OGE ENERGY CORP. annual report, FY2017

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OGE Energy Corp. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. OGE Energy operates regulated electric utility OG&E in Oklahoma and western Arkansas and holds a 25.7% equity-method investment in Enable Midstream Partners. The filing is an annual report, not a standalone fourth-quarter report.

Financial performance and position

  • Revenue and operating income: Revenue was $2.261 billion, essentially unchanged from $2.259 billion in 2016. Operating income rose to $510.3 million from $503.3 million.
  • Profit and EPS: Net income increased to $619.0 million from $338.2 million; diluted EPS was $3.10 versus $1.69. The increase was driven substantially by a one-time $234.7 million net income-tax benefit from remeasuring deferred taxes under the 2017 Tax Act, alongside higher Enable equity earnings. The reported increase therefore does not represent solely underlying operating growth.
  • Electric utility: OG&E net income was $305.5 million, up 7.5%. Gross margin declined 1.1% to $1.364 billion; management attributed pressure in part to milder weather and lower wholesale transmission revenue. System sales fell 2.2% to 26.3 million MWh.
  • Enable investment: OGE Energy recorded $131.2 million of equity earnings, compared with $101.8 million. Enable reported $400 million net income, versus $290 million, and higher gathering volumes and commodity-related margins contributed to improved results. OGE Energy received $141.2 million in distributions, unchanged from 2016.
  • Cash flow and investment: Cash from operations was $784.5 million, up from $644.7 million. Capital expenditures were $824.1 million, resulting in operating cash flow below capital spending by about $39.6 million. Investing activities used $821.9 million; financing activities provided $51.5 million.
  • Debt and liquidity: Long-term debt was $2.999 billion, including current maturities, versus $2.631 billion in 2016; short-term debt was $168.4 million. Cash was $14.4 million, and net available liquidity under revolving credit agreements was $731.3 million. Equity was $3.851 billion; long-term debt represented 43.8% of stated capitalization.
  • Dividends: Dividends declared were $1.27 per share for the year. The quarterly rate increased 10% to $0.3325 per share beginning October 2017.

Material changes versus 2016

  • Net income rose 83.0%, with the Tax Act deferred-tax remeasurement and increased Enable earnings the principal drivers; OG&E net income increased more moderately.
  • Operating cash flow improved by $139.8 million, primarily from higher customer receipts and fuel-cost recoveries. Capital spending increased, principally for environmental projects.
  • OG&E depreciation and amortization declined $35.5 million, largely following the March 2017 Oklahoma rate order. That order produced an annual net rate increase of about $8.8 million, below the amount sought, and OG&E completed $47.5 million of refunds of excess interim collections.
  • Regulatory liabilities rose to $1.287 billion from $312.0 million, primarily reflecting amounts expected to be returned to customers following the federal tax-rate reduction.

Outlook, commentary and risks

  • 2018 guidance: Consolidated net income of approximately $380–$410 million, or $1.90–$2.05 per diluted share. OG&E guidance is $286–$306 million; the projected Enable earnings contribution is $96–$104 million, with approximately $140 million of Enable cash distributions expected. OG&E’s forecast assumes normal weather, about 1% weather-adjusted sales growth, and new Oklahoma rates effective by August 1, 2018.
  • Investment plans: OGE Energy estimated capital expenditures of $625 million in 2018, excluding Enable. OG&E expected the $390 million Mustang Modernization Plan to finish in early 2018 and the $542.4 million Sooner dry-scrubber project in mid-to-late 2018. Recovery of project costs remains subject to regulatory processes.
  • Regulatory exposure: OG&E’s 2018 Oklahoma rate case seeks a $1.9 million annual increase and recovery of Mustang turbine costs. A pending FERC complaint seeks to reduce the return on equity used in transmission rates from 10.60% to 7.85%; OGE estimates each 25-basis-point reduction could lower annual transmission revenue by about $1.5 million. The outcome and potential refunds are uncertain.
  • Other risks: Results and distributions are exposed to weather, fuel and power-market costs, environmental compliance spending, rate recovery, and Enable’s commodity prices, producer activity, contract renewals and concentrated customer base. Moody’s changed the outlooks on OGE Energy and OG&E to negative in June 2017, citing possible weaker financial metrics and uncertainty over Oklahoma cost recovery and returns.
  • Unusual items and controls: The Tax Act benefit was recorded using provisional estimates and could be adjusted in 2018. The financial-statement audit opinion was unqualified; management and the auditor reported effective internal control over financial reporting.

Investor verification priorities

  1. Separate recurring earnings and cash generation from the one-time Tax Act benefit and verify any subsequent tax-accounting adjustments.
  2. Track the Oklahoma rate case, tax savings returned to customers, and the FERC transmission-rate complaint, including potential refunds.
  3. Confirm completion, final costs and regulatory recovery of the Mustang and Sooner projects, and compare spending with the capital plan.
  4. Assess Enable’s distribution sustainability, debt and customer concentration, contract renewals, and exposure to commodity prices and producer activity.
  5. Monitor liquidity, upcoming debt maturities, the negative Moody’s outlook and the funding of capital expenditures and dividends.