OGE Energy Corp. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. Amounts are in millions except per-share data.
Business context
OGE operates regulated electric utility OG&E in Oklahoma and western Arkansas and holds a 28.5% equity interest in Enable Midstream Partners. On May 1, 2013, OGE contributed Enogex LLC to Enable, deconsolidated its midstream operations, and began equity-method accounting. This transaction materially limits direct comparisons with 2012: 2013 midstream revenue and operating expenses include only activity through April 30, while equity earnings are reported thereafter. Per-share data reflect the July 2013 2-for-1 stock split.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $723.2 | $1,113.4 | $2,358.8 | $2,809.1 |
| Gross margin | $450.2 | $573.8 | $1,162.2 | $1,374.9 |
| Operating income | $260.9 | $304.0 | $480.2 | $579.6 |
| Net income attributable to OGE | $215.2 | $185.5 | $330.0 | $316.5 |
| Diluted EPS | $1.08 | $0.94 | $1.66 | $1.60 |
Q3 net income rose 16.0%; nine-month net income rose 4.3%. The consolidated revenue and operating-income declines largely reflect the midstream deconsolidation, not a like-for-like contraction. OG&E operating income increased to $261.0 from $258.0 in Q3 and to $452.0 from $425.6 for the nine-month period. Utility gross margin increased 0.2% in Q3 and 1.6% year to date; higher transmission revenue and customer growth were partly offset by weather-related volume and customer-mix effects.
OGE reported equity earnings from Enable of $46.0 for Q3 and $64.5 for the five months after formation. Its September 30 investment in Enable was $1,295.8. The Q3 result also benefited from a $17.1 reduction in deferred state income taxes following tax remeasurement related to Enable’s formation.
Nine-month cash from operations was $351.2, down from $678.0. Investing cash outflow was $739.4, including $772.9 of capital expenditures; financing cash inflow was $386.4. Cash at September 30 was less than $0.1. Current assets were $758.0 versus current liabilities of $941.5. Short-term debt was $447.0 and long-term debt $2,400.0; aggregate debt was approximately $2,847.0. OGE reported $700.9 of net available liquidity under its revolving facilities, totaling $1,150.0. Debt agreements were in compliance.
OG&E issued $250.0 of 3.9% senior notes due 2043 in May. The quarterly dividend declared was $0.20875 per share, versus $0.19625 a year earlier.
Material changes and management commentary
- Management raised 2013 consolidated earnings guidance from $335–$360 to $360–$380 of net income, or $1.80–$1.90 per diluted share, assuming approximately 200 million average diluted shares. Midstream earnings guidance increased from $70–$90 to $90–$100. OG&E and holding-company guidance was unchanged; the outlook assumes normal weather for the rest of the year.
- Management’s stated long-term objectives include 5–7% annual weather-normalized earnings growth and a dividend payout ratio no greater than 60% of normalized earnings.
- OGE expects cash from operations, debt financing, Enable distributions, and equity issuance to meet anticipated needs over the next three years. It expects no further 2013 pension contributions after contributing $35.0 in May.
- Management said Enable’s results were consistent with expectations; processing volumes increased with system expansions, while transportation throughput was affected by integrity work and slightly lower demand.
Risks, contingencies, and unusual items
- Environmental exposure: The EPA’s regional-haze federal implementation plan could require pollution controls or fuel switching costing more than $1 billion. The Tenth Circuit denied rehearing on October 31, 2013; OGE disputed whether the stay remained effective and was considering further appeal. MATS controls were estimated at $10–$20 per unit for five coal-fired units, with a one-year compliance extension requested.
- Clean Air Act litigation: Federal and Sierra Club proceedings concern alleged permitting and emissions issues at Muskogee and Sooner plants. Potential controls could exceed $1 billion, with possible civil penalties; OGE said it would vigorously defend and could not predict the outcome.
- Other proceedings: A wind-power provider sought curtailment charges; management estimated possible outcomes from $0 to approximately $10. The 2012 fuel-clause review was pending. An Oklahoma rate proceeding had been requested, with no procedural schedule established.
- Possible pension charge: OGE anticipated a potential fourth-quarter 2013 settlement charge of $19–$25, dependent on retirements and lump-sum payments. It would be noncash and accelerate expense otherwise recognized in future periods.
- Enable dependence and control: OGE does not control Enable’s decisions or distributions, and its operating cash flow partly depends on distributions from the affiliate. The filing also identifies integration, commodity-price, volume, and midstream-market risks. An Enable IPO was expected to enter registration during Q4 2013, subject to market conditions and with no assurance of completion.
- Other notable item: An MRT rate settlement set annual cost of service at $84.0 versus the requested $103.8; refunds to certain customers were reserved by Enable.
Important facts for investors to verify
- How much of the earnings increase and raised guidance is attributable to Enable, including the tax remeasurement benefit, and how sustainable are those contributions?
- Enable’s distribution capacity and OGE’s actual cash receipts, given OGE’s lack of control over the affiliate.
- OG&E’s eventual compliance obligations and costs under the regional-haze plan, MATS, and pending Clean Air Act cases, including the status of the stay and appeals.
- OGE’s funding needs and liquidity against planned capital spending, low cash on hand, and potential additional debt issuance.
- Whether the possible pension settlement charge is triggered, and the resolution and financial effects of pending regulatory and legal matters.