OGE Energy (OGE) - 2019 Q4 - Annual Report

Part I Business OGE Energy Corp. operates as a holding company with an electric utility segment and a 25.5% equity investment in natural gas midstream operations, aiming for reliable service and growth - The Company operates through two primary business segments: electric utility (OG&E) and natural gas midstream operations (investment in Enable)[21] - The electric utility segment, OG&E, is the largest electric utility in Oklahoma and also serves western Arkansas, generating, transmitting, distributing, and selling electric energy[22] - The natural gas midstream operations segment consists of a 25.5% ownership interest in Enable Midstream Partners, LP, involved in gathering, processing, transporting, and storing natural gas[23] - Company strategy aims to maintain its diversified asset position, grow OG&E's earnings at a long-term rate of 4-6%, maintain strong credit ratings, and use cash distributions from Enable to fund capital needs and dividend growth[25][27] Electric Operations - OG&E OG&E, serving Oklahoma and western Arkansas, is transitioning its generation portfolio to natural gas while its rates and operations are subject to regulatory oversight OG&E System Sales | Year | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | System Sales (Millions of MWh) | 28.4 | 28.1 | 26.3 | OG&E Electric Operating Revenues | Category | 2019 (In millions) | 2018 (In millions) | 2017 (In millions) | | :--- | :--- | :--- | :--- | | Residential | $891.1 | $901.0 | $884.1 | | Commercial | $503.1 | $519.9 | $532.8 | | Industrial | $223.0 | $234.5 | $229.7 | | Oilfield | $204.0 | $193.5 | $185.9 | | Total Operating Revenues | $2,231.6 | $2,270.3 | $2,261.1 | OG&E Fuel Mix and Cost | Fuel | Fuel Mix 2019 | Fuel Mix 2018 | Fuel Mix 2017 | Fuel Cost 2019 (¢/kWh) | Fuel Cost 2018 (¢/kWh) | Fuel Cost 2017 (¢/kWh) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Natural gas | 64% | 48% | 39% | 2.188 | 2.517 | 2.821 | | Coal | 28% | 45% | 54% | 2.029 | 2.025 | 2.069 | | Renewable | 8% | 7% | 7% | — | — | — | - OG&E's generation capability totals 7,081 MW, with 67.3% from natural gas, 26.2% from coal, 6.3% from wind, and 0.2% from solar[47] Natural Gas Midstream Operations - Enable Enable Midstream Partners operates natural gas and crude oil infrastructure through its Gathering and Processing and Transportation and Storage segments, serving diverse customers across multiple basins and states - Enable's Gathering and Processing segment provides services for natural gas, crude oil, condensate, and produced water, serving major unconventional shale plays[57][58] - Enable's Transportation and Storage segment operates interstate (EGT, MRT) and intrastate (EOIT) natural gas pipelines, serving a diverse customer base including utilities, producers, and industrial end-users[62][63] - For 2019, Enable's top ten natural gas producer customers accounted for approximately 68% of its gathered volumes, with significant customer concentration from CenterPoint (26% of EGT's service revenue) and Spire Inc. (70% of MRT's service revenue)[59][64][65] Risk Factors The company faces diverse regulatory, operational, and financial risks, with significant exposure to the performance and commodity price volatility of its Enable Midstream investment - Regulatory Risks: Profitability is highly dependent on the ability to recover costs in a timely manner through rates approved by the OCC, APSC, and FERC, while environmental compliance costs are significant and could increase with future regulations[75][80] - Operational Risks: Operations are exposed to disruptions from severe weather, cybersecurity attacks, and technological changes like distributed generation, with the company's Smart Grid program increasing potential cybersecurity risks[90][100][104] - Financial Risks: Market performance and interest rate changes can adversely affect pension plan funding and costs, and reductions in credit ratings could increase financing costs[105][115] - Risks Associated with Enable Investment: The company does not control Enable, and its earnings are subject to Enable's performance, which is influenced by volatile commodity prices, contract renewal risks, and dependence on the drilling decisions of producers[118][119][122][124] Properties OG&E operates 7,081 MW of generation capacity across diverse fuel types and an extensive transmission and distribution system, with significant recent capital investments OG&E Generating Capability by Fuel Type | Fuel Type | Capability (MW) | Percentage of Total | | :--- | :--- | :--- | | Natural Gas | 4,766 | 67.3% | | Coal | 1,854 | 26.2% | | Wind | 449 | 6.3% | | Solar | 12 | 0.2% | | Total | 7,081 | 100.0% | - OG&E's transmission system includes 60 substations and 5,399 structure miles of lines, while its distribution system includes 380 substations and over 32,000 structure miles of overhead lines across Oklahoma and Arkansas[222] - From 2017 to 2019, the company made gross property, plant, and equipment additions of $2.5 billion, representing 19.5% of the gross PP&E balance at year-end 2019[223] Part II Selected Financial Data This section summarizes OGE Energy Corp.'s key financial and operational data over five years, detailing trends in revenues, net income, and assets Selected Financial Data (2017-2019) | (In millions, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Operating revenues | $2,231.6 | $2,270.3 | $2,261.1 | | Operating income | $504.3 | $489.6 | $531.9 | | Net income | $433.6 | $425.5 | $619.0 | | Diluted EPS | $2.16 | $2.12 | $3.10 | | Dividends declared per share | $1.50500 | $1.39500 | $1.27000 | | Total assets | $11,024.3 | $10,748.6 | $10,412.7 | | Long-term debt | $3,195.2 | $3,146.9 | $2,999.4 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's 2019 financial performance, noting increased net income driven by OG&E, partially offset by Enable's lower equity earnings, and provides a 2020 outlook - Net income increased by $8.1 million in 2019 compared to 2018, primarily due to a $22.2 million increase at OG&E, offset by a $27.4 million decrease from the OGE Holdings segment (Enable investment)[238][240] - The 2020 earnings guidance is projected to be between $440 million and $463 million of net income, or $2.19 to $2.31 per diluted share[253] 2020 Outlook by Segment (Net Income) | Segment | Projected 2020 Net Income (In millions) | Projected 2020 EPS | | :--- | :--- | :--- | | OG&E | $346 - $357 | $1.72 - $1.78 | | OGE Holdings (Enable) | $94 - $106 | $0.47 - $0.53 | Results of Operations In 2019, OG&E's net income increased due to higher gross margin, while OGE Holdings' net income decreased primarily from lower equity earnings in Enable due to a goodwill impairment Net Income by Business Segment | Segment | 2019 (In millions) | 2018 (In millions) | | :--- | :--- | :--- | | OG&E (Electric Utility) | $350.2 | $328.0 | | OGE Holdings (Natural Gas Midstream) | $81.4 | $108.8 | | Other operations | $2.0 | $(11.3) | | Consolidated Net Income | $433.6 | $425.5 | - OG&E's gross margin increased by $66.9 million, or 4.9%, in 2019, primarily due to a favorable price variance of $43.6 million resulting from the expiration of the cogeneration credit rider[268][269] - OGE Holdings' income before taxes decreased by $43.8 million, mainly due to lower equity in earnings from Enable, which was negatively impacted by an $86.0 million goodwill impairment charge and a $38.0 million increase in interest expense[284][285] Liquidity and Capital Resources The company's liquidity relies on operations, debt, and Enable distributions, with projected capital expenditures of $3.51 billion through 2024, supported by revolving credit facilities and strong credit ratings Consolidated Cash Flows | Cash Flow Activity | 2019 (In millions) | 2018 (In millions) | | :--- | :--- | :--- | | Net cash from operating activities | $681.5 | $951.1 | | Net cash used in investing activities | $(624.7) | $(576.0) | | Net cash used in financing activities | $(151.1) | $(295.2) | Estimated Capital Expenditures 2020-2024 | Category | Total 5-Year Capex (In millions) | | :--- | :--- | | Transmission | $190 | | Oklahoma distribution | $1,115 | | Arkansas distribution | $90 | | Generation | $405 | | Reliability, resiliency, technology | $1,430 | | Other | $280 | | Total | $3,510 | - The company has unsecured five-year revolving credit facilities totaling $900.0 million, split evenly between OGE Energy and OG&E, maturing in March 2023[318] Environmental Laws and Regulations The company adheres to extensive environmental regulations, significantly reducing CO2 emissions and managing coal ash disposal, while navigating rules like the Affordable Clean Energy rule - OG&E has reduced CO2 emissions by over 40% compared to 2005 levels and targets a 50% reduction by 2030[355] - The EPA's Affordable Clean Energy rule, published in July 2019, will require Oklahoma to develop CO2 emission limitations for OG&E's existing coal-fired units, with a state plan due by July 2022[356] - The company is managing coal combustion residuals (coal ash) under EPA and state-approved programs, recycling approximately 86% of its ash for use in the concrete and cement industries[362][364] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2019, including income, balance sheet, and cash flow statements, along with detailed notes and the independent auditor's report Consolidated Statements of Income The Consolidated Statements of Income detail the company's revenues, costs, and expenses, showing a net income of $433.6 million for 2019 and diluted earnings per share of $2.16 Consolidated Income Statement Highlights | Line Item | 2019 (In millions) | 2018 (In millions) | 2017 (In millions) | | :--- | :--- | :--- | :--- | | Operating Revenues | $2,231.6 | $2,270.3 | $2,261.1 | | Operating Income | $504.3 | $489.6 | $531.9 | | Equity in earnings of unconsolidated affiliates | $113.9 | $152.8 | $131.2 | | Net Income | $433.6 | $425.5 | $619.0 | | Diluted EPS | $2.16 | $2.12 | $3.10 | Consolidated Balance Sheets The Consolidated Balance Sheets present the company's financial position at year-end 2019, with total assets of $11.02 billion and total stockholders' equity of $4.14 billion Consolidated Balance Sheet Highlights | Line Item | Dec 31, 2019 (In millions) | Dec 31, 2018 (In millions) | | :--- | :--- | :--- | | Total current assets | $430.2 | $557.3 | | Net property, plant and equipment | $9,044.6 | $8,643.8 | | Total Assets | $11,024.3 | $10,748.6 | | Total current liabilities | $657.9 | $869.4 | | Long-term debt | $3,195.2 | $2,896.9 | | Total Liabilities | $6,884.8 | $6,743.5 | | Total Stockholders' Equity | $4,139.5 | $4,005.1 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows show a decrease in operating cash flow to $681.5 million in 2019, with increased cash used in investing and decreased cash used in financing activities Consolidated Cash Flow Summary | Category | 2019 (In millions) | 2018 (In millions) | 2017 (In millions) | | :--- | :--- | :--- | :--- | | Net cash provided from operating activities | $681.5 | $951.1 | $784.5 | | Net cash used in investing activities | $(624.7) | $(576.0) | $(821.9) | | Net cash provided from (used in) financing activities | $(151.1) | $(295.2) | $51.5 | | Net Change in Cash | $(94.3) | $79.9 | $14.1 | Notes to Consolidated Financial Statements The notes provide detailed supplementary information on accounting policies, revenue recognition, the Enable investment, debt, retirement plans, and regulatory matters - Regulatory Accounting (Note 1): As a regulated utility, OG&E defers certain costs as regulatory assets for future recovery and certain credits as regulatory liabilities for future refunds, totaling $306.0 million in non-current regulatory assets and $1.22 billion in non-current regulatory liabilities at year-end 2019[412][415] - Investment in Enable (Note 5): The company's 25.5% investment in Enable is accounted for using the equity method, with OGE recording $113.9 million in equity earnings from Enable and receiving $144.0 million in distributions in 2019[494][502] - Retirement Plans (Note 13): The company's pension plan had a funded status deficit of $85.8 million at the end of 2019, an improvement from the $93.1 million deficit in 2018, with the company contributing $20.0 million to the plan in 2019[565][570] - Rate Matters (Note 16): Key regulatory activities in 2019 included the approval of a $3.3 million revenue increase in Arkansas, OCC approval for the acquisition of two power plants, and a settlement in an Oklahoma rate review that resulted in no change to base rates[636][637][643] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[677] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2019[681] - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[685] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information on directors, executive officers, corporate governance, compensation, and security ownership is incorporated by reference from the company's definitive proxy statement - Details for Items 10 through 14 are incorporated by reference from the Company's 2020 annual meeting proxy statement[697] - The company maintains a code of ethics for its CEO and senior financial officers, available on its website[695] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K, including those for Enable Midstream Partners, LP - The financial statements of Enable Midstream Partners, LP, an equity method investee, are filed as Exhibit 99.01[702] - A list of exhibits includes key agreements such as credit agreements, indentures, and executive compensation plans[703][705][706]