OGE Energy Corp. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited results. OGE Energy operates regulated electric utility OG&E and holds a 26.3% limited-partner interest in Enable Midstream Partners.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $754.7m | $723.2m | $1,926.9m | $2,358.8m |
| Operating income | $248.1m | $260.9m | $451.7m | $480.2m |
| Net income attributable to OGE Energy | $187.3m | $215.2m | $337.4m | $330.0m |
| Diluted EPS | $0.94 | $1.08 | $1.69 | $1.66 |
| Dividends declared per share | $0.25 | $0.20875 | $0.70 | $0.62625 |
Q3 net income fell $27.9m year over year; nine-month net income rose $7.4m. Revenue comparisons are affected by the May 2013 deconsolidation of Enogex and subsequent equity-method accounting for Enable: 2013 nine-month revenue includes midstream operations before deconsolidation, whereas 2014 revenue does not.
OG&E’s electric-utility gross margin was $449.4m in Q3, down $0.8m, and $1,057.3m for nine months, up $37.6m. Management cited milder weather as a drag; higher wholesale transmission revenue and customer growth partly offset it. Q3 consolidated operating income declined, while nine-month consolidated results also reflect changed midstream accounting. Enable equity earnings were $44.7m for Q3 and $131.9m for nine months, versus $46.0m and $64.5m, respectively.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $466.5m, versus $351.2m; capital expenditures were $437.4m, versus $772.9m. Investing cash outflow was $427.3m. Financing cash outflow was $46.0m, versus $386.4m provided in 2013.
- Cash was zero at September 30, 2014. Short-term debt was $411.4m and long-term debt was $2,509.7m; total reported borrowings were approximately $2.92bn. The company reported $736.6m of net available liquidity under revolving credit facilities totaling $1.15bn and said it was in compliance with debt agreements.
- Current assets were $740.0m and current liabilities $869.1m. Management expects operating cash, debt financing, Enable distributions and other sources to meet anticipated needs over the next three years.
Outlook, changes and notable items
- Management expected 2014 consolidated earnings at the low end of prior guidance: $388m–$411m net income, or $1.94–$2.06 diluted EPS. OG&E was projected below its prior $292m–$303m earnings range, primarily due to mild summer weather; Enable and holding-company guidance was unchanged. Guidance assumed normal weather for the rest of 2014.
- OG&E began participating in the SPP Integrated Marketplace on March 1, 2014. This increased purchased-power costs, while fuel and certain purchased-power costs are generally recovered through customer fuel clauses.
- OG&E issued $250m of 4.55% senior notes due 2044 in March and redeemed $140m of 6.50% notes in August, paying a 3.25% premium. The company expected to issue up to $100m of debt to refinance notes due November 2014 and up to $250m for OG&E funding needs, subject to market conditions.
- OG&E’s proposed MATS and Regional Haze compliance plan includes dry scrubbers at Sooner Units 1 and 2 and converting Muskogee Units 4 and 5 to natural gas. Estimated compliance capital costs are approximately $1.1bn; regulatory approval and cost recovery were being sought, with an OCC hearing scheduled for March 2015.
- OG&E faces federal Clean Air Act litigation. Potential pollution-control capital costs could exceed $1.1bn, and civil penalties could be as high as $37,500 per day per violation. The company said it could not estimate a reasonably possible loss and intends to defend the claims.
- Updated mortality tables were expected to increase pension and postretirement liabilities, but the company could not yet quantify the impact and expected to record it in Q4 2014. Adoption of the new revenue-recognition standard was still under evaluation.
Key investor verification points
- Assess how the Enable deconsolidation and equity-method accounting affect year-over-year revenue, earnings and cash-flow comparisons.
- Track 2014 earnings versus guidance, especially OG&E’s weather-sensitive results and Enable distributions and earnings.
- Verify approval, timing, cost recovery and financing for the approximately $1.1bn environmental compliance program.
- Monitor the Clean Air Act litigation, potential penalties and any resulting compliance obligations.
- Review liquidity, planned debt issuance, capital spending and the effect of updated benefit-plan mortality assumptions.