OGE Energy Beats, Maintains View

OGE Energy Corporation (OGE - Analyst Report), a distributor of natural gas and electricity primarily in the south central United States, reported second-quarter 2012 pro forma and GAAP earnings of 95 cents per share, beating the Zacks Consensus Estimate by 5 cents. However, quarterly earnings were below the year-ago figure of $1.04 per share.

A regulated electric utility company, Oklahoma Gas and Electric Company (“OG&E”), contributed earnings of 74 cents per share in the reported quarter compared with 79 cents per share last year.

Enogex, a midstream natural gas business, contributed earnings of 21 cents per share compared with 25 cents per share in the year-ago quarter.

Operational Metrics

OGE Energy’s operating revenues of $855 million in the reported quarter surpassed the Zacks Consensus Estimate of $522 million, but were down from the year-ago figure of $978.1 million.

Electric Utility revenues were $528 million compared with $568.7 million in the year-ago quarter. Natural Gas Midstream Operations revenues decreased to $327 million from $409.4 million in the year-ago quarter.

Sales of electricity to residential customers were 2.2 MWH versus 2.3 MWH in the year ago period. Sales to Commercial and industrial customers was 1.8 and 1 MWH, respectively, flat year over year.

OGE Energy’s consolidated gross margin on revenues was $445.7 million in the reported quarter compared with $428 million a year ago.

Total operating expenses in the quarter under review was $268.4 million, up 9.2% year over year. Net income attributable to OGE Energy was $93.9 million in the second quarter compared with $103 million in the year-ago quarter.

Segment Results

OG&E's gross margin on revenues was $323 million, up from $314 million in the comparable quarter last year driven by the revenues associated with various investments and higher transmission revenues, partially offset by milder weather compared to last year. However, due to higher operating expenses associated with additional plant in service, net income at the utility was down $6 million to $73 million in the second quarter.

Enogex’s gross margin on revenues was $121 million, up from $114 million in the prior-year quarter driven by higher gross margins in the gathering and processing businesses due to strong volume growth, partially offset by lower commodity prices. Net income attributable to OGE Enogex Holdings decreased to $21 million in the second quarter of 2012 from $25 million in the second quarter of 2011 as the increase in gross margin was more than offset by increased operating expenses associated with system growth and a higher ownership percentage by OGE's equity partner.

Financial Screening

Cash and cash equivalents at the end of June 30, 2012 were $1.7 million, down $5.1 million at the end of June 30, 2011. Long-term debt as of June 30, 2012 was $2.8 billion versus $2.6 billion as of June 30, 2011.

At the peer

One of the company’s peers, Northeast Utilities (NU - Analyst Report) reported second quarter 2012 results. Pro forma earnings came in at 45 cents per share, in line with the Zacks Consensus Estimate but surpassing the year-ago earnings by a penny.

Guidance

OGE Energy’s consolidated earnings guidance for full-year 2012 is $3.40 to $3.60 per average diluted share. The guidance reflects normal weather for the remainder of 2012 and new rates associated with the Oklahoma general rate case to be implemented in the August 2012 billing cycle.

Our Take

OGE Energy’s planned utility and midstream businesses led the company to surpass our earnings expectation despite lower natural gas prices, considerable drop in natural gas liquids prices and milder weather. Moreover, the company’s midstream assets are strategically located to benefit from solid growth in gas production in Oklahoma and the Texas panhandle.

However, we remain concerned about the volatility in its commodity business and the unfavorable macro backdrop. The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

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. The company operates through four business segments – electric utility, natural gas transportation and storage, natural gas gathering and processing and natural gas marketing.