OGE ENERGY CORP. annual report, FY2012

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OGE Energy Corp. — 2012 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2012; the filing also reports unaudited fourth-quarter results. OGE Energy operates regulated electric utility OG&E in Oklahoma and western Arkansas and natural gas midstream business Enogex, in which it held a 79.9% indirect interest at year-end. Enogex provides gathering, processing, transportation and storage services. Its segment presentation changed in 2012 following the integration of EER; prior periods were restated.

Financial and operating results

  • Revenue and margins: Revenue was $3.671 billion, down 6.2% from $3.916 billion. Gross margin rose 7.0% to $1.753 billion; operating income increased 4.7% to $676.9 million.
  • Profit and EPS: Net income attributable to OGE Energy was $355.0 million, up 3.5% from $342.9 million. Diluted EPS was $3.58 versus $3.45. Net income was $385.0 million, including $30.0 million attributable to noncontrolling interests. Fourth-quarter attributable income was $38.5 million and diluted EPS was $0.39, compared with $36.4 million and $0.37 in Q4 2011.
  • Segment performance: OG&E operating income increased to $489.4 million from $472.3 million, supported by higher gross margin and transmission revenue, partly offset by mild weather and higher expenses. Enogex operating income rose to $185.6 million from $175.0 million; gathering and processing improved, while transportation and storage weakened. Enogex’s attributable net income declined 9.9%, to $73.9 million, primarily reflecting higher operating and depreciation costs, interest expense, and OGE Energy’s reduced ownership share.
  • Cash flow: Operating cash flow was $1.046 billion, up 25.4%. Investing cash use was $1.193 billion, including $1.151 billion of capital expenditures and $78.6 million for gathering assets. Financing provided $143.7 million. Cash declined $2.8 million to $1.8 million. Operating cash flow less reported capital expenditures was approximately negative $105 million.
  • Debt and liquidity: Long-term debt was $2.849 billion and short-term debt $430.9 million, for total reported debt of about $3.280 billion. Cash was $1.8 million; net available liquidity under revolving credit agreements was $1.117 billion. Total assets were $9.922 billion, total liabilities $6.850 billion and stockholders’ equity $3.072 billion. The company reported compliance with debt agreements.
  • Dividends: Dividends declared were $1.595 per share for 2012, versus $1.5175 in 2011. The quarterly rate increased from $0.3925 to $0.4175 beginning in Q1 2013.

Material changes versus the prior comparable period

  • Revenue fell mainly because lower natural gas prices and sales reduced reported midstream revenue; lower fuel costs also reduced OG&E revenue and cost of goods sold. OG&E gross margin nevertheless increased by $64.1 million, including investment recovery and transmission revenue, partly offset by weather-related volume declines.
  • Enogex gathering and processing gross margin increased 19.4%, supported by higher volumes, expanded assets and new capacity, despite lower average natural gas and NGL prices. Transportation and storage gross margin declined 6.6%.
  • Capital spending and acquisitions expanded the asset base: net property, plant and equipment increased to $8.345 billion from $7.474 billion. Operating cash flow improved, while short-term debt rose to $430.9 million from $277.1 million.
  • Enogex’s ownership mix shifted: OGE Energy’s indirect interest declined from 81.3% to 79.9% as ArcLight’s interest increased to 20.1%.

Outlook, commentary, risks and unusual items

  • 2013 guidance: Net income of approximately $335–$360 million, or $3.35–$3.60 per diluted share. OG&E is projected to earn $280–$290 million; Enogex is projected to earn $55–$75 million, net of noncontrolling interest. Management’s long-term objective is 5%–7% annual weather-normalized earnings growth and a dividend payout ratio no greater than 60% of normalized earnings.
  • Capital program: Estimated capital expenditures total $1.245 billion in 2013 and $760 million in 2014. Management expected cash from operations, debt and equity issuance, and ArcLight funding to cover anticipated needs over the next three years. OGE Energy expected to issue up to $250 million of OG&E long-term debt in the first half of 2013, subject to market conditions.
  • Environmental exposure: The EPA regional-haze rule could require dry scrubbers or fuel switching at four coal units; OG&E estimated scrubbers could cost more than $1.0 billion. The rule was stayed pending appeal. MATS controls were estimated at $34–$72 million per coal unit. Environmental costs and regulatory outcomes remain uncertain, including cost recovery.
  • Other material risks: Enogex faces commodity-price and processing-spread volatility, drilling and throughput risk, and customer concentration (its top ten producers accounted for 73% of gathering and processing volumes). Pipeline integrity work was estimated at $100–$160 million for 2013–2017, with additional costs under new pipeline-safety requirements not yet estimable. Other risks include utility rate recovery, severe weather, cyber incidents, interest rates and access to capital.
  • Unusual items: Enogex recognized a $7.5 million insurance gain in 2012 related to the Cox City plant fire. A Texas Panhandle asset sale for about $35 million, expected to produce an approximately $10 million pretax gain, was completed in January 2013. The 2012 effective tax rate was 26.0%, compared with 30.7% in 2011, partly reflecting wind-related tax credits.
  • Regulatory and assurance: The OCC approved a 2012 rate-case settlement providing an annual net Oklahoma rate increase of about $4.3 million and an authorized return on equity of 10.2%. Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.

Important facts for investors to verify

  • Track the appeal and eventual compliance requirements for regional haze and MATS, including whether major control costs can be recovered in customer rates.
  • Compare actual 2013 earnings and Enogex volumes, commodity prices and contract mix with guidance assumptions.
  • Monitor capital spending, planned debt issuance, available revolver capacity and cash generation relative to investment and dividends.
  • Assess Enogex customer concentration, ArcLight’s ownership and funding commitments, and the performance of recent gathering and processing expansions.
  • Review subsequent decisions in pending regulatory matters, including the 2011 fuel-cost review, Crossroads wind cost recovery and FERC Order No. 1000 implementation.