OGE Energy Corp. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. OGE Energy operates a regulated electric utility, OG&E, and holds a 26.3% equity-method interest in Enable Midstream Partners. Consolidated operating revenue is primarily OG&E revenue; Enable’s results are reflected mainly through equity earnings and distributions.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $551.4m | $549.9m | $984.5m | $1,030.0m |
| Operating income | $125.9m | $127.2m | $163.8m | $183.6m |
| Net income | $71.5m | $87.5m | $96.7m | $130.7m |
| Diluted EPS | $0.35 | $0.44 | $0.48 | $0.66 |
| Dividends declared per share | $0.275 | $0.250 | $0.550 | $0.500 |
For the quarter, revenue was nearly unchanged, while net income fell $16.0m (about 18%). Six-month revenue declined 4.4% and net income declined $34.0m (about 26%). OG&E’s non-GAAP gross margin was $353.7m in Q2, up 4.3%, and $608.9m for six months, up 0.2%. Lower fuel costs largely reduced revenue and cost of sales; fuel costs are generally passed through to customers.
OG&E’s net income rose $3.3m in Q2 but fell $7.7m for six months. Enable-related earnings were a major consolidated headwind: equity earnings were $16.7m in Q2 versus $28.2m, and $45.0m for six months versus $59.9m. Enable reported Q2 net income of $35m versus $77m, and six-month net income of $121m versus $168m. Management cited lower commodity-related gross margins and, for the half year, lower firm transportation revenue and storage demand fees, as well as unrealized derivative losses.
Cash flow, debt and liquidity
- Six-month operating cash flow was $166.0m, down from $305.8m. Investing cash outflow was $305.7m, compared with $225.7m, primarily reflecting increased capital spending on environmental projects. Financing provided $64.5m, versus an $85.6m outflow, principally because of increased short-term borrowing.
- Capital expenditures, net of allowance for equity funds used during construction, were $331.1m versus $227.7m. Cash was zero at June 30, compared with $75.2m at year-end 2015.
- Short-term debt was $284.4m, versus none at year-end; long-term debt was $2,629.7m. Revolving credit facilities totaled $1.15bn, with $863.9m of net available liquidity. Management expected operating cash, debt financing and Enable distributions to meet anticipated needs over the next three years.
- OGE Energy retired $110m of long-term debt in January. It reported compliance with debt agreements. A further $20m pension contribution was made in July; no additional 2016 contributions were expected.
Outlook, developments and risks
- 2016 guidance: Net income of approximately $344m–$366m, or $1.72–$1.83 per diluted share. Assumptions include about 200m average diluted shares, normal weather, and full recovery of SmartHours lost revenues. The filing cautions that interim results are seasonal and not necessarily indicative of full-year results.
- Rates: OG&E requested a $92.5m annual Oklahoma rate increase. On July 1, 2016, it implemented a $69.5m annual interim increase, subject to refund pending the final order. Staff and intervenor recommendations differed substantially from OG&E’s request. OG&E intended to file an Arkansas rate case in Q3.
- SmartHours recovery: OG&E recorded $36.6m of lost revenues for 2013–2015 and had collected about $15.2m by June 30. An administrative law judge recommended a different calculation method; the OCC’s decision and whether OG&E can retain or recover the recorded balance remained unresolved. Disallowance could result in an impairment charge.
- Environmental and generation investment: The OCC approved the Sooner dry-scrubber project, but not its cost recovery; two parties appealed. Estimated scrubber cost was $547.5m, with $116.8m incurred by June 30. The Mustang modernization estimate was $424.9m, with $103.6m incurred; the OCC had denied pre-approval and related recovery requests. Recovery and final costs remain uncertain. Future environmental rules and regulatory outcomes could raise costs.
- Enable and strategic alternatives: CenterPoint solicited offers for its Enable units and general-partner interest, triggering OGE Energy’s right of first offer. OGE Energy was evaluating its options. Enable’s 10% preferred units rank ahead of common and subordinated units for distributions and may affect cash available to OGE Energy.
- Unusual item: A $8.7m pension settlement charge was recorded in the six months, accelerating costs otherwise expected in future periods. Management attributed earnings pressure also to higher O&M and Louisiana state tax expense.
- Other risks include Enable’s exposure to commodity prices, volumes, competition and financing; regulatory recovery and environmental compliance; weather; and access to capital markets. Management said reasonably possible losses on pending claims above accrued amounts were not expected to be quantitatively material. The filing reported effective disclosure controls.
Key facts for investors to verify
- Final Oklahoma rate-case outcome, refund exposure on interim rates, and the OCC’s SmartHours determination.
- Whether 2016 guidance assumptions—including full SmartHours recovery and normal weather—remain achievable.
- Enable’s earnings, distributions and preferred-unit obligations, plus any outcome of CenterPoint’s sale process or OGE Energy’s right of first offer.
- Dry-scrubber and Mustang project costs, regulatory approvals, appeals, and eventual customer cost recovery.
- Funding for the elevated capital program, short-term borrowing needs, and cash generation relative to dividends and investment spending.