OGE Energy Corp (OGE) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the OG&E Energy Earnings Conference Call. (Caller Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. James Hatfield. Please proceed, sir.

Thank you, Emma and good morning and welcome to OG&E Energy Corp.’s Q4 2004 conference call. I’m Jim Hatfield, SVP and CFO of OG&E Energy Corp. I have with me today Steve Moore, Chairman, Pete Delaney, EVP and COO and Howard Motley, Director Regulatory Strategies for OG&E and we also have several other members of the management team to address questions.

In terms of the call today, we’re going to start with comments from Steve Moore. I’ll then review the financial results, 2004 full year, Q4 2004, touch upon the 2005 outlook. Howard Motley will then give us an update on the regulatory proceedings and then we’ll proceed with the Q&A.

Before we begin, I want to remind everybody that we have prepared slides to accompany our webcast so it’ll be easier to follow the numbers when we get to that point.

And before I turn it over to Steve, I want to direct your attention to the Safe Harbor statement regarding forward-looking statements. It’s just an SEC requirement for financial statements and simply states we cannot guarantee forward-looking financial results, but this is our best estimate today.

And with that out of the way, I’d now like to turn the call over to Steve Moore, our Chairman. Steve?

Thanks Jim. I’d like to also welcome you to the call and thank you for your interest in OG&E Energy. Today we’ll expand on the fourth quarter and 2004 results we announced earlier this morning and bring you to date on some of the issues we’re working on and as usual, we’ll answer your questions.

We had a number of major accomplishments in 2004 and before we get to the recap of our strong earnings, I’d like to review some of them.

* We completed the McClain Power Plant acquisition. It was far more difficult than it should have been, but very important to our plans and we got it done.

* We completed the security case in Oklahoma that will help keep our systems safe and reliable and it allows us to pay as we go for security upgrades that are agreed upon in advance, a very positive regulatory outcome with a lot of innovative thinking involved in it.

* We were also successful in resolving the Smith Cogeneration contract, saving jobs at the Dayton Power Plant, saving money for our electric customers and increasing the flexibility of our operations.

* Our utility and pipeline operations once again posted excellent records for safety and we do see a direct connection between safety and a strong financial performance. It means we’re focused on the right details.

So it was a very good year for us and we look forward to building on our momentum in 2005. I feel we are intently on the move, managing a wide variety of important issues and getting things done.

Today, OG&E Energy reported earnings of $1.73 per diluted share for 2004, compared with $1.58 per share in 2003. For the fourth quarter, earnings were $0.10 per share, diluted, compared with a loss of $0.02 per share in the fourth quarter of last year.

For the quarter and the year, our earnings were a result of better financial performance at Enogex, our natural gas pipeline.

At OG&E, our electric utility, mild weather throughout most of the year resulted in lighter demand for electric power. OG&E’s results were also affected by increased system reliability expenses and we intend to seek recovery for those necessary and continuing expenses this year.

You will hear, in just a few minutes, more about our 2005 regulatory schedule. But I would like to focus for a moment on what I believe was a great achievement for our Company.

We improved our overall financial performance despite mild weather and increased spending at our core utility business, because Enogex is performing very well. Our natural gas operations are benefiting from a positive business climate but the improved performance is not due to commodity prices alone.

If you’ve been following our Company, you know that we’ve been sharply focused for a number of years now on improving the Enogex field and commercial operations. We’ve also improved and upgraded business processes, information systems, and technology tools and in 2004 Enogex captured a lot of value from the marketplace. That’s why the diversity of our assets is a key part of our business strategy.

But, as you’ve heard me say before, there’s always more work to do. At Enogex, we’re looking beyond the turnaround story to new opportunities for growth.

At OG&E, we’re moving forward with our customer savings and reliability plan. We have completed the McClain and integrated the plant into our operations and that’s but the first edition of a new base load power plant for us in over 20 years and its generating savings for our customers even as we speak.

The addition of that plant enhances our reliability as well. Also, to improve reliability, we’ve invested millions of dollars in new electric transmission substation and distribution equipment. But again, we’re not finished. Construction budgets are up again for OG&E in 2005 as we continue to execute our savings and reliability plans. In the months ahead, we will take our cash for a fair recovery of these investments to state regulators.

Certainly we’ll need a positive outcome in order for these kinds of investments to continue, but we believe the timing for all of this is excellent. We have a unique opportunity this year to include these investments in our regulated rate base, securing savings and reliability for our customers and better returns for our shareowners.

We start 2005 with cost savings for our customers of more than $100 million from cogeneration and power purchase contracts winding down or expired and additional savings produced by the McClain plant. This means a rate increase would have a minimal impact, if any, on our customers’ monthly electric bills.

So, taken altogether, the effectiveness of our strategy is demonstrated by the excellent results we’re reporting today.

We do appreciate your support of our conservative, thoughtful, patient approach to our business. We take our commitment to all of our stakeholders very seriously and we’ll continue to work to earn your confidence.

Once again, I want to thank you for your interest in OG&E Energy and now let’s turn the program back over to Jim.

Thank you, Steve.

For 2004, we reported net income of $153.5 million or $1.73 per diluted share, which is a 9.0% increase in EPS.

The EPS contribution by business unit on a comparative basis is as follows --

* OG&E - $1.22, down from $1.41 in 2003 * Enogex - $0.69 as compared to $0.33 in 2003 * The holding company - a loss of $0.18 versus a loss of $0.16 * Consolidated - $1.73 versus $1.58

Looking briefly at the fourth quarter --

We reported net income of $9.7 million or $0.10 per share, as compared to a net loss of $1.6 million or $0.02 per share in the fourth quarter of 2003. As you can see, Enogex produced strong financial results in the fourth quarter.

The contribution by business unit on a comparative basis is as follows --

* OG&E - loss of $0.16 versus a loss of $0.05 in 2003 * Enogex - $0.34 versus $0.06 * Holding company - a loss of $0.08 versus a loss of $0.03 * Consolidated - $0.10 versus a loss of $0.02

Now, turning back to full year results for OG&E --

Net income was $107.6 million or $1.22 per share, as compared to net income of $115.4 million or $1.41 per share in 2003.

Gross margin on revenues decreased 2.4% to $663.6 million. The major reason behind the $16 million decline was cooler weather in OG&E service territory, which saw cooling degree days 15% below normal.

Some of the other factors affecting earnings at the utility were operation and maintenance (O&M) expenses, other income, interest expense, and state tax credits.

O&M increased $7.1 million or 2.4% from the 2003 level. The largest increase in expenses came from a $17.9 million increase in outside service costs associated with system reliability. Partially offsetting these higher expenses were $13.4 million in lower employee and benefit costs.

Other income was up $5.3 million or $0.04 per share, primarily due to the sale of natural gas-producing property and increased allowance for equity funds used during construction.

Net income expense was down $3.4 million or $0.03 per share, primarily due to the interest portion of an income tax refund related to prior periods.

The utility also received Oklahoma State tax credits of $3.0 million that created a $2.1 million variance over 2003, or $0.02 per share.

Turning now to Enogex --

During 2004 gross margins increased $47.7 million to $301 million, a 19% increase from 2003. The increase in gross margin was primarily due to higher margins in our gathering and processing business. Our transportation and storage as well as our marketing business were relatively flat for the year.

During 2004, transportation and storage contributed approximately $137.4 million of Enogex’ gross margin, a slight decrease of approximately $700,000.

In 2004, this business was able to take advantage of higher [across all] and interruptible revenues, along with additional demand fees, which almost offset the transfer of $12.7 million in revenue to the gathering and processing business. We’ve talked about this issue in prior quarters.

For 2004, gathering and processing gross margins increased $48.5 million over 2003. Gathering gross margins were $27.5 million higher in 2004, as compared to 2003.

Higher gross margins were the result of the previously mentioned shift in revenues from the transportation and storage segment.

Additionally, continued strong natural gas prices resulted in new well connects, increasing from 232 in 2003 to 277 in 2004, which provided for a 2.0% increase in gathered volumes.

New well hookups, coupled with our continued efforts to improve the profitability of our existing contracts resulted in an 8.0% increase in margin per MMBtu gather.

In processing, gross margins increased $21 million, the result of stronger NGL prices, which produced a favorable commodity spread environment. Average NGL sales price was $0.72 a gallon in 2004, as compared to $0.59.5 a gallon in 2003. Marketing margins were flat in 2004, as compared to 2003.

Looking at expenses, O&M increased $10.3 million or $0.08 per share, primarily due to higher labor expense, outside services, and higher materials and supplies. That increase was partially offset by reduced interest expense, down $4.9 million or $0.03 per share. This is primarily due to the interest portion of an income tax refund related to prior periods and a reduction in interest expense as a result of the reduction of long-term debt.

Enogex reduced long-term debt $61 million in 2004 and has reached its targeted capital structure level of 50% debt to capital ratio. There was an Oklahoma investment tax credit of $1.5 million or $0.02 per share.

This continued operations also had a positive variance of $900,000. And as you remember, in 2003 we had a change in accounting principle in the marketing business, which provided a positive (+)$5.9 million variance or $0.04 per share in 2004, due to no comparable item this year.

During the year ended December 31, 204, Enogex had an increase in net income of $4.9 million relating to nonrecurring items. You see these items on the screen. We had a comparable contribution to net income of $3.6 million in 2003.

That sums up 2004 and now I’d briefly like to touch upon the fourth quarter of 2004.

At OG&E --

* A net loss of $14.1 million or $0.16 per share, as compared to a net loss of $4.3 million or $0.05 per share in the fourth quarter of 2003.

* Gross margin was up $3.4 million or $0.02 per share to $119.2 million. You see the major factors impacting gross margin on the screen.

* The relatively high contribution from growth in the fourth quarter is reflective of the increase in our customer count of which 70% occurred in the second half of the year.

* O&M expense increased $16.8 million or $0.12 per share. Although we had a large increase in the fourth quarter, we ended the year essentially on plan. If you remember from our prior calls, the timing of our O&M was such that it was reduced in the first part of the year and increased in the second part of the year. And as we mentioned earlier, O&M expenses were up due to spending on system reliability.

At Enogex --

* Net income increased $24.8 million, coming in at $30.1 million or $0.34 a share in 2004, as compared to $5.3 million or $0.06 per share in the fourth quarter of 2003.

* Gross margin was $101.7 million, up 53% as compared to the fourth quarter of 2003. You see the gross margin contributions on the screen. We are pleased to say we saw increases in gross margin across all of our businesses.

Looking first at transportation and storage, gross margins increased $4.0 million over 2003. The main drivers were higher interruptible and [cross all] revenues, as well as higher park and loan fees in the storage business.

Gathering and processing gross margins increased $12.9 million in the fourth quarter over 2003 levels. Gathering gross margin were $4.6 million higher in the fourth quarter 2004, as compared to 2003. Higher gross margins were the result of the previously mentioned shift in revenues from the transportation and storage segment.

Gathered volumes for the quarter were up 30%, as compared to last year’s fourth quarter. Additionally, our continued efforts to improve the profitability of our existing contracts resulted in a 3.0% increase in margin per MMBtu gather.

In processing, gross margins increased $8.3 million, the result of stronger NGL prices, which produced a favorable commodity spread environment. We realized $0.77.7 a gallon in the fourth quarter of 2004, as compared to $0.60.6 a gallon in last year’s quarter.

Marketing margins were up $18.4 million in the quarter, as compared to 2003, driven primarily due to improved trading margins.

In terms of expenses, operating expenses increased $3.4 million or $0.03 a share. However, this was more than offset by no impairment charge in 2004 and lower interest expenses. As I mentioned previously, Enogex has reached it 50-50 debt-to-capital target.

During the three months ended December 31, 2004 Enogex had an increase in net income of approximately $800,000 relating to various items that the Company does not consider to be reflective of the ongoing profitability of the Enogex business.

We had a reduction of $4.7 million of similar items in the fourth quarter of 2003, largely due to impairment changes.

That wraps up a summary of the quarter.

And now I just want to talk briefly about the 2005 outlook.

* In 2005, the Company’s earnings guidance is $137 to $147 million of net income, or $1.50 to $1.60 per share, assuming approximately 90.5 million average diluted shares outstanding.

* The 2005 outlook includes earnings guidance of $106 to $110 million or $1.17 to $1.22 per share at OG&E.

* We expect that margin growth approximating 1.0 to 2.0% will be more than offset by increased operating expenses and higher interest costs associated with the acquisition of the McClain plant and capital expenditures for investment in OG&E’s generation, transmission, and distribution system.

* There will be an increase in capital expenditures to approximately $248 million for electric system expansion and reliability upgrades in 2005.

* The key factors affecting OG&E’s 2005 net income will be the result of pending regulatory proceedings, weather, OG&E’s ability to control operating and maintenance expenses, and customer growth.

* Even though our consolidated earnings guidance has not changed, there has been a reduction in the utility guidance due to lower recovery of Enogex gas transportation storage fees. The current guidance reflects the ALJ’s recommendation and is not binding upon the Oklahoma Corporation Commission.

* Earnings guidance at Enogex of $39 to $43 million or $0.43 to $0.48 per share.

* We expect gross margin of approximately $269 million, down from $301 million in 2004.

* The Company assumes its percent of gross margin from the transportation and storage business will remain at 46% in 2005. Approximately 88% of these gross margins are under firm contract.

* Revenues in the transportation and storage business are expected to decrease due to the completion in 2004 of the over-recovery of prior year’s under-recovered fuel.

* The Company expects its gathering and processing business to increase its contribution of gross margin to approximately 48% in 2005, as compared to 46% in 2004.

* We have assumed lower commodity spreads of $1.53 per MMBtu in 2005, as compared to $2.45 per MMBtu in 2004 and assume lower average natural gas liquids prices of $0.71 per gallon in 2005, as compared to $72 per gallon in 2004.

* Earnings guidance at the holding company is expected to be a loss of between $6.0 and $8.0 million or $0.07 to $0.09 per share. The decrease in the loss, as compared to 2004, is primarily due to lower interest expenses associated with the redemption of $200 million of trust preferred securities on October 15, 2004.

And now I’d like to turn the call over to Howard Motley for a regulatory update. Howard?

Thank you, Jim.

I will provide an update on three activities of the Oklahoma Corporation Commission (OCC). The Company’s most significant pending proceeding in the Oklahoma jurisdiction is the $46.8 million gas transportation and storage case.

The Administrative Law Judge (ALJ) issued a report in October 2004 recommending the $41.9 million that Jim mentioned earlier and recommended that that annual payment to Enogex was fair, just and reasonable and should be recovered from Oklahoma customers.

In November 2004, the Commission completed an appeals hearing of the ALJ’s recommendation and the Company expects an order from the Commission in the first quarter of this year.

On October 28, 2004, all the parties in our security rider case signed a stipulation. The Company will spend approximately $19 million on capital security projects and around $2.5 million annually on O&M expense. The stipulation contained an adjustable rider that will recover up $5.0 million of annual revenues for recovery of these security enhancement expenditures.

In December of 2004, the Commission issued an order approving that stipulation and authorized the adjustable rider for that recovery.

As far as the rate case for the McClain plant and the other reliability investments, OG&E will file within 12 months, based on the 2002 settlement, on 12 months of the acquisition. The settlement additionally allows the capitalization of operation and maintenance expenses, depreciation, [indiscernible] taxes, and interest on debt related to McClain for that 12-month period after the purchase.

The Company has planned to file a rate case during the second quarter of 2005 and hopefully we’ll have new rates that are expected to be in effect by January of 2006.

Back to you, Jim, for the summary.

Thank you, Howard.

We accomplished a lot in 2004. We had strong financial performance. Despite one of the mildest summers on record in Oklahoma, which negatively impacted the utility, Enogex had record net income. Just like 2003, this reinforces a key component of our strategy - asset diversity.

We closed on the McClain plant, a key component in our customer savings and reliability plant. This new plant has delivered fuel savings to our customers and has increased the reliability and efficiency of our generation plates.

Our financial flexibility and profile are much improved. Enogex continues to be a strong cash generator, allowing them to pay down debt, reach their targeted capital structure, and now dividend cash to the parent, all reinforcing their turnaround. This improvement was recognized by the rating agencies when Moody’s removed their negative outlook during the summer.

In 2005, we will continue to execute on our plan. That includes continued infrastructure investment as part of our customer savings and reliability plan.

And as Howard said, during the second quarter we will file a rate case in Oklahoma to recover, among other things, the cost of our McClain acquisition.

And while Enogex has made significant operational and financial improvements, we will continue to focus on improving its business profile.

And that concludes our prepared remarks this morning. We’d now like to answer any questions you may have.

Thank you, sir. (Caller Instructions.) Paul DeBuss (ph) from Value Line.

Hi. I have a few questions about our CapEx. The $248 million, was that the number you mentioned and was that just for the utility?

Yes.

And what should I add for Enogex, another $30 million as usual?

Yes.

And would this require any financing?

We will generate cash from ops this year of roughly $325 to $335 million and with our CapEx and dividend, we will need to rely on our short-term borrowings in 2005.

Okay, but that would be the only financing then? You’re not expecting any equity financing, anything from [drift]?

No, nothing in 2005.

Okay. Thank you.

Kathleen Buchetic (ph) from W.H. Reese.

Good morning.

Good morning.

I was wondering if you could talk about -- do you have any idea what the size of the rate case would be? And I’m also curious how much rate bases changed since the time you filed.

We are currently putting the rate case together and have retained a witness on return on equity, because that’s a big, big piece of the rate case. So it’ll be probably 45 days or longer before we’ll be able to determine what the size of the rate increase would be.

But I think that one easy way to look at what rate base would have increased would be we spent around $165 to $170 million for McClain. It was over $200 million last year for reliability investment and other projects and then we had member $130 million or so of depreciation, which would increase your reserve.

So if you net those together - and I don’t have that number in front of me - that would be about what the increase in rate base would be.

Okay. Thank you. I was also curious, if you just returned to normal weather, what impact would that have on utility results year-over-year, given the mild summer last year?

Well, we had about a $20 million reduction in gross margin due to weather. As we said earlier, cooling degree days were about 15% below normal and of course we would weather-normalize our returns for rate-making purposes.

Okay and a final question. Do you have any comments on the dividend? Thank you very much.

Comment on the dividend? You know, at this point we’re continuing to pay the current level and continuing to go toward our goal of 75% targeted pay out and just to execute the rate case and increase the financial profile of Enogex.

Thank you so much.

Doug Fischer from A.G. Edwards & Sons.

Thank you. Just wanted to ask a question about your ‘05 guidance. I was not able to listen to the whole call, so maybe you mentioned this, but why is your [track] spread guidance so low relative to recent experience? Aren’t you being overly conservative in your outlook?

Well, we’re certainly being conservative in our outlook and while we start the year with a very health commodity spreads, we’re not going to base the forecast on what’s been pretty much a high end commodity spread over the last 6 months. So, we’re currently seeing, based on Wednesday spreads of about $2.41, average liquid’s about $0.87 and obviously if that continued that’d be positive for us. But we’re just being conservative on the guidance because we’ve seen drops in the commodity spreads before.

Jim, just a follow-up. What’s the basis for using $1.53 as opposed to some other number and then what sort of a -- is that some longer-term average or?

That was really as we came into the year and looked at historical averages and the spreads through sort of what was achievable in calendar year ‘05. That’s what we came up. The 4-year average was about $1.57, I think. If you look 2000 to 2004, including 2004 that average is $1.57. So that’s what we looked as we came into the year.

Okay. Thank you.

Eric Beaumont (ph) from Copia Capital.

Good morning. Just building a little bit on Doug’s question, I was curious if you could give us any type of sensitivities for the spreads and NGL prices and how that would flow through.

Well, as a rule of thumb, any about a $0.10 change in the commodity spread gives us $1.0 to $1.5 million of net income, all other things equal.

Okay and on the NGL side?

Well, just look at the spread. You have to look at both sides of this.

Yes, okay. Thank you.

Doug Fischer from A.G. Edwards.

Jim, just would you repeat that sensitivity?

Sure. Based on commodity spreads, every $0.10 change is roughly $1.0 to $1.5 million of net income.

Okay. Thanks. Sorry.

And we have no other questions at this time. I will turn it back to the speakers for closing remarks.

Well, we’d like to. Thank you for your interest in the Company and we appreciate your participation in the call this morning. Good day.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day. 7