OGE Energy Corp (OGE) 2008 Q3 法說會逐字稿

Good morning. My name is Patrick and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE Energy Corp. third quarter earnings 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.

Good morning, everyone, and welcome to OGE Energy Corp. third quarter 2008 earnings call.

I'm Todd Tidwell, Director, Investor Relations, and with me today I have Pete Delaney, Chairman, President, and CEO of OGE Energy Corp.; Scott Forbes, Interim CFO of OGE Energy Corp.; Keith Mitchell, Senior Vice President and COO of Enogex; Howard Motley, Vice President of Regulatory Affairs; Steve Merrill, Vice President and CFO of Enogex; Max Meyers, Managing Director of Corporate Development and Finance; and Jerry Peace, Corporate Risk Officer, as well as several other members of the management team to address any questions that you may have.

In terms of the call today, we will first hear from Pete Delaney followed by an explanation of third quarter results from Scott Forbes. Then an overview of regulatory issues from Howard Motley, and, finally, as always we will answer your questions.

I would like to remind you that this conference is being webcast and you may follow along on our website at OGE.com. In addition, the conference call and accompanying slides including required non-GAAP reconciliation information will be archived following the call on that same website.

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 Pete Delaney for his opening comments. Pete?

Good morning. From a financial, regulatory and strategic standpoint, the third quarter was a very good one as we accomplished several important initiatives that positions the Company well for the future.

Financially the quarter's earnings exceeded last year's as higher earnings at Enogex offset a cool summer at the utility. And from a regulatory standpoint the Company reached four important regulatory settlements with the Oklahoma Corporation Commission and other parties resulting in four final orders in the quarter. The approved Redbud plant acquisition and the renewable energy rider, in particular, positioned us well to execute on our key regulatory initiatives and the buildout of renewables and related transmission assets.

And lastly, we announced two strategic joint ventures, one with AEP and MidAmerican Energy to join and construct high voltage transmission lines and another joint venture involving Enogex and certain assets of Energy Transfer Partners that upon completion will provide both Enogex and OGE a host of financial and strategic benefits.

Despite the cooler than normal weather experienced during the summer, the utility is expected to provide higher earnings in 2008 than was forecasted due to lower interest expense and a lower effective tax rate from state tax credits. However, the projected improvement in earnings at the utility for the remainder of the year may not totally offset the risk of processing spreads falling even more below recent levels and as a result, we are lowering our 2008 earnings guidance to $2.40 to $2.55 which was in line with our $2.40 to $2.60 for guidance provided last February.

We increased our 2008 earnings guidance, as you may recall, in July to $2.50 to $2.70 from our initial forecast. driven almost entirely by higher processing spread than we initially forecasted. But with the recent decrease in processing spread, our single-point forecast is now around $2.50 at the bottom of the higher earnings guidance. The 2008 range of $2.40 to $2.55 reflects the risk of a further reduction in processing spreads from current market levels of approximately $4.90 and the risk of continued unfavorable weather at the utility during the balance of the year.

With the in precedented drop in commodity spreads in the first two weeks of October and an uncertain credit situation, we're cautious in providing projected spread levels. Before I discuss 2009 earnings, I would like to quickly review our local economy which continues to outperform the national averages in several areas reflecting in part the more favorable fundamentals with the state's housing and banking sectors at elsewhere in the nation.

Through September of 2008, foreclosures in Oklahoma were at the same level around this time in 2006 and employment growth, which has declined from earlier in this year, was well above the national average. For the second quarter this year, housing prices continued to increase. However, in early October, we have seen a rise in unemployment claims, accordingly, we're closely watching to gauge the impact of lower oil and gas prices on our economy which at this point seem secondary to the impact from limited credit availability.

During the first nine months of the year, our customer and sales growth were 0.9% and 1.9% just below our historic growth rates of 1% and 2% respectively. However, we have included lower KWH sales growth rates in our projections under the assumption of slower economic growth. Given the severity of the financial crisis and the lack of precedence, the impact on our businesses at this time is difficult to determine.

Accordingly, we have incorporated the risk of further deterioration in the economy into our range of guidance. The guide for consolidated earnings in 2009 is $2.30 to $2.60 which reflects our expectations for continued earnings growth at the utility associated with our regulatory initiatives, some of which were completed this quarter.

At Enogex, our guidance incorporates the potential for much lower processing spreads realized than last year, as well as the risk that commodity prices weaken and credit problems continue resulting in significant lower natural gas production, which, to date, we have not seen evidence of. Again, the recent turmoil in the financial commodity markets, we are cautious in predicting any near-term improvement in processing spreads.

Our utility guidance for 2009 is increased to $1.87 to $2 due to a full year operation of the Redbud plant and our assumption of Oklahoma and Arkansas retail rates increases in 2009. Our last general rate increase in Oklahoma went into effect in January of 2006 based on a test year ended December 31, 2004. A major part of the Oklahoma rate increase covered the increased costs from the acquisition of the McClain power plant at that time. Only a small part of that increase covered the increase in our general costs.

The 2006 rate increase permitted annual operation and maintenance costs of $290 million which are substantially below our actual O&M costs of $345 million for the 12 months ended September 30, 2008. At Enogex, our guidance for 2009 is $0.53 to $0.79 per share on a stand alone basis. This range reflects the potential for lower processing spreads than even today.

For example, a point case incorporating a real life spread, net of amortized costs of hedging of $3.16 or a market spread of around $5 which is roughly in line where spreads are today would be at high end of our range. At the levels incorporated in our range for 2009, we are very close to our floor set by our hedges and we would expect more upside than downside from processing spreads.

While we currently expect continued growth of 7% to 8% in gathering volumes, we have included in Enogex earnings range the risk of lower gas production, again, due to the current economic situation. The Gulf Crossing and Midcontinent Express transportation projects are scheduled for operation next year which will also contribute to our margin.

We continue to have good investment prospects. We have reviewed all of our approved projects under projected processing spreads and all of these projects meet our internal hurdle rates set to reflect our evaluation of each project's risk. At this juncture, we have reduced our planned capital expenditures at Enogex for 2009 to $277 million.

We continue to have a strong portfolio of growth prospects in this environment, some of which are being held by us pending more favorable credit markets. Even at the lower guidance for 2009, our projected return on average equity on that business is 16%. Our expenses at the holding company for 2009 are expected to be $0.15 to $0.17 due to higher level of debt outstanding.

Looking ahead to 2010, we expect continued growth in consolidated earnings as the utility completes the wind speed transmission line which will provide around $28 million of incremental revenue under a rider approved by the Oklahoma Corporation Commission earlier this year, as well as the annualized impact of the assumed 2009 Oklahoma and Arkansas rate increases. We would expect continued growth in Enogex from higher volumes from projects completed in 2008 and 2009.

In addition, our national gas liquid hedges in 2010 and 2011 are set at prices higher than those in 2009, although for a smaller percentage of our volumes in those years. We will provide more information on our hedges in a minute. Due to the increasing turmoil in the markets and subject to board approval, we are targeting a consolidated capital program of around $900 million in 2009, down almost $300 million from expected expenditures in 2008.

The capital program consists of $587 million dollars and $277 million of investment at the utility and Enogex respectively with the remainder associated with corporate services. The Company expects that its cash flow from operations, cash on the balance sheet and existing credit facility of $1.453 billion should provide adequate liquidity to fund through 2009, our capital investments, our operating expenses and our dividends.

As to the previously announced joint venture with Energy Transfer Partners, we continue to believe in the merits of that transaction and are working towards a successful closing. Under the terms of our agreement, we and Energy Transfer Partners are to obtain various financings for the new joint venture and close the joint venture no later than March 31, 2009, or either side can cancel the agreement.

In today's market, it would be difficult for the joint venture to secure the requisite financing under the agreed to terms, but we are working with our banking teams to monitor the market and evaluate our funding options. We filed our Hart-Scott-Rodino filing in October and hope to be cleared of that process in early November. We remain committed to the transaction due to its strategic benefits.

Now Scott Forbes will review in more detail our final performance. Scott?

Thank you, Pete. For the third quarter, we reported net income of $139.5 million, or $1.50 per average diluted share as compared to net income of $126.8 million, or $1.37 per average diluted share in 2007. That resulted in a 9% increase quarter-over-quarter.

The contribution by business unit on a comparative basis is as follows: OG&E earned $1.15 for the third quarter of 2008 compared to $1.18 for the third quarter of 2007. Enogex earned $0.30 for the third quarter of 2008 compared to $0.22 for the third quarter of 2007. The holding company earned $0.05 for the third quarter of 2008 which includes $0.04 from the marketing business, which beginning in 2008 is included with the holding company results, as compared to a $0.03 loss for 2007 third quarter.

Net income at OG&E net income for the third quarter was $107.1 million or $1.15 per share as compared to net income of $109 million or $1.18 per share in 2007. Some of the primary drivers were gross margin revenues decrease 1.5% from $306.3 million to $301.6 million. I'll provide details of gross margin on the next slide.

Operating and maintenance expense increased $1.4 million or 1.8% primarily due to higher employee costs, salaries, wages, pension and other benefits, higher fuel and maintenance costs for the OG&E transportation fleet and higher contract services due to overhauls at several of OG&E's power plants. These decreases were partially offset by higher capitalized labor and lower professional services than in the third quarter of 2007.

Depreciation expense increased $2.4 million or 6.8% primarily due to additional assets being placed in service. Interest expense increased $2.7 million, or 16.9%, primarily due to long-term debt issued in January and September of 2008. These factors were partially offset by lower effective tax rate primarily due to an increase in the federal renewable energy credits from our wind farm, and additional tax credits in Oklahoma from capital expenditures.

OG&E's gross margin was $301.6 million for the third quarter compared to $306.3 million for the same period in 2007, a decrease of $4.7 million or 1.5%. The gross margin decrease was primarily due to cooler weather in OG&E's service territory which resulted in a 10% decrease in cooling degree days compared to the same period in 2007. That decreased gross margin by $4.6 million and the reversal of the litigation reserve associated with the take or pay contract in 2007 which increased the 2007 gross margin by $4 million.

These decreases were partially offset by new customer growth which increased gross margin by approximately $2.5 million, and a price variance primarily due to new riders implemented during the third quarter of 2008, as well as other items which increased gross margin by approximately $1.4 million.

At Enogex, net income was $28.3 million or $0.30 per share as compared to net income of $20.4 million or $0.22 per share in 2007. Some of the primary drivers were gross margin was the largest variance as margins increased from $85.7 million to $108.2 million in 2008. That represents an increase of over 26%. I'll discuss the details in the next slide.

Operating and maintenance expense increased $4.3 million or 14.2% primarily due to increased employee costs, salaries, wages and other benefits as a result of system growth. Depreciation expense increased $2.6 million or 23% primarily due to higher levels [depreciable] plant associated with system growth. Net other income expense decreased $3.3 million from 2007 primarily due to lower interest income and the minority interest associated with the Atoka joint venture which began operations in August of 2007.

Gross margins at Enogex increased from $85.7 million in 2007 to $108.2 million in 2008, an increase of over 26%. Gathering and processing margins increased $16 million, an increase of nearly 35% primarily due to higher commodity prices and increased volumes. Gathering contributed $20.1 million of gross margins compared to $19.5 million in 2007. And processing contributed $42.1 million of gross margins compared to $26.7 million in 2007.

Gathered volumes increased 10% and processing volumes increased over 15% as Enogex continued to see growth on its system through September. Transportation and storage margins increased $8.2 million, an increase of 21.7%. Transportation contributed $39 million of gross margin compared to $29.4 million in 2007. And storage contributed $7 million of gross margin compared to $8.4 million in 2007.

The increase in gross margin was primarily attributable to a decrease in the imbalanced liability, increased demand fees and increased [crosshaul] revenues. Marketing and other contributed $2.6 million in gross margin to Enogex in the third quarter of 2007. Effective January 1, Enogex distributed the stock of the marketing company to OG&E.

We are revising our 2008 guidance. Net income now has a range of $224 million to $238 million or $2.40 to $2.55 per diluted share based on 93.2 million average diluted shares outstanding. The main reason for the increase at the utility is a lower effective tax rate primarily resulting from an increase in state investment tax credits associated with capital expenditures and lower interest expense due to a lower than anticipated level of long-term debt.

The decrease in earnings guidance at Enogex is driven by lower commodity spreads. Our previous guidance for Enogex in the second quarter 10-Q projected a realized commodity spread range of $7.03 to $8.32 per MMBtu for 2008. We now project the full year realized commodity spread to be between $6.17 and $6.26 with the projected fourth quarter realized spread range of $3.54 to $3.92. The holding company guidance remains unchanged.

We are also providing earnings guidance for 2009. Net income has a range of $220 million to $248 million, or $2.30 to $2.60 per diluted share based on 95.5 million average diluted shares outstanding. You can see the guidance for each business.

The key drivers are at the utility gross margins increase approximately $115 million due to a full year of the Redbud rider, a rate increase in Oklahoma and Arkansas. These increases are partially offset by higher operating expenses of $40 million, primarily depreciation expense and higher interest expense associated with long-term debt used to fund capital expenditures.

At Enogex, the main driver is the projected decrease in commodity spreads. We are projecting realized spread ranges of $2.19 to $3.16. The business continues to grow as we expect gathering volumes to grow by approximately 7%. At the holding company, higher levels of long-term debt are driving the higher than normal loss.

I would direct everyone to the Company's September 30, 2008 10-Q filed this morning for more details on the 2008 and 2009 guidance.

This chart reflects the amount of margin we have locked in for those volumes with commodity exposure and the percentage of margins which are hedged. In the appendix of the presentation are details of our hedges for the years 2009, 2010 and 2011. As Pete mentioned at the outset, planning for adequate liquidity in 2009 has been foremost on our minds. We have taken great care to ensure that our operational spending and capital expenditure plans don't exceed available liquidity.

The Company currently has available lines of credit totaling $1.235 billion plus a new 18-month term loan for $200 million. Cash flows from operations and available borrowings from our revolving credit agreements, along with the 18-month term loan, provide sufficient liquidity for all of 2009 and provide a cushion for such things as margin requirements under the Enogex hedging program, new capital requirements, or the inability to remarket OG&E's variable bonds.

The plan for 2009 assumes we do not have access to capital markets or choose not to access the capital markets because of pricing. Now I would like to turn it over to Howard Motley for an update on regulatory activities.

Thanks, Scott. Slide number 12, OG&E's use of riders and regulatory assets have minimized regulatory lag between the rate cases. In the Oklahoma jurisdiction, the Company has implemented recovery riders for our Centennial Wind Farm, enhanced security projects, the Redbud power plant and to recover our storm costs. The first three riders will terminate when all related costs are included in the rates approved in the 2009 Oklahoma rate case.

The Oklahoma Commission has also approved a renewable rider that is expected to be implemented mid-year 2010. The rider will recover the revenue requirement associated with the transmission line that will promote wind energy development in the state of Oklahoma. Rate case activities are discussed in a later slide.

On slide 13, this is a summary of our major regulatory actions so far this year. An Oklahoma Commission order established $7.2 million regulatory asset for the Red Rock cancellation costs which will be recovered starting in the 2009 rate case. The same order established a $33.7 million regulatory asset for 2007 excess storm costs and a recovery rider which includes a rate of return based on a 10.75% ROE. The rider is established to recover $3 million in 2008 and around $9 million in 2009.

As discussed on the previous slide, the Oklahoma Commission approved a Redbud recovery designed to recover $75 million annually. The rider is estimated to recover approximately $17 million in the fourth quarter of 2008. The renewables rider will generate approximately $28 million annually and is expected to be implemented mid-2010.

In Arkansas, we filed an application yesterday to defer $577,000 of 2008 storm costs that exceed the amount recovered in our rates. The application request recovery is pending Arkansas rate case. At the federal level, we implemented a $2.4 million rate increase subject to refund for our wholesale transmission customers in July of this year.

On slide 14, it talks about our rate cases. In August, we filed an application with the Arkansas Public Service Commission requesting to increase our rates $26.4 million. The Commission decision is expected in June 2009 based on the 10-month statutory timetable and new rates are targeted for implementation in July of 2009.

The Company just initiated the preparation of a rate case filing for the Oklahoma jurisdiction. We plan to file in late January 2009 based on a September 30, 2008 test year. A Commission decision is expected in July or August and new rates are targeted for implementation in August or September of 2009.

At this point in the preparation process, the Company has not determined the precise amount of the Oklahoma filing. However, the next slide summarizes the change in four of the major components of a rate case and provide the historical rate deficiency calculation. As reflected in slide 15, this summarizes the Company's Oklahoma historical rate deficiency based on a September 30, 2008 test year.

Total Company numbers are compared to the 2004 test year that we used in the last Oklahoma rate case. We utilized several parameters from the last Oklahoma rate order and applied an 85% general allocation factor. The resulting historical rate deficiency is $78.8 million. Back to you, Pete.

Thank you, Howard. At this point in time, I would be happy to take any of your questions.

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

Good morning.

Good morning, David.

I know you guys talked about your '09 guidance and, obviously, you didn't mention anything about the JV. But could you give us some indication, at least directionally, what you think the JV -- what impact the JV would have on your 2009 since you're already commenting on 2009, will it --?

You know, the last -- I would say the last -- the first two weeks of October we've seen a pretty precipitous drop in the processing spreads and you heard today we've looked at our numbers and redone our forecast and looked at our capital planning. Our discussions with ETP on both sides we continue to have strong interest in completing the transaction.

Based -- we do not have actually their numbers at this point and have not redone -- looked at the joint venture and have new joint venture runs. We do have issues of, you have to make an assumption on what the interest financing costs are. So, I mean, overall we believe with what work we've been able to do, I think that it's either neutral, possibly somewhat accretive to earnings.

We would expect it to come in -- the impact would be. There may be a quite substantial gain associated with the creation of joint venture from accounting in terms of deconsolidating Enogex. But, of course, that's a book -- non-cash earnings number that we would realize. But we still have work to do with our partner. We are scheduled to be sitting down with them. Our Hart-Scott-Rodino filing, we should be past that process November 6. And at that point in time, we'll have a much more better understanding of the numbers moving forward. But strategically, we still both sides are very interested in moving forward.

Right. And it seems like a great transaction for you. But I'm just wondering since you're going to give up half a year of Enogex's earnings and yet one of the big pipe projects under that -- those ETP assets are not going to come online until mid next year.

And outside of any gains, accounting gains associated with this consummating this transaction, might we see a dilutive effect from the JV in the first year just because of the mismatch of income contribution versus income receiving?

I think initially with the higher processing -- I mean, if we see a return, obviously, we're all having somewhat challenged by what's happened as to where are commodity prices going to be and where is the economy going to be in 2009.

I would say if we see a return to strong processing spreads that we had in 2008, with their MEP project coming in in mid year and I think as we initially disclosed, we would see potentially some dilution to our earnings, we though it would be no more than 4% to 5%. However, with the lower processing spreads that we have put in our range because of the uncertain situation we don't expect that we would have that type of dilution even though MEP, Midcontinent Express, excuse me, would be coming in in the middle of the year.

Okay. So everything is already factored in the existing '09 guidance essentially?

Right.

Okay, great. Thanks, guys.

Thank you, David.

Your next question comes from the line of Brian Russo from Ladenburg Thalmann.

Good morning.

Good morning, Brian.

Would you characterize your 2009 guidance on the Enogex side as conservative? It looks like you're forecasting a frac spread even below what you're assuming for the fourth quarter of '08?

You know, I would say it's a cautious forecast. Again, I think forecasting is always a challenge. And when you're dealing with commodities. And then given the particular circumstances that we're in as an industry and as a country, it makes it even more difficult. We have built in -- I think I tried to give a good thorough understanding of it in my comments. We did factor in further deterioration from where we are today.

A couple things. You know, we continue to see and we have went out and talked to, and Keith Mitchell, the Chief Operating Officer from Enogex is here. May have him comment on that. We went out to our producers, our major customers and we see that they're continuing to drill. We continue to forecast 7% to 8% gathering volumes based on what we see today.

However, we did build into our putting in a lower guidance in Enogex. We factored in risks and what happened if volumes decline substantially. We put that in the numbers. So we've covered that perspective. We looked at processing spreads. Is it a conservative assumption.

We say let's just lay it out there. Cautious we're going to take the higher end of the range if processing spreads stay where they are today we'd stay at the higher end of the range. Now we know the future is sort of showing it lower. So we've also built into our guidance what would happen if they are, in fact, lower than they are today.

So I think we've tried to be very cautious and just want to be very transparent of what is in our numbers so is everybody going to probably have their different viewpoint of what is going to happen with commodity prices, with the economy, with credit which does seem to be easing. But that's how we decided to it approach it here at OG&E.

Okay. So it be clear, are you assuming 7% to 8% gathering volume growth in '09 guidance or something less than that?

That would be towards the top end of our guidance. In other words, that's our best -- today that's our best look. Okay. So we take our best look which is 7% to 8% and then we say, well, wait a minute, what happens if it's not 7% to 8%. What happens if it actually goes down.

Uh-huh.

And that's why it drives us to the lower end of Enogex. So we're trying to incorporate the lower end, would say, look, this is a much more negative set of assumptions gets us to the lower end. Because we have to face it. We're in this uncertain situation economically.

Now we haven't seen our producers pull back. And we have on our $277 million of capital, there are some incremental projects that we've looked at under the existing, our forward look on processing, the forward curve of processing spreads that have very good returns. But we are not moving with them until we see some more clarity around where the capital markets are.

We have structured our spending and our initiatives to live within the liquidity provided by our existing bank lines so we do not have to be relying on the capital markets. They are improving, but they are expensive and we would right now assume to have the flexibility to be able to not rely on the capital markets. So that's how we positioned ourselves. But we have built in a much more negative outlook than we are seeing today in that business.

Okay. So just I guess to summarize the bottom end of the '09 range can be considered a floor kind of earnings power based on very cautious assumptions on volume growth and frac spread?

I would say, yes. In terms of its not absolute floor. But where our margins are, there's not much I would say -- shouldn't be that much more downside to that level. You would have to get some Draconian, I think, assumptions on some real bad significant drop in gathering volumes which we don't foresee.

Sure. So when we looked at 2010, I think you said earlier that you have locked into frac spreads higher than your hedge level in 2009. Can you elaborate on that?

Yes. I'm going to turn that over to Steve Merrill, our Chief Financial Officer of Enogex, and I think we have some things in the appendix we can refer to. But, Steve, why don't you go through those numbers for 2009, 2010, 2011.

Yes. Definitely take a look at that appendix. It gives much more detail than I'll give verbally to your question. But for 2010, the forward, say point forecast, the forward curve on market spreads would be about 372.

So still relatively low. Our realized spread would be 429. So our hedges would be propping us up above the market. The same is true for 2011, although not as substantial. We do have put options, puts out there for 2011 so the market spread into the forward curve would be 361, a realized spread would be 376. So a definite big pop in 2010 and just a modest one in 2011.

Okay. And then to switch to the utility side, what kind of actual ROE are you assuming in 2009 versus your allowed ROE?

Well, we haven't done a complete jurisdictional regulatory view. But if you took a financial view, it would be about 8.5% for the whole utility.

Okay. And that is primarily due to regulatory lag. So once new rates are in effect in Oklahoma in 2010, you guys should see some nice improvement in the ROE there?

Yes. That's right.

Okay. And then just, lastly, if you don't mind, on the JV financing, can you talk about those initiatives that you're pursuing and any other alternative plans if the markets aren't receptive to it?

Right now we're working with both financial advisors and we are encouraged by contingency improvement in the credit markets and in the bank markets in particular. We would, in this environment, look to structure the closing that would minimize our requirement to fund. And that is all we can say at this point in time is that what we would look to do, what we can do to pose the joint venture in substantially the same terms as we've outlined, but require less external financing.

The MLP market, as you know, Brian, is trading at some high yields which is obviously disturbing to us from a cost to capital standpoint. But both sides, we're really committed to closing the joint venture because of the strategic value that we both see.

There has been a pretty large discounting of basis between the Midcontinent and Henry Hub which points to the need for additional take away capacity. And the value of that take-away capacity, that's one of the key strategies, what the joint venture is focused on. So we see those conditions being very conducive to our business plan for the joint venture.

So we're both committed to find a way to be able to move forward in this difficult environment we're in. But, again, keep in mind in the last couple of weeks of October, things have changed dramatically causing, I think, both sides to really reshuffle and look at what investments we are going to move forward at this time. And now that we've all done that, we'll be spending the next probably four weeks looking at what we can do to change our financing strategy to be able to move forward.

So you might not need, I think it was $2 billion of potential debt at the JV is what you're saying?

I think there is ways we can look to reduce that need. That's correct. We were both, Energy Transfer and OG&E were getting cash distributions from the JV. We may or may not.

We still have, both sides, a lot to do. I can't speak for Energy Transfer either. We have not gotten any real detail about this other than that we're now sitting down to see what we can do from a financing standpoint. And we do have until March of 2009, as well. We see things improving and we may just wait and see how the bank market continues to improve at this time.

Okay. Great. Thank a lot.

Thank you, Brian.

Your next question comes from the line of William Maze from Ecofin.

Hi. Most of my questions have been answered, but maybe a couple points of clarification. On the assumed, that you'd thought at one point 4% to 5% of potential dilution from the JV, was that Enogex or was that at the total Company?

That would have been a consolidated number based on what our projections were at that time.

Okay. Got it. And essentially just again to sum up what Brian was hitting on, you really have taken an extremely conservative view of 2009 from what I can tell.

You're not really seeing too much economic deterioration down in your part of the woods at this point, but you're plugging that into the equation on both the gas side and the processing side. You're taking basically what you're seeing in the last two-week period from a drop in processing margin and essentially bringing that forward.

That's correct.

And then not -- assuming no access to the capital markets?

That's correct. That's correct. You have to make a decision on how to -- in this type of environment in terms of a forecast, I think we always tend to try to be on the conservative side and I think that's probably an accurate reflection of the approach we've taken today.

We do have a wider range than we normally would of the $0.30. And, again, that is probably reflective of the uncertain times. And we will really look to track and gauge and hopefully narrow that down. Hopefully, obviously, increase it. But really narrow that down.

If we can assume things are kind of bottoming out as we sit today. I'm just using this as an assumption and we start to see gradual improvement from these levels going forward and the economy overall, we can possibly hope that you do better than the mid range of your 2009 guidance?

Well, I would hope so. The fact that -- I don't know if we're at the bottom of a cycle at this point. Again, the fact that our business, the mid-point of the range is still earning 16% on equity. And plus, I think, from a cost standpoint, we've assumed, for example, that volume growth is 7%. We've assumed that processing spreads are not going to be that much farther below where we are today.

If, in fact, it looks like that is not a good assumption, we will, again, look at our operations and make changes there as well. But we're not doing that at this point because what we're seeing is something that's more towards the top end of the range at this point in terms of what our customers and natural gas producers are looking to continue to do in 2009.

Got it. And just for curiosity, if you did have access, normal type access to the capital markets, what's the delta in your sort of earnings there?

I guess I would answer it this way, I think that we'll probably see -- and Scott or Max, if we (inaudible) lower short-term interest rates we would see a couple of cents improvement in earnings because of just lowering the cost of our bank borrowings or taking out the bank -- we do have some negative arbitrage. We have $200 million of cash on our balance sheet at this point in time associated with that.

Hopefully, that would decrease. We do have investment opportunities, discretionary investment opportunities that we would, for example, if we were to go do additional debt and have more capacity under our existing bank lines, we would probably seriously look at adding additional investment opportunities. Now, those investment opportunities may not add to earnings in 2009 because of the timing of some of those projects.

They may come in towards the end of 2009. But we would expect to see the higher earnings or cash flow from those in 2010, 2011. Again, when we look at our projects initially, even when processing spreads were much higher, we risked those and look and make sure that across a broad range of assumptions and commodity spreads that our projects uphold their economics.

So, again, at this point in time, we have reduced our CapEx to $277 million. I think we originally were thinking more like $400 million going into 2009. Again, a lot of that reduction is what we made -- it's been on our side which we're holding back on things. And I would look to, on Enogex probably move forward with some of those economic projects.

If the utility -- some of that reduction is just expecting lower growth. But also some of it is we're delaying some of our projects until 2010 from 2009 because we're completing the wind speed, for example, transmission line which is, I think, $120 million. We have some big ticket capital projects that will be done in '09. And, again, it would cause a large drop in our CapEx utility and we would move ahead with some of these other projects we've delayed.

Can you talk about your pension plan, your funding and how that looks?

Scott, do you want to talk about our pension?

Yes. We've funded $50 million the last two years. And we're, of course, in pretty good shape coming into 2008. We've had what most plants have. We have negative return. And 15% plus range this year. We don't -- we will not be required to make any funding for the rest of the year. And potentially won't have to fund for 2009 unless we see better liquidity and then we may do some funding.

All right. Thanks, guys.

Thank you, William.

(OPERATOR INSTRUCTIONS) And there are no more questions.

I would just like to summarize by saying that despite the turmoil in the financial commodity markets, OG&E remains well positioned to stay our course with our key initiatives aligned with our strategic direction we've outlined previously. The utility, our wind program, our renewable related transmission project and demand side management initiatives continue to move ahead.

With the regulatory approval of the Redbud plant in September, we are now better positioned to defer any additional capacity needs until 2020. And this will provide OG Energy with the financial flexibility to pursue additional discretionary investments.

At Enogex, we continue to move forward without joint venture with ETP and continue to see continued opportunities to invest in natural gas gathering and processing infrastructure in the Midcontinent and the take away capacity out of the Midcontinent. The JV will be well positioned for both. Our payout ratio remains a conservative 57% based on the midpoint of our 2009 guidance.

Our liquidity from cash on our balance sheet, our existing bank lines, the projected cash flow from operations should be sufficient to fund operations, dividends and our capital programs we outlined today for 2009. And we will continue to look at opportunities in the capital markets to further increase our liquidity position to enable us to pursue additional growth.

We see a lot of upside at OG Energy at this juncture given our current investment opportunities at the utility and at Enogex, particularly those associated with natural resources in Oklahoma, a more constructive outlook for our state 's economy than the nation's, the upside from return of better processing spreads associated with an economic recovery, and from our financing flexibility which will allow us to execute our plans.

We thank you for your continued interest in the Company and have a good day. Thank you very much.

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