OGE Energy Corp. — Q1 2015 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2015, compared with Q1 2014. OGE Energy operates OG&E, a regulated electric utility in Oklahoma and western Arkansas, and holds a 26.3% limited-partner interest in Enable Midstream Partners, accounted for using the equity method. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Operating revenue | $480.1 million | $560.4 million |
| Operating income | $56.4 million | $61.8 million |
| Net income | $43.2 million | $49.3 million |
| Diluted EPS | $0.22 | $0.25 |
| Common dividend declared per share | $0.25 | $0.225 |
| Cash from operations | $139.6 million | $23.2 million |
| Capital expenditures | $108.8 million | $171.8 million |
| Cash and cash equivalents | $1.5 million | $5.5 million at Dec. 31, 2014 |
| Total debt, including current maturities | $2,865.3 million | $2,853.3 million at Dec. 31, 2014 |
| Current assets / current liabilities | $653.3 million / $641.6 million | $705.8 million / $573.3 million at Dec. 31, 2014 |
Operating margin was approximately 11.7% of revenue, versus 11.0% in Q1 2014. OG&E’s gross margin, a company-defined non-GAAP measure, increased 0.6% to $268.5 million. Operating cash flow rose substantially, principally due to cash received from fuel under-recoveries and from partners in jointly owned plants; investing cash outflow decreased, while financing cash flow shifted from $143.8 million provided in Q1 2014 to $34.9 million used in Q1 2015. At March 31, the company reported $1.038 billion of net available liquidity under revolving facilities totaling $1.15 billion, and $109.9 million of short-term debt.
Material changes and management commentary
- Revenue fell $80.3 million (14.3%), but cost of sales declined $81.8 million (27.9%), reflecting lower fuel costs. OG&E gross margin edged up $1.5 million: customer growth and price/mix gains were more than offset by a $10.6 million weather-related quantity decline.
- Consolidated net income declined $6.1 million. OG&E net income fell $3.6 million, mainly from milder weather, higher depreciation and higher interest expense; customer growth and lower operations and maintenance costs partly offset these effects.
- OGE Holdings’ net income decreased $6.6 million as equity earnings from Enable declined. Enable’s lower earnings were primarily associated with lower natural gas and NGL prices and weaker gathering and processing margins. Enable reported Q1 net income of $91 million, versus $149 million; revenue was $616 million, versus $1.002 billion.
- Management’s stated financial objectives include 3%–5% long-term annual OG&E earnings growth on a weather-normalized basis and dividend increases of approximately 10% annually through 2019. Enable cash distributions were expected to grow 3%–7% in 2015 from the Q4 2014 distribution.
Outlook, risks and contingencies
- 2015 consolidated earnings guidance was unchanged at $1.76–$1.89 per diluted share; projected Enable distributable cash flow was $139–$142 million.
- OG&E’s proposed environmental-compliance and Mustang modernization plan is estimated at approximately $1.1 billion. It includes dry scrubbers at Sooner Units 1 and 2, natural-gas conversion of Muskogee Units 4 and 5, and replacement generation at Mustang. The OCC hearing concluded April 8, 2015; a decision was expected in Q2 or Q3. Related Arkansas approvals were planned. The filing does not establish final approval or recovery terms.
- A separate Clean Air Act matter involving Muskogee Unit 6 remained subject to Sierra Club appeal after oral argument in March. Potential remedies could include pollution-control capital costs exceeding $1.1 billion and penalties of up to $37,500 per day per violation. OG&E said it could not estimate a reasonably possible loss; the EPA/Sierra Club case concerning other projects had been dismissed without appeal.
- An Oklahoma regulatory staff application filed in April disputes the calculation of SmartHours lost-revenue recovery. Staff’s proposed method would reduce 2013 recovery from $10.1 million to $4.9 million; OG&E said it believed recovery of $10.1 million for 2013 and $11.6 million for 2014 was probable. A hearing was scheduled for June 30, 2015.
- Enable expected lower producer activity, based on forward commodity prices, to affect future distribution growth. Management cited commodity prices, weather, environmental regulation, regulatory cost recovery, financing access, and Enable’s operating and market conditions among risks. The filing reported compliance with debt agreements and no significant change in market risks or risk factors from the 2014 Form 10-K.
- Planned OGE Energy capital expenditures, excluding Enable, totaled $560 million for 2015 and included environmental and Mustang projects; the environmental plan remained subject to regulatory approval.
Important facts for investors to verify
- Whether the OCC and APSC approve the environmental plan, Mustang modernization, and proposed cost-recovery mechanisms, and how approved costs compare with the estimated $1.1 billion.
- The outcome of the SmartHours lost-revenue dispute and the recoverability of the recorded regulatory asset.
- Enable’s earnings, commodity exposure, producer activity, distributions, and progress against the company’s 2015 guidance assumptions.
- OGE Energy’s ability to fund planned capital spending and dividends given minimal cash, short-term borrowings, debt maturities, and dependence in part on Enable distributions.
- Developments in the Muskogee Unit 6 appeal and any resulting capital, penalty, or operating consequences.