OGE Energy Corp (OGE) 2010 Q4 法說會逐字稿

Good morning, my name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise.After the speakers remark's, there will be a question and answer session.

(Operator Instructions)

Thank you.Mr. Todd Tidwell you may begin your conference.

Thank you, Steve.

Good morning everyone and welcome to OGE Energy Corp.'s fourth quarter, 2010 earnings call. I'm Todd Tidwell, Director of Investor Relations, and with me I have Pete Delaney, Chairman and CEO of OGE Energy Corp., Sean Trauschke, Vice President and CFO of OGE Energy Corp., and several other members of the management team to address any questions that you may have.

In terms of the call today, we'll first hear from Pete, followed by explanation of year-end fourth quarter results and 2011 earnings outlook from Sean, 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 web site at www.oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same web site.

Before we begin this morning's 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. In addition there is a Regulation G, reconciliation for ongoing 2010 earnings results in the appendix, along with projected capital expenditures.

I will now turn the call over to Pete Delaney for his opening comments. Pete?

Thank you, Todd, and good morning, everyone. Welcome to our fourth quarter earnings call. This morning our -- earnings for 2010, excuse me.

This morning I will update you on some of our more important initiatives and outlook for our businesses and Sean will review financial results in more detail, but I am very pleased to announce record consolidated ongoing earnings of $3.10 per share, up from $2.66 per share in 2009. Ongoing earnings exclude the impact of the charge for the elimination of the Medicare Part D tax subsidy, and on a GAAP basis, our earnings for 2010 were reported at $2.99.

We reported higher earnings at both utility and in the midstream business. Utility earnings benefited from higher rates associated with various riders and a full year of rate relief, along with hot summer weather, which drove the $155 million increase in gross margin.

The riders and rate increases accounted for nearly $75 million of the gross margin increase, and cooling degree days were 22% above normal, 25% above last year, accounting for $43 million of the increase. This was offset in part by increased expenses at our power plants associated with our mechanical integrity plan.

With the integrity plan in place, we project little growth in O&M over the next several years, due to savings associated with our smart grid deployment as well as other steps we have taken, which I will discuss in a moment. Integrity plan accounted for over $21 million of the O&M increase in 2010. We believe this level of funding will allow us to meet our objectives.

As I mentioned on our last call, this past hot summer has put a lot of strain on older, steam-fired units. Their age is reflected in the overall embedded cost of our fossil fuel generation fleet of approximately $150 per KW. While we believe maintain the reliability of this fleet provides great value to our customers, we did retire the 160 megawatt Muskogee 3 gas plant in this past December, and we continue to weigh the economics of investing in our aging plants versus the alternatives.

Like many others in the industry we are scenario planning around the myriad of environmental regulations that could impact further impact OG&E's generation portfolio. Given the availability of natural gas and related infrastructure in our area, we have several options to meet expected Clean Air Act regulations.

For one, in contrast to capital-intensive retrofits with emission control equipment.The perversion of natural gas requires very little capital, and replacement with new natural gas facilities on existing sites are also alternatives. But of course, we know all are not economically equivalent. Again, the far focus is on achieving a balanced portfolio resulting in the lowest risk-adjusted cost outlook for our customers. Over the long run, we are working with the state DEQ and other interested parties to explore potential solution to address all the impending air quality regulations.

Keeping our focus on cost, we have taken steps to better manage our cost trends, particularly the volatility of the costs associated with providing retirement benefits, which account for $16 million of the increase in year over year O&M. As a result of changes made to our benefit plans, we expect increase in 2011, to be significantly less than last year. In addition our pension plan is 89% funded, and that is before the planned $50 million infusion in 2011.

Another area of expected cost savings is associated with our smart grid program.The Oklahoma Corporation Commission order issued in July of last year, approving the program. In that we agreed to provide to our customers a cumulative O&M savings of $22 million -- $22million through 2013.

We continue to believe these savings will be realized. Our rollout of this technology is on track with around 200,000 smart meters installed. Unlike many other deployments, we are able to connect and disconnect customers, further saving expense with associated truck rolls, in addition to our ability to reduce the number of meter readers.

OG&E's plan is for the for the smart meters to be deployed system wide by 2013, delivering ongoing savings to customers. Again as a result of these efforts we are projecting that O&M, excluding O&M covered under existing revenue riders, in 2011 and 2012, should be relatively flat with 2010.

Our growth front in 2011 is in our investment program. We are planning for record level of capital expenditures in 2011, which are representative of the attractive investment opportunities we have. We've invested nearly $3 billion in the utility in the last five years and expect to invest an additional $5 billion -- $3 billion over the next five years, $1 billion of that is in 2011. These investments are moving our strategy forward in several respects.

We're building a wind-based renewable supply to further balance our generation portfolio. We're building transmission statewide to economically integrate more wind and improve reliability of our system. And lastly, we're deploying our positive energy platform, of which smart meters is a key part, enabling us to offer demand response, demand side management and other new products and services. At the same time we believe building out these capabilities is aligned with our objective of keeping our rates below the national and regional averages.

Before moving on to our Enogex and our earnings outlook, I want to briefly comment on the economy in our service area. It's much the same report as I have given in previous quarters. Our Oklahoma City area and state unemployment rates are 6.2% and 6.8% respectively, both as you know well below the national average.

However, like much of the country, county and state local governments, our government likewise is under spending pressures, tax revenues have declined, and the state has a sizeable structural deficit for the next budget cycle.

But, we have one party dominating both the legislature and governorship here and we expect that they will be able to work through that. Oil and gas tax receipts have improved and that will definitely help, as will the improving local economy. We expect slow and steady growth over next few years.

Our customer growth continues as 6,000 customers were added to the system last year.An annualized growth rate of 0.8%, slightly below our historical average of 1% per year. Our industrial load increased for the sixth consecutive quarter and industrial sales are up 7% compared to 2009.

And on a weather-normalized basis, kilo-hour sales increased almost 2%. Although slow, the economic rebound seems to be taking hold.

Now, turning to Enogex, our midstream business had another solid earnings year, increasing nearly 50%. We experienced record volumes in the gathering business as well as record inlet volumes and natural gas liquids production in the processing business.

Gathering volume increased 6%, and processing volumes grew 17%, compared to last year. Natural gas liquid prices were higher compared to last year, and commodity spreads averaged $5.74 per MMBtu, up from $4.12 per MMBtu the year before. Condensate volumes were up 3.3 million gallons, 16%.

We also embarked on the construction of two processing plants, which upon completion in 2012, will grow our processing capacity by about 33%. We're excited about the growth opportunities at Enogex. Enogex continues to have a good backlog of organic gathering projects beyond what we have shown as known and committed capital expenditures in our disclosures.

As you well know, earnings in an asset driven business, often increase in a step function manner.2011 is the building year for us, moving along a step after a 17% step-up in 2010 ongoing earnings. In 2011 we have a full plate to execute the projects and initiatives associated with the largest capital spending plan in our Company's long history.

Our plans provide for spending over $1 billion at the utility and just under $400 million at Enogex, based again on our known and committed projects at this time. Utility in 2011, $250 million will be spent to complete our 227-megawatt Crossroads Wind Farm and $245 million on our SPP transmission projects.

Enogex's capital program consists of $125 million for the construction -- continuing the construction of the 200 million-a-day South Canadian and the Wheeler processing plants, and the remaining $175 million for build-out of gathering pipeline and compression to serve new and existing customers in Oklahoma and the Texas panhandle.

As I mentioned earlier, we are actively working our backlog of organic growth opportunities as well as we're -- and as well as continuing to shifting the process mix -- processing mix more towards fixed fee.

The timing for completion of the majority of the utility and midstreams project is in 2012. That sets up 2011 for modest earnings growth. For 2011 as a management team, we are focused on executing our operational growth plans, which will position the company well for further growth and future opportunities.

Today we are announcing our 2011 earnings guidance of $3.00 to $3.20 per share.This guidance represents an increase over 2010 ongoing earnings per share on a weather normalized basis. Utilities projected to earn between $2.10, $2.20 per share.

Additionally, keep in mind as we move processing volumes from keep-hold to fixed-fee, we expect to be trading off some near-term margin for a more stable margin contribution long-term, and building our sustainable earnings base. Enogex's contribution to OG&E is expected to between 90 and $1.05 per share in 2011.

Sean will discuss in more detail the assumptions behind our earnings guidance. In closing, the rate case to be filed at mid-year, the Crossroads Wind Farm, transmission, and processing plant expansions, set the stage for a step-up in 2012.

In the mean time, we are working to continue to hit our milestones on key business initiatives, in both businesses, positioning us for earnings growth to meet our long-term 5% to 7% earnings goal.

As always, much work remains, as our management team focuses on the traditional challenges, for example associated with environmental compliance and cost management, to the new challenges associated with our smart meter deployment.

We have been able to exceed our long-term earnings goal since it was increased in 2009, and we are working to continue to do so. We work to find opportunities in these challenges.

Yesterday, the Board of approved another quarterly dividend of $0.0375 cents per share, in line with the higher dividend growth rate initiated last December. We have a stated goal of a payout ratio of not more than 60%, and if we execute on the completion of, and recovery of, our capital projects at hand, our projected ratio should well, be well below 60% in 2012, providing flexibility for continued dividend growth.

And now Sean is here to discuss the details of our results.Sean?

Thank you, Pete. In my remarks today I will review our 2010 results, briefly touch on our fourth quarter results, and then discuss our guidance for 2011. For 2010, our ongoing earnings per share was $3.10, compared to on going earnings per share of $2.66 in 2009.

As a reminder, ongoing earnings per share for 2010 excludes the charge for the Medicare Part D subsidy. This non-cash charge, resulting from the elimination of the tax subsidy associated with the retiree prescription drug benefit, lowered GAAP earnings by $0.11 per share in 2010.

The contribution by business unit on a comparative basis for both ongoing and GAAP earnings per share, is listed on the slide.

As Pete mentioned in his opening remarks, both ongoing and GAAP earnings were all-time records for the company.

Now, looking at the earnings details for the utility. OG&E reported record earnings -- record ongoing net income for 2010 of $222.7 million, or $2.25 per share, as compared to ongoing net income of $200.4 million or $2.06 per share in 2009. Some of the primary drivers are as follows. Gross margin increased $154.8 million or 16.2%, and I will provide details of gross margin on the next slide.

Operation and maintenance expense increased by $70.1 million. I would also like to point out that $14 million of O&M increase had direct revenue offsets in the form of riders. The remaining amount of the increase was primarily due to higher maintenance expense at some of our power plants, our benefit costs, primarily from increased post-retirement medical costs, and higher expenses associated with professional services and payroll.

Depreciation and amortization expense increased $21 million, primarily due to the OU Spirit Wind Farm and the wind speed transmission line being placed into service. Net other income and expense created a negative variance of $13.5 million, in part due to lower revenues associated with the guaranteed flat bill program of $10 million, which is an offset to weather, and lower levels of AFUDC in 2010, as compared to 2009. Interest expense increased $9.8 million, primarily from the issuance of $250 million of long-term debt this past June.

Now turning to gross margin.The biggest driver for the increase was the rate relief for the numerous investments made by the company in transmission, wind and other infrastructure investments.

Also, weather played a large role, contributing nearly $43 million to gross margin compared to 2009, after netting with the lower guarantee flat bill revenues. Cooling degree days were 25% above 2009, and 22% above normal. Compared to normal, favorable weather increased gross margin by approximately $25 million.

Looking at system megawatt hour sales, sales were up nearly 7% for the year, and industrial sales were up 7.2%. Industrial sales, while still below 2007 peak levels, continued to improve. Oil field sales up 4% compared to 2009, and have now surpassed the pre-recession levels as we continue to see solid growth in the oil and gas patches.

Our overall customer growth rate for 2010 was .8%, as the utility added over 6,000 new customers to our system. Weather normalized megawatt hour sales are up 1.5% compare to 2009.

Turning to Enogex.Ongoing earnings per share increased $0.31 in 2010, compared to 2009. The largest variance was gross margin, which increased by $65 million, or 18%. I'll discuss those details on the next slide.

Operation and maintenance expenses increased by $12.7 million in 2010, in part as a result of higher employee cost related to the system growth, and pipeline integrity work.

Depreciation and amortization expense increased $5.2 million, primarily due to higher levels of depreciable plant placed in to service in 2010.

Interest expense was $6.1 million lower compared to 2009, primarily due to the replacement of long-term debt in January of 2010 at a lower interest rate.

Net income attributed to non-controlling interest created a negative variance of $2.3 million, due to the 9.9% equity investment made by ArcLight in November of 2010.

Now turning to gross margin. Nearly all of the increase in Enogex's gross margin came in the gathering and processing business, driven by higher volumes, richer natural gas liquid streams, higher commodity prices, and improved processing plant efficiencies. Enogex's processing plants saw record inlet volumes, which increased 17%, and an increase in NGL production as recent expansion projects, primarily in the Granite Wash Play and Cana-Woodford Play, have added richer natural gas to Enogex's system.

In addition, having the new Clinton processing plant allowed Enogex to optimize recoveries across all processing plants. Enogex produced over 700 million gallons of NGLs in 2010, an all-time record. Higher commodity prices also fueled Enogex margins, as realized commodity spreads increased from $4.12 per MMBtu, to $5.74 per MMBtu in 2010.

Weighted average prices for NGL gallons also rebounded, going from $0.77 per gallon in 2009 to $0.96 per gallon in 2010.

Also condensate gross margins increased $11 million, further highlighting increased volumes in commodity prices. Gathering margins increased nearly $4 million, primarily as a result of the 6% increase in volumes.

Enogex continues to see robust growth in the Granite Wash and Cana areas.Transportation gross margins fell nearly $6 million, in part due to lower cross-sell volumes on the Enogex system, as basis differentials fell from 2009 levels.

Now turning to the quarter. For the quarter, we reported net income of $30.7 million or $0.31 per average diluted share as compared to net income of $34.2 million or $0.35 per average diluted share in 2009. The contribution by business unit, on a comparative basis, is listed on the slide.

At OG&E, net income for the quarter was $12.4 million, or $0.13 per share as compared to net income of $19.5 million, or $0.20 per share in 2009. Some of the primary drivers are as follows. Gross margin increased $12.7 million, or 6%, and I will touch on gross margin on the next slide.

Operation and maintenance expense increased by $13.1 million, and as with the yearly variance I mentioned earlier, higher expenses associated with the maintenance at some of our plants and higher post-retirement benefit costs account for much of the increase, compared to the fourth quarter of 2009.

Depreciation and amortization expense increased $6.7 million, in part due to additional assets being placed into service such as the OU Spirit Wind Farm, and wind speed transmission line, which were not in service for the entire quarter of 2009.

Interest expense increased $3.3 million, primarily from the issuance of $250 million of long-term debt in June.

Looking at gross margin, you can see the drivers on this slide for the $12.7 million increase in gross margin at the utility, for the fourth quarter, compared to 2009. As with the year-to-date variance, recovery on investments was the key driver, fourth quarter of 2010.

Weather had minimal impact on the fourth quarter compared to last year, and versus normal. System sales increased 1.7%, driven by increased sales across all classes, with the exception of a slight decline in residential.

At Enogex, earnings per share increased from $0.17 in 2009 to $0.22 in 2010. The largest variance again was the gross margin, which increased by $8.7 million.Operation and maintenance expenses increased by $3.1 million, in 2010, in part due to pipeline integrity assessments. Interest expense was $4.5 million lower compared to 2009, primarily due to lower interest costs associated with the refinancing of long-term debt.

Net income attributed to non-controlling interest created a negative variance of $2.2 million, again due to the 9.9% equity investment made by ArcLight in November of 2010.

For the quarter, the processing business was the primary driver for the increase. Enogex's processing plants saw a 16% increase in inlet volumes. October saw record production of 63.9 million gallons, and the fourth quarter was a record production quarter of 181.6 million gallons. Key pull margin saw the largest increase and was $7.3 million higher quarter over quarter.

As realized commodity spreads increased from $5.84 per MMBtu to $7.05 per MMBtu, and weighted average prices for NGL gallons increased from $0.99 per gallon in 2009 to $1.04 per gallon in 2010. Though gathering volumes increased 10% in the quarter, gross margin fell slightly, primarily due to lower fuel imbalance and field tracker revenues.

As Pete said earlier, our 2011 earnings guidance is between $3.00 and $3.20 per share, based on assumptions set forth in our 2010K, filed with the SEC this morning. Over the next couple of slides, I will discuss the 2011 earnings drivers for both OG&E and Enogex.

Looking specifically at the utility, we project earnings of $2.10 to $2.20 per diluted share. Recall, 2010 ongoing earnings were $2.25 per share, but add approximately $0.15 of positive weather. So when you look at earnings on a weather normalized basis, earnings are expected to grow.

On a weather normalized basis, gross margin is expected to increase as well. The main drivers are increased revenues from the smart grid program, a full year of the wind speed transmission line, along with our demand side management rider, and projected sales growth of just under 1%. In addition, we expect new Arkansas rates to be in effect during the third quarter of 2011.

Higher O&M projected for 2011, is primarily due to increases associated with revenue offsets in the form of rider -- in form of riders. As Pete said, excluding the O&M with revenue offsets, the overall increase is expected to be relatively flat compared to 2010.

Depreciation is expected to increase approximately $7 million, as you would expect from the increase in assets being placed in the service. Another major driver for earnings in 2011, is pre-tax equity AFUDC of $35 million to $40 million, which is approximately $20 million increase from 2010, primarily from the Crossroads wind project and a number of transmission investments underway.

On the financing front, we expect the utility to issue approximately $300 million of long-term debt in mid '11. The interest expense of $115 million to $120 million for the year includes $10 million of AFUDC debt. Our affective tax rate at the utility is projected to be around 28% for the year.

Before moving on to Enogex, I did want to provide a simple illustration of our projected rate base growth at the utility, which in this example assumes the required regulatory approvals.

Over the next four years, we are projecting rate base to grow at a compound annual growth rate of just under 8%, and you can see the current jurisdictional allocation chart to the right. At year end 2010, approximately 88% of rate base was allocated to Oklahoma and approximately 3% to FERC.

As we complete our transmission projects over the next several years, we are projecting that the FERC allocation of rate base will be near 12%, which illustrates the magnitude of our transmission build. We certainly like the trajectory of the rate base growth and believe we can create value for both customers and shareholders.

Turning to OGE Enogex holdings. We project earnings of $0.90 to $1.05 per average diluted share. This is OGE share, and does not include ArcLight's ownership percentage. There are many assumptions listed on the slide and in the 10k, and I won't go through all of them here.

The keys for Enogex in 2011, is the continued growth in the gathering and processing business. We are constructing two processing facilities, one in the Cana region of Oklahoma, which will add 200 million a day of processing capacity and be in service by November of this year.

The other is a 120 million a day plant in Wheeler, Texas that can be up-sized to 200 million a day. It should be on line in the second quarter of 2012. The Wheeler plant was delayed a few months from its original start date due to redeployment of the plant to Cox City.

These two new facilities will bring much needed processing capacity to the Granite Wash and Cana regions. Regarding the 120 million a day Cox City plant we expect it back in service by the third quarter of this year. We do not expect a material impact to earnings as a result of insurance coverage.

We continue to see strong commodity prices and drilling activity in western Oklahoma and the Texas panhandle. ArcLight's equity investments in the business are expected to bring their ownership level to 17% by the end of the year.

We continue to evaluate multiple projects and potential capital investments for Enogex. As a result, the contributions by both OGE and ArcLight may increase in 2011. We're also working on increasing our fixed-fee processing arrangements.

As we evaluate these arrangements we are focused on the long-term value and not just the current spot price.

Before closing, I do want to mention the change in our assumption methodology. You will notice that we do not have a commodity spread estimate on the assumption page, and as some of you have noted, commodity spreads can sometimes be misleading, depending on whether or not you're in ethane recovery or rejection. When we enter ethane rejection, the weighted average spread actually increases, though margins decline.

In it's place, Todd has updated the processing supplement on our website and has provided price assumptions, volumes from natural gas liquids, as well as natural gas shrink and natural gas price assumptions. I believe you will find this supplement helpful.

Lastly, I want to reiterate that with our contract mix and hedges in place, roughly 92% of margin on a consolidated basis is fee based.

This concludes our prepared remarks and we will now open it u up for your questions.

(Operator Instructions)

Your first question comes from the line of Anthony Crowdell from Jefferies.

Good morning, Sean. Two quick questions. One is, has the Company taken any new hedges or planning to take any new hedges, I guess, post 2011?

And second question is, it seemed most of the processing you are adding you are looking to do more fixed fee. I was wondering for you could comment on the fixed fee margins you've experienced in the fourth quarter? And do you see a lot of downward pressure to fixed fee margins going forward with all the other processing Companies looking to do more -- also fixed fee like CenterPoint, or Dominion, or other names that are just looking to do fixed fee?

Yes, as far as the hedges, no, we are not anticipating at this time putting on any hedges beyond 2011. Again we much prefer the economics associated with the fixed fee conversion in lieu of the hedges.

With regard to our second question, Keith Mitchell is here. He can talk a little bit about what he's seen in the market place, but as a general comment, what I would say, Anthony, is we are looking for double digit returns on those fixed fee processing agreements. That's what we are looking for, that's what our risk adjusted hurdle rates are requiring. And so, Keith, do you want to --

Yes. The only other comment I would make is that there is a lot of processing infrastructure that is needing to be constructed. So, even though there is competition, there is also the need for new infrastructure, which would require the fixed fees to be sufficient to meet returns.

Isn't the -- I'm sorry.

I think you asked one more question. We had about $6 million of margin in the fourth quarter from fixed fee.

Could you give a -- I could divide it, I'm wondering if you just had it -- margin per gallon for fixed fee?

$0.32 -- If you looking for kind of what the rate is.

Yes.

Probably $0.32.

Actually, you know, Anthony, for MMBtu, if you look at Todd's supplement he put on the web site, it's right there for you.

Great. Is it the right way to think about it, I guess, sort of the way you guys are thinking about it, with the hedges. The cost of the hedges, although the spreads look maybe attractive in keep hole, but the cost of the hedge kind of offset some or a nice chunk of the gain. That with fixed fee, you don't really need the hedges and still maintain -- you lose the volatility but maintain a lot of the profitability?

I think that's part of it. I think the other thing that the team has been very successful in achieving is, typically with these fixed fee agreements we are looking for additional acreage dedication. And looking for something longer than what can secure in the financial market.

Thank you very much for your time.

The next question comes from the line of Brian Russo from Ladenburg Thalmann. Your line is now open.

Good morning.

Good morning.

Could you just elaborate on little bit on the 5% to 7% CAGR? I think you mentioned that historically you have been able to beat that long-term growth rate and it just seems that given 7.8% rate-based growth at the utility driven by maybe higher return type transmission projects. Along with, it looks like, a quite impressive Enogex capital expenditure plan, that it seems conservative to me. And I was just wondering if you could kind of elaborate on your thoughts there.

Sure, Brian, it's Pete. Yes, I guess, and Todd will keep me honest on the numbers, as I was referring to. Yes, I think it was in 2009 we increased our growth rate from 4% to 6%, to 5% to 7%. I think since we did that I think we have grown at like 13%, for alpha at 245, is where we initially were looking at as an estimate, and then we for looking at 266 as we updated that and reconfirmed. We are still looking at our keeping with our long-term growth goal of 5% to 7%.

I will tell you a couple of things. One is that our 5% to 7% is a long-term earnings goal. We look to be consistent here and we look to, of course, be able to hopefully deliver consistency through cycles. We have commodity cycles. We have the economic cycle, one which we've just been through that was quite severe. And I don't think we are exactly out of the woods totally, with all the huge fiscal issues facing state and federal level. And so, we want to be consistent and are looking long-term at our goal. And we set that, and we set that looking at what we think is competitive as well.

But of course that doesn't mean we don't try to exceed that goal and do the best thing we can. Keeping in mind we need to keep our rates competitive, and we need to make good investments, and we have also risk parameters and a business strategy, which we stick to.

We are not going to sacrifice those parameters to go stretch for earnings goals, and so that's sort of our philosophy. We had that goal out there and we have been able to achieve that. And we are now reporting $3.10 again. And those growth rates I gave you were to $3.10 at the end of '10, and of course we are still keeping with our long-term earnings growth rate. But that's the way we are thinking about it ,and we hope to give you all the information that you guys need to make your own determinations.

Okay. What base year should we be focusing on now, to -- as the updated 5% to 7% long-term growth.

Our 2010 base year.

Okay. And then, just on the utilities side, you mentioned transmission rate base should grow to, I think, 14%, by what year?

I think it was 13% by 2014. So, put that in perspective, we will probably have $1.4 billion of investments in transmission. Actually it was 12%.

Okay. Can you comment on SPP's recent ITP 20 assessment, where they have identified another $1.8 billion of transmission needs. Any thoughts on how you can participate in that?

Well, certainly. I mean that was kind of the preliminary 20-year plan. There were some lines identified in there for OGE, and very preliminary cost estimates for those lines were in the $175 million range. But again that's a plan, there is still a lot more study that needs to go on.

But we would be very excited and interested in pursuing more transmission within the SPP. There are some projects in there for OGE, and we will certainly pursue those.

And then just real quickly on the Enogex side. The volume growth that you are expecting in '11, I guess on the processing side, was that impacted by the Cox City outage, and what would have that been without the outage?

This is Keith. It was impacted somewhat. We are looking at bringing that plant back on line to full capacity pre-event, in third quarter. It was impacted some. But then, we also have on our South Canadian plant coming online late in '11, which help us some. So, we have some volume growth.

Okay, and then just the CapEx that you have laid out for Enogex. Can you remind me just kind of the time frame of when that gets invested and starts generating margin. I think in a mid-teens type of internal rate of return, is it like a 12- to 18- month type of construction cycle?

Sure. So, this is Sean, Brian. So, clearly the South Canadian project, the CapEx associated with that. That will be completed this year and it will be generating returns immediately.

The Wheeler plant will be ready in the second quarter of 2012 and then it will be generating returns. And then we have a lot of gathering infrastructure that is being built. And so, to the extent that is completed, we have a lot of gathering lines that are being built in 2011, and you should expect that to get the full year benefit in 2012.

Okay, thank you very much.

Your next question comes from the line of Jay Dobson from Wunderlich Securities. Your line is now open.

Good morning.

Good morning.

Pete, and this may be fair for Sean as well. Continuing on the CapEx hit parade. I see in the appendix here you sort of lay out Enogex's CapEx, but on 100% basis. And Sean you detailed in your earnings guidance at the bottom that you are assuming that ArcLight owns a 17% position, and all of those numbers, of course, sound very accurate.

I know there is a lot of flexibility built in to the JV. So, I was wondering how you would like us to think of your percented requirement of this capital for primarily '11 and '12, but certainly the further out would be interesting. And then also, just you comments on sort of how the JV is working to date.

Okay. Why don't I take the first one. I will let Pete talk about his view of the JV.

I think when, just as a guideline for you, Jay. When we look what we are going to contribute, recall from the agreement that OGE has the right to contribute up to 50% of all CapEx -- of all capital that's needed for the business. Or as little as 10%. It's OGE's decision.

That's how we are looking at it, and the criteria we're using is, looking at our own credit metrics, our earnings profile, our own cash position. And if I look at 2011, Jay, just to get to that 17%, that's probably in the neighborhood of $150 million of contributions for ArcLight in 2011. Okay? As you think about that, this is a very, very large CapEx year for the Company, not just Enogex, but OGE as well.

And so, our position will change from year to year. I think what you should expect is we are going to look at it through the lens of what is good from our credit metrics stand point? What's the cheapest source of "funding" for us to raise capital? And lastly, we are certainly looking forward to what helps grow the Company in earnings. Does that help?

Yes. That helps, just for clarity, since they are 10% stake right now. That $150 million is increment they have to invest to get to 17% beyond the 10% that they --

That's correct. That's kind of a good round number. And you are exactly right , there is a lot of assumptions there. Our game plan here is we are clearly aligned and are focused on growing this Company.

The bigger Enogex gets, the more cash that's going available there to redeploy as well. This has the potential, if we continue to execute like we are doing, to grow, very

Second part of that question, in my opinion, I think the JV is going very well. We appreciate the relationships we are having good discussions. They are contributing to our thoughts about our business and our growth.

Of course you can see that financially, the flexibility that it provides us and that's working very well. I would also just want to point out now that we are still very early in to this. And as Sean said, we want to accelerate the growth of the Enogex. And that's the primary reason behind the step we've taken. And so, that we are still in the process of building our capabilities to be able to execute on what we think a higher growth platform is, with ArcLight. And that involves expanding mostly on the labor side, and on our capabilities is driven a lot by that. So, we are burned a little bit of 2011.

Costs with -- continued to build out some capabilities in people, to handle the assets that we see coming on. As well as business development is an area that, prior, while we did some of that we did not really build up our capabilities in that area, which we are working on as we speak. You know, we are still early in to this.

We expect to really be able to, hopefully, step out of where our foot print is. We think ArcLight can help that, but we have building to do, and we both knew that,. Both being ourselves, or course, and ArcLight, that there were things we were going to have to do and it was going to take a while.

We are on path and on track to position ourselves for both of us to be successful.

That's great, Pete. As a follow up to, that does that make acquisitions more likely, and I think of less an asset acquisition since you would not get a lot of the capabilities you just discussed in that. But something more corporate to throw in to the JV. I'm just thinking how since you have to build those things and they take time. But the backdrop is your desire of accelerating the growth, is there a way to accelerate that build out?

I wouldn't actually read that into that. I mean we -- Enogex has a lot of capabilities right now. Areas where we purposely were not building up, like business development. We would have some capability, not enough to get to where we want to from a goal stand point. So, I wouldn't read anything that we're looking at corporate, which is -- the MLP market, predominately. And at a very high valuations particularly, but probably more on the asset side would be our focus outside of the footprint. Of course, if we can improve our position inside the footprint we would do that.

But now, are acquisitions more likely? I would hope given that with ArcLight, I think the market knows that we are well capitalized and we have been clear what our objectives are. And so, I would expect we would hopefully see more opportunities. But of course we're going to stick with -- we are not going to lower return requirements either. But anyway, that's my view on it.

That's great. And then lastly, just looking back to the utility, Pete, you mentioned the sort of scenario planning around environmental and the shutdown of Muskogee 3, just what's developing there in Oklahoma? And I know it's sort of relative to things that are happening at the federal level, certainly you don't have all the clarity you would need. But you mentioned some communications with the state and trying to work through these issues, and know you have regulatory and legal protection for recovery, but what's the state of play there?

Yes. That's a good question, As you know the state DEQ and OG&E and BSO agreed on our state of limitation plan as it relates to regional haze. Where we found that -- DEQ found. They're the one that determined what BART is, that you know, burning our low sulphur coal was BART for meeting regional haze requirements.

It is our belief, and I think the EPA has let it known, that they will not accept that. And we expect to have a federal implementation plan at some point in time from the EPA to the state of Oklahoma, probably rejecting our stated limitation plans. So, I think it shows that we are working with the state, here in Oklahoma and what we're -- So, in expectation of that and plus the expectation of the haps and mac rules, which as you know, are coming down the pike. Those are very important and they are not -- are health based, whereas regional haze is not. And again, that's a whole different area of regulation from different perspectives.

So, we are talking with state DEQ looking at all of these potential regulations that are coming. And we are looking and doing our studying of our fleet, and looking to see what we think is something that is best for our customers. As well as allow us to meet environmentally coming -- environment regulations and hopefully in a time frame that makes sense.

And I think hopefully, we would be able together with the state and interested parties here in the state, come up with a plan and present that to EPA and try to get something agreed to. So, that's sort of what we would like to accomplish. Can't tell you whether we are going to get there, but we are working on that and we will be working on that throughout 2011.

Thanks so much.

Your next question comes from the line of Greg Reese with Capital. Your line now open.

Hi, guys. Just a real quick question. Just want to know what gas price you guys are assuming in your frac spread assumptions for 2011.

$4.32.

Got it. Thanks, guys.

Okay.

Your next question comes from the line of Chris Shelton with Millennium.

Good morning, guys.

Good morning, Chris.

I just wanted to check on the -- I see the new rate based slide showing in here showing 7.8% CAGR and rate base, I guess, can you triangulate that with kind of your 5% to 7% growth rate. Is there financing we should assume that would bring that down, the earnings growth rate I mean.

Well, I think -- You are making the leap from rate based growth to earnings growth. And to the extent we are earning our allowed return, that would be a good proxy for earnings growth. I think what I was trying to show there was a very simple example that obviously assumed perfect regulatory timing and approval. As soon as it went into -- as soon as you completed a project it went in to rates, and you're recovering it at that point. There will be a little bit of lag there, Chris, that will probably be the bigger driver of what you are looking at. Does that make sense?

It makes sense, I guess I mean 7.8% is obviously well above the 5% to 7% growth. So, I guess the other thing would be on the financing side. I guess I assumed with the ArcLight JV that kind of the financing needs would come from that entity

Yes, and I would -- if I look at the utility. I'd think the utility from a capitalization standpoint with retained earnings is in pretty good shape. We haven't got that far out there as far what our total debt and equity needs would be for that. I think the other point that I would make as far as the 5% to 7%. As Pete was indicating, our earnings, as you know in the utility base, is really a step function. So, some years it's going to be larger than others. If we had taken this out to 15%, maybe it wouldn't be a 7.8% CAGR, it might be a little bit lower. It's going to move around a little bit. That was just a point in time designation that we made.

Okay, so the 5% to 7% isn't necessarily for the next three years per se.

It's a long-term growth rate.

Okay. All right, thanks for the clarification, guys.

Okay, Chris.

(Operator Instructions) Your next question comes from the line of Adar Van Gogh with ZLP. Your line is now open.

Hey, good morning, Adar.

Good morning, guys. Back to the CAGR question. I guess what we are trying to understand, given the 5% to 7% is a more of a long-term view, is it fair perhaps to view 2012 specifically, or certain years, as an aberrant or much more growthy -- because you may have new rates in effect or projects coming on line. I know at '12, you will have a full year of Arkansas and Oklahoma, it sounds very conservative.

Absolutely. That's a very true statement.

Okay. And can you actually talk about the Oklahoma rate case that you will be filing in June? What's the tester you will be filing on, what are your earned ROEs there versus your allowed?

Okay. Howard Motley is here. He can fill you in.

We will be using calendar a year 2010 test year. And right now our targeted application date is at the end of June, and under the Oklahoma statutes they process the rate -- general rate cases in six months. And so we should have an order by the end of December of 2011.

Okay. Do you can you tell us what your earned ROE's are there currently?

Right around 10%.

Thank you.

Your last question comes from Reza Hatefi from Decade Capital. Your line is now open.

Thank you. I just wanted to clarify that last question. In your '11 guidance, you're earning roughly 10% at the utility?

Yes, that's roughly the weather-normalized normal ROE in Oklahoma.

I guess what I did was, I took your earnings guidance at OG&E, of $2.15, then times the share count, and then just used a rate base on the slide 16. And I came up to ROE of about 8.8%. I'm trying to figure out what I'm missing here.

You are doing '11? You are looking at '11?

Yes.

I was giving you the ROE of Oklahoma weather normalized for '10. I think the other big point there is that -- of that rate-based slide, Oklahoma is roughly 85% of that; Arkansas is 10%, and that's below 5%, Reza.

Okay. So, it sounds like, just going back to the previous question, you're -- You are under earning in '11 as overall rate based ROE, and then with rate cases coming up '12, that provides that '12 growth, that --

Right. We have a -- we filed a general rate case in Arkansas to address the underearning there and we will be filing in Oklahoma by June of this year.

Got it. Thank you very much.

Thank you.

There are no further questions, I will turn it back for closing remarks.

Thank you operator. Before closing I would like to recognize the contribution of members who are making all this happen. Thank you for your continued interest in the Company, have a great and safe day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect