OGE Energy Corp. — Q3 2012 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2012. OGE Energy operates a regulated electric utility, OG&E, and natural gas midstream businesses through Enogex. Enogex integrated its commodity management activities during the quarter and restated prior segment presentations.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenues | $1,113.4 million | $1,212.1 million | $2,809.1 million | $3,030.7 million |
| Gross margin on revenues | $573.8 million | $553.6 million | $1,374.9 million | $1,288.9 million |
| Operating income | $304.0 million | $299.7 million | $579.6 million | $549.8 million |
| Net income attributable to OGE Energy | $185.5 million | $178.7 million | $316.5 million | $306.5 million |
| Diluted EPS | $1.87 | $1.80 | $3.20 | $3.09 |
| Dividends declared per share | $0.3925 | $0.3750 | $1.1775 | $1.1250 |
Cash flow and investment: For the first nine months, operating cash flow was $678.0 million, versus $528.7 million a year earlier. Investing cash outflow was $836.6 million, including $792.8 million of capital expenditures and $80.5 million for gathering-asset acquisitions. Financing cash inflow was $164.2 million; cash ended at $10.2 million.
Debt and liquidity: At September 30, short-term debt was $455.6 million and long-term debt was $2,848.4 million. The company reported $1,092.2 million of net available liquidity under revolving credit agreements and $10.2 million of cash. Short-term debt carried a 0.44% weighted-average rate. Enogex entered into a $250 million, three-year term loan in August.
Material changes and drivers
- Q3 revenue declined 8.1%, while gross margin increased 3.7% and OGE-attributable net income rose 3.8%. For nine months, revenue fell 7.3%, while gross margin increased 6.7% and attributable net income rose 3.3%.
- OG&E’s nine-month gross margin increased $46.6 million, primarily from investment recovery, transmission revenue and customer growth; milder weather reduced margin by $41.4 million. Lower natural-gas prices reduced fuel costs, while depreciation and interest expenses increased.
- Enogex’s gathering and processing gross margin grew with expansion projects, acquired assets, higher volumes and processing capacity. Lower natural-gas and NGL prices, increased depreciation and higher interest costs were offsets. Transportation and storage margin weakened.
- Capital expenditures were lower year over year, chiefly because Crossroads wind-farm spending declined, but Enogex continued substantial gathering and processing expansion. Total estimated capital expenditures were $1.155 billion for 2012 and $1.140 billion for 2013.
Guidance, commentary and risks
- 2012 guidance unchanged: net income of $337 million to $357 million, or $3.40 to $3.60 per diluted share. OG&E was projected at the upper end of its $258 million to $268 million range, reflecting favorable Q3 weather; the filing assumes normal weather for the remainder of the year. Enogex guidance remained $80 million to $95 million, net of noncontrolling interest.
- Management’s long-term objectives include weather-normalized annual EPS growth of 5% to 7% and a dividend payout ratio no greater than 60% of normalized earnings. Results are seasonal and nine-month performance is not necessarily indicative of full-year results.
- Unusual items included a $7.5 million pretax insurance gain for the Cox City plant fire recovery and $3.8 million of acquisition-related sales tax expense. Management said these were not reflective of ongoing Enogex performance.
- Environmental exposure: The EPA regional-haze rule was stayed pending appeal; required dry scrubbers could cost more than $1.0 billion, although fuel switching is also a possible compliance path. Planned Mercury and Air Toxics compliance equipment was estimated at $155 million to $310 million. Timing and ultimate costs were uncertain.
- Regulatory and market risks: A customer group had sought disallowance of approximately $44 million in OG&E 2010 fuel costs; an administrative law judge recommended no disallowance, but an OCC decision was pending. Commodity prices, weather, regulatory cost recovery, credit ratings, financing access and derivative collateral requirements remain risks. Fitch downgraded OGE Energy’s short- and long-term ratings in June 2012.
- The filing reports the Price I and Price II natural-gas measurement cases as closed for Enogex LLC and EER after their dismissal. Other contingencies and environmental proceedings remain subject to uncertainty.
Important facts for investors to verify
- Whether 2012 earnings meet guidance, particularly given OG&E’s weather sensitivity and Enogex’s volume and commodity-price exposure.
- Outcome of the regional-haze appeal and the resulting compliance approach, capital cost and rate recovery.
- Final OCC resolution of the 2010 fuel-adjustment review and recovery of utility transmission and other investment costs.
- Enogex expansion returns, acquisition purchase-price adjustments, and the effect of the October 2012 capital contributions and ownership dilution.
- Funding needs and liquidity as planned 2012–2013 capital expenditures proceed; the filing’s liquidity and debt figures are as of September 30, 2012.