OG&E 2011 Annual Report Download - page 26

24 OGE Energy Corp.
Other operation and maintenance expense increased $17.2 million,
or 11.8 percent, primarily due to:
•Increased payroll and benefits costs due to increased headcount to
support business growth;
•Increased contract technical and professional services expense and
materials and supplies expense due to an increase in non-capital
projects in 2011;
•Increased property insurance costs;
•Increased rental expense due to growing demand for compression
as Enogex’s business expands; and
•Increased costs due to soil remediation projects.
Depreciation and amortization expense increased $6.3 million, or
8.8 percent, primarily due to additional assets placed in service through-
out 2010 and 2011.
Impairment of assets increased $5.2 million in 2011 primarily due
to an impairment of $5.0 million related to the leased Atoka Midstream
LLC joint venture (“Atoka”) processing plant as a result of a management
decision in August 2011 to use third-party processing exclusively for gath-
ered volumes dedicated to Atoka and, therefore, to take the processing
plant out of service and return it to the lessor in accordance with the rental
agreement. The noncontrolling interest portion of the impairment was
$2.5 million which is included in Net Income Attributable to Noncontrolling
Interests in the Company’s Consolidated Statement of Income.
Gain on insurance proceeds was $3.0 million in 2011 with no
comparable item in 2010. The gain on insurance proceeds was for reim-
bursement related to the damaged train at the Cox City natural gas
processing plant being replaced and the facility being returned to full
service in September 2011.
Transportation and Storage
The transportation and storage business contributed $157.2 million
of Enogex’s consolidated gross margin in each of 2011 and 2010. The
transportation operations contributed $125.9 million of Enogex’s consol-
idated gross margin in 2011 as compared to $124.3 million in 2010. The
storage operations contributed $31.3 million of Enogex’s consolidated
gross margin in 2011 as compared to $32.9 million in 2010. Factors
affecting the transportation and storage gross margin were:
•Higher capacity lease services under the Midcontinent Express Pipeline,
LLC (“MEP”) and Gulf Crossing capacity leases in 2011 as a result of
pipeline integrity work on an Enogex pipeline in 2010, which increased
the gross margin by $7.1 million;
•Higher firm 311 services due to new contracts with more favorable rates
in 2011, which increased the gross margin by $5.4 million;
•Higher interruptible transportation fees due to new contracts with more
favorable rates in 2011, which increased the gross margin by $1.6 million;
•Higher crosshaul revenues in 2011 resulting from the reversal of a
previously recognized reserve of $3.0 million associated with the settle-
ment of Enogex’s 2009 FERC Section 311 rate case partially offset by
decreased utilization of $2.5 million in 2011 due to shippers utilizing
crosshaul service in 2010 as a result of pipeline integrity work, which
increased the 2011 gross margin by $0.5 million; and
•Lower volumes and realized margin on sales of physical natural gas long
positions associated with transportation operations in 2011. Gross margin
in 2011 included the under recovery of fuel positions as compared to 2010
that included the recovery of prior year’s under-recovered fuel positions,
which reduced the gross margin in 2011 by $12.1 million, net of imbalance
and fuel tracker obligations.
Other operation and maintenance expense for the transportation and
storage business was $2.4 million, or 4.9 percent, lower in 2011 as
compared to 2010 primarily due to decreased contract technical and
professional services expense and materials and supplies expense
due to a decrease in non-capital projects in 2011 partially offset by an
increase in payroll and benefits costs due to increased headcount to
support business growth.
Gathering and Processing
The gathering and processing business contributed $296.4 million of
Enogex’s consolidated gross margin in 2011 as compared to $272.3 mil-
lion in 2010, an increase of $24.1 million, or 8.9 percent. The gathering
operations contributed $125.2 million of Enogex’s consolidated gross
margin in 2011 as compared to $117.6 million in 2010. The processing
operations contributed $171.2 million of Enogex’s consolidated gross
margin in 2011 as compared to $154.7 million in 2010.
In 2011, Enogex realized a higher gross margin in its gathering and
processing operations primarily as the result of continued growth in
gathered volumes from ongoing expansion projects, primarily in the
Granite Wash play and Cana/Woodford Shale play, which has added
richer natural gas to Enogex’s system and higher NGLs prices. Although
gathered volumes increased over 2010, gathering and processing volumes
grew at a slower pace during the fourth quarter of 2011 than Enogex
had anticipated. Enogex currently expects that this slower growth will
continue during 2012. The increased gathering volumes were partially
offset by the contract conversion of one of Enogex’s five largest cus-
tomer’s Oklahoma production volumes to fixed fee effective July 1, 2011,
a slight decrease in inlet processing volumes related to the 120 MMcf/d
Cox City natural gas processing plant being out of service due to the
fire from December 2010 until September 2011, the sale of the Harrah
processing plant and the associated Wellston and Davenport gathering
assets in April 2011 and lower average natural gas prices. Overall, the
above factors resulted in an increased gross margin on keep-whole
processing of $4.8 million and on percent-of-liquids and percent-of-
proceeds contracts of $2.6 million.