OGE Energy Corp. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited. OGE Energy operates a regulated electric utility, OG&E, and natural-gas midstream businesses through Enogex. Management cautions that first-quarter results are seasonal and are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Operating revenue | $840.7 million | $840.5 million |
| Gross margin | $355.4 million | $307.3 million |
| Operating income | $98.3 million | $67.9 million |
| Net income | $47.5 million | $29.7 million |
| Net income attributable to OGE Energy | $37.1 million; diluted EPS $0.38 | $24.8 million; diluted EPS $0.25 |
| Operating cash flow | $120.3 million | $76.3 million |
| Capital expenditures, net of construction allowance | $311.1 million | $195.0 million |
Gross margin was approximately 42.3% of revenue versus 36.6% a year earlier; operating margin was approximately 11.7% versus 8.1% (calculated from reported figures). Revenue was essentially flat, while gross margin rose 15.7% and operating income rose 44.8%. The company declared a $0.3925 per-share dividend, up from $0.3750.
OG&E operating income increased to $39.8 million from $26.0 million, principally on higher gross margin, including recovery of investments and transmission revenue; milder weather partly offset the increase. Enogex operating income rose to $58.7 million from $41.6 million, driven by gathering and processing growth, higher volumes and a $7.5 million insurance gain. Lower gas prices, higher operating costs and depreciation were offsets. Enogex EBITDA, a non-GAAP measure, was $81.3 million versus $59.5 million.
At March 31, total assets were $9.07 billion and total liabilities were $6.26 billion. Cash was $1.6 million. Short-term debt was $489.3 million, up from $277.1 million at year-end; long-term debt was $2.74 billion. The company reported $908.5 million of net available liquidity under revolving credit agreements. First-quarter investing cash outflow was $295.1 million and financing cash inflow was $171.8 million; cash declined $3.0 million from the start of the period.
Material changes and unusual items
- Operating income growth reflected improved utility gross margin and Enogex gathering and processing performance. Consolidated revenue barely changed, partly because lower natural-gas prices and changes in midstream marketing activity offset growth elsewhere.
- Enogex recorded a $7.5 million gain on insurance proceeds following settlement of the Cox City plant fire claim; it received $6.1 million during the quarter and another $1.5 million in April.
- OG&E revised wind-farm asset-retirement assumptions, increasing the related obligation from $24.8 million at January 1 to $51.9 million at March 31, including $26.7 million of revised estimated cash flows.
- First-quarter capital spending increased substantially, funded in part by higher short-term borrowing. Management estimated 2012 capital expenditures of $1.01 billion, including major utility transmission and Enogex expansion projects.
Outlook, risks and contingencies
- 2012 guidance: Net income of approximately $337 million to $357 million, or $3.40 to $3.60 per diluted share. Guidance excludes any effect of the pending Oklahoma rate case. Management’s long-term objective is annual weather-normalized earnings growth of 5% to 7%; its targeted dividend payout is no more than 60% of normalized earnings.
- OG&E outlook: $258 million to $268 million of 2012 earnings, assuming normal weather for the remainder of the year and weather-adjusted sales growth of about 1%. Each $5 million rate change is expected to affect annualized net income by about $3 million, with 2012 impact depending on the order’s timing.
- Enogex outlook: $80 million to $95 million of 2012 earnings, net of noncontrolling interest. Forecast assumptions include 6%–10% growth in gathered volumes and approximately 15% growth in processable volumes. Enogex’s 2013 volume projections assume 10%–15% growth in gathered volumes and approximately 15% growth in processable volumes.
- Rate and fuel proceedings: OG&E requested a $73.3 million annual Oklahoma rate increase; the OCC staff recommended a $6.2 million annual decrease, and other intervenors also sought decreases. No final rate order had issued. In a separate fuel-clause review, an intervenor recommended disallowance of approximately $44 million of previously recovered costs; OG&E disputed that recommendation. A hearing was scheduled for June 2012.
- Environmental exposure: EPA requirements for sulfur-dioxide controls could require dry scrubbers estimated to cost more than $1.0 billion, or fuel switching; the company and Oklahoma challenged the federal plan. Planned controls for hazardous air pollutants were estimated at $310 million. Timing, regulatory outcomes and recoverability are uncertain. An EPA notice of violation also alleges Clean Air Act permitting and emissions violations; potential remedies could include controls and penalties.
- Other risks: The Price natural-gas measurement cases remain pending; the company said it did not expect a material financial impact. Credit-rating downgrades could raise borrowing costs and require collateral. The company reported compliance with debt agreements and effective disclosure controls.
Important facts for investors to verify
- Whether the Oklahoma rate case results in a rate increase or decrease, and how its timing affects 2012 guidance.
- The outcome of the fuel-clause prudence review and any disallowance of the approximately $44 million under challenge.
- Environmental compliance costs, timing, regulatory cost recovery and the results of challenges to EPA requirements.
- Whether capital spending, expansion projects and operating cash generation affect short-term borrowing and available liquidity as expected.
- How much of reported earnings growth is repeatable, given the $7.5 million insurance gain, seasonal utility earnings and Enogex’s exposure to commodity prices and volumes.