OGE Energy Corp (OGE) 2005 Q1 法說會逐字稿

Good morning. My name is [Marcus], and I will be our conference facilitator today. At this time, I would like to welcome everyone to the OGE Energy Corp first quarter earnings release conference call.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during this time simply press star, then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you.

I would now like to turn the call over to Mr. Jim Hatfield, Senior Vice President and Chief Financial Officer.

Thank you. Good morning, and welcome everyone to OGE Energy Corp’s first quarter 2005 conference call. I’m Jim Hatfield, Senior Vice President and Chief Financial Officer.

I have with me today Steve Moore, Chairman, President, and CEO; Steve Delaney, Executive Vice President and Chief Operating Officer; Howard Motley, Director of Regulatory Strategies for OG&E; and Danny Harris, Vice President and Chief Operating Officer at Enogex. We have several other members of the Management Team available to answer questions.

In terms of the call today, we’ll start with some comments from Mr. Moore. I’ll follow with a summary of first quarter results. We’ll review the 2005 outlook. Howard is going to take us through an update on the regulatory proceedings, and then we’ll end with a q and a session.

Before we begin, I want to remind everybody that we 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’d like to direct your attention to the Safe Harbor Statement regarding forward-looking statements. This is a SEC requirement for financial statements, and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date.

And with that out of the way, I’d now like to turn the presentation over to Steve. Steve.

Thank you, Jim.

I appreciate you joining us on the call. Welcome. And I’d like to thank you, as always, for your interest in OGE Energy.

Today, we’re going to focus on the first quarter results we announced earlier this morning. We’ll also have an update on some of the regulatory issues and some other projects that we’re working on. And, as always, we’ll welcome your questions at the end of our presentation.

In our first quarter we had good results, but not as good as last year for a couple of reasons, that we’ll talk about those reasons this morning. Still, we have increased our earnings guidance for 2005. We had based our earlier guidance on a somewhat conservative outlook for commodity prices, but the strong price environment continues, and our natural gas gathering and processing business is we feel well positioned to capture value from the price environment.

OGE Energy earned 6 cents a share in the first quarter, again highlighting the value of diversity in our assets and operations. Our electric utility, Oklahoma Gas & Electric Company, recorded a loss of 2 cents, while the Holding Company posted a loss of 1 cent, while Enogex, our natural gas pipeline, earned 9 cents per share. Jim will go through all of the details in a moment, but in general we’re pleased with the direction of the Company.

At OG&E, our utility, we continue to invest in system reliability projects and to pursue customer focused operational improvements. Enogex continues to focus on improving operations, as well, while also exploring new opportunities and new markets, and developing new products and programs for customers.

In all areas of our Company, we’re executing a strategy of operational excellence and thoughtful balanced growth with the right mix of regulated and unregulated assets and operation. This all requires us to be sharply focused on the complex competitive marketplace in which we operate, including the critical role of regulation in our business.

We have notified the Oklahoma Corporation Commission of our intent to seek a rate increase, and we plan to make that filing on or about May the 20th, in just a few days. That’s when we’ll announce the details of our filing, but our general approach is already known. As you know, we have a unique opportunity to invest in our electric system with minimal impact on residential customers. At the same time providing relief for small business, which is the economic engine for our stake.

In McLain power plant our $160m investment is already providing significant savings to our customers. We promised these savings in our rate settlement agreement nearly three years ago, and we’re delivering on that promise. We will be seeking to have this valuable new asset included in our regulated rate base in our filing in a couple of weeks.

We’ve also been making big investments in our transmission and distribution systems. These projects will accommodate customer growth in the future, and they’re making our service more reliable today.

Meanwhile, the high costs of government mandated co-generation is finally declining. This will make it possible to significantly expand and upgrade our service at minimal costs for most customers.

The next step in the process is clearer treatment of this thoughtful strategy in the regulatory arena. We look forward to making our case with our regulators this summer. We want to limit regulatory uncertainty and the financial impact it can have on our Company, therefore, we will seek a reasonable procedural schedule to resolve the case this fall, and put new rates in effect by the end of this year.

As always, we appreciate your support of our conservative thoughtful approach to our business, and I thank you for your interest in OG&E Energy. And I’ll turn the program back over to Jim.

Thank you, Steve.

For the first quarter we reported net income of 5.3m or 6 cents per share, as compared to net income of 10.2m or 12 cents per share in the first quarter of 2004. The contribution by business unit on a comparative basis is as follows: OG&E a 2 cent loss in 2005 versus a breakeven quarter in 2004; Enogex, a 9 cent contribution versus a 15 cent contribution in 2004; and the Holding Company with a 1 cent loss in 2005 as compared to a 3 cent loss in 2004, consolidated 6 cents versus 12 cents.

Looking first at OG&E we had a net loss of 1.7m or 2 cents per share, as compared to breakeven results in the first quarter of 2004. Gross margin on revenues was up 4.9m or 2 cents per share to 126m, as compared to 121m in the first quarter 2004. The major factors impacting increased gross margins were customer growth which increased gross margin by 3.8m and a seasonal over collection of the co-generation rider of 3.1m. These were partially offset by warmer than normal weather. Heating degree days were 7 percent below normal and 15 percent below last year’s quarter. And I want to emphasize that the impact of the co-generation rider is a timing issue that should have no financial impact on OG&E in 2005, as amounts over collected will be returned to customers by the end of the year.

Some of the major categories affecting earnings at the utility were operation and maintenance and interest expenses. OM expenses increased 5.9m or 8 percent primarily due to higher labor, outside services, and material costs. Most of these costs are associated with the utilities, customer savings, and reliability plan.

Net interest expense decreased 1.4m or 15 percent.

Now, looking at Enogex we reported net income of 8.1m or 9 cents per share as compared to 12.8m or 15 cents per share in the first quarter of 2004. During the first quarter gross margins decreased to 63.2m, down 2.5m or 2 cents per share, as compared to 65.7m in the first quarter of 2004. The decrease in gross margin is primarily due to lower margins in the marketing business.

Looking at the businesses in the quarter, transportation storage margins were down 600,000 from the first quarter of 2004. The main factors impacting gross margins were 2.8m decrease due to higher natural gas and electric fuel expenses, partially offset by 2.1m of higher margins from the purchase and sale of natural gas.

In gathering and processing we had a contribution of 34.9m, an increase of 7.7 percent over last year’s quarter. Gathering gross margins were 500,000 higher in 2005 as compared to the first quarter of 2004. Key drivers were higher contractual fuel gains and higher compression fees, partially offset by lower margins on natural gas sales. Margin per [MMB] was up 5 percent for the quarter.

In processing gross margins were 2m higher in 2005 as compared to the first quarter of 2004, as we continued to experience higher NTL prices in a favorable commodity environment. Average sales price per NTL gallons was 70.6 cents in this year’s quarter, as compared to 65.9 cents in last year’s quarter.

Marketing gross margins were down 4.4m in the first quarter of 2005 from the first quarter of 2004 due to 7.7m decrease due to an accounting correction, partially offset by a 3.1m increase in storage margins. And I’ll address the accounting correction later in the presentation.

O&M expenses increased 1.2m or 5 percent due to higher outside service costs and higher materials and supplies expense, which were partially offset by lower allocations from the parent.

Net interest expense fell 700,000 due to the reduction of long-term debt. In the first quarter Enogex retired another 23m of long-term debt as we continued to reduce the long-term debt at Enogex.

Looking at nonrecurring items, on a comparative basis during the three months ended March 31, 2004, Enogex had an increased net income of approximately 4.2m relating to various items that the Company did not consider to be reflective of the ongoing profitability of Enogex’ business, and you see the items on the screen. During the three months ended March 31, 2005 Enogex had a decrease in net income of approximately 4.7m related to a correction in accounting procedure for a park and loan transaction which the Company does not consider to be reflective of the ongoing profitability of Enogex business.

Now, I want to talk a little bit about 2005 outlook. As Steve mentioned, we’ve been able to increase our guidance from 137m to 147m, or $1.50 to $1.60 per share, to $149m to $158m of net income, or $1.65 to $1.75 per share, assuming approximately 90.5m average diluted shares outstanding. The earnings guidance at Enogex has increased to 49m to 56m, or $54 to $62 per share, from 39m to 43m, or 43 cents to 48 cents per share. We now anticipate gross margins of approximately 286m to 297m.

Looking at the margin contributions by business, transportation and storage we anticipate about 45 percent of the total gross margin from transportation and storage, and we really have no change in assumptions in that business. Gathering and processing we now anticipate about 52 percent of the gross margins with the changes related to commodity spreads, where we were $1.53 in our original guidance, we now see a range of $2.02 to $2.56 per MBTU. And liquids prices projections increased from 71 cents per gallon to a range of 82 to 89 cents per gallon.

In terms of the marketing business we now see a 3 percent contribution in the gross margins, with the two changes in marketing related to the correction for the park and loan transactions, as well as capacity position on the [pipeline], which we now expect to be a negative contributor of 5m, as compared to 3m earlier.

The 2005 earnings guidance for OG&E remains unchanged at 106m to 110m or $1.17, $1.22 per share, and on the screen you can see the assumptions. Earnings guidance at the Holding Company also remains unchanged at an effective loss between 6m and 8m, or 7 cents and 9 cents per share.

But before I turn the presentation over to Howard, I’d like to briefly touch upon the accounting correction I mentioned earlier. In March we realized that our gas marketing subsidiary, OG Energy Resources, had incorrectly changed the procedure for recognizing park and loan transactions. Originally, revenues and margins were booked only when the park and loan transaction was completed.

This procedure was changed to booking revenues without the associated expenses at the time the transaction started. This resulted in a temporary overstatement of operating results until the transaction was completed and the associated expenses were realized. The amounts were not material. Nevertheless, we chose to clean-up this process in the first quarter, and the result was a pretax charge to net income at Energy Resources of 7.7m.

I’d now like to turn the presentation over to Howard. Howard.

Thanks, Jim.

Currently, the Company’s most significant pending proceeding in the Oklahoma jurisdiction is the $46.8m gas transportation and storage case. The administrative law judge issued a report in October of 2004 recommending a 41.9m annual payment to Enogex as fair, just, and reasonable, and that it should be recovered from the Oklahoma customer. On December 7th of 2004 the Commission completed an appeals hearing on the ALJ’s recommendation. A Commission order was effected in the second quarter of this year.

As for the upcoming rate case, the 2002 settlement agreement requires OG&E to file rate case within 12 months of the July 2004 acquisition of the McLain Plant. The settlement additionally allows the capitalization of operation, operating and maintenance expenses, depreciation, [at loan] taxes, and interest on debt related to the plant for a period of up to 12 months subsequent to the acquisition.

On April 4th of this year the Company notified the Oklahoma Commission that OG&E intended to file for a rate increase on or about May the 20th, utilizing calendar year 2004 as a test year. The Commission has to complete this hearing by November 16th because of a state statute that allows 180 days for them to have a hearing.

New rates are expected to be implemented at the end of the year, hopefully, the first billing cycle in December.

Back to you, Jim, for a summary.

Thanks, Howard.

Well, in summary as we look back at the first quarter we had solid performance and we were able to increase our earnings guidance to $1.65 to $1.75 per share. And as we look ahead, we will continue to execute on our strategy.

For 2005 the focus will be at our Oklahoma rate filing, which we expect to file on or about May 20th. We will continue to execute on the operational improvements at Enogex, and of course we will continue our infrastructure investment in our customer savings and reliability plant.

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

[OPERATOR INSTRUCTIONS]

Your first question comes from Doug Fischer.

Good morning. Good morning, all.

Good morning, Doug.

Good morning. Just a couple of numbers and then one question. Jim, what did you say the natural gas liquids price per gallon was in the first quarter?

The liquids price per gallon in the first quarter was 74.6 cents.

Versus what?

65.9.

Okay. And then would you go over the total gross margin for Enogex? And then give it to me by unit again? I didn’t get that all.

The total gross margin is…

For the ’05 guidance?

Sure. The total gross margin is 286 to 297.

Okay.

And then the contribution by the various businesses will be transportation storage at 45 percent, gathering processing 52 percent, and then marketing 3 percent.

And then at marketing you said basically the – explain the Cheyenne transaction to me, again.

Well, we have capacity on the Cheyenne [Plains] pipeline which extends from the Cheyenne Hub down into Kansas. And we took a position of – how much? 60m a day on that pipeline. That pipeline was going to start later in ’05, but actually went in service earlier in ’05. We, you know, our marketing on the pipeline, as you know, the Rockies is an area that we’re focused on as a Company now. And we just see, because the pipe went in earlier, you know, a bigger negative contribution in ’05 than we anticipated in the pipeline.

And that was a $5m gross margin negative you were saying versus a prior 3?

Yes.

I understand that correctly?

Yes, that’s correct.

Okay. And then can you talk to us a little bit about the general rate case in Oklahoma as to how, you know, any discussion of magnitude and how you’re going to position this thing, you know, by what the overall net rate increase to customers might be in just very rough terms?

We still are in the very preliminary stages of calculating the revenue requirements and then doing the rate design, so really those type of details really won’t be public until we file the case May 20th.

Okay. Thanks, Howard. That’s it.

Thanks, Doug.

Your next question comes from [Jeff Travilo].

How are you?

Good. How are you?

Good, good. Thanks. The accounting change in marketing, essentially you’re just kind of [inaudible] up your accounting that might have been slightly off for [inaudible], is that right?

It was a timing, a correction of timing of the recognition of gross margin and expenses associated with park and loans, yes.

Parking lots?

Park and loans.

Oh, that change, is that 7.7m is a pretax charge? Is that included in your ongoing guidance for 2005?

Yes, it is. And it’s one of the two drivers that are driving the marketing contribution this year down to 3 percent of gross margin.

That’s about a nickel a share?

Yes, that’d be correct.

Thanks. And this is going to be the new accounting standard going forward, though, right?

A new accounting standard?

I guess is that the accounting will remain the same in 2006?

Yes.

In 2006?

I’m having a hard time hearing your question, Jeff.

I just picked up my handset.

Okay.

That’s much better.

Yeah. I guess all else equal is the accounting going to stay the same in ’06 as it is in ’05, such that the marketing earnings will be affected in the same way in ’06 as they were in ’05 by this change? But ’05, I guess is a catch-up, right?

’05 is a catch-up. The accounting would be the same which is where, you know, the park and loan you have two legs of transaction. Any margin associated with those would be booked at the end of the second leg of the transaction, and that’ll be consistent going forward from this point.

What portion of the ’05 guidance was a catch-up for previous years? And what portion do you think is ongoing?

Well, 7.7 was a catch-up in the first quarter of 2005.

Well, that’s all of it, okay?

Yes.

Okay, so that 5 cents isn’t going to be occurring in every…

Correct. That was just a onetime catch-up.

Got it. Got it.

And that 7.7, of course, is pretax.

I understand. Okay. Thank you very much, guys. I appreciate it.

Thank you.

Your next question comes from [Dag Streiber].

I guess we’ve got you guys cornered today. Hi, Jim. Hi, Steve. Could you just follow-up on the rate case? Can you just remind us how much you spent on McLain? Can you just remind us sort of what the capitalization of that investment is? And also remind us about some of the key details of the ’02 settlement and the savings, and how all that stuff works? I’m trying to understand effectively how much of the McLain issues were already sort of predetermined already from the’02? And how much is sort of subject to, you know, the OCC’s sort of discretion going forward?

Well, if you’ll remember, the settlement that we got in 2002, it’s really we reduced rates 25m and needed to buy capacity up to 400 megawatts to satisfy future load. As part of that we were going to, we had the purchase power contract that expired at the end of 2003, we had a 2F contract that shutdown, or that actually expired August of 2004, and then with the efficiency, assumed efficiency of a new plant we would have additional fuel savings in those three items added up and any rate increase at McLain to guarantee a [75m] customer savings over a three year period of time.

So, that set the premise for us to acquire generation. We bought McLain, we bought it for 160m. As Howard alluded to earlier, we were able to have a regulatory asset that captures all of those costs associated with that plant. And that at the end of the March is approximately 17m, which is a regulatory asset. And the capitalization that came out of the rate case was 56 percent equity was [1155] return on equity as part of that stipulation.

And is that ROE and all those other issues subject to reopening this rate case, or so it was just a full-blown rate case, or is this just a deal with McLain and keep the general structure the same?

No, this is a full-blown rate case. All the issues will be on the table.

Got it. All right. Thanks so much.

Thank you.

Your next question comes from [Padula Parti].

Good morning, Jim.

Hey, good morning.

When you talked about, you know, the potential rate increase here, you always indicated that you’ll be having some of the [nub] contracts and QFs that were way out of the money, starting to drop off. Can you tell us in the next few years what kind of savings will be going back to customers as a result of those higher costs stepping down or dropping off, that may give some room for rate adjustments on the base side?

Yes. The AES contract contractually stepped down, 12.5, roughly 12.5m in 2004, and another 38.5m roughly in 2005. The other contracts stayed the same. Of course, the Smith contract capacity was reduced significantly, as well, when that was re-upped in 2004, well, September of 2004. It’s about 20m not counting fuel.

So, Smith was about 20m of savings?

Not counting fuel.

Oh, okay. So, basically, what I’m trying to get at here is that when we’re thinking about customer bills in Oklahoma, effectively if one compares ’05 versus ’04 bills are down almost 60m if one just looks at the [Asan] Smith step-down such that if you aspirate a rate increase of whatever, you know, from a customer perspective one should net that against the savings, correct?

That’s correct. And you also add on top of that I might add that fuel savings of McLain which flows through the customers, as well. So, that is a correct assumption.

Do you have an estimate on that number?

Yeah, the fuel savings in 2004 were close to over 20m and are projected to be in the 25m, 26m range in '05.

Oh, okay. And I wanted to make sure, in terms of the guidance on Enogex, when it came to the [Park] trade, I think the transaction you indicated.

Right.

That’s 5 cents per share, $7m pretax. Is that $7m pretax number in the 49 to 56? Or is it excluded?

No, it’s in that number.

And but that number will not recur next year? That $7m pretax will not recur?

That’s correct. It’s a catch-up correction.

Okay. Thank you.

You have a follow-up question from Doug Fischer.

Thank you. Just a follow-on to what Padula asked. While we have savings in capacity, well, in purchase power costs primarily capacity charges, I guess, and we do have a heat rate improvement with McLain, isn’t it true that we’ve had some fairly significant increases in natural gas? What’s been the net result of all of this on the customers all in bill?

Right now, our preliminary estimates looking at 2004 where the fuel cost level is with the increased gas prices, and with the increase in the rate case, and the credits we’ve been talking about in co-generation and the fuel. We still believe that that impact on, like the residential consumer is going to be less than, right around less than $3 a month on their bill. So, our preliminary numbers show still at the very minimal impact on our residential consumers, and on our business customers, our 80,000 general service business, small business customers, it looks like it’s going to be a net decrease, maybe like a 1 or 2 percent to them over the time period December ’04 to December ’05.

And, Doug, if you look at the financial and statistical data that’s attached to the news release, you’ll see that fuel and purchase power combined is down quarter over quarter, which I think is reflective of your question of what’s the overall impact of all of these things.

Okay. Thanks. And then just one final, hopefully, question about this accounting adjustment. Because this is a catch-up we won’t have any positive reversal in the future because you already recognized the positive and backed it out, or?

Yes. This will not turnaround, this is a nonrecurring, non-cash item in the first quarter that catches us up from where we had, and correcting the timing of the recognition of gross margin.

But when these transactions close out there would be a positive impact?

To the extent, yes, to the extent there’s margins associated with those park and loans that would be in their numbers on a go-forward basis.

Do you know when these transactions close out?

Well, most, the majority of them are August. By August of 2005. So.

They happen within this year?

Yes, for the most part.

Okay. So, they’re captured in the guidance?

Yes, yes.

Okay. Okay, great. Thank you.

Thank you, Doug.

Your next question comes from [Bob Siegel].

Yes, good morning. This question pertains to dividend. In your annual report you state that you’re working on a plan that if successful would enable OG&E to increase the dividend. Could you please share with us what are the elements of that plan and what is your best estimate of the timing as far as any positive dividend action, if any positive action is going to be forthcoming?

Well, as we look forward, we want to look to grow our earnings 3 to 5 percent a year, and that’s really with the utility and Enogex together. And, obviously, this Oklahoma rate case is key to strengthening our earnings profile of Oklahoma Gas & Electric in 2006 and beyond.

So, I don’t believe that the Board would be able to consider dividend till we get into 2006, and then we’ll have to look at the ongoing profitability of the business. You know, continued improvement in Enogex; continued program in OG&E, before we can make that determination.

At this time, you have no further questions.

Thank you, once again, for your interest in OG&E Energy. I appreciate you joining us on the call this morning. Have a good day.