OGE Energy Corp (OGE) 2005 Q2 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the second quarter earnings release conference call. [OPERATOR INSTRUCTIONS] Now I would like to turn call over to Mr. James Hatfield, Senior Vice President,Chief Financial Officer. Please go ahead.

Thank you and good morning. Welcome to OGE Energy Corp. second quarter, 2005 conference all. I am Jim Hatfield, CFO of OGE Energy Corp. and I have with me today Steve Moore, Chairman, President and CEO, Pete Delaney, Executive Vice President and Chief Operating Officer, Howard Motley, Director of Regulatory Affairs and Strategies at OGE, and Danny Harris, Senior Vice President, OGE Energy and President, Chief Operating Officer at Enogex. We also have several other members of the management team to address questions.

In terms of the call today, we will start with some comments from Steve Moore. I will go through second quarter results and 2005 outlook. Howard Motley will then give us a regulatory update, and we will end with questions and answers. Before we begin, I want to remind everybody that we have prepared slides to accompany our webcast, so it will be easier to follow the numbers when we get to that point. Also, would like to direct your attention to the Safe Harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements. It simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date.

With that, I would now like to turn the presentation over to Steve Moore. Steve?

Thanks, Jim. Welcome to our call, and I want to thank you all listening this morning for your interest in OGE Energy. This morning we will focus on the quarterly and mid-year financial results we announced this morning. We will bring you up to date on some of the issues we see in front of us.

In the second quarter we had solid results, basically unchanged from last year. As we indicated in our press release, we faced the challenge of rising costs and the need to recover the large investments we have made in our electric system. Still, we are comfortable with our 2005 earnings guidance of $1.65 to $1.75 per share. We believe we can get there with our focus on operational excellence and all of the details of our business and we work on that all the time.

In the second quarter, OGE Energy earned $0.42 a share with another significant contribution from our Enogex pipeline company. Their best performer was the gathering and processing business. That is the part of the business in the pipeline that is not connected to the electric power plants. That business is benefiting from strong commodity prices and also from the operational improvements we have made to capture value from the market. Enogex earned $0.12 a share in the second quarter compared with $0.13 a year ago.

Our electric utility, Oklahoma Gas & Electric Company, contributed $0.33 a share in the second quarter. That is a penny less than last year despite the positive impact of about $0.04 a share from warmer weather in the second quarter of this year. In a growing cost environment, it is a challenge to manage costs in every aspect of our business. People, equipment, and materials all cost more, and this is evident all across our industry. So, in an environment with rate pressure on one side and cost pressure on the other, we continue to execute a strategy sharply focused on service and value for our customers and consistent returns for you, our investors.

In the near term, the biggest driver of all of this is utility regulation. OG&E, our electric utility, continues to experience lower earnings and we could no longer treat the costs associated with the McLain plant as a regulatory asset. That ability expired in July. We have filed for an $89 million rate increase in Oklahoma to help pay for McLain and other system reliability investments totaling a half billion dollars in the last two years. Because of these investments, our customers are enjoying significant savings and improved reliability at this time. They have also been setting new records for their demand for electricity.

It is now time to include the McLain plant and the system reliability upgrades in our regulated rate base. We have a tentative procedural schedule in our rate case that should enable us to resolve the case this fall and put new rates into effect by the first of the year. We announced a few weeks ago that we have finally resolved our natural gas transportation and storage case. We are pleased to have that uncertainty cleared away. Meanwhile, we continue to execute our thoughtful strategy of balanced growth and asset diversity always building our skills and capabilities to deliver for our customers and our shareholders alike.

As always, I thank you for your support and your interest in OGE Energy and I will now turn the program back over to Jim Hatfield. Jim?

Thank you, Steve. For the second quarter, we reported net income of 38.5 million, or $0.42 per diluted share, as compared to 39 million or $0.44 per diluted share in the second quarter, 2004. Net income was basically flat. Earnings per share were affected by higher shares outstanding at 90.8 million as compared to 88.2 million.

The contribution by business unit on a comparative basis is as follows. OG&E, $0.33 versus $0.34 in 2004; Enogex $0.12 versus $0.13 in 2004; and the holding company with a $0.03 cent loss in both periods; consolidated $0.42 versus $044. Looking first at OG&E, net income was 29.7 million, or $0.33 per diluted share, as compared to 30.4 million, or $0.34 cents per diluted share, in the second quarter 2004. Gross margin on revenues was up 9.6 million, or $0.07 per diluted share, to 178.2 million as compared to 168.6 million in the second quarter of 2004.

The major factors impacting increased gross margins were warmer weather which increased gross margin by 5.3 million, customer growth which increased gross margin by 3.7 million, and a seasonal overcollection of the co-generation rider of 1.9 million. These were partially offset by the provision for refund of 1.1 million. Cooling degree days were 18% above normal and 4% above last year's quarter. 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 collected will be returned to customers by the end of the year.

Additionally, Steve mentioned and Howard will later discuss the gas transportation storage case which was recently resolved. The refund of 8.8 million which Howard refers to has been fully reserved and will not have an impact on earnings. In addition to revenue, some of the other major categories affecting earnings at the utility were operation and maintenance and depreciation expenses. O&M expenses increased 8.2 million, or 11%, primarily due to higher labor-related costs, outside services, and materials and supplies. Most of these costs are associated with the utility's customer savings and reliability plan. Depreciation expense increased 1.1 million, or 4%, due to investments made in the electric system for reliability.

Also note that, for the last six months of the year, the costs associate with the McLain plant, deferred as a regulatory asset through July 8, will hit the income statement. We anticipate those costs to be approximately 14.7 million for the last six months.

At Enogex we reported net income of 11.3 million, or $0.12 per diluted share, as compared to 11.5 million, or $0.13 per diluted share in the second quarter, 2004. During the second quarter gross margins decreased to 67.5 million, down 7 million as compared to 68.2 million in the second quarter of 2004. The decrease in gross margin is due to lower margins in the marketing and transportation and storage businesses. This decrease was partially offset by higher margins in the gathering and processing business.

During the second quarter, transportation storage margins were down 3.7 million from the second quarter of 2004. The main factors impacting gross margins were a 4.2 million decrease due to reduced fuel recoveries and a 3.4 million decrease due to a change in accounting estimate related to storage inventory writedown. These decreases were partially offset by 1.6 million of higher cross-off prices and volumes and 1.6 million in Ozark natural gas sales margins due to renegotiated contracts.

Gathering and processing contributed approximately 6.8 million, an increase of 21.7% over last year's quarter. Gathering gross margins were1.4 million higher in 2005 as compared to the second quarter of 2004. Key drivers were higher contractual fuel gains, higher compression fees and a 3% increase in the volumes of gathered gas.

In processing, gross margins were 5.4 million higher in 2005 as compared to the second quarter 2004 as we continue to experience higher NGL prices and a favorable commodity environment. Average sales price per NGL gallon was $0.75 in this year's quarter as compared to $0.68 in last year's quarter. The average commodity spread for the quarter was $2.52 per MMBtu compared to $1.57 last year.

Marketing gross margins were down 3.8 million in the second quarter of 2005 from the second quarter 2004 due to reduced margins in natural gas sales activities and mark-to-market losses in storage. I want to point out that these mark-to-market losses are a timing issue only. In terms of expenses, you see that expenses were down at Enogex in both O&M and net interest expense in the second quarter.

On a comparative basis during the three months ended June 30, 2004, Enogex had an increase to net income of approximately 2.6 million related to various items that the company does not consider to be reflective of the ongoing profitability of Enogex's business. You see those two items on the screen. There were no nonrecurring items during the three months ended June 30, 2005.

As Steve mentioned, we continue to be comfortable with maintaining our $1.65 to $1.75 per share earnings guidance for 2005. This range implies net income of between 149 to 158 million and assumes approximately 91 million average diluted shares outstanding. Earnings guidance at Enogex is 49 million to 56 million, or 0.54 to $0.62 per share. We anticipate gross margin of approximately 286 to 297 million. The 2005 earnings guidance for OG&E is 106 to 110 million, or $1.17 to $1.22 per share. Earnings guidance at the holding company is an expected loss between 6 and 8 million, or 0.07 to $0.09 cents per share. You can see all the assumptions behind those numbers on the screen.

Now I would like to turn the presentation over to Howard for a regulatory update. Howard?

Thanks, Jim. On July 14, the Oklahoma Commission issued an order in the gas transportation and storage case, which has been outstanding for several years. The commission authorized 41.9 million of annual recovery from our customers under the Enogex gas transportation and storage agreement.

At this time, the Company is estimating that there is a refund of around about 8.8 million as of June 30, and we will be working with the Commission over the next month or two in determining the refund and how to get it back to the customers. The most significant proceeding, as far as the Company is concerned, as the commissions day -- is our rate case that we filed for 89.1 million on May 20 of this year. OG&E selected calendar year 2004 as the test year, and we adjusted out a period for (inaudible) changes for items such as construction work in progress.

A procedures schedule has been agreed upon by the parties, which will require final approval of the Commission. Right now, we are looking at the staff and other parties filing their response to our $89 million rate request on September 15. Rebuttal testimony will be followed filed by all the parties on October 10, and a hearing will begin on October 24. The administrative law judge will issue a report, or her recommendations, on November 16 after hearing all the testimony. Then in December -- early December -- the Commission will hear appeals to the ALJ report and make the final decision. We expect to be able to implement these new rates in January of 2006.

Back to you, Jim, for the final comments.

Thank you, Howard. As we look back on the second quarter, it points out that the utility needs rate relief, and that Enogex continues to perform in line with expectations. When looking at Enogex's contribution, it is important to keep in mind two things. One we are comparing to a 60 million net income number in 2004. Second, we have reduced 2005 margins by 10.5 million, 7.7 million apart from loan margins in the first quarter and 2.8 million in storage inventory in the second quarter for items that occurred in prior periods.

Despite that, we are still looking for Enogex to earn between 49 and 56 million and point out that Enogex continues to generate significant cash, pay down debt, and contribute dividends to the Holding Company. As we look ahead, we will continue to execute on our strategy. The major focus will be our Oklahoma rate case. Additionally, 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 plan. That concludes our prepared remarks. And now, we would like to answer any questions you may have.

[OPERATOR INSTRUCTIONS] Your first question comes from Jeff Gildersleeve from Millennium Partners.

Good morning, Jeff. We are not hearing anything on our end.

His line is open.

I am sorry. Can you hear me in now.

Yes.

Hi Jim. On Enogex, you talked about -- and maybe I missed it -- but, the marketing transportation storage segment experiencing lower margins. Could you just elaborate on what's going on there specifically?

Yes. I think if you look at transportation and storage -- really, two main items on a comparative basis. First is we were over-recovering fuel that was due to us from prior periods last year, and that is no longer the case in this quarter a comparative basis. So that is -- that took away some margins.

The other is we had a storage inventory write-off of 3.4 million pretax. This year -- and, it really relates to a change in accounting estimate in terms of the gas on injection withdrawals that are being lost -- we ended up upping that percentage from 0.7 to 0.128, and that really relates to prior periods as well. In marketing, just lower margins on natural gas sales activity and then, with some storage positions, we took a mark-to-market loss in the quarter. Again, we would expect that that mark-to-market loss would turn around at some point in the future

Are you seeing spreads between different hubs tight end? Are there opportunities -- just don't seem as much, or do you think the second half, there will l be more opportunities to realize marketing gains?

Well, it is hard to predict spreads in the future. I would point out that, if we look at the margin contribution from the marketing segment in 2005, we are only expecting about 3% of that gross margin contribution to come from the marketing business. So, we would expect that they are going to make, based on the range of total gross margins, about $7 million of margin this year.

Some of that mark-to-market will come back in the second half. We have some park and load transactions at that we referred to before that will hit primarily in the third quarter. So we see some pickup for those margins in the second half of the year.

Great. Just last thing. I think I heard you correctly, September 15 we get staff testimony in the rate case?

Yes. That is correct.

And then, the rate case really won't be resolved unless there is a settlement until later in the year. That look for '06, will you be able to provide any outlook before that or just highlight some of the main drivers? Will you do that EI?

We won't be able to provide '06 guidance as it relates to the utility until after we get through the regulatory proceedings. So, probably the EI won't be (able to) provide much clarity as well, based on where we are. We will just have to see how the case plays out.

Understand. Thank you very much.

Thank you, Jeff.

Your next question comes from Paul Patterson from Glenrock Associates.

Good morning. Can you hear me?

Yes.

The lost gas that you were talking about earlier, just to follow up on Jeff's question, going from 0.7 to 1.8. What caused that?

It is 0.7 to 0.128. Danny, you want to talk about that?

We did a project back in 2003 to help reduce the amount of gas migration that we historically have had in the field and (if that can prove) that. As we have gone forward and done further testing and analysis, we just feel like the rate was a little bit greater than we expected -- still below what it was in the past. We are still continuing to work on the reduction of that gas migration on that fuel.

You said there was no impact going forward, is that correct, or not much of an impact going forward?

No. In fact, the adjustments that we have made take into account our findings there, so that is also built into our numbers.

And then, on the rate case, I have looked through it and stuff and I think if I am right you are asking for 55.7%, roughly speaking, equity ratio and 11.75% ROE?

Correct.

What is the rate base that we are talking about? I missed that.

The rate base is almost $1.9 billion in the Oklahoma jurisdiction.

And that is where you are filing it, right there? Are you filing anything else anywhere else? I missed it if you were.

We have to look at -- our other jurisdiction is Arkansas. We will have to look at that as we get through the Oklahoma process

Can you give us the idea about what the rate base is there?

I would guess, in Arkansas, it is probably about 10% of the business -- probably 8 to 10% of the rate base.

Okay. And then just to circle back on the settlement potential, it seems like the ONG case is being appealed, at least the ALJ decision is or what have you, so it is going past that 180 days. If there was a settlement, when do you think that might take place? Would that happen after initial testimony, or could it happen before? Any sense that you could -- obviously, it is hard to tell. This is very in advance. Any idea when it would be more likely than not, if it were to happen?

Actually, we are looking at two days -- two times to have a settlement conference. After the testimony is filed in October with all the rebuttal, there will be a day set out to sit down with the staff and the parties and discuss it.

And then just before the hearing starts, there will be a second settlement conference to see if there is any possibilities of settling it before we go to trial. When we finally get a procedure schedule from the commission within the next 10 days or so, it will have those dates in the procedures schedule.

Okay. Great. Thanks a lot, guys.

Your next question am from Reza Hatefi from Zimmer Lucas Partners.

Thank you. Could you expand a little bit on your O&M increases. I guess it was $8.2 million. And how much of this -- it looks like it was about 9% increase year-over-year. Could you expand on this as far as continuing and what kind of percentage O&M increases we should expect for '05 and maybe even '06.

Well, I think when you are looking at a comparative basis year-over-year, you have to keep one thing in mind as it relates to the utility. Last year if you remember we didn't acquire the McLain facility until July, and the stipulation called for a potential $25 million rate reduction had we not acquired generation at the end of the '03. So, as we went into '04 we were in somewhat of a contingency mode when it came to spending. As a result, we ended up getting an order in April that said we could just proceed on acquiring McLain.

So from a timing perspective, we ended up spending more in the second half in 2004 on a comparative basis from a timing. So, the fact that it is up for us is not unexpected. We would look for about a 2% increase in O&M year-over-year, at the end of the year, keeping in mind there is always timing that affects these expenditures on a quarterly perspective.

So, 2% year-over-year, and if I am not mistaken the McLain expenses are -- or is it just the depreciation that is deferred until July 9 after which they are -- or July 9, the previous July 9 after which they will be expensed until the resolution of the rate case?

It is all costs except for an equity return associated with McLain. So that would include ad valorem, O&M, depreciation, any costs associated with -- and interest expense as well, and that begins on July 9. We expect that would be about 14 million the rest of the year -- 14.7.

14 million. But, the first or this previous quarter, then, there was no McLain impact? I am still a little bit confused.

Yes, no McLain impact in that June 30. There was about $24 million of cost that accumulated in the regulatory asset.

And then how about, you mentioned also pension and benefit expenses. How much were those up year-over-year?

Pension and benefits were up about a million two this quarter over last quarter.

Great. Thank you.

You have a follow-up from Paul Patterson with Glenrock Associates.

Hello, guys. Sorry about this. I forgot to ask you. What was the 12 months ROE at the utility? What was the last 12 months, actual or (normally)?

Jurisdictional ROE at OG&E, 12 months into June, was about 10%. If you remember, at the year-end call we said it was about ten five last year, so we expect that it will continue to drop and be under 10 by the end of 2005.

Okay, great. Thanks a lot, guys.

Your next question comes from David Frank from Pequot Capital.

Hello. Good morning.

Hello, David.

Jim, could you tell us what the impact on margin will be from the transportation rate ruling you just received. I assume it is in place in your guidance for the second half of this year.

Yes. As Howard talked about, we ended up with a 41.9 million recovery on that contract, and we had fully reserved a refund of 8.8 million. So the refund will have no impact. We won't recover fuel going forward, and we expect that fuel number to be between 1 and $2 million the rest of 2005.

And then, probably, I am going to guess another 1 to 2 for the first half of '06?

Yes.

Incremental?

Yes. But that is in our -- that is incorporated in the guidance.

Right. Okay. Thank you.

Yes.

At this time, there are no further questions. You do have a question from John Hanson from (Imperior) .

Good morning. Just quick question here on the mark-to-market item. That is in the marketing area of Enogex?

Yes.

And what was that number again?

The mark-to-market for Enogex for the marketing business was 1.1 million.

1.1. Was there mark-to-market in another part of that business?

No. It is essentially in that marketing business.

And that should turn around here in '05 then, right?

Mostly in '05, yes

Okay, good. Thank you.

[OPERATOR INSTRUCTIONS] There are no further questions.

We would like to thank you for joining us this morning on our call and we, as always, appreciate your interest in OG&E and Enogex and OGE Energy. Thank you. Good day.

Thank you for participating in today's conference call. You may now disconnect .