OGE Energy Corp. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 3, 2011. Financial statements are unaudited. OGE Energy operates a regulated electric utility, OG&E, and natural-gas midstream businesses through Enogex.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $1,212.1 million | $1,125.4 million | $3,030.7 million | $2,888.4 million |
| Gross margin | $553.6 million | $512.8 million | $1,288.9 million | $1,199.2 million |
| Operating income | $299.7 million | $274.2 million | $549.8 million | $512.5 million |
| Net income attributable to OGE Energy | $178.7 million | $163.1 million | $306.5 million | $264.6 million |
| Diluted EPS | $1.80 | $1.65 | $3.09 | $2.68 |
| Dividends declared per share | $0.375 | $0.3625 | $1.125 | $1.0875 |
- Cash flow, nine months: Operating cash flow was $528.7 million, versus $586.9 million; capital expenditures were $907.3 million, and net cash used in investing was $852.3 million, versus $586.0 million. Financing provided $326.9 million, compared with $50.5 million used in 2010. Cash at September 30 was $5.6 million.
- Debt and liquidity: Short-term debt was $289.0 million and long-term debt $2,586.9 million, totaling $2,875.9 million, compared with $2,507.9 million at December 31, 2010. The company reported $943.8 million of net available liquidity under revolving credit agreements. Total assets were $8,378.8 million; stockholders’ equity was $2,698.9 million.
- Margins and segments: OG&E operating income rose to $258.7 million in Q3 and $418.0 million year to date. Enogex operating income fell to $41.1 million in Q3 and $131.6 million year to date, from $44.8 million and $140.3 million, respectively.
Changes versus comparable periods
- Q3 net income attributable to OGE Energy increased 9.6%; nine-month net income rose 15.8%. Diluted EPS increased 9.1% and 15.3%, respectively.
- OG&E’s higher gross margin—primarily from hotter-than-normal weather, customer growth, transmission revenues and rate-related items—drove much of the earnings improvement. Year-to-date warmer weather contributed $24.9 million to OG&E gross margin.
- Enogex’s Q3 gross margin improved, but higher operating costs and a $5.0 million Atoka plant impairment reduced operating income. For the nine months, higher gathering and processing margin was offset by costs, lower average gas prices, reduced processing capacity and weaker physical gas-position results.
- Operating cash flow declined $58.2 million, principally reflecting the absence of 2010 tax refunds. Investing outflows increased with construction spending. Debt increased, including after a $250 million long-term debt issuance in May.
Outlook, commentary, risks and unusual items
- 2011 guidance raised: Management expects net income of $338–$343 million, or $3.40–$3.45 per diluted share, versus prior guidance of $299–$318 million, or $3.00–$3.20. The increase primarily reflects unusually hot summer weather and higher expected OG&E earnings. Guidance assumes normal weather for the remainder of the year; OG&E earnings are seasonally concentrated in Q3.
- Segment outlook: OG&E guidance is $249–$254 million; Enogex is $90–$95 million. Management expects Enogex gross margin of $450–$465 million, with growth from transportation demand, contracts and NGL prices, partly offset by expenses and lower expected processing volumes. Its strategy emphasizes fee-based services and managing commodity exposure.
- Investment plans: Estimated 2011 capital expenditures are $1.475 billion. Major Enogex expansion projects include a $505 million western Oklahoma/Texas Panhandle gathering expansion estimate for 2011. Enogex’s $200 million Granite Wash gathering-system acquisition closed November 1, after quarter-end; purchase-price allocation was incomplete, with significant goodwill and intangibles expected. Subsequent contributions reduced OGE Energy’s Enogex ownership from 86.7% at September 30 to 81.3% at November 1.
- Unusual items: The Atoka processing plant impairment was $5.0 million pre-tax. Enogex recorded a $2.3 million increase in nine-month net income from the Harrah plant and related asset sale. A $1.3 million inventory valuation loss was expected to be offset by withdrawal-sale gains in Q1 2012. Enogex received $5.0 million of partial insurance reimbursement in October for the Cox City plant outage; further recovery remained uncertain.
- Regulatory and environmental exposures: OG&E’s pending Oklahoma rate case seeks a $73.3 million annual increase, or 4.3%, with a requested 11% return on equity; an order was expected in early 2012. EPA regional-haze proposals could require more than $1.0 billion for dry scrubbers, although final compliance costs were not yet determinable; estimated NOX controls were $70–$130 million. Other potential requirements include hazardous-air-pollutant, cross-state pollution, greenhouse-gas and water-intake rules. An EPA notice alleges Clean Air Act violations at two generating stations; potential controls and penalties are uncertain.
- Other contingencies and risks: OG&E agreed to credit customers $8.4 million under the 2009 fuel-clause settlement, of which $4.9 million had been credited by August 2011. A patent-infringement suit concerning smart meters seeks unspecified damages and injunctive relief; management said it intends to defend the case. The Farris Buser royalty case was dismissed without prejudice and Enogex considers it closed. Management did not expect other pending claims to materially affect consolidated results. A below-investment-grade downgrade could require collateral; a downgrade of Enogex by S&P to BBB- in October did not trigger collateral or materially increase facility fees.
- Management said cash from operations, debt and equity financing, and Enogex partner funding should meet anticipated needs over the next three years. The filing cautions that interim results are seasonal and not necessarily indicative of full-year results. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether OG&E’s Oklahoma rate request is approved and how much of the requested increase is realized.
- Actual earnings versus guidance, especially the sensitivity of utility results to weather and Enogex results to commodity prices, volumes and fee-based contract mix.
- How the $1.475 billion 2011 capital program and subsequent acquisition are funded, and the resulting debt, liquidity and ownership effects.
- Final EPA and other environmental requirements, compliance costs, recoverability from customers and the outcome of the Clean Air Act notice.
- Insurance recovery for Cox City, the smart-meter patent litigation, and Enogex’s pending FERC rate matters.