OGE Energy Corp. — Q2 2017 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2017, compared with the same 2016 periods. OGE Energy operates OG&E, a regulated electric utility serving Oklahoma and western Arkansas, and holds a 25.7% equity-method interest in Enable Midstream Partners. Enable’s results are not consolidated as revenue; OGE records its share of Enable’s earnings.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $586.4 million | $551.4 million | $1,042.4 million | $984.5 million |
| Operating income | $143.5 million | $125.9 million | $187.3 million | $163.8 million |
| Net income | $104.8 million | $71.5 million | $140.8 million | $96.7 million |
| Diluted EPS | $0.52 | $0.35 | $0.70 | $0.48 |
| Dividends declared per share | $0.3025 | $0.2750 | $0.6050 | $0.5500 |
- Q2 net income rose $33.3 million, or 46.6%; first-half net income rose $44.1 million, or 45.6%. Diluted EPS increased by $0.17 and $0.22, respectively.
- Calculated consolidated operating margin was approximately 24.5% in Q2 2017 versus 22.8% in Q2 2016, and 18.0% for the first half versus 16.6%.
- OG&E gross margin, a company-defined non-GAAP measure, was $354.3 million in Q2 (up 0.2%) and $601.6 million in the first half (down 1.2%). Lower weather-related revenue weighed on the first-half comparison.
- Enable’s reported net income was $86 million for Q2 and $197 million for the first half, compared with $35 million and $121 million, respectively, in 2016. OGE recorded equity earnings of $29.4 million and $65.0 million, respectively.
- Cash from operations was $197.4 million for the first half, versus $166.0 million. Capital expenditures were $491.1 million, versus $331.1 million; investing cash use was $490.3 million. Dividends paid were $120.8 million.
- At June 30, cash was zero. Current assets were $632.5 million and current liabilities $926.2 million, a working-capital deficit of $293.7 million. The company reported $546.5 million of net available liquidity under revolving facilities.
- Debt at June 30 included $193.2 million short-term debt, $2,863.0 million long-term debt and $224.9 million due within one year. OGE issued $300 million of 4.15% senior notes due 2047 in March. Moody’s changed the outlooks for OGE Energy and OG&E from stable to negative in June, citing possible weakening financial metrics and uncertainty over Oklahoma cost recovery.
Changes, outlook and material developments
- Management attributed earnings growth primarily to higher Enable equity earnings and lower pension-related and other operating costs at the holding-company level, and to lower depreciation at OG&E following Oklahoma rate-case depreciation changes. Higher fuel and purchased-power costs, taxes and some weaker utility gross margin partly offset these gains.
- Enable’s higher earnings reflected improved gross margin, including higher natural gas and NGL prices and volumes, as well as derivative fair-value changes. OGE cautions that Enable is exposed to contract renewal, producer activity and commodity-price risks.
- 2017 earnings guidance was unchanged but expected at the lower end of $386 million–$418 million net income, or $1.93–$2.09 per diluted share. Assumptions include approximately 200 million diluted shares and normal weather. Results are seasonal and may not indicate full-year performance.
- OG&E’s Oklahoma rate order produced an annual net rate increase of about $8.8 million. It began new rates May 1 and had refunded $15.3 million of an expected $47.5 million interim-rate refund by quarter-end. A $5.6 million reserve relates to disputed energy-efficiency lost-revenue recovery.
- An Arkansas settlement approved a $7.1 million annual rate increase and a formula rate rider; the first rider filing was expected in October 2018. OG&E intended to file another Oklahoma general rate case in Q4 2017.
- OG&E estimated Dry Scrubber project costs of $542.4 million, with $323.4 million invested by June 30, and Mustang Modernization costs of $390 million, with $276.3 million invested. Environmental compliance and recovery of project costs remain regulatory uncertainties; the Dry Scrubber approval was under appeal.
- Capital expenditure estimates were $920 million for 2017 and $545 million for 2018, including committed utility projects. Management expected operating cash, debt financing and Enable distributions to cover anticipated needs over the next three years; OG&E expected to issue up to $300 million of long-term debt in Q3, subject to market conditions.
- Subsequent events: in August, the company amended retiree medical coverage, anticipating an approximately $45 million reduction in the benefit obligation, and settled its retiree life plan for $27.9 million. These were to be reflected in the September 30 balance sheet.
- The company adopted share-based payment guidance in Q1, recording a $22.3 million cumulative adjustment to retained earnings. No material effect was expected from the forthcoming revenue standard; lease accounting adoption was expected to increase recognized assets and liabilities, but the amount was not yet determined.
Investor verification priorities
- Track Oklahoma and Arkansas rate recovery, the remaining interim-rate refund, and the disputed $5.6 million lost-revenue reserve.
- Monitor execution, total cost and regulatory recovery of the Dry Scrubbers, Mustang Modernization and other capital projects.
- Assess whether the lower-end 2017 earnings guidance remains achievable, including weather, utility margins and Enable’s commodity-sensitive earnings.
- Review debt issuance, liquidity and credit-rating developments in light of the negative Moody’s outlook and the planned capital spending.
- Verify post-quarter retiree-plan accounting impacts and the timing and effect of the announced benefit changes.