OGE Energy Corp. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013. Unaudited results. OGE Energy operates a regulated electric utility and has an equity investment in natural gas midstream partnership Enable Midstream Partners.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $734.2 million | $855.0 million | $1,635.6 million | $1,695.7 million |
| Operating income | $143.9 million | $177.3 million | $219.3 million | $275.6 million |
| Net income attributable to OGE Energy | $91.7 million | $93.9 million | $114.8 million | $131.0 million |
| Diluted EPS | $0.46 | $0.47 | $0.58 | $0.66 |
| Cash from operations | Not separately reported | Not separately reported | $79.9 million | $281.5 million |
- Revenue and margins: Q2 revenue declined 14.1% year over year and six-month revenue declined 3.5%. The reduction primarily reflects the May 1 deconsolidation of Enogex Holdings following formation of Enable Midstream Partners, rather than a directly comparable decline in continuing operations. Gross margin was $363.6 million in Q2 and $712.0 million for the first half, down from $445.7 million and $801.1 million, respectively.
- Electric utility: OG&E operating income increased 8.1% in Q2 to $138.1 million and 14.0% for the first half to $191.0 million. Higher transmission revenue and lower operation and maintenance expense contributed; weather, higher fuel and purchased-power costs, and taxes were offsets. First-half electric sales were 13.4 million MWh versus 13.9 million.
- Midstream: Reported midstream operating income was $9.0 million in Q2 and $33.2 million for the first half, compared with $48.6 million and $107.2 million. These figures are not directly comparable: 2013 consolidated midstream operations are included only through April 30; subsequent results are reflected as equity earnings. OGE recorded $18.5 million of equity earnings from Enable for May and June.
- Cash flow and investment: First-half operating cash flow fell to $79.9 million, primarily due to fuel refunds at OG&E and the midstream deconsolidation. Capital expenditures were $565.0 million; investing cash use was $531.8 million. Financing provided $450.1 million. Cash and cash equivalents were effectively zero at June 30.
- Debt and liquidity: At June 30, short-term debt was $478.7 million and long-term debt was $2.400 billion. The company reported $669.2 million of net available liquidity under its revolving facilities, with $1.150 billion of aggregate commitments. Current assets of $607.0 million were below current liabilities of $1.017 billion. OGE issued $250 million of 3.9% senior notes due 2043; its debt agreements were reported in compliance.
- Shareholder returns: Dividends declared were $0.20875 per share for Q2 and $0.41750 for the first half. Amounts in the filing reflect the July 1, 2013 2-for-1 stock split.
Material changes and unusual items
- Effective May 1, OGE, CenterPoint and ArcLight formed Enable Midstream Partners. OGE contributed its midstream business, ceased consolidating Enogex Holdings, and began equity-method accounting for its 28.5% limited-partner interest. OGE and CenterPoint each hold 50% of general-partner management rights; neither controls the partnership.
- The transaction materially changed reported assets and equity: OGE reported a $1.267 billion investment in unconsolidated affiliates and no noncontrolling interests at June 30. Consolidated total assets were $8.849 billion, versus $9.922 billion at year-end 2012.
- OGE recorded a $7.8 million reserve ($5.1 million after tax) for Oklahoma investment tax credits it may not be able to use. It also reported transaction expenses related to Enable’s formation.
- OGE completed its planned $35 million pension contribution in May and expected no further 2013 contribution.
Outlook, risks and contingencies
- 2013 guidance: Consolidated net income guidance remained approximately $335–$360 million, or $1.68–$1.80 per diluted share, with management expecting results toward the high end. The outlook assumes normal weather for the rest of the year. Midstream earnings guidance increased to $70–$90 million, reflecting the expected accretive effect of Enable.
- Environmental exposure: A federal regional-haze rule could require pollution controls or fuel switching at four coal-fired units. Dry scrubbers could cost more than $1 billion; the court affirmed the EPA rule in July 2013, and OGE planned to seek rehearing. Separately, Clean Air Act litigation could lead to controls costing more than $1 billion and potential penalties of up to $37,500 per day per violation. Outcomes and required expenditures remain uncertain.
- Other regulatory matters: The FERC rejected part of the SPP’s transmission-planning compliance approach concerning rights of first refusal; the effect on OG&E remains unclear. The OCC initiated review of OG&E’s 2012 fuel-adjustment clause. A settlement in an Enable pipeline rate case set MRT’s annual cost of service at $84 million, with customer refunds reserved by Enable.
- Enable-related risks: OGE does not control Enable’s decisions or cash-distribution policy; its operating cash flow depends partly on distributions from the partnership. Integration risks remain. An Enable IPO was anticipated, with a registration statement expected in Q4 2013, but timing and completion depend on market conditions.
- Other risks include fuel and commodity prices, weather, access to credit, regulation, environmental compliance, and the potential for environmental or other legal costs. Management cautioned that seasonal results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- How the Enable formation affects future comparisons, cash distributions to OGE, and reported midstream earnings; confirm the partnership’s final purchase-accounting valuation and IPO progress.
- Whether 2013 guidance was achieved, particularly the assumed normal weather and high-end earnings expectation.
- Developments in the regional-haze rule and Clean Air Act litigation, including potential capital costs, compliance deadlines and penalties.
- OGE’s liquidity and refinancing needs given low cash, negative working capital, capital spending plans, and short-term borrowings.
- Whether fuel-adjustment recoveries, transmission revenues, and regulatory decisions support continued utility margin growth.