OGE Energy Corp. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; filed February 26, 2016. This is an annual report, not a standalone fourth-quarter filing. OGE Energy operates regulated electric utility OG&E in Oklahoma and western Arkansas and holds a 26.3% equity-method interest in midstream partnership Enable.
Financial and operating results
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $2,196.9 million | $2,453.1 million |
| Operating income | $481.2 million | $536.8 million |
| Net income attributable to OGE Energy | $271.3 million | $395.8 million |
| Diluted EPS | $1.36 | $1.98 |
| Operating cash flow | $865.4 million | $721.6 million |
| Capital expenditures | $547.8 million | $569.3 million |
| Cash and cash equivalents, year-end | $75.2 million | $5.5 million |
| Long-term debt, including current portion | $2,755.6 million | $2,755.3 million |
- OG&E gross margin, a company-defined non-GAAP measure, declined 1.1% to $1,331.9 million. Electric operating revenue fell 10.4%, while cost of sales fell 21.8%; fuel and purchased-power costs are largely passed through to customers.
- OG&E net income was $268.9 million, down from $292.0 million. System sales declined 2.9% to 27.2 million MWh; milder weather, lower wholesale transmission revenue and expiration of the AVEC wholesale contract weighed on margin. Customer count increased about 1.2%.
- Operating cash flow increased 19.9%, primarily from higher fuel recoveries and lower vendor payments. Investing cash use was $500.1 million and financing cash use was $295.6 million. The filing does not present a formal free-cash-flow measure.
- OGE Energy reported $1,148.1 million of net available revolving-credit liquidity at year-end and no short-term debt; cash was $75.2 million. Current liabilities were $752.8 million. Total liabilities were $6,271.4 million and stockholders’ equity was $3,326.0 million.
- Common dividends declared were $1.05 per share versus $0.95 in 2014. The quarterly rate increased 10% to $0.275 effective October 2015.
Material changes versus 2014
- Net income attributable to OGE Energy fell $124.5 million, or 31.5%, and diluted EPS declined $0.62. The main driver was lower midstream earnings, including OGE Energy’s $108.4 million pretax share of Enable’s goodwill impairment. Management’s non-GAAP ongoing EPS was $1.71, excluding the impairment and pension-settlement charges; 2014 ongoing EPS was $1.98.
- Enable reported 2015 revenue of $2.418 billion versus $3.367 billion, operating loss of $712 million versus operating income of $586 million, and net loss of $752 million versus net income of $530 million. The $1,086.4 million goodwill impairment reflected weaker commodity prices, reduced producer activity and lower projected cash flows. OGE Energy’s equity in earnings of unconsolidated affiliates declined to $15.5 million from $172.6 million.
- OG&E’s lower fuel costs reduced reported revenue and cost of sales, while its gross margin declined modestly. Depreciation and amortization increased 10.7% to $299.9 million, primarily as additional assets entered service.
- OG&E’s fuel-clause position shifted from a $68.3 million under-recovery at year-end 2014 to a $61.3 million over-recovery at year-end 2015.
Outlook, risks and unusual items
- 2016 guidance: OGE Energy projected net income of approximately $344–$366 million, or $1.72–$1.83 per diluted share. The forecast included OG&E earnings of $288–$300 million and a $56–$66 million earnings contribution from Enable. OG&E assumptions included normal weather, about 1% weather-adjusted sales growth and new Oklahoma rates taking effect midyear.
- Management’s longer-term objectives included 3–5% annual weather-normalized OG&E earnings growth and dividend increases of approximately 10% annually through 2019. Management expected operating cash flow, debt and equity financing, and Enable distributions to meet anticipated cash needs over the next three years.
- OG&E’s December 2015 Oklahoma rate-case filing requested a $92.5 million increase and a 10.25% return on equity, primarily to recover $1.6 billion of infrastructure additions and higher operating costs. An Arkansas rate case was planned by August 15, 2016; outcomes were unresolved.
- Environmental-plan uncertainty: The OCC denied OG&E’s proposed Environmental Compliance Plan and Mustang modernization pre-approval in December 2015. OG&E had $94.8 million of dry-scrubber construction work in progress at year-end and estimated a further $35 million before May 2016. A February 2016 application sought approval by May 2; absent approval, OG&E said it would consider cancelling scrubber contracts and converting Sooner coal units to natural gas. Recovery of incurred or stranded costs was not assured. The proposed environmental plan’s estimated capital cost was approximately $1.1 billion.
- Enable’s quarterly distribution was $0.318 per unit in January 2016, unchanged from the prior quarter. Management warned that sustained low commodity prices and weaker producer activity could further affect Enable’s operations, financial position and future distributions—an important source of OGE Energy’s cash and dividend support.
- Other key exposures include regulatory recovery and rate-case decisions; environmental rules and litigation; weather and generation reliability; interest rates and capital-market access; pension funding; and cyber, operational and counterparty risks. The filing stated that reasonably possible legal losses in excess of accrued amounts were not expected to be quantitatively material, but did not provide a loss range for certain Clean Air Act litigation.
- Unusual non-cash items included the Enable-related goodwill impairment and pension settlement charges. OGE Energy recorded pension settlement charges of $21.7 million in 2015; management said these accelerated recognition of costs and did not require a cash outlay.
Important facts for investors to verify
- Track the OCC’s decisions on OG&E’s $92.5 million rate request, SmartHours lost-revenue recovery and the Sooner scrubber application, including whether environmental investment costs will be recoverable.
- Reconcile GAAP and ongoing earnings, especially the Enable impairment and pension-settlement adjustments, and assess the sustainability of OG&E earnings apart from those items.
- Review Enable’s producer volumes, commodity exposure, debt and distribution capacity; confirm whether its $0.318-per-unit distribution and OGE Energy’s related cash receipts remain supportable.
- Monitor the 2016 capital program and financing needs, including the $110.2 million of 2016 debt maturities, environmental commitments and any costs arising if the Sooner plan changes.
- Assess whether OG&E achieves forecast rate timing, normal-weather assumptions and sales growth, and whether the stated dividend-growth objective remains consistent with cash generation and regulatory outcomes.