OGE Energy Corp (OGE) 2007 Q1 法說會逐字稿

Good morning. My name is [LaPortia] and I will be your conference operator today. At this time, I would like to welcome everyone to the quarterly earnings 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 session. (Operator Instructions) Thank you. Mr. Hatfield, you may begin your conference.

Thank you and good morning, everyone, and welcome to OGE Energy Corp.'s first quarter 2007 conference call. I am Jim Hatfield, Senior Vice President and Chief Financial Officer, and I have with me today Steve Moore, Chairman of the Board and Chief Executive Officer; Pete Delaney, President and Chief Operating Officer; Howard Motley, Vice President, Regulatory Affairs and Strategy for OG&E; and Danny Harris, Senior Vice President of OGE Energy Corp. and President and COO of Enogex; and several other members of the management team to address questions.

In terms of the call today, we'll hear first comments from Steve Moore. I'll then cover first quarter results, 2007 outlook. Howard Motley will give us a regulatory update and then we'll turn the call over to Q&A.

Before we begin, I want to remind everyone that we have prepared slides to accompany our web cast so it will be easier to follow numbers when we get to that point. And before we begin the presentation, I'd just 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 that we do not guarantee forward-looking financial results; that this is our best estimate to date.

And with that, I'll now turn the call over to Steve Moore. Steve?

Thank you, Jim, and I would also like to join Jim and thank you for participating in the call and for your interest in the Company. Today, we're going to talk about our first quarter results and our outlook for the year ahead, and as always, we'll answer your questions.

As usual, Jim will have all the details, but I can tell you our utility and pipeline businesses have been performing well. We earned $0.19 per diluted share in the first quarter -- another solid performance. The colder weather increased customer demand for energy, which is visible in our utility result, but it also brought an ice storm that caused significant damage to our electric system. Our employees are to be commended for their hard work to repair it in bad operating conditions. At the same time, freeze offs in the natural gas fields restricted revenue generating [volumes] on the pipeline. Once again, our people did an outstanding job to keep our system running under extreme conditions.

As we look ahead, we continue our efforts to grow our businesses. We intend to accomplish this with major investments in infrastructure and with sharply focused customer programs. On the utility side, we are planning construction projects totaling at least $3 billion to expand capacity and maintain reliability and environmental performance.

Ton meet growing customer demand, we also need to increase our generating capacity. Our careful study of all the issues leads us to the conclusion that, for our customers, the Red Rock plant is the best. We look forward to presenting our case this summer. Howard Motley is here with an update on the regulatory proceedings that will figure into our construction program.

It's clearly a time of growth in our part of the country and we're strongly positioned, not only to benefit from that growth, but also to spur it along with reliable service and reasonable rates.

This year we are celebrating 100 years of statehood here in Oklahoma, and as we began a new century, we have officially dedicated our new wind farm, which we have named Centennial. We now have 170 megawatts of renewable wind energy operational on our grid and we are investigating the possibility of adding more.

Again, thanks for your interest in the Company and your confidence in OGE Energy and I'll turn the program back to Jim.

Thank you, Steve. For the first quarter, we reported net income of $17.2 million, or $0.19 per diluted share, as compared to net income of $24.9 million, or $0.27 per diluted share in 2006. From a continuing operations basis, we earned $0.19 per, share compared to [$0.20] per share in 2006. Throughout this presentation, earnings comparisons are based on net income from continuing operations.

The contribution by business unit, on a comparative basis, is as follows: OG&E $0.02 contribution versus $0.01 loss in 2006. Enogex, $0.17 versus $0.28 in 2006, holding company flat in 2007 compared to a $0.01 loss in 2006, consolidated $0.19 versus $0.26, discontinued operations of $0.01 in 2006, so consolidated $0.19 versus $0.27.

At OG&E, net income was $1.9 million, or $0.02 per share, as compared to a net loss of $1.1 million, or $0.01 per share in 2006. Some of the primary drivers are as follows: Gross margin on revenues increased 3.3% to $140.8 million from $136.3 million in 2006. I'll provide details of utility gross margin on the next slide.

Operation and maintenance expense decreased $5.5 million, or 6.9%, to $74.2 million in 2007. Lower O&M costs were primarily due to lower professional services and employee costs. Depreciation expense increased $2.3 million, or 6.9%, due to higher levels of depreciable plant, primarily the Centennial wind farm, which was put into service in January 2007.

Taxes other than income increased $1.5 million, primarily a result of higher property taxes. And interest expense increased $1.9 million, or 13.9%, primarily due to interest owed customers as a result of over recovered fuel, lower [ASCDC], and higher long-term debt interest expense.

Now looking at gross margin, approximately $140.8 million during the first quarter of 2007 as compared to approximately $136.3 million during the same period in 2006, an increase of approximately $4.5 million, 3.3%. The increase in gross margin was primarily due to higher rates, the result of increases from the Centennial wind farm rider; security rider in Arkansas [rate case], which increased gross margin by approximately $4.7 million; colder weather in OG&E's service territory, which increased gross margin by approximately $3.1 million; heating-degree days were 11% above last year, but still 15% below normal; megawatt hour sales were up 9.6%, with residential sales up 13.1%; new customer growth in OG&E's service territory, which increased the gross margin by approximately $2.9 million; customer growth was 1.3% above last year, with the largest growth coming in the residential and commercial sectors; and other, which includes higher demand charges associated with industrial customers, increased gross margin by approximately $1.6 million.

These increases in gross margins were partially offset by OG&E's filing of amended tariffs with the OCC in January of 2007 to cease collection of additional fuel related revenues that were not intended by OG&E's 2005 rate order, which caused the gross margin to be approximately $7.8 million lower than in the first quarter of 2006.

At Enogex, income from continued operations was $15.5 million, or $0.17 per share, as compared to an income from continuing operations of $26.2 million, or $0.28 per share in 2006. Some of the primary drivers are as follows: Gross margin decreased $11.4 million, from $85.2 million in 2006 to $73.8 million in 2007. I'll discuss the details of Enogex's gross margin on the next slide.

Operation and maintenance expense decreased $800,000, or 2.8%. The decrease was primarily due to lower outside service costs, partially offset by higher employee costs. Depreciation expense increased $1.1 million, or 10.8% from 2006, primarily due to new assets placed in service in 2006.

Other income decreased $5.7 million primarily due to a litigation settlement of $5.2 million recorded in the first quarter of 2006.

Now looking at gross margin: Gross margin at Enogex decreased $11.4 million, from $85.2 million to $73.8 million in 2007. Gathering and processing margins increased $3.7 million, or 9.7%, from $38.2 million in 2006 to $41.9 million in 2007, primarily due to reduced imbalance expense due to lower imbalance volumes, increased commodity spread, which favored (inaudible) processing, realized spread of $3.12 compared to $2.90 in last year's quarter, an increase in gathered volumes of 3.6%, which is reflective of new business from our step-out projects. These factors were partially offset by a reduction in Enogex's over recovered fuel position.

Marketing margins decreased $4.3 million, from $6.2 million to $1.9 million, primarily the result of timing. The timing resulted from mark-to-market losses related to economic hedge of a transportation contract of $6.7 million, in which the value will be realized in the remaining three quarters of 2007. The results were an economic hedge on storage of $1.3 million, which we realize in the first quarter of 2008.

Transportation and storage gross margins declined $10.8 million over the same period in 2006, primarily due to higher imbalance expense of $10.1 million due to weather-driven imbalance volumes and cash outs. This was partially offset by a higher storage gross margin of $1 million due to a new contract.

Slide 9 shows the impact of timing and nonrecurring items on a quarter-to-quarter comparison. Enogex recorded no nonrecurring items in the first quarter of 2007, as compared to a benefit of $4.3 million in the first quarter of 2006. As mentioned earlier, Enogex had $4.9 million of mark-to-market losses in the first quarter of 2007, as compared to a $9 million in mark-to-market gains in the 2006 quarter. As you can see, combining the two items reduced Enogex's net income by $10.1 million on a comparative basis in the first quarter.

For 2007, we are reiterating the Company's previously stated earnings guidance of $213 million to $231 million of net income from continuing operations, or $2.30 to $2.50 per diluted share. There's been no change in key assumptions, all of which are stated in the Company's 2006 10-K.

Now I'd like to turn to presentation over to Howard Motley for a regulatory update. Howard?

Thanks, Jim. The regulatory update today will cover the Company's regulatory activities in the Oklahoma jurisdiction. The status of OG&E's Homeland Security rider application and a future application regarding the 2002 settlement agreement will be summarized. I will also provide the procedure schedule and other commission activities that relate to OGE's Red Rock application.

In December 2006, OGE filed an application with the Oklahoma Commission updating its security plan and requested additional recovery through the security rider. On March 30th, the commission staff filed testimony recommending $17.6 million of the $18.5 million requested capital expenditures. The staff further recommended $2.6 million of the $2.7 million annual revenue increase requested by the Company in our application. A settlement conference is scheduled for May 16th and the hearing will begin May 30th. We expect a commission order in the third quarter this year.

In a 2002 rate case, OG&E entered into a settlement agreement that resulted in the purchase of the McClain generation facility. As part of that settlement, the Company also agreed to provide $75 million of customer savings over the 36-month period -- January 2004 through December 2006. OG&E has filed the 36 monthly reports required by that settlement, and those reports demonstrate customer savings at a double amount over the $75 million targeted amount.

In the second quarter, OG&E plans to file a compliance application, explaining to the commission that we have met the requirement for that settlement agreement and we expect a commission order by the end of 2007.

The major case of activity we have in Oklahoma Commission right now is our Red Rock application, and in January, OG&E filed an requested the commission to preapprove OG&E building the Red Rock coal plant, and this is under the commission rules that based on a new Oklahoma law. The Company also requested to the commission to approve a rider to recover the [curing] costs on the construction expenditures up to a capped level of $789 million, which is OG&E's portion of the Red Rock plant.

As far as the procedure schedule and timing on a decision in the Red Rock case, OG&E's been responding to information requests from all parties and communicating and discussing the benefits of the Red Rock plant. The procedure schedule establishes a May 11th cutoff date for discussions and data requests, and responsive testimony will be filed May 21st. And that's when the attorney general and the Oklahoma staff and other parties will file testimony regarding the Red Rock plant.

Each party has an opportunity to file rebuttal testimony on June 18th and a settlement conference is scheduled for June 25th. If a settlement is not reached, the hearing will begin on July 2nd. And right now, the administrative law judge is scheduled to issue a report on the Red Rock plant to the commission on August 6th of this year.

Other commission activities that really relate to our activities in Oklahoma, especially the Red Rock plant, we've had a commissioner -- Commissioner Denise Bode has resigned effective May 31st, 2007, and the governor will appoint the successor. This action will change the dynamics of the commission, and our Red Rock hearing is kind of right in the middle of this on July 2nd, which will decided either by the new commission panel, with a third commissioner, or it could even possibly be decided by two commissioners based on the timing of the appointment by the governor. This will change the dynamics a little bit on the decision-making on the Red Rock case.

Additionally, we're monitoring the Public Service Company rate case. Included in their application PSO requested a recovery mechanism for Red Rock during the construction period, like we did. The hearing started yesterday and should conclude next week, and the referee that's hearing the case with the commission (inaudible) is scheduled to issue a report on the rate case and recovery mechanism for Red Rock on May 30th. Back to you.

Thank you, Howard. That concludes our prepared remarks and now we'll be glad to answer your questions.

(Operator Instructions) Your first question comes from Doug Fischer with A.G. Edwards.

Good morning, all.

Good morning, Doug.

Good morning, Jim. Couple of questions. I believe the last time you -- or the last earnings call you talked about guidance, you talked about shading that guidance toward the lower half of the $2.30 to $2.50 range. Any change in that with the first quarter now completed?

No real change of where we thought we were with the first quarter call.

And then did I understand correctly that you said that employee costs were down in the first quarter for the utility? And if so, what was the driver of that?

Well, the biggest driver probably was just the delay in filling positions. We've had -- like all utilities, we've had retirements and we've had attrition and it's taken us a little longer to fill positions. Plus, you know, with the storm that we had, which was predominantly capital -- a lot more labor-related expenses were capitalized than we would have had in the previous period.

Okay. And then finally, for right now, the carbon issue, where did that get raised in the Red Rock proceeding? Will you expect to see something from the AG and from the OCC staff in their testimony? Give us some color as to what we might expect and how the issue might get aired in the application.

Doug, this is Pete. And Howard is probably going to talk after I give my view on this. I think where you'll see it is when we look at the choice of Red Rock and the risk around Red Rock and in our modeling, when we evaluated this plant versus other alternatives in our generation portfolio, we put in carbon assumptions into our modeling. There has been data requests and, you know, and various data questions around the modeling and our analysis on the economics of the project. We expect it will come up in the course of our testimony and cross-examination. If the commission -- in terms of the commission's consideration of granting us a preapproval and everything else, we've requested to proceed with the plan.

Howard, do you have anything to add?

Yes, Doug, I think that that is one of the issues that all the parties are looking at, and I think Pete is exactly right. They're looking at all the risks around not only the carbon issue, but you know, the price of gas and exposure for volatility in gas prices. In Oklahoma, we've looked at that over the last few years. The commission's been very serious about making sure that we have a stable fuel portfolio that balances the customer impact.

And on May 21st, when all the parties file their testimony, that's when they'll come out and discuss all the different (inaudible) and the best option for the customers, as far as long-term stability in price and reliability of power.

Howard, can you give us a little color -- Pete says you've modeled in carbon. If that's a matter of public record, maybe you can just summarize that for us. You know, what level per ton, or just give us a little color on that.

Honestly, our operational group is the one that runs the models and I'm not that familiar with how we modeled in the carbon.

We modeled it as a carbon tax and, you know, there's risk assessments around all the other commodity-based [variables] of low and mid and high cases. I don't have the specific numbers with me.

I think, Doug, if you go to Jesse Langston's testimony in this case, which if it's not available on the web site, we can get it to you -- it is available -- he would have the assumptions around the modeling of carbon, as it related to this, as the least-cost option.

Thanks, Jim. That's it for now.

Your next question comes from Steve Fleishman with Catapult Partners.

Hi. Good morning. Actually, it's David Frank. How are you?

Hey, David.

Hey, Jim, you commented that the frac -- I guess the realized frac spread in the quarter was $3.12 versus $2.90 last year?

Correct.

How much of that was from hedged positions versus the spot spread and where's the spread today?

If we were looking at the processing spread -- and this would have been as of last week -- it's about $4.98 from a market perspective. You know, we had a little hedged in the first quarter, really around ethane. You would have saw more of a market price of $3.12 -- $3.25 versus a realized $3.12 so very little impact of hedging in the quarter.

Is that because the spread blew out? Widened out towards the end of the quarter?

Well, that's -- you're looking at a quarter average versus a spot in time in April, and we have seen spreads widen in the month of April.

And what was -- what is your guidance for frac spreads this year within your earnings guidance?

$2.69 to $3.21 is the range, so we're still within the range after the first quarter on a realized basis. And obviously, as we go forward throughout the year, we'll update that as necessary.

Okay, great. Thank you.

(Operator Instructions) At this time, there are no further questions.

Okay. Thank you very much for your interest in the Company. Have a great day.

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