OGE Energy Corp.
Q1 2008 Earnings Call Transcript

Published: 7 May 2008

[Operator:]

Good morning. My name is Chantal, and I will be your conference operator today. At this time, I'd like to welcome everyone to the OGE First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Tidwell, you may begin your conference.

[Todd Tidwell:]

Thank you. Good morning, everyone, and welcome to OGE Energy Corp's first quarter 2008 conference call. I am Todd Tidwell Manager of Investor Relations and with me today I have Pete Delaney, Chairman, President and CEO of OGE Energy Corp; Dan Harris, Senior Vice President and COO of OGE Energy Corp and President of Enogex; Jim Hatfield, Senior Vice President and CFO of OGE Energy Corp; Howard Motley, Vice President of Regulatory Affairs; and several other members of the management team to address any questions that you may have. In terms of the call today, we will first hear an explanation of first quarter results from Jim Hatfield, then an overview of regulatory issues from Howard Motley. Pete Delaney will then follow up with closing remarks. 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 slide, including required non-GAAP reconciliation information will be archive 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 segments and simply states that we cannot guarantee forward-looking financial results, but this is our best estimates today. I will now turn the call over Jim Hatfield to discuss first quarter results. Jim.

[James R. Hatfield:]

Thank you Todd. For the first quarter, we reported net income of $13 million or $0.14 per average diluted share as compared to net income of $17.2 million or $0.17 per average diluted share in 2007. The contribution by business unit on a comparative basis is as follows

[Howard W. Motley Jr.:]

Thanks Jim. The regulatory update this morning will cover ongoing and future activities in both the Arkansas and Oklahoma jurisdictions. I will be discussing the recovery of that 2007 ice storm, giving the update on the Red Rock cancellation cost recovery case, we will discuss Redbud purchase timetable, and giving you an update on our accelerating Arkansas rate case, and discuss renewal plan we are going to be filing with the Commission next week. And I'll finally summarize the company's regulatory plan for 2009 to 2012. The Commission order in OG&E's 2006 rate case authorizes the company's to recover storm cost that exceed $3.5 million incur in any calendar year. The 2007 storm of $35 million which includes the December ice storms have been accrued the regulatory assets. The recovery of these costs will be addressed in OG&E's 2009 rate case. OG&E's request to recovery of its $14.7 million Red Rock cancellation cost at the Oklahoma Commission and we have requested the recovery through the sale SO2 allowances in order to not impact our customers. The staff of the Commission recommended $10.8 million recovery, by including that amount in the cost of our next power plant, which would be the Redbud, if approved later this year. The staff also recommended that the profit form SO2 sales be used to offset OG&E's December 2007 ice storm costs, not Red Rock. The other parties in the cash recommended no recovery. The case was scheduled to go to hearing today, however, the administrative law judge suspended the procedure schedule to allow additional settlement discussions. For the Redbud purchase on March 20th, OG&E's filed with Oklahoma Commission for pre-approval to purchase the Redbud power plant, and authorization of a recovery rider until the December... till the 2009 rate case is completed and new rates are implemented. Based on the 248 day statutory timing, we expect a Commission decision now later then mid November this year. In the Arkansas rate case we are currently preparing a financial package, based on a 2007 test year and plan to file the rate increase application in mid August. In the Arkansas jurisdiction there is a 10 month statutory timing for processing a rate case. Therefore, we expect a Commission decision in January 2009, and new rates implemented in July 2009. The next newest thing on the agenda is a renewable plan. OG&E is targeting to file an application with the Oklahoma Commission for a renewable plan, mid-May sometime next week. A company is requesting pre-approval to construct a transmission line between Oklahoma City and Woodward to facilitate wind energy development. Additionally a riders been requested to recover the revenue requirement related to the transmission line when it becomes in service in 2010. There will be renewable tariff offerings for customers that will be available, and finally the Commission, the company is requesting that the Commission issue an order by August 15th, this year. The foundation of OG&E's regulatory plan was the Oklahoma and Arkansas rate increases in 2006 and 2007 along with the Centennial and security riders authorized by the Oklahoma Commission. There has been a change as I just mentioned to our regulatory plans since February earnings call. We have decided to accelerate the Arkansas rate case that target to rate increase in mid 2009 instead of 2011. The driving factor is the purchase of the Redbud power plant at the end of this year, if approved by the Oklahoma Commission. Additionally if reflected in the regulatory plan, OG&E has requested a rider to recover Redbud revenue requirement beginning in January 2009 in Oklahoma. The company still plans to file an Oklahoma rate case in mid 2009 and expect to implement new rates in January 2010. If the company's renewable plan is approved, we will implement a renewable rider recover transmission investment some time during 2010. Finally, looking past 2010, the company plans to file a rate case every year alternating between the two retail jurisdictions. In summary, the rate increase illustration provides a visual of how that company's regulatory plans will work to cover our capital on O&M increases along with providing share and earnings. The Redbud rider will recover $75.4 million in 2009 and approximately $74 million will be included in base rate for Redbud and the 2010 Oklahoma rate increase. Renewable rider will recover $17.3 million in 2010 and that's just based on a half year recovery, and then $34.5 million in 2011 and this for the transmission line that will be build through Woodward. The rate increases for the Oklahoma, Arkansas are unknow at this time. An integral part of this plan is the phase in of these rate increases to our customers. That's imperative to be able to increase the rates with minimal impact, and definitely our relationship with Oklahoma and Arkansas Commissions and their staff is very important. As you can see OG&E has developed a strategic regulatory path and is prepared to execute. Pete?

[Peter B. Delaney:]

Thank you, Howard. Both that Enogex and OG&E continue to position our earnings growth over the next several years. Our expectations for growth beyond 2008 are increasing as we invest substantial capital to implement our business plans. We believe these plans are sound and that the fundamentals of our businesses remain strong. Economy of Oklahoma remained solid with job growth for the trailing 12 months at 1.6% which ranks the state ninth in the nation. Job growth above the national level is expected to continue for the remainder of 2008. In addition the housing market in Oklahoma has not exhibited the weakness as in other parts of the country where housing price is increasing about 5.3% over the last 12 months. And at the utility, our customer growth continues at just around 1% which is in line with historical levels. Of course, the strength in energy prices particularly natural gas provides a strong economics stimulus to our market areas in Oklahoma. The drilling activity continues at a strong pace particularly in the prolific Granite Wash and the Woodford shale areas as evidenced by our increased capital investment in those areas. Enogex's approved capital investment program of 2008 was recently increased to $232 million from $292 million but majority of that investment target for gathering projects and the reminder for processing, plant and transmission projects. By way of comparison as Jim noted, Enogex's total capital program was $67 million in 2006. Our projected gathering volume for 2008, growth remains 8% with processing volumes projected to be up 10%. And based on our projected EBITDA $232 to $253 million in 2008, EBITDA will have grown roughly 76% since 2005. By the end of the first quarter of 2008 EBITDA at Enogex increased 33% to $56 million from $42 million in the prior year's quarter. But due to timing of project completion, a lot of the earnings and cash flows associated with the capital investment in 2008 will not be realized until 2009, 2010. In addition, as we earlier noted, we have recently announced an open season for the Heartland Crossing project to provide needed interstate pipeline capacity from the Western part of our system to Bennington, Oklahoma where the gas enters interstate pipelines to meet the needs with the growing Southeast and Eastern markets. While we believe in this project the capital associated with that project is not included in the capital investment estimates due to contingent nature of our project in the open season process. We continue to keep a watchful eye on the MLP market, as we are committed to initial public offering of OGE Enogex Partners. We do not believe the OGE's stock price fully reflects inherent value of this business and that the Enogex story is even more compelling given the increase in its capital program and associated EBITDA growth. Among the timing considerations for an offering are the desire for more stable overall equity market and better technical MLP market to allow investors to focus on Enogex's fundamental that should result in a more successful offering. We are very excited about Enogex's future. At OG&E and the utility, we continue to implement our plans to position utility to meet demand growth, while mitigating exposure to natural gas prices and potential CO2 legislation. First part of this plan is to purchase the Redbud plant for $695 per KW by year-end, if OCC approve the requested recovery rider. The upcoming renewable filing that Howard talked about, the OCC is an important step forward for us to increase our wind generation and build the transmission required to support wind development in Oklahoma. We plan to issue a request for proposals for additional 300 megawatts of wind within the next several weeks, as we seek to increase our hedge against higher natural gas prices and future CO2 legislation for our customers. We will be requesting from the Southwest Power Pool and the Oklahoma Corporation Commission approval of the Oklahoma City to Woodward transmission line, which is estimated to cost approximately $265 million, line is projected to be complete in the first half of 2010. Engineering and right-of-way [ph] work are already under way. As part of renewals filing we'll be asking for a recovery rider to begin earning on this asset once that project is complete. The capital program at the utility in 2008 will primarily benefit earnings in 2009 to the Redbud rider and in 2010 to the transmission rider. Additionally due to the increase in other rate base items and expenses we expect to have an earnings gap [ph] versus our allowed return. As Howard mentioned, we plan to file a general rate case in our Arkansas later this year and in Oklahoma next year to address those gap. Base on our estimate, if successful in our rate filings, the impact on our residential customers including a 300 megawatts of wind from these rate increases would be just around 2.5% per year through the year of 2010. We are very excited about the opportunities and our plans at both OG&E and Enogex. OGE Energy is well positioned in both the natural gas midstream and utility businesses to build out energy infrastructure required to continue to provide reliable and affordable energy to our customers. As we execute our plans to capture these opportunities, we expect to not only provide good value to our customers but to deliver solid earnings growth for our shareholders. This concludes prepared remarks, and we will now answer your questions. Question And Answer

[Operator:]

[Operator Instructions]. And your first question comes from the line David Frank with Catapult [ph].

[Unidentified Analyst:]

Hello.

[Peter B. Delaney:]

Hi, David.

[Unidentified Analyst:]

Hi. Guys, I noticed that you reiterated your guidance for this year. But it appears now you're including this charge related to the mis-capitalization of prior expenses related to your employees?

[James R. Hatfield:]

That's correct.

[Unidentified Analyst:]

So the thought is to include... that off is offsetting higher projected Enogex results is that it?

[James R. Hatfield:]

Yes, somewhat. If you look the only thing we've historically excluded from guidance has been discontinued operations, gain and loss of sale of assets, sort of one-time items has typically been in the guidance. While we see Enogex higher, utility is slightly lower, but still within a range for that the high side to mid point at this point.

[Unidentified Analyst:]

Right. Well, if

[James R. Hatfield:]

It's about $0.06, is the impact of that prior... adjustment for prior period.

[Unidentified Analyst:]

So would a better operating number for the quarter be $0.20?

[James R. Hatfield:]

Yes, that will be correct.

[Unidentified Analyst:]

And how much was the overhaul on this generating unit, what did that impact the quarter by?

[James R. Hatfield:]

It was about $3 million in the first quarter of 2008.

[Unidentified Analyst:]

Pre-tax?

[James R. Hatfield:]

Yes.

[Unidentified Analyst:]

So, I am going to guess that's a couple of pennies?

[James R. Hatfield:]

Yes.

[Unidentified Analyst:]

Okay. And do you have any update on the frac spreads, where they are at currently versus last year?

[James R. Hatfield:]

Well, we had a little over $7 for the quarter. We are about $6.66 or so for sort of a current frac spread. If you just took a snapshot in time as of earlier this week.

[Unidentified Analyst:]

$6.66... $6.81.

[James R. Hatfield:]

Sorry, yes.

[Unidentified Analyst:]

Okay. Okay. And any updates on you said you were continuing to invest in Enogex as you see multiple growth opportunities. Can you elaborate a little bit on some of those?

[James R. Hatfield:]

Well, I think if you look at... it was really a comment, David, about taking CapEx from a $166 million last year to now seeing $323 million. And we're seeing obviously we have Mid-Continent, Gulf Crossings on the transportation side, and multiple gathering and processing opportunities in just the organic Woodford shale and Granite Wash place. So we're really seeing increased drilling and capacity... need for additional capacity, takeaway capacity processing really across the system.

[Unidentified Analyst:]

Okay, alright. Well, thank you very much.

[James R. Hatfield:]

Sure.

[Operator:]

And your question comes from line Chris Shelton [ph] with Millennium.

[Unidentified Analyst:]

Can you hear me?

[Peter B. Delaney:]

Yes.

[Unidentified Analyst:]

I got pulled off for just a second. I think David asked about the current frac spreads, can you just... can you reiterate those for me please?

[James R. Hatfield:]

Yes, if you just take a snapshot in time as of earlier this week, it's at $6.81, so still very strong just slightly behind what we averaged for the quarter.

[Unidentified Analyst:]

Okay. And on the current guidance, your current guidance for frac spread is about where it is currently then?

[James R. Hatfield:]

Yes, it's within the range of the revised guidance.

[Unidentified Analyst:]

Okay. And the other thing I wanted to check on that you guys reiterated support for the MLP structure, and I wanted to see if you can comment on when you think that might come or what you are seeing the market have currently for MLPs?

[Peter B. Delaney:]

This is Pete Delaney. Yes, we

[Unidentified Analyst:]

Hi Pete.

[Peter B. Delaney:]

As I mentioned we continue to monitor that market as you know the conditions... everybody knows the conditions of the overall equity markets. And MLP market well, has been down, it's not as much as the overall equity market and we have seen... but the MLP market has had some technical... more technical issues in the broader market in terms of overhang of private equity transactions and institutions that seem to be a full on too many names. One thing we all are obviously watching is that we understand that western gas resources in the marketplace for IPO. That's a gathering and processing company like Enogex and we will watch and see how that goes, and how it trades in the aftermarket. So we look that closely. We're keeping our S1 up to speed, and it's hard to predict the markets, but we're... again given where we believe the value we're getting in our for Enogex in our stock and where we think it would be valued in MLP, we're very much clear to make that happen when we think it's the right time to make a move given overall market conditions. And it's hard to predict when that will be, but we do see obviously from January when we were out on the road-show before we stepped back from the market, we have seen improvement over the last couple of months and so we're encouraged by that.

[Unidentified Analyst:]

Got you. And is there a certain window you guys are looking at? I mean is there kind of a drop-dead date those or are you just committed, waiting for kind of the technical issues in the MLP market to lift and fully committed?

[Peter B. Delaney:]

There is no drop-dead date other than technical either or periods of time where we will have to update our S1 for earnings.

[Unidentified Analyst:]

Sure.

[Peter B. Delaney:]

But other than that those technical windows, there is no other windows that we are confined to.

[Unidentified Analyst:]

Okay. Great, thank you guys.

[Unidentified Company Representative:]

Welcome.

[Operator:]

[Operator Instructions]. And your next question comes from the line of Ho Chen Talon Capital [ph].

[Unidentified Analyst:]

Good morning. Can you quantify what the impact of the hedging was for the quarter at Enogex?

[Howard W. Motley Jr.:]

Quantifyit in terms of the

[Unidentified Analyst:]

Realized price, or however you want to give it?

[Howard W. Motley Jr.:]

Okay. The market price for the quarter was $8.35 we realized $7.03, so I guess we're about $1.30 below market I guess.

[Unidentified Analyst:]

And that's going to continue on as long as you... if plan on following through with the IPO for the MLP?

[Howard W. Motley Jr.:]

Right.

[Unidentified Analyst:]

And then just can you discuss the trend and the well connects, I mean it looks you are in a... it looks like to be declining like quarterly. And I am just curious, what's happening there, and what the competitive landscape is looking like in the different place that you are pursuing?

[Danny P. Harris:]

This is Danny Harris. As far as the fundamentals for our continued well connect activity, it looks really strong. You recall that we did adjust our outlook on volumes a little bit earlier. And in the previous conference call we described there really is lot of producers that were just redeploying rigs, other areas to keep leaseholds intact and things of that sort. But as long as the gas prices up in the area that it's projected to be, we continue to feel like we are very strong drilling activity what's relate good well connect activities as well.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

And there are no further questions at this time.

[Peter B. Delaney:]

No other questions. Again, I like to thank you for attending the call and for your continued interest in OG&E. Thank you very much and have a good day.

[Operator:]

And this concludes today's conference call. You may now disconnect.