OGE Energy Corp (OGE) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the first quarter 2012 OGE Energy earnings conference call. I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question and a question-and-answer session. (Operator Instructions). To remind you this conference is being recorded for replay purposes.

I would like to turn the over to Mr. Todd Tidwell, Director of Investor Relations.

Thank you Keisha. Good morning, everyone and welcome to OGE Energy Corp's first quarter 2012 call. I'm Todd Tidwell, Director of Investor Relations and with meet I have Pete Delaney, Chairman, President and CEO of OGE Energy Corp.; Sean Trauschke, Vice President and CFO of OGE Energy Corp.; and Keith Mitchell, President of Enogex.

In terms of the call today we will first hear from Pete followed by an explanation from Sean of first quarter results and as always we will answer your questions. I would like to remind you that this conference is being webcast and you may follow along at OGE.com. In addition, the conference call and the company slides 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 we cannot guarantee forward-looking financial results, but this is our best estimate to date. In addition there is a regulation G reconciliation for EBITDA in the appendix along with capital expenditures. I will turn it over to Pete Delaney for his opening comments.

Thank you, Todd. Good morning and welcome to our call. For the first quarter 2012 we earnings of $0.38 cents per share compared to $0.25 in 2011 with higher margins and earnings at utility and Enogex. The increase at Enogex which driven by the investment associated with volume growth particularly in the processing business. Processing volumes grew 20% quarter-over-quarter, highlighting Enogex expansion, liquids rich-basins of western Oklahoma and the Texas panhandle. Enogex also benefited from insurance proceeds associated with the Cox City plant fire discussed on previous calls.

On utility side, primary earnings drivers are investments in the crossroads wind farm and transmission that benefits both customers and shareholders.

While the first quarter results show continued progress on several fronts defending Oklahoma profits one the those. As you recall key differences between our request and intervener's are the ROE requested and recovery of O&M expenses outside the test year. We are still waiting on the ALJ decision that while not binding on the Oklahoma commission does in our opinion influence decision making. We had expected that report would have been issued by this time. We may have underestimated however the impact of the state's cutbacks to the commission's budget. Meanwhile, we are hopeful that in a short period of time, a report will be issued. We will be working to bring this case to a conclusion and we will keep you posted as events unfold. This uncertainty on the case continues to overhang the market view of our future earnings. So today we are providing 2012 earnings guidance without the impact of the Oklahoma rate case. With expectations of an order earlier in the quarter we have previously declined to issue 2012 guidance for the utility.

Our consolidated earnings guidance for 2012 is $3.40 and $3.60 per average diluted share. Utility outlook is between $2.60 and $2.70 per share, and as you will hear, transmission is a big driver. The previously issued Enogex guidance is unchanged. While natural gas prices at a ten-year low in significant investor attention our plans are outlined on the last call are the same. We took prudent action earlier this year to adjust the Enogex 2012 capital expenditure and volume growth projections with the expected volume lower growth rate associated with the low price.

Our continued growth said the majority of our assets are located in rich, natural gas liquid spaces. In fact our 2012 capital plant at Enogex, was recently increased by $55 million as our management team secured meaningful dedications added to our portfolio that improves our earnings growth and additional value for shareholders. As always the commodity side moves through its paces and the operating environment continually changes around us. But a well positioned portfolio provides the ability to respond by shifting tactics by not requiring us to change our long-term strategy.

Utility plans remain on track apart from the wending rate case. Our transmission reliability expansion continues with $700 million in projects over the next three years. This does not include the conditional notice to constructs $250 million - $300 million of additional projects scheduled to be complete in the 2018, 2021 time frame.

Over the past week, we have completed two projects on time and on plan the sunny side to hugo line. Total cost of these projects was approximately %200 million. We are now beginning to realize meaningful earnings from our transition investment with projected 2012 transmission gross margin up $30 million over last year.

By the end of 2016 we are projecting $1.5 billion of transmission rate base, with over $800 million under jurisdiction. On the environmental side we are moving forward with plans for (unintelligible) activated carbon injection at up to five call units to comply with Casper and Mac and to comply with the not provisions that we agreed to. This will require approximately $450 million to be invested by the year 2017. The timing is dependent on legal proceedings underway. If no changes are granted by the current appeals OGE will have until may of 2013 to be in compliance with the Casper rule.

A short term compliance plans could include redispatch, low nots earners, purchasing credits, purchasing power or a combination of these. While subject to challenge, Mac rules have gone into affect and require compliance in three years with a possible one year extension. Compliance with the Mac rules for OGE provide primarily relates to mercury and acid gases. As I have mentioned activated carbon injection and the use of dry soda injection on a limited basis are expected to allow us to comply. However an extra year may be required to complete testing and installation.

As you know regional haze has the largest potential regarding investment and impact on our customers. Meeting the EPA's implementation plan would require more than a billion dollars of investment as opposed to the state implementation plan which finds low silver coal to be bark. On April 4, the Oklahoma attorney general and the OGE requested a stay with the temp Circuit Court of Appeals. We believe a legal brief filing a petition compelling, legal and technical reasons to satisfy the requirements for a stay. Based on previous timelines for similar issues we would expect a decision this summer.

We are proceeding with our initial engineering and design plans for scrubbers in order to comply with the fifth should our legal efforts not be successful. We recently announced the PSO settlement and principal says that the only low cost option for our customers to regional Hayes is for the federal implementation plan to be overturned and the Oklahoma state plan to go forward.

Phase two of our deployment as it relates to the installation of smart meters and targeted distribution and automation investment is in its third and final year. at this junction almost 625,000 of approximately 800,000 meters on our system has been replaced including 33,000 in Arkansas. These investments are part of a second phase covering the years 2010 to 2012 during which investment and operating expenses net of guarantee savings are covered under regulatory writer. Part of our deployment we have embarked on ambitious volunteer demand response programs seeking to enroll 40,000 customers with a goal of saving about 70 megawatts off our peak demand this year . We currently have over 12,000 customers enrolled. Success of this program is a critical component of our plan of not adding additional base load capacity until 2020. We are currently reviewing plans for a phase three starting in 2013 which will include an expansion of the voluntary demand program. At Enogex in the current price environment, the economics are difficult to producers in the leaner gas regions.

Enogex has long-term dedications in the leaner areas that extend for several years into the future when drilling will likely return. Enogex is well positioned with a large portion of our assets in the richer areas of the Woodford shell and granite wash areas. These highly profitable and competitive areas are driving the growth at Enogex. While these liquid-rich areas are very competitive, Enogex continues to win new business and increase market share.

In our 10-Q we announced a new long-term acreage dedication in a rich natural gas liquids plant in six counties in southern and central Oklahoma which require new gathering and compression investment. The 200 million a day wheeler and McClure plants are scheduled for completion in 2012 and 2013 respectively as the gas wall in western Oklahoma and the Panhandle are proven to be high in liquid content.

We experienced 2% gathering and 20% processing volume growth quarter over quarter and anticipate reaching our volume growth targets this year of 6% to 10% for gathering and at least 15% for processing. Enogex pool of acreage dedication is expanding and we look forward to adding more opportunities for growth in the near future.

We are turning it over to Sean and I want to mention the economics health of our service territory remains strong andthe March unemployment rates for the state are 5.3%, lowest in the nation and Oklahoma city's unemployment rate is 4.4%. The lowest in the nation for large metro areas even significantly ahead of the economic engine we know as Washington, D.C. that has an unemployment rate of 5.5%. Utility customer growth continues at 1% or 7,000 new customers per year an oil field and industrial sales are showing steady growth. However, low natural gas price impacting the state's tax receipts and hopefully oil production tax receipts will ramp up to mitigate the impact. Overall, smart grid implementation on practice on track. Technically our environmental compliance plans are in place and the cost estimates for various alternatives are known. The timing of expenditures continues to be in flux with legal proceedings pending.

I discussed several calls ago tight control of utility costs remains a priority to mitigate customer impact from future environmental compliance costs. Expect to be announcing on the second quarter call more specific timing of spending, as well as complying with Mac and Casper. Enogex continues to grow in terms of with market share, gathering and processing volumes and acreage rich dedications in key areas that provide the basis for future growth.

Our arc light partnership provides us capital that is needed to execute on our objective of positioning for significant growth and as a more substantial competitor with more base and diversity. This provides OGE Energy with more options in the future as we seek to maximize value. We continue to look at ways to produce sustainable value creation that withstands the test of time as opposed to short-term, but less sustainable gains. Now I would like to turn the call over to Sean to review our financial performance in more

Thank you, Pete, and good morning. For the first quarter we reported net income of $37 million or $.38 cents per share compared to net income of $25 million or $0.25 cents per share in 2011. The contribution by business unit on a comparative basis is listed on the slide.

At OG&E net income for the quarter was $12 million or $0.13 cents per share compared to net income of$ 6 million or $0.06 cents per share. Now looking at some of the key drivers. First quarter gross margin came in stronger as we saw an increase of $29 million or 14%. I will discuss those drivers on the next slide. O&M and depreciation was higher for the quarter. The increase was due to additional assets being placed in the service such as crossroads and smart group. We do have revenue offsets for both of these.

Net other income decreased nearly $3 million due to lower ABPC equity resulting from the completion of the crossroads wind farm. Interest expense was $5 million higher mainly due to the long-term debt issuance we completed in may of 2011. I would like to remind you that although earnings are up for the quarter compared to last year, the first quarter comprises less than 5% utility earnings for the year.

Now turning to first quarter gross margin, the utility performed well, despite the warmer than normal weather. There were two primary drivers for the increase in gross margin. First was the recovery various utility investments as I mentioned previously. This accounted for $24 million of the increased margin. Second was the recovery of transmission investments primarily from SPP customers which increased gross margin by $9 million. Major offset to these gains was the weather which lowered gross margin. If I look at that compared to normal whether I had a $5 million impact.

Like much of the country, the winter of 2012 was one of the warmest on record. 20% lower than last year and 23% lower than normal. On a weather normalized basis residential megawatt hour sales grew just over 1% while oil field sales were up 9%. Public authority was up 5% and industrial sales grew 4%.

Now turning to first quarter Enogex earnings, OGE's portion of Enogex increased from $0.19 cents in 2011 to $0.25 cents in 2012. Gross margin grew by $20 million or 19%. On the next slide we will look at the gross margin growth in more detail. O&M and depreciation increased $10 million due to higher costs to support system expansion and high levels of plant and service. I did want to touch on the gain on insurance proceeds from the Cox city plant fire which occurred in December 2010. We recognize $7.5 million of the gains from insurance proceeds in this final $7.5 million resolves the claim with our insurers. Lastly, the impact of Arclight's change in ownership resulted in $1.5 million variance quarter over quarter.

Now turning to gross margin for Enogex during the quarter, gross margin increased in all of Enogex's businesses with the exception of storage. The largest increase came from the processing business where processing volumes increased 20% quarter over quarter. Prices were mixed for the quarter as natural gas prices declined from $4.13 per MBTU to $2.80 per MBTU.

Natural gas liquid prices remain strong although the average price per gallon declined from $1.11 in 2011 to $0.99 cents per gallon in 2012. We saw record volumes in gross margins. for common sake Volumes increased 25% to 10 million gallons in the first quarter of 2012 compared to 8 million gallons in 2011.

Margins $18 million for the quarter, up $5 million or 38% compared to 2011. Gathering volumes increased 2% quarter over quarter. Finally transportation margins also increased, but were offset by a $4 million lower cost to market adjustment in the storage business. Consistent with what we saw with the Clinton plant I would also like to point out the new south Canadian plant and a replacement of the Cox city plant has increased system efficiencies and therefore resulted in our recovery of liquid. These new plants can recover nearly 100% of the heavier liquids and 90% of the ethane in which ethane recovery was approximately 65%.

Before moving on to your questions, I would like to discuss our consolidated and utility earnings guidance that Pete mentioned in his opening remarks. On a consolidated basis we are projecting earnings of $3.40 to $3.60 per average diluted share. The utility forecasted to earn $3.60 to $3.70 per share and holding company loss of $0.01 to $0.02 cents per share. The outlook for OG's portion remains unchanged at $0.80 cents to $0.95 cents per share.

Before going through the key details of the utility outlook, I did want to point out the guidance does not include any impacts regarding the pending Oklahoma rate case. As Pete mentioned we are well past the 180-day statutory time line, and we felt it was important for us to provide investors with more clarity concerning 2012 earnings. As a reminder, for every $5 million change in rate earnings are impacted $.03 cents a share and every 10-basis point change impacts the requested rate increase by $3million.

Looking closer at the utility guidance of $2.60 to $2.70 per average share, one of the main drivers for higher gross margin in 2012 compared to 2011 is the recovery of our investments for the regionally allocated transmission projects from the SPP. We are projecting $40 million of gross margin from these projects of which approximately $30 million is incremental compared to 2011. Under the incentive rate plan we allow recovery of and on our balances.

All of the revenues forecasted for 2012 are from SPP customers outside of Oklahoma and Arkansas. We did ask for recovery of the Oklahoma jurisdictional portion in our Oklahoma rate case. That equates to approximately $3 million of the revenue requirement. I would also like to point out we held O&M flat year-over-year with the exception of investments with direct revenue offsets.

And as you would expect, depreciation expense would be higher as we place additional assets in the service. Finally, if you look at the capital expenditure table on the 10-Q file this morning you notice the capital expenditure estimates 2012 through 2016 have been reduced by $285 million including $80 million in 2012. By lowering our capital spending we are helping to mitigate future rate increases to customers especially in light of pending environmental regulations. Once we have a final wait order we will update our guidance. This concludes our prepared remarks and we will now open it up for your questions.

(Operator Instructions). Your first question comes from the line of Brian Russo with Ladenberg Thalmann.

Hi. Good morning.

Hi, good morning. Brian.

Just on the utility guidance of 260 to 270, and based on your sensitivities, you guys asked for roughly $70 million. The staff came in flat. Let's just assume on a more normalized roe and you get most of your planned additions say $30 million of additional revenue, that equates to $0.0\18 cents of upside to your current guidance? There are no offsets there? You won't increase your O&M or reposition the utility once you received rate released?

Brian, this is Sean. The guidance excludes any impact of the wait order. And so our plan is something that we view at the utility that is sustainable . So I want to avoid speculating on what we would and wouldn't do. I think it is safe to say that the impact of the right outcome would be additive to the -- to our

So I guess my math is in line.

Yes, if your math was -- you said that $30 million is roughly $0.18 cents, yes.

And you mentioned you have cut back on your CapEx at the utility. Where are those cutbacks coming from, and why exactly are you pulling back on that?

Well, this is something we've been looking at for quite some time. We've been investing a lot of money and improving the reliability of our system across our footprint. And we recognize that we are going to have increased environmental expenditures coming down the road. And we are balancing -- we are trying to minimize the impact on reliability and customer impact with these future and environmental expenditures. This is not in any one particular area, but this is more efficiencies and rationalizations of some of the investments we are making.

Great. And just switching gears to Enogex, you have about a $0.15 cent range in your guidance assumption, even after what appears to be a strong first quarter 2012. Is there any bias toward the upside of the range or the mid-end of the range?

You know, it is the first quarter. I think we are comfortable right where we are right now, Brian. No bias at this time one way or the other.

And the CapEx profile a Enogex, have -- at Enogex have there been any other projects or is the CapEx similar to what we saw last quarter?

It has increased by $55 million. In Pete's remarks he talked about an additional acreage dedication for that, but the CapEx is increased by $55 million and maybe Keith can talk a little about that dedication.

Sure. There is a lot of activity going on in the rich areas around our system. And we were successful with bidding on one package. There are other packages, but at this point in time, we added in the CapEx for what we were awarded.

Okay and remind me, I think you got over a million dedicated acreages? Is that accurate?

Over the last year and a half, yes, there has been over a million acres that we have had awarded to us in dedications across our system.

Could you break that down by region?

Well, not to get too specific, but it is definitely western Oklahoma, Texas , That's where there has been a lot of development development. The granite wash areas and the woodford area is where most of the activity has been

And then lastly, we have seen a lot of activity in the MLP space and just in the midstream sector , particularly in your mid continent region. You guys have a lot of dedicated acreage. You have a very good partner in Arclight. What is the long-term strategy for Enogex and is an MLP arrangement something to be

Brian, our strategy really hasn't changed from the outset when we did the partnership was our strategy is to again as you noted we are grateful to be successful in the dedications that we are undertaking. You know the acquisition, the $200 million acquisition we viewed as important for us to help position in a great area. Of course Arclight's capital was helpful in that regard. And so we continue with our plans to continue to build that portfolio of the acreage dedications which as you know and you pointed out is the basis for the future growth of the company. We expanded the leadership team and we are doing everything to strengthen that company more and more as a stand alone entity. As you know, that provides us greater flexibility with which -- with our partner go down different roads in the future which one is under consideration would be a partnership. And obviously I talked a little in my comments about we are looking for to produce long-term sustainable value for shareholders. And so that's what our goal is and remains our goal.

Thank you. One last quick question. Are you involve in the Mississippi oil play at all?

We have been involved I would say in more of the eastern portion of that. That's a pretty large area, northwest Oklahoma, northern Oklahoma and into Kansas, but we have been talking to some of the producers in the area, and we certainly think we wil lbe successful in certain parts of that play.

Thank you very much.

As a reminder, press star 1 if you have a question. Your next question comes from the line of Andy Bischoff with Morningstar. Please proceed.

Good morning. Just one quick question for you. If you could -- once the decision is handed down, if you could maybe provide a regulatory time frame of which we could expect a decision on the rate case decision, if you can?

Well, after the ALJ there is probably -- the earliest would be after that period of time I think would be three weeks or so period, 30 days. You know, there is a two-week period for appeal, but That's -- again That's probably the minimum . There is no -- on the other side it could go on longer than

And there is really no indication on when the ALJ decision will come down?

We haven't been very good at predicting that over the last couple months. But we do believe -- we do have indications that it is in the near future.

Great, thank you.

Your next question comes from the line of Greg Reiss with Catapult. Please proceed.

Good morning. It is actually David Frank.

Hi, Dave, good morning.

Good morning. Question for you guy on the pso regional haze settlement. I was a little unclear from your comments earlier on, but is there a road for you to settle for some kind of similar compliance level That's more economic to the state? Or does this not have much application -- applicability toward your fleet?

I think it is the latter which it doesn't have much applicability to us.

So there is not really a cheaper option if you were to really comply with --

well, there is cheaper options and we have evaluated exhaustively a lot of those, and -- but unfortunately we don't believe that the EPA will entertain any of those cheaper options. in terms of settlement. Again we don't have -- I think the PSO is agreement and principal. Those are the basic terms. But there is always a lot of details that are important to work things out. But again we -- any type of settlement like that for us would put a lot of economic -- a big increase in rates on our customers.

And was I correct to understand that you would expect some kind of decision on this potentially this summer?

Well, let me walk through that a minute. It is probably worth while to do that. In my remarks I talked about a couple things. One, the low knocks portion we agreed with. When you look at the low knocks as part of our Mac compliance and Casper and Mac is more dsi and aci. That looks to us to be about a $450 million investment. And so we are moving ahead with our planning , and in the next call, we will layout more specifically the timing of expenditures for that $450 million. Now, as regional Hayes which is the much bigger number potentially, we believe that again our estimate would be that we would get a stay from the -- a stay decision would be made by the 10th Circuit Court of Appeals in July . And depending on what that decision is, obviously we will have an impact on what

And if they grant a stay, then --

if they grant a stay then ---

If they grant a stay, David, that starts the -- actually the five-year period then would start at the end of the litigation when the case is decided. So that decision could be -- would probably be in 2013. Various people tell you whether It is the beginning of '13 or the end of '13. Your compliance would be pushed back to '18.

And if they don't grant the stay, then you have to make some decision on complying by the normal time?

Yes. We are already January 27th, so we are already a couple months into that time. That clock is ticking and will continue to tick.

All right, great. Thank you very much.

You are welcome.

There are no further questions in queue at this time. I would now like to hand the conference over to Mr. Pete Delaney foreclosing remarks.

Thank you, operator. As always I would like to acknowledge our company's members continued hard work to make this quarter a success. I thank you for your continued interest in OGE Energy. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.