Zacks_Analysts' Blog : OGE Energy Tops Estimates - Analyst Blog

OGE Energy Corporation (OGE) a distributor of natural gas and electricity primarily in the south central United States reported its third quarter 2011 results. In the reported quarter, the company with pro forma and GAAP earnings of $1.80 per share topped the Zacks Consensus Estimate of $1.76.

The results also comfortably beat the year-ago earnings of $1.65 per share. The upsurge came from the extremely hot weather in its service territory boosting electricity sales and higher margins in its natural gas midstream business.

Operational Metrics

OGE Energy’s operating revenues increased 7.7% year over year to $1.2 billion in the reported quarter. Results were also higher than the Zacks Consensus Estimate of $1.1 billion. Electric Utility revenues increased to $774.8 million compared with $723.0 million in the year-ago quarter. Natural Gas Midstream Operations revenues increased to $437.3 million from $402.4 million in the year-ago quarter.

Segment Results

OGE Energy reported consolidated gross income of $554 million in third quarter 2011 compared with $513 million in the year-ago period. Net income was $179 million in the reported quarter, compared to $163 million in the year-ago quarter.

In the quarter under review, OGE Energy’s regulated electric utility subsidiary, Oklahoma Gas and Electric Company (OG&E) clocked gross income of $440 million compared with $412 million in the year-ago period due primarily to hot weather, higher transmission revenues and new customer growth. Net income for OG&E was $159 million in the reported quarter, compared with $142 million a year earlier.

OGE Energy’s midstream natural gas pipeline business, Enogex, reported gross income of $114 million compared with $102 million in the year-ago quarter due to higher gross margins in the transportation and processing businesses. Net income was $23 million compared to $19 million a year earlier. This was due to higher operating expenses owing to system expansion and an outage at Enogex's Cox City processing plant.

Guidance

OGE Energy raised its fiscal 2011 earnings guidance range to $3.40–$3.45 per share from its earlier guidance range of $3.00–$3.20 per share. The bullishness stems from expected higher gross margins at its regulated utility.

Our Take

OGE Energy Corporation is a well-positioned regulated utility, with unregulated midstream gas businesses. Going forward, the company operates in a strong Oklahoma economy, has a bias toward fixed fee in its unregulated natural gas business, and employs ongoing infrastructure improvement programs.

However, we remain concerned about the volatility in its commodity business and pending regulatory cases, along with the unfavorable macro backdrop. All the above discussed positives have already been priced in the current valuation, leaving little room for further upside in the near term. OGE Energy presently retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.