OG&E 2011 Annual Report Download - page 17

OGE Energy Corp. 15
Overview
Company Strategy
The Company’s mission is to fulfill its critical role in the nation’s electric
utility and natural gas midstream pipeline infrastructure and meet individ-
ual customers’ needs for energy and related services in a safe, reliable
and efficient manner. The Company’s corporate strategy is to continue
to maintain its existing business mix and diversified asset position of its
regulated electric utility business and unregulated natural gas midstream
business while providing competitive energy products and services to
customers primarily in the south central United States as well as seeking
growth opportunities in both businesses. Additionally, the Company wants
to achieve a premium valuation of its businesses relative to its peers, grow
earnings per share with a stable earnings pattern, create a high perform-
ance culture and achieve desired outcomes with target stakeholders.
OG&E is focused on increased investment to preserve system reliability
and meet load growth by adding and maintaining infrastructure equipment
and replacing aging transmission and distribution systems. OG&E is
focused on maintaining strong regulatory and legislative relationships
for the long-term benefit of its customers. In an effort to encourage more
efficient use of electricity, OG&E is also providing energy management
solutions to its customers through the Smart Grid program that utilizes
newer technology to improve operational and environmental performance
and promote demand-side management programs. If these initiatives
are successful, OG&E believes it may be able to defer the construction
or acquisition of any incremental fossil fuel generation capacity until
2020. As the Smart Grid platform matures, OG&E anticipates providing
new products and services to its customers. In addition, OG&E is also
pursuing additional transmission-related opportunities within the Southwest
Power Pool (“SPP”). OG&E is customer focused and strives to provide
excellent customer service.
Enogex’s business plan entails growing its businesses and providing
attractive financial returns through efficient operations and effective
commercial management of its assets, capturing growth opportunities
through expansion projects, increased utilization of existing assets and
through acquisitions in and around its footprint. In addition, Enogex is
seeking to geographically diversify its gathering, processing and trans-
portation businesses principally by expanding into other areas that are
complementary with the Company’s capabilities. Enogex expects to
accomplish this diversification by undertaking organic growth projects
and through acquisitions.
The Company’s financial objectives include a long-term annual
earnings growth rate of five to seven percent on a weather-normalized
basis, maintaining a strong credit rating as well as increasing the dividend
to meet the Company’s dividend payout objectives. The Company’s
target payout ratio is to pay out dividends no more than 60 percent of
its normalized earnings on an annual basis. The target payout ratio has
been determined after consideration of numerous factors, including
the largely retail composition of the Company’s shareholder base, the
Company’s financial position, the Company’s growth targets, the com-
position of the Company’s assets and investment opportunities. The
Company believes it can accomplish these financial objectives by, among
other things, pursuing multiple avenues to build its business, maintaining
a diversified asset position, continuing to develop a wide range of skills
to succeed with changes in its industries, providing products and services
to customers efficiently, managing risks effectively and maintaining
strong regulatory and legislative relationships.
Summary of Operating Results
2011 Compared to 2010
Net income attributable to OGE Energy was $342.9 million, or $3.45
per diluted share, in 2011 as compared to $295.3 million, or $2.99 per
diluted share, in 2010. Included in net income attributable to OGE
Energy in 2010 was a one-time, non-cash charge of $11.4 million, or
$0.11 per diluted share, related to the elimination of the tax deduction
for the Medicare Part D subsidy (as previously reported in the Company’s
Form 10-Q for the quarter ended March 31, 2011). The increase in net
income attributable to OGE Energy of $47.6 million, or 16.1 percent, or
$0.46 per diluted share, in 2011 as compared to 2010 was primarily due to:
•An increase in net income at OG&E of $47.6 million, or 22.1 percent, or
$0.47 per diluted share of the Company’s common stock, primarily due
to a higher gross margin primarily from warmer weather in OG&E’s service
territory partially offset by higher other operation and maintenance expense,
higher interest expense and higher income tax expense. Income tax
expense was higher due to higher pre-tax income which more than offset
the effects of the Medicare Part D subsidy discussed above;
•A decrease in net income at Enogex of $8.9 million, or 9.8 percent,
or $0.09 per diluted share of the Company’s common stock, primarily
due to higher other operation and maintenance expense and the equity
sale of a membership interest in Enogex Holdings to Bronco Midstream
Holdings, LLC, Bronco Midstream Holdings II, LLC, (collectively the
“ArcLight group”) partially offset by a higher gross margin primarily from
increased gathered volumes associated with ongoing expansion projects
and higher NGLs prices, the recognition of a gain related to the sale of
the Harrah processing plant and the associated Wellston and Davenport
gathering assets, lower interest expense and lower income tax expense
related to the Medicare Part D subsidy discussed above; and
•An increase in net income at OGE Energy of $8.9 million, or 77.4 percent,
or $0.08 per diluted share of the Company’s common stock, primarily
due to lower other operation and maintenance expense, a decrease in
charitable contributions in 2011 and a higher income tax benefit related
to the Medicare Part D subsidy discussed above.
Timing Item
Enogex’s net income in 2011 was $82.2 million, which included a loss
of $2.6 million resulting from recording OGE Energy Resources LLC,
wholly-owned subsidiary of Enogex LLC (“OER”), natural gas storage
inventory at the lower of cost or market value. The offsetting gains from
the sale of withdrawals from inventory are expected to be realized during
the first quarter of 2012.