OGE Energy Corp (OGE) 2009 Q1 法說會逐字稿

Good morning. My name is Jean and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE Energy Corporation earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions) Thank you. Mr. Tidwell, you may begin your conference.

Thank you, Jean. Good morning, everyone, welcome to OGE Energy Corp.'s first quarter 2009 earnings call.

I'm Todd Tidwell, Director of Investor Relations and with me today, I have Pete Delaney, Chairman, President and CEO of OGE Energy Corp.; Scott Forbes, Controller for OGE Energy Corp.; Dan Harris, Senior Vice President and CEO of OGE Energy Corp. and President of Enogex; and several other members of the management team to address any questions that you may have. In addition, I would also like to welcome our new CFO of OGE Energy Corp., Sean Trauschke. In terms of the call today, we will first hear from Pete Delaney followed by an explanation of first quarter results from Scott Forbes 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 www.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?

Thank you, Todd. Good morning, everyone, and welcome to our first quarter earnings call.

As is our custom, Scott Forbes will provide a more detailed overview of our financial results and I'll discuss the principal factors that frame management's outlook for 2009 and beyond. But first, I would like to express our excitement over the appointment of Sean Trauschke as our Chief Financial Officer. He has been with us for a sum total of about seven days. May not hear from him today, but you will have plenty of opportunity to hear from him in the future. We're pleased with our financial performance during the first quarter. Our results are on plan despite milder weather at the utility and an unplanned mark-to-market loss associated with natural gas and storage at Enogex. These two items reduced our net operating income by around $12 million. The primary reasons we remained on plan despite those items is more favorable projected market conditions at Enogex and cost management efforts at the utility that held O&M flat after adjusting for last year's one-time charge. We have been able to keep O&M flat this year despite the additional operating costs associated with the purchase of the Redbud plant last fall.

While the Oklahoma economy continues to weaken, we see no reason to change our outlook from late last year when we forecasted a reduction in our kilowatt hour sales growth to 1% in 2009. At the utility customer count grew at 9/10 of 1% in the first quarter, which accounted for approximately $2 million increase in gross margin, this is in line with our expectations. Oklahoma's outlook remains more resilient than other regions and we expect continued customer growth in 2009, although as I mentioned, at a lower rate than 2008. The metro area unemployment rate has increased but remains well below the national average at about 5.6%. Our local banks remain financially sound and housing prices held up in 2008 eeking out a small gain. We do expect the Oklahoma economy to be weaker in 2009 than in 2008, but still positive relative to other areas. The weakness is driven by lower energy prices that started to impact the oil field segment late last year. The outlook for large customers, that's our industrial and oil field segment, remains mixed with total consumption down. But at the same time, we have some major projects coming on line.

Gross margin for industrial and oil field customers segment was up around $2 million in the first quarter due to higher prices and the rate structure despite a drop of 9% in volume. These rate structures of these customers are largely demand-based, reducing the impact of volume reductions. However, we do expect to start serving incremental load from the first of several new large customer projects starting in the second quarter. This will help mitigate any further decreases. We continue to believe utility remains well positioned to execute its investment program associated with our business strategy. We are starting from a position of strength due in large part to the satisfactory settlement of several important regulatory initiatives in 2008. The two most important of these initiatives were the rate settlements covering the Redbud Power Plant acquisition and the regulatory rider for the $200 million wind speed transmission line scheduled for completion in early 2010. The Redbud Plant acquisition an was important step towards our goal of not requiring any additional fossil fuel generating capacity until 2020.

We believe that in this environment, the best path for our customers and shareholders is to defer any new incremental generation requirements until environmental regulations and available technology are more likely to be in balance. At the same time, we think technology is here to make significant in-roads in increasing the load factor of our system by shifting demand. Accordingly, a key aspect of our 2020 strategy is the implementation of demand side management initiatives as well as our positive energy smart grid program as part of our Oklahoma rate case. In accordance with this strategy, we continue to focus our growth capital on renewable energy, specifically renewable base transmission and wind farms to capitalize on our enviable position in the wind corner in the United States. The wind speed transmission line from Woodward to Oklahoma City was previously approved by the Corporation Commission and will help anchor the growth of the needed wind energy production in western Oklahoma. We fully expect legislation limiting carbon emissions or mandating renewable energy production will become law sometime in the near future. The development of our wind power portfolio is part of our preparing for such legislation. Wind energy is an economic hedge to protect our customers from higher and the volatility of natural gas prices and CO2 emission costs.

To build upon our wind energy capabilities, OG&E started construction in April of 101 megawatt wind farm that's scheduled to be completed by the end of 2009. We are also evaluating bids received from our 300 megawatt request for proposals and following approval by the OCC, we would expect these wind farms to begin operation late in 2010. The magnitude of the expected wind generation in our region will require a large buildout of transmission and we have been positioning to participate in both construction of 345 and 765 kV transmission lines. As you know, we formed a partnership, Tallgrass Transmission, with AEP and Mid-American to build a specific 765 kV transmission line in western Oklahoma. We are interested in entering into new partnerships or expanding existing ones in regard to 765 kV transmission buildout. Just last week, the Southwest Power Pool approved the portfolio of 345 kV lines in the region. That should result in additional $250 million of investment for OG&E through 2012. We expect to get a notice to construct these lines from the Southwest Power Pool this summer. While our investment opportunities in renewables are part of our future, the recovery of past investments the key to our result, continued success and we were pleased to announce the settlement of the Arkansas rate case for $13.6 million increase.

As a last step in the process, a public hearing was held in Fort Smith last week where the settlement was unopposed and we hope to implement the increase next month ahead of our original timetable. The $110 million Oklahoma rate case filed in February is predicated on a 12.25 return on equity and recovery of roughly $900 million of investment since our last rate case in 2004. We expect a hearing this summer with decision by late August. These rate increases coupled with rider for the wind speed transmission line should provide earnings growth for OG&E through 2011 provided we continue to manage our costs carefully. We are very excited about the opportunities these projects represent to our customers and for earnings growth at the utility. While the growth picture for Enogex is not as clear in this commodity environment, Enogex remains well positioned to serve its customers and resume its growth when producer activity increases in the mid-continent as prices recover. The business is sound, it has ample liquidity and good cash flow. Our planned capital expenditures at Enogex for 2009 remain at around $230 million, reflecting continued activity by some of our key producers. In 2010, assuming no improvement in natural gas prices, we project our capital program at Enogex to drop to under $50 million. In its eventuality, the projected excess cash flow would be used to reduce debt at Enogex or the parent.

Meanwhile, an annualized return of our first quarter results equates to a return of equity just under 14% for Enogex after absorbing about $17 million of allocated overheads. And as important as any of these considerations is the flexibility we have to manage through this environment for the betterment of our shareholders. That flexibility stems from the combination of our ability to manage our O&M, our ability to reduce our capital program in response to market conditions, our low payout ratio resulting in strong internal generation of funds and ample liquidity in our banking facilities. A point in case is our forecast for 2010 and 2011 that provides for our cash flow from operations to virtually cover our capital requirements, including dividends. Of course, this assumes the satisfactory rate relief in Oklahoma and a capital program consisting only of our known and committed projects.

As planned, we completed our $75 million of equity issuance during the first quarter. We would not expect any future issuance would be required to support our investment in these known and committed projects. We have a lot of investment opportunities beyond those known and committed to and we would anticipate issuing equity and debt to fund these investments. However, these investments represent great opportunities to grow our earnings and would be expected to be accretive to our forecast. In summary, we are pleased with the results to date. We are reaffirming our earnings guidance set late last year and we remain confident of our ability to properly pursue our growth aspects.

Now, I'll turn it over to Scott to review our first quarter results in more detail. Scott?

Thank you, Pete.

For the first quarter, we reported net income of $16.8 million or $0.18 per average diluted share as compared to net income of $13 million or $0.14 per average diluted share in the first quarter of 2008. On slide 4, you can see the contribution by business unit on a comparative basis. At OG&E, net income for the first quarter of 2009 was $1.3 million or $0.01 per share as compared to a net loss of $11.3 million or $0.12 per share in the first quarter of 2008. Some of the primary drivers are gross margin on revenues increased $19.9 million or over 13%. I'll go over those details on the next slide. Operation and maintenance expense decreased $9 million, primarily due to a decrease of $2.6 million from outside services associated with the major power plant overhaul in the first quarter of 2008 and a one-time item, which increased expenses $9.5 million in the first quarter of 2008. The decreases were partially offset by higher employee costs, primarily salaries and benefits of $2 million.

Depreciation and amortization expense increased $9.2 million, primarily due to the Redbud facility being placed in service and the amortization of the storm regulatory asset, as well as additional assets being placed in service. Other income had a positive variance of $4 million in part due to an increase in allowance for equity funds used during construction and gains from the guaranteed flat bill program. Interest expense increased $4.8 million due to higher levels of long-term debt that was issued during 2008, partially offset by the cost of an treasury lock in the first quarter of 2008, as well as lower short-term interest and borrowings. Gross margin was $165.7 million in the first quarter of 2009 as compared to $145.8 million in the same period for 2008, an increase of $19.9 million or 13.6%. The gross margin increased due to new revenues from the Redbud Power Plant rider and the storm cost recovery rider, which increased gross margin by $19.3 million.

In price variance, due to sales and customer mix, along with customer growth in OG&E service territory, and higher transmission revenues, which in total, increased gross margin by $6.5 million. These increases were partially offset by milder weather in the service territory, resulting in an approximate 8% decrease in heating degree days compared to the first quarter of 2008, which decreased gross margin by $5.9 million. We have seen a drop in megawatt hour sales of 9% in the industrial and oil field sector compared to the first quarter of 2008. However, because much of the industrial margins driven by demand pricing as opposed to megawatt hour sales and because of the rate increase associated with the Redbud rider, gross margin actually increased 2.4%. At Enogex, net income decreased $0.08 per share in the first quarter of 2009 compared to the first quarter of 2008. Some of the primary drivers, our gross margin was the largest variance as margins decreased $10.9 million. I'll discuss those details in the next slide.

Depreciation and amortization expense increased $2.4 million primarily due to higher levels of depreciable plant associated with the current system growth, and interest expense created positive variance of $2.2 million from 2008 due to an increase in the amount of construction expenditures eligible for interest capitalization during the first quarter of 2009. Gross margin at Enogex decreased $10.9 million in the first quarter of 2009 compared to the same period in 2008. The main driver for the drop in margin was in the gathering and processing business, which decreased $18.8 million. The decrease was in the processing area where realized commodity spreads fell from $7.03 per MMBTu to $2.85 per MMBTu average liquid prices decreased from $1.35 per gallon to $0.63 per gallon quarter-over-quarter. In total, processing margins fell $24 million compared to the first quarter of 2008. Partially offsetting this decline were gathering margins, which increased $5.3 million as we continue to see volume growth on the system.

The transportation and storage margins increased $7.9 million primarily due to higher (inaudible) revenues, gains on realized operational storage hedges, and a lower imbalance liability. These increases were partially offset by a $5.8 million write down to the market value for natural gas and storage. For more detailed variance explanations, please see our first quarter 2009 10-Q that was filed with the Securities and Exchange Commission this morning. As Pete mentioned earlier, we have worked hard to trim our capital budget in order to minimize external capital requirements. The chart on page 9 illustrates our ability to internally fund our identified base capital expenditures for each of the years 2010 through 2014, even if projected 2009 cash flow from operations, less dividends, remain constant. Any additional discretionary projects beyond what is shown on the slide will be analyzed on a risk return basis and would be financed with traditional (inaudible) and equity. As you can see, we have reaffirmed our 2009 earnings guidance at $2.30 to $2.60 per average diluted share. The guidance for each business is shown on slide 10. I'd like to direct you to the Company's 2008 Form 10-K for information on the assumptions used in the 2009 guidance.

Now, I'll turn it back to Pete for question and answers.

Thank you, Scott. Now we will take your questions. Operator?

Yes. (Operator Instructions) Our first question comes from Brian Russo. Go ahead, please.

Good morning.

Morning, Brian.

Could you first just go over what could be considered one-time gains or losses in the first quarter? You mentioned something earlier regarding a hedging benefit and then, also, something negative.

Scott?

Well, we did incur a lower cost of market write down at Enogex just based on the price drop in natural gas and this was for the gas that was in storage, and that was $5.8 million. In the first quarter of 2008, we had a one-time charge of $9.5 million for costs that had been overcapitalized, payroll costs that were overcapitalized, and we had some hedging gains in the first quarter of 2009 related to our operational storage hedges at Enogex.

Are those realized or unrealized?

Those were realized.

Okay. How much was that?

After tax, it was $3.3 million.

Okay . The $5.8 million that you mentioned earlier, is that a pretax

That is pretax.

Okay. And also, can you just talk about the trends that you're seeing in the frac spread since the beginning of the year?

Yes, this is (inaudible). Spreads have improved a little bit since the beginning of the year, they're up about $0.50. So, we're seeing kind of a steady trend upward, but that's primarily not due to changes in liquid prices, but the depression of the natural gas price.

And where is the current market frac?

It's about $3.82.

Okay, great. And what about volume growth? I think embedded in your guidance assumptions is what, 10% to 12% volume growth? Did you see that in the first quarter?

Yes, this is Keith Mitchell, and we have seen that. Actually, the quarter-over-quarter increase is about 16%. I think that we've said it before, about 10% to 12% and we still think we're on track for that.

Okay. And you're assuming 1% low growth at the utility?

We're assuming 1% in the kilowatt hour sales growth, roughly, for 2009.

All right. And also, any benefits from the stimulus package that you can talk about in terms of your renewable buildout, maybe in terms of treasury grants or ITC, PGC?

Sure, Brian, this is Max Myers. We're looking at that both from the transmission side in terms of loan guarantees in the stimulus bill. Then also on the win side, of course you have the investment tax credit versus production tax credit. We're kind of analyzing all of our alternatives there and we will look to participate in the stimulus package to the extent we can.

Okay. And then, correct me if I'm wrong, but did your, the OG&E utility guidance, the high end, did it move up to $1.98 from $1.93?

Yes, Brian, this is Todd. Yes, it did.

Okay. Any particular driver of that?

Well, that was updated last time.

Okay.

Yes, it has not changed since the 10-K filing.

Okay, very good, thank you.

Our next question is from David Frank. Go ahead, please, sir.

Hi, good morning, guys.

Morning, David.

Just a couple questions. What was the impact of weather on OG margin versus normal, I think versus last year, you said it was roughly 5 point something million, but what was it versus normal, $5.9 million.

David, this is Scott. The weather was below normal and it was roughly comparable to the change compared to last year. Last year was actually a fairly normal year for the first quarter. So, the reduction compared to last year was virtually the same as normal -- change in normal. Yes, about somewhere between $5.5 million and $6 million.

Wait, I'm confused. The weather negatively impacted you $5.9 million in the first quarter this year versus what?

That was compared to last year. It negatively affected us. And that was about the same as the change against normal.

Oh, okay, so, okay, got it.

Our plan's based on normal, as you know, and so when we talked about impacting our plan, we were referring to -- it's sales relative to normal.

Right.

Sales relative to normal.

So last year was about a normal year, I got you, okay.

Yes.

And then, do you have any update on the current wind RFP, I forget the name of it.

The wind RFP?

Yes.

We don't have a name for the wind RFP, but we do have, we're in that process, we do have the bids in. They're being evaluated and I believe the month of May there will be some decisions made to get that down to the amount that we need. We do expect to get 300 megawatts out of the process and then we will move forward to get those approved by the Oklahoma Corporation Commission sometime this summer, late summer probably.

So, is there a list of winners that's going to come out this month or is that an internal short list or --

Probably be later this summer made known publicly.

Later this summer. Do you have a rough timeframe?

David, this is Max. No, we don't. We don't have a public notification of the short list of the bidders. We're going through the multiple bids by multiple developers now, we're going to cull that down to the short list by the end of the month, then negotiate with those folks. Depending on the negotiation, then go to the Commission, at that point it will become public.

Okay. But you guys are participating in this, correct?

We did submit a bid, yes.

Okay. No word on whether or not you're going to be on the short list?

No.

Okay. And then, Pete, you spoke of investment in opportunities outside of what you've outlined in your current Cap Ex program and, maybe it was just me, but you sounded as if you might have had something specific in mind. Is that the case or was that a misinterpretation on my part?

Well, I think what we've tried to outline in our disclosure and we put in table was somewhat different. We laid out our capital program and we have a category that I talked about, our known and committed projects, which are those projects, our distribution transmission projects that we have committed to build for the Southwest Power Pool. It has in there for this year our wind speed transmission line, it has in our OU spirit wind farm and some other transmission 345 transmission lines that we are proceeding with. Not included in those numbers are, for example, I mentioned we just -- the last two weeks Southwest Power Pool independent board approved a set of called Portfolio 3E of 345 kV transmission buildout. Our portion of that plus a line that we are building for cooperative equates to that roughly $250 million of investment capital for transmission that I mentioned in my comments.

Now, the process is that we will sometime in the next 60 days, say, 30 to 60 days, get a notice to construct from the Southwest Power Pool. After we get notice to construct, we have I think around a 90 day period in which to decide that yes, we will undertake those obligations to build. Then we would set about going through the process of getting those lines put up. That $250 million is not in our known and committed to projects because while they're known, we haven't committed to them. Another example would be the Tallgrass transmission, the 765 with AEP Mid-American where that has not been approved, that's about another $250 million, our portion, that has not been approved by the Southwest Power Pool. There's a regional cost allocation that has to be resolved and any of that, that line is just one of a much larger, longer term 765 kV buildout that may be undertaken here in the Southwest Power Pool. So, those are particularly what we have in mind, but also we would be investments for, opportunities at Enogex. Again, we have the $50 million in our known and committed to because those are projects that we have committed to for our customers, as well as capital required, our maintenance capital for our system at Enogex. So, there are of course opportunities that we look at there as well, which we would think would be accretive to our value, and those are the things that we clearly do have in mind and are looking at.

Okay. So the $250 million is incremental to that existing, that slide you have with your existing Cap Ex forecast?

That is correct, and that's all outlined in our Q.

Right, and then potentially more transmission or more wind could come on line?

That's correct.

Should we expect that that $250 million will be funded 50% with equity issued in the market or some portion of that?

Well, we will look at it when we get, depending on how it's going to come out over time, the different timing in the projects, we're looking at our cash flow, we will look at all those issues. Over time, our goal is to maintain our strong capital structure at OG&E. So, but, you manage that over time. Doesn't mean every time you do a discrete financing of a discrete asset, it's 50/50, but we have our capitalization targets and manage those over time.

Okay, great, thank you.

We have Brian Russo on line. Go ahead, please, sir.

Hello, thanks for taking my follow-up question. Just curious, it seems like the capital markets have loosened up a little bit and I'm just wondering what your thoughts are on your previous attempts to harvest the value of Enogex and anything you guys may be looking at in the near and intermediate term on that.

Well, in referring to the partnership with Energy Transfer Partners, I think we have obviously, obviously, we have seen improvement in the MLP market, equity market, debt markets. Not sure about the bank markets, but we have seen improvement there. From our perspective as management, from the Enogex business, we continue to strive to make sure that the value of Enogex is realized in our OGE Energy stock. One of the primary reasons behind that partnership was we felt that with that partnership with Energy Transfer would really help us realize that value as well as position Enogex in terms of a bigger platform. Our efforts with regard to Enogex remain the same, that would be looking for opportunities to strengthen that platform and opportunities to be able to get that stock or that value realized in our OG Energy stock. So our strategic objectives remain the same and we will continue to go down that path and look at opportunities. But meanwhile, as I said, we're -- the Company is well positioned, it's got good cash flow and we're comfortable with how it's positioned today.

Okay. So, if I interpreted you correctly, it seems like you're comfortable managing the business as part of the OGE enterprise today and you will look for opportunities in the future?

I mean, we're always looking at opportunities, sure. I mean, we will look at opportunities, try to make opportunities happen as best we can.

Understood, thank you.

And we have a question from Jeff Gildersleeve. Go ahead, please.

Good morning, guys, it's [Chris Shelton], how are you?.

Hey Chris, how are you?

I heard you mention, I think in your prepared remarks, that Enogex had been sort of ahead of your plan for the quarter, I just want to get a feel versus the last report, how you guys are feeling on that business. It seems like maybe a little more positive than when the K had come out, just wanted to gauge that.

Well, yes, I'll turn it over to Keith, but yes, we're operating on plan. And we have seen some higher commodity spreads and we -- our guidance was in October of 2008 and I think we all feel like we have been operating in this environment so we have got a little bit more clarity than we did in October of 2008. But Keith, Keith Mitchell, do you have any comments?

Well, Pete, I just reiterate those comments and that is the actual budget was set back in 2008. We said last time that we're taking certain cost reduction measures and we would expect it to be below budget. But if you looked at what we had been planning for it to be, we are right on plan, slightly above plan, because of the cost reduction measures and the market improvements we have seen.

Got you. And then I guess, in your plan, the frac spreads that you assumed were, was it $2.19 to $3.16, is that right, does that sound right?

No, Chris, this is Todd. No, in the plan, let me grab it here. It was $2.38 to $2.91, we updated that the last quarter.

Okay. And the current spreads are north of that now, right?

Right, but remember that's a realized spread, so that takes into account our hedges.

Right, exactly. But I guess directionally, the current market seems like it's more favorable than it was before. Okay.

The other thing I would point out is that in addition to just the processing margins we have seen higher than planned across all revenues. The transportation segment has certainly turned out more favorable than what we had in our forecast.

Got you, and how is that, I know you guys were pretty down on (inaudible) originally, how does that market kind of look of late?

We have been in recovery mode and we project to be in recovery mode while again, as gas prices being down and it's been creating some opportunities for us to recover, I think.

Okay. Great, thank you very much guys.

I show no more questions in the queue at this time.

Well, in summary I would just like to say that we're very pleased with our first quarter performance. We remain excited about the direction of this Company. We're reaffirming our earnings guidance and remain optimistic about our ability to effectively manage the Company through this market environment. That said, continued vigilance over the condition of the financial system and the uncertainty in the economy is appropriate and we need to proceed with our capital and operating plans thoughtfully. We will maintain the ample financial flexibility outlined here as it is our belief that such flexibility is required to be successful in this environment. Again, I want to thank you for your interest in the Company and participating this morning. You all have a great day.

This does conclude today's conference call. You may now disconnect. Thank you.