OGE Energy Corp. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. OGE Energy operates a regulated electric utility, OG&E, and holds a 26.3% limited-partner interest in Enable Midstream Partners, accounted for under the equity method.
Financial results and liquidity
Amounts are in millions, except per-share data.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $719.8 | $754.7 | $1,749.8 | $1,926.9 |
| Operating income | $250.8 | $248.1 | $434.4 | $451.7 |
| Net income | $111.2 | $187.3 | $241.9 | $337.4 |
| Diluted EPS | $0.55 | $0.94 | $1.21 | $1.69 |
| Operating cash flow | — | — | $609.1 | $466.5 |
- OG&E gross margin, a company-defined non-GAAP measure, rose 2.4% to $460.0 million in Q3 and 1.0% to $1,067.5 million year to date, despite lower revenues. Lower fuel and purchased-power costs largely explain the revenue declines; these costs are generally passed through to customers.
- OG&E net income increased 3.6% to $162.9 million in Q3, but decreased 2.3% to $249.0 million year to date. The midstream segment recorded losses attributable to OGE Energy of $50.0 million in Q3 and $9.2 million year to date, versus income of $28.2 million and $81.6 million, respectively, in 2014.
- Cash from operations increased $142.6 million year to date, primarily from higher fuel recoveries. Investing cash outflow was $335.9 million, mainly capital expenditures of $375.0 million; financing cash outflow was $235.4 million, including $149.7 million in dividends paid. Cash at quarter-end was $43.3 million.
- At September 30, total current assets were $753.1 million and current liabilities $586.8 million. Short-term debt was zero; long-term debt was $2,645.5 million, with $110.0 million due within one year. Revolving facilities totaled $1.15 billion, with $1,148.1 million of net available liquidity.
- Dividends declared were $0.275 per share for Q3 and $0.775 year to date, up from $0.250 and $0.700 in the comparable 2014 periods.
Material changes and unusual items
- OGE Energy’s share of Enable’s goodwill impairment resulted in a $108.4 million pre-tax, non-cash charge. Enable reported a $1,086.4 million impairment of goodwill in its gathering and processing and transportation and storage units. Falling commodity prices, lower producer activity and a higher discount rate contributed to the impairment.
- A $16.2 million Q3 pension settlement charge was recorded at the Company level; it was non-cash and represented accelerated recognition of pension costs. OGE Energy separately identified a $4.8 million non-cash pension settlement charge associated with Enable in its ongoing-earnings reconciliation.
- Management’s non-GAAP ongoing EPS was $0.90 for Q3, excluding the specified impairment and pension charges, compared with GAAP EPS of $0.55 and 2014 GAAP/ongoing EPS of $0.94. Ongoing earnings should not be viewed as a substitute for GAAP results.
- Enable’s reported net income was a loss of $985 million in Q3 and $817 million for nine months, compared with income of $139 million and $408 million in 2014. OGE Energy’s equity-method results include basis-difference adjustments.
Guidance, outlook and risks
- For 2015, management projected ongoing consolidated EPS at the low end of its $1.76–$1.89 range. OG&E was projected at the low end of its $1.41–$1.49 range, citing milder-than-normal summer weather and environmental-compliance assets in service but not yet reflected in rates. Enable distributable cash flow was projected at approximately $140 million.
- Management’s stated longer-term objectives included 3%–5% annual weather-normalized OG&E earnings growth and dividend increases of approximately 10% annually through 2019. These are objectives, not assurances.
- OG&E estimated approximately $1.1 billion of capital costs for its environmental compliance and Mustang modernization plans. Cost recovery and approval remained uncertain: an administrative law judge recommended denying the Mustang plan and deferring many cost-recovery issues; the OCC proceeding was unresolved at filing.
- OG&E had announced its intent to file a general rate case by November 30, 2015. It also filed an interim Arkansas rate schedule for certain environmental expenditures.
- Environmental and regulatory exposure includes MATS and Regional Haze compliance, the Clean Power Plan, and a pending Sierra Club appeal concerning Muskogee Unit 6. Potential outcomes in the appeal could include additional controls and penalties; the Company could not estimate a reasonably possible loss range.
- Enable’s outlook was exposed to commodity prices and producer activity; management expected lower producer activity to constrain future distribution growth. Other stated risks include weather, fuel and power prices, regulation, environmental requirements, financing access and credit ratings.
Important facts for investors to verify
- Whether the Enable impairment is a one-time valuation adjustment or signals sustained deterioration in midstream cash flows and distributions.
- Whether OGE Energy achieves its 2015 ongoing EPS and Enable distributable-cash-flow outlook, and how results reconcile to GAAP.
- Final OCC decisions on environmental-plan approval, cost recovery, Mustang modernization and the pending rate case.
- Actual capital spending, financing needs and customer-rate impacts for the approximately $1.1 billion environmental and modernization program.
- Developments in the Muskogee Unit 6 appeal, MATS compliance requirements and state implementation of the Clean Power Plan.
- Enable’s distribution capacity and OGE Energy’s reliance on those distributions to support capital needs and dividends.