OGE Energy Corp. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. OGE Energy operated through its electric utility and natural gas midstream businesses. Enogex was consolidated during the quarter; the Midstream Partnership transaction closed May 1, 2013, after the reporting date.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $901.4 million | $840.7 million |
| Gross margin | $348.4 million | $355.4 million |
| Operating income | $75.4 million | $98.3 million |
| Net income attributable to OGE Energy | $23.1 million | $37.1 million |
| Diluted EPS | $0.23 | $0.38 |
| Operating cash flow | $59.2 million | $120.3 million |
| Capital expenditures, net of AFUDC | $325.1 million | $311.1 million |
| Dividends declared per share | $0.4175 | $0.3925 |
Revenue rose 7.2%, but gross margin fell 2.0% and operating income declined 23.3%. Net income attributable to OGE Energy decreased 37.7%; diluted EPS fell 39.5%. The filing attributes the earnings decline principally to weaker Enogex midstream results, partly offset by higher OG&E earnings. Approximate consolidated gross and operating margins were 38.7% and 8.4%, versus 42.3% and 11.7% a year earlier.
Segment performance: OG&E operating income increased to $52.9 million from $39.8 million, helped by higher transmission revenue, usage and lower operating and maintenance costs. Enogex operating income fell to $24.3 million from $58.7 million. Its gathering and processing results were pressured by lower NGL prices and keep-whole spreads, plus a major customer’s shift from keep-whole to fixed-fee; higher volumes and gathering rates provided partial offsets.
Cash, debt and liquidity
Cash was $7.1 million at March 31, versus $1.8 million at year-end. Current assets of $626.5 million were below current liabilities of $1,482.2 million, a working-capital deficit of $855.7 million. Short-term debt was $707.0 million, up from $430.9 million at December 31; long-term debt was $2,848.7 million. The company reported $840.9 million of net available liquidity under its revolving facilities and was in compliance with its debt agreements.
Operating cash flow declined by $61.1 million year over year, primarily reflecting OG&E fuel refunds versus prior-year fuel over-recoveries and weaker Enogex margins. Investing cash use was $289.5 million, including $325.1 million of capital expenditures, partly offset by $35.6 million of asset-sale proceeds. Financing cash provided was $235.6 million, mainly from increased short-term borrowing; dividends paid were $41.2 million.
Material developments, outlook and risks
- Midstream Partnership: The May 1 closing combined Enogex with CenterPoint midstream assets, with OGE holding 28.5% of partnership limited-partner interests at closing and sharing equal management rights with CenterPoint. OGE deconsolidated Enogex and expects equity-method accounting. The filing says the transaction’s effects are excluded from 2013 earnings guidance; an IPO was contemplated but not assured.
- Guidance: 2013 consolidated net income guidance remained approximately $335 million to $360 million, or $3.35 to $3.60 per diluted share, assuming normal weather for the rest of the year. Guidance excludes the Midstream Partnership formation and contributed CenterPoint operations.
- Unusual items: Enogex recorded a $9.9 million pretax gain on the Texas Panhandle asset sale (approximately $35 million proceeds), increasing its Q1 net income by $6.1 million. Q1 2012 included a $7.5 million insurance gain, which increased Enogex net income by $4.6 million. OG&E recorded a $7.8 million reserve, or $5.1 million after tax, for Oklahoma investment tax credits it may not be able to use.
- Environmental exposure: OG&E’s challenge to an EPA regional-haze rule remained pending; a court stay delayed implementation. Dry scrubbers could cost more than $1.0 billion if required. Separately, DOJ indicated it was prepared to bring enforcement litigation over alleged Clean Air Act violations at two generating plants; litigation timing and outcome were uncertain, and potential equipment costs and penalties could be significant.
- Other risks: Midstream integration and OGE’s lack of unilateral control over partnership decisions; commodity prices and processing spreads; weather; financing access and interest rates; regulation and environmental requirements. Management stated disclosure controls were effective.
Investor verification priorities
- Confirm post-closing ownership, partnership accounting and any resulting effects on OGE’s earnings, cash flows, debt and distributions.
- Assess the sustainability of 2013 earnings guidance, especially Enogex’s weaker processing margins and the impact of nonrecurring gains.
- Track OG&E’s EPA litigation exposure and the outcome and cost implications of regional-haze and other environmental requirements.
- Review liquidity and refinancing needs alongside capital spending plans; verify whether expected second-quarter long-term debt issuance of up to $250 million occurred.
- Evaluate the investment tax credit reserve and potential further limitations on credit utilization.