OGE Energy Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. OGE Energy operates a regulated electric utility, OG&E, and holds a 25.7% equity-method interest in natural gas midstream partnership Enable. The first quarter is seasonally weak for OG&E, and results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $456.0 million | $433.1 million | +5.3% |
| Operating income | $43.8 million | $37.9 million | +$5.9 million |
| Net income | $36.0 million | $25.2 million | +$10.8 million |
| Diluted EPS | $0.18 | $0.13 | +$0.05 |
| Operating cash flow | $91.0 million | $73.4 million | +$17.6 million |
| Capital expenditures | $219.9 million | $177.7 million | +$42.2 million |
| Dividends declared per share | $0.30250 | $0.27500 | Higher |
OG&E’s reported gross margin, a non-GAAP measure defined as revenue less cost of sales, declined to $247.3 million from $255.2 million (down 3.1%), despite higher revenue. Cost of sales increased 17.3% to $208.7 million. Consolidated net income increased 42.9%; diluted EPS comparisons reflect unchanged basic share count and only modest dilution.
Cash flow and liquidity: Investing cash outflow was $219.9 million; financing provided $128.6 million, including proceeds from new long-term debt. Cash was zero at quarter-end. Current assets were $538.1 million against current liabilities of $915.0 million. The company reported $770.0 million of net available liquidity under revolving credit agreements.
Debt: At March 31, short-term debt was $128.2 million, long-term debt was $2,703.2 million, and long-term debt due within one year was $224.8 million. In March OG&E issued $300 million of 4.15% senior notes due 2047, using proceeds in part to repay short-term borrowing. OGE Energy and OG&E each entered into a new $450 million five-year revolving facility. The company reported compliance with its debt agreements.
Material changes and drivers
- OG&E net income rose $10.1 million, primarily as lower depreciation expense followed the Oklahoma Corporation Commission’s (OCC) rate-case order, with higher allowance for equity funds used during construction also contributing. Higher operating and maintenance costs, lower gross margin, and higher income tax expense partially offset those benefits.
- OG&E’s depreciation and amortization expense fell $22.0 million year over year. Its gross margin was affected by a $20.8 million provision for rate refunds, partly offset by interim rate increases and other items.
- Equity earnings from Enable rose to $35.6 million from $28.3 million. Enable reported net income of $110.8 million versus $86.0 million, with higher operating income and improved gathering, processing, and transportation results. OGE Energy received $35.3 million in Enable distributions.
- Capital spending increased, principally for OG&E environmental projects. Cash from operations improved mainly due to lower vendor payments and higher customer receipts, partly offset by lower fuel recoveries and higher tax payments.
Outlook, commentary and risks
- 2017 guidance: Management expected OG&E earnings at the low end of $316–$340 million net income, or $1.58–$1.70 per diluted share. Assumptions included normal weather for the rest of the year, Oklahoma rates effective May 1, Arkansas rates taking effect in 2017, and approximately 1% weather-adjusted sales growth.
- Management projected Enable earnings contribution of approximately $70–$78 million, or $0.35–$0.39 per diluted share, and approximately $140 million in cash distributions. Consolidated 2017 earnings guidance was at the low end of $386–$418 million, or $1.93–$2.09 per diluted share.
- The OCC’s March 20 final Oklahoma rate order provided an annual net rate increase of approximately $8.8 million and authorized a 9.50% return on equity. OG&E implemented new rates on May 1 and began refunding excess interim-rate collections. The order also reduced depreciation rates; the filing does not quantify the remaining refund obligation clearly beyond noting the interim increase was fully reserved at quarter-end.
- An Arkansas rate-case settlement reached in April proposed a $7.1 million annual increase and a formula rate rider, subject to Arkansas Public Service Commission approval. A fuel-cost prudence review and appeals related to environmental approvals also remained pending.
- OG&E estimated Dry Scrubber project costs at $547.5 million, with $281.6 million in construction work in progress at quarter-end; the project was scheduled for completion by 2019. Mustang modernization was estimated at $424.9 million, with $231.8 million invested and completion expected in late 2017. Management forecast total 2017 capital expenditures of $930 million for listed base and committed projects and expected to issue up to $300 million of additional long-term debt in the second half, depending on market conditions.
- Environmental rules and litigation, potential additional compliance costs, weather, fuel and power prices, utility rate recovery, and Enable’s contract-renewal, commodity-price, and producer-activity risks could affect results. Management stated that the quarter’s results were seasonal and that reasonably possible losses beyond accrued amounts were not expected to be quantitatively material.
- The company adopted share-based payment accounting guidance in Q1 and recorded a $22.3 million cumulative-effect adjustment to opening retained earnings, with a corresponding deferred tax asset. This accounting change increased reported equity, but was not Q1 operating income.
Important facts for investors to verify
- How the OCC rate order’s refund calculations and new depreciation rates affect subsequent OG&E earnings and cash flows.
- Whether Arkansas regulators approve the proposed settlement and formula rate rider, and when rates become effective.
- Progress, final costs, funding, and rate recovery for the Dry Scrubbers, Mustang modernization, and other planned capital projects.
- Whether Enable’s earnings and distributions meet management’s 2017 expectations, including developments in its ownership and subordination arrangements.
- Available liquidity, planned debt issuance, and capital spending against management’s full-year guidance and the company’s seasonal earnings pattern.