OGE Energy Corp. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. OGE Energy operates a regulated electric utility and natural gas midstream and marketing businesses, primarily in the south-central United States. Financial statements are unaudited; dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $887.2 | $644.1 | $1,763.0 | $1,250.7 |
| Operating income | $151.5 | $126.4 | $238.3 | $178.4 |
| Net income attributable to OGE Energy | $77.3 | $70.5 | $101.5 | $87.3 |
| Diluted EPS | $0.78 | $0.72 | $1.03 | $0.91 |
| Dividends declared per share | $0.3625 | $0.3550 | $0.7250 | $0.7100 |
- Revenue rose 38% in Q2 and 41% for the first half year over year, reflecting higher electric utility revenue and substantially higher natural gas pipeline revenue. Operating income increased 20% in Q2 and 34% for the first half.
- Q2 net income attributable to OGE Energy increased 9.6%; first-half net income rose 16.3%, despite an $11.4 million non-cash charge in Q1 related to the change in tax treatment of Medicare Part D subsidies. First-half reported diluted EPS was $1.03; management’s non-GAAP ongoing EPS was $1.14.
- Six-month operating cash flow was $341.5, versus $186.9 in 2009; investing cash outflow was $291.6, versus $472.9. Operating cash flow included tax refunds and other working-capital effects. Cash ended at $7.3, down from $58.1 at year-end 2009.
- At June 30, total current assets were $697.6 and current liabilities $870.1. Long-term debt was $2,402.6 and short-term debt $112.9. Long-term debt increased from $2,088.9 at year-end, principally reflecting OG&E’s $250 million bond issue and Enogex borrowings. The company reported $1,047.6 of net available liquidity under revolving credit agreements.
- Segment trends: OG&E operating income increased to $113.0 in Q2 from $96.5, mainly on rate increases and riders. Enogex operating income rose to $44.0 from $32.6, driven by processing spreads, NGL prices and volumes; transportation and storage gross margin declined. OERI reported a Q2 operating loss of $6.0 versus $2.2, as narrower gas-market price spreads reduced marketing margins.
Outlook, commentary and risks
- 2010 ongoing earnings guidance was unchanged at $265–$290 million, or $2.70–$2.95 per diluted share, and management projected results toward the upper end. This excludes the $11.4 million Medicare Part D charge; projected GAAP net income was $253.6–$278.6 million, or $2.59–$2.84 per diluted share.
- Management cited expected OG&E earnings of $207–$217 million and Enogex earnings of $63–$85 million, with Enogex expected at the top of its range. Guidance assumptions included higher Enogex gathered and processing volumes, but increased pipeline integrity and maintenance costs. Consolidated projected effective tax rate was approximately 33%, excluding the one-time charge.
- Capital expenditures were estimated at $870 million for 2010 and $4.265 billion over the listed multi-year plan. The plan includes major transmission, Smart Grid and Crossroads wind projects. OG&E’s Crossroads project was approved for a larger 227.5 MW configuration, with projected total cost of about $450 million.
- OG&E expected to refund approximately $100 million of prior fuel over-recoveries to customers over six months beginning July 2010. Management expected operating cash, debt issuance and equity financing to meet anticipated needs over the next three years.
- Fitch downgraded OG&E’s issuer rating from A+ to A and senior unsecured debt rating from AA- to A+ in June, citing forecast cash-flow metrics, capital spending and non-cash allowance-for-funds-used-during-construction income. The company said the downgrade did not trigger collateral requirements or credit-facility fee changes.
- Key exposures include commodity-price and processing-spread volatility, weather and fuel costs, access to capital and credit-rating changes, regulatory recovery, environmental requirements, and counterparty risk. Proposed or pending environmental rules could add costs; preliminary regional-haze NOx-control estimates were about $100 million, plus or minus 30%.
- Two natural-gas measurement lawsuits remain unresolved; the company could not assess likelihood or estimate potential losses. The franchise-fee class action continued, although management did not expect a material adverse effect. The Oxley arbitration and the pipeline-rupture matter were resolved. OG&E’s coal railcar lease has a January 2011 end date and a potential maximum exposure of approximately $31.5 million if it neither purchases nor renews and actual railcar value is below the stipulated value.
- Results are seasonal and interim performance is not necessarily indicative of full-year results. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported GAAP earnings with management’s ongoing earnings guidance and assess the Medicare Part D tax charge and remaining projected tax effects.
- Confirm the drivers and durability of Enogex’s improved processing margins and volumes, and the continued losses at OERI.
- Review liquidity, planned capital spending, debt maturities and financing needs, including the effects of fuel refunds and the OG&E rating downgrade.
- Track regulatory approvals and cost recovery for Smart Grid, Crossroads, rate cases and transmission projects, plus environmental compliance costs.
- Monitor the unresolved litigation, railcar lease exposure, commodity/collateral requirements and any subsequent developments after June 30, 2010.