OGE Energy Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results. OGE Energy is a holding company whose principal operations are regulated electric utility OG&E and a 25.6% equity-method investment in natural gas midstream partnership Enable.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $698.8M | $716.8M | $1,758.5M | $1,759.2M |
| Operating income | $227.3M | $249.1M | $431.6M | $446.2M |
| Net income | $205.1M | $183.4M | $370.8M | $324.2M |
| Diluted EPS | $1.02 | $0.92 | $1.85 | $1.62 |
| OG&E gross margin | $454.4M | $461.1M | $1,094.9M | $1,062.7M |
Revenue was down 2.5% in Q3 and essentially flat for the first nine months. Net income increased 11.8% in Q3 and 14.4% year to date, while operating income declined in both comparisons. Lower income tax expense—reflecting the federal tax-rate reduction, tax credits and other items—was a major contributor to higher net income. Q3 OG&E gross margin fell 1.5%; the nine-month measure rose 3.0%. Gross margin is a company-defined non-GAAP measure.
Enable contributed $40.1M to equity earnings in Q3 and $103.3M for nine months, versus $33.6M and $98.6M, respectively, in 2017. Enable’s net income was $129M for Q3 and $320M for nine months. OGE received $35.3M of Enable distributions in Q3 and $105.9M year to date.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $711.7M, up from $463.7M. Investing used $413.1M, including $413.8M of capital expenditures, versus $660.3M used in 2017. Financing used $222.3M, compared with $196.3M provided in 2017.
- Cash and cash equivalents were $90.7M at September 30, 2018, versus $14.4M at year-end 2017. Short-term debt was zero, down from $168.4M. Revolving credit facilities totaled $900M, with $899.7M reported as available liquidity.
- Long-term debt was $2,896.8M, with $249.9M due within one year. In August, OG&E issued $400M of 3.80% senior notes due 2028; proceeds supported repayment of $250M of maturing notes, short-term debt and ongoing needs.
- Dividends declared were $0.365 per share for Q3 and $1.03 per share for nine months, compared with $0.3325 and $0.9375 in 2017.
Material changes and management outlook
- OG&E’s Oklahoma rate settlement took effect July 1, 2018 and reduced annual Oklahoma retail rates by a net $64M, including the effects of the Mustang Modernization Plan and the 2017 Tax Act. The settlement also provided regulatory-asset treatment for specified Dry Scrubber costs, subject to future prudence and used-and-useful determinations.
- Management raised 2018 consolidated earnings guidance to $410M–$418M, or $2.05–$2.09 per diluted share, from prior guidance of $380M–$410M. OG&E guidance is $318M–$322M; Enable’s earnings contribution is projected at $100M–$104M, with approximately $140M of cash distributions expected. Guidance assumes normal weather for the balance of the year and an approximately 13% consolidated effective tax rate.
- OG&E’s 2018 Integrated Resource Plan identified a capacity need. It issued a request for proposals and anticipated filing pre-approval cases in Oklahoma and Arkansas in Q4 2018. OG&E exercised its option to terminate the AES 320-MW cogeneration contract effective January 15, 2019, and is seeking replacement capacity.
- OG&E had invested $483.5M in the Sooner Dry Scrubbers by quarter-end; estimated total cost is $532M. Unit 1 entered service in October 2018; Unit 2 was expected to be completed in late 2018 or early 2019.
Risks, contingencies and unusual items
- A $12.8M pension settlement charge was recorded in Q3 following increased retirements and lump-sum payments. The filing says it was noncash and accelerated costs otherwise expected in future periods.
- A pending FERC complaint seeks to reduce OG&E’s transmission return on equity from 10.60% to 7.85%. The company reserved an amount within the requested range; each 25-basis-point reduction could lower annual transmission revenue by about $1.5M. The outcome and timing are uncertain.
- Environmental compliance rules and litigation create potential cost and recovery uncertainty. The Oklahoma Supreme Court ruled that the OCC lacked authority to pre-approve the Dry Scrubber project under the cited statute; OG&E plans to seek recovery in a future rate review. The company also faces uncertainty around federal air-quality and greenhouse-gas rules.
- OG&E’s Arkansas tax-adjustment rider began October 1, 2018; approximately $7.7M of tax-related amounts were refunded in October. Estimated tax reserves and refunds have true-up mechanisms. A $22.8M tax-related reserve remained at September 30.
- Credit ratings were downgraded during 2018: S&P lowered OGE Energy and OG&E to BBB+; Moody’s lowered them to Baa1 and A2, respectively, with negative outlooks; Fitch lowered OGE Energy to BBB+ and OG&E to A, with stable outlooks. The filing states that borrowing-cost increases under credit agreements were expected to be immaterial.
Key investor verification points
- Track execution of the raised 2018 earnings guidance, especially weather, tax assumptions and Enable’s contribution and distributions.
- Monitor the FERC transmission-return complaint, potential refunds and the related impact on utility revenue.
- Confirm Dry Scrubber completion, final project costs and whether future regulators permit full cost recovery.
- Review capacity procurement following the AES contract termination and any resulting capital, rate or reliability implications.
- Assess credit-rating developments, refinancing needs, and Enable’s regulatory and commodity-related exposure and distribution capacity.