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OGE Energy Corporation (OGE - Analyst Report), a distributor of natural gas and electricity primarily in the south central United States, reported third-quarter 2012 earnings of $1.87 per share, beating the Zacks Consensus Estimate by 4 cents per share. The results were also above the year-ago figure of $1.80 per share.

The results were driven by the company’s cost performance, execution on transmission projects at the utility and focus at its midstream business.

A regulated electric utility company, Oklahoma Gas and Electric Company (“OG&E”), contributed earnings of $1.69 per share in the reported quarter, up from $1.60 last year.

Enogex, a midstream natural gas business, contributed earnings of 18 cents per share compared with 19 cents per share in the year-ago quarter.

Operational Metrics

OGE Energy’s operating revenues of $1.11 billion were down from the year-ago figure of $$1.21 billion.

Electric Utility revenues were $721 million compared with $774.8 million in the year-ago quarter. Natural Gas Midstream Operations revenues decreased to $392.4 million from $437.3 million in the year-ago quarter.

Sales of electricity to residential customers were 3.2 MWH versus 3.5 MWH in the year-ago period. Sales to Commercial customers were 2.1 MWH versus 2 MWH in the year-ago period. Sales to Commercial customers were 1 MWH, flat year over year.

OGE Energy’s consolidated gross margin on revenues was $573.8 million in the reported quarter compared with $553.6 million a year ago.

Total operating expenses in the quarter under review were $269.8 million, up 6.3% year over year. Net income attributable to OGE Energy was $185.5 million in the third quarter of 2012 compared with $178.7 million in the year-ago quarter.

Segment Results

OG&E's gross margin on revenues was $449 million, up from $440 million in the comparable quarter last year driven by increase in revenues associated with various investments, transmission projects and customer growth. However, this was partially offset by milder weather compared with the third quarter of 2011.

Enogex’s gross margin on revenues was $124 million, up from $114 million in the prior-year quarter driven by higher gross margins in the gathering and processing businesses as a result of increased processing volumes and gathering revenues associated with system expansion projects. However, this was partially offset by lower commodity prices.

Financial Screening

Total current assets at the end of September 30, 2012 were $689.8, down $46.6 million at the end of September 30, 2011. Long-term debt as of September 30, 2012 was $2,050.2 million versus $2,039.2 million as of September 30, 2011.

Guidance

OGE Energy’s expects consolidated earnings guidance for full-year 2012 in the range of $3.40 to $3.60 per average diluted share. The guidance reflects normal weather for the remainder of 2012. It expects earnings to be toward the upper end of the earnings range of $2.60 to $2.70.

Our Take

OGE Energy’s earnings surpassed our expectation. OGE Energy Corporation 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 toward fixed fee in its unregulated natural gas business, offers a high dividend yield and employs ongoing infrastructure improvement programs. Also, the company’s midstream assets are strategically located to benefit from strong growth in gas production in Oklahoma and the Texas panhandle. Going forward, key growth drivers of the company include cost control initiatives, its transmission projects and the midstream business.

However, we remain concerned about the volatility in its commodity business and pending regulatory cases, along with the unfavorable macro backdrop.

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.

Some of its competitors are SCANA Corp. (SCG - Analyst Report) and Alliant Energy Corporation (LNT - Snapshot Report).

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