchase. This process occurs once per week. Since the original issuance of these series of bonds in 1995 and 1997, the remarketing agent has successfully remarketed all tendered bonds. If the remarketing agent is unable to remarket any such bonds, OG&E is obligated to repurchase such unremarketed bonds. As OG&E has both the intent and ability to refinance the bonds on a long-term basis and such ability is supported by an ability to consummate the refinancing, the bonds are classified as Long-term Debt in the Company's Condensed Consolidated Balance Sheets. OG&E believes that it has sufficient liquidity to meet these obligations.
Issuance of Long-Term Debt
In April 2020, OG&E issued $300.0 million of 3.25 percent senior notes due April 1, 2030. The proceeds from the issuance were added to OG&E's general funds to be used for general corporate purposes, including to fund ongoing capital expenditures and working capital.
10.Short-Term Debt and Credit Facilities
The Company borrows on a short-term basis, as necessary, by the issuance of commercial paper and by borrowings under its revolving credit agreements. As of March 31, 2020, the Company had $375.0 million of short-term debt as compared to $112.0 million short-term debt at December 31, 2019. The following table provides information regarding the Company's revolving credit agreements at March 31, 2020.
| | | | | | | | | | | | | | | | | | |
| Aggregate | Amount | Weighted-Average | | | |
Entity | Commitment | Outstanding (A) | Interest Rate | | Expiration | |
(In millions) | | | | | | |
OGE Energy (B) | $ | 450.0 | | $ | 375.0 | | 1.81 | % | (D) | March 8, 2023 | |
OG&E (C) | 450.0 | | 0.3 | | 1.00 | % | (D) | March 8, 2023 | |
Total | $ | 900.0 | | $ | 375.3 | | 1.81 | % | | | |
(A)Includes direct borrowings under the revolving credit agreements, commercial paper borrowings and letters of credit at March 31, 2020.
(B)This bank facility is available to back up the Company's commercial paper borrowings and to provide revolving credit borrowings. This bank facility can also be used as a letter of credit facility.
(C)This bank facility is available to back up OG&E's commercial paper borrowings and to provide revolving credit borrowings. This bank facility can also be used as a letter of credit facility.
(D)Represents the weighted-average interest rate for the outstanding borrowings under the revolving credit agreements, commercial paper borrowings and letters of credit.
The Company's ability to access the commercial paper market could be adversely impacted by a credit ratings downgrade or major market disruptions. Pricing grids associated with the Company's credit facilities could cause annual fees and borrowing rates to increase if an adverse rating impact occurs. The impact of any future downgrade could include an increase in the costs of the Company's short-term borrowings, but a reduction in the Company's credit ratings would not result in any defaults or accelerations. Any future downgrade could also lead to higher long-term borrowing costs and, if below investment grade, would require the Company to post collateral or letters of credit.
OG&E must obtain regulatory approval from the FERC in order to borrow on a short-term basis. OG&E has the necessary regulatory approvals to incur up to $800.0 million in short-term borrowings at any one time for a two-year period beginning January 1, 2019 and ending December 31, 2020.
In April 2020, the Company entered into a $75.0 million unsecured one-year term credit agreement, which is scheduled to terminate on April 7, 2021. Advances under this agreement were used to refinance existing indebtedness and for working capital and general corporate purposes of the Company. The credit agreement, under certain circumstances, may be increased to a maximum commitment limit of $100.0 million and contains substantially the same covenants as the Company's existing $450.0 million revolving credit agreement.
11.Retirement Plans and Postretirement Benefit Plans
Net Periodic Benefit Cost
The following table presents the net periodic benefit cost components, before consideration of capitalized amounts, of the Company's Pension Plan, Restoration of Retirement Income Plan and postretirement benefit plans that are included in the Condensed Consolidated Financial Statements. Service cost is presented within Other Operation and Maintenance, and the remaining net periodic benefit cost components as listed in the table below are presented within Other Net Periodic Benefit Expense in the Company's Condensed Consolidated Statements of Income. OG&E recovers specific amounts of pension and postretirement medical costs in rates approved in its Oklahoma rate reviews. In accordance with approved orders, OG&E defers the difference between actual pension and postretirement medical expenses and the amount approved in its last Oklahoma rate review as a regulatory asset or regulatory liability. These amounts have been recorded in the Pension tracker in the regulatory assets and liabilities table in Note 1 and within Other Net Periodic Benefit Expense in the Company's Condensed Consolidated Statements of Income.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Plan | | | | | Restoration of Retirement Income Plan | | | Postretirement Benefit Plans | |
| | | Three Months Ended | | | | | Three Months Ended | | | Three Months Ended | |
| | | March 31, | | | | | March 31, | | | March 31, | |
(In millions) | | | 2020 | 2019 | | | | 2020 | 2019 | | 2020 | 2019 |
| | | | | | | | | | | | |
Service cost | | | $ | 3.7 | | $ | 3.5 | | | | | $ | 0.2 | | $ | 0.1 | | | $ | 0.1 | | $ | 0.1 | |
Interest cost | | | 4.6 | | 5.7 | | | | | 0.1 | | 0.1 | | | 1.1 | | 1.4 | |
Expected return on plan assets | | | (9.4) | | (8.7) | | | | | — | | — | | | (0.5) | | (0.5) | |
Amortization of net loss | | | 3.8 | | 3.8 | | | | | 0.1 | | 0.1 | | | 0.6 | | 0.6 | |
Amortization of unrecognized prior service cost (A) | | | — | | — | | | | | — | | — | | | (2.1) | | (2.1) | |
Settlement cost | | | — | | 19.7 | | | | | — | | — | | | — | | — | |
Total net periodic benefit cost | | | 2.7 | | 24.0 | | | | | 0.4 | | 0.3 | | | (0.8) | | (0.5) | |
Less: Amount paid by unconsolidated affiliates | | | 0.5 | | 0.9 | | | | | — | | — | | | (0.2) | | (0.2) | |
Net periodic benefit cost | | | $ | 2.2 | | $ | 23.1 | | | | | $ | 0.4 | | $ | 0.3 | | | $ | (0.6) | | $ | (0.3) | |
(A)Unamortized prior service cost is amortized on a straight-line basis over the average remaining service period to the first eligibility age of participants who are expected to receive a benefit and are active at the date of the plan amendment.
In addition to the net periodic benefit cost amounts recognized, as presented in the table above, for the Pension and Restoration of Retirement Income Plans for the three months ended March 31, 2020 and 2019, the Company recognized the following:
| | | | | | | | |
| Three Months Ended March 31, | |
(In millions) | 2020 | 2019 |
Increase (decrease) of pension expense to maintain allowed recoverable amount in Oklahoma jurisdiction (A) | $ | 1.7 | | $ | (1.0) | |
Deferral of pension expense related to pension settlement charges: | | |
Oklahoma jurisdiction (A) | $ | — | | $ | 11.2 | |
Arkansas jurisdiction (A) | $ | — | | $ | 1.0 | |
(A) Included in the pension regulatory asset or liability in each jurisdiction, as indicated in the regulatory assets and liabilities table in Note 1.
In addition to the net periodic benefit income amounts recognized, as presented in the table above, for the postretirement benefit plans for the three months ended March 31, 2020 and 2019, the Company recognized the following:
| | | | | | | | |
| Three Months Ended March 31, | |
(In millions) | 2020 | 2019 |
Increase of postretirement expense to maintain allowed recoverable amount in Oklahoma jurisdiction (A) | $ | 0.2 | | $ | 0.3 | |
(A) Included in the Pension tracker, as presented in the regulatory assets and liabilities table in Note 1.
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
(In millions) | | | 2020 | 2019 |
Capitalized portion of net periodic pension benefit cost | | | $ | 1.0 | | $ | 1.0 | |
Capitalized portion of net periodic postretirement benefit cost | | | $ | — | | $ | 0.1 | |
12.Report of Business Segments
The Company reports its operations in two business segments: (i) the electric utility segment, which is engaged in the generation, transmission, distribution and sale of electric energy and (ii) the natural gas midstream operations segment. Intersegment revenues are recorded at prices comparable to those of unaffiliated customers and are affected by regulatory considerations. The following tables summarize the results of the Company's business segments during the three months ended March 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| | | | | |
Three Months Ended March 31, 2020 | Electric Utility | Natural Gas Midstream Operations | Other Operations | Eliminations | Total |
(In millions) | | | | | |
Operating revenues | $ | 431.3 | | $ | — | | $ | — | | $ | — | | $ | 431.3 | |
Cost of sales | 135.0 | | — | | — | | — | | 135.0 | |
Other operation and maintenance | 121.0 | | 0.6 | | (1.6) | | — | | 120.0 | |
Depreciation and amortization | 94.4 | | — | | — | | — | | 94.4 | |
| | | | | |
| | | | | |
Taxes other than income | 23.9 | | 0.1 | | 1.6 | | — | | 25.6 | |
Operating income (loss) | 57.0 | | (0.7) | | — | | — | | 56.3 | |
Equity in earnings (losses) of unconsolidated affiliates (A) | — | | (746.5) | | — | | — | | (746.5) | |
Other income (expense) | 1.8 | | — | | 1.3 | | (1.0) | | 2.1 | |
Interest expense | 36.9 | | — | | 2.4 | | (1.0) | | 38.3 | |
Income tax expense (benefit) | 2.0 | | (179.2) | | (57.4) | | — | | (234.6) | |
Net income (loss) | $ | 19.9 | | $ | (568.0) | | $ | 56.3 | | $ | — | | $ | (491.8) | |
Investment in unconsolidated affiliates | $ | — | | $ | 348.0 | | $ | 19.5 | | $ | — | | $ | 367.5 | |
Total assets | $ | 10,030.7 | | $ | 353.4 | | $ | 252.9 | | $ | (266.1) | | $ | 10,370.9 | |
(A)At March 31, 2020, the Company recorded a $780.0 million impairment on its investment in Enable, as further discussed in Notes 4 and 5.
| | | | | | | | | | | | | | | | | |
| | | | | |
Three Months Ended March 31, 2019 | Electric Utility | Natural Gas Midstream Operations | Other Operations | Eliminations | Total |
(In millions) | | | | | |
Operating revenues | $ | 490.0 | | $ | — | | $ | — | | $ | — | | $ | 490.0 | |
Cost of sales | 212.6 | | — | | — | | — | | 212.6 | |
Other operation and maintenance | 120.3 | | 0.4 | | (1.7) | | — | | 119.0 | |
Depreciation and amortization | 82.4 | | — | | — | | — | | 82.4 | |
| | | | | |
| | | | | |
Taxes other than income | 24.4 | | 0.2 | | 1.7 | | — | | 26.3 | |
Operating income (loss) | 50.3 | | (0.6) | | — | | — | | 49.7 | |
Equity in earnings of unconsolidated affiliates | — | | 30.7 | | — | | — | | 30.7 | |
Other income (expense) | 2.6 | | (7.4) | | 0.7 | | (0.4) | | (4.5) | |
Interest expense | 32.4 | | — | | 2.6 | | (0.4) | | 34.6 | |
Income tax expense (benefit) | 0.9 | | 1.4 | | (8.1) | | — | | (5.8) | |
Net income | $ | 19.6 | | $ | 21.3 | | $ | 6.2 | | $ | — | | $ | 47.1 | |
Investment in unconsolidated affiliates | $ | — | | $ | 1,162.0 | | $ | 11.9 | | $ | — | | $ | 1,173.9 | |
Total assets | $ | 9,478.5 | | $ | 1,173.0 | | $ | 200.5 | | $ | (90.4) | | $ | 10,761.6 | |
13.Commitments and Contingencies
Except as set forth below, in Note 14, under "Environmental Laws and Regulations" in Item 2 of Part I and in Item 1 of Part II of this Form 10-Q, the circumstances set forth in Notes 15 and 16 to the Consolidated Financial Statements included in the Company's 2019 Form 10-K appropriately represent, in all material respects, the current status of the Company's material commitments and contingent liabilities.
Environmental Laws and Regulations
The activities of OG&E are subject to numerous stringent and complex federal, state and local laws and regulations governing environmental protection. These laws and regulations can change, restrict or otherwise impact OG&E's business activities in many ways, including the handling or disposal of waste material, planning for future construction activities to avoid or mitigate harm to threatened or endangered species and requiring the installation and operation of emissions or pollution control equipment. Failure to comply with these laws and regulations could result in the assessment of administrative, civil and
criminal penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations. Management believes that all of its operations are in substantial compliance with current federal, state and local environmental standards.
Environmental regulation can increase the cost of planning, design, initial installation and operation of OG&E's facilities. Management continues to evaluate its compliance with existing and proposed environmental legislation and regulations and implement appropriate environmental programs in a competitive market.
Other
In the normal course of business, the Company is confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits or claims made by third parties, including governmental agencies. When appropriate, management consults with legal counsel and other experts to assess the claim. If, in management's opinion, the Company has incurred a probable loss as set forth by GAAP, an estimate is made of the loss, and the appropriate accounting entries are reflected in the Company's Condensed Consolidated Financial Statements. At the present time, based on currently available information, the Company believes that any reasonably possible losses in excess of accrued amounts arising out of pending or threatened lawsuits or claims would not be quantitatively material to its financial statements and would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
14.Rate Matters and Regulation
Except as set forth below, the circumstances set forth in Note 16 to the Consolidated Financial Statements included in the Company's 2019 Form 10-K appropriately represent, in all material respects, the current status of the Company's regulatory matters.
Completed Regulatory Matters
Arkansas 2019 Formula Rate Plan Filing
OG&E filed its second evaluation report under its Formula Rate Plan in October 2019. On January 29, 2020, OG&E, the General Staff of the APSC and the Office of the Arkansas Attorney General filed a settlement agreement requesting the APSC approve a $5.2 million revenue increase, with rates effective April 1, 2020. The settling parties agreed that the Series I grid modernization projects are prudent in both action and cost and that the Series II grid modernization projects are prudent in action only and the determination of prudence of costs will be reserved until the actual historical costs are reviewed. The settling parties also agreed that OG&E will no longer use projections for the remaining initial term or extension of its current Formula Rate Plan and that all costs will be included for recovery for the first time in the historical year. On February 28, 2020, the APSC approved the settlement agreement.
Pending Regulatory Matters
Set forth below is a list of various proceedings pending before state or federal regulatory agencies. Unless stated otherwise, OG&E cannot predict when the regulatory agency will act or what action the regulatory agency will take. OG&E's financial results are dependent in part on timely and adequate decisions by the regulatory agencies that set OG&E's rates.
FERC Proceedings
Order for Sponsored Transmission Upgrades within SPP
Under the SPP Open Access Transmission Tariff, costs of participant-funded, or "sponsored," transmission upgrades may be recovered from other SPP customers whose transmission service depends on capacity enabled by the upgrade. The SPP Open Access Transmission Tariff required the SPP to charge for these upgrades beginning in 2008, but the SPP had not been charging its customers for these upgrades due to information system limitations. However, the SPP had informed participants in the market that these charges would be forthcoming. In July 2016, the FERC granted the SPP's request to recover the charges not billed since 2008. The SPP subsequently billed OG&E for these charges and credited OG&E related to transmission upgrades that OG&E had sponsored, which resulted in OG&E being a net receiver of sponsored upgrade credits. The majority of these net credits were refunded to customers through OG&E's various rate riders that include SPP activity with the remaining amounts retained by OG&E.
Several companies that were net payers of Z2 charges sought rehearing of the FERC's July 2016 order; however, in November 2017, the FERC denied the rehearing requests. In January 2018, one of the impacted companies appealed the
FERC's decision to the U.S. Court of Appeals for the District of Columbia Circuit. In July 2018, that court granted a motion requested by the FERC that the case be remanded back to the FERC for further examination and proceedings. In February 2019, the FERC reversed its July 2016 order and November 2017 rehearing denial, ruled that the SPP violated its tariff to charge for the 2008 - 2015 period in 2016, held that the SPP tariff provision that prohibited those charges could not be waived and ordered the SPP to develop a plan to refund the payments but not to implement the refunds until further ordered to do so. In response, in April 2019, OG&E filed a request for rehearing with the FERC, and in May 2019, OG&E filed a FERC 206 complaint against the SPP, alleging that the SPP's forced unwinding of the revenue credit payments to OG&E would violate the provisions of the Sponsored Upgrade Agreement and of the applicable tariff. OG&E's filing requested that the FERC rule that the SPP is not entitled to seek refunds or in any other way seek to unwind the revenue credit payments it had paid to OG&E pursuant to the Sponsored Upgrade Agreement. The SPP's response to OG&E's filing agreed that OG&E should be entitled to keep its Z2 payments and argued that the SPP should not be held responsible for those payments if refunds are ordered. Further, the SPP has requested the FERC to negotiate a global settlement with all impacted parties, including other project sponsors who, like OG&E, have also filed complaints at FERC contending that the payments they have received cannot properly be unwound.
On February 20, 2020, the FERC denied OG&E's request for rehearing of its February 2019 order, denying the waiver and ruling that the SPP must seek refunds from project sponsors for Z2 payments for the 2008 - 2015 period and pay them back to transmission owners. The FERC also denied the SPP's request for a stay and for institution of settlement procedures. The FERC stated it would not institute settlement procedures unless parties on both sides of the matter requested them. The FERC did not rule on OG&E's complaint or the complaints of other project sponsors, or consider the SPP's refund plan. The FERC thus has not set any date for payment of refunds. On March 2, 2020, OG&E petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review of the FERC's order denying the waiver and requiring refunds. The appeal will likely be heard later this year.
The Company cannot predict the outcome of this proceeding based on currently available information, and as of March 31, 2020 and at present time, the Company has not reserved an amount for a potential refund. If the reversal of the July 2016 FERC order remains intact, OG&E estimates it would be required to refund $13.0 million, which is net of amounts paid to other utilities for upgrades and would be subject to interest at the FERC-approved rate. If refunds were required, recovery of these upgrade credits would shift to future periods. Of the $13.0 million, the Company would be impacted by $5.0 million in expense that initially benefited the Company in 2016, and OG&E customers would incur a net impact of $8.0 million in expense through rider mechanisms or the FERC formula rate.
The SPP has recently proposed eliminating Attachment Z2 revenue crediting and replacing it with a different mechanism that would provide project sponsors such as OG&E the same level of recovery they would receive if payments continued under Attachment Z2. The FERC rejected that proposal to the extent it would limit recovery to the amount of the upgrade sponsor's directly assigned upgrade costs with interest, finding that providing the possibility of recovering greater than the cost of the investment could serve as an incentive for entities to build merchant transmission projects. The SPP is allowed to resubmit a proposal without this limited recovery.
APSC Proceedings
Environmental Compliance Plan Rider
In May 2019, OG&E filed an environmental compliance plan rider in Arkansas to recover its investment for the environmentally mandated costs associated with the Sooner Dry Scrubbers project and the conversion of Muskogee Units 4 and 5 to natural gas. The filing is an interim surcharge, subject to refund, that began with the first billing cycle of June 2019. OG&E is reserving the amounts collected through the interim surcharge, pending APSC approval of OG&E's filing. A hearing on the merits was held in December 2019, and parties submitted additional briefs to the APSC in March 2020. The primary question before the APSC is whether a company can utilize an environmental compliance plan rider while also being regulated under a formula rate plan. OG&E is awaiting a final decision from the APSC.
Order Regarding COVID-19
On April 10, 2020, the APSC issued Order No. 1 related to COVID-19 and the provision of safe, adequate and reliable utility service at just and reasonable rates. Among other things, the APSC ordered the suspension of disconnects during the pendency of the Arkansas Governor's emergency declaration or until the directive is rescinded by the APSC, as well as encouraging reasonable payment arrangements once the prohibition is lifted. The APSC also authorized utilities to establish regulatory assets to record costs resulting from the suspension of disconnections. These regulatory assets will be reviewed in future proceedings for reasonableness. The APSC ordered the General Staff of the APSC to consult with utilities to create a quarterly report to be used to report the costs incurred and saved that have been booked to the regulatory asset. OG&E is
monitoring the regulatory activity regarding COVID-19 at the APSC and will consider the request for additional regulatory action by the APSC as needed.
On May 1, 2020, OG&E filed a Request for Additional Actions and Tariff Deviation seeking relief from the Arkansas General Service Rules and OG&E's Terms and Conditions under the tariff, in order to allow for: more flexible deferred payment agreements for all customer classes, suspension of increased deposits due to non-payment and suspension of the removal of customers from certain billing and extended due date plans for late payments. In addition, OG&E requested that incremental expenses, such as additional personal protective equipment, increased sanitation efforts at facilities, implementing health-screening processes and securing temporary facilities for potential sequestration of critical operation personnel, be tracked in a regulatory asset. OG&E noted that all possible cost categories are not known currently and reserved the right to file subsequent requests as needed.
OCC Proceedings
Oklahoma Grid Enhancement Plan
On February 24, 2020, OG&E filed an application with the OCC for approval of a mechanism that allows for interim recovery of the costs associated with its grid enhancement plan. The plan includes approximately $800.0 million of strategic, data-driven investments, over five years, covering grid resiliency, grid automation, communication systems and technology platforms and applications. A hearing on the merits is scheduled to begin on July 7, 2020.
Oklahoma Retail Electric Supplier Certified Territory Act Causes
Certain rural electric cooperative electricity suppliers have filed complaints with the OCC alleging that OG&E has violated the Oklahoma Retail Electric Supplier Certified Territory Act. OG&E believes it is lawfully serving customers specifically exempted from this act and has presented evidence and testimony to the OCC supporting its position. If the OCC were to ultimately find that some or all of the customers being served are not exempted, then OG&E would have to evaluate the recoverability of some plant investments made to serve these customers. OG&E may also be required to reimburse certified territory suppliers for an amount of lost revenue.
OCC Public Utility Division Motion Regarding COVID-19
On April 28, 2020, the Director of the Public Utility Division filed an application requesting an order from the OCC authorizing action in response to COVID-19. The application requests the OCC to authorize the State's utilities to record as a regulatory asset increased bad debt expenses, costs associated with expanded payment plans, waived fees and incremental expenses that are directly related to the suspension of or delay in disconnection of service beginning March 15, 2020, with the issuance of the Oklahoma Governors' emergency declaration. The application also requests the OCC to allow utilities to defer additional expenses associated with ensuring the continuity of utility service, such as additional personal protective equipment, increased sanitation efforts at facilities, implementing heath-screening processes and securing temporary facilities for potential sequestration of critical operation personnel. The application asks the OCC to consider in future proceedings whether each utility's request for recovery of these regulatory assets is reasonable and necessary and to consider issues such as the incremental bad debt experienced over normal periods, the appropriate period of recovery for any approved amount of regulatory asset, any amount of carrying costs and other related matters. The application is scheduled to be heard by the OCC on May 7, 2020.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The Company is a holding company with investments in energy and energy services providers offering physical delivery and related services for both electricity and natural gas primarily in the south-central U.S. The Company conducts these activities through two business segments: (i) electric utility and (ii) natural gas midstream operations. The accounts of the Company and its wholly-owned subsidiaries are included in the Condensed Consolidated Financial Statements. All intercompany transactions and balances are eliminated in consolidation. The Company generally uses the equity method of accounting for investments where its ownership interest is between 20 percent and 50 percent and it lacks the power to direct activities that most significantly impact economic performance.
The electric utility segment generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. Its operations are conducted through OG&E and are subject to regulation by the OCC, the APSC and the FERC. OG&E was incorporated in 1902 under the laws of the Oklahoma Territory and is a wholly-owned subsidiary of the Company. OG&E is the largest electric utility in Oklahoma, and its franchised service territory includes Fort Smith, Arkansas and the surrounding communities. OG&E sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution business.
The natural gas midstream operations segment represents the Company's investment in Enable through wholly-owned subsidiaries and ultimately OGE Holdings. Enable was formed in 2013, and its general partner is equally controlled by the Company and CenterPoint, who each have 50 percent management ownership. Based on the 50/50 management ownership, with neither company having control, the Company accounts for its interest in Enable using the equity method of accounting. Enable is primarily engaged in the business of gathering, processing, transporting and storing natural gas. Enable's natural gas gathering and processing assets are strategically located in four states and serve natural gas production in the Anadarko, Arkoma and Ark-La-Tex Basins. Enable also owns crude oil gathering assets in the Anadarko and Williston Basins. Enable has intrastate natural gas transportation and storage assets that are located in Oklahoma as well as interstate assets that extend from western Oklahoma and the Texas Panhandle to Louisiana, from Louisiana to Illinois and from Louisiana to Alabama. As disclosed in the Company's 2019 Form 10-K, Enable is subject to a number of risks, including contract renewal risk, the reliance on the drilling and production decisions of others and the volatility of natural gas, NGLs and crude oil prices. If any of those risks were to occur, the Company's business, financial condition, results of operations or cash flows could be materially adversely affected.
Overview
Company Strategy
The Company's mission, through OG&E and the Company's equity interest in Enable, is to fulfill its critical role in the nation's electric utility and natural gas midstream pipeline infrastructure and meet individual customer's needs for energy and related services, focusing on safety, efficiency, reliability, customer service and risk management. The Company's corporate strategy is to continue to maintain its existing business mix and diversified asset position of its regulated electric utility business and interest in a publicly traded midstream company, while providing competitive energy products and services to customers as well as seeking growth opportunities in both businesses.
Additionally, the Company wants to achieve a premium valuation of its businesses relative to its peers, grow earnings per share with a stable earnings pattern, create a high-performance culture and achieve desired outcomes with target stakeholders. The Company's financial objectives include a long-term annual earnings growth rate for OG&E of four to six percent on a weather-normalized basis, maintaining a strong credit rating as well as projecting dividend increases to be consistent with utility earnings growth. The Company also utilizes cash distributions from its investment in Enable to help fund its capital needs and support future dividend growth. The Company believes it can accomplish these financial objectives by, among other things, pursuing multiple avenues to build its business, maintaining a diversified asset position, continuing to develop a wide range of skills to succeed with changes in its industries, providing products and services to customers efficiently, managing risks effectively and having strong regulatory and legislative relationships.
Recent Developments
COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the U.S. and world. In an effort to contain COVID-19 or slow its spread, the U.S. federal, state and local governments have enacted various measures, including orders to close businesses not deemed "essential," enact "shelter in place" restrictions on residents and practice social distancing when engaging in essential activities. The COVID-19 outbreak has adversely impacted global markets and activity, including the energy industry, and it is impossible to predict the ultimate impact of the COVID-19 pandemic, as the situation is rapidly evolving. The Company's current and potential future responses to the COVID-19 impacts on our employees, customers and shareholders are further discussed below.
•Our top priority is to protect our employees and their families, as well as our customers. We are taking all precautionary measures as directed by health authorities and local and national governments. We continue to monitor the outbreak of COVID-19, and other closures, or closures for a longer period of time, may be required to help ensure the health and safety of our employees and our customers.
•As a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic, the Company entered into a one-year $75.0 million term loan agreement in April 2020. Further, OG&E issued $300.0 million in senior notes in April 2020.
•In March 2020, President Trump signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act, or the "CARES Act," which is aimed at addressing the economic disruption resulting from the COVID-19 pandemic and providing certain tax relief to businesses in the U.S. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of the employer portion of FICA payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company concluded that the financial impact of the provisions it adopted is immaterial.
•The Company announced that it would voluntarily suspend all disconnects for nonpayment, effective March 16, 2020. The Company adjusted its reserve on accounts receivable as of March 31, 2020 in light of the current expected credit loss model (ASU 2016-13) and the COVID-19 pandemic. The adjustment, which was not material, incorporated concerns of slower customer payment due to unemployment. Overall, the financial impact of COVID-19 was relatively minor for the three months ended March 31, 2020; however, we expect continued instances of slower payment or non-payment by customers and reduced commercial and industrial demand, depending upon the length and severity of "shelter in place" orders. The Company will continue to monitor the reserve as we gain better clarity on the impacts of COVID-19 on our customers and business. The Company is also monitoring customer usage to determine any impact on load forecasts, in terms of both energy and demand usage. Due to different customer characteristics, the contribution to margin varies by customer class and applicable tariffs. The below table presents a one percent annual gross margin sensitivity by class, based on the gross margin guidance the Company provided in its 2019 Form 10-K. This analysis only incorporates retail gross margin and excludes transmission and other gross margin sensitivities.
| | | | | |
Customer Class | 1% Margin Sensitivity (In millions) |
Residential | $ | 6.5 | |
Commercial | $ | 3.6 | |
Industrial | $ | 1.3 | |
Oilfield | $ | 1.1 | |
Public authorities | $ | 1.2 | |
•Beginning in March 2020, oil and natural gas commodity prices have experienced extreme volatility, primarily attributable to decreased demand resulting from the COVID-19 pandemic and the actions of the Organization of Petroleum Exporting Countries and other oil exporting nations. On April 1, 2020, Enable announced its plan to reduce its quarterly distributions to its shareholders by 50 percent. This change in distribution, which should help strengthen Enable's balance sheet and increase its annualized cash flows, is supported by the Company. The Company does not foresee the need to access equity markets as a result of this reduction in distributions from Enable.
Impairment of the Company's Equity Investment in Enable
At March 31, 2020, the Company estimated the fair value of its investment in Enable was below the book value and concluded the decline in value was not temporary due to the severity of the decline and recent rapid deterioration, as well as the near term future outlook, of the midstream oil and gas industry. Accordingly, the Company recorded a $780.0 million impairment on its investment in Enable for the three months ended March 31, 2020. Further discussion can be found in Notes 4 and 5 in "Item 1. Financial Statements."
Regulatory Matters
Further discussion can be found in Note 14 within "Item 1. Financial Statements."
Arkansas 2019 Formula Rate Plan Filing
OG&E filed its second evaluation report under its Formula Rate Plan in October 2019. On January 29, 2020, OG&E, the General Staff of the APSC and the Office of the Arkansas Attorney General filed a settlement agreement requesting the APSC approve a $5.2 million revenue increase, with rates effective April 1, 2020. The settling parties agreed that the Series I grid modernization projects are prudent in both action and cost and that the Series II grid modernization projects are prudent in action only and the determination of prudence of costs will be reserved until the actual historical costs are reviewed. The settling parties also agreed that OG&E will no longer use projections for the remaining initial term or extension of its current Formula Rate Plan and that all costs will be included for recovery for the first time in the historical year. On February 28, 2020, the APSC approved the settlement agreement.
Summary of Operating Results
Net loss was $491.8 million, or $2.46 per diluted share, during the three months ended March 31, 2020 as compared to net income of $47.1 million, or $0.24 per diluted share, during the same period in 2019. The decrease in net income of $538.9 million, or $2.70 per diluted share, is further discussed below.
•A net loss at OGE Holdings of $568.0 million, or $2.84 per diluted share of the Company's common stock, during the three months ended March 31, 2020 compared to net income of $21.3 million, or $0.11 per diluted share of the Company's common stock, during the three months ended March 31, 2019 was primarily due to a decrease in equity in earnings of Enable related to the impairment on the Company's investment in Enable, partially offset by an income tax benefit related to this impairment charge.
•An increase in net income of other operations of $50.1 million, or $0.25 per diluted share of the Company's common stock, was primarily due to higher income tax benefit driven by the impairment recorded on the Company's investment in Enable. The tax benefit impact is due to a consolidating tax adjustment related to the interim period that will reverse over the course of the year.
•An increase in net income at OG&E of $0.3 million was primarily due to higher gross margin (driven by the expiration of the cogeneration credit rider), partially offset by higher depreciation and amortization expense due to additional assets being placed into service and higher interest expense driven by increased long-term debt outstanding.
2020 Outlook
Key assumptions for 2020 include:
OG&E
OG&E's earnings outlook for 2020 is unchanged. The utility is projected to earn approximately $346 million to $357 million of net income, or $1.72 to $1.78 per average diluted share, in 2020.
OGE Holdings
As a result of the revised guidance by Enable and the equity method investment impairment recorded by the Company, OGE Holdings projects earnings contributions to be between ($2.59) to ($2.55) per average diluted share. Ongoing earnings per average diluted share are projected to be between $0.36 and $0.40, and the Company expects to receive approximately $93 million in cash distributions. Ongoing earnings per average diluted share is a non-GAAP financial measure; further discussion and a reconciliation in accordance with GAAP can be found under "Non-GAAP Financial Measures" below.
Consolidated OGE
The Company's 2020 earnings guidance has changed from approximately $440 million to $463 million of net income, or $2.19 to $2.31 per average diluted share, to a net loss of approximately ($173) million to ($154) million, or ($0.87) to ($0.77) per average diluted share. Ongoing earnings are projected to be between approximately $417 million to $436 million of net income, or $2.08 to $2.18 per average diluted share. Ongoing earnings and ongoing earnings per average diluted share are non-GAAP financial measures; further discussion and reconciliations in accordance with GAAP can be found under "Non-GAAP Financial Measures" below. The guidance is based on the following assumptions:
•approximately 201 million average diluted shares outstanding;
•an effective tax rate of approximately 41 percent and a 13 percent effective tax rate on ongoing earnings; and
•breakeven results are projected at the holding company which is unchanged.
Non-GAAP Financial Measures
The Company
"Ongoing earnings" and "ongoing earnings per average diluted share" are defined by the Company as GAAP Net Income (Loss) and GAAP Earnings (Loss) per Average Diluted Share adjusted to exclude certain non-cash charges and the associated tax impacts. These financial measures excluded a non-cash charge of $780.0 million, or $3.90 per average diluted share, associated with the impairment of the Company's investment in Enable, which the Company's management considers an unusual and infrequent event. Management believes that ongoing earnings and ongoing earnings per average diluted share provide a more meaningful comparison of earnings results and are more representative of the Company's fundamental core earnings power. The Company's management uses ongoing earnings and ongoing earnings per average diluted share internally for financial planning and analysis, for reporting of results to the Board of Directors and when communicating its earnings outlook to analysts and investors.
Reconciliations of ongoing earnings and ongoing earnings per average diluted share for the three months ended March 31, 2020 are below.
| | | | | | | | | | | | | | |
Reconciliation of Ongoing Earnings to GAAP Net Income (Loss) | | | | |
(In millions) | GAAP Net Income (Loss) | Enable Investment Impairment Charge (A) | Tax Effect | Ongoing Earnings |
OG&E (Electric Utility) | $ | 19.9 | | $ | — | | $ | — | | $ | 19.9 | |
OGE Holdings (Natural Gas Midstream Operations) (B) | (568.0) | | 780.0 | | (190.4) | | 21.6 | |
Other operations (C) | 56.3 | | — | | (52.8) | | 3.5 | |
Consolidated total | $ | (491.8) | | $ | 780.0 | | $ | (243.2) | | $ | 45.0 | |
| | | | | | | | | | | | | | |
Reconciliation of Ongoing Earnings per Average Diluted Share to GAAP Earnings (Loss) per Average Diluted Share | | | | |
| GAAP Earnings (Loss) per Average Diluted Share | Enable Investment Impairment Charge per Share (A) | Tax Effect per Share | Ongoing Earnings per Average Diluted Share |
OG&E (Electric Utility) | $ | 0.10 | | $ | — | | $ | — | | $ | 0.10 | |
OGE Holdings (Natural Gas Midstream Operations) (B) | (2.84) | | 3.90 | | (0.95) | | 0.11 | |
Other operations (C) | 0.28 | | — | | (0.26) | | 0.02 | |
Consolidated total | $ | (2.46) | | $ | 3.90 | | $ | (1.21) | | $ | 0.23 | |
(A)Does not include a $4.4 million pre-tax charge recorded during the three months ended March 31, 2020 for the Company's share of Enable's goodwill and long-lived asset impairments, as adjusted for basis differences.
(B)Tax Effect and Tax Effect per Share are calculated utilizing the Company's effective tax rate for the three months ended March 31, 2020.
(C)As a result of the impairment of the Company's investment in Enable, other operations' GAAP Net Income (Loss) and GAAP Earnings (Loss) per Average Diluted Share include a tax benefit impact due to a consolidating tax adjustment related to the interim period that will reverse over the course of the year.
Reconciliations of ongoing earnings and ongoing earnings per average diluted share included in the 2020 Outlook are below.
| | | | | |
| Twelve Months Ended December 31, 2020 (A) |
OGE Holdings | |
GAAP net loss per average diluted share | $ | (2.57) | |
Enable investment impairment charge per share (B) | 2.95 | |
Ongoing earnings per average diluted share | $ | 0.38 | |
| |
Consolidated OGE (In millions) | |
GAAP net loss | $ | (163.5) | |
Enable investment impairment charge (B) | 590.0 | |
Ongoing earnings | $ | 426.5 | |
| |
Consolidated OGE | | |
GAAP net loss per average diluted share | $ | (0.82) | |
Enable investment impairment charge per share (B) | 2.95 | |
Ongoing earnings per average diluted share | $ | 2.13 | |
(A) Based on the midpoint of earnings guidance for 2020.
(B) Represents the tax-effected impairment amount that the Company recorded on its equity investment in Enable for the three months ended March 31, 2020.
OG&E
Gross margin is defined by OG&E as operating revenues less cost of sales. Cost of sales, as reflected on the income statement, includes fuel, purchased power and certain transmission expenses. Gross margin is a non-GAAP financial measure because it excludes depreciation and amortization and other operation and maintenance expenses. Expenses for fuel and purchased power are recovered through fuel adjustment clauses, and as a result, changes in these expenses are offset in operating revenues with no impact on net income. OG&E believes gross margin provides a more meaningful basis for evaluating its operations across periods than operating revenues because gross margin excludes the revenue effect of fluctuations in these expenses. Gross margin is used internally to measure performance against budget and in reports for management and the Board of Directors. OG&E's definition of gross margin may be different from similar terms used by other companies. Further, gross margin is not intended to replace operating revenues as determined in accordance with GAAP as an indicator of operating performance. For a reconciliation of gross margin to revenue, which is the most directly comparable
financial measure calculated and presented in accordance with GAAP, for the three months ended March 31, 2020 and 2019, see "OG&E (Electric Utility) Results of Operations" below.
Enable
Gross margin is defined by Enable as total revenues minus costs of natural gas and NGLs, excluding depreciation and amortization. Total revenues consist of the fees that Enable charges its customers and the sales price of natural gas and NGLs that Enable sells. The cost of natural gas and NGLs consists of the purchase price of natural gas and NGLs that Enable purchases. Enable deducts the cost of natural gas and NGLs from total revenues to arrive at a measure of the core profitability of their mix of fee-based and commodity-based customer arrangements. Gross margin allows for meaningful comparison of the operating results between Enable's fee-based revenues and Enable's commodity-based contracts which involve the purchase or sale of natural gas, NGLs and/or crude oil. In addition, the Company believes gross margin allows for a meaningful comparison of the results of Enable's commodity-based activities across different commodity price environments because it measures the spread between the product sales price and cost of products sold. Enable's definition of gross margin may be different from similar terms used by other companies. Further, gross margin is not intended to replace operating revenues as determined in accordance with GAAP as an indicator of operating performance. For a reconciliation of gross margin to revenue, which is the most directly comparable financial measure calculated and presented in accordance with GAAP, for the three months ended March 31, 2020 and 2019, see "OGE Holdings (Natural Gas Midstream Operations) Results of Operations" below.
Results of Operations
The following discussion and analysis presents factors that affected the Company's consolidated results of operations for the three months ended March 31, 2020 as compared to the same period in 2019 and the Company's consolidated financial position at March 31, 2020. Due to seasonal fluctuations and other factors, the Company's operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any future period. The following information should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Known trends and contingencies of a material nature are discussed to the extent considered relevant.
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
(In millions except per share data) | | | 2020 | 2019 |
Net income (loss) | | | $ | (491.8) | | $ | 47.1 | |
Basic average common shares outstanding | | | 200.2 | | 199.9 | |
Diluted average common shares outstanding | | | 200.2 | | 200.5 | |
Basic earnings (loss) per average common share | | | $ | (2.46) | | $ | 0.24 | |
Diluted earnings (loss) per average common share | | | $ | (2.46) | | $ | 0.24 | |
Dividends declared per common share | | | $ | 0.38750 | | $ | 0.36500 | |
Results by Business Segment
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
(In millions) | | | 2020 | 2019 |
Net income (loss): | | | | |
OG&E (Electric Utility) | | | $ | 19.9 | | $ | 19.6 | |
OGE Holdings (Natural Gas Midstream Operations) (A) | | | (568.0) | | 21.3 | |
Other operations (A)(B) | | | 56.3 | | 6.2 | |
Consolidated net income (loss) | | | $ | (491.8) | | $ | 47.1 | |
(A)At March 31, 2020, the Company recorded a $780.0 million impairment on its investment in Enable, as further discussed in Notes 4 and 5 in "Item 1. Financial Statements." Other operations includes a tax benefit impact due to a consolidating tax adjustment related to the interim period that will reverse over the course of the year.
(B)Other operations primarily includes the operations of the holding company and consolidating eliminations.
The following discussion of results of operations by business segment includes intercompany transactions that are eliminated in the Condensed Consolidated Financial Statements.
OG&E (Electric Utility)
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
(Dollars in millions) | | | 2020 | 2019 |
Operating revenues | | | $ | 431.3 | | $ | 490.0 | |
Cost of sales | | | 135.0 | | 212.6 | |
Other operation and maintenance | | | 121.0 | | 120.3 | |
Depreciation and amortization | | | 94.4 | | 82.4 | |
Taxes other than income | | | 23.9 | | 24.4 | |
Operating income | | | 57.0 | | 50.3 | |
Allowance for equity funds used during construction | | | 1.3 | | 1.5 | |
Other net periodic benefit income (expense) | | | (0.5) | | 0.4 | |
Other income | | | 1.5 | | 1.4 | |
Other expense | | | 0.5 | | 0.7 | |
Interest expense | | | 36.9 | | 32.4 | |
Income tax expense | | | 2.0 | | 0.9 | |
Net income | | | $ | 19.9 | | $ | 19.6 | |
Operating revenues by classification: | | | | |
Residential | | | $ | 172.3 | | $ | 195.4 | |
Commercial | | | 94.1 | | 100.2 | |
Industrial | | | 42.6 | | 53.7 | |
Oilfield | | | 39.0 | | 50.2 | |
Public authorities and street light | | | 35.6 | | 41.5 | |
Sales for resale | | | (0.1) | | — | |
System sales revenues | | | 383.5 | | 441.0 | |
Provision for rate refund | | | (0.6) | | (0.1) | |
Integrated market | | | 7.2 | | 6.7 | |
Transmission | | | 34.2 | | 36.1 | |
Other | | | 7.0 | | 6.3 | |
Total operating revenues | | | $ | 431.3 | | $ | 490.0 | |
Reconciliation of gross margin to revenue: | | | | |
Operating revenues | | | $ | 431.3 | | $ | 490.0 | |
Cost of sales | | | 135.0 | | 212.6 | |
Gross margin | | | $ | 296.3 | | $ | 277.4 | |
MWh sales by classification (In millions) | | | | |
Residential | | | 2.2 | | 2.4 | |
Commercial | | | 1.5 | | 1.3 | |
Industrial | | | 1.1 | | 1.1 | |
Oilfield | | | 1.1 | | 1.2 | |
Public authorities and street light | | | 0.6 | | 0.7 | |
| | | | |
System sales | | | 6.5 | | 6.7 | |
Integrated market | | | 0.3 | | 0.3 | |
Total sales | | | 6.8 | | 7.0 | |
Number of customers | | | 859,628 | | 852,141 | |
Weighted-average cost of energy per kilowatt-hour (In cents) | | | | |
Natural gas | | | 1.663 | | 3.064 | |
Coal | | | 1.905 | | 1.958 | |
Total fuel | | | 1.531 | | 2.306 | |
Total fuel and purchased power | | | 1.887 | | 2.868 | |
Degree days (A) | | | | |
Heating - Actual | | | 1,649 | | 2,084 | |
Heating - Normal | | | 1,800 | | 1,798 | |
Cooling - Actual | | | 23 | | — | |
Cooling - Normal | | | 13 | | 13 | |
(A)Degree days are calculated as follows: The high and low degrees of a particular day are added together and then averaged. If the calculated average is above 65 degrees, then the difference between the calculated average and 65 is expressed as cooling degree days, with each degree of difference equaling one cooling degree day. If the calculated average is below 65 degrees, then the difference between the calculated average and 65 is expressed as heating degree days, with each degree of difference equaling one heating degree day. The daily calculations are then totaled for the particular reporting period.
OG&E's net income increased $0.3 million, or 1.5 percent, during the three months ended March 31, 2020 as compared to the same period in 2019. Primary drivers for this increase in net income are further discussed below.
Gross margin increased $18.9 million, or 6.8 percent, during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to the below factors.
| | | | | | |
(In millions) | $ Change | |
| | |
| | |
Price variance (A) | $ | 23.2 | | |
New customer growth | 6.2 | | |
| | |
Other | 0.8 | | |
| | |
Weather (price and quantity) (B) | (11.3) | | |
| | |
| | |
Change in gross margin | $ | 18.9 | | |
(A)Increased primarily due to the expiration of the cogeneration credit rider in 2019.
(B)Decreased primarily due to a 20.9 percent decrease in heating degree days for the three months ended March 31, 2020.
Cost of sales for OG&E consists of fuel used in electric generation, purchased power and transmission related charges. The actual cost of fuel used in electric generation and certain purchased power costs are passed through to OG&E's customers through fuel adjustment clauses. The fuel adjustment clauses are subject to periodic review by the OCC and the APSC. OG&E's cost of sales decreased $77.6 million, or 36.5 percent, during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to the below factors.
| | | | | | | | | | | | | |
(In millions) | $ Change | | | % Change | |
| | | | | |
| | | | | |
Fuel expense (A) | $ | (38.9) | | | | (42.8) | % | |
Purchased power costs: | | | | | |
Purchases from SPP (B) | (32.3) | | | | (39.2) | % | |
Cogeneration (C) | (7.2) | | | | (100.0) | % | |
Wind (D) | 2.2 | | | | 17.5 | % | |
| | | | | |
Transmission expense (E) | (1.4) | | | | (7.5) | % | |
Change in cost of sales | $ | (77.6) | | | | | |
(A)Decreased primarily due to lower fuel costs related to the generating assets utilized during the three months ended March 31, 2020.
(B)Decreased primarily due to lower market prices primarily due to decreased fuel costs for generators for the three months ended March 31, 2020.
(C)Decreased primarily due to the expiration of cogeneration contracts in 2019.
(D)Increased primarily due to a 16.5 percent increase in MWs purchased during the three months ended March 31, 2020.
(E)Decreased primarily due to lower SPP charges for the base plan projects of other utilities.
Other operation and maintenance expense increased $0.7 million, or 0.6 percent, during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to the below factors.
| | | | | | | | | | | | | |
(In millions) | $ Change | | | % Change | |
| | | | | |
| | | | | |
New expenses related to River Valley power plant (A) | $ | 4.2 | | | | * | | |
Contract technical and construction services | (1.4) | | | | (12.0) | % | |
Vegetation management | (1.1) | | | | (10.6) | % | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other | (1.0) | | | | (1.1) | % | |
| | | | | |
| | | | | |
Change in other operation and maintenance expense | $ | 0.7 | | | | | |
*Not applicable, as prior year expenses were zero.
(A)Additional other operation and maintenance expenses related to the purchase of the River Valley plant are primarily recovered through a rider mechanism, as approved by the OCC in 2019.
Depreciation and amortization expense increased $12.0 million, or 14.6 percent, during the three months ended March 31, 2020, as compared to the same period in 2019, primarily due to additional assets being placed into service and depreciation expense for the Sooner Dry Scrubbers no longer being deferred to a regulatory asset.
Interest on long-term debt increased $4.0 million, or 12.3 percent, during the three months ended March 31, 2020, as compared to the same period in 2019, primarily due to increased long-term debt outstanding and interest expense for the Sooner Dry Scrubbers no longer being deferred to a regulatory asset.
Income tax expense increased $1.1 million during the three months ended March 31, 2020, as compared to the same period in 2019, primarily due to higher pretax income and reduced tax credit generation.
OGE Holdings (Natural Gas Midstream Operations)
| | | | | | | | | | |
| | | Three Months Ended March 31, | |
(In millions) | | | 2020 | 2019 |
Operating revenues | | | $ | — | | $ | — | |
Cost of sales | | | — | | — | |
Other operation and maintenance | | | 0.6 | | 0.4 | |
| | | | |
| | | | |
| | | | |
Taxes other than income | | | 0.1 | | 0.2 | |
Operating loss | | | (0.7) | | (0.6) | |
Equity in earnings (losses) of unconsolidated affiliates (A) | | | (746.5) | | 30.7 | |
Other expense | | | — | | 7.4 | |
| | | | |
Income (loss) before taxes | | | (747.2) | | 22.7 | |
Income tax expense (benefit) | | | (179.2) | | 1.4 | |
| | | | |
| | | | |
Net income (loss) attributable to OGE Holdings | | | $ | (568.0) | | $ | 21.3 | |
(A)At March 31, 2020, the Company recorded a $780.0 million impairment on its investment in Enable, as further discussed in Notes 4 and 5 in "Item 1. Financial Statements."
Reconciliation of Equity in Earnings (Losses) of Unconsolidated Affiliates
See Note 4 within "Item 1. Financial Statements" for the reconciliation of Enable's net income to OGE Energy's equity in earnings (losses) of unconsolidated affiliates and the reconciliation of the difference between OGE Energy's investment in Enable and its underlying equity in the net assets of Enable (basis difference).
Enable Results of Operations and Operating Data
The following tables present summarized financial information of Enable for the three months ended March 31, 2020 and 2019.
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
(In millions) | | | 2020 | 2019 |
Reconciliation of gross margin to revenue: | | | | |
Total revenues | | | $ | 648 | | $ | 795 | |
Cost of natural gas and NGLs | | | 226 | | 378 | |
Gross margin | | | $ | 422 | | $ | 417 | |
Operating income | | | $ | 146 | | $ | 165 | |
Net income | | | $ | 103 | | $ | 113 | |
| | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2020 | 2019 |
Natural gas gathered volumes - TBtu/d | | | 4.52 | | 4.54 | |
Natural gas processed volumes - TBtu/d (A) | | | 2.44 | | 2.54 | |
NGLs sold - MBbl/d (B)(C) | | | 121.32 | | 140.09 | |
Crude oil and condensate gathered volumes - MBbl/d | | | 141.25 | | 107.90 | |
Transported volumes - TBtu/d | | | 6.56 | | 6.67 | |
(A)Includes volumes under third-party processing arrangements.
(B)Excludes condensate.
(C)NGLs sold includes volumes of NGLs withdrawn from inventory or purchased for system balancing purposes.
OGE Holdings' net loss of $568.0 million during the three months ended March 31, 2020 compared to net income of $21.3 million during the three months ended March 31, 2019 was primarily due to the impairment on the Company's investment in Enable, which is discussed in more detail in Notes 4 and 5 in "Item 1. Financial Statements." The following table presents summarized information regarding Enable's income statement changes for the three months ended March 31, 2020, as compared to the same period in 2019, and the corresponding impact those changes had on the Company's equity in earnings of Enable.
| | | | | | | | | | | |
| | | | | |
| | | | | |
(In millions) | | | | Income Statement Change at Enable | Impact to Company's Equity in Earnings |
Gross margin | | | | $ | 5.0 | | $ | 1.3 | |
Impairments (A) | | | | $ | 28.0 | | $ | (4.4) | |
Operation and maintenance, General and administrative | | | | $ | (3.0) | | $ | 0.8 | |
| | | | | |
(A)Included in the $28.0 million of impairments recorded by Enable is a $12.0 million goodwill impairment and a $16.0 million impairment for certain long-lived assets in their gathering and processing business segment. These certain long-lived assets are jointly-owned by Enable, which reduces the impairment's impact by 50 percent on the Company's equity in earnings. The Company recorded a $4.4 million pre-tax charge for its share of Enable's goodwill and long-lived asset impairments, as adjusted for basis differences.
Enable's gathering and processing business segment reported a decrease in operating income of $29.0 million for the three months ended March 31, 2020, as compared to the same period in 2019. The following table presents summarized information regarding Enable's gathering and processing business segment income statement changes for the three months ended March 31, 2020, as compared to the same period in 2019, and the corresponding impact those changes had on the Company's equity in earnings of Enable.
The decrease in Enable's gathering and processing business segment operating income was primarily due to the following:
| | | | | | | | | | | |
| | | | | |
| | | | | |
(In millions) | | | | Income Statement Change at Enable | Impact to Company's Equity in Earnings |
Gross margin | | | | $ | (4.0) | | $ | (1.0) | |
Impairments (A) | | | | $ | 28.0 | | $ | (4.4) | |
| | | | | |
Operating and maintenance, General and administrative | | | | $ | (3.0) | | $ | 0.8 | |
(A)Included in the $28.0 million of impairments recorded by Enable is a $12.0 million goodwill impairment and a $16.0 million impairment for certain long-lived assets in their gathering and processing business segment. These certain long-lived assets are jointly-owned by Enable, which reduces the impairment's impact by 50 percent on the Company's equity in earnings. The Company recorded a $4.4 million pre-tax charge for its share of Enable's goodwill and long-lived asset impairments, as adjusted for basis differences.
Gathering and processing gross margin decreased primarily due to:
•a decrease in revenues from NGLs sales less the cost of NGLs due to lower average sales prices for all NGLs products, partially offset by higher recoveries of all NGLs products other than ethane in the Anadarko basin;
•a decrease in revenues from natural gas sales less the cost of natural gas due to lower average natural gas sales prices and lower sales volumes;
•a decrease in processing service fees due to lower processed volumes under fee-based arrangements, partially offset by higher consideration received from certain processing arrangements due to an increase in retained volumes at lower average market prices; and
•a decrease in natural gas gathering fees due to lower gathered volumes in the Anadarko and Arkoma Basins and lower shortfall payments associated with the expiration of certain minimum volume commitment contracts in the Ark-La-Tex and Arkoma Basins, partially offset by higher revenue associated with the amendment of certain minimum volume commitment contracts in the Arkoma Basin; partially offset by
•an increase in changes of fair value of and realized gains on natural gas, condensate and NGLs derivatives; and
•an increase in crude oil, condensate and produced water gathering revenues, primarily due to an increase in gathered volumes in the Anadarko Basin, partially offset by a decrease in gathered volumes in the Willison Basin.
Enable's transportation and storage business segment reported an increase in operating income of $10.0 million for the three months ended March 31, 2020, as compared to the same period in 2019. The increase in Enable's transportation and storage business segment operating income was primarily due to an increase of $9.0 million in gross margin, which impacted the Company's equity in earnings by $2.3 million. Transportation and storage gross margin increased primarily due to:
•an increase in firm transportation and storage services due to the recognition of revenue upon the settlement of a rate case, partially offset by lower interstate contracted capacity and lower rates on certain contracts for intrastate service with power generators;
•an increase in system management activities; and
•an increase in realized gains on natural gas derivatives; partially offset by
•a decrease in natural gas storage inventory due to lower of cost or net realizable value adjustments;
•a decrease in volume-dependent transportation and storage revenues due to lower off-system intrastate transportation rates and volumes, partially offset by the recognition of revenue upon settlement of a rate case; and
•a decrease in revenues from NGLs sales less the cost of NGLs due to a decrease in average NGLs prices and lower volumes.
OGE Holdings' income tax benefit was $179.2 million during the three months ended March 31, 2020, as compared to income tax expense of $1.4 million during the same period in 2019. The change is primarily due to a tax benefit of $190.4 million related to the impairment recorded on the Company's investment in Enable, partially offset by state deferred tax adjustments related to the Company's investment in Enable.
Off-Balance Sheet Arrangements
There have been no significant changes in the Company's off-balance sheet arrangements from those discussed in the Company's 2019 Form 10-K. The Company has no off-balance sheet arrangements with equity method investments that would affect its liquidity.
Liquidity and Capital Resources
Cash Flows
| | | | | | | | | | | | | | |
| Three Months Ended | | | |
| March 31, | | 2020 vs. 2019 | |
(Dollars in millions) | 2020 | 2019 | $ Change | % Change |
Net cash provided from operating activities (A) | $ | 103.9 | | $ | 28.9 | | $ | 75.0 | | * | |
Net cash used in investing activities (B) | $ | (124.9) | | $ | (153.9) | | $ | 29.0 | | (18.8) | % |
Net cash provided from financing activities (C) | $ | 166.9 | | $ | 30.7 | | $ | 136.2 | | * | |
* Change is greater than 100 percent variance.
(A)Increased primarily due to a decrease in vendor payments and increased amounts received from customers at OG&E.
(B)Decreased primarily due to environmental projects at OG&E being completed and placed into service as well as fewer OG&E plant outages in 2020.
(C)Increased primarily due to the payment of long-term debt by OG&E in January 2019, partially offset by a decrease in short-term debt year over year.
Working Capital
Working capital is defined as the difference in current assets and current liabilities. The Company's working capital requirements are driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to and the timing of collections from customers, the level and timing of spending for maintenance and expansion activity, inventory levels and fuel recoveries. The following discussion addresses changes in working capital balances at March 31, 2020 compared to December 31, 2019.
Cash and Cash Equivalents increased $145.9 million, primarily due to normal business operations and holding of short-term borrowings as a precautionary measure in order to preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic.
Accounts Receivable and Accrued Unbilled Revenues decreased $16.2 million, or 7.4 percent, primarily due to a decrease in billings to OG&E's retail customers reflecting lower seasonal usage in March 2020 as compared to December 2019.
Fuel Clause Under Recoveries decreased $39.5 million, primarily due to increased collections from customers and lower fuel costs.
Other Current Assets increased $6.4 million, or 26.2 percent, primarily due to an increase in under-recovered riders and prepayments associated with software expense.
Short-term Debt increased $263.0 million, primarily as a precautionary measure in order to preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic. The Company borrows on a short-term basis, as necessary, by the issuance of commercial paper and by borrowings under its revolving credit agreements.
Accounts Payable decreased $37.7 million, or 19.3 percent, primarily due to the timing of vendor payments and lower fuel costs.
Accrued Taxes decreased $7.0 million, or 16.7 percent, primarily resulting from the timing of ad valorem payments, partially offset by tax accruals.
Accrued Compensation decreased $13.7 million, or 33.7 percent, primarily due to 2019 incentive compensation payouts that occurred in the first quarter of 2020, partially offset by 2020 accruals.
Fuel Clause Over Recoveries increased $10.8 million, primarily due to increased collections from customers and lower fuel costs.
Other Current Liabilities decreased $16.5 million, or 25.3 percent, primarily due to changes in amounts owed to OG&E customers.
Future Capital Requirements
The Company's primary needs for capital are related to acquiring or constructing new facilities and replacing or expanding existing facilities at OG&E. Other working capital requirements are expected to be primarily related to maturing debt, operating lease obligations, fuel clause under and over recoveries and other general corporate purposes. The Company generally meets its cash needs through a combination of cash generated from operations, short-term borrowings (through a combination of bank borrowings and commercial paper) and permanent financings.
Capital Expenditures
The Company's consolidated estimates of capital expenditures, which represent base maintenance capital expenditures plus capital expenditures for known and committed projects, for the years 2020 through 2024 are discussed in detail within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Form 10-K. Additional capital expenditures beyond those identified in the Company's 2019 Form 10-K, including additional incremental growth opportunities in electric transmission assets, will be evaluated based upon their impact upon achieving the Company's financial objectives. The Company remains on track for its approximately $575.0 million in capital investment planned for 2020 as disclosed in the Company's 2019 Form 10-K. However, the progression of, and global response to, the COVID-19 outbreak increases the risk of delays in construction activities and equipment deliveries related to the Company's capital projects, including potential delays in obtaining permits from government agencies, resulting in potential deferral of capital expenditures.
Financing Activities and Future Sources of Financing
Management expects that cash generated from operations, proceeds from the issuance of long- and short-term debt, proceeds from the sales of common stock to the public through the Company's Automatic Dividend Reinvestment and Stock Purchase Plan or other offerings and distributions from Enable will be adequate over the next three years to meet anticipated cash needs and to fund future growth opportunities. The Company utilizes short-term borrowings (through a combination of bank borrowings and commercial paper) to satisfy temporary working capital needs and as an interim source of financing capital expenditures until permanent financing is arranged. As indicated above, as a precautionary measure in order to increase the Company's cash position and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic, the Company entered into a one-year $75.0 million term loan agreement in April 2020. Further, OG&E issued $300.0 million in senior notes in April 2020. The disruption in the capital markets and the commercial paper markets caused by the COVID-19 outbreak could make additional financing more challenging, and there can be no assurance that the Company will be able to obtain such financing on commercially reasonable terms or at all.
Short-Term Debt and Credit Facilities
The Company borrows on a short-term basis, as necessary, by issuance of commercial paper and by borrowings under its revolving credit agreement. The Company has unsecured five-year revolving credit facilities totaling $900.0 million ($450.0 million for the Company and $450.0 million for OG&E) that mature on March 8, 2023. These bank facilities can also be used as letter of credit facilities. The following tables highlight the Company's short-term debt activity as of and for the three month period ended March 31, 2020.
| | | | | |
(Dollars in millions) | March 31, 2020 |
Balance of outstanding supporting letters of credit | $ | 0.3 | |
Weighted-average interest rate of outstanding supporting letters of credit | 1.00 | % |
Net available liquidity under revolving credit agreements | $ | 524.7 | |
Balance of cash and cash equivalents | $ | 145.9 | |
| |
(Dollars in millions) | Three Months Ended March 31, 2020 |
Average balance of short-term debt | $ | 145.2 | |
Weighted-average interest rate of average balance of short-term debt | 1.81 | % |
Maximum month-end balance of short-term debt | $ | 375.0 | |
OG&E has the necessary regulatory approvals to incur up to $800.0 million in short-term borrowings at any one time for a two-year period beginning January 1, 2019 and ending December 31, 2020. See Note 10 within "Item 1. Financial Statements" for further discussion of the Company's short-term debt activity.
In April 2020, the Company entered into a $75.0 million unsecured one-year term credit agreement, which is scheduled to terminate on April 7, 2021. Advances under this agreement were used to refinance existing indebtedness and for working capital and general corporate purposes of the Company. The credit agreement, under certain circumstances, may be increased to a maximum commitment limit of $100.0 million and contains substantially the same covenants as the Company's existing $450.0 million revolving credit agreement.
Issuance of Long-Term Debt
In April 2020, OG&E issued $300.0 million of 3.25 percent senior notes due April 1, 2030. The proceeds from the issuance were added to OG&E's general funds to be used for general corporate purposes, including to fund ongoing capital expenditures and working capital.
Security Ratings
Access to reasonably priced capital is dependent in part on credit and security ratings. Generally, lower ratings lead to higher financing costs. Pricing grids associated with the Company's credit facilities could cause annual fees and borrowing rates to increase if an adverse rating impact occurs. The impact of any future downgrade could include an increase in the costs of the Company's short-term borrowings, but a reduction in the Company's credit ratings would not result in any defaults or accelerations. Any future downgrade could also lead to higher long-term borrowing costs and, if below investment grade, would require the Company to post collateral or letters of credit.
A security rating is not a recommendation to buy, sell or hold securities. Such rating may be subject to revision or withdrawal at any time by the credit rating agency, and each rating should be evaluated independently of any other rating.
On April 3, 2020, S&P's Global Ratings affirmed its issuer credit and commercial paper ratings, as listed in the Company's 2019 Form 10-K, for both the Company and OG&E. S&P's Global Ratings also affirmed both companies' stable outlooks. S&P's Global Ratings' affirmation follows the announcement that Enable will increase the level of cash it retains, which effectively reduces dividend distributions for the Company by as much as half. However, S&P's Global Ratings indicated it does not expect the Company's credit quality to weaken materially, given the cushion in its current financial measures. Further, S&P's Global Ratings indicated they continue to view OG&E as insulated from the Company, reflecting the combination of OG&E's stronger stand-alone credit profile and sufficient separateness between OG&E and the Company.
On April 21, 2020, Moody's Investors Service did not take direct action but did issue a comment in response to Enable's decision to reduce dividend distributions. Moody's Investors Service stated that, despite the reduction in cash flow, the Company's credit profile is manageable, as it is primarily supported by the stable operations and supportive regulatory environment of OG&E.
Quarterly Distributions by Enable
Pursuant to the Enable Limited Partnership Agreement, during the three months ended March 31, 2020, Enable made a distribution of $36.7 million to the Company. On April 1, 2020, Enable announced a 50 percent reduction to its quarterly distribution in order to strengthen its balance sheet and increase its annualized retained cash flow. The Company will receive distributions of $18.3 million in the second quarter of 2020 and does not expect any changes to its operations or foresee the need to access the equity markets as a result of Enable's action.
Critical Accounting Policies and Estimates
The Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements contain information that is pertinent to Management's Discussion and Analysis. In preparing the Condensed Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Changes to these assumptions and estimates could have a material effect on the Company's Condensed Consolidated Financial Statements. However, the Company believes it has taken reasonable positions where assumptions and estimates are used in order to minimize the negative financial impact to the Company that could result if actual results vary from the assumptions and estimates.
In management's opinion, the areas of the Company where the most significant judgment is exercised for all Company segments include the determination of Pension Plan assumptions, income taxes, contingency reserves, asset retirement obligations and depreciable lives of property, plant and equipment. For the electric utility segment, significant judgment is also exercised in the determination of regulatory assets and liabilities and unbilled revenues. For the natural gas midstream segment, significant judgment is also exercised in the determination of any impairment of equity method investments. The selection, application and disclosure of the Company's critical accounting estimates have been discussed with the Company's Audit Committee and are discussed in detail within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Form 10-K.
Impairment of Equity Method Investments
Investments in unconsolidated affiliates accounted for under the equity method are assessed for impairment when there are indicators of a loss in value, such as a lack of sustained earnings capacity or a current fair value less than the investment's carrying amount. When it is determined that an indicated impairment is other than temporary, an impairment charge is recognized for the difference between the investment's carrying value and its estimated fair value.
When determining whether a decline in value is other than temporary, management considers factors such as the duration and extent of the decline, the investee's financial condition and near-term prospects, and our ability and intention to retain our investment for a period that allows for recovery. When estimating an investment's fair value, quoted market prices are utilized, as available, and other rights and privileges that are a feature or attribute of the investment security are considered, as appropriate. Different assumptions could affect the timing and the amount of an impairment of an investment in any period.
At March 31, 2020, the Company estimated the fair value of its investment in Enable was below the book value and concluded the decline in value was not temporary due to the severity of the decline and the recent rapid deterioration, as well as the near term future outlook, of the midstream oil and gas industry. Accordingly, the Company recorded a $780.0 million impairment on its investment in Enable for the three months ended March 31, 2020. Further discussion can be found in Notes 4 and 5 in "Item 1. Financial Statements."
Commitments and Contingencies
In the normal course of business, the Company is confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits or claims made by third parties, including governmental agencies. When appropriate, management consults with legal counsel and other experts to assess the claim. If, in management's opinion, the Company has incurred a probable loss as set forth by GAAP, an estimate is made of the loss, and the appropriate accounting entries are reflected in the Company's Condensed Consolidated Financial Statements. At the present time, based on available information, the Company believes that any reasonably possible losses in excess of accrued amounts arising out of pending or threatened lawsuits or claims would not be quantitatively material to its financial statements and would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. See Notes 13 and 14 within "Item 1. Financial Statements" for a discussion of the Company's commitments and contingencies.
Environmental Laws and Regulations
The activities of OG&E are subject to numerous, stringent and complex federal, state and local laws and regulations governing environmental protection. These laws and regulations can change, restrict or otherwise impact OG&E's business activities in many ways, including the handling or disposal of waste material, planning for future construction activities to avoid or mitigate harm to threatened or endangered species and requiring the installation and operation of emissions or pollution control equipment. Failure to comply with these laws and regulations could result in the assessment of administrative, civil and criminal penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations. Management believes that all of its operations are in substantial compliance with current federal, state and local environmental standards. These environmental laws and regulations are also discussed in detail within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Form 10-K.
Environmental regulation can increase the cost of planning, design, initial installation and operation of OG&E's facilities. Management continues to evaluate its compliance with existing and proposed environmental legislation and regulations and implement appropriate environmental programs in a competitive market.
Air
Federal Clean Air Act Overview
OG&E's operations are subject to the Federal Clean Air Act as amended and comparable state laws and regulations. These laws and regulations regulate emissions of air pollutants from various industrial sources, including electric generating units and also impose various monitoring and reporting requirements. Such laws and regulations may require that OG&E obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of existing air emissions, obtain and strictly comply with air permits containing various emissions and operational limitations or install emission control equipment. OG&E likely will be required to incur certain capital expenditures in the future for air pollution control equipment and technology in connection with obtaining and maintaining operating permits and approvals for air emissions.
Cross-State Air Pollution Rule
On September 7, 2016, the EPA finalized an update to the 2011 Cross-State Air Pollution Rule. The new rule applies to ozone-season NOX emissions from power plants in 22 eastern states (including Oklahoma). The rule utilizes a cap and trade program for NOX emissions and went into effect on May 1, 2017 in Oklahoma. The 2016 rule reduces the 2011 Cross-State Air Pollution Rule emissions cap for all of OG&E's coal and gas facilities (except the River Valley and Frontier facilities which were not owned by OG&E until 2019) by 47 percent combined. OG&E and numerous other parties filed petitions for judicial and administrative review of the 2016 rule. On September 13, 2019, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion that deferred a decision on our challenges to the rule pending an EPA review and decision on a separate administrative petition that we filed. Subsequently, all of OG&E's judicial challenges were voluntarily dismissed, but the administrative petitions for reconsideration remain pending at the EPA.
OG&E is in compliance with the 2016 rule requirements which remain in effect. The Company does not anticipate, at this time, additional capital expenditures for compliance with the 2016 rule.
Hazardous Air Pollutants Emission Standards
On February 16, 2012, the EPA published the final MATS rule regulating the emissions of certain hazardous air pollutants from electric generating units. The Company complied with the MATS rule by the April 16, 2016 deadline that applied to OG&E's coal units. On April 16, 2020, the EPA released a final rule which reconsidered certain elements of the 2012 rule in response to litigation in the D.C. Circuit Court. In the final rule, the EPA concluded that it is not "appropriate and necessary" to regulate MATS-related emissions from coal-fired units. Nonetheless, the EPA retained the emissions limits that were established in the 2012 rule, which remains in effect today.
National Ambient Air Quality Standards
The EPA is required to set NAAQS for certain pollutants considered to be harmful to public health or the environment. The Clean Air Act requires the EPA to review each NAAQS every five years. As a result of these reviews, the EPA periodically has taken action to adopt more stringent NAAQS for those pollutants. If any areas of Oklahoma were to be designated as not attaining the NAAQS for a particular pollutant, the Company could be required to install additional emission controls on its facilities to help the state achieve attainment with the NAAQS. As of March 31, 2020, no areas of Oklahoma had been designated as non-attainment for pollutants that are likely to affect the Company's operations. Several processes are under way to designate areas in Oklahoma as attaining or not attaining revised NAAQS.
The EPA proposed to designate part of Muskogee County, in which OG&E's Muskogee Power Plant is located, as non-attainment for the 2010 SO2 NAAQS on March 1, 2016, even though nearby monitors indicated compliance with the NAAQS. The proposed designation was based on modeling that did not reflect the conversion of two of the coal units at Muskogee to natural gas. The State of Oklahoma's monitoring preliminarily indicates that ambient SO2 emissions in the area are well within the NAAQS. The EPA has indicated that it anticipates finalizing a designation at the end of 2020. At this time, the Company cannot determine with any certainty whether the proposed designation of Muskogee County will cause a material impact to the Company's financial results.
The Company continues to monitor these processes and their possible impact on its operations but, at this time, cannot determine with any certainty whether they will cause a material impact to the Company's financial results.
Climate Change and Greenhouse Gas Emissions
There is continuing discussion and evaluation of possible global climate change in certain regulatory and legislative arenas. The focus is generally on emissions of greenhouse gases, including CO2, sulfur hexafluoride and methane, and whether these emissions are contributing to the warming of the earth's atmosphere. On November 4, 2019, President Trump announced that the U.S. has officially notified the United Nations that the U.S. will withdraw from the "Paris Agreement" on climate change after having announced in 2017 that the U.S. would begin negotiations to re-enter the agreement with different terms. A new agreement may result in future additional emissions reductions in the U.S.; however, it is not possible to determine what the international legal standards for greenhouse gas emissions will be in the future and the extent to which these commitments will be implemented through the Clean Air Act or any other existing statutes and new legislation.
If legislation or regulations are passed at the federal or state levels in the future requiring mandatory reductions of CO2 and other greenhouse gases on the Company's facilities, this could result in significant additional compliance costs that would affect the Company's future consolidated financial position, results of operations and cash flows if such costs are not recovered through regulated rates. Several states outside the area where the Company operates have passed laws, adopted regulations or undertaken regulatory initiatives to reduce the emission of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs.
OG&E's current business strategy has resulted in reduced carbon dioxide emissions by over 40 percent compared to 2005 levels, and during the same period, emissions of ozone-forming NOx have been reduced by approximately 75 percent and emissions of SO2 have been reduced by approximately 90 percent. OG&E expects to further reduce carbon dioxide emissions to 50 percent of 2005 levels by 2030. To comply with the EPA's MATS rule and Regional Haze Rule FIP, OG&E converted two coal-fired generating units at the Muskogee Station to natural gas, among other measures. OG&E's deployment of Smart Grid technology helps to reduce the peak load demand. OG&E is also deploying more renewable energy sources that do not emit greenhouse gases. OG&E's service territory borders one of the nation's best wind resource areas, and OG&E has leveraged its geographic position to develop renewable energy resources and completed transmission investments to deliver the renewable energy. The SPP has authorized the construction of transmission lines capable of bringing renewable energy out of the wind resource areas in western Oklahoma, the Texas Panhandle and western Kansas to load centers by planning for more transmission to be built in the area. In addition to increasing overall system reliability, these new transmission resources should provide greater access to additional wind resources that are currently constrained due to existing transmission delivery limitations.
On July 8, 2019, the EPA published the Affordable Clean Energy rule. Numerous parties, not including OG&E, have filed petitions for judicial review of the Affordable Clean Energy rule in the U.S. Court of Appeals for the District of Columbia Circuit. The Affordable Clean Energy rule requires states, including Oklahoma, to develop emission limitations for carbon dioxide for each existing coal-fired utility boiler within the state, including all of OG&E's coal units, and submit a compliance and implementation plan to the EPA by July 2022. The EPA will approve or disapprove the proposed state plan within 18 months of submittal and develop a federal implementation plan if the proposed state plan is disapproved. At this time, the Company cannot determine with any certainty whether the implementation plan will cause a material impact to its financial results.
EPA Startup, Shutdown and Malfunction Policy
On May 22, 2015, the EPA issued a final rule to address the provisions in the SIPs of 36 states (including Oklahoma) regarding the treatment of emissions that occur during startup, shutdown and malfunction operations. The final rule clarifies the EPA's Startup, Shutdown and Malfunction Policy. Although judicial challenges to the rule are ongoing, the Oklahoma Department of Environmental Quality submitted a SIP revision for the EPA's approval on November 7, 2016 to comply with this rule. This rule has resulted in permit modifications for certain OG&E units and applications remain pending for other units. The Company does not anticipate capital expenditures, or a material impact to its consolidated financial position, results of operations or cash flows, as a result of adoption of this rule.
Regional Haze Regulation - Second Planning Period
In January 2017, the EPA finalized a rule that would revise certain provisions of the Regional Haze Rule. Notably, the EPA extended the due date for the second Regional Haze implementation period by three years to 2021 and made changes to the provisions for impacts to national parks and other protected wilderness areas. Petitions for Reconsideration to the EPA were filed by industry groups. While not acting on the petitions, the EPA announced on January 17, 2018 that it intends to commence a notice-and-comment rulemaking revisiting certain aspects of the rule. During 2019, the EPA released technical resources to assist states in developing SIPs, including a significant non-binding guidance document and updated atmospheric modeling which will allow states to better account for international emissions affecting regional haze in the U.S. At this time, the Company cannot predict the outcome of this rulemaking or SIP development or how it will affect the Company.
Endangered Species
Certain federal laws, including the Bald and Golden Eagle Protection Act, the Migratory Bird Treaty Act and the Endangered Species Act, provide special protection to certain designated species. These laws and any state equivalents provide for significant civil and criminal penalties for unpermitted activities that result in harm to or harassment of certain protected animals and plants, including damage to their habitats. If such species are located in an area in which the Company conducts operations, or if additional species in those areas become subject to protection, the Company's operations and development projects, particularly transmission, wind or pipeline projects, could be restricted or delayed, or the Company could be required to implement expensive mitigation measures.
Waste
OG&E's operations generate wastes that are subject to the Federal Resource Conservation and Recovery Act of 1976 as well as comparable state laws which impose detailed requirements for the handling, storage, treatment and disposal of waste.
In 2015, the EPA finalized a rule under the Federal Resource Conservation and Recovery Act for the handling and disposal of coal combustion residuals or coal ash. The rule regulates coal ash as a solid waste rather than a hazardous waste, which would have made the management of coal ash more costly. In August 2019, the EPA proposed revisions to the 2015 coal ash rule in response to the D.C. Circuit Court of Appeals issuing a decision regarding the ongoing Coal Combustion Residuals litigation. The proposed changes do not appear to be material to OG&E at this time. OG&E completed the clean closure of one regulated inactive coal ash impoundment in August 2019.
On June 28, 2018, the EPA approved the State of Oklahoma's application for a state coal ash permitting program that will operate in lieu of the federal coal ash program promulgated under the Federal Resource Conservation and Recovery Act. On September 26, 2018, a citizen suit was filed against the EPA in the U.S. District Court in the District of Columbia concerning the final approval. OG&E and others have moved to intervene on behalf of the EPA. The Company is monitoring regulatory developments relating to this rule, none of which appear to be material to OG&E at this time. OG&E is in compliance with this rule at this time.
The Company currently recycles and provides approximately 89 percent of its ash to the concrete and cement industries for use as a component within their products. Using fly ash in this way enables aggregate manufacturers to minimize their impact on the environment by avoiding the need to extract and process other natural resources.
The Company has sought and will continue to seek pollution prevention opportunities and to evaluate the effectiveness of its waste reduction, reuse and recycling efforts. The Company obtains refunds from the recycling of scrap metal, salvaged transformers and used transformer oil. Additional savings are expected to be gained through the reduction and/or avoidance of disposal costs and the reduction in material purchases due to the reuse of existing materials. Similar savings are anticipated in future years.
Water
OG&E's operations are subject to the Federal Clean Water Act and comparable state laws and regulations. These laws and regulations impose detailed requirements and strict controls regarding the discharge of pollutants into state and federal waters.
The EPA issued a final rule on May 19, 2014 to implement Section 316(b) of the Federal Clean Water Act, which requires that power plant cooling water intake structure location, design, construction and capacity reflect the best available technology for minimizing their adverse environmental impact via the impingement and entrainment of aquatic organisms. The
Oklahoma Department of Environmental Quality issued final permits on December 22, 2017 and August 22, 2018 for Muskogee Power Plant and Seminole Power Plant, respectively, in compliance with the final 316(b) rule, and OG&E did not incur any material costs associated with the rule's implementation at either location. OG&E expects to be able to provide a reasonable estimate of any material costs associated with the rule's implementation at other facilities following the future issuance of permits from the State of Oklahoma.
In 2015, the EPA issued a final rule addressing the effluent limitation guidelines for power plants under the Federal Clean Water Act. The final rule establishes technology- and performance-based standards that may apply to discharges of six waste streams including bottom ash transport water. Compliance with this rule will occur by 2023; however, on April 12, 2017, the EPA granted a Petition for Reconsideration of the 2015 Rule. On November 22, 2019, the EPA published a proposed rule to revise the technology-based effluent limitations for flue gas desulfurization waste water and bottom ash transport water. OG&E is evaluating what, if any, compliance actions are needed but is not able to quantify with any certainty what costs may be incurred. OG&E expects to be able to provide a reasonable estimate of any material costs associated with the rule's implementation following issuance of the permits from the State of Oklahoma.
On April 21, 2020, the EPA and U.S. Army Corps of Engineers published in the Federal Register "The Navigable Waters Protection Rule: Definition of Waters of the United States." This final rule replaces the repealed definition of waters of the U.S. from 2015. The effective date of this final rule will be June 22, 2020. The Company does not expect any material impacts as a result of this rule.
Since the purchase of the Redbud facility in 2008, OG&E's average use of treated municipal effluent for all of the needed cooling water at Redbud and McClain is approximately 2.6 billion gallons per year. This use of treated municipal effluent offsets the need for fresh water as cooling water, making fresh water available for other beneficial uses like drinking water, irrigation and recreation.
Site Remediation
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state laws impose liability, without regard to the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances into the environment. Because OG&E utilizes various products and generates wastes that are considered hazardous substances for purposes of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, OG&E could be subject to liability for the costs of cleaning up and restoring sites where those substances have been released to the environment. At this time, it is not anticipated that any associated liability will cause a significant impact to OG&E.
For further discussion regarding contingencies relating to environmental laws and regulations, see Note 13 within "Item 1. Financial Statements."
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in the market risks affecting the Company from those discussed in the Company's 2019 Form 10-K.
Item 4. Controls and Procedures.
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer and chief financial officer, allowing timely decisions regarding required disclosure. As of the end of the period covered by this report, based on an evaluation carried out under the supervision and with the participation of the Company's management, including the chief executive officer and chief financial officer, of the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934), the chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective.
No change in the Company's internal control over financial reporting has occurred during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
While remote work arrangements have been implemented in response to the COVID-19 pandemic, the Company believes there have been no material changes to the processes and procedures that impact financial reporting. The Company continues to monitor potential internal control impacts of COVID-19 and plan accordingly to ensure the effectiveness of the Company's internal controls over financial reporting and disclosures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Item 3 of Part I of the Company's 2019 Form 10-K for a description of certain legal proceedings presently pending. Except as described under "Environmental Laws and Regulations" within "Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," there are no new significant cases to report against the Company or its subsidiaries, and there have been no material changes in the previously reported proceedings.
Item 1A. Risk Factors.
Except as detailed below, there have been no significant changes in the Company's risk factors from those discussed in the Company's 2019 Form 10-K, which are incorporated herein by reference.
We face risks related to health epidemics and other outbreaks.
The recent outbreak of COVID-19 is a rapidly developing situation around the globe that has adversely impacted economic activity and conditions worldwide. In particular, efforts to control the spread of COVID-19 have led to shutdowns of various facilities as well as disrupted supply chains around the world. Efforts to control the spread of COVID-19 have also resulted in remote work arrangements and increased unemployment and will likely result in customer slow payment or non-payment and decreased commercial and industrial load. We are continuing to monitor developments involving our workforce, customers and suppliers and cannot predict whether COVID-19 will have a material impact on our results of operations, financial condition and prospects. However, an extended slowdown of the United States' economic growth, demand for commodities and/or material changes in governmental policy could result in lower economic growth and lower demand for electricity in our key markets as well as the ability of various customers, contractors, suppliers and other business partners to fulfill their obligations, which could have a material adverse effect on our results of operations, financial condition and prospects.
Decreased demand for commodities as a result of COVID-19 impacts have impacted the valuation of our investment in Enable, resulting in an impairment charge that had a material adverse impact on our results of operations at March 31, 2020. Further, our operating cash flow is derived partially from cash distributions we receive from Enable. In response to current industry conditions, Enable reduced its dividend distribution by half. Prolonged decreased demand for commodities and/or further reductions in distributions from Enable could materially adversely affect our results of operations, financial condition and cash flows.
In addition, we cannot predict the impact that COVID-19 will have on our customers, suppliers, vendors and other business partners and each of their financial conditions; however, any material effect on these parties could adversely impact us. The impact of COVID-19 may also exacerbate other risks discussed in "Item 1A. Risk Factors" in the Company's 2019 Form 10-K, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table contains information about the Company's purchases of its common stock during the first quarter of 2020.
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan |
1/1/20 - 1/31/20 | — | $ | — | | N/A | N/A |
2/1/20 - 2/29/20 | — | $ | — | | N/A | N/A |
3/1/20 - 3/31/20 | 255,000 | $ | 38.04 | | 255,000 | N/A |
N/A - not applicable
During the three months ended March 31, 2020, the Company purchased 255,000 shares of its common stock at an average cost of $38.04 per share on the open market. The shares were used to satisfy payouts of earned performance units and restricted stock unit grants, pursuant to the Company's Stock Incentive Plan, during the three months ended March 31, 2020.
Item 6. Exhibits.
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Exhibit No. | Description |
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4.01 | | |
31.01 | | |
32.01 | | |
99.01 | | |
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101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Schema Document. |
101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document. |
101.LAB | Inline XBRL Taxonomy Label Linkbase Document. |
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document. |
101.DEF | Inline XBRL Definition Linkbase Document. |
104 | | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101). |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| OGE ENERGY CORP. |
| (Registrant) |
| |
By: | /s/ Sarah R. Stafford |
| Sarah R. Stafford |
| Controller and Chief Accounting Officer |
| (On behalf of the Registrant and in her capacity as Chief Accounting Officer) |
May 6, 2020