OGE Energy Corp. Q4 2008 Earnings Call Transcript

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 |  About: OGE Energy Corp. (OGE)
by: SA Transcripts

OGE Energy Corp. (NYSE:OGE)

Q4 2008 Earnings Call Transcript

February 13, 2009 9:00 am ET

Executives

Todd Tidwell – Director, IR

Pete Delaney – Chairman, President & CEO

Scott Forbes – Interim CFO, Controller and Chief Accounting Officer

Howard Motley – VP, Regulatory Affairs

Keith Mitchell – SVP & COO, Enogex

Steve Merrill – VP & CFO, Enogex

Max Myers – Treasurer, Managing Director of Corporate Development and Finance

Analysts

Brian Russo – Ladenburg Thalmann

Reza Hatefi

Kyle Henderson [ph] – Prestadas Asset Management [ph]

Jeff Coviello – Duquesne Capital

David Frank – Catapult Capital

Chris Shelton – Millennium Partners

Operator

Good morning. My name is Katharine and I will be your conference operator. At this time, I would like to welcome everyone to the fourth quarter 2008 OGE Energy 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) Mr. Tidwell, you may begin your conference.

Todd Tidwell

Thank you. And good morning, everyone and welcome to OGE Energy Corp.'s fourth 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; Steve Merrill, Vice President and CFO of Enogex; Howard Motley, Vice President of Regulatory Affairs; and Max Myers, Treasurer 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 from Pete Delaney, followed by an explanation of full year and fourth 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 Web site at www.oge.com. We do have a new Web site today and the link can be found under Financials in the center of the web page.

In addition, the conference call and accompanying slides, including required non-GAAP reconciliation information, will be archived following the call on that same Web site. 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.

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

Pete Delaney

Good morning and welcome to our fourth quarter earnings call. As Scott Forbes will provide a more detailed overview of our financial results, I will keep my remarks to five main themes that frame our outlook for the Company.

First, from a financial standpoint, 2008 was another year of solid performance with earnings on an operating basis in line with the record levels of prior years and well within our beginning of the year guidance of $2.30 to $2.50. Reported earnings of $2.49 per share include several one-time charges relative to last year's earnings of $2.64.

And at the utility, despite continued growth, customer count grew at 1% and retail sales grew at 2%, which is in-line with growth over the last several years. Regulatory lag ate into net income. Enogex recorded net income for the second year in a row, record net income for the second year in a row as commodity spreads reached all-time high.

Secondly, the Oklahoma economy remains much more constructive than in other regions and we expect continued sales and customer growth in 2009, although at a lower rate than we had in 2008. The metro area unemployment rate remains well below the national average at just below 5% and for 2009, job growth of 0.2% is expected, that's about 1100 jobs. And housing prices are projected to hold up with pricing gains of 3% through the coming year. Relative to other areas, this is quite positive.

The outlook for our industrial segment is mixed with several manufacturers in our area reducing production, but at the same time, we have new customers coming on line. In 2009, we are expecting an additional 45 megawatts of incremental capacity will be required to serve the load of specific large, commercial and industrial electrical projects currently underway. Net total, we are expecting industrial sales to increase this year, but at a rate lower than last year.

Regarding the residential segment, building permits continue to decline; whereas commercial permits have been more steady. As you may recall from October's earnings call and our guidance for 2009, we did assume a reduction in our total sales growth, reducing our projections for 2009 to 1% from around the 2% annual growth rate we have realized over the last several years. We have no indication that a revision of our sales growth rate assumption is required at this time.

Third theme is that utility is well-positioned to execute its investment program associated with our business strategy, due largely to the success of several important initiatives in 2008. We are focusing our growth capital on renewables, specifically renewable-based transmission and generation, i.e. wind farms, capitalizing on our enviable position in the wind corridor in the United States.

Our regulatory initiatives result in important rate orders in Oklahoma. These orders include the recovery of around $41 million expenditures associated with December 2007 ice storm and Red Rock coal plant development. An order approving our acquisition of 51% ownership interest in a 1,200 megawatt combined-cycle plant, the Redbud Power Plant that we purchased at a great price of $695 per KW.

And the Oklahoma Commission approved recovery of a $250 million, 345-kV renewables-based transmission line that we call wind speed, which will extend into western Oklahoma and scheduled for completion in early 2010. This line supports our plan to expand our wind generation by over 700 megawatts over the next three years to five years.

In addition to these 2008 regulatory initiatives, OGE is pursuing a partnership that we announced with AEP and MidAmerican to build a 765-kV transmission line in western Oklahoma, the Tallgrass project, which has received a FERC order, including an incentive return.

A 100 megawatt wind farm that will be completed by the end of 2009 should be connected to the wind speed transmission line I just discussed. Construction of another $95 million, 345-kV transmission line in southeast Oklahoma that OG&E has recently been directed to construct by the Southwest Power Pool.

Rate cases in both Arkansas and Oklahoma to recover more than $700 million that OGE has invested since the live rate cases are in the plans as well. Specifically, to recover these costs, we filed a $26 million rate case last year with the Arkansas Commission. And we will file an approximately $100 million request in Oklahoma this month. These increases will provide a basis for earnings growth at the utility through 2011, providing we manage our costs carefully. As you can tell, we have a lot going on at the utility and we are very excited about these opportunities for growth.

Our fourth theme is that Enogex, on a standalone basis is positioned for growth. We announced yesterday we have agreed with our partner Energy Transfer to terminate our proposed joint venture. While the strategic merits of the transaction are still valid, we believe it is in the best interest of our shareholders to terminate our efforts at this time.

Among other things, much higher credit spreads for debt, bank debt or otherwise, coupled with limited bank revolver capacity in the market and significantly higher yields for midstream MLPs significantly reduced the financial benefits of this transaction to OG&E.

We are focused on maximizing long-term shareholder value and we do not believe we could close the transaction in the current market environment that would be beneficial to our shareholders. However, we remain very confident about our ability to grow and strengthen Enogex on a standalone basis.

Enogex is well-positioned to grow its presence in the Mid-Continent. The business is sound and there is ample liquidity to fund its capital expenditure program and we will pursue acquisition opportunities that line up with our strategic goals and are accretive at the onset. We will, however, be very diligent and are very sensitive to the challenges associated with the financing in this market.

Enogex continues to make progress towards expanding and strengthening its business. For example, at the beginning of this year, we were able to convert on a month-to-month basis around 10% of our processing volumes to a percentage of liquids basis from a keep-whole arrangement.

We are working now to move that agreement from a short-term to a long-term basis. That shift alone reduces our keep-whole process volumes – again, those volumes with a BTU content of over 1080, down to 22% of our processing portfolio from 31%. In 2007, keep-whole volumes represented 40% of our total.

While we have reduced our planned capital expenditures at Enogex for 2009 to $230 million from $277 million, reflecting several projects that producers have put on hold, we have seen continued activity by some of our key producers in our major areas of development, such as the Woodford Shale and in the Granite Wash area, surrounding our new Clinton plant, which is scheduled to come online later this year.

And lastly, we are confirming our guidance. We are reaffirming our earnings guidance for 2009 of $2.30 to $2.60 per share, reflecting expectation for earnings growth at the utility associated with the regulatory initiatives that I have mentioned. Offsetting that increase somewhat is the lower projected earnings for Enogex based on lower processing spreads offsetting higher gas rate volumes.

Since the call in October where we initially gave guidance for 2009, our projected processing margins in 2009 have been reduced due to a lowering of projected commodity prices. In response, Enogex has taken steps to reduce costs by, among other things, reducing headcount by about 5% and foregoing all salary increases.

The net result is that our most recent point forecast for Enogex is towards the lower half of their range, which is $0.53 per share to $0.70 per share. As a result, our current point forecast is towards the lower half of our $2.30 to $2.60 guidance for consolidated earnings. We have looked at the results for January on a very preliminary basis. And those results, in our opinion are consistent with our overall range. However, as we know, that's the only first month of the year.

Now I would like to turn it over to Scott to review more specificity our 2008 financial results. Scott?

Scott Forbes

Thank you, Pete. For the full year 2008, we reported net income of $231.4 million or $2.49 per average diluted share as compared to net income of $244.2 million or $2.64 per average diluted share in 2007. The 2008 earnings include several one-time charges that reduced earnings per share by $0.18.

On Slide #3, you can see the contribution by business unit on a comparative basis. Please keep in mind that in 2008, the marketing business is included with the holding company results, while in 2007 it was included in Enogex. Over the next few slides, I will go into more detail regarding the results by business.

At OG&E, net income for 2008 was $143 million or $1.54 per share, as compared to net income of $161.7 million or $1.75 per share in 2007. Some of the primary drivers are as follows

Gross margin on revenues increased $34.6 million or 4.3%. I will provide details on gross margin on the next slide.

Operating and maintenance expense increased $30.9 million or 9.6%. $9.5 million of the increase was due to a one-time charge for overcapitalized costs in prior years. The remaining increase resulted from higher payroll and benefits, increased contract services associated with overhauls at several of OG&E's power plants, increased vegetation management costs, higher fuel costs for our transportation fleet and lower O&M in 2007 as labor associated with the December 2007 ice storm was capitalized as part of a regulatory asset.

Depreciation and amortization expense increased $13.7 million or 9.7% due to additional assets being placed in service, including the Redbud power plant that we purchased in late September.

Other income and expense is down due to a one-time write-off of $7.7 million of the Redrock plant abandonment costs and $1.5 million of storm costs as part of a regulatory settlement in July.

Interest expense increased $24.2 million or 44.1%, primarily due to the long-term debt issuances in 2008 and an IRS settlement in 2007, which reduced interest expense by $7.2 million. These factors were partially offset by a lower effective tax rate, primarily due to an increase in the federal renewable energy credits and additional state investment tax credits in 2008 when compared to 2007.

Gross margin at OG&E was $844.6 million in 2008 compared to $810 million in 2007, an increase of $34.6 million or 4.3%. Gross margin increased primarily due to the Redbud recovery of $18.1 million and the storm cost recovery of $3 million. New customer growth added $8.4 million as the new customer count grew at a rate of 1% and retail sales growth grew at 2%, which were both in line with growth over the last several years.

Increased demand and other related revenues from non-residential customers added $5.1 million despite a slight 1% drop in kilowatt hour sales to this class. Overall, approximately 13% of our gross margin is derived from our industrial and oil field customers.

Finally, weather had no effect on gross margin as it was flat year-over-year. At Enogex, net income for 2008 was $91.2 million or $0.98 per share as compared to net income of $86.2 million or $0.93 per share in 2007.

Some of the primary drivers are as follows

Gross margin was the largest variance as margins increased $39.9 million or 11.3%. I will discuss those details on the next slide.

Operation and maintenance expenses increased $8.1 million or 6.4%, primarily due to an increase in pipeline integrity and information technology projects. Higher salaries and benefits and increased allocations from the parent as well as the marketing business.

Depreciation and amortization expense increased $8.7 million or 19%, due to higher levels of depreciable plant associated with system growth. Other income and expense decreased $11.8 million from 2007 due to lower interest income and the minority interest associated with the Atoka joint venture, which began operations in August 2007.

Gross margin at Enogex increased by $39.9 million or 11.3% in 2008. The increase in the gathering and processing business was almost all attributable to processing margins due to higher commodity prices and volumes. Of the $50.9 million increase in gathering and processing segment, $49.4 million was associated with the processing business.

Transportation and storage margins increased $13.5 million, in part due to a decreased imbalance liability and higher cross-haul revenues, which were partially offset by fuel over recoveries which resulted in a loss compared to 2007.

Marketing and other contributed $24.5 million to gross margin for Enogex in 2007. Effective January 1, 2008, Enogex distributed the stock to the marketing company to OG&E. The marketing company contributed $19.9 million of gross margin in 2008 to the parent.

For more detailed explanations on 2008 results, please refer to the Company's 2008 Form 10-K, which was filed this morning with the Securities and Exchange Commission.

For the fourth quarter, we reported net income of $21.8 million or $0.23 per average diluted share, as compared to net income of $37.6 million or $0.40 per average diluted share in 2007. The fourth quarter of 2008 includes a one-time $0.06 per share charge for transaction costs associated with the previously planned OGE Enogex Partners IPO and the proposed ETP Enogex Partners joint venture.

Slide #8 shows the contribution by business unit on a comparative basis. At OG&E, net income for the fourth quarter of 2008 was $16.3 million or $0.17 per share as compared to net income of $15.7 million or $0.17 per share in 2007.

Gross margin on revenues increased $18.9 million or over 11%. I will go over the changes in gross margin on the next slide. Depreciation and amortization expense increased $8.1 million or 22.5% primarily due to the acquisition of the Redbud Power Plant and it being placed in service along with the amortization of the storm regulatory asset as well as additional assets being placed in service.

Other income and expense created a positive variance of $6 million, in part, due to interest income from under-recovered fuel balances and higher revenues from the Guaranteed Flat Bill program.

Interest expense increased $17.1 million related to long-term debt issued in 2008; the IRS settlement which lowered interest expense in 2007; and higher interest expense associated with commercial paper and other short-term borrowings. These factors were partially offset by a lower effective tax rate, primarily due to increased federal renewable energy credits and additional state investment tax credits compared to the same period of 2007.

OG&E gross margin was $189.2 million for the fourth quarter of 2008 as compared to $170.3 million in 2007, an increase of approximately $18.9 million or 11.1%. The gross margin increased due to new revenues from the recovery of the Redbud Power Plant totaling $17.7 million and the storm cost recovery of $2.3 million.

New customer growth in OG&E service territory increased gross margin by approximately $1.7 million. Also, other revenues added $1.7 million. These increases were partially offset by cooler weather in OG&E service territory, which resulted in a 59% decrease in cooling degree days compared to the fourth quarter of 2007, which decreased gross margin by approximately $4.4 million.

At Enogex, net income decreased $0.14 per share in the fourth quarter of 2008 as compared to the same period in 2007. Some of the primary drivers are as follows

Gross margin was the largest variance as margins decreased $20 million. I will discuss the details on the next slide.

Operation and maintenance expense decreased $5.1 million, primarily due to lower professional and contract services, the transfer of the marketing business to the parent, and lower allocations from the parent.

Depreciation and amortization expense increased $2.7 million due to higher levels of depreciable plant associated with system growth. And other income and expense created a negative variance of $1.6 million from 2007, primarily due to lower interest income.

Gross margin at Enogex decreased $20 million in the fourth quarter of 2008 as compared to the same period in 2007. Transportation and storage margins increased $6.8 million, primarily due to a lower imbalance liability and higher cross-haul revenues. The main driver for the drop in margin was in the gathering and processing business where processing margins fell $13.7 million due to weaker commodity prices in the fourth quarter.

In addition, gathering margins declined $7.2 million, primarily as a result of an increased imbalance liability and an increase in fuel reserve. Marketing and other contributed $5.9 million of margin in 2007 and marketing was transferred to the holding company in January of 2008.

As you can see, we are reaffirming our 2009 guidance at $2.30 to $2.60 per average diluted share. However, some of the individual components have changed. Based on the current commodity price environment, we are now projecting earnings to be toward the lower half of the guidance. On Slide #13, you can see the guidance for each of the businesses.

I would like to direct you to the Company's 2008 Form 10-K for additional information on our guidance.

Slide #14 shows that the Company has ample liquidity for 2009 without accessing the capital markets. In fact, we are projecting a cushion of approximately $619 million. The only upcoming debt financing in our portfolio is the $400 million 8 1/8 senior notes at Enogex, which are due in January of 2010. We are currently reviewing our options for the refinancing of this debt.

We have also issued approximately $41 million of our previously announced $75 million equity offering and plan to raise the additional $34 million most likely through our dividend reinvestment waiver program. The possibility of additional equity needs for 2009 and beyond depend on a variety of factors, including timing of capital projects, cash flow, rate relief and credit metrics. The Company remains committed to a strong balance sheet and maintaining its current credit ratings.

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

Howard Motley

Thanks, Scott. In August 2008, OG&E filed an application with the Arkansas Public Service Commission requesting to increase its rates to $26.4 million. On January 13th of this year, the staff filed testimony recommending $12 million. The hearing is scheduled for April, the 7th. A Commission decision is expected in June 2009 based on a 10-month statutory time table and new rates are targeted for implementation in July of this year.

Also, last year, in October 2008, OG&E filed an application requesting recovery of $600,000 of storm costs incurred in 2008 that exceeded the amount of recovery in our base rates in the Arkansas jurisdiction. In December, the Commission authorized OG&E to defer these costs and address in the pending rate case without any guarantee. In January of 2009 when the staff filed their recommendation, the $12 million recommendation, they recommended recovery of these storm costs in the rate case.

In the Oklahoma jurisdiction, OG&E plans to file a rate case around February 26. The amount of the request will range between $100 million and $110 million. We will be proposing a 12.25% return on equity with a 54% common equity level. In the upcoming Oklahoma rate case, 100 basis points is worth approximately $25.5 million. A Commission decision is expected in August of this year based on the 180-day statutory timing for processing a rate case. The implementation of new rates is targeted for September 2009.

In December 2008, OG&E also filed an application with the Oklahoma Commission to harden our electric system from storms we experience every year due to wind, ice and tornadoes. The Company is requesting an approval of a five-year program with a recovery rider. The program targets $115 million for capital expenditures in underground facilities over the five years and an additional $10 million annually for vegetation management. The hearing is scheduled for March 25, 2009 and a Commission order is expected in the second quarter. If approved by the Oklahoma Commission, our target is to implement this program and the recovery rider in the third quarter of this year.

Two other regulatory actions in Oklahoma. On January 15, OG&E filed an application requesting approval of certain NERC compliance projects as part of the Company's updated security plan. If approved by the Commission, the annual revenue requirement for these projects is approximately $900,000, which should be recoverable through a previously approved security rider. The Commission decision is expected in the third quarter of this year.

Finally, the Oklahoma staff filed an application in September 2008 for a prudence review of the 2007 costs recovered through the Company's fuel cost adjustment. On January 26, 2009, the Company filed the minimum filing requirement established by the Commission rules. At this time, a procedure schedule has not been issued. Back to you, Pete.

Pete Delaney

Thank you, Howard. Now, we will take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Brian Russo with Ladenburg Thalmann. Your line is open.

Brian Russo – Ladenburg Thalmann

Good morning. Just a question on the 2009 outlook, it looks like you have increased OG&E expectations slightly, maintaining the low end of the Enogex EPS. But the holding company negative drag has been reduced quite meaningfully and I was just curious to know what was the driver of that?

Pete Delaney

Scott?

Scott Forbes

Hi, Brian. It's lower borrowings as well as interest rates less than what we had forecast back in October.

Brian Russo – Ladenburg Thalmann

Okay. And in terms of your external capital needs, if I understood you correctly, your equity needs are satisfied with the remaining DRIP program, but depending on incremental CapEx or other needs, you may consider equity offering?

Scott Forbes

Sure, we will take a look at the variety of factors we talked about, but at this point, we think the remaining balance of $34 million is where we are looking for this year.

Brian Russo – Ladenburg Thalmann

What's your target equity ratio?

Scott Forbes

Well, at the utility, of course, we are maintaining a 54% equity ratio and overall, the target is somewhere around 50% for the holding company.

Brian Russo – Ladenburg Thalmann

Okay. And I think in your 10-K and the '09 outlook, you are assuming 10% volume growth at Enogex. I think that compares to a previous forecast of 7%. And I was wondering what the drivers were there. And then, secondly, are you seeing any shut-ins or slow-down in drilling given where gas prices are today?

Pete Delaney

Yes, Keith, Chief Operating Officer of Enogex, will handle that call. Keith?

Keith Mitchell

Yes, we are seeing a lot of activity in certain areas that we do have some growth and that's why you see the volumes growth still remains strong. We have seen some areas where we have had some rigs laid down, but some of the areas that we have some of our growth projects in have remained strong. So that's why you see the growth.

Brian Russo – Ladenburg Thalmann

Okay, so even with gas prices below $5, you are not seeing any shut-ins?

Keith Mitchell

We have seen some in some areas and we have seen some rigs lay down, but even with the current gas prices, which right now in Oklahoma are around $3.50, we have continued to see drilling in some key development areas that we have infrastructure going in.

Brian Russo – Ladenburg Thalmann

Okay, thank you very much.

Operator

Our next question comes from the line of Reza Hatefi. Your line is open.

Reza Hatefi

Thank you very much. Could you break down your gross margin for your gathering and processing business? Again, the percentages that you expect from keep-whole versus percentage of liquids versus – I mean for the volumes that versus fee?

Pete Delaney

I think the question was – let me put that back to you. You are looking for I thought a breakdown of margin, not volume by –

Reza Hatefi

Yes, margin –

Pete Delaney

– type of contract?

Reza Hatefi

Both, actually, yes.

Pete Delaney

Both volumes and margins. Steve Merrill, Chief Financial Officer of Enogex.

Steve Merrill

With regard to margin, our gathering processing margin is about 56% of total margin, transportation storage about 44%, so that shifted considerably from '08 to almost pretty close to an even mix with regard to margin. With regard to our processing mix, our current mix is about 40% POL, keep-whole greater than 1080 is about 30%. Keep-whole less than 1080 – again, which we have the ability to reject ethane and flow that directly into the pipeline is 15%, almost 16% and then our fixed fees, 14%, which has almost doubled since 2007.

Reza Hatefi

I see. Okay, great. And I notice that your gross margin guidance is $190 million to $220 million for 2009. How much of that is fixed fee?

Steve Merrill

That's all gathering and processing. That's the gathering and processing piece of our gross margin. The fixed fee portion of that – keep in mind, you got your gathered in there that is more fee-based.

Todd Tidwell

Yes, Reza, this is Todd. We don't give out the margin on fixed fee. What I can tell you is though our projected inlet volumes, fixed fee is about 13% is being projected in 2009 of our inlet volumes and our total inlet volumes are about 262 million for 2009. So you can do the math there and determine what the MMBTU basis for fixed fee would be. And then you will just have to – obviously, for competitive reasons, we don't disclose that number on what we pay for fixed fee processing. But once you know what the MMBTU amount is, you can apply a price to that.

Reza Hatefi

And I was wondering your frac spread guidance for 2009 is a little bit less than half of what it was realized in 2008, if I'm not mistaken, and roughly the same goes for NGL prices in '09 versus realized in '08. And your gathering and processing gross margin is only 25% or so – 20% or so lower than last year. Could you describe – is it because less of the margin is commoditized and thus even though the commodities are dropping by roughly 50% that's leading to gross margin only dropping by 20%? Could you talk about that a little bit?

Steve Merrill

Yes, remember, we also have volume growth in our gathering business. So you are seeing some of the loss of the commodity margin being offset by the fact that we are growing our volumes and we have the fees from our gathering volumes.

Reza Hatefi

Great. Thank you very much.

Todd Tidwell

And Reza, I might add also, this is Todd again that the actual processing margins that came in 2008 were about $143 million. That does not include Atoka. And if you look at our midpoint of our current guidance, we are at about $78 million to $80 million on processing. So it is – the drop in commodity spreads and liquids prices is built into the guidance.

Reza Hatefi

Thank you.

Operator

Our next question comes from the line of Kyle Henderson [ph] with Prestadas Asset Management [ph].

Kyle Henderson – Prestadas Asset Management

Good morning. I want to make sure I understand the slide for your processing hedges, particularly for 2009. It looks like you have unhedged about 14 million gallons to 15 million gallons unhedged, is that correct?

Pete Delaney

Are you talking on total or just on the keep-whole or –

Kyle Henderson – Prestadas Asset Management

I'm sorry. Yes, I am talking on total on your unhedged volumes there for your processing margins for your keep-whole contracts in 2009. I read that, it says about 14.7 million gallons or so of total unhedged.

Pete Delaney

That is on keep-whole, that is correct.

Kyle Henderson – Prestadas Asset Management

And then it looks like you have a spread number of $654 per MMBTU.

Pete Delaney

Right. And that does not include ethane.

Kyle Henderson – Prestadas Asset Management

That does not include ethane? Okay. What's the source of those numbers for the spreads there for the unhedged portion? Is that an estimate or what is that?

Pete Delaney

That's a price curve as of January 31st.

Kyle Henderson – Prestadas Asset Management

Okay. And that's quoted out of Mont Belvieu, is that correct? Or where would that be – what would be the source I guess for that number?

Pete Delaney

Conway.

Kyle Henderson – Prestadas Asset Management

Conway. Okay. What are you currently seeing right now in Conway?

Scott Forbes

They are in line with that current spreads right now. The market spreads about $3.63 at Conway, which would equate to a realized spread around $2.20, $2.30.

Pete Delaney

Right now would include ethane.

Scott Forbes

Correct. Including ethane.

Kyle Henderson – Prestadas Asset Management

Okay. So at the risk of grossly oversimplifying here, if I were to mark that to market with where the curve is currently right now, it appears to me that because you got so much of this hedge, we are probably only talking about maybe $0.02 a share. Did I get that calculation roughly correct?

Scott Forbes

On upside?

Kyle Henderson – Prestadas Asset Management

I'm sorry. If I were to mark it down to say the $2.20, $2.30 or so we are seeing at Conway, because you got so much of this – so much of your keep-whole already hedged, it appears that the impact is pretty minimal.

Scott Forbes

That's correct. It would really be roughly flat with where our current outlook is.

Kyle Henderson – Prestadas Asset Management

Okay. So I guess the real question I have then is you have already guided Enogex to the lower end of a pretty wide variance. I understand there is some volumetric risk, but I wonder if you could walk me through what the rest of the risk is there at Enogex?

Scott Forbes

It's volumetric. It would be the remaining risk. We don't have much downside left on the commodity side. There is very little margin that is unhedged on the downside, so really it's volume risk at this point.

Kyle Henderson – Prestadas Asset Management

Okay, very good. That's it. Thank you.

Scott Forbes

There is a little bit of natural gas link that's out there, so there is a little bit of risk associated with that, but most of it is on the processing side.

Kyle Henderson – Prestadas Asset Management

I appreciate your responses. Thank you.

Operator

Our next question comes from the line of Jeff Coviello with Duquesne Capital. Your line is now open.

Jeff Coviello – Duquesne Capital

Good morning, guys. How are you?

Pete Delaney

Hey, Jeff.

Jeff Coviello – Duquesne Capital

I just wanted to ask a question about the basins you are in. You mentioned that the current gas prices, I think it’s around $3.50, you are still seeing your development growth in drilling. And I was just wondering if you thought that was from the fixed costs of picking up the acreage and they're just drilling in, or do you think that actually the reserves there are economic at $3.50 and even if gas prices stay here, you are still going to see growth?

Pete Delaney

Yes. Again, we have seen some rigs come down, but there are some key areas that are continuing to develop in that area. I think that if you look at the Woodford Shale and also some of these granite wash plays around where we have infrastructure going in, they've continued to develop at these rates. I think they have acreage that they want to continue to develop and hold. They also are looking for – they don't think that this will be sustained throughout the year or even going into the first part of next year. So they are continuing their developing plans instead of letting these rigs go.

Jeff Coviello – Duquesne Capital

Got it. Okay. And o you have any sense of where, I mean roughly, at around what gas price you think you would see a permanent slowing? Is it $5, $6, $7 or is it – I know it's probably pretty low cost there to develop the gas.

Pete Delaney

Yes, I think it depends somewhat by the producer and their particular situation. Like I said, some producers are down and they don't expect to come back until prices say get because – say the $4 range, but we also have those that are saying at $3.50 they are going to continue to drill.

Jeff Coviello – Duquesne Capital

Got it. Alright. That's helpful, guys. Thanks a lot.

Operator

Our next question comes from David Frank with Catapult Capital. Your line is open.

David Frank – Catapult Capital

Hi, good morning guys.

Pete Delaney

Good morning.

David Frank – Catapult Capital

Could you tell me or could you tell us what ROE is embedded at the utility for your guidance? What ROE assumption is embedded for your '09 guidance for this year?

Pete Delaney

In terms of the range, what falls out from our guidance?

David Frank – Catapult Capital

Yes, approximately what do you expect the utility to earn; what kind of ROE in '09? What is reflected in your guidance for '09?

Pete Delaney

My recollection and checking the numbers that with our assumptions for 2009, and we do have – Howard went through we do have Arkansas which we expect to have a final order in the summer and we have our Oklahoma that – but overall, I think it comes in around 9.5% return on equity. Of course, we have an authorized at this point in time about 10.75%, so that was a regulatory lag I referred to in my comments.

David Frank – Catapult Capital

So the utility earnings guidance of $1.83 to $1.98 for '09 assumes a 9.5% ROE versus roughly a 10.7% authorized?

Pete Delaney

Yes. I mean we don't make an assumption of what we earn. We do our projections – project through pricing volumes, cost management, and that range falls out. That range probably if you took the midpoint, my guess is it's around 9.5%.

Todd Tidwell

That's exactly – David, this is Todd. And remember that we are only going to get about four months of Oklahoma rate relief and six months of Arkansas rate relief, so there is going to be a lag on that ROE.

David Frank – Catapult Capital

Right. And was that ROE on your fully (inaudible) capital fees?

Scott Forbes

It's on our capital structure utility, the 54% roughly equity base average year.

David Frank – Catapult Capital

And that takes into account all the investments you made?

Scott Forbes

Yes, through the date through December '08, really.

David Frank – Catapult Capital

I am sorry, also on your one, the Tallgrass, I believe it was, the transmission project?

Pete Delaney

Correct.

David Frank – Catapult Capital

Did you say you had already received FERC approval, and did you say something about incentives on that?

Pete Delaney

Max?

Max Myers

Sure. David, this is Max Myers. We did receive a FERC order at the end of 2008. We got 12.8 ROE as well as recovery, CWIP recovery and abandonment recovery as well. Now we are working with the STP and awaiting cost allocation methodology for the STP to move forward, but we did get FERC approval.

Pete Delaney

We do have another step, as Max said, so we don't have the authority to go ahead and start construction on that line. And with regards to the Southwest Power Pool, that process, the timeline is not as transparent as we would want it to be. So it's hard for us to project at which point in time we would be able to be moving forward, although we have timelines around I think trying to start in the middle of the year and complete that in 2013. Whether that will be met remains to be seen.

David Frank – Catapult Capital

Could you remind us what is the portion of your investment on that line?

Pete Delaney

It would be half.

Keith Mitchell

About $250 million.

David Frank – Catapult Capital

$250 million. And on the other SPP transmission line you mentioned, I think that was – I forget the name that one.

Pete Delaney

Well, there is two other lines. There is the windspeed line from Oklahoma City to Woodward that we got regulatory pre-approval for that we are constructing now. And then we received a notice to construct from the SPP for a 345-kV line in Southeast Oklahoma. That's about $96 million.

David Frank – Catapult Capital

Okay. Alright. Thank you very much.

Pete Delaney

Thank you.

Operator

Our next question comes from the line of Chris Shelton with Millennium Partners. Your line is open.

Chris Shelton – Millennium Partners

Good morning, guys. Just wanted to get a little more color on the parent, what's driving the parent interest expense reduction. Did you said less borrowings? Was there anything driving the less borrowings? Did you cut CapEx or –?

Pete Delaney

Hi, Chris, it's really lower interest rates. If you recall back when we set guidance in October, we were at that point you know in the market where our short variable rate debt on our tax-exempt bonds was 8% for a two-week point in time. So variable rates at that point in time were very, very high, and it was that anomaly in the market back in October. So we took a pretty conservative view in terms of our 2009 short-term interest rates. Those rates have come back, as you know, and so it's just a reduction in the short-term interest rate assumption for '09.

Chris Shelton – Millennium Partners

Okay. And so the level of borrowing is relatively the same from interest rate assumption?

Pete Delaney

That's correct.

Chris Shelton – Millennium Partners

Okay. And then on the – I notice you've got and I think you said in the prepared remarks, a higher share count assumed in '09. Should we just assume that you execute the remaining portion of the dribble [ph] plan you guys have started?

Pete Delaney

That's correct.

Chris Shelton – Millennium Partners

Okay. Alright. Thank you.

Operator

At this time, there are no further questions in queue.

Pete Delaney

Well, as you have seen, 2008 for OG&E was quite a year with many accomplishments and we're really excited also about our prospects for 2009. We have financial flexibility with ample borrowing capacity, also from a low payout ratio and also associated with the really limited maintenance or I would call nondiscretionary expenditures relative to our cash flow to manage through this financial crisis that we find ourselves in. We have a clear path for growth in the utility. We have $85 million of incremental revenues in 2009 and $35 million of incremental revenue in 2010 from 2008 rate case settlements. In addition, we filed a $26 million request in Arkansas that we talked about last year and we will be filing the $100 million rate filing in Oklahoma this month.

We also believe Enogex will have opportunities in the current marketplace to improve its position relative to its competitors, continue experiencing increased gathering volumes in 2009.

And in terms of profitability, we think, clearly, we have much more upside than downside based on processing spreads at this part of the cycle.

And while the efforts to joint venture with Energy Transfer has ended at the current time, management will continue to explore strategies with the goal that OGE Energy stock would fully reflect the value of our midstream business.

I thank you for your interest in the Company and have a great day.

Operator

This concludes your conference. You may now disconnect your lines. Thank you for using the conferencing services.

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