OGE Energy Corp. — Second-Quarter 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 4, 2011. OGE Energy operates a regulated electric utility, OG&E, and natural gas midstream businesses through Enogex, primarily in Oklahoma and the surrounding region. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenues | $978.1 | $887.2 | $1,818.6 | $1,763.0 |
| Gross margin | $428.0 | $380.7 | $735.3 | $686.4 |
| Operating income | $182.2 | $151.5 | $250.1 | $238.3 |
| Net income attributable to OGE Energy | $103.0 | $77.3 | $127.8 | $101.5 |
| Diluted EPS | $1.04 | $0.78 | $1.29 | $1.03 |
| Dividends declared per share | $0.3750 | $0.3625 | $0.7500 | $0.7250 |
- Q2 revenue increased 10.2% and OGE-attributable net income rose 33.2%; six-month revenue increased 3.2% and attributable net income rose 25.9%.
- Q2 gross margin increased $47.3 million. OG&E’s margin benefited from warmer weather, rate riders, transmission revenue and customer growth. Enogex benefited from higher NGL and natural gas prices and increased gathered volumes.
- Six-month operating income increased $11.8 million. OG&E’s operating income rose $14.4 million, while Enogex’s fell $5.0 million, chiefly reflecting higher costs, lower natural gas prices and reduced processing volumes. The 2010 comparison also included an $11.4 million noncash Medicare Part D tax charge, improving the year-over-year tax comparison.
- Q2 margin and earnings included a $3.7 million pretax gain on Enogex’s sale of the Harrah processing plant and related assets; Enogex identified $2.3 million of net income from the sale as non-recurring.
- Cash from operations for the first half was $246.5 million, down from $341.5 million. Capital expenditures, net of construction allowance, were $571.8 million; investing cash outflow was $532.7 million. Financing provided $289.0 million, and cash ended at $5.1 million. The cash-flow decline primarily reflected tax refunds received in the prior-year period.
- At June 30, cash was $5.1 million, short-term debt $211.1 million and long-term debt $2,586.8 million. Total reported short- and long-term debt was $2,797.9 million, versus $2,507.9 million at December 31, 2010. Net available liquidity under revolving credit agreements was $1,021.7 million; short-term borrowing cost averaged 0.34%.
- Total assets were $8,135.5 million and stockholders’ equity $2,548.4 million at June 30. Capital spending and construction work in progress increased substantially; construction work in progress was $774.8 million, up from $460.0 million at year-end.
Material changes and business developments
- OG&E issued $250 million of 5.25% senior notes due 2041 in May; proceeds were used to repay short-term debt. The company reported compliance with its debt agreements.
- OGE Energy’s ownership of Enogex Holdings declined from 90.1% to 86.7%; ArcLight’s interest increased to 13.3%. ArcLight contributed $71.6 million toward Enogex capital requirements in February.
- Enogex sold the Harrah processing plant and associated gathering assets for $15.9 million. The Cox City plant’s damaged 120 MMcf/d train was being replaced, with full service expected in Q3 2011; estimated restoration cost was about $30 million, with insurance recovery above a $10 million deductible under negotiation.
- OG&E’s Arkansas rate settlement authorized $8.8 million of annual recovery and return on system investments and operating costs, effective June 20, 2011. A separate Oklahoma rate case filed July 28 requested a $73.3 million annual increase, or 4.3%; a decision was expected in early 2012.
- OG&E’s Arkansas Smart Grid settlement was approved by the APSC on August 3, after quarter-end. The company estimated net Arkansas capital spending of $14 million after the federal grant. Arkansas recovery through a rider is to begin when deployed meters are in service.
Outlook, risks and contingencies
- Management said it expected to exceed its previously disclosed 2011 earnings guidance of $299–$318 million net income, or $3.00–$3.20 per diluted share, citing unusually hot weather through July 31. The filing did not provide a revised numerical guidance range. It assumed normal weather for the remainder of the year.
- Enogex’s stated 2011 earnings guidance was $0.90–$1.05 per diluted share; if it successfully renews or extends contracts with one of its five largest customers and changes the processing arrangement from keep-whole to fixed-fee, management expected results toward the low end.
- Management’s long-term objectives include weather-normalized annual earnings growth of 5%–7% and a dividend payout ratio no greater than 60% of normalized earnings. Planned capital expenditures were $1.355 billion for 2011 and $1.095 billion for 2012, subject to project and market conditions.
- Environmental requirements pose significant uncertainty. EPA-proposed regional haze standards could require dry scrubbers at four coal units, estimated by OG&E to cost more than $1 billion; final compliance costs were not yet reasonably estimable. Estimated NOX controls under the Oklahoma plan were $70–$130 million. Proposed hazardous-air-pollutant and water-intake rules, and possible Cross-State Air Pollution Rule requirements, could also add costs.
- The EPA issued a notice of violation alleging Clean Air Act permit and opacity violations at OG&E’s Sooner and Muskogee plants. OG&E said it could not predict possible further action; penalties or additional controls could result. A separate state opacity consent order required projects and a $150,000 penalty plus a $150,000 environmental-fund payment; OG&E considered that matter closed.
- Other exposures include a pending OG&E fuel-adjustment review in which an industrial customer intervenor sought a $15.5 million refund; ongoing Enogex FERC rate matters; commodity-price and counterparty risk; and potential collateral requirements after a below-investment-grade downgrade. Management did not expect other pending claims and contingencies to materially harm consolidated results, subject to the disclosed matters.
- Management identified weather, fuel and commodity prices, regulation, environmental rules, construction costs, financing access, credit ratings and execution of Smart Grid projects among factors that could cause actual results to differ from forward-looking statements. Results for the first half may not indicate full-year performance.
Most important facts for investors to verify
- Whether exceptionally hot weather and rate riders drive full-year results above the previous guidance range, and the earnings effect if weather normalizes.
- Progress, insurance recovery and final cost for the Cox City plant restoration, and performance following Enogex’s asset sale.
- Outcome and timing of OG&E’s requested Oklahoma rate increase and the recovery mechanisms for transmission, Smart Grid and other capital investment.
- Final EPA regional-haze, air-toxics, cross-state and water-intake requirements, including whether scrubbers or other major compliance spending will be required and recoverable.
- Enogex’s contract-renewal outcome with its large customer, the resulting processing mix, and the effect of commodity prices on margins.
- Funding needs and liquidity as planned capital expenditures rise, including debt issuance, ArcLight contributions and the company’s ability to maintain credit access.