OGE Energy Corp (OGE) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 OEG Energy earnings conference call. My name is Kathryn, and I will be your Operator for today. At this time, all participants under a listen-only mode. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Todd Tidwell, the Director of Investor Relations. Please proceed, sir.

Thank you. Good morning, everyone, and welcome to OEG Energy's first quarter 2013 earnings call. I'm Todd Tidwell, Director of Investor Relations, and with me, I have Pete Delaney, Chairman, President and CEO of OEG Energy Corp; Sean Trauschke, Vice President and CFO of OEG 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, finally, as always, we will answer your questions. I would like to remind you that this conference is being webcast and you may follow along on our website at OGE.com. In addition, the conference call and accompanying slides 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's a Regulation G Reconciliation for EBITDA in the appendix, along with projected capital expenses. I will, now, turn the call over to Pete Delaney for his opening comments. Pete?

Thank you, Todd. Good morning, everyone, and thank you for your continued interest in the Company and joining us this morning. Before discussing the quarter's results, I want to discuss our Midstream joint venture with CenterPoint that closed yesterday. We are very pleased to be able to close in less than 50 days from announcement, somewhat ahead of plan, but we are anxious to move ahead to begin to capitalize on the opportunities identified.

The integration planning teams have been meeting for several weeks, and while their work will continue on, the focus will be expanded to the implementation of the integration and filing the S1 for our initial public offering. So, you can appreciate, with the transaction closed, much can be accomplished with our combined resources now being able to talk about serving customers, and pursuing commercial opportunities in the marketplace. We also understand leadership is critical. Our process to select the CEO and CFO of the joint venture is well underway, with external and internal candidates involved in the search. Work is also progressing on filling other key positions.

We are sensitive to the balance between conducting a thorough process to get the best candidates in place, and moving expeditiously to have leadership in place. In addition, while the partnership's leadership team is being assembled. Greg Harper and Keith Mitchell are working closely together as co-leaders of the partnership, each continuing to have authority over former CenterPoint Energy and Enogex Midstream operations, respectively.

As you know, prior to HSR approval, our discussions are limited to integration planning, as opposed to determining additional commercial opportunities with new or existing customers. We, now, are in a position to work together as teammates, as opposed to potential competitors. We are very excited about the future of the Midstream joint venture with the increased geographic reach, financial strength, and complementary capabilities along the Midstream value chain. Now on to the quarter.

As you have seen in our release, that went out early this morning, we reported first quarter 2013 earnings of $0.23 per share, compared to $0.38per share in 2012. Our earnings, while lower quarter over quarter, are in line with the guidance we provided for 2013. Our 2013 earnings guidance remains $3.35 to $3.60 per share, without any adjustments for the new Midstream joint venture.

The utility earnings reflect quarter over quarter. The fundamentals of the utilities business remains strong with customer base continuing to grow, supported by a robust service economy. OG&E reached a milestone this quarter, surpassing the 800,000 customer mark. While weather was positive for the quarter, this was offset by a one-time, $0.05 reserve taken for reduction in Oklahoma income tax credits related to a windfarm.

You will recall, we mentioned this on the fourth quarter call and is included in our guidance. Our transmission spending on our Southwest Power Pool project drops next year, from recent years, marking the completion of the last large transmission project of a multi-year, $1.5 billion transmission program. We have received notices, however, to construct two additional lines for, approximately, $300 million, with construction starting in 2016. Looking forward, we are evaluating opportunities for OG&E under FERC Order 1000 competitive rules to build and own additional transmission in the Southwest Power Pool.

As you may know, the rules for competing have not been finalized and much remains in flux. We hope to leverage off our substantial experience to bring additional opportunities to OGE Energy. On the utility front, we continued to execute our plan of leveraging off our Smart Grid platform to create an improved customer experience through improved interfaces, interactions, and operational effectiveness that results in, among other things, greater reliability. Our demand response efforts are spear headed by our SmartHours program, which is projected to have some 80,000 customers enrolled for this summer's peak.

The success of SmartHours is integral in allowing the utility to defer incremental base load generation until after 2020, and while scoring very high in customer satisfaction. Another important initiative is the comprehensive work underway in the operations area, related to cost performance driven by ideas from our members in the field. Like other utilities, we have significant retirements in the future, and are implementing changes that we believe should allow us to be able to be more effective while maintaining quality.

As you saw from the quarter's financials, operations and maintenance costs were roughly flat year over year. While there are many reasons for this result, one metric track is headcount, which is 6% lower than a year ago. These efforts are to protect the customer bill, given future cost pressures. Speaking of costs, we continue to wait on the [regional Hayes] ruling from the Tenth Circuit Court, that ruling is expected sometime this summer. The court decision will be pivotal to our next steps, either moving ahead with scrubbers, to waiting for the EPA to start the process over again. As you know, we will have five years to comply with the regulations once the final regulatory is issued.

In March, the utility was notified by the Department of Justice that it was prepared to initiate enforcement litigation regarding the EPA's notice of violation on the new source review, pertaining to OG&E's coal plants. This is similar to what the EPA has asserted in other cases regarding the permitting the standard maintenance and repair to coal plants. It's our strong belief that we have not violated the federal Clean Air Act. As always, we will keep you posted on events as they unfold. Turning to the regulatory front, in Oklahoma, we do not, again, have a [general rate case] slated for any time in 2013.

Our base capital expenditures are close to depreciation levels and we are aggressively managing our costs, as you heard, in order to negate any need for rate increases. Arkansas regulatory lag is very much an issue that results in an unacceptable rate of return on our investments. We are looking at ways, again, to reduce that lag through riders or formula rates. Good news is, this past month, the Arkansas Commission granted a recovery of costs associated with the Crossroads Windfarm back to the August 2012 filing date. We are working with staff on similar recovery mechanisms to reduce lag.

At Enogex, earnings fell $0.13 from $0.25 a share to $0.12 a share. As you know, our guidance was for lower earnings at Enogex and we expect to meet our guidance for 2013. During the quarter, the first quarter, we realized record volumes in gathering and processing business. Gathering volumes grew by 15%; processing volumes by 16%; and, condensate production by 20%. This resulted in increases in the gathering margin, which was more than offset by a drop in processing margin, due to last year's key whole contract conversion and lower prices.

Transportation margins were lower due to numerous factors, most of which is expected to be reversed by year end. In this environment, our focus on cost control, and efficient execution of our growth initiatives, remain key to our 2013 results. Sean will discuss our outlook in more detail. Looking ahead beyond 2013 for Enogex, the [$200 million a day]. McClure processing plant will be in process at the turn of the year, as we continue to build out the infrastructure required in Western Oklahoma and the Texas Panhandle.

The Southeast [Cane-up] region is providing robust growth to our system in the prolific scoop play and we are bidding on substantial acreage dedications there. Even without the new dedications, if the volumes continue to grow at this pace, we may need additional processing facility towards the end of 2014. We do expect to win additional dedications with our excellent field operations and customer relationships, combined with a well-positioned system. While year-over-year comparisons will continue to be impacted by cyclically-low ethane and propane prices, and the conversion of a major key whole contract, looking forward, volume growth should be the principle driver in gross margin.

We do expect more upside than down side to commodity prices. The partnership with CenterPoint Energy's Midstream business substantially changed the nature of OGEnergy's investment in the Midstream industry. These transactions creates a geographically-diversified, scaled Midstream business, that in our opinion, would be a premier, maximum partnership investment; such as we have been working to create with the Enogex ArcLight partnership. While much work is in front of us, this partnership has greater opportunities for our customers, members and, of course, our shareholders. Now, I would like to turn the call over to Sean. Sean?

Thank you, Pete, and good morning. For the first quarter, we reported a net income of $23 million, or $0.23 per share, as compared to net income of $37 million, or $0.38 per share in 2012. The contribution by business unit, on a comparative basis, is listed on the slide. Although quarter-over-quarter results were lower, both businesses are on plan for 2013, and we'll discuss guidance later in the presentation. At OG&E, net income was $13 million, or $0.13 per share, as compared to net income of $12 million, or $0.13 per share in 2012.

First quarter gross margin came in stronger, as we saw an increase of [$11 million], or 5%. I will discuss gross margin in greater detail on the next slide, but first, I want to discuss some of the other key drivers. We are focused on controlling our O&M costs, which are lower for the quarter, and as we have mentioned before, we are projecting O&M to be relatively flat in 2012. We are on that plan. Depreciation and property taxes were higher for the quarter, as a result of additional assets being placed in service throughout 2012 and through first quarter of this year. Net other income declined, primarily due to revenues associated with the Guaranteed Flat Bill program, as a result of more heating degree days compared to normal.

Income tax expense was [$12 million] in the first quarter, an increase of, approximately, [$9 million], due to the one-time reserve associated with the Oklahoma investment tax credit, we told you about on the last call, as well as higher pretax net income this quarter. Now, turning to the utility, margins were up for the first quarter of 2013. There were three primary drivers for the increase in gross margin. First was an increase in wholesale transmission revenue of [$10 million].

The increase was primarily due to [C whiff] recovery for specific SPP projects. Second, the weather had a gross variance margin of [$9 million, and eating days were 30% higher compared to 2012. Compared to normal, weather contribute [$6 million] to gross margin in 2013. And, finally, customer growth added another [$3 million] in gross margin. We added over 9,000 new customers to the system, as compared to the first quarter of 2012.

And on a weather-normalized basis, megawatt hours grew nearly 1%, with the largest growth coming from residential and commercial sectors. Partially offsetting these increases was the contribution from riders, which were placed in the based rates as a result of Oklahoma rate case. Revenues previously collected, evenly throughout the year in riders, are now collected based on our load curve, which is heavier weighted towards the summer months. Turning to Enogex, OGE's portion of earnings per share decreased from $0.25 in 2012, to $0.12 in 2013, and our share of EBITDA fell from [$66 million to $49 million]. One of the primary drivers for the decline was gross margin, which I will discuss on the next slide, but, first, I would like to discuss some of the other drivers for the quarter.

Excluding the gain on insurance proceeds, total operating expenses increased by [$8 million] for first quarter of 2013, as compared to 2012. The primary reasons for the increase were increased headcount to support business growth, and higher levels of depreciation and amortization relating to additional assets being placed into service. Turning to gross margin, during the first quarter of 2013, Enogex's gross margin was [$19 million] lower, compared to the same period in 2012. Volumes and gathering and processing were at record levels in the quarter, as volumes increased 15% and 16%, respectively. However, processing margins fell, primarily due to lower NGL prices.

From $1.30 compared to $1.50, excluding ethane. In the previously-announced contract conversion of a major customer from keep whole to fix fee. In addition, the basis differential between Conway and Mt. [Bellevue] has narrowed considerably. We are seeing a current spread of about $0.04, and for 2012, the average spread was closer to $0.23. This translated into a marginal reduction of about [$9 million] for the quarter. Condensate volumes were at record levels, as they increased 20%, but gross margin remained flat, as prices declined from $2.17 per gallon, to $1.97 per gallon. This was partially offset by higher gross margins and gathering, due to the record volumes. Gross margin also decreased for the transportation and storage segment by [$4 million] for the quarter. As compared to the first quarter of 2012, the decreases were primarily due to an 18% decrease in volumes and lower natural gas sales. Now, turning to guidance. As you know, the majority of the utility earnings occur in the second and the third quarters, and assuming normal weather, we are comfortable with our current guidance. At Enogex, we continue to see strong volume growth in our gathering and processing businesses and we believe that continued volume growth for the balance of 2013 will allow us to meet our guidance projections.

Volumes continue to grow, not only compared to the first quarter of 2012, but also since the end of the year, as volumes were up 1.3% in gathering, and 1.9% in processing. We anticipate volume growth to continue based, in part, on drilling plans provided to us by some of our largest customers. We continue to face the natural gas liquids pricing headwinds, but our locations and key basins has helped us to weather the downturn in commodity prices, as have our fixed fee contracts.

Before turning to your questions, I did want to reiterate our guidance for 2013 as unchanged for both of our businesses. We still project consolidated earnings between $3.35 to $3.60 per share. This excludes the impact of the joint venture transaction with CenterPoint. To be clear, we are confident that this transaction will be accretive to OEG earnings in 2013. Now that we have closed, we can begin working through the accounting treatment of the transaction, and the integration teams are able to put our plans together to realize the full potential of this partnership.

Our plan is to provide updated guidance on the second quarter earnings call, once we have put together the detailed forecast of the combined entities. We understand you are anxious to have numbers for your models, but we want to provide you with meaningful forecasts for the combined entity, and the corresponding impact to OEG. This concludes our prepared remarks. With that, I will open it up for questions.

Thank you, ladies and gentlemen. (Operator instructions.) Please stand by for your first question. The first question is from the line of Bryan Russo from Ladenburg. Please go ahead.

Hi, good morning.

Hi, good morning, Brian.

When can we expect the S1 to be filed?

Brian, I think the simple answer, as soon as we can. We want to get that done as soon as possible. I think there's a handful of things we have to get done before that, and, as you know, we're somewhat limited, prior to closing, what we're allowed to do. Both entities, we're still competitors, so we weren't really able to begin working together. So, the first thing we were going to be doing now is, really kicking off these integration teams. We have done some high-level integration work, but now they are going to dig in. We also have to create audited financial statements for this entity. As Pete mentioned about the management teams, we will put the management team together, and lay out the forecast. We're going to do this as quickly as possible, but there's still some work to be done.

Understood. And can you just remind us of your gathering and processing, and volume growth outlook in '13 and '14?

Yes. Our guidance was 10% to 15% this year. Can you hear me, Brian?

Yes.

Okay. Our guidance was 10% to 15% this year, and 5% to 10% next year.

Okay. So, it looks like you are tracking at the high end of that?

We're good with the guidance.

Okay. Are you able to quantify the margin impact from the keep whole contract that was converted to fixed fee in the first quarter?

Sure, it was about $8 million of margin.

Okay. Great. And is the $300 million of incremental transmission spend, is that included in the projected capital expenditure slide?

It is in our CapEx table in the Q and the K, but we don't begin investing those dollars until '16/'17.

Okay. And correct me if I'm wrong, but it looks like the Enogex CapEx has increased quote increased quite meaningfully in '14 and '15? Can you just comment on that?

I don't believe it has, Brian, from what we put out in the K.

Okay. Okay. That's all I have. Thank you.

Okay. Thanks, Brian.

Thank you. The next question comes from Sarah Akers with Wells Fargo.

Hey, good morning, everyone.

Hey, good morning, Sarah.

Can you talk about the cash benefits to OEG of the new structure and, kind of, potential dividend strategy for OEG, as well as the ability to fund regional Hayes CapEx?

Okay. Okay. So, Sarah, a couple of things happened at closing. First off, we were probably, the day before closing, as all of the accounts settled, we did receive kind of a near-term cash benefit as the shore-term borrowing was probably, in round numbers, about $730 million. Today, it's about [$600 million]. Going forward, obviously, in an NLP structure, you will have distributable cash coming out of the business. So, Enogex will be -- or this new venture, I shouldn't say Enogex, but this new venture will be a source of cash where, historically, it has been a use of cash. So, we will have a lot more cash flow coming into the business. A lot of that will be driven on the forecast of the new entity, as well, as we finalize the accounting treatment of that and determine, at the entity, whether there will be any step-up in basis and things like that. But, we do expect there will be significant cash flow coming out of the business, and if we did go down the path, coming out of regional Hayes, that we had to invest in scrubbers, or something like that, that, certainly, would be a source of cash to mitigate, or eliminate, any equity needs for the utility. Then, as far as the dividend, I will let Pete tackle that one.

Yes. Sarah, from a dividend standpoint, one of our goals associated with this transaction, and as Sean talked about, would be for it to be cash flow accretive to OEG Energy, relative to our standalone case. We believe that will, in fact, be the case. As you know, we continue to increase, and have in past years, our dividend growth rate. We have our longer-term goals of 60% of earnings on our dividend payout, but. Sean also said we, now, are able to work very closely, as we are now closed, and getting our detailed financial forecasts, and would like to get some more clarity on environmental, but I hope you understand and have seen that we are, of course, dedicated to deploying our capital where we can get a good return for our shareholders or, if not, give it to shareholders. So, we will continue on with that commitment.

Great. That's helpful. And, then, on electric transmission, it sounds like you are looking at opportunities outside of the OG&E footprint. Is this the case, and should we expect the formation of a separate transco to pursue these opportunities?

You know, yes. I talked about outside of our footprint, that's correct. You can tell from our $1.5 billion of transmission projects we've got a lot of experience in the Southwest Power Pool, working with the Southwest Sower Pool, and building in this region. We've been studying the opportunities we may have, under the competitive rules, which are still being developed, to compete for additional projects. We continue to study that and, of course, we don't think that all of the valuation of the winner will be based on price, but, of course, we've got to look at our ability to manage large-scale projects, to do them efficiently, build them to, perhaps, different standards than we have of our system. The cost of capital is also important in that, and, so, as we evaluate, we are taking steps internally for what we think internal capabilities will be required to compete, but, again, depending on how the ultimate rules come out, we would finalize our strategy. I think it's premature for us to say that we would be creating any separate transco or entering into any partnerships at this time; but, we are giving it a hard look.

Great. And, then, last question, I'm not sure I heard this correctly. Did you say that you see a need for additional processing capacity at the end of '14?

Keith?

Yes. As we look at our volume growth, and continued drilling, we try to look ahead and plan when we might need additional capacity, and, right now, that would look like towards the end of '14, where we would have additional capacity over and above our current buildout.

And that's not embedded in the current CapEx forecast?

That's correct, it's not.

Perfect. Thank you so much.

Thank you.

Your next question comes from the line of Anthony Crowdell from Jeffries.

Good morning, guys. A couple of questions, and one you will probably not like. The easy one is, what is your trailing 12-month ROE at the utility?

The second question was just, and I know you guys, "as soon as possible" has been the answer on the S1, but is that expected to be a summer event, or do we think of that as the fall? Just trying to put some months around that. And, last, just following up on the last question, it seems like the growth in your service territory, with the new plan share added, you are, basically, I don't want to say "consuming," but you, basically, need another processing plan, it looks like, each year; is that accurate?

Okay. So, Anthony, I will try to take these in order here. On the first one, the trailing 12-months ROE, in Oklahoma, we're earning close to our allowed return of [$10.2 million). As Pete mentioned, in Arkansas, we are probably earning closer to 6% to 7% there. And, obviously, at the FERC transmission, on the formula rate, you are earning your allowed return there of [$11.1 million]. So, second question, as far as putting a month, or some specificity to the S1, we really can't, Anthony. We are going to work as quickly as we can. Because our ultimate goal is to IPO this as soon as we can. I mean, that's our goal. We are all very much aligned around that objective. What we have heard, from various institutions that if you were going to try to get an IPO out this year, you really need to file the S1 by September 1st, but that's not a commitment of when we're going to be able to do this. We are going to work as quickly as we can. As far as the processing capacity, I will turn that over to Keith.

Yeah. As we mentioned earlier, and if you look at what we have been placing into service, it's been about a plant a year. We are in some very good basins, with good acreage positions, with some of the biggest players in the area, and the most active drillers, but that's something that we have to continue to look at with these dedications and the rigs that they are deploying and whether or not that's going to continue. And it kind of depends on producers. We have seen some increases in some areas, and some that shifted around, but, right now, that is our projection.

Great. And, Sean, if I could just follow-up, when you file an S1, is there, I guess, a period of time, where, I guess, does the SEC approve it? What happens once you file that?

You are exactly right. You file it. You will get comments, and you may have a couple of turns at that.

And those turns, the government agency could take as long or as short as I believe?

True. That's correct.

Thank as a lot for the help, guys.

All right, see you, Anthony.

The next question comes from the line of Brian Russo of Ladenburg. Please go ahead.

Hi. Thanks for the follow-up. Just curious, it looks like you purchased NGOs in your keep whole agreements, and I was curious in you could elaborate on that?

Yes, those are, when we have fixed fee agreements as well, we will a lot of times monetize those NGLs, and so we are actually buying them from the producer and reselling them. That's kind of our purchase for resale. On the keep hole, those are our equity of gallons as we recover them. So we, obviously, would sell those as well.

Okay. Got it. Thank you.

Thank you. You have no questions at the moment, (Operator's Instructions). Thank you.

Operator?

Yes, thank you. I would now like to turn the call over to Pete Delaney for closing remarks.

Thank you, Operator. I would like to take a moment to thank our members for their hard work and dedication at OGEnergy, and I would like to recognize all the OEG Energy and Enogex members who, in addition to their regular responsibilities, are working hard to make this new partnership with CenterPoint a success. Again, thank you for your participation in the call, and thank you for your continued interest in OGEnergy. We are adjourned.

Thank you for joining today's conference. This concludes the presentation. You can now disconnect and have a very good day.