OGE Energy Corp. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. Although the request identifies 2011 Q4, this filing is an annual report; it includes unaudited fourth-quarter data as well as full-year results. Amounts are in U.S. dollars unless stated otherwise.
Business context
OGE Energy operates a regulated electric utility, OG&E, serving Oklahoma and western Arkansas, and natural-gas midstream businesses through Enogex, including transportation and storage, gathering and processing, and marketing. At year-end, OGE Energy indirectly owned 81.3% of Enogex Holdings.
Key financial metrics
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Operating revenue | $3,915.9 million | $3,716.9 million | Up 5.4% |
| Gross margin | $1,638.0 million | $1,529.5 million | Up 7.1%; 41.8% of revenue versus 41.1% |
| Operating income | $646.7 million | $593.9 million | Up 8.9%; 16.5% operating margin versus 16.0% |
| Net income attributable to OGE Energy | $342.9 million | $295.3 million | Up 16.1% |
| Diluted EPS | $3.45 | $2.99 | Up 15.4% |
| Cash from operations | $833.9 million | $782.5 million | Up 6.6% |
| Cash used in investing | $1,395.8 million | $846.1 million | Higher capital spending and $200.4 million gathering-asset acquisition |
| Cash and cash equivalents | $4.6 million | $2.3 million | Year-end balance |
| Long-term debt | $2,737.1 million | $2,362.9 million | Up $374.2 million |
| Short-term debt | $277.1 million | $145.0 million | Up $132.1 million |
| Total assets / stockholders’ equity | $8,906.0 million / $2,819.3 million | $7,669.1 million / $2,400.0 million | Both increased |
OG&E operating income rose to $472.3 million from $413.7 million, principally on higher gross margin. Enogex operating income declined to $175.0 million from $184.3 million; gathering and processing growth was offset by higher expenses, plant downtime and other factors. Enogex marketing continued to report an operating loss.
OGE Energy’s net income margin was approximately 8.8% in 2011, compared with 7.9% in 2010. Dividends declared were $1.5175 per share, versus $1.4625. Management recommended raising the quarterly dividend from $0.3750 to $0.3925 per share beginning in 2012.
Net available liquidity under revolving credit agreements was $1,120.7 million at year-end. The company reported $1,550 million of new five-year revolving facilities entered into in December 2011. Operating cash flow was below capital expenditures of $1,270.4 million, before acquisition spending and other investing cash flows.
Material changes versus 2010
- OG&E gross margin increased $88.3 million, supported by warmer weather, customer growth, rate riders and transmission revenue. System sales rose 3.3% to 28.5 million MWh.
- Enogex gathered volumes increased, but its operating income fell 5.0%. The Cox City plant returned to full service in September after a 2010 fire; Enogex recorded a $3.0 million insurance gain in 2011 and received $7.4 million of insurance proceeds, with further recovery expected.
- Enogex acquired gathering assets for $200.4 million and sold the Harrah plant and related assets for $15.9 million, recording a $3.7 million pretax gain.
- OGE Energy’s share of Enogex declined from 90.1% to 81.3% as ArcLight funded capital needs and ownership rose to 18.7%. Noncontrolling-interest income consequently increased.
- Property, plant and equipment in service increased 12.3% to $10,315.9 million, reflecting utility and midstream projects. Total capital expenditures were $1,270.4 million, excluding the acquisition.
Outlook, risks and unusual items
- Guidance: Consolidated 2012 earnings guidance was deferred pending the Oklahoma rate-case order. Enogex guidance was $80–$95 million of net income attributable to Enogex, or $0.80–$0.95 per average diluted share. Assumptions included $500–$515 million gross margin, 6–10% growth in gathered volumes, approximately 15% growth in processable volumes, and specified commodity-price assumptions. Enogex expected 2013 gathered-volume growth of 10–15%.
- Rate-case exposure: OG&E requested a $73.3 million annual Oklahoma rate increase, while the OCC staff recommended a $6.2 million annual decrease and industrial customers sought a $56 million decrease. The filing anticipated an OCC order in the first quarter of 2012.
- Environmental uncertainty: The EPA rejected part of Oklahoma’s regional-haze plan and required a more stringent SO2 limit for four coal units. OG&E estimated dry scrubbers could cost more than $1 billion; the company and state planned to challenge the federal plan. Other air and water rules could also require material spending. Budgeted environmental capital expenditures were $34.4 million in 2012 and $36.0 million in 2013.
- Pipeline safety: Enogex estimated $100–$160 million of pipeline-integrity capital and operating costs for 2012–2016. Costs of complying with the pipeline safety law enacted in January 2012 were not yet estimable and could be significant.
- Capital plan: Forecast capital expenditures totaled $1.040 billion in 2012 and $985 million in 2013. Management expected operating cash flow, debt, equity issuance and ArcLight funding to meet anticipated needs over the next three years; OG&E expected to issue about $250 million of long-term debt in late 2012, subject to market conditions.
- Unusual items: Enogex recorded a $5.0 million impairment for the Atoka processing plant and a $3.0 million gain on Cox City insurance proceeds. It also recorded a $4.8 million write-down of natural-gas storage inventory; management expected offsetting gains from inventory withdrawals in the first quarter of 2012. The 2010 comparison included an $11.4 million noncash Medicare Part D tax charge.
- Other risks and contingencies: Commodity-price and processing-spread exposure, dependence on key producers and utility customers, weather, regulatory cost recovery, pension funding, cyber and operational risks, and significant planned investment are disclosed. OGE Energy reported $6.1 billion of total indebtedness and other liabilities. The filing states that management did not expect most pending litigation to materially affect the company; the outcome of the natural-gas measurement cases remained uncertain.
Investor verification priorities
- Check the final outcome and revenue requirement of OG&E’s Oklahoma rate case, including authorized return on equity and recovery of recent capital investments.
- Verify Enogex’s actual 2012 volumes, margins, commodity-price realizations and performance against the guidance assumptions.
- Track the EPA regional-haze challenge, required controls and any resulting capital, operating or customer-rate impacts.
- Confirm pipeline-integrity spending and the cost or throughput effects of new pipeline-safety requirements.
- Review funding of the 2012–2013 capital program, debt issuance, liquidity, and the extent of ArcLight’s contributions as its Enogex ownership changes.
- Monitor insurance recovery for the Cox City fire, the natural-gas measurement litigation, and other contingencies; distinguish cash receipts from gains recognized in earnings.