OGE ENERGY CORP. The following combined discussion is separately filed byOGE Energy andOG&E . However,OG&E does not make any representations as to information related solely toOGE Energy or the subsidiaries ofOGE Energy other than itself.
Introduction
OGE Energy 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-centralU.S. OGE Energy conducts these activities through two business segments: (i) electric utility and (ii) natural gas midstream operations. The accounts ofOGE Energy and its wholly-owned subsidiaries, includingOG&E , are included inOGE Energy's condensed consolidated financial statements. All intercompany transactions and balances are eliminated in such consolidation.OGE Energy 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.OG&E .OGE Energy's electric utility operations are conducted throughOG&E , which generates, transmits, distributes and sells electric energy inOklahoma and westernArkansas .OG&E's rates are subject to regulation by the OCC, the APSC and theFERC .OG&E was incorporated in 1902 under the laws of theOklahoma Territory and is a wholly-owned subsidiary ofOGE Energy .OG&E is the largest electric utility inOklahoma , and its franchised service territory includesFort 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. Enable.OGE Energy's natural gas midstream operations segment representsOGE Energy's investment in Enable. The investment in Enable is held through wholly-owned subsidiaries and ultimatelyOGE Holdings . Formed in 2013, 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 theAnadarko ,Arkoma and Ark-La-Tex Basins. Enable also owns crude oil gathering assets in theAnadarko and Williston Basins. Enable has intrastate natural gas transportation and storage assets that are located inOklahoma as well as interstate assets that extend from westernOklahoma and the TexasPanhandle toLouisiana , fromLouisiana toIllinois and fromLouisiana toAlabama . Enable's general partner is equally controlled byOGE Energy and CenterPoint,who each have 50 percent management ownership. Based on the 50/50 management ownership, with neither company having control, OGE Energy accounts for its interest in Enable using the equity method of accounting. As disclosed inOGE Energy's 20 20 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. The effects of COVID-19, including negative impacts on demand and commodity prices, could exacerbate these risks. If any of those risks were to occur,OGE Energy's business, financial condition, results of operations or cash flows could be materially adversely affected. InFebruary 2021 , Enable entered into a definitive merger agreement with Energy Transfer, which is further discussed under "Recent Developments - Enable Merger Agreement with Energy Transfer" below and in Note 4 within "Item 1. Financial Statements." For a discussion of risks related to the Enable and Energy Transfer merger, see "Item 1A. Risk Factors" in OGE Energy's 2020 Form 10-K .
Overview
Strategy
OGE Energy is focused on creating long-term shareholder value by targeting the consistent growth of earnings per share of five percent at the electric utility, underscored by a strategy of investing in lower risk infrastructure projects that improve the economic vitality of the communities it serves inOklahoma andArkansas .OGE Energy utilizes cash distributions from its natural gas midstream operations segment to help fund its electric utility capital investments.OGE Energy's financial objectives also include maintaining investment grade credit ratings and providing a strong and reliable dividend for shareholders. 33 --------------------------------------------------------------------------------OGE Energy's long-term sustainability is predicated on providing exceptional customer experiences, investing in grid improvements and increasingly cleaner generation resources, environmental stewardship, strong governance practices and caring for and supporting its members and communities.
Recent Developments
Enable Merger Agreement with Energy Transfer
InFebruary 2021 , Enable entered into a definitive merger agreement with Energy Transfer, pursuant to which, and subject to the conditions of the merger agreement, all outstanding common units of Enable will be acquired by Energy Transfer in an all-equity transaction. Under the terms of the merger agreement, Enable's common unitholders, includingOGE Energy , will receive 0.8595 of one common unit representing limited partner interests in Energy Transfer for each common unit of Enable. The transaction is subject to the receipt of the required approvals from the holders of a majority of Enable's common units. InApril 2021 , CenterPoint andOGE Energy ,who collectively own approximately 72.9 percent of Enable's common units, delivered written consents approving the merger agreement, and those consents are sufficient to approve the merger. The transaction also is subject to the receipt of anti-trust approvals and other customary closing conditions. The transaction is anticipated to close in 2021. Assuming the transaction closes,OGE Energy will own approximately three percent of Energy Transfer's outstanding limited partner units in lieu of the 25.5 percent interest in Enable that it currently owns.OGE Energy expects to incur transaction costs for investment bankers, advisors and attorneys as part of the transaction. The quarterly distribution currently received from Enable is expected to be replaced by dividends received from Energy Transfer.OGE Energy does not expect significant changes to its cash requirements for funding operations or capital expenditures as a result of the merger between Enable and Energy Transfer. Assuming the successful completion of the merger,OGE Energy intends to exit the midstream segment in a prudent manner.
InFebruary 2021 ,OG&E's service territory experienced an unprecedented, prolonged, cold spell that resulted in record winter peak demand for electricity and extremely high natural gas and purchased power prices. Both the OCC and APSC have approved regulatory mechanisms forOG&E's recovery of the significant fuel and purchased power costs associated with the unprecedented weather event, as further discussed in Note 15 within "Item 1. Financial Statements." As ofMarch 31, 2021 ,OG&E has recorded a$829.4 million regulatory asset for theOklahoma jurisdictional portion of fuel and purchased power costs incurred during this extreme weather event.OG&E has also recorded$102.4 million related to theArkansas jurisdictional portion of the fuel and purchased power costs, which is primarily included within Fuel Clause Under Recoveries in the balance sheets as ofMarch 31, 2021 . InMarch 2021 ,OGE Energy entered into a$1.0 billion unsecured 364-day term loan agreement and borrowed the full$1.0 billion to help cover the significant fuel and purchased power costs incurred during the extreme cold weather event. Further discussion can be found in Note 11 within "Item 1. Financial Statements." TheOklahoma andArkansas legislatures have both passed legislation that would help alleviate the immediate burden on customers andOGE Energy by securitizing the cost impacts from this extreme winter event. The securitization of these costs could spread out the recovery of the costs over a longer period of time at a lower finance carrying charge. OnApril 26, 2021 ,OG&E filed an application seeking OCC approval to securitize its costs related to theFebruary 2021 extreme cold weather event. Further discussion can be found in Note 15 within "Item 1. Financial Statements."
COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout theU.S. and world. In an effort to contain COVID-19 or slow its spread, theU.S. federal, state and local governments enacted various measures, including orders to close or place restrictions on businesses not deemed "essential," enact "shelter in place" restrictions on residents and practice social distancing when engaging in essential activities. SinceMay 2020 , there have been noOklahoma City -wide orOklahoma state-wide "shelter in place" restrictions. Currently, COVID-19 vaccines are available to allOklahoma andArkansas residents, depending upon the age requirements of the particular vaccine, and the Registrants have provided on-site access to COVID-19 vaccines to their members. The Registrants' top priority is to protect their employees and their families, as well as their customers. The Registrants are taking precautionary measures as directed by health authorities and local and national governments and continue to monitor the outbreak of COVID-19 and whether any occupancy reductions or closures are necessary to help ensure the health and safety of their employees and customers. The OCC and the APSC both issued accounting orders allowing the Registrants to defer for recovery the incremental costs incurred for pandemic-related safety measures and the incremental bad debt resulting from COVID-19, as 34 --------------------------------------------------------------------------------
OG&E's Regulatory Matters
Completed regulatory matters affecting current period results are discussed in Note 15 within "Item 1. Financial Statements."
Summary of OGE Energy Operating Results
OGE Energy's net income was$52.7 million , or$0.26 per diluted share, during the three months endedMarch 31, 2021 as compared to a net loss of$491.8 million , or$2.46 per diluted share, during the same period in 2020. The increase in net income of$544.5 million , or$2.72 per diluted share, is further discussed below. •Net income atOGE Holdings of$37.9 million , or$0.19 per diluted share ofOGE Energy's common stock, during the three months endedMarch 31, 2021 compared to a net loss of$568.0 million , or$2.84 per diluted share ofOGE Energy's common stock, during the three months endedMarch 31, 2020 . The increase was primarily due to the 2020 impact of equity in earnings of Enable related to the impairment ofOGE Energy's investment in Enable, partially offset by a decrease in income tax benefit related to this impairment charge. The increase in equity in earnings of Enable was also impacted by increased net income from Enable's transportation and storage business resulting from higher average natural gas sales prices. •A decrease in net income atOG&E of$8.7 million , or$0.04 per diluted share ofOGE Energy's common stock, was primarily due to lower gross margin driven by losses from the guaranteed flat bill program during theFebruary 2021 extreme cold weather event, higher depreciation and amortization expense due to additional assets being placed into service and higher interest expense driven by increased long-term debt outstanding, partially offset by lower other operation and maintenance expense. •A decrease in net income of other operations (holding company) of$52.7 million , or$0.27 per diluted share ofOGE Energy's common stock, was primarily due to a lower income tax benefit driven by the 2020 impairment ofOGE Energy's investment in Enable. The income tax benefit impact was due to a consolidating income tax adjustment related to the interim period that was eliminated in the ordinary course of business over the remainder of 2020.
2021 Outlook
OG&E's 2021 earnings guidance remains unchanged and is between$352 million to$373 million , or$1.76 to$1.86 per average diluted share. Based on first quarter 2021 results, including the impacts of theFebruary 2021 extreme cold weather event and strong mitigation efforts,OG&E's full year earnings are currently projected to be in the lower half of this range. The guidance assumes, among other things, approximately 200 million average diluted shares outstanding and normal weather for the year. As indicated in its 2020 Form 10-K , OGE Energy is not issuing 2021 consolidated earnings guidance due to Enable not issuing an earnings outlook due to the announced merger between Enable and Energy Transfer. See OGE Energy's 202 0 Form 10-K for other key factors and assumptions underlying its 2021 guidance.
Non-GAAP Financial Measures
Gross margin is defined byOG&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 except for the portion of fuel and purchased power costs related to customers under the guaranteed flat bill program.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 35 -------------------------------------------------------------------------------- calculated and presented in accordance with GAAP, for the three months endedMarch 31, 2021 and 2020, 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,OGE Energy 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 endedMarch 31, 2021 and 2020, see "OGE Holdings (Natural Gas Midstream Operations) Results of Operations" below.
Results of Operations
The following discussion and analysis presents factors that affected the Registrants' results of operations for the three months endedMarch 31, 2021 as compared to the same period in 2020 and the Registrants' financial position atMarch 31, 2021 . Due to seasonal fluctuations and other factors, the Registrants' operating results for the three months endedMarch 31, 2021 are not necessarily indicative of the results that may be expected for the year endingDecember 31, 2021 or for any future period. The following information should be read in conjunction with the condensed financial statements and notes thereto. Known trends and contingencies of a material nature are discussed to the extent considered relevant. Three Months EndedOGE Energy March 31 , (In millions except per share data) 2021
2020
Net income (loss)$ 52.7 $ (491.8) Basic average common shares outstanding 200.1
200.2
Diluted average common shares outstanding 200.1
200.2
Basic earnings (loss) per average common share$ 0.26 $ (2.46) Diluted earnings (loss) per average common share$ 0.26 $ (2.46) Dividends declared per common share$ 0.40250 $ 0.38750 Results by Business Segment Three Months Ended March 31, (In millions) 2021 2020 Net income (loss): OG&E (Electric Utility)$ 11.2 $ 19.9 OGE Holdings (Natural Gas Midstream Operations) (A) 37.9 (568.0) Other operations (A)(B) 3.6 56.3 OGE Energy net income (loss)$ 52.7 $ (491.8) (A)In 2020,OGE Energy recorded a$780.0 million impairment ($589.6 million after tax) on its investment in Enable, as further discussed in Note 4 within "Item 1. Financial Statements." Other operations' 2020 results included a$52.8 million tax benefit impact due to a consolidating tax adjustment related to the interim period that eliminated in the ordinary course of business over the remainder 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
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Three Months
Ended
March 31,
(Dollars in millions) 2021 2020
Operating revenues $ 1,630.6 $ 431.3
Cost of sales 1,346.8 135.0
Other operation and maintenance 110.3 121.0
Depreciation and amortization 98.7 94.4
Taxes other than income 25.7 23.9
Operating income 49.1 57.0
Allowance for equity funds used during construction 1.3 1.3
Other net periodic benefit expense (0.9) (0.5)
Other income 1.7 1.5
Other expense 0.4 0.5
Interest expense 38.4 36.9
Income tax expense 1.2 2.0
Net income $ 11.2 $ 19.9
Operating revenues by classification:
Residential $ 573.3 $ 172.3
Commercial 309.7 94.1
Industrial 147.7 42.6
Oilfield 161.3 39.0
Public authorities and street light 123.9 35.6
Sales for resale - (0.1)
System sales revenues 1,315.9 383.5
Provision for rate refund - (0.6)
Integrated market 302.1 7.2
Transmission 36.3 34.2
Other (23.7) 7.0
Total operating revenues $ 1,630.6 $ 431.3
Reconciliation of gross margin to revenue:
Operating revenues $ 1,630.6 $ 431.3
Cost of sales 1,346.8 135.0
Gross margin $ 283.8 $ 296.3
MWh sales by classification (In millions)
Residential 2.5 2.2
Commercial 1.5 1.5
Industrial 1.0 1.1
Oilfield 1.0 1.1
Public authorities and street light 0.6 0.6
System sales 6.6 6.5
Integrated market 0.3 0.3
Total sales 6.9 6.8
Number of customers 871,494 859,628
Weighted-average cost of energy per kilowatt-hour (In cents)
Natural gas 43.843 1.663
Coal 1.786 1.905
Total fuel 21.168 1.529
Total fuel and purchased power 18.401 1.886
Degree days (A)
Heating - Actual 2,066 1,649
Heating - Normal 1,800 1,800
Cooling - Actual 6 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.
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OG&E's net income decreased $8.7 million , or 43.7 percent, during the three
months ended March 31, 2021 , as compared to the same period in 2020. The
following section discusses the primary drivers for the decrease in net income
during the three months ended March 31, 2021 , as compared to the same period in
2020.
Operating revenues increased $1.2 billion , primarily due to increased cost of
sales as a result of the February 2021 extreme cold weather event and related
extremely high fuel costs. Cost of sales are typically recovered from customers.
Gross margin decreased $12.5 million , or 4.2 percent, primarily driven by the
below factors.
(In millions) $ Change
Guaranteed flat bill program (A) $ (31.6)
Industrial and oilfield sales (1.4)
Non-residential demand and related revenues (1.0)
Price variance 10.5
Quantity impacts (primarily weather) (B) 7.7
New customer growth 1.8
Other 1.5
Change in gross margin $ (12.5)
(A)Decreased primarily due to the loss from the guaranteed flat bill program
related to the February 2021 extreme cold weather event. The guaranteed flat
bill program allows qualifying customers the opportunity to purchase their
electricity needs at a set monthly price for an entire year, which resulted in
those customers not being allocated incremental fuel and purchased power costs
incurred during the February 2021 extreme cold weather event.
(B)Increased primarily due to a 25.3 percent increase in heating degree days.
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
increased $1.2 billion , primarily driven by the below factors.
(In millions) $ Change % Change
Fuel expense (A) $ 672.1 *
Purchased power costs:
Purchases from SPP (B) 537.6 *
Wind (C) (1.2) (8.5) %
Other 3.2 - %
Transmission expense 0.1 0.5 %
Change in cost of sales $ 1,211.8
*Change is greater than 100 percent variance.
(A)Increased primarily due to higher fuel costs related to the February 2021
extreme cold weather event.
(B)Increased primarily due to higher market prices as a result of increased fuel
costs related to the February 2021 extreme cold weather event.
(C)Decreased primarily due to a decrease of 12.5 percent in MWs purchased.
Other operation and maintenance expense decreased $10.7 million , or 8.8 percent,
primarily driven by the below factors.
(In millions) $ Change % Change
Corporate overheads and allocations$ (5.1) (14.3) % Capitalized labor (3.4) 11.8 % Payroll and benefits (3.1) (4.8) % Other (2.4) (6.3) % Contract technical and construction services 3.3
33.1 %
Change in other operation and maintenance expense (A)
(A)
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Depreciation and amortization expense increased
Taxes other than income increased
Interest on long-term debt increased$1.8 million , or 4.9 percent, primarily due to increased long-term debt outstanding. Income tax expense decreased$0.8 million , or 40.0 percent, primarily due to lower pretax income, partially offset by reduced tax credit generation.
Three Months
Ended March
31,
(In millions) 2021 2020
Operating revenues $ - $ -
Cost of sales - -
Other operation and maintenance 0.4 0.6
Depreciation and amortization - -
Taxes other than income 0.1 0.1
Operating loss (0.5) (0.7)
Equity in earnings (losses) of unconsolidated affiliates (A) 53.2 (746.5)
Other expense 0.5 -
Income (loss) before taxes 52.2 (747.2)
Income tax expense (benefit) 14.3 (179.2)
Net income (loss) attributable to OGE Holdings $ 37.9 $ (568.0) (A)In 2020,
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 toOGE Energy's equity in earnings (losses) of unconsolidated affiliates and the reconciliation of the difference betweenOGE 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 section presents summarized financial information of Enable for the three months endedMarch 31, 2021 and 2020 and related discussion of the primary drivers for the changes during the period. Three Months EndedMarch 31 , (In millions) 2021
2020
Reconciliation of gross margin to revenue: Total revenues$ 970 $ 648 Cost of natural gas and NGLs 519 226 Gross margin$ 451 $ 422 Operating income$ 206 $ 146 Net income$ 155 $ 103 39
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Three Months Ended
March 31,
2021 2020
Natural gas gathered volumes - TBtu/d 4.09 4.52
Natural gas processed volumes - TBtu/d (A) 2.06 2.44
NGLs sold - MBbl/d (B) 119.86 121.32
Crude oil and condensate gathered volumes - MBbl/d 113.79 141.25
Transported volumes - TBtu/d 6.10 6.56
(A)Includes volumes under third-party processing arrangements. (B)Excludes condensate. NGLs sold includes volumes of NGLs withdrawn from inventory or purchased for system balancing purposes.
OGE Holdings' net income was$37.9 million compared to net loss of$568.0 million during the three months endedMarch 31, 2021 and 2020, respectively. The increase was primarily due to the 2020 impact of the impairment ofOGE Energy's investment in Enable, as discussed in Note 4 within "Item 1. Financial Statements."OGE Holdings' net income during the three months endedMarch 31, 2021 was also impacted by an increase in Enable's net income. The following table presents summarized information regarding Enable's income statement changes for the three months endedMarch 31, 2021 , as compared to the same period in 2020, and the corresponding impact those changes had onOGE Energy's equity in earnings of Enable. See Note 4 within "Item 1. Financial Statements" for further discussion ofOGE Energy's equity investment in Enable. The increase in Enable's net income was primarily driven by the below factors.
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