OGE Energy Corp. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparative figures are for 2011. Amounts are in millions except per-share data. OGE Energy operates regulated electric utility OG&E and natural gas midstream business Enogex; OGE Energy owned an indirect 81.3% interest in Enogex Holdings at quarter-end.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenues | $855.0 | $978.1 | $1,695.7 | $1,818.6 |
| Gross margin on revenues | $445.7 | $428.0 | $801.1 | $735.3 |
| Operating income | $177.3 | $182.2 | $275.6 | $250.1 |
| Net income attributable to OGE Energy | $93.9 | $103.0 | $131.0 | $127.8 |
| Diluted EPS | $0.95 | $1.04 | $1.33 | $1.29 |
| Dividends declared per share | $0.3925 | $0.3750 | $0.7850 | $0.7500 |
- Q2 revenue declined 12.6% and OGE-attributable net income declined 8.8%. Gross margin increased, but higher operating costs and depreciation, together with lower other income, weighed on results.
- For the first half, revenue fell 6.8%, while OGE-attributable net income rose 2.5%. Higher gross margin at OG&E and Enogex, plus a $7.5 million insurance gain at Enogex, contributed to the improvement.
- OG&E’s Q2 operating income fell to $127.8 million from $133.3 million; Enogex’s rose slightly to $48.5 million from $48.9 million only after segment presentation? The filing reports Enogex operating income of $48.5 million versus $48.9 million for Q2, and $107.2 million versus $90.5 million for the first half. Enogex’s first-half improvement reflected stronger gathering and processing margins and the insurance gain.
- Enogex’s first-half gathering and processing gross margin increased to $174.4 million from $148.6 million, supported by higher volumes, expansion activity and acquired assets. Lower natural gas and NGL prices were offsets. Electric utility gross margin benefited from investment recovery and transmission revenue, partly offset by milder weather.
Cash flow, debt and liquidity
- First-half operating cash flow was $281.5 million, compared with $246.5 million in 2011. Investing cash outflow was $526.9 million, including $558.5 million of capital expenditures net of allowance for equity funds used during construction. Financing provided $242.5 million. Cash ended at $1.7 million.
- Short-term debt increased to $596.7 million at June 30 from $277.1 million at year-end. Long-term debt was $2,737.5 million; total reported short- and long-term debt was approximately $3.33 billion.
- The company reported $801.1 million of net available liquidity under revolving credit agreements and $1.7 million of cash. Short-term borrowing rates were low, but access to commercial paper and borrowing costs could be affected by ratings or market disruption.
- Total assets were $9.35 billion and stockholders’ equity was $2.88 billion at June 30. The filing states the company was in compliance with its debt agreements.
Outlook, developments and risks
- Management maintained 2012 earnings guidance of $337–$357 million of net income, or $3.40–$3.60 per diluted share. OG&E guidance was $258–$268 million; Enogex guidance was $80–$95 million, net of noncontrolling interest.
- OG&E’s guidance assumes normal weather for the remainder of the year. New Oklahoma rates, effective in early August, are expected to add about $3 million to gross margin; a transmission rider planned for October was expected to add about $1 million. OG&E noted that earnings are seasonal, with most typically earned in the third quarter.
- Enogex’s outlook assumes higher gathered and processable volumes, specified commodity-price and contract-mix assumptions, and up to $250 million of debt financing in Q3. Management projected 2013 increases of 10–15% in gathered volumes and about 15% in processable volumes.
- Oklahoma approved an OG&E rate-case settlement providing an annual net rate increase of about $4.3 million and a 10.2% authorized return on equity, well below the company’s requested $73.3 million increase. A 2010 fuel-cost review remained pending: an intervenor had proposed disallowing approximately $44 million, while OCC Staff later recommended a $3 million customer refund tied to a generating-unit outage. OG&E disputed the recommendations.
- Environmental compliance is a major uncertainty. The EPA regional-haze rule could require scrubbers estimated to cost more than $1.0 billion, or fuel switching; a court stay delayed implementation while litigation proceeds. OG&E estimated up to $310 million for planned hazardous-air-pollutant controls. Costs and timing for other air and water rules were uncertain and could be significant.
- On August 1, Enogex agreed to acquire gathering assets for approximately $70 million and enter a fee-based service agreement, subject to closing conditions. Associated gathering and compression investment was projected at about $325 million through 2012 and 2013. Enogex also had substantial expansion projects underway.
- Unusual items include the $7.5 million first-half insurance gain from the Cox City plant fire settlement; the comparable 2011 period included a gain on asset sales. Fitch downgraded OGE Energy’s short- and long-term ratings in June, citing environmental uncertainty and Enogex commodity and growth risks. Management identified commodity prices, weather, regulation, environmental rules, financing access and counterparties among forward-looking risks.
Important facts for investors to verify
- Whether OG&E’s approved rate settlement and transmission recovery deliver the expected margin contribution, and the outcome of the fuel-adjustment review.
- Progress and funding for Enogex’s planned asset purchase and expansion spending, including anticipated debt financing and ArcLight contributions.
- The outcome, timing and ultimate compliance costs of environmental rules and litigation, particularly regional haze and hazardous-air-pollutant requirements.
- Whether 2012 earnings guidance is achieved, given weather sensitivity, commodity prices, lower midstream product prices and Enogex volume assumptions.
- Liquidity and refinancing capacity as short-term debt and capital spending increase, including any impact from credit-rating changes.