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OGE Energy Corp. (NYSE:OGE)

Q4 2012 Results Earnings Call

February 27, 2013 9:00 AM ET

Executives

Todd Tidwell - Director, Investor Relations

Pete Delaney - Chairman, President and CEO

Sean Trauschke - Vice President and CFO

Keith Mitchell - President, Enogex

Analysts

Anthony Crowdell - Jefferies

Ashar Khan - Visium

Brian Russo - Ladenburg Thalmann

Andy Bischoff - Morningstar

Chris Ellinghaus - William Capital

Pu Chen - Talon Capital

Stephen Huang - Carlson Capital

Operator

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

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

Todd Tidwell

Thank you, Shaquana, and good morning, everyone. And welcome to OGE Energy Corp.’s fourth quarter 2012 earnings call. I’m Todd Tidwell, Director of Investor Relations, and with me today I have Pete Delaney, Chairman, President and CEO of OGE Energy Corp.; Sean Trauschke, Vice President and CFO of OGE Energy Corp.; and Keith Mitchell, President of Enogex.

In terms of the call today, we will first hear from Pete, followed by Keith with update on the midstream business and then an explanation from Sean of fourth quarter and year end results, and finally as always we will answer your questions.

I would like to remind you that this conference is being webcast and you may follow along on our website at oge.com. In addition, the conference call an accompanying slides will be archived following the call on that same website.

Before we begin the presentation, I would like to direct your attention to the Safe Harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date. In addition, there is a Regulation G reconciliation for EBITDA in the appendix, along with our projected capital expenditures.

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

Pete Delaney

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

Higher earnings were driven by solid performance of utility, contributions from new customer growth continues adding approximately $12 million to our margin. This reflects strong economy in our service territory and we expect that growth to continue, in fact we’ve increased our sales growth estimate for ‘13 up to 1.5% from our historical norm of around 1%.

Margins were also higher due to the completion of our three-year smart grid deployment at year end, which was on time and budget, and from the completion of the Crossroads wind farm earlier in the year. Another main contributor was earnings from our investments in transmission driven in part by our FERC order which allows for cash earnings on our transmission construction work in progress.

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

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

For the past three years we have invested in acreage dedications and liquids rich basins to secure long-term growth. We’ve also focused on operational capabilities to support realized and plant volume growth, and are managing through key pole processing contract, expiration and conversion, and renegotiating longer term dedications under fixed fee processing contract. We now have 2.5 million acres of long-term dedications, which we project will provide opportunities for us to invest for years to come.

During that same period gathering volumes in our system have grown 20% to more 1.5 trillion Btus per day and processing volumes were up over 1 trilling Btus per day, an increase of 40%, both all time record levels, with some of the commodity prices cyclical lows we are emphasizing more than ever our discipline around capital development and operating cost.

In 2013, double-digit growth in gathering and processing volumes expected to keep OG&E share of EBITDA flat offsetting the conversion of key pole arrangement at year end and projected 8% further decline in NGL pricing from the 2012 average price.

After 2013 we believe the headwinds of key pole contract conversions and declining commodity prices will be mostly behind us. As well as in the case in 2012, higher depreciation, interest expense and a lower ownership percentage will cause reduction in earnings contribution of OG&E.

Depreciation expense is projected to increase another $14 million, as well ArcLight ownership percentage go from 20% to 22% as we continue to invest in the business. Consequently, our 2013 earnings guidance for Enogex to earn $0.55 to $0.75 per share.

From last year, we are mainly excited about the opportunities ahead for Enogex and believe in our growth initiatives, and that further positions us to maximize the value our investment in Enogex.

Growth in EBITDA establishing clarity around future EBITDA growth an important element of positioning us to execute our long-term public market option, you all know well, our partnership with ArcLight has been about growing Enogex and positioning for the continued evolution of that business.

Utility is entering the final stages of our transmission buildout and our major projects should completed by the end of 2014. There is multi-year initiative will add 1.5 billion of transmission rate base. The real-time cash recovery of the FERC portion of this project is greatly improved the quality of our earnings and it’s been the significant earnings driver of utility.

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

Our smart meter installation across our system is complete and we continue to focus on delivering value from our smart grid investment. One of those areas of value is demand response and our focus on the next phase of demand reduction. We are able to save approximately brought 60 megawatts off our peak this past summer. Our goal is to reach 300 megawatts demand reduction through the incremental baseload generation is not need until 2020.

On the operating side, driving value from the data received from deployed technology is expected enable us to provide better reliability and service while taking out cost. As our transmission winds down, our capital program will be increasingly driven by our regional haze compliance plan, oral argument before the Tenth Circuit Court on our regional haze lawsuit are scheduled for March 6th and we expect the decision by summer. There is a range of potential outcomes, of course, that will be in a better position to get more specific regarding our compliance timeline once that comes known.

However, the MATS compliance deadline draws near and decisions will need to be made. Our recent test have confirmed the ability of using low-level dry sorbent injection and ACI to meet required emissions level, matching our regional haze and MATS compliance strategies optimal for us since DSI can be used to reduced SO2 emissions as well.

Our low-NOX burner installation is underway on seven of our units. And we expect completion of that project by 2016 and the costs were approximately $100 million. Our $2.80 to $2.90 in 2013 earnings guidance for OG&E reflects continued growth.

At Enogex, our primary focus is on integrating our existing acreage dedications. Drilling rig activity remains consistent or higher than our earlier performed expectations as these dedications are in very prolific basins.

Keith Mitchell will now lead -- will now provide a few comments on what we’re seeing from producers in our area. Keith.

Keith Mitchell

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

Drilling activity remains strong and are monthly well connect to exceeding expectations. Rig counts have increased 20% over last six months in our dedicated area. However, most of the rigs in the multizone areas of Western Oklahoma and Texas panhandle are currently charging the heavier oil pay zones. This is the result of higher relative returns and lower capital requirements.

This difference in volume to Enogex of these different zones is significant. For example, as the Tonkawa well may provide an initial production rate of less than 500,000 cubic feet a day, compared to a well exporting the Granite Wash zone with initial production rate of approximately 6 million cubic feet a day and higher.

That said, with the active and growing drilling activity on our dedications, our volume forecast for 2013 is still robust. And we are projecting strong growth in both gathering and processing for the next two years.

We are growing nicely into the premier gathering and processing essence, we’ve constructed over the last few years. And our producers are not only continuing to be very active drillers in our area but also acquiring new acreage that we will have the opportunity to serve.

Also the return of drilling more Granite Wash wells could significantly accelerate our volume growth projections. In the meantime, we remain confident in the ability of Enogex to deliver significant growth from this point forward.

Pete Delaney

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

Our consolidated earnings guidance of $3.35 and $3.60 reflects the lower earnings estimate of Enogex, offset to some degree by continued growth of the utility. I would note that OG&E’s share of EBITDA project to be flat as Enogex absorbs frequently low ethane and propane prices in the conversion of people contracts at year end.

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

Reflecting that view, we are asking our shareholders to double the number of our authorized shares at the annual shareholders’ meeting and expectation for the two to one stock split later this year. Our view of the stock split in subsequent additional shares outstanding will enhance our value proposition to investor. Thank you for your interest in OG&E.

And now, I’d like to turn the call over to Sean to review our financial performance in more detail.

Sean Trauschke

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

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

Now, looking at some of the other key drivers, as we’ve mentioned on previous calls, we’re focused on controlling our O&M costs which were basically flat for the quarter. Depreciation was $6 million higher for the quarter and the increase was due to additional assets being placed in the service, including two new transmission lines.

Net other income decreased primarily due to lower levels of equity at AFUDC in 2012. And likewise, the increase in interest expense is due in part due to lower AFUDC debt levels in 2012. Consistent with what we provided in our earnings guidance, our income tax rate was 22% in the fourth quarter compared to 36% in 2011.

This lower effective tax rate was due to federal and state renewable energy tax credits associated with Crossroads Wind Farm. Please keep in mind that these tax credits are passed due to customers by lowering our revenue requirement for Crossroads.

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

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

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

And finally, the effective income tax rate decreased from 31% in 2011 to 25% in 2012. And this was due to the federal energy renewable tax credits associated with Crossroads Wind Farm. As I mentioned earlier, utility margins were up for 2012 and there were four primary drivers for the increase in gross margin.

First was the recovery of various utility investments, including the Crossroads Wind Farm and Smart Grid. These increased gross margin by $54 million. The second, our SPP transmission projects created a positive gross margin variance of $29 million.

Third, growth from new and existing customers added another $16 million in gross margin. We added nearly 9000 new customers to the system compared to 2011. And finally, other items including the new rates in Oklahoma and Arkansas contributed $10 million in gross margin.

On a weather-normalized basis, residential megawatt hour sales grew at 1%. And the largest area growth was in the commercial sector, which increased 2% in 2012. Partially offsetting these increases was milder weather compared to 2011.

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

Turning to fourth quarter Enogex earnings, gross margin grew $10 million or 9% in the quarter as gathering volumes increased 11% and process volumes increased 18%, despite lower natural gas prices and a 15% drop in liquids prices. Interest expense increased $3 million in part due to higher debt levels used to fund our system expansion.

Lastly, the impact of the increased ownership from our equity partner, decreased earnings less than a penny as ArcLight made a $45 million contribution in the fourth quarter. I do want to provide a little more color on the fourth quarter in which we had a handful of unusual items.

You will recall in the fourth quarter of 2011, we had a gain on the insurance proceeds related to the Cox City, which contributed about $0.02 per share. In 2012, we increased the depreciation rates on certain assets and added true up with some natural gas and balances during the year. These items impacted Enogex’s net income by about approximately $0.06 attributable to OGE.

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

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

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

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

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

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

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

Now, turning to look closer at some of the key assumptions for our businesses, at utility, the drivers for earnings growth are going to come from the $375 million to be invested in SPP projects and 1.5% projected retail sales growth.

In addition, we received a notification from the Oklahoma Tax Commission in January, indicating our Crossroads wind farm was only entitled to a 1% investment tax credit. Obviously, we are disappointed by this because the rules were changed after we committed the capital.

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

Turning to Enogex, 2013 EBITDA guidance is relatively flat with 2012 actions. The drop in commodity prices and our convergence to fixed fee were offset by an increase in volumes. Unfortunately, we were anticipating more volume growth but as Pete mentioned, producers are targeting the Tonkawa zones, we were expecting some Granite Wash Wells to be drill.

Still, all of these are within our dedications. To be clear, the rig counts are increasing and volumes are still growing. Back to OGE levels, earnings to OGE from Enogex will be down due to the investments we are making to grow this business. The two drivers for the lower earnings are depreciation and the increased ownership interest by ArcLight.

Continued volume growth is expected and as we look at the business, it has a fundamentally different business profile. A good example of this is the contract mix. For 2013, a 10% move in NGL prices for the entire year is now $5 million impact at OGE.

This concludes our prepared remarks. Now, we will open up the lines for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Anthony Crowdell, representing Jefferies. Please proceed.

Anthony Crowdell - Jefferies

Good morning, guys. I guess question on the Enogex guidance and maybe two parts. One is you had some new processing plants coming on last year. I believe you maybe have a new plant coming on 2013. What do you forecast with these volume assumptions? What do you forecast, is that by -- I guess capacity utilization of those plants?

And second, when I look at like gathering and processing volumes, I mean there are still healthy numbers but maybe be some investors thought numbers could be higher. Is it a case of -- you had mentioned maybe less drilling, but also is there a function of it’s just the law of large numbers that -- I know Enogex is growing to a part or a size where double-digit growth is kind of getting very limited?

Pete Delaney

Keith.

Keith Mitchell

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

So we are growing into these capacities that we are adding. So we have good utilization on the newer plant and then we will back off of some of the older plants and as the volumes grow and then those will fill back up. As far as the drilling goes, we are seeing strong volume growth. There still a lot of drilling. As we mentioned, we are talking about 10% to 20% growth both this year and next year. And again, if you just take that on our throughput as Pete mentioned, we are over Bcf a day now in processing, so 10% to 20% is basically another whole plant.

So we do see that continuing and even with the drilling that we’re seeing, we are seeing last Granite Wash zones being targeted. Those zones are still there. They will be exploited at some point in time and we do have long-term acreage dedications.

But right now producers seem to be more focused on more of the Tonkawa zones or the [OREO] zones, which we do get gas production from. That’s why we still see grow, but not as much growth as we would see if they were drilling the Granite Wash wells.

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

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

Anthony Crowdell - Jefferies

What do you think like, what causes drillers to get back aggressively into the Granite Wash? Is it a natural gas price, I don’t know, above $3.50, is it NGL price above $0.90 a gallon, what causes the drillers to get back because, I know you had mentioned relative economics there better on the Tonkawa -- in the Tonkawa zones versus the Granite Wash? But, you had given out slides earlier through the year where the economics still look great in the Granite Wash, I guess, they are favoring the other zone. What cause them get back in the Granite Wash.

Keith Mitchell

Well, I think, there is multiple factors, I will tell you that the Tonkawa wells are lower CapEx and more oil, so that’s why relative economics are higher. There are still a lot of good economics in Granite Wash and Granite Wash wells are being drilled just not as many on the percentage basis as what we would earlier project, that I think depends on the producer, with commodity prices being down producers are certainly looking at their capital budget and they are looking at their allocation of where they want to drill so they are obviously going to prefer in the queue, the higher return. Also they can drill more wells if well costs are lower Tonkawa then they could if their Granite Wash.

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

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

Anthony Crowdell - Jefferies

Just because I’m not familiar with the geography in Oklahoma, I mean, is Tonkawa in the SCOOP zone, I think some E&P companies have maybe talked about that zone during this past summer, where is the Tonkawa zone or what the SCOOP?

Pete Delaney

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

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

The SCOOP or the Southeast Cana area is really more just the Cana Woodford is an extension of the Cana Woodford down further south and east. And that is an area that continues to be very strong and we still see a lot of active drilling and additional potential acreage dedications down there.

Anthony Crowdell - Jefferies

Great. Thank you for your help guys.

Operator

The next question comes from the line of Ashar Khan representing Visium. Please proceed.

Ashar Khan - Visium

Hi. Good morning.

Pete Delaney

Good morning, Ashar.

Ashar Khan - Visium

A question, you’ve guys had mentioned that you would have a $0.10 pre-tax gain on the sale of assets in the first quarter of ‘13, is that in the guidance or no?

Sean Trauschke

Yeah. It is.

Ashar Khan - Visium

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

Sean Trauschke

In ‘13 and in Oklahoma will be very close to, it’s a large return of 10.2%.

Ashar Khan - Visium

10.2%.

Sean Trauschke

Arkansas will be closer to about 6% and obviously, the FERC transmission will be at that rate, under the formula rates at 11.1%.

Ashar Khan - Visium

At 11.1%. Okay. Appreciate it. Thank you so much.

Sean Trauschke

Okay. Thanks Ashar.

Operator

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

Brian Russo - Ladenburg Thalmann

Hi. Good morning.

Pete Delaney

Good morning.

Sean Trauschke

Hi, Brian.

Brian Russo - Ladenburg Thalmann

So just to be clear there is a gain at Enogex included in the guidance, there is a $0.05 negative to the reserve at the utility, in the utility guidance?

Sean Trauschke

Yeah. That’s right.

Brian Russo - Ladenburg Thalmann

Okay.

Sean Trauschke

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

Brian Russo - Ladenburg Thalmann

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

Pete Delaney

Yeah. I think it’s, I let, I’ll start and then I’ll let Keith fill in here. But as Keith was explaining, a lot of this is related to, we do not having a new plant. The 2013 capital is really related to completing the McClure plant. We do not have an additional plant in there, for this a lot of this is building out to gathering and compression for the Western Oklahoma and Texas Panhandle expansions.

We’ve talked a lot about the SCOOP area. We are deploying capital in that area as well. So a lot of that is really gathering and compression just to kind of buildout the system. And I think Keith can give an idea as far as the timing of, the time it takes to build compression, compressor stations and plants and things like that.

Brian Russo - Ladenburg Thalmann

Okay.

Keith Mitchell

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

Brian Russo - Ladenburg Thalmann

Okay. So does this CapEx translate into volume growth that supported in your ‘13 and ‘14 volume guidance assumptions or should we look at this investment as more of like post 2014 type of contribution?

Pete Delaney

I believe that you’ll see it in 2014. Some -- for example, well connect, again you’re talking about kind of more current month-to-month compressor stations. You’re talking about timeframes of six month to 10 months and then processing plants.

We’ve been building McClure for a while and we’re going to finish that up this year. It’s an 18-month type process. So I think with all of these investments we’re looking at for 2013, you should see margin contributions in 2014.

Brian Russo - Ladenburg Thalmann

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

Sean Trauschke

Yeah. Brian, so at the end of ‘13, we would expect Oklahoma rate base to be about $4 billion, okay. The Arkansas piece is probably just shy of $400 million and the FERC rate base will be about $700 million. And that’s at the end of ‘13.

Brian Russo - Ladenburg Thalmann

Okay. So looks like $5.3 billion in total?

Sean Trauschke

Yeah.

Brian Russo - Ladenburg Thalmann

Okay.

Sean Trauschke

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

Brian Russo - Ladenburg Thalmann

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

Pete Delaney

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

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

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

Brian Russo - Ladenburg Thalmann

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

Pete Delaney

Well, let’s say, any time, you look at a sale, it’s a typical different decision you make on selling any parts of your business. And of course, you’re going to have depending on the tax basis any tax associated with that but that in terms of the public offering, the public options that I’m thinking about, that was not one of the ones.

Brian Russo - Ladenburg Thalmann

Okay. Thank you very much.

Operator

Your next question comes from the line of Andy Bischoff representing Morningstar. Please proceed.

Andy Bischoff - Morningstar

Hi. Good morning. I was wondering if you could prior just a little clarity on building and maintain O&M expense in 2003 and beyond. You have regularly been able to maintain O&M so far?

Sean Trauschke

Sure. Are you referring to the utility?

Andy Bischoff - Morningstar

Yeah. The utility.

Sean Trauschke

Yeah. So as we’ve done -- the last couple of years, we’ve done a very nice job. The folks have done a very nice job managing this. And I will tell you the good news there is there hasn’t been one big item that’s really moved the needle, it’s just been a lot of continuous improvement efforts where we have plans to continue that control of O&M. So that it does not exceed the rate of inflation going forward.

And everybody is aligned and onboard in the company. And that’s how we’re focusing. There’s not a specific action or effort we’re undertaking. It’s just, I think of it in terms of continuous improvement. And couple of examples, we’ve made great strides and managing our inventory, managing just the number of contractors or headcount that we have on the system.

We’re always looking for improvements on how we run our plants and our retail business. So I think it’s a concerted effort all across the board and every little bit is contributing.

Andy Bischoff - Morningstar

Thanks. I appreciate that.

Operator

Your next question comes from the line of Chris Ellinghaus representing William Capital. Please proceed.

Chris Ellinghaus - William Capital

Hey guys. How are you?

Pete Delaney

Hey, great. Chris, how are you?

Chris Ellinghaus - William Capital

I’m good. Sean, you said something about weather versus normal in ‘12. Did you give a number for that?

Sean Trauschke

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

Chris Ellinghaus - William Capital

Right.

Sean Trauschke

It was probably $45 million of margin difference versus ‘11 because it’s just the extreme heat we had in ‘11.

Chris Ellinghaus - William Capital

Okay.

Sean Trauschke

So it’s favorable to normal but less than ‘11.

Chris Ellinghaus - William Capital

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

Sean Trauschke

I guess, Chris -- help me. I’m a little confused. I think we’ve been in that, kind of, mid to high 30 range last couple of years at Enogex.

Chris Ellinghaus - William Capital

I just want to take a look at that again?

Sean Trauschke

Okay. All right.

Chris Ellinghaus - William Capital

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

Sean Trauschke

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

Chris Ellinghaus - William Capital

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

Sean Trauschke

Yeah.

Chris Ellinghaus - William Capital

Okay. And thanks a lot.

Sean Trauschke

And Chris?

Chris Ellinghaus - William Capital

Yeah.

Sean Trauschke

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

Chris Ellinghaus - William Capital

Okay.

Sean Trauschke

So also club with you.

Chris Ellinghaus - William Capital

Thanks so much.

Sean Trauschke

Thanks, Chris.

Operator

(Operator Instructions) Your next question comes from the line Anthony Crowdell representing Jefferies. Please proceed.

Anthony Crowdell - Jefferies

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

Sean Trauschke

No. We already sold it. So, when we met this 2nd January, we put out an 8-K announcing that we had converted a contract to a fixed fee agreement. Along with that, we had also, we picked up additional some acreage dedication in a longer-term. But one of the other pieces of that is we actually sold the low-pressures gathering system to this party and we recorded $10 million gain on 2nd January.

Anthony Crowdell - Jefferies

Okay. Great. Got it. So, if I’m just thinking of 2013, you have a nickel loss, non-recurring loss in first quarter to I guess in tax related to transmission and in first quarter, you are going to have a $10 million gain but that’s Enogex, you guys or whatever your percentage is of that? Is that accurate?

Sean Trauschke

Yeah. Just to be clear. The $0.05 reserve we are taking is related to investment tax credits associated with the Crossroads wind farm. In short there, the investment tax credit is basically, we’re allowed to take 2% for five years and we received a notice from the tax commission in January that they had reduced that to 1%. So that’s the issue there. On the gain, the $10 million gain, again, $0.5 that’s an aftertax number. The $10 million gain at Enogex, that’s a pretax number.

Anthony Crowdell - Jefferies

And that’s Enogex portion, that’s not OGE’s portion. I mean, that’s all of Enogex, right?

Sean Trauschke

Yeah. That’s our share.

Anthony Crowdell - Jefferies

Okay. Got it. So it’s roughly $0.06 positive or nickel negative.

Sean Trauschke

Let me back. I think I got, I think we are talking past each other. The $10 million was the total gain on that. Our share of that would be about 80%.

Anthony Crowdell - Jefferies

Got it.

Sean Trauschke

But that’s a pre-tax number.

Anthony Crowdell - Jefferies

Perfect.

Sean Trauschke

Okay.

Anthony Crowdell - Jefferies

Thanks, again, Sean.

Sean Trauschke

Thanks, Anthony. See you. Bye.

Operator

Your next question comes from the line of Pu Chen representing Talon Capital. Please proceed.

Pu Chen - Talon Capital

Good morning.

Pete Delaney

Hey. Good morning, Pu.

Pu Chen - Talon Capital

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

Pete Delaney

Right. So we’ve been -- we’ve received two conditional notices to construct from the SPP for couple hundred million dollars for two lines coming into service in ‘18 and 2021. We’ve responded to those. We will build those. There is some -- obviously with third quarter 1000, those were conditional notices until that all is resolved there. But we will probably begin deploying capital in the ‘16, ‘17 timeframe.

Pu Chen - Talon Capital

Okay. And one other question is regarding the parent holding company expenses, anything driving that in particular?

Pete Delaney

We have a $100 million of debt at the holding company at 5% and that’s a lot of it.

Pu Chen - Talon Capital

Okay. Great. Thanks.

Pete Delaney

All right. Thanks, Pu.

Operator

Your next question comes from the line of Stephen Huang, representing Carlson Capital. Please proceed.

Stephen Huang - Carlson Capital

Good morning, guys.

Pete Delaney

Good morning.

Stephen Huang - Carlson Capital

Couple of quick things here. On T&S, can you help us understand why it’s declining earnings at transportation, storage and is that due to recontracting lower prices, or and how we should be thinking about 2014?

Pete Delaney

Okay. Keith, you want to talk a little bit about ‘13.

Keith Mitchell

Sure. I think back to your first question, we had some cross-haul in ‘11 and some positive things in ‘11, that we didn’t see occurring at ‘12. I think for ‘13, we still see things relatively stable in T&S as opposed to transportation. Storage margins are down a bit. I’m sure you’ve seen storage spreads are challenged, so we see it down a bit for ‘13, but relatively flat as far as the total segment.

Pete Delaney

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

Stephen Huang - Carlson Capital

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

Pete Delaney

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

Todd Tidwell

Hey, Stephen, this is Todd. The $0.82 is derived from standard barrel, even though we are going to be in rejection all year. So it does assume about 47% ethane, even though we are going to be in rejection. So the $0.82 pricing is basis, if you were in full recovery. I saw the ONEOK $0.66 yesterday and I think their barrel composition is a little bit different than ours and that’s why their price is lower.

Stephen Huang - Carlson Capital

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

Pete Delaney

Yeah.

Stephen Huang - Carlson Capital

And your rejection is for both, Conway and Belvieu.

Pete Delaney

Yeah.

Stephen Huang - Carlson Capital

Okay. Great. Thank you.

Pete Delaney

Thanks, Steve.

Operator

You have a question from the line of (inaudible) representing Baloise Asset Management.

Unidentified Analyst

Hi. This is actually (inaudible) from Baloise Asset Management. I’m just curious about a few things. First, in terms of your CapEx, does that include your group CapEx spending back to few years?

Pete Delaney

Yeah. It does.

Unidentified Analyst

And thinking about the acreage dedication that you guys have, what kind of conservative you think about the CapEx spending for about $250 million every year for 2014 going forward?

Pete Delaney

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

Unidentified Analyst

Right. And then, when I think about the financing for all this CapEx, I think you guys have been spending like $0.5 billion every year in the past two years and it seems like to kind of what you do is keep this lean. How should I think about your methods in terms of financing going forward?

Pete Delaney

Yeah. So for 2013, the way we’re looking at, if you think our EBITDA just sharp $300 million, CapEx is $455 million, we’ll have some minimum distributions coming out of Enogex. We are probably looking to we financed a lot of this with debt in 2012. We will rely on some contributions in 2013 and we forecasted around $100 million from ArcLight in 2013.

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

Unidentified Analyst

Does that mean ArcLight will increase the share in Enogex?

Pete Delaney

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

Unidentified Analyst

Okay. Is -- I know you…

Pete Delaney

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

Unidentified Analyst

Got it. And is that going to keep increasing going forward as you keep spending in the emission business?

Pete Delaney

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

Unidentified Analyst

Okay. All right. Thank you.

Operator

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

Pete Delaney

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

Operator

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

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