OGE Energy Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. OGE Energy operates a regulated electric utility in Oklahoma and western Arkansas and natural gas transportation, storage, gathering, processing and marketing businesses, primarily in the south-central United States. Financial statements are unaudited.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $1,125.4 million | $845.3 million | $2,888.4 million | $2,096.0 million |
| Gross margin | $512.8 million | $431.2 million | $1,199.2 million | $1,004.5 million |
| Operating income | $274.2 million | $229.7 million | $512.5 million | $408.1 million |
| Net income attributable to OGE Energy | $163.1 million | $136.8 million | $264.6 million | $224.1 million |
| Diluted EPS | $1.65 | $1.40 | $2.68 | $2.31 |
| Dividends declared per share | $0.3625 | $0.3550 | $1.0875 | $1.0650 |
- For the nine months, operating cash flow was $586.9 million, versus $439.3 million a year earlier. Investing activities used $586.0 million, including $591.3 million of capital expenditures; financing activities used $50.5 million. Cash declined to $8.5 million from $58.1 million at year-end 2009.
- At September 30, short-term debt was $224.0 million and long-term debt was $2,372.8 million. Revolving credit commitments totaled $1.235 billion, with $268.5 million outstanding; reported net available liquidity under the facilities was $966.5 million.
- Total assets were $7.527 billion and stockholders’ equity was $2.248 billion. Capital expenditures were estimated at $865 million for 2010 and $4.425 billion for 2010–2015.
Changes versus the prior comparable periods
- Q3 net income attributable to OGE Energy rose 19.2%; nine-month net income rose 18.1%. Nine-month results included an $11.4 million, $0.11-per-share, noncash charge from the 2010 change in tax treatment of Medicare Part D retiree-health subsidies. Excluding that charge, management reported ongoing earnings of $276.0 million, or $2.79 per diluted share, for the nine months.
- OG&E’s operating income increased to $231.0 million in Q3 from $193.2 million and to $375.9 million for nine months from $308.5 million. Higher gross margin reflected warmer weather, rate increases and riders; higher fuel, purchased power, maintenance and other operating costs partly offset the benefit.
- Enogex operating income increased to $46.8 million in Q3 from $41.9 million and to $147.7 million for nine months from $106.3 million. Gathering and processing improved on higher volumes, processing spreads and NGL and natural-gas prices; transportation and storage operating income declined, including from pipeline integrity work and weaker transportation margins.
- OERI, the natural-gas marketing business, recorded operating losses of $3.0 million for Q3 and $10.5 million for nine months. Its nine-month loss widened from $6.3 million in 2009, largely due to narrower market-location price spreads.
Outlook, developments and risks
- Management raised 2010 ongoing earnings guidance to $292–$302 million, or $2.95–$3.05 per diluted share, from $265–$290 million. The comparable projected GAAP range is $280.6–$290.6 million, or $2.84–$2.94 per share, after the Medicare Part D charge. Enogex’s outlook improved; OG&E’s earnings outlook was unchanged. Guidance is subject to seasonality, weather and other assumptions.
- On October 5, 2010, after quarter-end, OGE Energy agreed to sell Bronco Midstream Holdings, an ArcLight subsidiary, a 9.9% interest in Enogex Holdings for $183.15 million. Closing was expected November 1, 2010, subject to customary conditions. OGE Energy planned to contribute OERI to Enogex before closing and expected to retain control and consolidate Enogex. The sale was reflected in guidance through a projected noncontrolling-interest deduction.
- OG&E’s major investment programs include Smart Grid deployment, Crossroads wind generation and substantial transmission projects. Crossroads was expected to cost about $450 million and enter service by the end of 2011; transmission interconnection studies could affect timing or cost. The Smart Grid project has a $366.4 million eligible-cost cap inclusive of a $130 million federal grant.
- OG&E requested a $17.7 million Arkansas rate increase, with a decision and implementation targeted for 2011. It also expected to refund customers $100 million of prior fuel over-recoveries by December 2010. These outcomes depend on regulatory processes.
- Environmental exposure includes regional-haze controls estimated at approximately $100 million, plus or minus 30%. If the EPA rejects the proposed state plan and appeals are exhausted, alternatives could include dry scrubbers or fuel switching; scrubber cost estimates exceed $1 billion. The cost and effect of evolving greenhouse-gas, air-quality and coal-ash rules remained uncertain.
- Other risks include commodity prices and spreads, weather, regulation and cost recovery, financing and credit ratings, derivative collateral requirements, and project execution. A downgrade below investment grade would have required $13.7 million of cash collateral on certain derivative positions at September 30. Enogex’s S&P outlook was revised to negative in October; OGE Energy and OG&E ratings and outlooks were unchanged.
- Two natural-gas measurement class actions remained pending; class certification had been denied and rehearing rejected, but the company could not estimate the likelihood or amount of potential loss. The Oxley arbitration was closed with no additional payment due. Management said other disclosed contingencies were not expected to have a material adverse effect, subject to stated exceptions.
Investor verification priorities
- Reconcile reported GAAP earnings with ongoing earnings, including the Medicare Part D charge and the treatment of OERI after its planned contribution to Enogex.
- Track completion and terms of the Bronco investment, Enogex’s future capital funding and the impact of the noncontrolling interest.
- Assess whether OG&E’s capital program, rate riders and pending Arkansas rate request support timely recovery of planned investment and operating costs.
- Monitor Enogex processing spreads, volumes and transportation margins, as well as commodity exposure and potential collateral needs.
- Follow environmental rulemaking, transmission and wind interconnection approvals, and the unresolved natural-gas measurement litigation.