OGE Energy Corp. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are with December 31, 2010. Amounts are in millions of dollars unless otherwise noted. OGE Energy operates a regulated electric utility, OG&E, and natural-gas midstream businesses through Enogex. Results are unaudited and the company cautions that the quarter may not indicate full-year results.
Financial results and key metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating revenues | $840.5 | $875.8 |
| Gross margin | $307.3 (36.6% of revenue) | $305.7 (34.9%) |
| Operating income | $67.9 | $86.8 |
| Net income attributable to OGE Energy | $24.8 | $24.2 |
| Diluted EPS | $0.25 | $0.25 |
| Cash from operating activities | $76.3 | $116.0 |
| Capital expenditures, net of equity AFUDC | $195.0 | $135.0 |
- Revenue declined 4.0% and operating income fell 21.8%; gross margin increased modestly, but operating and maintenance costs and depreciation rose.
- OG&E’s gross margin rose to $202.7 from $193.2, supported by rate riders, customer mix, non-residential demand and customer growth. Milder weather partly offset those gains. OG&E operating income nevertheless declined to $26.0 from $31.9, mainly on higher operating and maintenance expense.
- Enogex operating income fell to $41.6 from $57.0. The prior-year quarter benefited from $6.7 of recovery of earlier fuel under-recoveries and $2.4 of operational storage hedge gains, neither repeated in Q1 2011. Lower natural-gas prices and physical gas position effects also weighed on results; higher NGL prices and volumes partly offset the decline.
- Net income attributable to OGE Energy increased $0.6, or 2.5%, despite lower operating income. The 2010 comparison included an $11.4 non-cash tax charge ($0.11 per diluted share) related to the elimination of the Medicare Part D subsidy tax deduction. Q1 2011 also included higher noncontrolling-interest income following ArcLight’s increased ownership in Enogex Holdings.
- Cash from operations decreased $39.7, principally because Q1 2010 included a tax refund related to a prior-year loss. Investing cash outflow increased to $182.0, mainly reflecting higher project spending. Financing provided $107.4, including $73.5 of noncontrolling-partner contributions and $92.2 of increased short-term debt; cash ended at $4.0.
- At March 31, short-term debt was $237.2, up from $145.0 at year-end; long-term debt was $2,338.1, down from $2,362.9. The company reported $997.5 of net available liquidity under revolving credit agreements, in addition to $4.0 of cash. It was in compliance with debt agreements.
- Total assets were $7,690.6 and total stockholders’ equity was $2,468.9. Declared dividends rose to $0.375 per share from $0.3625.
Material changes, outlook and management commentary
- Guidance unchanged: 2011 net income of $299–$318, or $3.00–$3.20 per average diluted share. Management said stronger NGL prices could lift Enogex above its $0.90–$1.05 per-share guidance range if prices persist and other assumptions hold. If Enogex completes proposed contract renewals that shift a large customer from keep-whole to fixed-fee processing, management instead expects Enogex near the lower end of that range.
- ArcLight investment: ArcLight and OGE contributed $71.6 and $8.0, respectively, toward Enogex capital needs; OGE also sold ArcLight a 0.1% Enogex Holdings interest. ArcLight’s ownership reached 13.3%. The transactions contributed to higher noncontrolling interests and provided funding for Enogex investment.
- Capital program: The filing estimates 2011 capital expenditures of $1.35 billion, including $960 for OG&E and $370 for Enogex. Management expects operating cash, debt, equity issuance and ArcLight funding to support anticipated needs over the next three years. In April, the company contributed $20 to its pension plan and expected a further $30 during 2011.
- Environmental exposure: EPA proposals on regional haze could require controls at OG&E coal plants. OG&E estimated NOx-control costs of $70–$130; the proposed federal SO2 standard could require dry scrubbers estimated to cost more than $1 billion, or fuel switching. The final compliance approach and costs were not yet determinable. EPA also proposed hazardous-air-pollutant rules whose compliance costs could be significant.
- Legal and regulatory matters: EPA issued a notice alleging Clean Air Act permitting violations at the Muskogee and Sooner plants; potential remedies could include pollution controls and penalties. A citizen-suit notice also alleged opacity violations. An intervenor sought a $15.5 refund in OG&E’s review of its 2009 fuel adjustment clause; OG&E disputed the claims. OG&E’s Arkansas rate case remained pending. Management did not expect the disclosed pending matters to materially affect consolidated results, subject to the stated uncertainties.
- Other developments: OG&E’s SPP transmission-cost tracker was approved, with $1.8 of incremental 2011 revenue anticipated. Enogex completed the sale of its Harrah plant and associated gathering assets on April 1 for approximately $16.1 and expected a second-quarter pre-tax gain of approximately $3.0.
- Management’s stated financial objectives include 5%–7% long-term annual weather-normalized earnings growth and a dividend payout of no more than 60% of normalized earnings. The company also highlighted commodity prices, weather, regulation, environmental requirements, financing access and project execution as risks to forward-looking results.
Important facts for investors to verify
- Whether operating performance and cash generation improve after the first-quarter decline, particularly at Enogex and in operating costs.
- Whether the $299–$318 full-year earnings guidance remains supportable given NGL prices, contract negotiations and other assumptions.
- How OG&E’s rate cases, fuel-clause review and other regulatory proceedings resolve, including the requested $15.5 refund.
- The final EPA requirements, compliance timetable and recoverability of environmental spending, especially potential SO2 controls.
- Whether the company can fund its substantial capital program while managing higher short-term debt, pension contributions and liquidity needs.
- The outcome of EPA allegations and the opacity matter, and any resulting penalties, controls or other costs.