OGE Energy Corp (OGE) 2008 Q1 法說會逐字稿

Good morning, my name is [Chantal] and I will be your conference operator today. At this time, I'd like to welcome everyone to the OGE first quarter 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. Tidwell, you may begin your conference.

Thank you. Good morning, everyone, and welcome to OGE Energy Corp.'s first quarter 2008 earnings call. I'm Todd Tidwell, Manager of Investor Relations, and with me today I have Pete Delaney, Chairman and CEO of OGE Energy Corp.; Dan Harris, Senior Vice President and COO of OGE Energy Corp. and President of Enogex; Jim Hatfield, Senior Vice President and CFO of OGE Energy Corp.; Howard Motley, Vice President of Regulatory Affairs, and several other members of the management team to address any questions you might have.

In terms of the call today, we'll first hear an explanation of the first quarter results from Jim Hatfield, then an overview of regulatory issues from Howard Motley. Pete Delaney will then follow-up with closing remarks and finally, as always, we will answer your questions. I would like to remind that you this conference is being webcast and you may follow along on our Web site at oge.com.

In addition, the conference call and the accompanying slides, including required non-GAAP reconciliation information, will be archived following the call on that same Web site. Before we begin the presentation, I would 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 cannot guarantee forward-looking financial results, but this is our best estimate to date. I will now turn the call over to Jim Hatfield to discuss first quarter results. Jim?

Thank you, Todd. For the first quarter, we reported net income of $13 million or $0.14 per average diluted share as compared to net income of $17.2 million or $0.19 per average diluted share in 2007. The contribution by business unit on a comparative basis is as follows: OG&E, a loss of $0.12 versus $0.02 in 2007; Enogex, $0.24 versus $0.17 in 2007; and the marketing company, $0.02 contribution in 2008, flat in 2007, $0.14 versus $0.19.

Timing items for the marketing business are included in the appendix. At OG&E, the net loss for the first quarter was $11.3 million, or $0.12 per share compared to net income of $1.9 million, or $0.02 per share in 2007. Some of the primary drivers are as follows. Gross margin on revenues increased nearly 4% from $140.8 million to $145.8 million. I'll provide details of gross margin on the next slide.

Operation and maintenance expense increased $20.1 million, primarily due to a one-time, non-cash charge of approximately $9.5 million due to the correction of overcapitalized labor and overhead costs in prior periods. Additionally, in the first quarter of 2007, we had a significant ice storm. This resulted in reduced O&M expenses in last year's quarter of approximately $3.1 million which further skewed the numbers on a comparative basis.

Some of the first quarter increases are timing. When you consider the one-time charge, the 2007's storm and timing the first quarter increase is in no way a reflection of the run rate at the utility. Interest expense increased $3.9 million, $2.4 million of this increase was related to a treasury lock associated with the issuance of $200 million of long-term debt in January of 2008. The remaining increase of approximately $1.8 million is the interest expense related to that debt issuance.

Now looking at gross margin, gross margin was approximately $145.8 million during the three months ended March 31, 2008, as compared to approximately $140.8 million during the same period in 2007, an increase of approximately $5 million. The gross margin increased primarily due to customer growth, which increased the gross margin by approximately $2.1 million, higher rates from the Centennial Wind Farm rider and the Arkansas rate case, which were both implemented in February 2007, which increased gross margin by approximately $2 million.

Increased demand-related revenues by non-residential revenues increased gross margin by approximately $1.1 million. At Enogex, net income was $22.5 million or $0.24 per share as compared to net income of $15.5 million or $0.17 per share in 2007. The increase in first quarter net income was driven primarily by a 29% increase in gross margin to $95.4 million in 2008 from $73.8 million in 2007.

Operation and maintenance expense increased $5 million primarily due to an increase in system projects and higher employee costs, in part the result of growth. Net other income decreased $3.1 million from 2007 primarily due to lower interest income and the minority interest associated with the Atoka joint venture.

Now, looking at Enogex's gross margin, we see a 29% increase from $73.8 million in 2007 to $95.4 million in 2008. Gathering and processing gross margin increased $19.3 million from $41.9 million in 2007 to $61.2 million in 2008, an increase of 46.1%. The increase is primarily the result of higher commodity prices and increased volumes. Realized commodity spreads increased from $3.20 in 2007 to $7.03 in 2008.

In terms of volumes, we saw gathered volumes increase 8% and processed volumes increase 17%. Transportation and storage margins increased $4.2 million from $30 million in 2007, to $34.2 million in 2008, an increase of 14%. Increases in gross margin were primarily due to a decrease in balanced liability, increased storage demand fees and increased cross-haul revenues.

These increases were partially offset by operational storage hedges realized in the first quarter of 2007, decreased transportation demand fees and fuel under recovery in the transportation business. Marketing and other contributed $1.9 million gross margin to Enogex in the first quarter of 2007. Commensurate with our corporate restructuring effective January 1, 2008 Enogex distributed stock of the marketing company to OGE Energy Corp. For more detailed explanations on all of the aforementioned items, please refer to the Company's first quarter 2008 10-Q filed this morning with the SEC.

As we transition Enogex from a C corp. to an MLP, we want to introduce investors to EBITDA at Enogex. While we will continue to focus on net income at the utility and at the consolidated level, EBITDA, along with [distributal] cash flow are more appropriate valuation measures for an MLP. This slide illustrates the tremendous growth in EBITDA that Enogex has experienced since 2005. We anticipate that EBITDA will have grown 76% from 2005 to 2008, assuming the mid-point of our 2008 guidance.

Not only are we experiencing favorable commodity prices, but increased volumes on the system as a result of our growth initiatives. In terms of capital, Enogex plans on spending $323 million in 2008, which is a 95% increase above 2007 levels. In addition, we've recently announced an open season for the Heartland Crossing pipeline which is not included on the slide.

You can see that our additional capital spend at Enogex is driving EBITDA growth. However, it's important to note that we do experience a lag in EBITDA contributions from capital spending so that the 2008 EBITDA would not fully reflect the contributions of our 2008 capital program. The bottom shrine is Enogex continues to see multiple organic growth opportunities and it is investing for the future.

The Company previously disclosed that its 2008 earnings guidance was $223 million to $242 million of net income, or $2.40 to $2.60 per diluted share as shown on this slide. Although the Company has reaffirmed 2008 earnings guidance, excluding any gains on asset sales, we are increasing the outlook for Enogex reflecting results to date and continued strong business fundamentals. We would now expect to end 2008 above the mid-point of our guidance.

We've also tweaked downward slightly the 2008 outlook at OGE, and in fact, would be raising guidance if not for the one-time item that OGE recorded in the first quarter. Our guidance assumes approximately 93.1 million average diluted shares outstanding, cash flow from operations of between $483 million and $502 million, and an effective tax rate of 33.5%. You can see the guidance for each business, and I'll now discuss the various assumptions behind that guidance.

OG&E's revised earnings guidance is between $140 million to $150 million, or $1.50 to $1.61 per diluted share, compared to $145 million to $155 million or $1.56 to $1.66 to average diluted share previously. The key change to OG&E's 2008 guidance is higher operating expenses of approximately $445 million, up from the previous guidance of $536 million. The increase in OG&E's operating expenses is attributable in part to the non-cash charge of $9.5 million to correct the overcapitalization in prior years of various operating and maintenance expenses as discussed previously.

Enogex's earnings guidance has been increased from $83 million to $91 million, or $0.89 to $0.98 per diluted share to $88 million to $101 million, or $0.95 to $1.08 per diluted share. EBITDA is anticipated in a range between $232 million to $253 million. The key change is in the gathering and processing segment, where we continue to see stronger than previously anticipated commodity prices. Our previous 2008 guidance projected gathering and processing gross margins to be between $235 million to $249 million.

The 2008 gross margin has been revised upward for gathering and processing to be between $247 million to $268 million. Volume and hedging assumptions remain unchanged. You can see the commodity price assumptions on this slide. Most importantly, realized weighted average commodity spreads on the dollar per MMBtu basis ranges between $6.21 and $7.12, up from $5.48 to $6.09 per MMBtu previously.

Operating expenses and interest expense increased slightly primarily as a result of system growth. Capital expenditures for investment in Enogex' pipeline system are approximately $323 million compared to $292 million previously reported. The projected loss of the Holding Company of between $4 million to $5 million, or $0.04 to $0.05 per average diluted share has not changed.

I would again refer you to our filed 10-Q for the complete set of assumptions that support our 2008 outlook. Now I'd like to turn the call over to Howard Motley for a regulatory update. Howard?

Thanks, Jim. The regulatory update this morning will cover ongoing and future activities in both the Arkansas and Oklahoma jurisdiction. I'll be discussing the recovery of the 2007 ice storm, give you an update on the Red Rock cancellation cost recovery case, we'll discuss the Redbud purchase timetable and give you an update on accelerating our Arkansas rate case and discuss the new renewable plan we'll be filing with the Commission next week. And I'll finally summarize the Company's regulatory plan for 2009 to 2012.

The Commission order in OG&E's 2006 reg case, authorizes the Company to recover storm costs that exceed $3.5 million incurred in any calendar year. The 2007 storm cost of $35 million, which includes the December ice storm have been accrued to a regulatory asset. The recovery of these costs will be addressed in OG&E's 2009 reg case.

OG&E's request to recovery of its $14.7 million Red Rock cancellation costs is at the Oklahoma Commission, and we've requested the recovery through the sale of SO2 allowances in order to not impact our customers. The staff of the Commission recommended $10.8 million recovery by including that amount in the cost of our next power plant, which would be the Redbud, if approved later this year. The staff also recommended that the profit from SO2 sales be used to offset OG&E's 2007 ice storm costs, not Red Rock. The other parties in the case recommended no recovery. The case was scheduled to go to hearing today. However, the administrative law judge suspended the procedure schedule to allow additional settlement discussions.

For the Redbud purchased on March 20, OG&E filed with the Oklahoma Commission for pre-approval to purchase the Redbud power plant and authorization of a recovery rider until the December -- or until the 2009 rate case is completed and new rates are implemented. Based on the 240-day statutory timing, we expect a Commission decision no later than mid-November of this year.

In the Arkansas rate case, we are currently preparing a financial package based on a 2007 test year and plan to file the rate increase application in mid-August. In the Arkansas jurisdiction, there is a 10-month statutory timing for processing a rate case. Therefore, we expect a Commission decision in June of 2009 and new rates implemented in July of 2009.

The newest thing on the agenda is a renewable plan. OG&E's is targeting to file an application with the Oklahoma Commission for a renewable plan, mid-May, sometime next week. The Company's requesting pre-approval to construct a transmission line between Oklahoma City and Woodward to facilitate wind energy development. Additionally, a rider has been requested to recover the revenue requirement related to the transmission line when it becomes in service in 2010.

There will be a renewable share of offerings for customers that will be available, and finally, the Commission -- or the Company is requesting that the Commission issue an order by August 15 this year. The foundation of OG&E's regulatory plan was the Oklahoma and Arkansas rate increases in 2006 and 2007, along with the Centennial and security riders authorized by the Oklahoma Commission. There had been a change, as I just mentioned, to our regulatory plan since the February earnings call. We have decided to accelerate the Arkansas rate case that targets a rate increase in mid-2009 instead of 2011.

The driving factor is the purchase of the Redbud power plant at the end of this year if approved by the Oklahoma Commission. Additionally, as reflected in the regulatory plan, OG&E has requested a rider for recovery of the Redbud revenue requirement beginning in January of 2009 in Oklahoma. The Company still plans to file an Oklahoma rate case mid-2009, and expects to implement new rates in January 2010. If the Company's renewable plan is approved, we will implement a renewable rider to recover transmission investment sometime during 2010.

Finally, looking past 2010, the Company plans to file a rate case every year, alternating between the two retail jurisdictions. In summary, the rate increase illustration provides a visual of how the Company's regulatory plan will work to recover our capital and O&M increases along with providing share earnings. The Redbud rider will recover $75.4 million in 2009 and approximately $74 million will be included in base rates for Redbud in the 2010 Oklahoma rate increase. The renewable rider will recover $17.3 million in 2010, and that's just based on a half a year recovery, and then $34.5 million in 2011, and this is for the transmission line that will be built through Woodward.

The rate increases for Oklahoma and Arkansas are unknown at this time. An integral part of this plan is the phase-in of these rate increases to our customers. That's imperative to be able to increase the rates with minimal impact, and definitely our relationship with Oklahoma and Arkansas commissions and their staff is very important. As you can see, OG&E has developed a strategic regulatory path and is prepared to execute it. Pete?

Thank you, Howard. Both Enogex and OGE continue to position for earnings growth over the next several years. Our expectations for growth beyond 2008 are increasing as we invest substantial capital to implement our business plans. We believe these plans are sound and that the fundamentals of our businesses remain strong.

The economy of Oklahoma remains solid with job growth for the trailing 12 months at 1.6%, which ranks the state 9th in the nation. Job growth above the national level is expected to continue for the remainder of 2008. In addition, the housing market in Oklahoma has not exhibited the weakness as has other parts of the country with housing prices increasing around 5.3% over the last 12 months. And at the utility our customer growth continues at just around 1% which is in line with historical levels.

Of course, the strength in energy prices, particularly natural gas, provides a strong economic stimulus to our market areas in Oklahoma. The drilling activity continues at a strong pace, particularly in the prolific Granite Wash and Woodford shale areas as evidenced by our increased capital investment in those areas. Enogex's approved capital investment program of 2008 was recently increased to $232 million from $292 million, with the majority of that investment targeted for gathering projects and the remainder for processing plant and transmission projects.

By way of comparison, as Jim noted, Enogex's total capital program was $67 million in 2006. Our projected gathering volume for 2008 growth remains 8% with processing volumes projected to be up 10%. Based on our projected EBITDA of $232 million to $253 million in 2008, EBITDA will have grown roughly 76% since 2005. By the end of the first quarter of 2008, EBITDA at Enogex increased 33% to $56 million from $42 million in the prior-year's quarter.

Due to the timing of project completions, a lot of the earnings and cash flow associated with the capital investment in 2008 will not be realized until 2009 and 2010. In addition, as we earlier noted, we recently announced an open season for the Heartland Crossing project to provide needed interstate pipeline capacity from the western part of our system to Bennington, Oklahoma, where the gas enters interstate pipelines to meet the needs of the growing Southeast and Eastern markets.

While we believe in this project, the capital associated with that project is not included in the capital investment estimate due to the contingent nature of the project in the open season process. We continue to keep a watchful eye on the MLP market as we are committed to an initial public offering of OGE and Enogex partners. We do not believe that OGE's stock price fully reflects the inherent value of the business and that the Enogex story is even more compelling given the increase in its capital program and associated EBITDA growth.

Among the timing considerations for an offering are the desire for a more stable overall equity market and better technicals in the MLP market that will allow investors to focus on Enogex' fundamentals which should result in a more successful offering. We are very excited about Enogex's future. At OG&E, the utility, we continue to implement our plans to position the utility to meet demand growth while mitigating exposure to natural gas prices and potential CO2 legislation.

The first part of this plan is to purchase the Redbud plant for $695 per KW by year end if the OCC approves the requested recovery rider. The upcoming renewable filing that Howard talked about at the OCC is an important step forward for us to increase our wind generation and build the transmission required to support wind development in Oklahoma. We plan to issue a request for proposals for additional 300 megawatts of wind in the next several weeks as we seek to increase our hedge against higher natural gas prices and future CO2 legislation for our customers.

We will be requesting from the Southwest Power Pool and the Oklahoma Corporation Commission approval of the Oklahoma City to Woodward transmission line which is estimated to cost approximately $265 million, which line is projected to be complete in the first half of 2010. Engineering and right-of-way work are already underway. As part of the renewals filing, we'll asking for a recovery rider to begin earning on this asset once that project is complete.

The capital program at the utility in 2008 will primarily benefit earnings in 2009 through the Redbud rider and in 2010 through the transmission rider. Additionally, due to the increase in other rate based items and expenses, we expect to have an earnings gap versus our allowed return. As Howard mentioned, we plan to file a general rate case in Arkansas later this year and in Oklahoma next year to address this gap.

Based on our estimates, if successful in our rate filings, the impact on our residential customers, including a 300 megawatts of wind from these rate increases would be just around 2.5% per year through the year 2010. We are very excited about the opportunities and our plans at both OG&E and Enogex. OGE Energy is well positioned in both the natural gas midstream and utility businesses to build out energy infrastructure required to continue to provide reliable, yet affordable energy to our customers.

As we execute our plans to capture these opportunities, we expect to not only provide good value to our customers, but to deliver solid earnings growth for our shareholders. This concludes prepared remarks, and we will now answer your questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. (OPERATOR INSTRUCTIONS) And your first question comes from the line of David Frank with Catapult.

Hello?

Hey, David.

Oh, hi. Guys, I noticed that you reiterated your guidance for this year, but it appears now you're including this charge related to the miscapitalization of prior expenses related to your employees?

That's correct.

So the thought is to include -- that is offsetting higher projected Enogex results. Is that it?

Yes, somewhat. If you look -- the only thing we've historically excluded from guidance has been discontinued operations and gain and loss on sale of assets, sort of one-time items has typically been in the guidance. While we see Enogex higher, the utility slightly lower, but still within the range, but at the high side of the mid-point at this point.

Right. Well --

It's about $0.06, is the impact for -- adjustment for prior periods.

So would a better operating number for the quarter be $0.20?

Yes, that would be correct.

And how much was the overhaul on this generating unit? What did that impact the quarter by?

It was about $3 million in the first quarter of 2008.

Pre-tax?

Yes.

So I'm going to guess, that's a couple pennies?

Yes.

Okay. And do you have any update on the frac spreads, where they're at currently versus last year?

Well, we had said a little over $7 for the quarter. We're about $6.66 or so for sort of a current frac spread. If you just took a snapshot in time as of earlier this week.

$6.66, $6.81.

I'm sorry, yes.

Okay. Okay. And any updates on -- you said you were continuing to invest in Enogex, that you see multiple growth opportunities. Can you elaborate a little bit on some of those?

Well, I think if you look at -- it was really a comment, David, about taking CapEx from $166 million last year to now seeing $323 million, and we're seeing -- obviously, we had MidContinent, Gulf Crossing on the transportation side, and multiple gathering and processing opportunities in just the organic Woodford shale and Granite Wash play. So we're really seeing increased drilling and needs for additional capacity, take away capacity, processing really across the system.

Okay. All right. Well, thank you very much.

Sure.

And your next question comes from the line of [Chris Shelton] with Millennium.

Do you hear me?

Yes.

I got pulled off for just a second. I think David asked about the current frac spreads. Can you just -- can you reiterate those for me, please?

Yes. If you just took a snapshot in time as of earlier this week it's at $6.81. So still very strong. Just slightly behind where we averaged for the quarter.

And the current guidance -- is the current guidance for frac spreads is about where it is currently then?

Yes. If you -- it's within the range of the revised guidance.

Okay. And then the other thing I wanted to check on -- you guys reiterated support for the MLT structure, and I wanted to see if you could comment on when do you think that might come and what you're seeing the market as currently for MLPs?

This is Pete Delaney. As I mentioned, we've continued to monitor that market, as you know. The conditions -- everybody knows the conditions of the overall equity markets, and the MLP market while it has been down, it was not as much as the overall equity market, and we have seen -- but the MLP market has had some technical -- more technical issues in the broader market in terms of overhang of private equity transactions and institutions that seem to be full on too many names.

One thing we are, obviously, watching is that we understand that Western Gas Resource is in the marketplace for IPO, you know. That's a gathering and processing company like Enogex, and we'll see watch and see how that goes and how it trades in the after market. We'll look at that closely.

We're keeping our S-1 up to speed, and it's hard to predict the markets, but we're again given where we believe the value we're getting in our -- for Enogex and our stock is where we think it would be valued in the MLP.

We're very much committed to making that happen when we think it's, you know, the right time to make a move, given overall market conditions, and that's hard to predict when that will be, but we do see, obviously, from January, when we were out on the road show before we stepped back from the market, we have seen improvement over the last couple of months, and so we're encouraged by that.

Got it. And is there a certain window you guys are looking at? I mean, is there kind of a drop-dead date for this, or are you just committed, waiting for kind of the technical issues in the MLP market to lift and fully committed?

There's no drop-dead date, other than technically there are periods of time when we have to update our S-1 for earnings.

Sure.

But other than that, those technical windows, there's no other windows that we're confined to.

Okay. Great. Thank you, guys.

You're welcome.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of [Ho Chen] with [Talon Capital.]

Good morning. Can you quantify what the impact of the hedging was for the quarter at Enogex?

Quantify it in terms of the --

Realized price, however you want to give it --

Okay. The market price for the quarter was $8.35. We realized $7.03, so I guess -- I guess we were about $1.30 below market, I guess.

And that's going to continue -- continue on as long as you plan on following through with the IPO for the MLP?

Right, right.

And then could you discuss the trend in the well connects? It looks like you're in -- it looks like it could be declining, like, quarterly, and I'm just curious what's happening there and what the competitive landscape is looking like in the different plays that you're pursuing?

This is Danny Harris. As far as the fundamentals for continued well connect activity, it looks really strong. You'll recall that we did adjust our outlook on volumes a little bit earlier.

In the previous conference call, we described that really there are a lot of producers that were just redeploying rigs to other areas to keep leaseholds intact and things of that sort. But as long as the gas prices is up in the area it's projected to be, we continue to feel like it will be a very strong drilling activity which relates to good well connect activity as well.

Great. Thank you.

And there are no further questions at this time.

No other questions? Again, I'd like to thank you for attending the call and your continued interest in OG&E. Thank you very much and have a good day.

And this concludes today's conference call. You may now disconnect.