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Oklahoma Gas and Electric, a subsidiary of OGE Energy Corporation (OGE - Analyst Report), has reached a settlement in the Oklahoma rate case that had been in the process for approximately a year. Per the settlement, the company would get about a $4 million rate increase. Despite this increase, the residential customers will experience a small reduction in their monthly bills due to new rate designs and a lower rate of return on equity (ROE) of 10.2%.

The settlement agreement will result in the reduction of an average residential customer’s bill by 9 cents per month. However, it will increase the cost for highly subsidized municipal and security lighting customers.

In July 2011, the company had made its initial filing for a $73 million increase at the Oklahoma Corporation Commission. It had requested for an ROE of 11%. Each 0.10% change in the requested ROE affects the requested rate increase by $3.0 million. Consumer and industrial groups had therefore objected to the hike request. This led to many discussions, resulting in the present settlement. If the original request was granted, the average residential customer's monthly bill would have increased by approximately $6.50 per month while allowing the company to recoup the costs of approximately $500 million in new investments over the past couple of years.

In May 2012, the company had planned to execute an interim annual rate increase of $24 million with the new rates effective June 1, 2012, for its residential, commercial and industrial customers. However, in order to offset the increase, the energy company had planned 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.

The settled agreement will help in removing uncertainty and provide a way to move forward for the recovery of investment in transmission assets. Meanwhile, the company also maintained its earnings guidance in the range of $3.40 to $3.60 per share for fiscal 2012 that takes into account normal weather for the remainder of 2012.

On July 30, 2012, the company is expected to release its second quarter 2012 earnings. The Zacks Consensus Estimates for second quarter and fiscal year 2012 are currently at 90 cents per share and $3.61 per share, respectively.

OGE Energy Corporation distributes natural gas and electricity through its subsidiaries (Oklahoma Gas and Electric Company or OG&E, and Enogex) primarily in the south central United States. It is the largest electric utility in Oklahoma, with well-positioned regulated utility and unregulated midstream gas businesses. The company operates in a strong Oklahoma economy, has a bias towards fixed fee in its unregulated natural gas business, offers a high dividend yield and employs ongoing infrastructure improvement programs.

However, we remain concerned about the volatility in its commodity business along with the unfavorable macro backdrop. The positives have already been priced in the current valuation, leaving little room for further upside in the near term. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.

Some of OGE Energy’s competitors include Entergy Corporation (ETR - Analyst Report) and ONEOK Inc. (OKE - Analyst Report).

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