OGE Energy Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited. OGE Energy operates a regulated electric utility, OG&E, and holds an equity-method investment in Enable Midstream Partners. Comparisons with Q1 2013 are affected by the May 2013 contribution of Enogex to Enable and OGE Energy’s resulting deconsolidation of its midstream operations.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenues | $560.4 million | $901.4 million |
| Operating income | $61.8 million | $75.4 million |
| Equity earnings from unconsolidated affiliates | $47.9 million | — |
| Net income attributable to OGE Energy | $49.3 million | $23.1 million |
| Diluted EPS | $0.25 | $0.12 |
| Operating cash flow | $23.2 million | $59.2 million |
| Capital expenditures | $171.8 million | $325.1 million |
| Dividends declared per share | $0.225 | $0.20875 |
OG&E’s electric-utility gross margin, a non-GAAP measure defined as operating revenue less fuel, purchased power and certain transmission costs, increased 10.1% to $267.0 million from $242.5 million. Utility operating income rose to $61.8 million from $52.9 million; higher transmission revenue and sales in colder weather were partly offset by increased maintenance and depreciation. Consolidated revenue and operating-income comparisons are not like-for-like because Q1 2013 included consolidated midstream revenue and expenses, while Q1 2014 reflects equity earnings from Enable.
Cash and cash equivalents were $2.4 million at quarter-end. Short-term debt was $377.8 million; long-term debt was $2,549.4 million, including $100 million due within one year. Total debt on these balance-sheet categories was approximately $3.03 billion. The company reported $770.2 million of net available liquidity under revolving credit facilities totaling $1.15 billion. Working capital was negative $246.8 million, calculated from current assets of $702.5 million less current liabilities of $949.3 million.
Operating cash flow declined $36.0 million year over year, principally due to increased vendor payments, including power-plant maintenance, and the prior-year consolidation of Enogex. Cash used in investing was $171.4 million, compared with $289.5 million, mainly reflecting lower capital spending after the midstream deconsolidation and reduced utility transmission-project spending. The company received $246.9 million of long-term debt proceeds and paid $44.7 million in common dividends.
Material changes and Enable
- OGE Energy recorded $47.9 million of equity earnings from Enable and received $32.5 million in distributions during the quarter. Enable reported Q1 revenue of $1,001.6 million and net income attributable to Enable of $149.2 million; these are Enable figures, not consolidated OGE Energy revenue.
- Enable completed an IPO on April 16, 2014, after quarter-end, raising approximately $466 million for Enable. OGE Holdings’ limited-partner ownership declined from 28.5% to 26.7%; OGE Energy retains a 60% interest in incentive distribution rights.
- OG&E issued $250 million of 4.55% senior notes due March 15, 2044. Proceeds were used for general purposes, including repayment of short-term debt, capital expenditures and working capital.
- OG&E began participating in the SPP Integrated Marketplace on March 1, 2014. Fuel and purchased-power cost variances are generally recovered through fuel adjustment clauses.
Outlook, risks and contingencies
Management maintained 2014 consolidated earnings guidance of $388 million to $411 million of net income, or $1.94 to $2.06 per diluted share, assuming approximately 200 million average shares and normal weather for the remainder of the year. The company’s stated long-term objectives include weather-normalized annual earnings growth of 5%–7% and a dividend payout ratio of approximately 60% of normalized earnings. Management said cash from operations, debt issuance, equity-investment distributions and equity issuance are expected to meet anticipated cash needs and fund growth opportunities over the next three years. Estimated 2014 capital expenditures were $585 million, excluding Enable spending and uncertain environmental-control costs.
- Environmental exposure: The EPA’s regional-haze federal implementation plan could require dry scrubbers or fuel switching at four coal-fired units. OG&E estimates scrubbers could cost more than $1.0 billion. The plan remained stayed while the U.S. Supreme Court considered a petition for review. Separate Clean Air Act litigation could also result in pollution-control costs exceeding $1.0 billion and penalties; outcomes and required costs were uncertain.
- Other environmental requirements: OG&E planned approximately $20 million over three years for activated-carbon injection to address mercury requirements and was evaluating whether additional dry-sorbent controls, estimated at approximately $45 million, would be needed.
- Legal and regulatory items: A court dismissed one Sierra Club permitting claim but allowed opacity and particulate-matter claims to proceed. A FERC-accepted wholesale-rate settlement was expected to reduce revenue by approximately $1.0 million annually through June 30, 2015. An Oklahoma fuel-clause review was pending; an administrative law judge recommended finding the 2012 costs prudent.
- Financing and operating risks: Management identified potential effects from credit-rating changes, capital-market access, commodity prices, weather, regulation, environmental rules, and Enable’s performance. OG&E contracts with Enable for gas transportation and storage under a new agreement effective May 1, 2014 through April 30, 2019.
- Management cautioned that first-quarter results may not indicate full-year performance because of seasonality and other factors. The company reported compliance with debt agreements and effective disclosure controls.
Important facts for investors to verify
- How much of the Q1 EPS increase reflects recurring OG&E performance versus the change to equity-method accounting for Enable, and whether Enable distributions support OGE Energy’s expected cash flows.
- Whether the 2014 earnings guidance remains achievable under actual weather, utility costs, regulatory outcomes and Enable results.
- Current status and potential cost, timing and customer-recovery treatment of the regional-haze plan and Clean Air Act litigation.
- OG&E’s ability to fund its capital program and dividends while operating with low cash balances, negative working capital and significant short-term borrowings.
- Enable’s post-IPO ownership, distribution terms and subordinated-unit conditions, and the implications for OGE Energy’s investment returns.