OGE Energy Corp. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. OGE Energy operates regulated electric utility OG&E and holds an equity-method investment in natural-gas midstream partnership Enable Midstream Partners.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenues | $611.8 million | $734.2 million | $1,172.2 million | $1,635.6 million |
| Operating income | $141.8 million | $143.9 million | $203.6 million | $219.3 million |
| Net income attributable to OGE Energy | $100.8 million | $91.7 million | $150.1 million | $114.8 million |
| Diluted earnings per share | $0.50 | $0.46 | $0.75 | $0.58 |
| Dividends declared per share | $0.225 | $0.20875 | $0.45 | $0.4175 |
- Cash flow: First-half operating cash flow was $181.8 million, investing cash outflow $297.0 million, and financing cash inflow $110.6 million. Cash ended the period at $2.2 million.
- Liquidity and debt: Current assets were $696.7 million versus current liabilities of $1,093.9 million, a $397.2 million working-capital deficit. Short-term debt was $386.6 million; long-term debt was $2,409.5 million, with $240.0 million due within one year. The company reported $761.4 million of net available revolving-credit liquidity and compliance with debt agreements.
- Capital spending: First-half capital expenditures were $297.6 million. The company’s 2014–2018 capital expenditure estimate totals $2.995 billion, excluding Enable spending.
Material changes and business drivers
- Reported revenue comparisons are substantially affected by the May 1, 2013 formation of Enable: OGE deconsolidated Enogex and now records its Enable interest using the equity method. Thus, 2014 midstream revenue is not consolidated, whereas 2013 includes pre-formation midstream operations; the revenue decline is not a like-for-like measure of business performance.
- OGE’s Enable equity earnings rose to $39.3 million in Q2 and $87.2 million in the first half, compared with $18.5 million in each 2013 period. Enable’s IPO in April 2014 and subsequent unit issuance left OGE with a 26.3% limited-partner interest at June 30.
- OG&E first-half operating income increased to $204.0 million from $191.0 million, supported by higher gross margin, including increased wholesale transmission revenue. First-half utility gross margin was $607.9 million, up 6.7%. Higher maintenance, reduced capitalized labor, depreciation, and interest expense partly offset gains.
- OG&E’s Q2 gross margin rose 4.3% to $340.9 million. The SPP Integrated Marketplace, entered March 1, 2014, contributed to higher purchased-power costs; fuel and purchased-power costs are generally recovered through adjustment mechanisms, subject to review.
Outlook, risks, contingencies, and unusual items
- Guidance: 2014 consolidated earnings guidance was unchanged at net income of approximately $388–$411 million, or $1.94–$2.06 per diluted share. It assumes normal weather for the remainder of the year and reflects Enable IPO dilution. Management’s longer-term objective is 5–7% annual weather-normalized earnings growth and a dividend payout ratio near 60% of normalized earnings.
- Environmental investment: In an August 6, 2014 filing with the OCC, after quarter-end, OG&E sought approval for an environmental compliance plan and cost recovery. The plan includes dry scrubbers at Sooner Units 1 and 2, converting Muskogee Units 4 and 5 to natural gas, and replacing Mustang steam turbines. Estimated MATS and Regional Haze compliance capital cost is about $1.1 billion; regulatory approval and cost recovery remain important uncertainties.
- Litigation: Federal and Sierra Club Clean Air Act proceedings concerning Muskogee and Sooner remain pending. OG&E disputes the allegations; potential remedies could include pollution-control equipment costing over $1.0 billion and penalties of up to $37,500 per day per violation. The company says it cannot predict whether these costs will be required.
- Other regulatory risks: The Supreme Court left the EPA’s Regional Haze FIP in place. OG&E also noted evolving greenhouse-gas and water-intake requirements, with compliance costs not fully determinable. Fuel-clause reviews and rate approvals can affect recovery of costs.
- Financing and subsequent event: OG&E issued $250 million of 4.55% senior notes due 2044 in March. On August 1, 2014, it redeemed $140 million of 6.50% notes at a premium; the $4.6 million premium is to be deferred and amortized. Revolving-credit maturities were extended to December 2018, although certain lender commitments expire in December 2017 unless replaced.
- Management cautions that seasonal fluctuations mean interim results may not indicate full-year results. It reported effective disclosure controls and no significant change in risk factors from the 2013 Form 10-K.
Important facts for investors to verify
- Track OCC and APSC decisions on the environmental plan, capital recovery mechanism, and planned generation changes; distinguish estimated project costs from approved spending.
- Assess the Clean Air Act cases and any resulting equipment, operating, penalty, or reliability costs.
- Evaluate Enable distributions and earnings contribution, including the effects of OGE’s reduced ownership, subordinated units, and distribution conditions.
- Monitor short-term funding needs, debt maturities, credit availability, and the effect of planned capital spending on liquidity and dividends.
- Compare future results on a consistent basis that accounts for the 2013 midstream deconsolidation; consolidated revenue is not directly comparable across periods.