OGE Energy Corp. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results. OGE Energy operates a regulated electric utility, OG&E, and holds a 26.3% limited-partner interest in natural-gas midstream partnership Enable, accounted for under the equity method.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Operating revenue | $549.9 million | $611.8 million | $1,030.0 million | $1,172.2 million |
| Operating income | $127.2 million | $141.8 million | $183.6 million | $203.6 million |
| Net income | $87.5 million | $100.8 million | $130.7 million | $150.1 million |
| Diluted EPS | $0.44 | $0.50 | $0.66 | $0.75 |
| OG&E gross margin | $339.0 million | $340.9 million | $607.5 million | $607.9 million |
- Revenue declined 10.1% in Q2 and 12.1% in the first half, largely reflecting lower fuel and purchased-power costs passed through to customers. OG&E gross margin was nearly unchanged in both periods.
- OG&E net income fell $7.9 million in Q2 and $11.5 million in the first half. Drivers included milder weather, lower wholesale transmission revenue, higher depreciation and higher taxes other than income; customer growth and other income partly offset these factors.
- Midstream earnings also weakened: OGE Holdings’ net income was $18.0 million in Q2 versus $24.0 million, and $40.8 million for the first half versus $53.4 million. OGE’s equity earnings of unconsolidated affiliates fell to $28.2 million in Q2 from $39.3 million and to $59.9 million for the first half from $87.2 million. The filing attributes the declines primarily to lower natural-gas and NGL prices and related Enable operating pressures.
- Common dividends declared were $0.25 per share for Q2, versus $0.225 a year earlier; first-half dividends were $0.50 versus $0.45.
Cash flow, debt and liquidity
- First-half operating cash flow was $305.8 million, compared with $181.8 million in 2014; the increase was primarily attributed to fuel under-recoveries and related cash timing.
- Capital expenditures were $227.7 million, versus $297.6 million. Investing cash outflow was $225.7 million; financing cash outflow was $85.6 million, compared with $110.6 million of financing inflow in the prior-year period. Period-end cash was zero.
- At June 30, 2015, short-term debt was $105.5 million, long-term debt was $2,645.4 million, and $110.0 million of long-term debt was due within one year. The company reported $1,042.6 million of net available liquidity under revolving credit agreements totaling $1.15 billion; it stated it was in compliance with debt agreements.
- Current assets were $682.0 million and current liabilities were $662.3 million. Enable distributions to OGE were $68.9 million in the first half, down from $76.5 million.
Outlook, material developments and risks
- Management reaffirmed 2015 consolidated diluted EPS guidance of $1.76–$1.89 and expected Enable distributable cash flow of $139–$142 million. The company’s stated long-term objectives include 3%–5% annual weather-normalized OG&E earnings growth and dividend increases of approximately 10% annually through 2019; these are objectives, not guarantees.
- Enable raised its quarterly distribution per unit to $0.31250 in April and announced $0.31600 in July. Management noted that lower forward commodity prices could reduce producer activity and constrain Enable’s future distribution growth.
- OG&E’s proposed environmental compliance and Mustang modernization program was estimated at approximately $1.1 billion. The administrative law judge supported scrubbers at Sooner and natural-gas conversion at Muskogee, but recommended no immediate rate increase and rejection of the Mustang modernization plan. The OCC’s final outcome and cost-recovery timing remained uncertain.
- OG&E filed notice of intent to submit a general rate case by November 30, 2015. A separate Oklahoma proceeding over SmartHours demand-program lost-revenue calculations could affect recovery: OG&E asserted $10.1 million for 2013 and $11.6 million for 2014, while staff’s proposed 2013 methodology would reduce recovery to $4.9 million.
- Clean Air Act litigation concerning Muskogee Unit 6 remained on appeal; potential remedies could include additional pollution controls and penalties. OG&E said a reasonably possible loss range could not be estimated. The final Clean Power Plan had been issued, but OG&E had not reached conclusions on its impact.
- Management cited weather, commodity prices, regulation, environmental requirements, financing access and Enable’s operating and distribution performance among factors that could cause actual results to differ from expectations. It cautioned that interim results may not indicate full-year performance.
Most important facts for investors to verify
- Whether the OCC’s final orders support timely recovery of environmental-compliance costs and approve, modify or reject the Mustang plan.
- The outcome and financial effect of the SmartHours rider review and the planned general rate case.
- Whether Enable’s earnings, cash distributions and guidance hold up amid lower commodity prices and producer activity.
- Whether OG&E’s environmental litigation, emissions rules and required capital spending create costs beyond current estimates.
- Whether 2015 EPS and Enable distributable-cash-flow guidance remain achievable; the filing does not provide a clear quantified sensitivity for key assumptions.