OG&E 2012 Annual Report Download - page 13

OGE Energy Corp. 11
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 indi-
vidual customers’ needs for energy and related services focusing on
safety, efficiency, reliability, customer service and risk management.
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 provid-
ing competitive energy products and services to customers primarily in
the south central United States as well as seeking growth opportunities
in both businesses.
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 expects to maintain a diverse generation portfolio while remaining
environmentally responsible. 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 as well as allow
customers to monitor and manage their energy usage, which should
help reduce demand during critical peak times, resulting in lower capac-
ity requirements. 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. The Smart Grid program also
provides benefits to OG&E, including more efficient use of its resources
and access to increased information about customer usage, which
should enable OG&E to have better distribution system planning data,
better response to customer usage questions and faster detection and
restoration of system outages. 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”).
Enogex’s business plan entails growing its businesses and providing
attractive financial returns through efficient operations and effective
commercial management of its assets. Enogex also plans to capture
growth opportunities through expansion projects, increased utilization of
existing assets and through acquisitions (including joint ventures) in and
around its footprint and attracting new customers. 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.
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 performance culture and achieve desired
outcomes with target stakeholders. 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 share-
holder base, the Company’s financial position, the Company’s growth
targets, the composition 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
2012 Compared to 2011
Net income attributable to OGE Energy was $355.0 million, or $3.58 per
diluted share, in 2012 as compared to $342.9 million, or $3.45 per diluted
share, in 2011. The increase in net income attributable to OGE Energy
of $12.1 million, or 3.5 percent, or $0.13 per diluted share, in 2012 as
compared to 2011 was primarily due to:
•An increase in net income at OG&E of $17.0 million, or 6.5 percent,
or $0.18 per diluted share of the Company’s common stock, primarily
due to a higher gross margin and lower income tax expense. The higher
gross margin was primarily due to increased recovery of investments
and increased transmission revenue partially offset by milder weather in
OG&E’s service territory. These increases were partially offset by higher
other operation and maintenance expense, higher depreciation and
amortization expense, lower allowance for equity funds used during
construction and higher interest expense;
•A decrease in net income at Enogex of $8.1 million, or 9.9 percent, or
$0.08 per diluted share of the Company’s common stock, primarily due
to higher other operation and maintenance expense, higher depreciation
and amortization expense, lower other income primarily due to the
recognition of a gain related to the sale of the Harrah processing plant
and the associated Wellston and Davenport gathering assets in 2011,
higher interest expense and OGE Energy’s lower membership interest
in Enogex Holdings. These decreases were partially offset by a higher
gross margin related to (i) increased gathering rates and volumes associ-
ated with ongoing expansion projects and increased volumes from gas
gathering assets acquired in November 2011 and August 2012 and (ii)
increased inlet volumes partially offset by lower average natural gas and
NGLs prices. Also having a positive impact on net income was a higher
gain on insurance proceeds in 2012 and an impairment related to the
Atoka Midstream LLC joint venture (“Atoka”) processing plant in 2011; and