OGE Energy Corp (OGE) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 OGE Energy earnings conference call. My name is Shaquanna and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Todd Tidwell. Please proceed, sir.

Thank you, Shaquanna. And good morning, everyone. And welcome to OGE Energy Corp.'s fourth-quarter 2012 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.; 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 Keith with an update on the midstream business, and then an explanation from Sean of fourth-quarter and year-end results. And finally, as always, we will answer your questions.

I would like to remind you that this conference is being webcast and you may follow along on our website at OGE.com. In addition, the conference call and the accompanying 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 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 EBITDA in the Appendix, along with our projected capital expenditures.

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

Thank you, Todd. Good morning, everyone. Thank you for joining us this morning. We're pleased again to announce another year of solid financial performance. As you've seen in our release that went out earlier this morning, we reported 2012 earnings of $3.58 per share compared to $3.45 in 2011. And for the quarter, we reported earnings of $0.39 per share compared to $0.37 per share for the prior period. Higher earnings were driven by solid performance at the utility.

Contributions from new customer growth continues, adding approximately $12 million to our margins. This reflects a strong economy in our service territory and we expect that growth to continue. In fact, we've increased our sales growth estimate for '13 up to 1.5% from our historical norm of around 1%. Margins were also higher due to the completion of our three-year Smart Grid deployment at year-end, which was on time and on budget, and from the completion of the Crossroads Windfarm early in the year. Another main contributor was earnings from our investments in transmission, driven in part by our FERC order, which allows for cash earnings on our transmission construction work in progress.

At Enogex, earnings fell $0.08 from $0.83 per share to $0.75 per share. The decline in earnings was driven by our growth initiatives, which resulted in higher depreciation and interest expense accounting for $0.21 of the lower earnings. In addition, the increase of ArcLight's ownership percentage reduced earnings by another $0.05 per share.

On a more positive note, OG&E's portion of EBITDA increased 6% for the year, as gross margin increased $48 million, driven by higher volumes in our Gathering and Processing businesses, which grew 4% and 24%, respectively. These growth rates are in line with our guidance for the third quarter call. This volume growth offset significantly lower NGL prices.

In the past three years we invested in acreage, dedications and liquids-rich basins to secure long-term growth. We've also focused on operational capabilities to support realized and planned volume growth, and on managing through keep-whole processing contract expirations and convergence by renegotiating longer-term dedications under fixed fee processing contracts. We now have 2.5 million acres of long-term dedications, which we project will provide opportunities for us to invest for years to come.

During that same period, gathering volumes in our system have grown 20% to more than 1.5 trillion BTUs per day. And processing volumes are up over 1 trillion BTUs per day, an increase of 40%. Both are all-time record levels. With some of the commodity price's cyclical lows, we are emphasizing, more than ever, our discipline around capital deployment and operating costs.

In 2013, double-digit growth and gathering of processing volumes is expected to keep OG&E's share of EBITDA flat, offsetting the conversion of a keep-whole arrangement at year-end, and a projected 8% further decline in NGL pricing from the 2012 average price. After 2013, we believe the headwinds of keep-whole contract convergence and declining commodity prices will be mostly behind us.

As was in the case in 2012, higher depreciation, interest expense and a lower owner's percentage will cause reduction in earnings' contribution to OG&E. Depreciation expense is projected to increase another $14 million, as will ArcLight's ownership percentage go from 20% to 22%, as we continue to invest in the business. Consequently, our 2013 earnings guidance for Enogex turned $0.55 to $0.75 per share.

From my Chair, I remain excited about the opportunities ahead for Enogex and believe in our growth initiatives, and that it further positions us to maximize the value of our investment in Enogex. Growth in EBITDA and establishing clarity around future EBITDA growth are important elements of positioning us to execute on long-term public market options. You all know well our partnership with ArcLight has been about growing and adjacent positioning for the continued evolution of that business.

The utility is entering the final stages of our transmission buildout and our major projects should [be] completed by the end of 2014. You know, this multi-year initiative will add $1.5 billion of transmission rate base. The real-time cash recovery of the FERC portion of these projects has greatly improved the quality of our earnings, and has been a significant earnings driver of the utility.

We do have two more lines scheduled for completion in 2018 and 2021. While the bulk of the transmission projects in our service area will be winding down, we continue to evaluate alternative paths for continued transmission investment opportunities.

Our Smart Meter installation across our system is complete, and we continue to focus on delivering value from our Smart Grid investments. One of those areas of value is demand response. In our focus on the next phase of demand reduction, we were able to shave approximately 50 megawatts off our peak this past summer. Our goal is to reach 300 megawatts of demand reductions so the incremental baseload generation is not needed until 2020.

On the operating side, driving value from the data received from deployed technology is expected to enable us to provide better reliability and service while taking out costs. As our transmission winds down, our capital program will be increasingly driven by our Regional Haze Compliance plan. Oral arguments before the 10th Circuit Court on our Regional Haze lawsuit are scheduled for March 6, and we expect a decision by summer.

There is a range of potential outcomes, of course, but we'll be in a better position to get more specific regarding our compliance timeline once that comes known. However, the MATS compliance deadline draws near and decisions will need to be made. Our recent tests have confirmed the ability of using low-level Dry Sorbent Injection and ACI to meet required emissions levels. Matching our Regional Haze and MATS compliance strategy is optimal for us, since DSI can be used to reduce S02 emissions as well.

Our low NOx burner installation is underway on seven of our units, and we expect completion of that project by 2016 at a cost of approximately $100 million. Our $2.80 to $2.90 in 2013 earnings guidance for OG&E reflects continued growth. At Enogex, we remain focused on integrating our existing acreage dedications. Drilling rig activity remains consistent or higher than our earlier pro forma expectations, as these dedications are in very prolific basins.

Keith Mitchell will now provide a few comments on what we are seeing from producers in our area. Keith?

Thanks, Pete. As Pete mentioned, we remain focused on integrating our existing acreage dedications, now over 2.5 million acres, in very prolific basins of the Cleveland Tonkawa, Southeast Cana or the Scoop area; the Mississippi lime, and the Granite Wash area.

Drilling activity remains strong and our monthly well connects are exceeding expectations. Rig counts have increased 20% over the last six months in our dedicated areas. However, most of the rigs in the multi-zone areas of Western Oklahoma and Texas Panhandle are currently targeting the heavier oil pay zones. This is a result of higher relative returns and lower capital requirements.

The difference in volumes to Enogex of these different zones is significant. For example, as the Tonkawa well may provide an initial production rate of less than 500,000 cubic feet a day, compared to a well exploiting the Granite Wash zone, with initial production rate of approximately 6 million cubic feet a day and higher. That said, with the active and growing drilling activity on our dedications, our volume forecast for 2013 is still robust. And we are projecting strong growth in both Gathering and Processing for the next two years.

We are growing nicely into the premier Gathering and Processing assets we've constructed over the last few years. And our producers are not only continuing to be very active drillers in our area, but also acquiring new acreage that we will have the opportunity to serve. Also, the return of drilling more Granite Wash wells could significantly accelerate our volume growth projections. In the meantime, we remain confident in the ability of Enogex to deliver significant growth from this point forward.

Thank you, Keith. Before turning the call over to Sean, I'd like to say that, overall, we're pleased with our record 2012 consolidated financial result. And though our earnings were lower at Enogex, our belief in our long-term growth prospects for the midstream business has not changed.

Our consolidated earnings guidance of $3.35 to $3.60 reflects the lower earnings estimate of Enogex, offset to some degree by continued growth of the utility. I would note that OG&E's share of EBITDA is projected to be flat, as Enogex absorbs cyclically low ethane and propane prices in the conversion of a keep-whole contract at year-end.

Looking forward, volume growth should be the principal driver in gross margin with upside, as ethane and propane prices return to their cyclical averages. We remain committed to value creation for our shareholders and believe both businesses are well-positioned to create a good return for shareholders.

Reflecting that view, we are asking our shareholders to double the number of our authorized shares at the annual shareholders meeting in the expectation for the 2-to-1 stock split later this year. Our view is the stock split and subsequent additional shares outstanding would enhance our value proposition to investors.

Thank you for your interest in OG&E. And now I'd like to turn the call over to Sean to review our financial performance in more detail.

Thank you, Pete, and good morning. For the fourth quarter, we reported net income of $39 million or $0.39 per share as compared to net income of $36 million or $0.37 per share in 2011. The contribution by business unit on a comparative basis is listed on the slide. For the full-year 2012, we reported net income of $355 million or $3.58 per share as compared to net income of $343 million or $3.45 per share in 2011.

Looking first at the fourth-quarter results, at OG&E, net income for the quarter was $28 million or $0.28 per share as compared to net income of $20 million or $0.20 per share in 2011. Fourth-quarter results -- fourth-quarter gross margin came in stronger, as we saw an increase of $18 million or 7%, in part driven by strong sales in the commercial, oilfield, and industrial sectors.

Now looking at some of the other key drivers. As we have mentioned on previous calls, we are focused on controlling our O&M costs, which were basically flat for the quarter. Depreciation was $6 million higher for the quarter, and the increase was due to additional assets being placed into service, including two new transmission lines. Net other income decreased primarily due to lower levels of equity AEFUDC in 2012, and likewise, the increase in interest expense is due in part due to lower AEFUDC debt levels in 2012.

Consistent with what we provided in our earnings guidance, our income tax rate was 22% in the fourth quarter compared to 36% in 2011. This lower effective tax rate was due to federal and state renewable energy tax credits associated with the Crossroads Windfarm. Please keep in mind that these tax credits are a pass-through to customers by lowering our revenue requirement for Crossroads.

Now, turning to the full-year, at OG&E, net income for the year was $280 million or $2.83 per share as compared to net income of $263 million or $2.65 per share in 2011. The quality of our earnings was stronger in 2012 due to the real-time recovery of our transmission projects and our various riders.

Gross margin for 2012 came in stronger, as we saw an increase of $64 million or 5%. Weather, though positive compared to normal, was much less of a factor compared to 2011. I'll discuss gross margin on the next slide, but looking at some of the other drivers, our O&M costs increased $10 million or 2% for the year, and was higher in large part due to costs associated with riders that have a revenue offset. Said another way, net of riders, base O&M was basically flat year-over-year.

Depreciation was $33 million higher in 2012. The increase was due to additional assets being placed into service, including the Crossroads Windfarm, two new transmission lines, and implementation of our Smart Grid investments. The decrease in net other income is due to lower levels of equity AEFUDC in 2012, and the increase in interest expense is due to additional long-term debt issued in 2011 and lower levels of AEFUDC debt in 2012.

And finally, the effective income tax rate decreased from 31% in 2011 to 25% in 2012. And this was due to the federal energy renewable tax credits associated with the Crossroads Windfarm.

As I mentioned earlier, utility margins were up for 2012 and there were four primary drivers for the increase in gross margin. First, was the recovery of various utility investments, including the Crossroads Windfarm and Smart Grid. These increased gross margin by $54 million.

The second, our SPP Transmission Project created a positive gross margin variance of $29 million. Third, growth from new and existing customers added another $16 million in gross margin. We added nearly 9000 new customers to the system compared to 2011.

And finally, other items, including the new rates in Oklahoma and Arkansas, contributed $10 million in gross margin. On a weather normalized basis, residential megawatt hour sales grew at 1%, and the largest area of growth was in the commercial sector, which increased 2% in 2012. Partially offsetting these increases was milder weather compared to 2011.

Looking closer at weather, cooling degree days were 22% above normal, compared -- and compared to 2011, which was 45% above normal. The margin impact from fewer cooling degree days in 2012 compared to 2011 was approximately $45 million. Compared to normal, weather contributed $9 million of gross margin in 2012. Overall utility margins were up for 2012, despite a weather impact that was significantly lower than 2011.

Turning to fourth-quarter Enogex earnings, gross margin grew $10 million or 9% in the quarter, as Gathering volumes increased 11%, and Processed volumes increased 18%, despite lower natural gas prices and a 15% drop in liquids prices. Interest expense increased $3 million, in part due to higher debt levels used to fund our system expansion. Lastly, the impact of the increased ownership from our equity partner decreased earnings less than a penny, as ArcLight made a $45 million contribution in the fourth quarter.

I do want to provide a little more color on the fourth quarter, in which we have a handful of unusual items. You'll recall in the fourth quarter of 2011, we had a gain on the insurance proceeds related to the Cox City, which contributed about $0.02 per share. In 2012, we increased the depreciation rates on certain assets, and had a true-up with some natural gas and balances during the year. These items impacted Enogex's net income by approximately $0.06, attributable to OGE.

Turning to the full-year 2012 Enogex earnings, on an EBITDA basis, Enogex Holdings EBITDA increased by 14% to $292 million, and OGE's portion of Enogex EBITDA increased by 6% to $237 million. Gross margin grew $48 million or 11%. And I'll discuss gross margin on the next slide, but first I'd like to review some additional drivers for the year.

OGE's portion of Enogex earnings per share decreased from $0.83 in 2011 to $0.75 in 2012, due to the increased ownership in Enogex by OGE's equity partner, which averaged 19% in 2012 compared to 14% in 2011. Operating expenses increased $37 million for the year, driven by higher O&M, depreciation, and property taxes related to the system expansion and growth.

The $6 million variance for net other income occurred because we had a gain from the sale of the Harrah processing plant in 2011, and a non-cash charge for asset retirements in 2012. And finally, interest expense increased almost $10 million, due to higher debt levels used to fund system expansion.

Turning to gross margin, Enogex's increasing gross margin came from the Gathering and Processing businesses as they continue to show solid growth. Gathering margins were up, driven by higher fees and volumes associated with expansion projects. Inlet volumes were also up, as we had a full year of service from the Cox City and South Canadian plants, along with the addition of the Wheeler plant in 2012.

Processed volumes grew 24% and condensate volumes increased 30% compared to 2011. Processing volume growth more than offset the impact from lower NGL prices. NGL prices declined from $1.16 per gallon in 2011 to $0.89 per gallon in 2012. Natural gas prices declined from $4.08 per Mmbtu to $2.79 per Mmbtu. Condensate margins were $55 million compared to $41 million in 2011, and gallons produced were $35 million compared to $27 million in 2011.

At the transportation business, the primary factors for lower gross margin were driven by the events in the fourth quarter I mentioned earlier, and lower cross-haul revenues of approximately $2 million, due to the drop in natural gas prices. Overall, margin continues to grow, even as natural gas liquids prices have fallen more than 23%. We anticipate continued volume growth on our system, as we develop our existing acreage dedications.

Before answering your questions, I did want to discuss our guidance for 2013, which, on a consolidated basis, is between $3.35 and $3.60 per share. Looking at the utility, and assuming normal weather, we project earnings per share to be between $2.80 and $2.90 per share. At Enogex, our projection is between $0.55 and $0.75 per share. And at the Holding Company, we are projecting a loss between $0.02 and $0.04 per share.

Now, turning to look closer at some of the key assumptions for our businesses, at the utility, the drivers for earnings growth are going to come from the $375 million to be invested in SPP projects in the 1.5% projected retail sales growth. In addition, we received a notification from the Oklahoma Tax Commission in January indicating our Crossroads Windfarm was only entitled to a 1% investment tax credit.

Obviously, we were disappointed by this because the rules were changed after we committed the capital. Nevertheless, under the accounting rules, we may be required to book this one-time reserve of $0.05 in early 2013. And we have included that in our guidance assumptions. Therefore, on a weather-normalized basis, when considering investment tax credit reserve, the midpoint of our 2013 earnings guidance is about $0.11 higher compared to 2012.

Turning to Enogex, 2013 EBITDA guidance is relatively flat with 2012 actuals. The drop in commodity prices and our conversions to fixed fee were offset by an increase in volumes. Unfortunately, we were anticipating more volume growth; but as Pete mentioned, producers are targeting the Tonkawa zones. We were expecting some Granite Wash wells to be drilled. Still, all of these are within our dedications. To be clear, the rig counts are increasing, and volumes are still growing.

Back at the OGE level, earnings to OGE from Enogex will be down, due to the investments we are making to grow this business. The two drivers for the lower earnings are depreciation and the increased ownership interest by ArcLight. Continued volume growth is expected. And as we look at the business, it has been fundamentally -- it has a fundamentally different business profile. A good example of this is the contract mix. For 2013, a 10% move in NGL prices for the entire year is now a $5 million impact at OGE.

This concludes our prepared remarks. And now we'll open up the lines for your questions.

(Operator Instructions) Anthony Crowdell, Jefferies.

I guess a question on the Enogex guidance and maybe two parts of it. One is, you had some new processing plants coming on last year. I believe maybe you have a new plant coming on in 2013. I mean, what do you forecast with these volume assumptions? What do you forecast? Is that, like, I guess, capacity utilization of those plants?

And second, when I look at, like, Gathering and Processing volumes, I mean they're still healthy numbers but maybe some investors thought numbers could be higher. I mean, is it a case of -- you had mentioned maybe less drilling, but also -- or is there a function of it's just the [law of] large numbers that Enogex has grown to a part -- a size where double-digit growth is kind of getting very limited?

Yes, in your first question, we do have a plant coming online late this year -- the McClure plant. And we've brought on Wheeler in 2012. So, what happens is we are utilizing those plants, the newer plants, and then we free up capacity on some of our other older plants. And then as the volumes continue to grow, we'll continue to more fully utilize the capacity. And then when a new plant comes online, that will create more capacity for continued growth.

So, we're growing into these capacities that we're adding. So, we have good utilization on the newer plants. And then we'll back off on some of the older plants as the volumes grow, and then those will fill back up.

As far as the drilling goes, we are seeing strong -- strong volume growth. There's still a lot of drilling. As we mentioned, we're talking about 10% to 20% growth, both this year and next year. And again, if you'd just take that on our throughput, as Pete mentioned, we're over a BCF a day now in processing. So, 10% to 20% is basically another whole plant.

So, we do see that continuing. And even with the drilling that we're seeing, we are seeing less Granite Wash zones being targeted. Those zones are still there. They will be exploited at some point in time. And we do have long-term acreage dedications. But right now, producers seem to be more focused on more of the Tonkawa zones or the oilier zones, which we do get gas production from. That's why we still see growth, but not as much growth as we would see if they were drilling the Granite Wash wells.

So, that could switch pretty much at any time, as these producers look at their capital budgets and the zones that they want to target. Obviously, the Tonkawa wells being more oil is something that they're targeting because of just relative economics. Granite Wash wells are still very economic. But I think relative economics, they're choosing the Tonkawa zones because of the oil and are actually a lower well cost for those type of wells.

So, we still see a lot of growth. We're still projecting 10% to 20%. If we have some return back to the Granite Wash or even some return into some of these other areas that are leaner, then you could see that accelerate.

What do you think like -- what causes drillers to get back aggressively into the Granite Wash? Is it a natural gas price, I don't know, above $3.50? Is it an NGL price above $0.90 a gallon? You know, what causes the drillers to get back?

Because I know you had mentioned relative economics that are better on the Tonkawa -- in the Tonkawa zones versus the Granite Wash. But, you know, you had given out slides earlier through the year where the economics still look great in the Granite Wash. So I guess they're favoring the other zone. What caused them to get back in the Granite Wash?

Well, I think there's multiple factors. I will tell you that the Tonkawa wells are lower CapEx and more oil, so that's why relative economics are higher. There's still a lot of good economics in Granite Wash. And Granite Wash wells are being drilled, just not as many on the percentage basis as what we would earlier project.

That, I think, depends on the producer. You know, with commodity prices being down, producers are certainly looking at their capital budgets. And they're looking at their allocation of where they want to drill, so they're obviously going to prefer, in the queue, the higher return. Also, they can drill more wells if the well costs are lower -- Tonkawa, than they could if they're Granite Wash.

And so, some producers that maybe don't have some of those choices, that maybe all they have is more of a Granite Wash selection, they're still drilling Granite Wash. Other producers that have a lot of maybe Permian wells, Bakken wells, Tonkawa wells, they may not drill their Granite Wash zones for some time to come. And certainly, you know, the Granite Wash, higher gas production, more NGL barrel; the condensate is of a different gravity, not as valuable as, say, some of the oil produced from the Tonkawa.

So, it's all relative. And every producer is in a little bit different position. Obviously, with NGL prices depressed, and as well as gas prices down, that puts them lower in the queue, and therefore, takes a little more capital or a producer with less options to choose that zone.

Just because I'm not familiar with the geography in Oklahoma, I mean, is Tonkawa in the Scoop zone? You know, I think some E&P companies had maybe talked about that zone during this past summer. Where is the Tonkawa zones? Or what's in the Scoop --?

That's a good question. The -- you may recall when we did the acquisition from Cordillera as well as the acquisition of Gathering from Chesapeake; it's out in Western Oklahoma, Texas Panhandle. We kind of call it that greater Granite Wash area.

There's multiple zones there, and there are more zones than just the Tonkawa and Cleveland and the Granite Wash. There's other zones as well, which is really nice from the perspective if you've got a lot of production potential to come -- for many years to come, but as far -- they have also then choices as to which zones.

But that's the area that a lot of the Tonkawa Cleveland zones are being drilled. The Scoop or the Southeast Cana area is really more just the Cana Woodford. It's an extension of the Cana Woodford down further south and east. And that is an area that continues to be very strong. And we still see a lot of active drilling and additional potential acreage dedications down there.

Great. Thank you for your help, guys.

Ashar Khan, Visium.

A question -- you guys had mentioned that you would have a $0.10 pre-tax gain on the sale of assets in the first quarter of '13. Is that in the guidance? Or no?

Yes, it is.

Okay. Okay. And then, Sean, can you just go over what -- I guess I had more utility earnings. What kind of an ROE will the utility be earning at the midpoint of the range for the year?

In '13, in Oklahoma will be very close to its allowed return of 10.2%. Arkansas will be closer to about 6%. And obviously, the FERC transmission will be at that rate, under formula rates, at 11.1%.

That's lovely. Okay. Appreciate it. Thank you so much.

Sean Trauschke Okay. Thanks, Ashar.

Brian Russo, Ladenburg Thalmann.

So just to be clear, there's a gain at Enogex included in the guidance, and then there's a $0.05 negative for the reserve at the utility, in the utility guidance?

Yes, that's right. And you know, Brian, year-over-year, that gain -- we put that in there only because it occurred in January. We already know about it. But year-over-year, looking back to 2012, we had the gains from the Cox City insurance settlement too, so they kind of offset.

Right. Okay, understood. And the CapEx update. It looks like there's a little movement, I think, in 2015, utility CapEx, and then quite a bit of increase at Enogex relative to prior disclosures. I was wondering if you could just comment on the Enogex CapEx and what's driving that? And I assume that's why ArcLight is increasing their ownership. I just want to get a timing of when these new projects come online and when they can start contributing margin.

Yes, I think it's -- I'll let -- I'll start and then I'll let Keith fill in here but, as Keith was explaining, a lot of this is related to -- we do not have a new plant. The 2013 capital is really related to completing the McClure plant. We do not have an additional plant in there for this.

A lot of this is building out the gathering and compression for the West -- the Western Oklahoma and Texas Panhandle expansions. We've talked a lot about the Scoop area. We're deploying capital in that area as well. So, a lot of that is really gathering and compression, just to kind of build out the system. And I think Keith can you give you an idea as far as the timing of -- the time it takes to build compressor stations and plants and things like that.

You know, a lot of the capital, as Sean mentioned, we are completing our McClure plant, which we project to come online at the end of this year. So there's a final buildout of that throughout 2013. We are extending our header system down into the Scoop area to connect that area into our Western Oklahoma/Texas Panhandle processing header, because of the volumes that we're seeing. And then there's a lot of, just as these volumes come on, again, we'll add the compression and well connects and gathering systems to connect to these new volumes.

Okay, and is -- so, does this CapEx translate into volume growth that's supported in your '13 and '14 volume guidance assumptions? Or should we look at this investment as more of like a post-2014 type of contribution?

I believe that you'll see it in 2014. Some, for example, well connects, again, you're talking about kind of more current month-to-month compressor stations. You're talking about time frames of six months to 10 months. And then processing plants, you know we've been building McClure for a while, and we're going to finish that up this year. It's an 18-month type process. So, I think with all of these investments we're looking at for 2013, you should see margin contributions in 2014.

Okay, great. And could you remind us, what's kind of the 2013 utility rate base? And if you could just break that down into the FERC piece versus the retail piece.

Yes, Brian. So, at the end of '13, we would expect Oklahoma rate base to be about $4 billion. Okay? The Arkansas piece is probably just shy of $400 million, and the FERC rate base will be about $700 million. And that's at the end of '13.

Okay, so it looks like $5.3 billion in total?

Yes.

Okay.

And so, you know, the interesting thing, Brian, I think what's occurring here as we complete '13, this is kind of a big year -- another big year on the transmission front. Traditionally, we've spoken in terms of Oklahoma was roughly 85% of the total and Arkansas was 15%. What's really occurring now is, Oklahoma is about 80%, and by the end of the year, FERC will be about 15% and Arkansas will be about 5%.

Okay, great. And earlier, there were comments on exploring public options for Enogex. I was hoping you could elaborate on that a bit.

Yes, Brian, this is Pete. You know we are always looking at those types of things. And as we did, talked about the ArcLight. And our driver there, as you know, was to continue invest in Enogex, to continue to position for long-term growth and try to minimize, during that growth period, dilution to our shareholders.

And we think that if you can hear from our 2.5 million acre dedication, and the continued activity we're seeing in drilling, that we've accomplished that, and that we are focusing on earnings and EBITDA. We're talking about here on a sort of -- we're growing into our assets as we're making these investments. And the growth and volume growth shows up a little later.

But we think that we understand that what I mentioned was a clarity around EBITDA growth particularly, we look at public market options as important. We think we're establishing that. And we've been asked about MLP many times. Of course, you know we're not going to comment in any specificity, I guess, on that type of thing until we've really committed to preceding forward. But, clearly, we think we're moving in the right direction.

Just on the MLP option versus just an outright sale, is the sale still economical despite any kind of tax friction?

Well, what sale -- we, you know, any time you look at a sale, it's a typical different decision you make on selling any parts of your business. And, of course, you're going to have, depending on the tax basis, any tax associated with that. But that's in terms of the public offerings or public options that I'm thinking about, that was not one of the ones.

Okay, thank you very much.

Andy Bischof, Morningstar.

I was wondering if you could provide just a little clarity on ability to maintain O&M expense. In 2003 and beyond, you've been very good in being able to maintain O&M so far.

Sure. Are you referring to the utility?

Yes, the utility.

So. Yes, we've done -- the last couple of years we've done a very nice job -- the folks have done a very nice job managing this. And I will tell you the good news there is there hasn't been a -- one big item that's really moved the needle. It's just been a lot of continuous improvement efforts.

We're -- we have plans to continue that control of O&M, so that it does not exceed the rate of inflation going forward. And everybody is aligned and onboard in the Company, and that's how we're focusing it. There's not a specific action or effort we're undertaking. It's just, I think of it in terms of continuous improvement.

And a couple examples, we've made great strides in managing our inventory, managing just the number of contractors or headcount that we have on the system. We're always looking for improvements on how we run our plants and our retail business. So, I think it's a concerted effort all across the board and every little bit is contributing.

Thanks. I appreciate the thoughts.

Chris Ellinghaus, Williams Capital.

Sean, you said something about weather versus normal in '12. Did you give a number for that?

We did. So, you know the weather impact in 2012 per normal is about $9 million of margin. Okay? The issue there is -- remember how hot it was in 2011, Chris?

Right.

It was probably $45 million of margin difference versus '11, because of just the extreme heat we had in '11. It was favorable to normal, but less than '11.

Okay. And then on the Enogex tax rate, it looks like the last couple of years you have had a more below -- well, it's been more in the 30%, 33% kind of range. What do you see in 2013 that brings it back up to the more typical 37%, 38%?

I guess, Chris, I'm -- help me here. I'm a little confused. I think we've been in that kind of mid to high-30 range the last couple of years at Enogex. (multiple speakers)

I'll have to take a look at that again.

Okay. All right.

And then, what are you seeing in the OG&E growth front that gets you more into the 1.5%?

You know, we had -- the fourth quarter, we began seeing significant growth in the commercial segment as well as the oilfield; some industrial, just existing customers, more demand. And we've had some econometric models reviewed, and we've been looking at that. And so, based on what we saw in the fourth quarter and what they're projecting, we're seeing more growth in those specific areas.

Okay. Is the oilfield push a big component of that?

Yes.

Okay. All right, thanks a lot.

I mean -- hey, and Chris?

Yes.

Your tax question, I'll have Todd follow-up with you, but that may be -- we may be getting tangled up there on the minority interest.

Okay, great.

So we'll circle up with you.

All right, thanks so much.

Thanks, Chris.

Anthony Crowdell, Jefferies.

Just a quick follow-up on Enogex. You guys are taking a pre-tax gain. What are you selling?

No, we already sold it. (laughter) So, when we -- back in January, we put out an 8-K announcing that we had converted a contract to a fixed fee agreement. Along that -- along with that, we had also -- we had picked up additional -- some acre dedication in a longer term. But one of the other pieces of that is we actually sold the low-pressure gathering system to this party and we recorded a $10 million gain.

Okay, great. (multiple speakers)

(multiple speakers) We announced it in January -- sorry.

Got it. And so, if I'm just thinking of 2013, you have a nickel loss nonrecurring loss in first-quarter, due to, I guess, some tax related to transmission. And in first-quarter, you're going to have a $10 million gain, but that's Enogex, you guys, whatever -- whatever your percentage is of that. Is that accurate?

Yes. Just to be clear, the $0.05 reserve we're taking is related to investment tax credits associated with the Crossroads Windfarm. In short, there, the investment tax credit is basically we're allowed to take 2% for five years. And we received a notice from the Tax Commission in January that they reduced that to 1%. So, that's the issue there.

On the gain, the $10 million gain, again -- the 5 million -- $0.05, that's an after-tax number. The $10 million gain at Enogex, that's a pre-tax number.

And is that -- that's Enogex portion; that's not OGE's portion, right? That's all of Enogex, right?

Yes. That's our share.

Okay, got it. So it's roughly $0.06 positive there, a nickel negative? (multiple speakers)

But let me back -- I think I got -- I think we're talking past each other. The $10 million was the total gain on that. Our share of that would be about 80%.

Got it.

But that's a pre-tax number.

Perfect.

Okay.

Thanks again, Sean.

Thanks, Anthony. See you, bud.

[Bao Chan], [Italian Capital].

Just a quick question on the transmission. In transmission projects kind of on the regional basis post-'14? I know you kind of talked about it in the past that there are some other things. I know you're only showing the committed and known projects, but how about some other ones that maybe in backlog, if you want to call it that?

Right. So we've been -- we've received two conditional notices to construct from the SPP for a couple hundred million dollars for two lines coming into service in '18 and 2021. We responded to those. We will build those. There is some -- obviously, with FERC order 1000, you know those were conditional notices until that all is resolved there. But we're -- we'll probably begin deploying capital in the '16/'17 time frame.

Okay. And one other question just regarding the parent Holding Company expenses. Anything driving that in particular --?

You know, we -- Bao, we have $100 million of debt at the Holding Company at 5%. And that's a lot of it.

Okay, great. Thanks.

All right? Thanks, Bao.

[Stephen Hong], [Kaufman Capital].

A couple of quick things here. On TNS, can you help us understand why it's declining earnings at transportation storage? And is that due to recontracting lower prices? Or -- and how should we be thinking about 2014?

Okay, Keith, do you want to talk a little bit about '13?

Sure. I think that, you know, back to your first question, we had some cross-haul in '11 and some positive things in '11 that we didn't see occurring in '12. I think for '13, we still see things relatively stable at TNS as it applies to transportation.

Storage margins are down a bit. I'm sure you've seen storage spreads are challenged. So we see it down a bit for '13. But you know relatively flat as far as the total segment.

Again -- and Stephen, just maybe there's a bit of geography going on there too. You recall we used to report a Energy Resources segment there. That was really our long-term transportation business where we took -- had demand fees on those lines. We've consolidated all of that into this segment at Transportation Storage. So, there is -- we have demand fees, and because of the low natural gas prices, not really any basis. We have demand fees around $7 million or $8 million that we're really not able to recover.

Okay. And then can you help us understand your -- last year, we had a little confusion on what you were using for NGL pricing in your guidance, because you had the rejection in the second half of the year. Can you help us understand the $0.82 that you're using in the guidance today, are you assuming rejection of ethane for the full year, and that composite includes no ethane at all? Because ONEOK, for example, uses $0.66 NGL composite. And I know everybody's different, so can you help us understand what your $0.82 is?

Sure. So we have assumed ethane rejection for the entire year. However, there is a little bit of ethane in that margin there. But we have assumed rejection for the year.

Hey, Stephen, this is Todd. The $0.82 is derived from standard barrel, even though we're going to be in rejection all year. So, it does assume about 47% ethane, even though we're going to be in rejection. So, the $0.82 pricing is based as if you were in full recovery.

I saw the ONEOK's $0.66 yesterday, and I think their barrel composition is a little bit different than ours. And that's why their price is lower.

Right. And that's why I just wanted some clarity. So you are assuming ethane -- this is a normal composite barrel, even though your rejection for the whole year?

Yes.

That's correct.

And your rejection is for both Conway and Bellevue?

Yes.

Okay, great. Thank you.

Thanks, Stephen.

[Zach Ultang], [Blue Star Asset Management].

This is actually [Suchi Tan] from [Poliasni Asset Management]. Just curious about a few things. First, in terms of your CapEx. Does that include your Scoop CapEx spending in the next few years?

Yes, it does.

I mean, I was thinking about the acreage dedication that you guys have. Is it like -- isn't it kind of conservative to think about like the CapEx spending for the [I think] about $250 million every year from ['14-ish] going forward?

Yes. That includes our buildout of Southeast Cana, the Scoop area. We certainly have included in '13 our completion of the headers that we need as well as compression and well connects. We will then evaluate what we need to spend in '14 and '15, as we continue to see those volumes develop and we see the need for additional capacity. So, we haven't necessarily included capital that may be needed, depending on the rate at which that develops.

Right. And then when I think about the financing for all this CapEx, I think you guys have been spending like [$0.5 billion] every year in the past two years. And it seems like kind of to keep this -- how should I think about your message in terms of financing going forward?

Yes, so for 2013, the way we're looking at it, if you think EBITDA is just shy of $300 million; CapEx is $455 million. We'll have some minimum distributions coming out of Enogex. We're probably looking to -- we financed a lot of this with debt in 2012. We will rely on some contributions in 2013, and we forecasted around $100 million from ArcLight in 2013.

And we -- the way we approach that is we do that on a quarterly basis. It will not come in and just sit there. We want to make sure that the money actually does go in and gets invested pretty quickly. And then depending on the outlook for 2014, we'll make those financing decisions at that time.

Does that mean ArcLight will increase the share in Enogex?

Yes. They would move from where they are today at about 20% to 22%.

Okay. Is that (multiple speakers) --

That's our guidance. And as we move through the year, we'll adjust that accordingly.

Got it. Is that going to keep increasing going forward, as you keep spending in the midstream business?

Well, certainly to the extent that we need additional funding to support these growth initiatives, their ownership interest will increase. But, as Keith talked about, we've been adding a new processing plant each of the last three years. And the time frame for that's about 18 months. So now that those plants are coming into service, we would expect that we would have more real-time recovery of those expenditures and may not need as much in the future.

Okay, all right. Thank you.

I would now like to turn the call over to Mr. Pete Delaney.

Thank you, operator. In closing, I'd like to thank -- take a moment and thank the men and women at OGE Energy for their hard work and dedication, and service to our customers and shareholders. I would like to thank each of you for your continued interest in OGE Energy. And have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.