OGE Energy Corp. Q3 2008 Earnings Conference Call Transcript

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OGE Energy Corporation (NYSE:OGE)

Q3 FY08 Earnings Call

October 30, 2008, 9:00 AM ET


Todd Tidwell - Director, IR

Peter B. Delaney - Chairman, President and CEO

H. Scott Forbes - Interim CFO and Controller, Chief Accounting Officer

Howard W. Motley Jr. - VP, RegulatoryAffairs

Steve Merrill - VP and CFO of Enogex


David Franks - Catapult Capital Management

Brian Russo - Ladenburg Thalman

William Maze - Ecofin


Good morning. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE Energy Corp. Third Quarter Earnings 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 - Director, Investor Relations

Good morning, everyone, and welcome to OGE Energy Corp's third quarter 2008 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, Scott Forbes, Interim CFO of OGE Energy Corp, Keith Mitchell, Senior Vice President and COO of Enogex; Howard Motley, Vice President of Regulatory Affairs, Steve Merrill, Vice President and CFO of Enogex, Max Myers, Managing Director Corporate Development of Finance and Jerry Peace, Corporate Risks Officer as well as 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 from Pete Delaney followed by an explanation of third quarter results from Scott Forbes, then an overview of regulatory issues from Howard Motley. 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, including required non-GAAP reconciliation information, 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 simple states that we cannot guarantee forward-looking financial results. But this is our best estimate to-date.

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

Peter B. Delaney - Chairman, President and Chief Executive Officer

Good morning. From our financial regulatory and strategic standpoint the third quarter was a very good one as we accomplished several important issues that positions the company well for the future. Financially, the quarters earnings exceeded last year as higher earnings at our Enogex offset the cool somewhat utility. And from a regulatory standpoint, the company reach four important regulatory settlements with the Oklahoma Corporation Commission and other parties, resulting in four final quarters in the quarter.

We approved Redbud Plant acquisition and the renewables energy rider in particular position us well to execute on our key regulatory initiatives, and the build out renewables and related transmission assets.

And lastly, we announced two strategic joint ventures; one with AEP and MidAmerican Energy to join and construct high voltage transmission lines, and another joint venture involving Enogex and certain assets of energy transfer partners that upon completion will provide both Enogex and OG&E a host of financial and strategic benefits.

Despite the cooler and normal weather experienced during the summer utility is expected to provide higher earnings in 2008 than those forecasted due to lower interest expense and a lower effective tax rate from state tax credits.

However, the projected improvement in earnings at the utility for the remainder of the year may not totally offset the risk of processing spreads falling even more below recent levels. And as a result, we are lowering our 2008 earnings guidance to $2.40 to $2.55, which was inline with our $2.40 to $2.60 of guidance provided last February.

We increased our 2008 earnings guidance as you may recall in July to $2.50 to $2.70 from our initial forecast driven all this entirely by higher processing spreads than we initially forecasted. But with the recent decrease on processing spreads, our single point forecast has now ramped $2.50 at the bottom of the higher earnings guidance.

The 2008 range of $2.40 to $2.55 reflects the risk of a further reduction in processing spreads from current market levels of approximately $4.90. And the risk of continued unfavorable weather at the utility during the balance of the year. With the unprecedented drop in commodity spreads in the first two weeks of October and an uncertain credit situation, we are cautious in providing projected spread levels.

Before I discuss 2009 earnings, I would like to quickly review our local economy which continues to outperform the national averages in several areas reflecting in part the more favorable fundamentals with the state's housing and banking sector than elsewhere in the nation. Till September 2008 foreclosures in Oklahoma were at the same level around this time of 2006 and employment growth which has declined from earlier this year was well above the national average.

Through the second quarter this year, housing prices continue to increase. However, early October, we have seen a rise on unemployment claims. Accordingly, we're closely watching to gage the impact of lower oil and gas prices on our economy which at this point seems secondary to the impact from limited credit availability.

During the first nine months of the year, our customer sales growth were 9 to 10 from 1% and 1.9% just below our historic growth rates of 1% and 2% respectively. However, we have included lower KWH sales growth rates in our projections under the assumption of slower economic growth.

Given the severity of the financial crisis and the lack of precedence the impact on our businesses at this time is difficult to determine. Accordingly, we have incorporated the risk of further deterioration in the economy into our range of guidance. The guidance for consolidated earnings in 2009 is $2.30 and $2.60, reflects our expectation for continued earnings growth at utility associated with our regulatory initiatives. Some of which were completed this quarter.

At Enogex, our guidance incorporates the potential for much lower processing spreads realized than last year, as well as the risk that commodity price as weakened and credit problems continue resulting in significant lower natural gas production which today we have not seen evidence of. Again the recent turmoil of the financial commodity markets, we are cautious and predicting any near-term improvement in processing spreads.

Our utility guidance for 2009 has increased to $1.87 to $2 due to a full year operation of the Redbud Plant and an assumption of Oklahoma and Arkansas retail rating increases in 2009. Our last channel rate increase in Oklahoma went into effect at January 2006 based on the test year in December 31, 2004.

A major part of the Oklahoma rate increase cover the increase cost from the acquisition of the McClain power plant at that time. Only a small part of that increase cover the increase in our general cost.

The 2006 rate increase permitted annual operational and maintenance cost of $290 million which was substantial below our actual O&M cost of $345 million for the 12 months ended September 30, 2008.

At Enogex, our guidance for 2009 is $0.53 to $0.79 per share on a standalone basis. This range reflects the processing spreads and even today. For example, a point Ks incorporating a realized spread again net of amortized cost of hedging of $3.16 or market spread of around $5 which is roughly inline where spreads are today would be at the high end of our range. At the levels incorporated on our range for 2009, we're very closed to our force set by our hedges and we would expect more upside than downside from processing spreads.

While we currently expect continued growth of 7% to 8% in gathering volumes, we have included an Enogex earnings range, the risk of lower natural gas production, again, due to the current economic situation.

The Gulf Crossing and Midcontinent Express transportation projects are scheduled for operation next year which will also contribute to our margin. We continued to have good investment prospects. We have reviewed all of our approved projects under projected processing spread and all these projects meet our internal hurdle rates, set to reflect our evaluation of each projects risk.

At this juncture, we have reduced our plan capital expenditures at Enogex for 2009 to $277 million. We continued to have a strong portfolio of growth prospects in this environment, some of which are being held by us pending more favorable credit markets. Even at the lower guidance for 2009 our projected a return on average equity on that business is 16%.

Our expenses at the holding company for 2009 are expected to be $0.15 to $0.17 due to higher level of debt outstanding.

Looking ahead to 2010, we expect continued growth in consolidated earnings as utility completes the wind speed transmission line which provides around $28 million of incremental revenue under rider approved by the Oklahoma Corporation Commission earlier this year, as well as the annualized impact of the assumed 2009 Oklahoma and Arkansas rate increases.

We would expect continued growth at Enogex from higher volumes from projects completed in 2008 and 2009. In addition, our national gas liquid hedges in 2010 and 2011, are setup price is higher than those in 2009, although for a smaller percentage of volumes in those years. We'll provide more information on our hedges in a minute.

Due the increasing turmoil in the markets and subject to board approval, we are targeting the consolidated capital program of our $900 million in 2009, down almost $300 million from expected expenditures in 2008.

The capital program consists of $587 million and $277 million of investment at the utility and Enogex respectively. With the remainder, associated with corporate services, the company expects that it's cash flow from operation, cash on the balance sheet and existing credit facility of $1.453 billion should provide adequate liquidity to fund through 2009; our capital investments, our operating expenses and our dividends.

As due to previously announced, join ventures with Energy Transfer Partners, we continued to believe in the merits of that transaction and are working towards the successful closing. Under the terms of our agreement, we and Energy Transfer Partners are to obtain various financings for the new joint venture and close the joint venture notably earlier than March 31, 2009 or either side can cancel the agreement.

In today's market, it would be difficult for the joint venture to secure the requisite financing under degree to terms. But we are working with our banking teams to monitor the market and evaluate our funding options. We thought our Hart-Scott-Rodino in October and hopefully cleared of that process in early November. We remain committed to the transaction towards strategic benefits.

Now Scott Forbes will review in more detail our financial performance. Scott?

H. Scott Forbes - Interim Chief Financial Officer and Controller, Chief Accounting Officer

Thank you, Pete. For the third quarter, we reported net income of $139.5 million or $1.50 per average diluted share as compared to net income of $126.8 million or $1.37 per average diluted share in 2007. That result to the 9% increase quarter-over-quarter. The contribution by business unit on a comparative basis is as follows: OG&E earned $1.15 for the third quarter of 2008, compare to $1.18 for the third quarter of 2007. Enogex earned $0.30 for the third quarter of 2008 compared to $0.22 for the third quarter of 2007.

The Holding company were in $0.05 for the third quarter 2008, which includes $0.04 from the marketing business, which beginning in 2008, it include the holding company results, as compared to $0.03 loss for 2007 third quarter.

Net income... at OG&E, net income for the third quarter was $ 107.1 million for $1.15 per share as compared to net income of $109 million or $1.18 per share in 2007.

Some of the primary drivers were gross marginal revenues decreased 1.5% from $306.3 million to $301.6 million. I'll provide details of gross margin on the next slide.

Operating and maintenance expense increased $1.4 million or 1.8%, primarily due to higher employee cost; salaries, wages, pension and other benefits. Higher fuel and maintenance cost for the OG&E transportation fleet and higher contract services due to overhauls at several of OG&E power plants. These decreases were partially offset by higher capitalized labor and lower professional services than in the third quarter of 2007.

Depreciation expense increased $2.4 million or 6.8%, primarily due to additional assets being placed in service. Interest expense increased $2.7 million or 16.9%, primarily due to long-term debt issued in January and September of 2008.

These factors were partially offset by lower effective tax rate, primarily due to an increase in the federal renewable energy credits from our wind farm, and additional investment tax credits in Oklahoma from capital expenditures.

OG&E gross margins was $301.6 million for the third quarter compared to $306.3 million for the same period in 2007, a decrease to $4.7 million or 1.5%.

The gross margin decrease was primarily due to cooler weather in OG&E service territory, which resulted in a 10% decrease in cooling degree days compared to the same period of 2007. That decreased gross margin by $4.6 million.

In the reversal of the litigation reserve, associated with the take or pay contract in 2007, which increased the 2007 gross margin by $4 million. These decreases were partially offset by new customer growth which increased gross margin by approximately $2.5 million. In a price variance, primarily due to new riders implemented during the third quarter of 2008 as well as other items which increased gross margin by approximately $1.4 million.

At Enogex, net income was $28.3 million or $0.30 per share as compared to net income of $20.4 million or $0.22 per share in 2007. Some of the primary drivers were gross margin was the largest variance as margins increased from $85.7 million to $108.2 million in 2008. That represents an increase of over 26%. I'll discuss the details on the next slide.

Operating and maintenance expense increased $4.3 million or 14.2% primarily due to increased employee calls, salaries, wages and other benefits as a result of system growth. Depreciation expense increased $2.6 million or 23% primarily due to higher levels of depreciable plant associated with system growth.

Net other income expense decreased $3.3 million from 2007 primarily due to lower interest income and the minority interest associated with the Atoka joint venture which began operations in August of 2007. Gross margin at Enogex increased from $85.7 million in 2007 to $108.2 million in 2008, an increase of over 26%.

Gathering and processing margins increased $16 million, an increase of nearly 35%, primarily due to higher commodity prices and increased volumes. Gathering contributed $20.1 million of gross margins compared to $19.5 million in 2007 and processing contributed $42.1 million of gross margins compared to $26.7 million in 2007. Gathered volumes increased 10% and processing volumes increased over 15% as Enogex continued to see growth on its system through September.

Transportation and storage margins increased $8.3 million, an increase of 21.7%. Transportation contributed $39 million of gross margin which compared to $29.4 million in 2007 and storage contributed $7 million of gross margin compared to $8.4 million in 2007. The increase in gross margin was primarily attributable to a decrease in the imbalance liability, increased demand fees and increased cost sold revenues.

Marketing and other contributed $2.6 million in gross margin to Enogex in the third quarter of 2007. Effective January 1st, Enogex distributed the stock of the marketing company to OG&E.

We are revising our 2008 guidance. Net income now has a range of $224 million to $238 million or $2.40 or $2.55 per diluted share, based on $93.2 million average diluted shares outstanding. The main reason for the increase of the utility is a lower effective tax rate, primarily resulting from an increase in state investment tax credits associated with capital expenditures and lower interest expense due to a lower than anticipated level of long-term debt.

The decrease in earnings guidance at Enogex is driven by lower commodity spreads. Our previous guidance for Enogex in the second quarter 10-Q projected realize commodity spread range of $7.03 due to $8.32 per MMBtu for 2008. We now project the full year realized commodity spread to be between $6.17 and $6.26 with a projected fourth quarter realized spread range of $3.54 to $3.92. The holding company guidance remains unchanged.

We are also providing earnings guidance for 2009. Net income has a range of $220 million to $248 million, or $2.30 to $2.60 per diluted share based on $95.5 million average diluted shares outstanding.

You can see the guidance for each business. The key drivers are at the utility gross margins increased approximately $115 million due to a full year the Redbud rider, a rate increased in Oklahoma and Arkansas. These increases were partially offset by higher operating expenses of $40 million, primarily depreciation expense. And higher interest expense associated with long-term debt use to fund capital expenditures.

At Enogex, the main driver is to projected a decrease in commodity spreads. We are projecting realized spread ranges up $2.19 to $3.16. The business continues to grow as we expect gathering volumes to grow by approximately 7%. At the Holding Company, higher levels of long-term debt were driving the higher than normal loss. I would direct everyone to the company September 30, 2008 10-Q filed this morning for more details on the 2008 and 2009 guidance.

This chart reflects the amount of margin we have locked in for those volumes with commodity exposure, and the percentage of margins which are hedged. In the appendix of the presentation for details of our hedges for the years: 2009, 2010 and 2011.

As Steve mention at the offset planning for adequate liquidity in 2009 has been foremost on our minds. We have taken great care to ensure that our operational spending and capital expenditure plans don't exceed available liquidity.

The company currently has available lines of credit totaling 1.235 billion plus a new 18 months term loan for 200 million. Cash flows from operations and available borrowings from our revolving credit agreements along with the 18 months term loan provides sufficient liquidity for all of 2009, and provides a cushion for such things as margin requirements under the Enogex hedging program, new capital to requirements or the inability to remarket OG&E variable rate bonds.

The plan for 2009 assumes we do not have access to capital markets or choose not to access the capital markets because of pricing.

Now, I would like to turn it over to Howard Motley for an update on regulatory activities.

Howard W. Motley Jr. - Vice President, RegulatoryAffairs

Thanks, Scott. Slide number 12, OG&E's use of riders and regulatory assets have minimized rates to a lag [ph] between the rate cases. In the Oklahoma jurisdiction, the company has implemented recovery riders for our centennial wind farm, enhanced security projects, the Redbud Power Plant and to recover a strong cost.

The first three riders will terminate on all related cost are included in the rates approved in the 2009 Oklahoma rate case. The Oklahoma commission has also approved a renewal rider that is expected to be implemented mid year of 2010. The rider will recover the revenue requirement associated with the transmission line that will promote wind energy development for the state of Oklahoma. Rate case activities are discussed in the later slide.

On slide 13, this is a summary of our major regulatory actions so far this year. And Oklahoma Commission orders established 7.2 million regulatory assets for the Red Rock cancellation cost, which will be recovered starting in the 2009 rate case. The same order established $33.7 million regulatory asset for 2007 excess storm cost and a recovery rider which includes the rate of return based on 10.75% ROE.

The riders established to recover 3 million in 2008 and around $9 million in 2009. As discussed on the previous slide, the Oklahoma Commission approved the Redbud recovery rider designed to recover $75 million annually. The riders estimate to recover approximately $17 million in the fourth quarter of 2008. The renewables rider will generate approximate $28 million annually and is expected to be implemented to mid 2010.

In Arkansas, we filed an application yesterday for the $577,000 of 2008 storm costs that exceed the amount recovered in our rates. The application request recovery are pending Arkansas rate case. At the Federal level, we implemented $2.4 million rate increase subject to refund for a host of transmission customers in July of this year.

On slide 14, is talked about our rate cases, in August we filed an application with Arkansas Public Service Commission requesting to increase our rates $26.4 million. A Commission decision is expected in June 2009 based on the 10 months statutory timetable and new rates are targeted for implementation in July of 2009.

The company just initiates the preparation of rate case filing for the Oklahoma Jurisdiction. We plan to file in late January 2009, based on the September 30, 2008 test year. A commission decision is expected in July or August and new rates are targeted for implementation in August or September of 2009.

At this point in the preparation process, the company has not determined the precise amount of the Oklahoma filing. However, the next slide summarizes the change in four of the major components of the rate case and provides a historical rate efficiency calculation.

As reflected in slide 15, this summarizes the company's Oklahoma historical rate deficiency based on September 30, 2008 test year. Total company numbers are compared to the 2004 test year that we used in the last Oklahoma rate case. We utilized several parameters from the last Oklahoma rate order and applied an 85% general allocation factor. The resulting historical rate efficiency is 78.8 million.

Back to you, Pete.

Peter B. Delaney - Chairman, President and Chief Executive Officer

Thank you Howard. At this point in time, we'd be happy to take any of your questions.

Question And Answer


[Operator Instructions]. Your first question comes from the line of David Franks from Catapult Capital Management.

Peter B. Delaney - Chairman, President and Chief Executive Officer

Good morning David.

David Franks - Catapult Capital Management

I know you guys, you talked about you're '09 guidance and obviously you didn't mention anything about the JV. But could you give us some indication, at least directionally what you think the JV... what impact to JV would have on your 2009 since you already commented on 2009 would?

Peter B. Delaney - Chairman, President and Chief Executive Officer

We the last... I'll say the last... the first two weeks of October, we've seen pretty precipitous drop in the processing spreads and you heard today we've look at our numbers and we done our forecast and look at our capital planning.

My discussions with VPP, on both sides we continue to have strong interest in completing the transaction. Based... we do not have actually their numbers at this point and have not... looked at the joint venture and have new joint venture runs. We do have issues of... you have to make an assumption on what the interest financing costs are.

So I mean overall we believe with what work we've been able to do I think that its either neutral possibly somewhat accretive to earnings. We would expect it to come in that the impact would be. There maybe a quite substantial gain associated with creation of joint venture from accounting in terms of deconsolidating Enogex. But of course that's a book non-cash earnings number that we would realize.

But we still have a work to do with our partner. We are schedule to sitting down with them. Our Hart-Scott-Rodino filling, we should be pass that process November 6th and at that point of time will have a much more better understanding of the numbers moving forward. But strategically, we still both sides are very interested in moving forward.

David Franks - Catapult Capital Management

Right. Well, and, it seems like a great transaction for you, but I'm just wondering, since you're going to give up half a year of Enogex's earnings and yet one of that big... one of the big pipe projects under that those ETP assets are not going to come online till mid next year, and outside of any gains, accounting gains associated with this consummating this transaction. Might we see a dilutive effect from the JV in the first year just because of the mismatch of income contribution versus income receiving?

Unidentified Company Representative

I think that with the higher... initially with the higher processing... I mean, I answer that if we see a return, I mean obviously it's well having somewhat challenged by, what's happen this to... where is commodity price is going to be, and where is the economy going to be in 2009. I would say if we see a return to strong processing spreads that we had in 2008 that with their MLP project coming in at mid year, and I think as we initially disclose, we would see potentially some dilution to our earnings. We thought it would be not more than 4% to 5%. However, with the lower processing spreads that we have put in a range again because of the uncertain situation, we don't expect that we would have that type of dilution even though the MLP Midcontinent express, will becoming in the middle of the year.

David Franks - Catapult Capital Management

Okay. So, that's everything is already factored in the existing '09 guidance essentially?

Peter B. Delaney - Chairman, President and Chief Executive Officer


David Franks - Catapult Capital Management

Okay, great. All right. Well, thanks, guys.

Peter B. Delaney - Chairman, President and Chief Executive Officer

Thank you, David.


Your next question comes from the line of Brian Russo from Ladenburg Thalmann.

Brian Russo - Ladenburg Thalman

Good morning.

Peter B. Delaney - Chairman, President and Chief Executive Officer

Good morning, Brian.

Brian Russo - Ladenburg Thalman

Would you characterize your 2009 guidance on the Enogex side as conservative? It looks like you're forecasting a flat spread of even below what you're assuming for the fourth quarter of '08?

Peter B. Delaney - Chairman, President and Chief Executive Officer

We say that it was a cautious forecast. What we've done is, again, in all... I think forecasting is always a challenge, and when you're dealing with commodities, and then given the particular circumstances that we're in as an industry and as a country, it makes that even more difficult. We have build in; I think I tired to give a good thorough understanding of in my comments that we did factor in further deterioration from where we are today.

A couple things, we continued to see, and we've gone out and talk to and Keith Mitchell, the Chief Operating Officers, Enogex here. They have a color on that, we went out to our producers, our major customers and we see that they're continuing to drill, we continue to forecast 7% to 8% gathering volumes based on what we see today.

However, we did build into our... putting in lower guidance at Enogex, we factored in a risk, or what happens if volumes decline substantially.

We put that in the numbers, so we cover that perspective. We looked at processing spreads and so what's the ... is that a conservative assumption, we say, we lets just laid out there, the cautious is that we're going to take the higher end of the range if processing spreads stay where are today would be at the higher end of that range.

Now, we know the future sort of showing at lower. So, we've also build into our guidance what would happen if they are in fact lower than they are today. So, I think we've tried to be very cautious, and we just want to be very transparent of what is in our numbers so that as everybody probably going to have their own different viewpoint of what's going to happen with the commodity prices, with the economy, with credit, which does seem to be easing, but that's how we've decided to approach OG&E.

Brian Russo - Ladenburg Thalman

Okay. So, to be clear, are you assuming 7% to 8% gathering volume growth in '09 guidance or something less than that?

Peter B. Delaney - Chairman, President and Chief Executive Officer

That would be towards the top end of our guidance. In other words, that's our best ... Today, that's our best look. Okay? So we take our best look, which is 7% to 8%, and then we say, wait a minute, what happens if it isn't 7% to 8%, what happens that it actually goes down. And that's what... that's why we have... that's why it drive it to the lower end of Enogex. So, we're trying to incorporate, that the lower end would say, look, this is much more negative set of assumptions gets us to the lower end, because we've got a face of... we're in this uncertain situation economically.

Now... we haven't seen our producers pull back and we have $277 million capital, there are some incremental projects that we've looked at under the existing our forward look on processing the forward curve. On processing spreads, that have very good returns but we are not moving with them until we see some more clarity around where the capital market are. We have structured our spending and our initiatives to live within the liquidity provided by our existing bank lines. So, we do not have to be relying on the capital markets.

They are improving but they are expensive and we would right now assume to have a flexibility to be able to and not rely on the capital markets. So, that's what's how we positioned ourselves but we have build in a much more negative outlook than we are seeing today in that business.

Brian Russo - Ladenburg Thalman

Okay. So, just ... I guess to summarize the bottom end of the '09 range, it can be considered a floor kind of earnings power based on very cautious assumptions on volume growth and frac spread?

Peter B. Delaney - Chairman, President and Chief Executive Officer

I would say I mean in terms of its not absolute floor but where our margins are, it does not much... I would say... shouldn't be that much more downside to that level. You'd have to get some real Draconian, I think, assumptions on some real bad significant drop in gathering volumes which we don't foresee.

Brian Russo - Ladenburg Thalman

Sure. So when we look to 2010, I think you said earlier that you have locked into the frac spreads higher than your hedge level in 2009. Can you elaborate on that?

Peter B. Delaney - Chairman, President and Chief Executive Officer

Yeah, I'm going to turn that over to Steve Merrill, our Chief Financial Officer of Enogex who... I think we have something in be appendix we refer to but Steve why don't you go through those numbers for 2009, 2010, 2011?

Steve Merrill - Vice President and CFO of Enogex

Definitely if you take a look at that appendix I guess much more details than I'll give verbally to your question but for 2010 the point forecast of forward curve on market spreads would be about 372 so still relatively low.

Our realized spread would be 429. So our hedges would be probably above the market. The same is true for 2011, although not as substantial. We do have put options that puts out there for 2011. So the market spread into the four curve would be 361. Our realized spread would be 376. So that's a big pop in 2010 and just a modest one in 2011.

Brian Russo - Ladenburg Thalman

Okay. And then switch to the utility side. What kind of actual ROE are you assuming in 2009 versus your allowed ROE?

H. Scott Forbes - Interim Chief Financial Officer and Controller, Chief Accounting Officer

We haven't done a complete jurisdictional regulatory view. But if you just look to financial view, it would be about 8.5% for the whole utility.

Brian Russo - Ladenburg Thalman

Okay. And that's primarily due to regulatory lag. So once new rates are in effect in Oklahoma in 2010, you guys should see some nice improvement in the ROE there.

H. Scott Forbes - Interim Chief Financial Officer and Controller, Chief Accounting Officer

Yes, that's right.

Brian Russo - Ladenburg Thalman

Okay. And then just lastly, if you don't mind, on the JV financing, can you talk about those initiatives that you're pursuing? And any other alternative plans if the markets aren't receptive to it?

H. Scott Forbes - Interim Chief Financial Officer and Controller, Chief Accounting Officer

Right now, we're working with both financial advisors and we are encouraged by continuing to see improvement in the credit markets and in the bank markets in particular. We would... in this environment look to structure the closing that would minimize our requirement to fund and that's all we can say at this point in time is that what's we would look to do is what can we do to pose the joint ventures substantially the same terms is we've outline but require less... external financing.

The MLP market, as you know, Brian, is trading at some high yields which is obviously disturbing to us from cost of capital standpoint. But both sides, we're really committed to closing the joint venture because of the strategic value that we both see. There has been a pretty large discounting of the bases between Midcontinent and Henry Hub which points to be for additional take away capacity and the value of that take away capacity that's a one of the key strategies and that with the joint ventures focused on. So we see that conditions are being very conducive to our business plan for the joint venture. So we're both committed to find a way to be able to move forward in this difficult environment we're in.

But again you keep in mind that in the last couple of weeks of October, things have changed dramatically which causing both sides to really reshuffle and look at what investments are going to move forward at this time. And now that we've all done that we'll be spending the next probably four weeks looking at what we can do to change our financing strategy to be able to move forward.

Brian Russo - Ladenburg Thalman

Also you might not need, I think it was $2 billion of potential debt at the JV, is what you're saying?

Peter B. Delaney - Chairman, President and Chief Executive Officer

No, I think there is ways we could look to produce that need. That's correct. We were both... both Energy Transfer and OG&E were getting cash distribution from the JV. We may or may not... we still have both sides of lot to do.

I can't speak for Energy Transfer either. We have not gotten any real detail about this other than that we're now starting... sitting down to see what we can do from a financing standpoint. We do have to March 2009 as well so we see things improving, we may just wait and see how the bank market continues to improve at this time.

Unidentified Analyst

Okay, great. Thanks a lot.

Peter B. Delaney - Chairman, President and Chief Executive Officer

Thank you Brian.


Your next question comes from the line of William Maze from Ecofin.

William Maze - Ecofin

Hi, most of my questions have been answer but maybe a couple of points of clarification. On the assumed that you target 1.45% of potential dilution from the JV, was that at Enogex or was that at the total company.

Peter B. Delaney - Chairman, President and Chief Executive Officer

That would have been a consolidated number based on what our projection were that time.

William Maze - Ecofin

Okay. Got you. So and essentially and just again to sum up what basically Brian was hitting on, you've really taken an extremely conservative view of 2009 from what I can tell. You're not really seeing too much economic deterioration down in near part of the woods. At this point but your plug-in that into the equation. Both the gas side and the processing side, you're taking basically what you are seeing in two week period... the last two week period from a drop in processing margin and essentially bringing that forward, and then assuming no access to the capital market?

Peter B. Delaney - Chairman, President and Chief Executive Officer

That's correct. You have to make decision on how to... in this type of environment in terms of forecast and I think we always tend to be, try to be on the conservative side and I think that's probably an accurate reflection of the approach we have taken today. And we do have a wider range and we normally would of the $0.30 and again that's probably reflective of certain times and we will really look to track and gage and hopefully narrow that down. Hopefully, obviously increase it...

[Multiple Speakers]

William Maze - Ecofin

We're going to assume that things are kind of bottoming out as we said today. I mean I'm just using as an assumption and we start to see gradual improvement from these levels going forward in the economy overall. We could probably hope that you do better than the mid range of year 2009 guidance.

Unidentified Company Representative

I would hope so. We're... the fact that in our effort to bottom of the cycle or this point again the fact that this... our business mid point of range is still earning 16% on equity and plus we've... I think from the cost standpoint we have assumed for example that volume growth is 7%. We've assumed that processing spreads are not going to be that much far below we are today. Its in fact... it looks like that's not a good assumption we will again look at our operations and make changes there as well.

But we're not doing that at this point because what we're seeing is something that's more towards the top end of the range at this point in terms of what our customers and natural gas producers are looking to continue to do in 2009.

William Maze - Ecofin

Got you. And just little curiosity, if you did have access normal buyback to capital market. How much is that ... what's the delta in your sort of earnings there?

Peter B. Delaney - Chairman, President and Chief Executive Officer

I guess that I would answer it this way. I think that we'll probably see Scott or Max if we in fact see lower short-term interest rates, where we would see a couple of cents improvement in the earnings, because of the ... just lowering the cost of our bank followings, were taking out the bank... we do have some negative environment charges, we have $200 million of cash on our balance sheet at this point in time associated with that. Hopefully that would decrease.

We do have investment, I would... we do have investment opportunities, discretionary investment opportunities that we would, for example, if we would go to additional debt and have more capacity under our existing bank lines. We'll probably, seriously look at adding additional investment opportunities. Now those investment opportunities may not add to earnings in 2009, because of the timing of some of those projects they may come in towards the end of 2009. But we expect to see higher the higher earnings or cash flow from those in 2010, 2011. Again, even at the... when we look at our projects initially even when processing spreads were much higher, we risk those and look and make sure that across a broad range of assumptions and commodity spreads that our projects uphold their economics.

So, again, at this point in time, we have reduced our CapEx to $277 million. I think we originally was thinking at more like 400 going in 2009, again a lot of that reduction is what we've made. It's been on our side, which we're holding back on things and I would look to on Enogex probably move forward with some of those economic projects with the utility, some of that reduction is just expecting lower growth, but also sounds that it is... were delaying some of our projects till 2010 from 2009 because we're completing at a wind speed. For example, transmission line, which is I think $120 million. So, we have some big ticket capital projects that will be done in '09, and again we would, it would cause a large drop at our CapEx utility, which we would then move ahead with some of these other projects we've delayed.

William Maze - Ecofin

Did you talk about your pension plan? The funding and how that looks?

Peter B. Delaney - Chairman, President and Chief Executive Officer

Scott, you want to talk about our pension?

H. Scott Forbes - Interim Chief Financial Officer and Controller, Chief Accounting Officer

Yes, we've funded $50 million in the last two years, and we're of course in pretty good shape coming into 2008, where we've had worth most plans... and we've got the negative returns, even in the 15 plus percent range this year. We don't... we will not be required to make any funding for the rest of year and potentially we'll have to fund for 2009 unless we see our better liquidity and than we might do some funding.

William Maze - Ecofin

All right. Thanks, guys.

Peter B. Delaney - Chairman, President and Chief Executive Officer

Thank you, Will.


[Operator Instructions]. And there are no more questions.

Peter B. Delaney - Chairman, President and Chief Executive Officer

Well, I'd just like to summarize, by saying, despite the turmoil in the financial commodity markets, OG&E remains well positioned to stay our course with our key initiatives inline with our strategic... last direction we've outlined previously. Centennial wind program and renewable related transmission project and demand side management issues is continued to move ahead.

With the regulatory approval, the Redbud Plant, September we're now better positioned to defer any additional capacity needs until 2020. And this will provide OGE Energy with the financial flexibility to pursue additional discretionary investment. At Enogex, we continued to move forward our joint venture with ETP and continue to see continued opportunities to invest in natural gas gathering and processing infrastructure in the Midcontinent and the take away capacity out of the Midcontinent.

The JV will be well position for both, our payout ratio remains to conservative 57% based on the mid point of our 2009 guidance, our liquidity from cash on our balance sheet our existing bank lines to project a cash flow from operations should be sufficient to fund operations dividends on our capital programs we outline today for 2009. And we'll continue to look at opportunities in the capital markets to further increase our liquidity position to enable us to pursue additional growth. Still lot of upside, OGE Energy at this juncture, given our current investment opportunity at the utility in the Enogex. Particularly, those associated with natural resources in Oklahoma.

A more constructive outlook for our states' economy with the nations, the upside from return of better processing spreads associated with an economic recovery from our financing flexibility, which will allow us to execute our plans. We thank you for your continued interest in the company and have a good day. Thank you very much.


This concludes today's conference call. You may now disconnect. .

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