OGE Energy Corp. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. OGE Energy operates a regulated electric utility, OG&E, and holds a 26.3% equity-method investment in natural-gas midstream partnership Enable. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $743.9 | $719.8 | $1,728.4 | $1,749.8 |
| Operating income | $257.3 | $250.8 | $421.1 | $434.4 |
| Net income | $183.6 | $111.2 | $280.3 | $241.9 |
| Diluted EPS | $0.92 | $0.55 | $1.40 | $1.21 |
| OG&E gross margin | $474.1 | $460.0 | $1,083.0 | $1,067.5 |
OG&E gross margin is a company-defined non-GAAP measure: revenue less fuel, purchased power and certain transmission costs. Q3 dividends declared were $0.3025 per share versus $0.2750; nine-month dividends were $0.8525 versus $0.7750.
- Cash flow, nine months: Operating cash flow was $426.9, down from $609.1; capital expenditures were $466.7 versus $375.0; investing cash outflow was $440.5 versus $335.9. Financing cash outflow was $61.6 versus $235.4. Cash ended at zero, down from $75.2 at year-end 2015.
- Debt and liquidity at September 30: Short-term debt was $213.2; long-term debt was $2,505.2, with $124.9 due within one year. The company reported $935.1 of net available liquidity under its revolving credit facilities, which total $1,150.0. It reported compliance with debt agreements.
- Balance sheet: Total assets were $9,784.0 and total liabilities $6,338.8. Current assets of $547.1 were below current liabilities of $795.3.
Material changes versus comparable periods
- Net income rose $72.4 in Q3 and $38.4 for the first nine months. The largest driver was improved equity earnings from Enable compared with 2015, when Enable recorded a substantial goodwill impairment. OGE’s equity earnings changed from a $71.9 loss to $34.5 income in Q3, and from a $12.0 loss to $79.5 income year to date. The comparison is materially affected by the 2015 impairment and should not be read as equivalent recurring growth.
- OG&E’s nine-month net income fell $10.7 despite gross margin increasing $15.5; higher operating and maintenance expense, depreciation and income tax expense more than offset the margin increase. Q3 OG&E net income declined $3.0.
- Consolidated revenue was up 3.3% in Q3 but down 1.2% year to date. For the first nine months, OG&E system sales were 20.6 million MWh versus 21.3 million; customer count increased to 832,234 from 821,596.
- Operating cash flow declined 29.9%, primarily reflecting fuel-clause cash-flow timing: higher fuel refunds in 2016 versus higher fuel recoveries in 2015. Short-term debt increased from zero at year-end, while the company paid $110.1 of long-term debt during the period.
Outlook, management commentary and risks
- 2016 guidance: Net income of $344–$366, or $1.72–$1.83 per diluted share. Assumptions include approximately 200 million diluted shares, normal weather for the remainder of the year, and a final OCC rate-case order before year-end providing adequate relief.
- Oklahoma rate case: OG&E requested a $92.5 annual increase and a 10.25% return on equity. It implemented a $69.5 annual interim increase effective July 1, subject to refund. By September 30, $23.6 of interim-rate revenue had been recorded, with $21.0 reserved. Staff and intervenor recommendations differed materially from the company’s request.
- Arkansas rate case: OG&E requested a $16.5 increase; a hearing was scheduled for the second quarter of 2017.
- Major projects: OG&E estimated dry-scrubber costs at $547.5, with $138.6 invested by September 30; completion was scheduled by 2019. The Mustang modernization plan was estimated at $424.9, with $133.6 invested. The OCC approved the dry-scrubber project but not its cost recovery; appeals were pending. The OCC had denied the broader environmental plan and Mustang pre-approval.
- Enable exposure: Enable’s Q3 net income was $110 million versus a $985 million loss in 2015, which included the goodwill impairment; nine-month net income was $231 million versus a $817 million loss. Management noted that commodity prices and producer activity could pressure Enable’s operations and future distributions. OGE depends in part on Enable distributions, and Enable’s Series A preferred units have priority distribution rights that may constrain cash available to common and subordinated unitholders.
- Other risks and unusual items: Environmental rules, including the Clean Power Plan litigation and pending Muskogee-area sulfur-dioxide designation, could require added compliance spending; cost recovery and timing remain uncertain. The company recorded $8.7 of pension settlement charges in the first nine months of 2016. Management said reasonably possible legal losses beyond accruals were not expected to be quantitatively material. Operating results are seasonal and not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the OCC’s final Oklahoma rate-case outcome supports the 2016 earnings guidance and how much of the interim revenue remains refundable.
- Whether Enable distributions remain sustainable given commodity conditions, operating performance and preferred-unit obligations.
- Project cost, schedule and eventual regulatory recovery for the dry scrubbers and Mustang modernization; also monitor the dry-scrubber appeal.
- Underlying earnings trends excluding the unusually large 2015 Enable impairment comparison, and the extent to which cash flow remains below capital spending.
- Current borrowing capacity and refinancing needs, including the $124.9 of debt due within one year and the renewal of OG&E’s short-term borrowing authority.