OGE to Offset Uprates with Cost Cut

Oklahoma Gas and Electric Company, a subsidiary of OGE Energy Corporation (OGE - Analyst Report), has planned to execute an interim annual rate increase of $24 million with the new rates effective from June 1, 2012, for its residential, commercial and industrial customers. However, in order to offset the increase the energy company plans to file for a reduction in fuel costs by $50 million annually that will finally result in a net reduction of the bill amount for all customers.

If the Oklahoma Corporation Commission (“OCC”) takes more than six months for review and issuance of order in rate case proceedings, then subject to reimbursement of the money, a utility is allowed to implement interim rates.

The company had made its initial filing in July last year for rate increase of approximately $73 million that if approved would be effective in 2012. If approved, the request would increase the average residential customer's monthly bill by approximately $6.50 per month. Larger commercial and industrial customers would likewise suffer a rate increase. However, schools and small businesses would see little or no increase. A hearing on the case was done in December 2011.

These rate increase filings seek to recover investments of $500 million made by the company over the past several years for electric system improvements. The company has made prudent investments that have improved the quality of service, provided customers with tools and information to better manage their energy use and earned best-in-class distinction for customer satisfaction. With plans to invest $3.7 billion over 2012–2016, the company is pursuing an aggressive energy efficiency program, investing in renewable energy technologies and upgrading its infrastructure.

OGE Energy is the largest electric utility in Oklahoma, with well-positioned regulated utility and unregulated midstream gas businesses. The company’s midstream assets are strategically located to benefit from strong growth in gas production in Oklahoma and the Texas panhandle. Moreover, a rate increase being offset by a decrease in fuel costs indicates that the company is not oblivious to the plight of its customers who have to foot higher bills.

However, we remain concerned about the volatility in its commodity business and pending regulatory cases, along with the unfavorable macro backdrop. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock. The company mainly completes with Entergy Corporation (ETR - Analyst Report) and Williams Companies, Inc. (WMB - Analyst Report).