OGE Energy Corp (OGE) 2006 Q1 法說會逐字稿

Good morning my name is Deborah and I will be your conference operator today. At this time and a like to welcome to the quarterly earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mr. Hatfield Senior Vice President and Chief Financial Officer. You may begin your conference, sir.

Thank you Deborah. Good morning everyone and welcome to OGE Energy Corp's first quarter 2006 conference call. As Deborah said, I am Jim Hatfield, Senior Vice President and Chief Financial Officer. 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 Strategy at OGE, and Danny Harris Senior Vice President of OGE Energy Corp and President and Chief Operating Officer at Enogex. And several other members of the management team to address questions.

In terms of the call today, we'll start with comments from Steve Moore. I'll read the first quarter results. We'll talk about our updated 2006 outlook. We'll hear from regulatory proceedings for Oklahoma and Arkansas from Howard Motley. And then we'll close with Q&A. Before we begin I want to remind everybody that we have prepared slides to accompany our webcast, so it will be easier to follow numbers when we get to that point in the presentation. Also before we begin I'd like to direct your attention to the Safe Harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements and simply states we cannot guarantee forward-looking results, but this is our best estimate today.

With that I will now turn the call over to Steve Moore. Steve?

Thanks Jim. Welcome to the call. Thank you for joining us and we do appreciate your interest in OGE Energy. Today were going to focus on our first quarter results which we announced earlier this morning. We'll also have an update on some of the regulatory issues and other projects that we're working on. And as always there will be time for your questions at the end.

In the first quarter we had strong results. Driven mostly by Enogex's business. This performance and the outlet for natural gas and natural gas liquids is allowing us to increase our earnings guidance for 2006. We had based our earlier guidance on market expectations of continued high natural gas prices and lower prices for crude oil and gas liquids. Now we find just the opposite is happening. Natural gas prices have come down from recent highs and oil prices are up. This has big implications for our natural gas processing business and we are able to capture that rate from the market. Jim will take us through the details in a moment. But the main point is that we are raising our earnings guidance to between $2.05 and $2.25 a share for 2006. And of course that's up from our prior earnings guidance of $1.75 to $1.85 per share.

In the first quarter OGE energy earned $0.27 per diluted share. Enogex, our natural gas pipeline earned $0.29 while our holding company and our electric utility, OG&E, each posted slight losses of $0.01 per share. At OG&E we continued to seize opportunities for growth in two ways. By competing effectively for new customers in a growing economy and by making capital investments in our electric system.

The latest example is the unanimous approval from on our Oklahoma Corporation Commission for our new 120 megawatt wind power project in northwestern Oklahoma. Construction will begin very soon on the continual wind farm. The name we have chosen to celebrate our state's 100th anniversary in 2007. We applaud our state regulators for taking this step to increase Oklahoma's supply of renewable energy. The Commission's prompt action enabled us to move forward on a timely basis.

We believe a new pre-approval process benefits our rate payors and protect our shareholders. It's a $200 million project and we will be able to begin recovering our investment when it's completed, hopefully by year end. Looking ahead, we are planning to follow a general rate case for OGE in Arkansas this summer. This affects about 10% of our utility business and we intend to make a strong case that reflects our assets in our operations. There are a number of other issues of our regulatory agenda this spring and summer. And Howard Motley is here to provide you an update on those activities.

At Enogex growth is at the top of their agenda as well. We have just completed another asset sale. Our second this past year. We intend to read deployed the proceeds from these sales in new investments as we continue to consider changes in our geographic footprint and look for ways to reduce volatility. The Continental connector project with El Paso is a good example of this. Hopefully by now you've seen our new annual report. Our focus is on reliability.

Delivering for our customers our shareowners, and our employees, and indeed everyone who has a stake in our performance. Times are good in our part of our country and we are in a strong position for continued success. We will continue to make thoughtful investments in the energy infrastructure and we will continue to strive for operational excellence in both of the lines of our businesses. Certainly we appreciate your continued support and interest in the company. And I'll turn the call back over to Jim.

Thank you Steve.

One for the first quarter we reported net income of 24.9 million or $0.27 per share as compared to net income of 5.3 million or $0.06 per share in the first quarter of 2005. The contribution by business unit that on a comparative basis is as follows : OG&E a loss of $0.001 versus a loss of $0.02 in 2005. Enogex, $0.28 versus $0.05 in 2005. Holding company with a loss of $0.01 in each period . Continuing operations $0.26 versus $0.02. Contribution from discontinued operations $0.01 versus $0.04. Consolidated $0.27 as compared to $0.06.

Looking first at OG&E, we had a net loss of 1.1 million or $0.01 per share as compared to a loss of 1.7 million or $0.02 per share in the first quarter 2005. Gross margin on revenues was up 10.3 million to $136.3 million, as compared to a 126 million in the first quarter of 2005. The major factors impacting this were the rate increase, which increased margins by 9.7 million, price quantity variance, which includes increased uses usage by existing customers and the rate mix between customer classes contributed 2.9 million. And customer and industrial growth contribute 4 million. These increases were partially offset by warmer than normal weather which resulted in lower margins of approximately 5.9 million.

Heating degree days were 24% below normal and 10% below last year's quarter. Partially offsetting the increase in gross margins were higher expenses. L and M expenses were up 2.3 million primarily due to higher employee expenses related expenses, higher allocations from the parent and timing differences in legal costs. Partially offset by increased capitalized labor and lower materials and supplies. Net interest expenses was 12.7 million, an increase of 4.6 million primarily due to the interest expense associated with a claim. Which was recorded as a regulatory asset in the 2005 quarter. Interest due to the high levels of short-term borrowing and additional interest expense related to an IRS reserve.

At Enogex, we reported net income of 27 million or $0.29 per share as compared to 8.1 million or $0.09 per share in the first quarter of 2005. Income from continuing operations was 26.2 million or $0.28 per share, as compared to 4.5 million or $0.05 per share in the first quarter of 2005. During the first quarter, gross margins and increased to 85.2 million, up 33.6 million from 51.6 million in the first quarter of 2005. This increase is primarily due to higher margins in the transportation storage businesses but higher gross margins were reported in all of Enogex's businesses.

During the first quarter transportation storage margins were 16.8 million higher than the same period last year. The main factors impacting the higher margins were 5.8 million increase due to better management of gas pipeline and balances. A 4.2 million increase due to improved fuel recovery. The company underrecovered approximately 7.1 million of fuel in 2005 for the full year Q2 over recovery in prior periods which created a positive variance in 2006. We believe fuel recovery will match fuel expenses in 2006 thereby reducing volatility of gross margins.

The 3.5 million of the increase was due to storage fuel hedging gains. We had a little over a million due to increased commodity and interruptible profile revenues. Primarily a result of higher volumes and increase in demand fees for various contracts. Gathering processing contributed 38.2 million, an increase of 31% over last year's quarter. Gathering gross margins were up 4.3 million as a result of reversal of fuel under contractual fuel gains and higher natural gas sales. Offset in part by transfer of an imbalance liability from the transportation business. Additionally volumes gathered work at 12% and 2006 compared to the same period in 2005.

In processing, gross margins were up 4.7 million higher, compared to the first quarter of 2005. Primarily due to higher keep whole margins. Keep whole margins were up 71% for the first quarter of 2005. Marketing gross margins were up 7.8 million in the first quarter 2006 from the first quarter 2005. Due to 7.7 million increase due to a 2005 accounting correction and a $6.7 million increase related to transportation hedging gains, partially offset by decreases in trading and storage margins.

At Enogex, O&M expenses increased 6.1 million or 27% due to higher outside service costs and higher employer costs related expenses and increased allocations from the parent. Other income increased 6 million primarily due to a litigation settlement and net interest expense fell 1.7 million do to increase in interest income primarily a result of the interest earned on the failed proceeds from EAPP. On a comparative basis, and I just had a increased net income of 4.3 million related to various items of that the company did not consider to be reflective of the ongoing profitability of Enogex's business. And you see those items are on the screen.

During the first quarter of 2005, Enogex had a decrease in net income of approximately 1.1 million relating to various items that the Company does not consider to be reflective of the ongoing profitability of the business. And you see those items on the screen as well. For 2006, the company has increased it's earnings guidance to $2.05 to $2.25 per share or a 187 million to 205 million net income from a $1.75 to $1.85 per share or 159 to 169 million in net income, assuming approximately 91.6 million average diluted shares outstanding.

The 2006 earnings guidance for OG&E remains unchanged at $1.36 to $1.40 per share or 124 million to 128 million net income. And you can see it's assumptions there on the screen for the utility. Earnings guidance for Enogex has increased to $0.75 to $0.90 per share or 69 million to 82 million from $0.48 to $0.53 per share or 44 to 48 million. We anticipate gross margins of approximately 303 million to 324 million as compared to 272 million to 279 million in our original 2006 earnings guidance.

Transportation and storage gross margins contribution of approximately 135 million as compared to approximately 116 million in the original 2006 earnings guidance. Increase in gross margin is primarily due to increased gains from imbalances and higher current and forecasted demand fees in agreements. Gathering and processing gross margin profits was approximately 159 to 180 million, as compared to 147 to 154 million in the original 2006 earnings guidance.

Gross margin increase in Enogex as gathering and processing business in 2006 primarily due to higher commodity spread offset by lower contractual gains as the result of lower natural gas prices. Natural gas prices are assumed to be $6.98 to $7.45 per MMBTU in 2006. Commodity spreads are assumed to be $2.56 to $3.46 for MMBTU in 2006 as compared to 1.95 to 2.25 per MMBTU in original 2006 earnings guidance, and average natural gas liquids prices are $0.99 to $1.09 per gallon as compared to $0.94 to $1.16 per gallon in the original 2006 earnings guidance. In addition, 30% of our processing gross margin is hedged for the rest of the year.

Holding company guidance has increase from a loss of 7 million to 9 million or $0.08 to $0.10 per share. To a loss of 5 million to 6 million or $0.05 to $0.06 per share in our original guidance.

Now I'd like to turn the presentation over to Howard. Howard?

Thanks Jim. On February 27,2006 OG&E filed and questioned the Oklahoma commission to improve the construction and ownership of 120-megawatt wind energy project. The estimated capital cost of the project will be up to 205 million. As part of the proposal OG&E, also requested a rider that will immediately recover the company's authorized rate of return, the pressure depreciation, add-along taxes and O&M expense. On April 28, the Oklahoma commission unanimously approved the project and the recovery rider.

In Oklahoma we also have a security rider that in December, 2004, the Oklahoma commission approved it. a security rider is very similar to the Centennial wind rider. And the majority of the security projects will be completed in May 2006 which will trigger the implementation of the recovery rider June 1. The Company is also planning to file an application in July of this year to update OG&E's security plan

The next slide is the Arkansas rate case in January of this year. OG&E began developing a rate case filing for the Arkansas jury jurisdiction. On Monday May 1st we filed a notice to of intent to file this rate case in July of this year. The amount of requested increase is not been read question at this time. Also, as we just discussed, the Centennial wind plant approval in Oklahoma we plan to file an application with the Arkansas commission in June 2006 for approval to allocate the Arkansas portion of the wind project not been recovered in the Oklahoma rate. The Arkansas portion will be included in the Arkansas rate case filing that will be filed in June of this year, or in July of this year. Jim, back to you for summary.

Thank you Howard. As we look back on the first quarter we had solid financial performance. As a result we were able to increase our earnings guidance to $2.05 to $2.25 per share which reflects our performance today and our expectation of can favorable commodity prices. As we look ahead we will continue to execute on our strategy.

But the remainder of 2006, the focus will be on completion of the centennial wind farm construction project and the Arkansas rate case at the utility. We will redeploy capitol and pursue growth opportunities at Enogex. And we approached all of this from a position of financial strength. We have no short term debt and a solid balance sheet.

That concludes our prepared remarks. we would now like answer any questions you might have.

[OPERATOR INSTRUCTIONS].

We have a question from Doug Fischer with A.G. Edwards.

Good morning, all. And congratulations.

Good morning Doug

Thank you Jim. Just a couple of questions. Howard could you go over the elements in the rider with regard to wind that is Is it all the costs that one would get in a typical rate case? I didn't catch every single piece of it but it sounded like that.

Yes it is every piece or every component of the cost of the Centennial Project. In other words in the rate case you put the investment and get a rate of return that will recover earnings to the stockholders. And it will be a 10.75ROE. You cover your interest on it and you get your appreciation expense on your Centennial investment. Any O&M expenses and also your Avalon taxes. It really is a single issue of revenue requirement like in any rate case.

Okay that's what I thought. And then with regards to the really good results in the first quarter at Enogex can you let least conceptually talk about what might be due to abnormally good conditions that as we look into future years may not be sustained? And beyond just the nonrecurring items what might be doomed to just some more permanent and durable changes. I realize commodity prices fluctuate and that presents a little bit of a hard discussion. But maybe you could talk about that just a little bit.

Well. To answer your question, Doug I guess it's conceptually I guess I look at Enogex' results of the quarter and I see things like transportation and storage up due to better management of gas line pipeline storage which really reflects our investments we've made in technology and our ability to capture more real time information and turn that into commercial decisions. Those are the sorts of things I think we'll seek at on a go forward basis.

from the Commodity perspective which of course impacts the whole environment at Enogex, it's hard for me to say what I think would be normal going forward. I do thin the markets reflecting a period of higher oil prices. So that's going to be reflective of the market's places. and it gets back on sort of sustainable and paying for scene we're seeing imbalance in fuel. Our ability to manage and balances on a some real time basis reduces volatility and we under recovered fuel of 17 million in 2005. which we believe will be back recovered in 06 and be back to normal. Those were normal. Those are some of the things we see as an improvement in the business versus the commodity impact.

So the one big thing that maybe isn't in the nonrecurring items and looking at it from a whole year basis is you're going to get an abnormally high benefits from over recovering the fuel that you under recovered last year?

In '06 that's correct.

And that's about 17 million in pretax? In post margin?

Yes. Across the business.

Okay Jim.

Your next question comes from the line of Scott Engstrom.

Good morning.

Hey Scott.

Hey Jim. Just following up on Doug's question a little bit. maybe it could you say it $25 million in guidance for Enogex's - - how much would you say of that is commodity and how much is somebody's business processes that you talked about?

We're seeing commodity spreads up significantly from our original guidance. that's going to be most of the really improve performance for 2006 at Enogex. As we go forward we do have some in balance recoveries but most of it is really the commodity impact on the business at this point.

And would use say that it's primarily the frac spread or the higher crude, or both?

Well it's really higher crude and lower natural gas prices that lead to the better commodity spread.

Okay but it's not just liquid prices.

Okay just on this Centennial project, back of the envelope with the 10.75 ROE and your capital structure, that's saying $11 million of net contribution is that ball park? Yes that would be correct

And the question that I had is they're going to be significant differences. Well one how much of that comes from that 11 million is tax credit and is there a significant difference between financial and regulatory ROE given the accelerated depreciation that's available for wind projects or it is all of that incorporated in the rider?

All of that is incorporated into the rider Scott. The 11 million would be ahead of tax credits and of course the rate base or how the writer was calculated from the revenue requirement was reflect the summary of depreciation reduction of rate base. The 11 million would be net of tax credits and of course the rate base or how the rider was calculated from the revenue requirement was reflect the accelerated depreciation reduction of rate base.

Great. That's a lot.

Your next question comes from Jim Covello.

Morning guys. How're you?

Fine.

Talk with me if you could break down for me all little bit the result of the gathering if I missed it. The impact of rising margin versus a rise in volume? Is that just kind of this quarter? And what you see going forward for the year? If you're expecting both volume and margin to go up? Or if you're expecting one to be up more than the other?

In the quarter we saw volumes up over the prior year about 12%. As we go into the year we don't see a big rise in volume so over the course of the year year-over-year margins are up slightly for the year. Most of the forecast is really based on better fuel recoveries and contractual gains. More than they are driven by volume or per unit margin.

Transportation and storage is and fuel recovery and operational improvements made. That doesn't have to do with higher volumes it's just a commodity environment is that right?

Well we did have about collectively about 2.2 million which really relates to higher revenues to volumes across hall and commodity interruptible as well as demand fees on contracts. Those who should be a sort of volume and contractual driven and the rest would be what we talked about earlier in terms of managing the imbalances and recoveries of fuel.

The vast majority of the improvement is operational. Thanks a lot.

Thanks.

Your next question comes Reza Hatefi.

Thank you, good morning. Could you explain that $17 million issue. I kind of got lost.

Okay.

Please go through it again if possible

Sure. The high flying test fuel rates on a annual basis which is expected to be recovered over the course of the year to the extent that prices are different or volumes are different. They were over or under recovery over the course of time. If you remember back to 2004 and even 2003 we were over recovering some underrecoveries of prior years. In 2005, we underrecovered about 17 million. And this year will just be collecting that $17 million back which was underrecovered in 2005. We're trying to be in a position where that does not impact results year to year. But by the nature of the fuel rates in the pipeline we will tend to over or under recover in periods.

And what is the most current facts that you're seeing? Does that match your guidance or --

Well the last processing spread that we saw which was as of April 24th is $4.94. we realize in the first quarter, $2.90.

4.94 was the number?

4.94, correct.

So I kind of sounds like to me that if I was to normalize the year I strip out the 17 million. Which I'm guessing was a pretax number. But it looks like you're being conservative on your spreads so they would potentially offset each other to get you. And you still end up probably at your -- you hit your guidance. I haven't done the math but it seems if I was to normalize then I'd take out the 17. But your facts are understated.

On the over and under recovery you go back to 2004 we overrecovered. We under recovered last year. We expect that 2006 recovery to be more normal. Because they will get back to zero. in terms of the processing spread, we're just estimating a range based on the market for the year and it's going to go back up and down based on the 290 in the first quarter and the 494 now. when it what is normal when it comes to these products.

So that 17 million. is that sort of a one time benefit issue. or is it just getting you back to normal on a normalized basis?

It's just getting us back to normal on a normalized basis.

So there's no need to it's a one time. Okay. and just finally you mentioned volumes were up 12% first quarter. Doug, I think, was asking the same question. Should we assume that the whole year will be up 12% or be up significantly and like that?

I think that in the first quarter, if you do remember 2005 was very wet. We saw a real lag in production giving out and getting wells drilled. We've had a very warm dry first quarter so as we look out on volume expectations for the year we see volumes basically flat year over year.

So I wouldn't take the first quarter as indicative that we're at a double-digit gain on gathering volumes.

Okay fine thank you very much.

You have a follow-up question from Doug Fischer.

Yes, quickly remind me what a good average tax rate for this year would be?

A tax rate of 36.2% or so.

So roughly 36%? Thanks Jim.

Your next question comes from the line of David Frank.

Yes, hi, good morning. Jim, I was wondering could you give us an estimate of the earnings impact the weather had purses say normal for the quarter?

Yes. We had a very warm first quarter and weather impact was about 5.9 million to the negative in the quarter.

Okay

That some the gross margin basis.

Right. Okay. And could you also talk a little bit about some of the transformation then Enogex is undergoing right now? It looks like your selling some assets here which is selling some of the gathering assets. You're investing in what appear to be some of the more stable pipeline assets. What is the goal with the Enogex here? What is it you're trying to accomplish?

This is Dan Harris, David. You know it seems a little bit counterintuitive when you think about being in a growth mode and selling assets however with be looking into profitability for individual assets and what their returns are. That's been part of the decision plus our strategic approach as to which businesses we choose to be in. Cause us to make those decisions the sale. As far as redeployment of those funds things that we're trying to wash are things that help reduce the volatility of Enogex's business. For example, the Continental connector project, which were pursuing right now would be an more stable earnings to the company and reduce overall volatility of Enogex. And then we have also our current reinvestment of our gathering systems on the west side of the state which is a very strong environment.

So those areas are much more in growth mode. Then the third areas as far as improvement will be just looking at our geographic exposure and trying to look out and diversify the bases of operation we have So we're continuing to expand commodity pursuit opportunities it in the Rockies areas to diversify geographically. And the other is just operational. We've heard a lot of about our technology investments. You've seen the results of that today in just improved management of imbalance expenses. We have a lot more granularity around the information of day-to-day information we need to our business and making use of that to perform operationally better.

Oh. Geographic diversity, I guess higher level stability of cash flows. And technological improvements?

Yes sir.

Okay. What is your long-term thinking of Enogex? Do you think there's room? Are you evaluating any strategic opportunities as part of this transformation to give yourself some optionality with regard to these assets?

David I would answer that by saying we really like our asset mix and our strategy at this point If you think about a key component of the strategy is asset diversity. And we saw Enogex. Really the benefits of that in 2003, 2004 with Enogex results. Last year we saw really the utility. And now we're looking at Enogex as commodity price environment. That said, we're always looking and thinking about the things that could continue to drive shareholder values. So, that's about the best answer I can come out up with.

Okay. Do you have any time frame for coming to any conclusions or is this just an ongoing?

It's a continuum. it's something that we're always thinking about.

Okay.

And looking at the marketplace.

All right. Great. thank you very much.

You have a follow-up question from the line of Reza Hatefi.

Thank you. Could you refresh us on what you think 06 or maybe even 07 Capex will be?

06 CapEx we have a base CapEx of about 250 at the utility and about 60 million at Enogex. So about 310 We now see with wind called that about 200 million we'd be somewhere up around 500 million consolidated roughly 450 at the utility and 60 or 70 million at Enogex.

And do those numbers -- I'm guessing those numbers don't include anything from Continental connector, a Twin Basin? Correct?

Correct. we've announced that we're doing some step out projects and continue Well Connect but nothing beyond that at Enogex at this point.

Okay. I guess when are we going to get some updates or on potential amount of money to be spent or timing or when those projects will come along? I think at Continental's was supposed to come in '07 and Twin Basin in '08. Is that right?

Well. Twin Basins is still in development so there's really nothing to report there. Connector is in the process of finding open season. And once that process is done we know the scope of the project. assuming it goes forward we would have something to talk about from the guidance perspective.

Thank you very much.

[OPERATOR INSTRUCTIONS]. Mr. Hatfield there are no questions at this time.

We'd like to thank you for your interest and a OGE Energy and have a great day.

This concludes today's conference call. You may now disconnect.