OGE Energy Corp. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Unless otherwise stated, financial amounts are in U.S. dollars.
Business context
OGE Energy operates through OG&E, a regulated electric utility serving Oklahoma and western Arkansas, and a 25.7% equity-method investment in Enable Midstream Partners, a natural-gas and crude-oil gathering, processing, transportation and storage business. OG&E accounted for the reported consolidated operating revenue; Enable’s results are reflected primarily through equity earnings and distributions.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $2,259.2 million | $2,196.9 million |
| Operating income | $503.3 million | $481.2 million |
| Net income | $338.2 million | $271.3 million |
| Diluted EPS | $1.69 | $1.36 |
| OG&E gross margin (non-GAAP) | $1,379.1 million | $1,331.9 million |
| Cash provided by operations | $644.6 million | $865.4 million |
| Capital expenditures, net of AFUDC | $660.1 million | $547.8 million |
| Cash and cash equivalents at year-end | $0.3 million | $75.2 million |
Net income attributable to OGE Energy rose 24.7%, while revenue increased 2.8%. OG&E net income was $284.1 million, up 5.7%; OGE Holdings’ net income was $53.7 million, versus $9.4 million. Fourth-quarter revenue was $530.8 million and net income was $57.9 million, compared with $447.1 million and $29.4 million, respectively, in Q4 2015.
Operating cash flow declined 25.5%, primarily reflecting cash returned to customers from fuel over-recoveries. Capital spending exceeded operating cash flow by approximately $15.5 million. Cash dividends paid were $225.1 million. Dividends declared were $1.155 per share for the year; the quarterly rate rose 10% to $0.3025 effective October 2016.
At December 31, total assets were $9.94 billion and stockholders’ equity was $3.44 billion. Long-term debt, including current maturities, was $2.63 billion; short-term debt was $236.2 million. The company reported $912.0 million of net available revolving-credit liquidity. Current liabilities were $1.03 billion. The filing reports consolidated liabilities of $6.50 billion.
OG&E’s 2016 electric gross margin increased $47.2 million. Drivers included the Oklahoma interim rate increase, higher wholesale transmission revenue, price and weather-related effects, partly offset by the reserve for potential rate refunds and expiration of the AVEC wholesale contract. System sales declined 1.1% to 26.9 million MWh; customer count increased to 833,582.
Material changes and unusual items
- The 2016 earnings comparison benefited substantially from Enable’s 2015 impairment charges: Enable recorded about $1.086 billion of goodwill impairment in 2015, and OGE Energy recorded a related $108.4 million pre-tax charge. The resulting earnings rebound is not solely an improvement in recurring operations.
- Enable reported 2016 net income of $290 million, compared with a $752 million net loss in 2015. Excluding the 2015 impairment effect, Enable’s gross margin and segment operating results faced pressure from commodity prices and other factors.
- OG&E recorded $39.0 million of revenue from interim Oklahoma rates through year-end and reserved $33.7 million, subject to refund pending the final rate-case order.
- The OCC-approved SmartHours settlement reduced previously recorded lost revenues and the related regulatory asset by $6.3 million.
- The company recorded $8.6 million of pension settlement charges in 2016. Its $20.0 million pension contribution was made during the year.
Outlook, commentary and key risks
For 2017, management projected consolidated net income of approximately $386–$418 million, or $1.93–$2.09 per diluted share. The outlook assumes normal weather, new Oklahoma and Arkansas rates taking effect, and approximately 1% weather-adjusted sales growth. OG&E earnings guidance was $316–$340 million; management expected $70–$78 million of earnings contribution from Enable and approximately $140 million of Enable cash distributions. OG&E planned about $950 million of 2017 capital expenditures, excluding Enable, and expected to issue $300 million of long-term debt in the first half of 2017, subject to market conditions.
Management’s stated objectives include 3%–5% long-term annual weather-normalized OG&E earnings growth and approximately 10% annual dividend increases through 2019. These are targets, not guarantees. Management expects operating cash, financing proceeds and Enable distributions to meet anticipated needs over the next three years.
- Regulation and cost recovery: The Oklahoma rate case remained unresolved; the ALJ recommended a $40.7 million annual increase and 9.87% return on equity, but the OCC’s decision and timing were uncertain. OG&E also requested a $16.5 million Arkansas rate increase. Recovery of major capital and environmental costs depends on regulatory decisions.
- Environmental investment: OG&E estimated Dry Scrubber costs of $547.5 million and Mustang modernization costs of $424.9 million. The OCC approved the Dry Scrubber project, but appeals were pending; cost recovery was not yet approved. Mustang modernization was expected to finish in late 2017, with recovery to be sought later. Environmental compliance spending was estimated at $241.3 million in 2017.
- Enable exposure: OGE Energy does not control Enable. Its earnings and distributions are exposed to commodity prices, producer drilling and volumes, contract renewals, customer concentration, capital-market access and Enable’s ability to maintain distributions. Enable’s S&P rating had fallen below investment grade in February 2016.
- Other risks: The filing highlights weather, generation or pipeline outages, fuel supply, cybersecurity, pension costs, environmental and pipeline-safety regulation, interest rates, and competition. An Oklahoma 2015 fuel-cost prudence review was pending.
- Contingencies and assurance: Management said reasonably possible litigation losses above accrued amounts were not expected to be quantitatively material. The independent auditor issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Final OCC and APSC rate-case outcomes, including the treatment of interim Oklahoma rates and the $33.7 million refund reserve.
- Whether OG&E completes the Dry Scrubber and Mustang projects on schedule and within estimated costs, and how much regulators ultimately allow it to recover.
- Enable’s recurring operating performance, credit rating, cash distributions and contract renewals, separating ongoing trends from the 2015 impairment comparison.
- Funding for the large 2017 capital program, planned debt issuance, near-term maturities and the company’s very low year-end cash balance.
- Whether the 2017 earnings and dividend-growth assumptions—including new rates and normal weather—are achieved.