OGE Energy Corp. 2010 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2010; it is not a standalone fourth-quarter filing. OGE Energy operates regulated electric utility OG&E in Oklahoma and western Arkansas and natural-gas midstream businesses through Enogex, including transportation and storage, gathering and processing, and marketing.
Financial results and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $3,716.9 million | $2,869.7 million |
| Gross margin | $1,529.5 million | $1,312.0 million |
| Operating income | $593.9 million | $491.9 million |
| Net income attributable to OGE Energy | $295.3 million | $258.3 million |
| Diluted EPS | $2.99 | $2.66 |
| Cash from operating activities | $782.5 million | $654.5 million |
| Capital expenditures | $851.7 million | $847.8 million |
Revenue increased 29.5%, while gross margin increased 16.6% and operating income 20.7%. Net income attributable to OGE Energy rose 14.3%. The company reported $2.3 million of cash at year-end, $145.0 million of short-term debt, and $2,362.9 million of long-term debt. It reported $1,064.7 million of net available liquidity under revolving credit agreements. Operating cash flow was about $69 million below capital expenditures.
OG&E generated $413.7 million of operating income, up from $354.1 million; Enogex generated $184.3 million, up from $138.7 million. Enogex’s segment gross margin was $422.6 million. The filing does not provide a consolidated EBITDA figure.
Material changes versus the prior comparable period
- OG&E gross margin grew to $1,109.7 million from $954.9 million, supported by rate riders, the full-year effect of prior rate increases, warmer weather, and customer growth. Higher fuel, purchased-power, operating, and depreciation costs partly offset the increase.
- Enogex operating income improved substantially, mainly on higher processing spreads and commodity prices, and increased gathered and processed volumes. Transportation and storage gross margin declined slightly; natural-gas marketing shifted to a gross-margin loss.
- System electric sales rose 6.6% to 27.6 million MWh. Enogex gathered volumes increased, while total transportation throughput declined to 1.72 TBtu/d from 1.79 TBtu/d.
- Cash from operations increased, including the effect of tax refunds and higher Enogex receipts. Investing cash outflow remained high at $846.1 million.
Outlook, commentary, risks, and unusual items
- Management’s 2011 earnings guidance is $299 million–$318 million of net income, or $3.00–$3.20 per diluted share, based on stated assumptions including normal weather. The company’s long-term objective is 5%–7% annual weather-normalized earnings growth and a dividend payout ratio no greater than 60% of normalized earnings.
- Planned 2011 capital expenditures are $1.42 billion, including major utility transmission, Smart Grid, Crossroads wind, and Enogex gathering and processing projects. Management expects to fund needs through operating cash, debt, equity issuance and ArcLight’s Enogex investment. OG&E expected to issue $250 million–$300 million of long-term debt in mid-2011.
- OG&E’s 2010 Arkansas rate case requested a $17.7 million increase. Regulatory approval and recovery of planned investments remain important uncertainties. Environmental compliance is a major risk: possible federal regional-haze requirements could make dry scrubbers cost more than $1.0 billion; final requirements and recoverability were uncertain.
- Enogex estimated $100 million–$150 million of pipeline integrity expenditures and operating costs for 2011–2015. Commodity prices, producer drilling and customer concentration affect midstream results. Its top 10 producer customers represented 66.6% of gathering and processing volumes.
- A December 2010 fire damaged a processing train at Enogex’s Cox City plant. The company recorded a $3.5 million pretax loss and an offsetting $3.5 million insurance gain; it expected the plant to return to full service in the third quarter of 2011, with most repair costs above the $10 million deductible expected to be insured.
- The $183.15 million ArcLight investment gave the investor a 9.9% Enogex Holdings interest at closing; its interest reached 13.3% by February 2011. OGE Energy continued to consolidate Enogex.
- 2010 earnings included an $11.4 million non-cash Medicare Part D tax-subsidy charge, or $0.11 per diluted share. Excluding it, management reported non-GAAP ongoing earnings of $306.7 million and ongoing EPS of $3.10; these measures are not substitutes for GAAP results.
Important facts for investors to verify
- Whether 2011 earnings guidance, weather and volume assumptions, and stated commodity-price assumptions were achieved.
- Final outcomes and recovery mechanisms for the Arkansas and Oklahoma rate proceedings, Smart Grid costs, transmission riders, and environmental requirements, particularly regional haze.
- Enogex’s project spending, pipeline integrity costs, Cox City insurance recovery and repair schedule, and exposure to concentrated producers and commodity spreads.
- Debt issuance, liquidity, capital spending and funding needs, including the effect of ArcLight’s increasing ownership and capital contributions.
- The status and potential exposure of unresolved gas-measurement and royalty litigation; the filing says potential loss estimates for the Price cases are unavailable.