OGE Energy Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. OGE Energy operates a regulated electric utility, OG&E, and holds a 25.7% equity-method investment in Enable Midstream Partners.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $716.8 million | $743.9 million | $1,759.2 million | $1,728.4 million |
| Operating income | $243.3 million | $257.3 million | $430.6 million | $421.1 million |
| Net income | $183.4 million | $183.6 million | $324.2 million | $280.3 million |
| Diluted EPS | $0.92 | $0.92 | $1.62 | $1.40 |
| Dividends declared per share | $0.33250 | $0.30250 | $0.93750 | $0.85250 |
For the nine months, net income increased 15.7% and revenue increased 1.8% year over year. Q3 revenue declined 3.6%, while net income was essentially unchanged. OG&E gross margin, a company-defined non-GAAP measure, was $461.1 million for Q3 and $1,062.7 million for nine months, down 2.7% and 1.9%, respectively. Lower-than-normal cooling demand was the primary pressure; lower depreciation after an Oklahoma rate order and higher construction-related allowances partly supported earnings.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $463.7 million, versus $426.9 million. Investing activities used $660.3 million, including $662.8 million of capital expenditures; financing activities provided $196.3 million. Cash was zero at September 30.
- At September 30, total debt was approximately $3.25 billion, including $146.5 million short-term debt, $349.7 million current maturities and $2,749.5 million long-term debt. Short-term debt was down from $236.2 million at year-end 2016.
- Available liquidity under revolving credit facilities was $753.2 million. The Company reported compliance with debt agreements. Current assets of $599.8 million were below current liabilities of $953.5 million.
- OG&E issued $300 million of 4.15% senior notes due 2047 in March and $300 million of 3.85% notes due 2047 in August. Proceeds supported debt repayment, capital spending and general corporate needs.
Material changes and notable items
- OG&E’s March 2017 Oklahoma rate order provided an annual net rate increase of approximately $8.8 million and reduced depreciation expense. OG&E had refunded $45.6 million of an expected $47.5 million interim-rate refund by September 30, and reserved $5.6 million in a separate dispute over energy-efficiency lost revenues.
- An Arkansas settlement approved a $7.1 million annual rate increase and a formula rate rider; the first rider filing was expected in October 2018.
- OGE Energy’s equity earnings from Enable rose to $98.6 million for nine months from $79.5 million. Enable’s nine-month operating income was $399 million versus $299 million, supported mainly by higher gathering and processing margins. Q3 equity earnings were lower year over year, reflecting higher Enable expenses and weaker transportation and storage margins.
- Capital investment was elevated: OG&E had $893.9 million of construction work in progress. Estimated project costs include $542.4 million for Sooner dry scrubbers, with $352.7 million invested, and $390 million for the Mustang modernization plan, with $306 million invested.
- A retiree medical plan amendment reduced the postretirement benefit obligation by $42.9 million. The Company also settled its retiree life plan, paying $26.4 million; no settlement gain or loss was recognized. Adoption of share-based-payment accounting produced a $22.3 million cumulative adjustment to opening retained earnings.
Outlook, risks and contingencies
- 2017 consolidated earnings guidance was reduced to $370–$388 million, or $1.85–$1.91 per diluted share, from $386–$418 million, or $1.93–$2.09. OG&E guidance was lowered to $300–$304 million, or $1.50–$1.52 per share, from $316–$340 million, or $1.58–$1.70. Enable contribution guidance remained $70–$78 million; expected Enable cash distributions were approximately $140 million.
- Management’s stated long-term OG&E earnings growth objective is 3%–5% annually on a weather-normalized basis. The Board approved a 10% quarterly dividend increase to $0.33250 per share, effective October 2017; the Company’s stated dividend-growth target is approximately 10% annually through 2019.
- OG&E planned approximately $905 million of 2017 capital expenditures, primarily for base utility investment, transmission and environmental projects. Management expected operating cash, debt financing and Enable distributions to cover anticipated needs over the next three years.
- Moody’s revised the Company’s and OG&E’s outlooks from stable to negative, citing potential pressure on financial metrics and uncertainty about Oklahoma cost recovery and earned returns. The change did not trigger collateral requirements or credit-facility fee changes.
- Environmental compliance costs and timing remain uncertain, including pending litigation concerning regulatory rules and appeals of approval for the Sooner scrubbers. The filing says management cannot predict the financial impact of several environmental matters. Rate recovery, fuel-cost prudence reviews, weather, commodity and market conditions, and Enable’s operating and contract risks also remain relevant. Management said reasonably possible legal losses above accrued amounts were not expected to be quantitatively material.
Key facts for investors to verify
- Whether OG&E’s reduced 2017 earnings outlook and the assumptions behind it remain achievable.
- Progress, final costs, schedule and rate recovery for the Sooner scrubbers and Mustang modernization projects.
- Outcomes of Oklahoma rate proceedings, the pending lost-revenue dispute and fuel-adjustment reviews.
- Enable’s distribution capacity, operating performance and contribution to OGE Energy earnings and liquidity.
- Effects of the negative credit outlook, substantial capital spending and environmental requirements on financing costs and balance-sheet flexibility.