OGE Energy Corp (OGE) 2002 Q3 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. My name is Emily and I will be the lead coordinator for today's call. I would now like to turn the program over to your host, Mr. Jim Hatfield. Go ahead, sir.

Thank you. Good morning, everyone, and welcome to OGE Energy Corp.'s third quarter 2002 earnings conference call. I'm Jim Hatfield, Chief Financial Officer of OGE Energy Corp. I have with me today Steve Moore, chairman, President and CEO of OGE Energy Corp., Pete Delaney, Executive Vice President of Energy Corp. and CEO of the non regulated businesses, Donald Rowlett, VP Controller, Eric Weekes, treasurer as well as Danny Hears Chief Operating Officer of Enogex. What we'd like to do today, we'll start with some comments from Steve Moore. I'll review the third quarter. We'll have some comments from Pete Delaney around the non-regulated operations, and then we'll close with question and answers. Before we get started, I wanted to point everybody to the safe harbor statement that's contained in our third quarter release. And with that, I'll turn it over to Steve.

Good morning. Thanks for joining us. I appreciate your continued interest in OGE Energy. Today we reported earnings of $1.27 a share for the third quarter, and as you know, that's an improvement from last year at this time, when we earned $1.25. Now, Jim will go through the numbers in a lot more detail in just a moment, but I would like to point out that while our weather was 10% cooler, our electricity sales declined only by less than 2%. Obviously, this shows a resiliency in our economy here in this part of the country as the turn around in the national picture seems a little slower in coming than we had hoped. We are also very encouraged by the improvement we are seeing in the results of our natural gas pipelines. Our people at Enogex are making great progress. We'll hear more from Pete Delaney about their progress in just a few moments. Many of you have been closely following the OGE rate case at the Oklahoma corporation commission. As we said, we are pleased to have reached a settlement agreement for a number of reasons. It enables us to expand our generating capacity with a new regulated asset and it clears away the risk and uncertainty associated with ongoing hearings and appeals. Remember, there were some very big cuts proposed by others earlier in the case. The agreement which we have reached enables us to recover expenses from the ice storm earlier this year, which is one of the keys to our agreeing to settle the case. We feel we can deal with the $25 million rate decrease by continuing to sharpen our focus on what we call operational excellence, and with continued progress in growing the profitability at Enogex. The administrative law judge in the rate case has recommended the full commission approve the settlement agreement, and the commission is scheduled to meet later this month to consider the judge's recommendation.

The settlement agreement leaves us with some unfinished business. The need to invest in our electric system will not go away. But as always, we will focus on operational excellence to carry us through the challenges we face. Since we announced the rate case settlement last month, we have gotten a lot of questions about our dividend. We've been saying the settlement will have no effect on the company's dividend policy in the near term. There have been questions about what we mean by "the near term." The rate agreement would take effect next year, so any questions about our dividend must be looking forward to 2003. When we say this rate settlement will have no impact on our dividend policy in the near term, we mean 2003. I believe the board will continue to support our annual dividend of $1.33 a share based on our earnings expectations and a strong cash flow of more than $300 million. We believe Fitch investor's service recognize our strong cash flow when they affirmed our credit ratings last week. In 2004, we expect to add rate base and revenues and increase our earnings. We expect to show again as we have demonstrated in the past that we are serious about our commitment to our shareholders. Our job is not to cut the dividend just because things get a little tough. We feel our job is to earn our allowed rate of return. Through all the turmoil and uncertainty in the energy industry and despite the anxiety caused by the prospect of big revenue cuts for our own company, OGE Energy Corp.'s fundamentals remain sound. I emphasize again that one advantage we have is that we don't have to go back and rediscover our core business. We've been focused on it all along. So thank you for participating with us today and for your continued interest in the company. Now let's go back over to Jim for a more detailed review of the third quarter. Jim?

Thank you, Steve. We'll walk through the third quarter, as Steve said, $1.27 reported versus a $1.25 within the Enogex E and P segment we did sell Oklahoma assets in September and took a $2.3 million pretax charge on that sale, so from an operating basis, it was $1.29 versus $1.25. If you look at the breakdown, holding company, loss of 4 cents versus four cents in the prior period. The holding company is where we have the trust preferred and the commercial paper program for all the entity. OGE regulated utility $1.26 versus $1.29 in Enogex on a reported basis 5 cents versus a flat third quarter in 2001. A couple things on presentation before we go on to the numbers. We did record this quarter net revenue as everybody has in this industry based on the EITF 02-03, so we're reporting revenue on net versus gross basis. We also with the announced sale of the West Texas assets, we are showing a discontinued operation presentation which incorporates both the E and P segment as well as West Texas assets.

Looking specifically at OGE, Steve mentioned even though weather was only 1% below normal, it was really 10% below last year on a cooling-degree day basis. We did have 1.23% customer growth, and system sales were off 1.86%. But if you look at weather and growth together, revenue was off about a penny, weather and growth is up about a penny, and then all of our other off-system sales and so on were off about two cents for the one cent reduction in revenue. I want to end with this essentially flat quarter over quarter. Nothing significant, and then other which is really depreciation and other off about a penny for your comparison quarter to quarter. At Enogex on a segment EBITDA was up 21% this quarter over last quarter. Transportation and storage was up about 3.8 million. These are EBITDA comparisons. Gathering processing down about 3.1 million, marketing and trading up 1.6 and E and P up about half a million dollars. Highlights in the transportation and storage segment, total throughput was off about 1%. Storage was up about $2.1 million, which really just reflects higher margin from capacity leases from third parties versus the comparable number in 2001. We did have positive fuel comparisons of about 1.2 million. This is better fuel recovery this year versus last year. The transportation segment was up about 3.3 million, which really reflects new firm contracts in 02 versus 01 as well as a better basis environment in the third quarter this year versus last year. Those were offset by increased expenses about 2.8 million, which really is increased depreciation and some timing of some other operating expenses in the quarter for a total benefit of $3.8 million in transportation storage.

[Earning] processing was off $3.1 million. The big story in this segment continues to be volumes. We saw rate counts in the state down 23% in this quarter, 96 versus 125 for Enogex, off 53% at 35 versus 74, resulting in gathering volumes down 13%, although we continue to work on our fee structure as Pete has alluded to earlier, our fees were really at 26% quarter to quarter from trying to increase our margins in the field. Processing volumes were down 20% after you take into account rejected volumes, and we did have 53% versus 53% last year, $1.46 versus $1.83. Operating expenses were down, gathering and processing as a result of field restructuring efforts that have been ongoing that we have alluded to in the past. Market and trading up $1.6 million, really reflecting storage activity through the market and trading company, which is, we feel good about if you take into account the reduced liquidity and uncertainty that's happened in the marketplace as well as counter party credit in our environment over the last 12 months.

On an E and P, as I said, EBITDA was up about half a million dollars. We did have lower volumes so we did have higher prices as well as lower expenses. As know, we stopped crewing DD and A on E and P after we announced we would sell those assets, and so that's about $2.8 million benefit, those things combined offset by the 2.3 loss from the sale of E and P assets. At Enogex, we do have on end of quarter comparison debt outstanding down $112 million this year versus last year. The outlook for 2002, we're still in the $1.40 to $1.50 range with no real changes in our assumptions. For 2003, we expect to earn at least a dividend with no specific guidance now. We're still working on all the aspects of our 2003 plan, and we will be in New York in early December to lay out all the assumptions and provide for more specific guidance at that time, and Pete is going to talk a little bit more about that in a minute as well.

I want to emphasize one thing that Steve alluded to in terms of 2003 earnings. As I said, we do expect to earn at least a dividend, and we do have strong cash flows. We continue to see operating cash flows in excess of $300 million. If you look at our maturities on the liquidity side in 03, we see about $20 million in maturity, so we're at a very good cash position, and as we said when we were in New York, we are comfortable with a high payout ratio over the near term based on strong generation of cash. With that, I'm going to turn it over to Pete Delaney.

Thank you, Jim. Our guidance for consolidated earnings in 2003 incorporates improvements in Enogex's operating earnings. Enogex expect to meet the current estimate of $6 million for net income in 2002 and we expect to double operating earnings in 2003. As you know from our past calls, we have reorganized this business, redesigned our work processes and have sold and continue to sell assets. This makes year to year earnings comparisons difficult. I would like to discuss, however, our earnings drivers for 2003. Keep in mind absent from the earnings picture for 2003 are the E and P assets and West Texas assets which we are assuming will be sold by or around January 1st of next year.

Even for our ongoing business segments, we have to build up expenses in revenues from scratch for each of these segments because of the restructuring work -- because the restructuring work is being performed in many cases by different groups, by different people and in different ways. We cannot look at historical numbers for these reasons. The process takes a little more time under normal circumstances and that will be needed in future years. Our budget numbers will be available in several weeks and we'll be coming to New York to share these numbers with you at that time. I would like to review our business outlook and drives behind the 2003 operating earnings numbers. Recognizing overall production declines in the region and recent drilling rates as Jim mentioned, we're projecting gathering volumes to be down around 8% next year based on assumed well connect of around 150 wells. That is in comparison to 100 or so wells expected to be connected this year, and in relation to about 191 wells that were connected in 2001. We do expect to, however, offset much of this decline with pricing upgrades achieved through changes in the statement of operating conditions on the pipelines and through gathering contract negotiations.

As Jim mentioned in our review of quarterly earnings, we've already seen margin improvement, pricing improvement from those actions. On the processing side, volumes are expected to be down again commensurate with the gathering declines. Our margin projections on the processing segment assume gross spreads of about $1.16 next year throughout the year or for an average for the year. This is in comparison to the $1.06 realized year to date in 2002. Transportation volumes and revenues are expected to remain relatively flat. As you know, the majority of revenue in this area comes from our gas transportation contracts with utility. The primary area of margin improvement in this segment will be from recovery of un-recovered fuel costs. The fuel tracker allows us to recover -- in excess of the current fuel rates charged. Due to our improvement in our fuel usage, we expect to over recover fuel in 2003, this is estimated to bring an additional $5 million in margin.

We also expect to see an increase in margin contribution from storage. Last month Enogex took ownership of the Stuart storage facility which provides gas storage services to the Seminole power plant. Enogex exercised an option of purchasing this facility, using part of a $23 million judgment against the owner of that facility as payment for the option. About[Inaudible]is dedicated to the utility and payment for these services should result in about an incremental $7 million next year of margin. On our other storage position, we expect the margin contribution to be relatively the same. Marketing is expected to increase this contribution to EBITDA by 2 to 3 million. We see opportunities in the region to provide additional gas service as many competitors have left the area. Additionally, 2002, the unit had run a million dollars of losses from trading activities that have been discontinued.

Going back to our process redesign and restructuring work, we also expect 9 to $10 million in terms of margin enhancement from operating cost savings at increased margins on our existing business. Some enhancements in margins track separately from the process redesign work. Margin enhancement is compared to the cost savings is really from revenue increases driven primarily by pricing upgrades in the gathering business due to the changes in the statement of operating conditions. On the cost side -- on the plus side in terms of increasing costs, we're seeing cost increases associated with higher salaries, increase in cost of benefits, insurance, and also increased training for our people. These factors will increase our costs by approximately 4 to $5 million. We also believe that the settlement of the FERC case involving our gathering of processing rates and terms will reduce our exposure to unfavorable processing margins. As we discussed in New York, gas BTU content greater than 1080 per MCF, we will receive a treating fee if the margin is negative. Based on the FERC settlement on our projected volumes, we believe that approximately 20% of our processing volumes at the current time will be subject to keep hold exposure without a treating fee. We expect to file the settlement with the FERC this month. In terms of asset sales, we have sold the Oklahoma property as Jim mentioned and we expect to announce the sale of our Michigan property shortly for $47 million in aggregate. Additionally, we've agreed to sell a small segment of the [Inaudible] pipeline for $10 million. Our total proceeds will be around $64 million. The sale of our West Texas assets continues. All the proceeds will be used to reduce debt. As a result, these asset sales, settlement of the FERC filing and restructuring of the work processes, earnings drivers at Enogex have changed. We expect not only higher earnings but, just as important, earnings with less volatility. By better managing the assets in relation to and in spite of the market. I believe we incorporated conservative assumptions reflecting realities of our business in every location in our outlook. Jim?

Thanks, Steve. That concludes our prepared remarks this morning, and we're now -- we'd Love to take any questions anybody might have.

At this time, if you would like to ask a question, please press the #- 1 on your touchtone phone. To withdraw the question at any time, you may press the pound sign. Once again to register for a question press the 1 on your touchtone phone. We will take our first question from Devon Geoghan Luminous Managing. Go ahead please.

Hi. Congratulations on a great quarter. Just a couple of questions. In terms of the balance sheet, can you update me on, I guess, what your projected ending 02 balance sheet would be for [Inaudible] and Enogex?

This is Jim Hatfield. In terms of cap structure?

Yes.

Okay. Year-end 2002, we expect the holding company to have debt to cap of around 62%, and based on current projections the utility balance sheet is around 57% of equity.

What about Enogex?

Enogex is about -- give me just a minute here. I'll get that number. About 55% debt.

Okay. Great, just two more quick questions. In terms of the OCF numbers you gave, what kind of working capital assumptions are behind the 300 million?

Basically flat working capital assumption.

Zero or flat with 02?

Basically zero working capital. We're trying to not forecast for any positive or negative working capital over time.

One last question. Just on 03 numbers, I don't know if you can tell me if my thinking is right, but I'm starting with the $1.55 utility taking on about 20 cents from the rate case, 20 cents of corporate overhead. It looks like you guys can maybe get back 9 to 10 cents from incremental interest savings and then Enogex looks to be about 8 cents on this year. I assume that doubles to 16 cents, but then I'm not sure if there's -- if some of the E and P EPS was in that 8 cents guidance you gave. So it looks like you guys can get about $1.33, $1.35? Is that the right way to think about it?

I don't know if all your numbers are exactly correct but that's sort of the process to go through to get to the number. I think the other thing you have to look at is the utility was allowed or earned 1155, and year end, we expect equity at the utility to be about 940 million so I gave you another basis to sort of drive what the earnings power of the utility would be.

Okay, great. Thank you very much, guys.

Thank you. Our next question will come from the side of Doug Fisher with AG Edwards. Go ahead, please.

Yes, thank you. Just to maybe get back to part of what Devon was talking about, do you - you know, I guess the guidance you're giving this year includes the discontinued ops?

That would be correct, yes.

So there is 11 cents in the nine months that's in the 1.40 to 1.50?

11 -- where do you get the 11 cents?

Off your release here. Net income from discontinued ops net of tax.

Oh, you're talking about 12-months ended?

I'm sorry, is that 12?

Yes.

Okay. I'm misreading the column . How much is it for the nine months?

For 2002, it's about 6.7.

6.7 cents or 6.7 million?

Net income. For the nine months ended. But remember, from the -- certainly on E and P side, and that's about 8 cents, Doug, from an E and P side, you're going to continue to have lower volumes going forward because we have not invested in that business.

So what you're saying is the number would have declined if you'd held on to those properties.

Yeah, it would naturally decline over time as well as that business has section 29 tax credits in it that expire at the end of 02 as well.

Okay. So getting back to Enogex in 03, what did Peter say? Did you say that you're looking for operating income? Is that operating net income of -- to double or what exactly were you saying there, Peter?

What I was talking about was our operating earnings, so it's our net income.

Okay.

Without any gains from sales of assets or losses or anything like that. It's just our operating earnings.

So you were saying 6 million in 02 and more than double in 03?

I said we expect -- we came out with estimate for 6 million this year, several -- three or four months ago, that estimate, and we expect to double that next year.

Okay. And that's net of -- and that incorporates the loss of the E and P and everything else?

It reflects that we're selling all the assets that are currently either been sold or on the block right now.

How much of -- moving back to the utility, how much of an impact are we likely to see on earnings given that you have a different sharing percentage on the wholesale sales in Oklahoma?

What Doug is referring to is we're going from 50/50 to 75/25 in 03. Also within that number is the recovery of the 5.4 million regulatory asset related to the January ice storm. We also look at the wholesale market today and ability to move power around. It's a de minimums amount in terms of the impact to off system sales. We've seen that number as I said earlier continues to decline, you know, really every year since 1999, which reflects our generation mix as well as the wholesale marketplace.

So to recap Jim, that change is not expected to have a material net change on the OGE earnings in 02 versus -- 03 versus 02.

No.

Okay. Thank you.

Thank you. We will take our next question from the side of Devon Geoghan as a follow-up. Go ahead, sir.

I just wanted to ask a follow-up question. Is the discontinued net income included in this year's guidance of 140 to 150? I missed that.

Yes.

Okay. So then I guess it's about 6.7 year-to-date, so maybe it's -- I don't know -- what, 8 million for the full year? So if I can just revisit my 03 numbers, in the 8 cents of Enogex EPS for this year which is your guidance, how much EPS from E and P was in there? Maybe 4 cents?

It's about six cents of E and P in that guidance.

In the eight cents of Enogex.

Yes.

So I guess my question is, if I exclude Enogex completely and go with $1.55 for the utility, it looks like you are going to earn an incremental 4 cents if you[Inaudible] then subtract out 21 cents for the rate case, 20 cents from corporate overhead, add back 10 cents from long-term debt that was paid down partially this year and so forth next year you get to $1.24 excluding Enogex. Then if I take the 8 cents of guidance for this year, subtract out 6 cents, 2 cents of Enogex, then if I assume that that increases 100% so you earn 4 cents, it gets to about $1.24 of 03 EPS. I am not sure if I am understanding that correctly.

I think there's a couple of things. First of all, at the utility, you have to include system growth in 03 over 02, which for us runs, you know, about 2% a year.

Okay.

So revenue net of fuel, $685 million at the utility. Then you add 2% to that for normal growth. Also in the return, the 11.55 is the jurisdictional return, we have about 50 basis points of deferred IPC which equates to roughly 50 basis points that you need to also - were actually on top of the allowed return, so that's incremental growth number and then [Inaudible] at Enogex, I think what Pete was alluding to when he talked about where we'd be this year versus next year, think those are all net of discontinued operations and asset sales and for next year

Okay, great.

You got a little bit of apples to oranges comparison when you're trying to take Enogex 02 and look at Enogex 03 when we're talking about 02, we're talking about a number that includes its current business mix, but doesn't include gains on sale of assets, and then you're trying to compare that to 03 which doesn't include those businesses, so there's a lot of reconciliation. What we intend to do when we come to New York in December is sort of walk through that comparison so it's more easily understood.

Okay. I guess it makes sense, but if - I guess I'll just wait for December. Thanks very much.

Thank you. Our next question comes from the side of Nick Vasalakos with Eaton Vans Management.

Good morning. I just wanted to ask a quick question. Could you guys provide some color with regards to your recent conversations with Moody's and S & P?

The only color we would add is we updated them on the rate case and we are scheduled to go back later and provide a complete picture of all the businesses, not just the impact of the rate case. And then we're going to do that in early December as well.

Okay. Thank you.

Once again, if would you like to ask a question at this time, please press the 1 on your touchtone phone. We will take our next question from the side of Sharena[Inaudible] with Merrill Lynch. Go ahead, please.

Good morning, guys. I'm wondering if you can give us the actual EBITDA numbers by segment, not the variance for the quarter, and also for year-to-date for Enogex?

Yes. For the quarter, transportation and storage was 16.4. Gathering and processing was 2.2. Marketing and trading was negative 2.1. E and P was negative 6. On a year-to-date basis, transportation and storage is 36.5, gathering and processing is 1.2, marketing and trading is negative 2, and E and P was 1.6.

And the negative -- the 1.6 on the E and P year-to-date, you're assuming some pick-up to get to the 6 cents for the year in your 8 cents guidance?

Are you talking about E and P?

Yeah.

Well, E and P, you know, has the tax credits that wouldn't be in the EBITDA number.

Okay.

And that's about -- those tax credits are about 1.6 million a year.

The 8 cents includes West Texas as well.

Yeah, the 8 cents includes West Texas as well.

Okay. Thanks.

Once again, to ask a question, please press the 1 on your touchtone phone at this time. We will now take a follow-up from Doug Fisher with A.G. Edwards. Go ahead, please.

Just to clarify on the EBITDA, the EBITDA includes the discontinued ops, the numbers you just gave?

Yes.

Okay. Thanks.

It appears we have no further questions at this time. I would now like to turn the program back over to management.

I'd like to thank you for your interest in the company and for joining our call this morning. Thank you very much.

That's it. Thank you very much.

This concludes today's teleconference. You may now disconnect your line. Thank you for participating and have a wonderful day.