OGE Energy Corp. — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018; this is an annual filing, not a standalone fourth-quarter report. OGE Energy is an Oklahoma-based holding company with two principal businesses: regulated electric utility OG&E, serving Oklahoma and western Arkansas, and a 25.6% equity interest in midstream partnership Enable.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Operating revenues | $2,270.3 million | $2,261.1 million |
| Operating income | $489.6 million | $531.9 million |
| Net income | $425.5 million | $619.0 million |
| Diluted EPS | $2.12 | $3.10 |
| Cash from operating activities | $951.1 million | $784.5 million |
| Capital expenditures | $573.6 million | $824.1 million |
| Cash and cash equivalents at year-end | $94.3 million | $14.4 million |
| Long-term debt, including current portion | $3,146.9 million | $2,999.4 million |
- Operating margin was approximately 21.6% of revenue, versus 23.5% in 2017. OG&E gross margin, a company-defined non-GAAP measure, rose 1.0% to $1,377.8 million.
- OG&E generated net income of $328.0 million, up 7.4%. OGE Holdings, primarily reflecting Enable investment results, reported $108.8 million, down from $325.2 million.
- Enable reported 2018 revenue of $3.431 billion, net income of $485 million, and gross margin of $1.612 billion. OGE Energy recorded $152.8 million in equity earnings and received $141.2 million in distributions.
- Year-end total assets were $10.749 billion, total liabilities $6.744 billion, and stockholders’ equity $4.005 billion. The reported capitalization mix was 56.0% equity and 44.0% long-term debt.
- OGE Energy had no short-term debt outstanding at year-end and reported $899.7 million of available liquidity under its $900 million revolving facilities. The current ratio was approximately 0.64.
- Dividends declared were $1.395 per share for 2018. The quarterly dividend was raised 10% to $0.365 per share effective October 2018.
Changes versus the prior comparable period
- Net income declined $193.5 million, or 31.3%, and diluted EPS fell $0.98. A major factor was the absence of the $245.2 million deferred-tax benefit recorded in 2017 following the Tax Cuts and Jobs Act.
- Operating revenue increased 0.4%, while operating income decreased 8.0%. OG&E’s operating income declined, though its net income increased, primarily on higher gross margin and lower income tax expense.
- Enable’s equity earnings increased $21.6 million, supported mainly by higher gathering and processing volumes and fees. Enable’s transportation and storage operating income declined $19 million.
- Operating cash flow rose 21.2%, while investing cash outflow fell as OG&E capital expenditures declined from the prior year’s elevated environmental and major-project spending.
- OG&E system sales increased 6.8% to 28.1 million MWh, and year-end customer count increased to 849,372 from 841,830.
Outlook, commentary, risks and unusual items
- 2019 guidance: Consolidated net income of approximately $412–$442 million, or $2.05–$2.20 per diluted share. OG&E is projected to earn $311–$325 million; the Enable investment is projected to contribute $104–$117 million. Management assumed normal weather, approximately 1% weather-adjusted sales growth, and new Oklahoma rates by July 1, 2019.
- OG&E’s December 2018 Oklahoma rate filing seeks a $77.6 million annual increase, including recovery of Dry Scrubbers and the Muskogee natural-gas conversion. The outcome and timing were pending. The company had invested $504.3 million in the Sooner Dry Scrubbers by year-end; recovery is subject to regulatory review.
- OG&E also sought pre-approval to acquire two generating plants for $53.5 million, subject to OCC approval, to replace power-purchase capacity contracts expiring in 2019. A proposed Arkansas settlement would increase revenue by $3.3 million, subject to APSC approval.
- Credit ratings were lowered during 2018: S&P ratings for OGE Energy and OG&E moved to BBB+, Moody’s to Baa1 and A2, respectively, and Fitch to BBB+ and A. The filing cites Oklahoma regulatory outcomes, capital spending, tax-law effects and Enable-related risk among the considerations.
- Key risks include timely recovery of utility costs through regulated rates; environmental compliance costs; weather, fuel prices and generation reliability; and dependence on Enable distributions. Enable faces customer and contract concentration, contract renewals, producer drilling and commodity exposure. For example, one customer accounted for about 70% of MRT service revenue, and certain related contracts were due to expire in 2019–2020.
- Other notable exposures include an unresolved FERC complaint seeking a lower transmission return on equity, pension-plan sensitivity to investment returns and discount rates, and a possible $20.4 million non-reimbursable pension/health-care charge if the Enable employee seconding arrangement ends under specified circumstances.
- Management said reasonably possible losses above accrued amounts from pending or threatened legal matters were not expected to be quantitatively material. The financial statement audit opinion was unqualified, and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Progress and final regulatory treatment of OG&E’s $77.6 million Oklahoma rate request and recovery of the Dry Scrubber investment.
- Whether 2019 earnings guidance assumptions, including weather, sales growth, rate timing and the Enable contribution, are achieved.
- OG&E’s plant acquisition approvals and replacement of expiring power-purchase capacity contracts.
- Enable customer contract renewals, especially MRT’s Spire contracts and EGT’s CenterPoint contracts, and any effects of the Spire STL Pipeline.
- Credit-rating and financing developments, capital spending, debt maturities, and the sustainability of dividends and Enable distributions.