OGE Energy Corp. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The company operates regulated electric utility OG&E in Oklahoma and western Arkansas and holds an equity-method investment in natural-gas midstream partnership Enable.
Business context and reporting change
On May 1, 2013, OGE Energy, CenterPoint and the ArcLight group formed Enable. OGE Energy contributed Enogex and, because it does not control Enable, deconsolidated Enogex and began equity-method accounting. At year-end, OGE Energy held 28.5% of Enable’s limited partner interests and 60% of incentive distribution rights. This change materially affects year-over-year comparisons: 2013 consolidated midstream revenue and expenses include Enogex only through April 30, while subsequent performance is reflected principally in equity earnings.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Consolidated operating revenue | $2,867.7 million | $3,671.2 million |
| Operating income | $553.5 million | $676.9 million |
| Net income attributable to OGE Energy | $387.6 million | $355.0 million |
| Diluted earnings per share | $1.94 | $1.79 |
| Operating cash flow | $623.2 million | $1,046.1 million |
| Capital expenditures | $990.6 million | $1,150.6 million |
| Long-term debt, including current portion | $2,400.1 million | $2,848.6 million |
| Short-term debt | $439.6 million | $430.9 million |
- Net income attributable to OGE Energy rose 9.2%; diluted EPS increased from $1.79 to $1.94. Equity earnings from Enable were $101.9 million for the eight months after formation.
- Consolidated revenue fell about 21.9% and operating income about 18.2%, primarily reflecting the deconsolidation of Enogex; these figures are not directly comparable on a like-for-like basis.
- OG&E operating revenue was $2,262.2 million, gross margin was $1,296.3 million (up 2.7%), operating income was $525.3 million (up 7.3%) and net income was $292.6 million (up from $280.3 million). Higher transmission revenue and lower operating and maintenance costs supported results; higher fuel, purchased-power and transmission costs partly offset the margin increase.
- OG&E system sales rose 0.7% to 28.2 million MWh. Year-end electric customers totaled 806,940.
- Net cash used in investing was $957.0 million; net cash provided by financing was $338.8 million. Year-end cash was $6.8 million. The filing attributes lower operating cash flow mainly to OG&E fuel refunds and the midyear deconsolidation.
- Year-end total assets were $9.13 billion, total liabilities $6.10 billion and stockholders’ equity $3.04 billion. OGE Energy reported $715.1 million of net available liquidity under its revolving credit agreements.
- OG&E issued $250 million of 3.9% senior notes due 2043. The board recommended increasing the quarterly dividend to $0.225 per share beginning in first-quarter 2014, from $0.20875.
Outlook, commentary and material risks
- 2014 net income guidance is approximately $388 million to $411 million, or $1.94 to $2.06 per diluted share. OG&E guidance is $292 million to $303 million; projected Enable equity earnings are $98 million to $110 million. Assumptions include normal weather and approximately 1.2% weather-adjusted sales growth. OG&E earnings are seasonal, typically concentrated in the third quarter.
- Management’s long-term objectives include weather-normalized annual earnings growth of 5%–7% and a dividend payout ratio near 60% of normalized earnings. These are objectives, not guarantees.
- Planned OGE Energy capital expenditures are $600 million in 2014 and $390 million in 2015; Enable’s expansion capital expenditures are excluded from that table. Enable estimated approximately $450 million of expansion spending for the twelve months ending March 31, 2015.
- Environmental requirements are a major uncertainty. OG&E estimated more than $1.0 billion to install dry scrubbers for the EPA regional-haze rule, or may have to switch fuel. The rule remained stayed pending Supreme Court action on a petition filed in January 2014. Potential additional dry-sorbent controls for MATS were estimated at $45 million; whether they are needed was unresolved.
- OG&E faces Clean Air Act litigation concerning work at its Sooner and Muskogee plants. If it loses, potential controls could exceed $1.0 billion, in addition to possible penalties; outcomes and required spending were not determinable. OG&E estimated environmental compliance expenditures of $72.6 million for 2014 and $49.6 million for 2015, excluding certain uncertain items.
- Other material exposures include regulatory rate and cost-recovery decisions, fuel and commodity prices, weather, interest rates, cyber and operational disruptions, and dependence on Enable distributions. OGE Energy does not control Enable. A proposed Enable IPO was subject to market conditions and was not assured.
- OG&E reported a $22.4 million fourth-quarter pension settlement charge, including $17.0 million assigned to its Oklahoma jurisdictional pension tracker. The charge was non-cash and accelerated expense otherwise expected in future periods.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. The auditor relied on another auditor for Enable financial information.
Important facts for investors to verify
- Compare 2013 and 2012 results on a consistent basis, accounting for Enable’s formation and the midstream deconsolidation.
- Track the Enable IPO, OGE Energy’s ownership and distributions, and whether Enable’s performance supports the forecast equity earnings.
- Monitor the outcome and compliance timing of the regional-haze and MATS requirements, Clean Air Act litigation, and their potential capital and operating costs.
- Assess whether operating cash flow, available credit and planned financing are sufficient for capital spending, debt maturities and dividends.
- Review progress against 2014 earnings guidance, including weather, sales growth, transmission revenues and regulatory recovery assumptions.