OGE Energy's CEO Hosts Formation of Midstream Partnership Conference (Transcript)

Mar.15.13 | About: OGE Energy (OGE)

OGE Energy Corp. (NYSE:OGE)

CenterPoint Energy, OGE Energy Corp. and ArcLight Capital to Combine Assets to Form Leading Midstream Partnership Conference Call

March 15, 2013 11:30 am ET

Executives

Todd J. Tidwell – Director-Investor Relations, OGE Energy Corp.

David M. McClanahan – President and Chief Executive Officer-CenterPoint Energy, Inc.

Peter B. Delaney – Chairman, President and Chief Executive Officer, OGE Energy Corp.

Keith Mitchell – President, Enogex LLC

C. Gregory Harper – Senior Vice President, Division Group President-Pipelines and Field Services

Carla Kneipp – Vice President-Audit Services, CenterPoint Energy, Inc.

Sean Trauschke – Vice President and Chief Financial Officer, OGE Energy Corp.

Gary L. Whitlock – Executive Vice President and Chief Financial Officer-CenterPoint Energy, Inc.

Analysts

Carl L. Kirst – BMO Capital Markets

Stephen J. Maresca – Morgan Stanley & Co. LLC

Reza Hitucki – Decade Capital Management LLC

Charles J. Fishman – Morningstar Research

John D. Edwards – Credit Suisse Securities LLC

Anthony C. Crowdell – Jefferies & Co., Inc.

Brian J. Russo – Ladenburg Thalmann Securities

Ali Agha – SunTrust Robinson Humphrey

Raymond M. Leung – Goldman Sachs & Co.

Steve I. Fleishman – Wolfe Trahan & Co.

Steven Gambuzza – Millennium Partners

Stephen Huang – Carlson Capital LP

Randall Li – Nexus Asset Management

Nikhil Chopra – Trust Company of the West

Greg Haas – Hart Energy Research

Dan Hynes – Salient Partners, L.P.

Operator

Good morning and welcome to CenterPoint Energy and OGE Energy’s conference call with senior management. During the company’s prepared remarks, all participants will be in a listen-only mode. There will be a question-and-answer session after management’s remarks. (Operator Instructions)

I would now turn the call over to Todd Tidwell, OGE Energy’s Director of Investor Relations. Mr. Tidwell?

Todd J. Tidwell

Thank you, operator, good morning everyone. On behalf of CenterPoint Energy and OGE Energy, let me welcome you to our joint call where we will discuss through creation of a new midstream partnership between our two companies. We will focus today's call on the creation of this new partnership and request that you hold any questions regarding the parent companies until our respective first-quarter 2013 earnings calls; at that time each company will be prepared to detail the partnership's impact on the parent.

David McClanahan, President and CEO of CenterPoint Energy; Pete Delaney, Chairman, President and CEO of OGE Energy; Keith Mitchell, President of Enogex; and Greg Harper, Senior Vice President and Group President of CenterPoint Energy's Midstream business will discuss the detail of this announcement. Also joining us today are Gary Whitlock, Executive Vice President and CFO of CenterPoint Energy; Sean Trauschke, Vice President and CFO of OGE Energy and other members of management who may assist in answering questions following the prepared remarks.

The companies would like to remind you that any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in each companies filing with the SEC, including their most recent filings on Form 10-K and subsequent filings made on Form 8-K. Actual results may vary materially from those expressed in or indicated by the forward-looking statements made during this call. A replay of this call as well as the joint press release and supplemental materials will be made available on both company's respective websites. The supplemental materials are for information purposes only and we will not be referring to them during the prepared remarks.

I will now turn the call over to David McClanahan. David?

David M. McClanahan

Thank you Todd and good morning ladies and gentlemen. We are pleased to be with you today to discuss the combination of our midstream businesses. Yesterday CenterPoint Energy, OGE Energy, and ArcLight Capital Partners entered into an agreement to form a master limited partnership. CenterPoint will contribute its interstate pipelines and field services businesses, and OGE and ArcLight will contribute their interest in Enogex. The master limited partnership will be managed by a general partner whose governance will be shared equally by CenterPoint and OGE. Subject to certain adjustment at closing, CenterPoint will have a 59% economic interest in the partnership, OGE will have a 28% interest and ArcLight will have a 13% interest. CenterPoint Energy and OGE Energy will hold 40% and 60% interests respectively in the incentive distribution rights of the general partner.

Those of you that follow CenterPoint and OGE know that each company has been considering the formation of their own MLP. With this combination, the companies made the decision to accelerate the formation of a private MLP concurrent with closing. Further, we are committed to taking the necessary steps to execute an initial public offering of the MLP, which subject to market conditions and legal requirements, we hope to complete within six to 12 months after the transaction is closed.

We believe this partnership will have the attributes of a strong MLP; scale, diversity and growth with consistent and predictable cash flows. This partnership should be much stronger and more competitive than either company could have achieved on a standalone basis. The industrial logic of putting these two businesses together is strong. We have complementary skill sets, capabilities and assets.

Together, we will have greater scale, geographic reach, diversification, and service capabilities, and expect to realize operating and commercial synergies. More importantly we believe we can grow faster and capture more opportunities in a midstream industry that has become more competitive over time.

The MLP will provide access to capital on an attractive basis and consistent with other competitors in this space. Further we plan to capitalize this company on a conservative basis with investment grade credit matrix.

Pete and I have been discussing this combination for some time. There were three fundamental requirements that had to be satisfied. Can we serve our customers better? Will our shareholders benefit, and will our employees have more opportunities. Pete and I are convinced that we can achieve all of these requirements with the formation of this partnership.

We recognized that it will require hard work and focus by both of our organizations to realize these objectives. Both Pete and I are committed to ensuring the success of the new partnership.

I’ll now turn the call over to Pete.

Peter B. Delaney

Thank you David. Good morning everyone. We are very excited and pleased to announce the formation of our Midstream partnership with a great company like CenterPoint Energy. Together we share a vision of creating one of the countries premier Midstream Company with a common investment objective of creating value for all of our stakeholders, our customers, our employees, our shareholders, and the communities where we do business.

As you may know OGE has had a partnership with ArcLight Capital Partners in 2010. And we’ve been pleased with this relationship and together we have grown the Enogex midstream business. However we all believe the formation of this partnership will allow us to accelerate our growth by combining the two companies to achieve more scale and market reach with enhanced capability. Our new company will have a multi-state assets and the superb operational know-how, with an excellent portfolio of processing in pipeline assets. The new combined company will have approximately 11,000 miles of gathering lines, 8,400 miles of interstate pipelines and nearly 2,300 miles of interstate pipelines, and 11 major processing plants.

We believe our partnership will achieve higher earnings growth, capturing additional growth opportunities by executing combined business plan with additional scale, strength, and capability. Prior to the closing of the transaction Keith and Greg will continue to manage their respective businesses, such as they have always done with the focus on safety and efficiency of their operation providing the highest quality of service to our respective customers. At the same time teams and personnel from both companies will develop an integration plan that will be executed subsequent to the closing of the transaction.

Before I turn the call over to Keith and Greg, who will discuss the operational drivers and business opportunities of the new partnerships, both David and I would like to recognize our respective employees, who will come together after the closing to build what we believe will be a very special company. I want to thank them for their dedication, their safety, operational excellence, and customer service and the commitment they have demonstrated in growing our respective businesses. It will take their continued focus and dedication of our combined employee base to ensure the success of our new partnership.

We are very excited and ready to get started, now I would like to turn the call over to Keith Mitchell, Keith?

Keith Mitchell

Thank you Pete. Good morning, let me begin first by providing a quick overview of Enogex. We provide integrated natural gas midstream services and are engaged in the business of gathering, processing, transporting, and storing natural gas. Enogex assets are strategically located in the prolific basins of Oklahoma and Texas Panhandle, with the significant intrastate natural gas transportation and storage system, providing fee based services.

Turning now to our new partnership; we are excited by the improved operational scale provided by combining the assets of Enogex and CenterPoint Energy Midstream. We believe this combination will create a top tier Midstream service provider in the midcontinent with improved and expanded capability to execute on a collective growth strategy.

Together, the partnership will have an immediate and major presence in key conventional and shale basins such as the Granite Wash, Tonkawa, Mississippi Lime, Cana Woodford, Haynesville, Fayetteville, Barnett and Woodford. Additionally, CenterPoint’s Waskom processing plant is well positioned in the Cotton Valley field providing a competitive outlet for natural gas liquids including a direct connect market for ethane, railcar on and offloading as well as several takeaway options for natural gas. The combined assets serve a balanced mix of dry gas and liquids rich plays, resulting in sustained and expected increases in volumes.

Further, we at Enogex are excited about the emerging opportunity to expand into liquids rich areas such as the Bakken, provided by CenterPoint’s recent open season. We also believe CenterPoint’s interstate pipelines located in nine states spanning the South West, South East and Mid West provide attractive and stable fuel sourcing optionality for the natural gas conversion of electric generation facility.

Further, CenterPoint’s Perryville Hub in the Southeast Supply Header, a joint venture with Spectra Energy provide highly desirable market takeaway points. It should become even more attractive as the midcontinent shales develop. Our business portfolio provides us many opportunities from which to grow and we are excited about finalizing the integration as quickly as we can.

I would now like to turn the call over to Greg.

C. Gregory Harper

Thank you, Keith. Hello everyone. Before addressing our view of the operational benefits of the partnership, allow me to provide a brief overview of CenterPoint Energy’s Midstream group. We operate three interstate pipelines, which provide natural gas transportation, storage and pipeline services to customers principally in Arkansas, Illinois, Louisiana, Missouri, Oklahoma and Texas.

In addition, we own a 50% interest in the Southeast Supply Header that runs from the Perryville Hub in Louisiana to Coden, Alabama. We also operate a field services business which provide gas gathering, treating and processing services primarily in the midcontinent.

Now, to expand on Keith comments regarding the new partnership, we believe the combined assets spin around a key network of processing plants will play an important role in the expansion of the gathering and transmission services we offer today. From CenterPoint’s perspective we are excited about the increased capabilities provided by Enogex interconnected processing plants.

We proceed the opportunity to optimize our collective Oklahoma dry and rich gas assets providing an array of services offerings for our customers. We believe the robust supply resources behind our combined intra and interstate systems will offer all of our collected customers the increased surety and diversity of the supply they seek.

The partnership will be connected to over 38 gas fired power generation facilities which have a potential of consuming up to 3.9 Bcf per day of natural gas. We will even be in better position to serve these existing customers and attract and connect new generation in our footprint. With minimal current producer of market and customer overlap we are excited to provide both of our customer groups the opportunity to increase their supply and market connectivity.

The majority of the new partnerships cash flows will be under long-term contracts with established and credit worthy customers. Furthermore approximately 60% of the partnerships operating margin will come from demand based transportation and storage service fees in our intra and interstate pipeline and minimum proof of commitment and guaranteed returns in our field services activities. Additionally both company supplies backed by acreage dedications.

By continuing to diversify our midstream activity and manage risk through our contracting strategy we will have a strong financial foundation and be well positioned for growth. We were diligently consider our service and support, improve through this transition, is our intent to be thoughtful and diligent as we bring these two organizations together ensuring we’re equipped with the best talent and establish procedures to exceed our customers expectations both in speed to market and project execution.

We believe that by coming together in this partnership, we will be one of the top midstream service providers with the scale, reach and capabilities to meet our growth objectives. Through this transition, we remained committed to serving our customer needs focused on safety and efficiently operating the business and developing the n number of solutions they need.

Carl, I’ll turn the call over to you now.

Carla Kneipp

As you have heard, it is a very exciting time for both companies. Let me remind you that we will be addressing the ongoing earnings profile of CenterPoint Energy and OG&E during our first quarter conference call. As we announced in our press release and 8-K we plan to form an MLP. Until the SEC registration process is complete, we’re limited in what we can say about the planned MLP.

Please keep in mind that we will only be addressing questions on our new midstream business during this call. With that we’ll now open the call for questions

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. Our first question from Carl Kirst with BMO Capital.

Carl L. Kirst – BMO Capital Markets

Thank you. Good morning everybody, and certainly congratulations to all involved. The first thing I was hoping to – you drill down a little bit more on, at least possible quantitatively is the idea of the commercial and operating synergies, and I know there was a lot of examples kind of thrown out there about potentially optimization and then the collective assurity, diversity of supply. And I guess what I’m trying to get is and understanding this is early days, is there a mediate sort of optimization that you see either from a cost or revenue standpoint or is this more business development related or for instance retention of current contracts, just given then the better assurity, better diversity of supply more likely to kind of stay with you guys, then go with somebody else in this more competitive environment. I'm just trying to get a better sense of that if I could.

Peter B. Delaney

Carl, thank you for the question. I think the answer as far, we're going to get all those but we've done some work in this area but it's been at a fairly high level as you would expect. We think there is going to be about commercial synergies and operating synergies, some of these we can get pretty quickly, but some are going to take time. Our initial kind of preliminary 10,000 for instance there is at least $50 million worth of synergies here we can capture. We hope to do better now, but our teams are going to start looking at that as soon as possible.

Carl L. Kirst – BMO Capital Markets

And would that be net of say for instance as much as this is a new corporate entity whatever back-office G&A, I assume there would be some incremental cost of just becoming a public entity. So do you think that $50 million is possible net in that?

Peter B. Delaney

I think so.

Carl L. Kirst – BMO Capital Markets

And one last question if I could, and then there is a lot in the queue here. As we think about the closing potentially, this is just the formation of the MLP in the second quarter and third quarter, apart from HSR, is there primarily a gating factor or a gating regulatory approval that is one that you are more watchful of than the not. I am just thinking if HSR expires in 30 days, what is the thing that would push us to third quarter?

David M. McClanahan

Carl, HSR is the gating approval here. It could take 30 days, or it could take 60 days. So but that is the primary gating item.

Carl L. Kirst – BMO Capital Markets

Understood, I’ll get back in queue. Thanks, guys.

David M. McClanahan

Thank you.

Operator

Our next question comes from Steve Maresca with Morgan Stanley.

Stephen J. Maresca – Morgan Stanley & Co. LLC

Hey, good morning everybody. Thanks for taking the question and certainly congratulations to everybody. I was wondering if you could give me just some thought process on maybe why did you, it seems like you’ve put all the assets into this partnership at first. What’s your thought process and maybe starting the MLP smaller as opposed to being a big partnership all at once where you can kind of feed it – assets over time, can you just talk through that throughout process?

David M. McClanahan

Yeah. Steve, I think it’s a good question, certainly, one that we spent a lot of time with. The reason we decided to put all the assets in upfront; two reasons, one is, we think we have a lot of growth in front of us that we’re going to try to capture that we think will feed the cash flow growth at the MLP level. But secondly, there were complexities around the indentures as well as the ArcLight, OG&E partnership that just made it very complex to try to get a workable drop down strategy. So this was absolutely the best approach for us, but we’re very confident that we’ll be able to grow organically and have plenty of growth for the MLP.

Stephen J. Maresca – Morgan Stanley & Co. LLC

So as a follow-up, so if we think about the organic potential of the MLP, is this – can you talk through how this maybe a one plus one equals three in terms of a midstream projects you had at CenterPoint, and then what was at Enogex. Do you see already the landscape with the combined entity, there is even more that you get on the organic side, because you’re together, like what are you seeing from that and what is your thought about?

David M. McClanahan

Yeah, let me ask Pete to address that one.

Peter B. Delaney

Well, as you well know and I hope you well know on the Enogex side, here we’ve got 2.5 million acres of dedications in the prolific Anadarko basin that we expect to give us investment opportunities for many years. We have done – it’s the question on the synergies, we at our 10,000 foot level have identified optimization between our systems. We think that, we have a 11 processing plant – 9 processing plants, 11 will be in the new partnership. We’ve got extensive experience on the processing side. We’ve got 2,300 miles of interstate, experience on the interstate, and we think that combining – yes, our focus and expertise, with the expertise at Centerpoint, on their interstate system and some other and the gathering areas that they have, there is going to be additional growth that will be what we’ll drive.

Now that’s going to take obviously a lot more work and discussions that will – we’re running these businesses until HSR has separate entities and we remain competitors and there is we are what we can do on the integration side. We’re going to stick to that. Then after closing you can bet that we’re going to be very aggressive in seeking those out. We’re very excited about the Bakken. And then also both companies were looking to expand into crude oil gathering and for liquids as well. And so we’re very excited to think that we’ve got some opportunities. Again with our scale why not to advance in those areas.

Gary L. Whitlock

The only thing I would add to Pete’s comment is that, we have a customer base that don’t have a lot of overlap. So together we’re going to have a much broader customer base that we’re going to have direct relationships with. And we believe the additional capabilities that this partnership brings means, we’re going to be able to create more values for our joint customers and we’ll be able to grab more growth there.

Stephen J. Maresca – Morgan Stanley & Co. LLC

Thanks. One quick follow-up, you mentioned I think you would like to go public in six to 12 months or take an IPO six to 12 months after this closes. Would you like to be at the shorter end of the timeframe? What would push you towards the shorter end of that timeframe?

Gary L. Whitlock

Yes. We are going to start working on the IPO as soon as we can. Our goal is to meet that target timeframe, but as you know it takes a lot of time and effort and we’ve given ourselves a window there of six to 12 months, but our goal is to be at the low-end of that.

Stephen J. Maresca – Morgan Stanley & Co. LLC

Okay. Thanks a lot for the color. And congrats again.

Gary L. Whitlock

Thanks.

Operator

Our next question is from Reza Hitucki with Decade Capital.

Reza Hitucki – Decade Capital Management LLC

Thank you very much. One question I had was the LP units that CenterPoint and OGE will hold, are they going to get taxed at the CenterPoint and OGE level or is the tax going to be deferred, could you talk about that?

Gary L. Whitlock

I will answer. Are you talking about the income of the LP units or are you talking about after transaction?

Reza Hitucki – Decade Capital Management LLC

Well, once the MLP is done and CenterPoint or OGE holds their interest and LP for the 59% and the 28%, the cash flow as a distribution that are coming from the MLP to CenterPoint and OGE, although distribution is going to get taxed at the CenterPoint level and OGE level?

Peter B. Delaney

Yes, they will be.

Reza Hitucki – Decade Capital Management LLC

Okay, they will be taxed. Okay.

Peter B. Delaney

Yes, it’s correct.

Reza Hitucki – Decade Capital Management LLC

And then, you talked about growth, could you maybe elaborate on growth rate target that you guys might have?

Peter B. Delaney

Well, no, I think it goes back to some of things we talked about and Carla mentioned that we are planning and we just got a question about the S-1 and how quickly we can grow. We don’t want to talk about things and those such things that would be contrary to not help to who are following the S-1 getting approval. So we will not be able to answer that today.

Reza Hitucki – Decade Capital Management LLC

And then just lastly, I guess you mentioned $50 million of synergies potential at MLP. How should we think about at the utility level, is there any synergies or dis-synergies or how should we separation of the companies, how will that effect the remaining [C-Corps]?

Peter B. Delaney

It should have really no effect on the utilities, obviously the parent companies are going to continue to provide some services in the interim, accounting, finance, HR et cetera. But over time, we will most likely move those into the MLP itself, so it shouldn’t have any impact on our utility operations at all.

Reza Hitucki – Decade Capital Management LLC

Thank you very much.

Operator

Our next question is from Charles Fishman with Morningstar Research.

Charles J. Fishman – Morningstar Research

Good morning. Are there any restrictions on either partner for doing development, field services development outside the partnership?

Keith Mitchell

Yes, this is the partnership is the only vehicle that either OGE or CenterPoint can conduct their midstream businesses.

Charles J. Fishman – Morningstar Research

Okay, and then I believe Keith maybe commented 60, and I just want to verify this, 60% of the EBITDA is guaranteed undertaker pay at the combined company, did that hear that right?

Keith Mitchell

That was by Greg; Greg made that comment, Greg you want to comment on that?

C. Gregory Harper

Yeah, I had said that 6% of the margin, so revenues less cost of gas sold will be from transportation arrangements on interstate pipes, on transportation that keeps adds on, there is intrastate pipes, and then the collective storage agreements between the two entities, and then also throwing to that our contracts that we have in Haynesville and Fayetteville and Woodford areas, and on the fine commitments and guarantee returns will make up over 60% of that margin.

Charles J. Fishman – Morningstar Research

Okay, thank you for the clarification, that’s it.

Operator

Our next question is from John Edward with Credit Suisse.

John D. Edwards – Credit Suisse Securities LLC

Yeah, good morning everybody congratulations.

David M. McClanahan

Hi.

John D. Edwards – Credit Suisse Securities LLC

Can you talk a little bit about how you, I guess came up with the splits that you mean, the percentages the 59, 28, 13, because it did not look appeared to be proportionate to the relative EBITDA contributions.

David M. McClanahan

John, that’s accurate, these splits both on the LP side as well as the IDR, it really reflects the profile of each company, CenterPoint brings a lot of stability, predictable cash flows, and Enogex has a lot higher growth profile, and so we took all those things into account in determining the LP splits as well as the incentive distribution rights, so at the end of the day, it’s negotiated set of numbers, but it does reflect the relative profiles of each company.

John D. Edwards – Credit Suisse Securities LLC

Okay that's helpful, and can you elaborate a little bit on the Enogex growth profile, what kind of longer-term outlook is there?

Peter B. Delaney

Yeah, Keith, you want to address that?

Keith Mitchell

Yeah, thanks Pete, I mentioned this some, but obviously we've had a lot of acreage dedications, and a lot of the rich basins in Oklahoma, Texas Panhandle, certainly you've heard the announcements that is going on in what they call in the SCOOP area, so if you look at this and the drilling activity, and with us getting the dedication of a lot of that acreage, we really do see a continued build out of gathering, processing, infrastructure and so we really see a lot of growth as we go forward, as they continue – these producers continue to develop these areas, and if you look at the volume guidance that we have given, we're expected to grow 10% to 15% both in '13 and in '14.

And again, we’ll look at it as we go forward, but if you look at the number of acreage the numbers of acres and the development that could certainly continue for many years, so we certainly see a lot of growth, and that's just kind of what we have in our footprint, but also I think that has been mentioned here, we think together with the more diverse costumer base, and our complementary skills that we think we can even add on to that.

John D. Edwards – Credit Suisse Securities LLC

Okay just to make sure I heard that right, so you’re saying about 15% that's volumetric growth or EBITDA growth?

Keith Mitchell

That is volumetric on the processing side and gathering side, 10%, 15% this year and then for ‘14 the processing is 10% to 15% as well.

Peter B. Delaney

Standalone.

Keith Mitchell

And that standalone with the Enogex business as we are seeing it.

John D. Edwards – Credit Suisse Securities LLC

Okay, that’s really helpful. And then on – I am just wondering, I don’t know, if you could talk about this right now, but is there going to be, I guess with respect to the ArcLight share, is there going to be some kind of a lockup provision or will they be looking to staying long-term or exit or I don’t know, if there is even that you can comment on that?

David M. McClanahan

Sean Trauschke will take that one.

Sean Trauschke

Sure. So upon filing as part of our documents and our agreement with ArcLight, they will have the standard lockup provisions on any IPO.

John D. Edwards – Credit Suisse Securities LLC

Okay. All right, and then I guess – and you were mentioning 60% fixed fee in terms of commodity exposure, is there a fair amount of hedging in place?

Peter B. Delaney

Keith?

Keith Mitchell

We don’t have any hedging in our numbers. We haven’t hedged anything.

John D. Edwards – Credit Suisse Securities LLC

Yeah.

Keith Mitchell

And I think with the portfolio of businesses and contracts that we have, again it’s mainly demand fee and fixed fee, a good portion of it. So at this time, we haven’t seen a need to do that.

John D. Edwards – Credit Suisse Securities LLC

Okay, great. I have got more questions, but I will get back in line. Thank you very much.

Operator

Our next question is from Anthony Crowdell with Jefferies

Anthony C. Crowdell – Jefferies & Co., Inc.

Hey, good morning guys, congratulations. Just want to know is there any tax leakage associated with pushing down these assets into an MLP structure?

David M. McClanahan

No.

Anthony C. Crowdell – Jefferies & Co., Inc.

Great, thank you.

David M. McClanahan

You bet.

Operator

Our next question is from Brian Russo with Ladenburg Thalmann.

Brian J. Russo – Ladenburg Thalmann Securities

Hi, actually, my questions have been answered.

David M. McClanahan

You bet, thank you.

Operator

Our next question is from Ali Agha with SunTrust.

Ali Agha – SunTrust Robinson Humphrey

Thank you. I wanted to clarify the point I think that was made earlier. On the Enogex volumetric growth of 10% to 15%, let’s step back for a second. Is that, should we also think of that as a good proxy, for a standalone EBITDA growth for that business or would that be a different way to think about it?

Peter B. Delaney

Sean?

Sean Trauschke

Hi, this is Sean. No, that was just a volumetric growth number, year-over-year growth, and just consistent with what we have stated in our public guidance, we did not speak to an EBITDA growth rate.

Ali Agha – SunTrust Robinson Humphrey

Okay. So David, I know you guide on this and you said that your standalone field services growth, 10% and there we were talking EBITDA I believe was doable of that portfolio. Is it fair to say, I mean on a combined basis, I know these are not combined yet, but fair to say that at least that’s the amount of growth rate we should be thinking about for this larger entity going forward?

Peter B. Delaney

Well, Ali, we can’t really talk about the entity going forward, but let me kind of say what I’ve discussed in the past on prior calls that is well, our goal is and we believe we could grow our field services businesses in that 10% range. Our pipeline business had a lot more modest growth in it, because there’s not a lot of expansion opportunities around our interstate pipeline in the immediate term, so but we haven’t translated, and we really can’t speak to the growth rate of the joint venture given the S-1 restrictions.

Ali Agha – SunTrust Robinson Humphrey

Okay. And a couple of other clarifying questions if I could. How much of the, I guess the old sub debt or CenterPoint debt is now going to be part of this new entity.

C. Gregory Harper

Gary?

Gary L. Whitlock

Yeah, this is Gary. It’s about a $1.362 billion and in terms of maybe just take a moment in terms of the credit profile that we’re looking for in this company, both companies have been aligned. As we look at the formation to have a goal of ensuring that, we had financial flexibility for the new company to execute the business plan. So our plan is to capitalize the company in a very conservative manner, about 2.5 times debt to EBITDA. So again, we are certainly aligned there and I think we’ve got a very conservative capital treasure again to execute what we think will be a growth business plan.

C. Gregory Harper

Gary, just to clarify that – make sure that this is understood. The partnership itself is going to have $1 billion term loan that is going to pay-off the CERC inter company debt at the time of closing, and then CenterPoint will take that money and actually reduce CERC debt at that entity.

Gary L. Whitlock

And in addition, so that’s really the mechanics, the glue that gets the CERC debt, so what will happen effectively $362 million to $363 million of CERC debt will be moved to the entity. The term-loan will be put in place and that money will then go back to CERC and which to paydown debt is CERC and then in addition to that we will put in or in the process of syndicating there is $1.4 million revolving credit facility that will support the liquidity needs of the new venture.

Ali Agha – SunTrust Robinson Humphrey

Got it, got it. So again, I think just I understand the thermal mechanics, and we’ve done the geographic regions that you currently will have. I mean that’s on a standalone or even a combined basis, however where currently do you see the biggest growth opportunities.

Keith Mitchell

I think we see it in multiple areas obviously with all of the drilling going on in the rich gas basins in Oklahoma. I think also you’ve got significant growth potential in East Texas, so it was the rich areas that CenterPoint is in. Certainly there is a lot of dedication and good great contracts that CenterPoint brings in Haynesville area. And then I think as we’ve mentioned in our remarks, you got a transportation system that’s connected to a lot of power plants, a lot of natural gas conversions and a lot of new power plants that we also think will provide some growth. So I think throughout the footprint in the midcontinent, I think we pretty much cover a lot of the areas that we currently have growth and areas that we see future growth as well.

Gary L. Whitlock

Yeah. I’ll add to that Keith, that on the Bakken, as we’ve discussed on our call, a couple of weeks ago, it’s just not a one-off investment. We see the Bakken as once we get a foothold there, then we see that as a great opportunity to expand, as well as the interstate opportunities that are in the South-East where we will be pursing some of those that are out there in the market on, for example the FPL, RFP that’s out.

Ali Agha – SunTrust Robinson Humphrey

Got it. Last question, have you guys and maybe you’ll add it on, Mitchell, what is the management structure for this new entity.

Keith Mitchell

We haven’t announced the management team at the joint venture. The partnership will be governed by a general partner that is owned 50% by CenterPoint and 50% by OGE.

Ali Agha – SunTrust Robinson Humphrey

All right, but the individuals have not yet been named?

Gary L. Whitlock

No.

Keith Mitchell

That’s correct. We’re going to wait until we get all regulatory approvals quarterly, we do that.

Ali Agha – SunTrust Robinson Humphrey

Got it. Thank you.

Operator

Our next question is from Raymond Leung with Goldman Sachs.

Raymond M. Leung – Goldman Sachs & Co.

Hey, guy’s just want to follow up a little bit, it is only sort of hit on my question but could you sort of walk through the debt component, I guess I see that Enogex’s – those bonds are going to be assumed. So I think you have more bonds at CERC than what’s been outlined? Can you talk about how that works relative to the indenture, is this a $1 billion term loan, is that going to be, how should we think about how you would deal with the bonds, because I think it probably attributes to substantial in oil test? And what bonds would you be able to move, I mean with the indenture of first up bonds being moved to the MLP structure?

Gary L. Whitlock

No. This is Gary again. We are moving $362 million of debt. The term loan is being put in place just frankly to address the issue of the substantial oil, so $1.05 billion term loan will be put into Enogex. The funds will flow back to CenterPoint and those to CERC effectively and we will pay down debt at CERC. So that’s the construct for that.

Raymond M. Leung – Goldman Sachs & Co.

Okay. Will that be some sort of bond tender or just as a mature?

Gary L. Whitlock

No. Well, we are looking at the liability management. So we have the maturities that will be coming to, but we’ll look at liability management in a thoughtful way, but effectively we will pay down debt at CERC.

Raymond M. Leung – Goldman Sachs & Co.

Okay. And does notes at CERC serving in one of the charts here, is that just an inter company note or is it actual bonds that move from CERC downtime?

Gary L. Whitlock

It’s an inter company note.

Raymond M. Leung – Goldman Sachs & Co.

Okay. And that would probably also be used towards paying down CERC debt?

Gary L. Whitlock

Effectively, that’s correct.

Raymond M. Leung – Goldman Sachs & Co.

Great, thank you very much guys.

Gary L. Whitlock

Yeah.

Operator

Our next question is from Steve Fleishman with Wolfe Trahan.

Steve I. Fleishman – Wolfe Trahan & Co.

Hi, good morning.

Peter B. Delaney

Good morning.

Steve I. Fleishman – Wolfe Trahan & Co.

Just a question on the, first just from a value standpoint; when both companies looked at doing this transaction, just what were the key value metrics that you looked at versus staying where you are today?

Gary L. Whitlock

Steve, I think we tried to address that in our remarks, but its scale. We think this is a much stronger MLP than we could do individually, diversification both from a rich gas versus dry gas, interstate pipelines, intrastate pipelines, a lot more diversification, a lot more combined capabilities, each one of us do similar things, but we are much stronger in the pipeline side, the Enogex folks are much stronger in the processing side. So bringing those capabilities together and being able to offer a combined service offering to our customers, we think is going to be very attractive to the market place. So we think this is just a much stronger entity together than we would be separately.

C. Gregory Harper

And then there were question from our side Steve, we did not get a investment grade rating, our indications are that this will be investment grade rate and which is more important. And if you all know the size and scale, we’ll open up a lot of opportunities outside of the organic growth, which we would be challenged to try to accomplish if those opportunities were to avail themselves. So there is multiple reasons of value streams that we see is associated with this combination.

Steve I. Fleishman – Wolfe Trahan & Co.

Okay, and just one other question. What is the intent of both companies with the state that is not IPO-ed in 6 months to 12 months, the intent to keep it long-term or is the intend to sell that over time or spend?

C. Gregory Harper

All that is from CenterPoint, we don't plan to sell down any of out interest in this venture we still very much believe in the midstream and we are going to continue to hold our interest.

Peter B. Delaney

Yes, we're trying to limit our discussions to hold to our parent company calls, but as we deal with ArcLight partnership, we were looking ways to grow the business and maintain our investment, because we like the business and believing in the business and believe in the management team and that hasn’t changed.

Keith Mitchell

I would also say Steve that both of OGE and CenterPoint Energy, we’ve been around over 110 years each. We do this for long-term and we look at this as a long-term investment, a long-term strategy, and not just what it’s going to do next quarter. So I think we’re both excited about the potential here for the long-term.

Steve I. Fleishman – Wolfe Trahan & Co.

Thank you.

Operator

Our next question is from Eli Kraicer with Millennium Partners.

Steven Gambuzza – Millennium Partners

Good morning, it’s Steve Gambuzza. Thanks very much for taking my question. I understand you guys are limited in terms of what you can discuss on parent company impacts. I was just wondering for the new company, when will we expect to see a new combined capital expenditure forecast, would that be when the S-1 is filed or not until kind of closer to actually launching IPO?

Keith Mitchell

We’ll provide all that with the S-1 filing.

Steven Gambuzza – Millennium Partners

Okay. So would it be like a five-year capital expenditure forecast or and I guess, will that be reflective of just kind of combining the 10-K capital expenditures or do you think that will give us a better sense as to what the kind of new opportunity set that you’re pursuing?

Keith Mitchell

Yeah. I think we’ll put as much information as we can in the S-1 that we’re comfortable with.

Steven Gambuzza – Millennium Partners

Okay. And I guess as capital expenditures are obviously a key driver of the growth profile, there’s new company. I was just wondering what, I appreciate you can’t give us specifics on combined company impacts today. But obviously everyone is very interested to find out what this transaction is going to do for the earnings, cash flow and dividends at CenterPoint and OGE over the near and long-term. So I was wondering if you could comment on what type of information you’d expect to be able to provide on your next call in terms of – is it just qualitative impacts or do you actually expect to be able to provide some long-term targets for your companies? Thanks.

Peter B. Delaney

Well, I think on our next call, we’re going to try to be as clear as possible for all those impacts to earnings and to cash flow and to the key metrics that impact CenterPoint, Sean I think.

Sean Trauschke

And from the OGE standpoint we’ll certainly speak at a qualitative level as far as the impacts, but as Pete and David mentioned the respective companies are going to continue to run their businesses, until closing, and we are focused on achieving those guidance targets we put out previously for this year.

Steven Gambuzza – Millennium Partners

Thank you very much.

Operator

Our next question is from Shin Fukuda with Carlson Capital.

Stephen Huang – Carlson Capital LP

It’s Stephen Huang here, just the first question one the term loan, the $1.05 billion, what type of interest rate is that versus inter company loan that you guys are paying down.

Gary L. Whitlock

I will be a $1.05 billion will be a three year term loan. It will have market interest rates. They would be in line with what the revolver will be priced at.

Stephen Huang – Carlson Capital LP

But is it above or below, I’m just trying to get idea of the cash flow impact?

Gary L. Whitlock

Well, I think let’s wait until that’s completed, but it will be a market rate as you would expect on a three year maturity.

Stephen Huang – Carlson Capital LP

Okay. And then just from accounting like a overall day one standpoint, do you think the 2012 numbers, CenterPoint is 66% of the EBITDA and OGE is 34%, but going forward from day one because you had a buyer ArcLight GP facility with LP shares. CenterPoint is going to get 60% of the EBITDA, so and OGE goes from 27 to 24, so is that the right way to think about it? Just from a day one standpoint on EBITDA or earnings contribution that you get because you had to buyout the ArcLight position?

David M. McClanahan

David, look those are questions, I think they are better – that we wait until we have our respective conference calls, and again at that point, we'll share with you what we think the impact will be to our respective companies.

Stephen Huang – Carlson Capital LP

Accounting wise, all right – you follow the distribution for earnings, is that correct?

David M. McClanahan

Well, we will follow the accounting for the transaction, that's exactly correct.

Stephen Huang – Carlson Capital LP

Okay, all right, that's fine, thanks.

Operator

The next question comes from Randall Li with Nexus Asset Management.

Randall Li – Nexus Asset Management

Hi good morning guys, congratulations. I was wondering what would be the fee based versus commodity sensitive exposure of the new consolidated revenue parts of the business?

David M. McClanahan

I think that we try to address that Randall, but today the margin will be at least 60%, fee based, our guaranteed rate of return type of margin, which means that we have some commodity or some volumetric exposure around the other 40%. As you know CenterPoint has been much more fee based than Enogex in the past, but that's what the margin will play out initially, and I think it's also fair to say, and Pete you can address it or Keith that overtime the amount of fee-based margin that Enogex has experienced has gone up as the commodity exposure came down as they re-negotiated some contracts.

Sean Trauschke

Sure, this is Sean, and what we have stated previously on our 2013 guidance is because of that conversion to a lot of these fee-based contracts. If commodity prices were to change 10% for the entire year, it’s about $0.05 of earnings to OGE.

Randall Li – Nexus Asset Management

Okay, is the intention to keep the percentages where they are now or continue to get work through this?

Peter B. Delaney

I am sorry, I didn’t hear your question. Could you speak up a little bit?

Randall Li – Nexus Asset Management

Sure the intentions to keep the percentages where they are now or it continues to be more fee based?

David M. McClanahan

The question more towards more fee based.

C. Gregory Harper

Yeah, I can address that, David.

David M. McClanahan

Yeah, go ahead Greg.

C. Gregory Harper

Yeah, I would think the market conditions are going to dictate how we contract. We have a great portfolio to start from, it gives us a lot of runway from the 60% of margin being driven not just by fee based but demand charges. I want to particularly state that. Most of our, all of our contracts are fee based, unit price type driven is matter of we would have volumetric exposure from acreage dedication only.

And going forward, big pipeline contracts or pipeline type transport deals will be demand charge oriented as well as things on interest based side gathering. It’s going to be how competitive we can be, and get the project and roll the project, demand a volumetric type deal or can it heavily supported by this acreage dedication alone.

So I think the luxury of being such a large entity with a scale and size and financial strength that we can look at our contract portfolio as a whole, and kind of dictate how we want to go with each particular job, and project and get the contracts that will suit that portfolio.

Randall Li – Nexus Asset Management

One more question, as in the IPO your intention only to sell new units or would you guys also start selling existing units.

C. Gregory Harper

It’s really hard for us to comment on the IPO at this stage. I think that will become obvious or we’ll make that available as soon as we file the S-1.

Randall Li – Nexus Asset Management

Okay. But is the way to think about it as, if you are selling just the unit, are there any taxification for that?

David M. McClanahan

If you’re saying if we sell new units?

Randall Li – Nexus Asset Management

Yeah, as for the existing units with selling those of any taxification.

David M. McClanahan

If we sell the existing units the transfer we’ll be taxed.

Randall Li – Nexus Asset Management

Okay.

David M. McClanahan

Same to ownership.

Randall Li – Nexus Asset Management

Okay. Thanks, guys.

David M. McClanahan

You bet.

Operator

Our next question comes from Nikhil Chopra with TCW, Trust Company of the West.

Nikhil Chopra – Trust Company of the West

Hi guys. My question is just around the $1 billion term loan at the partnership. Eventually, you guys talked parallel of bonds at the MLP level and consequently with the limited guarantee goal of them?

David M. McClanahan

Yeah. And that’s correct; Nikhil I would expect the $1.05 billion, three-year term loan callable at par. And I think the joint venture at some point will make a determination whether they want to term that out as long-term debt in the capital market, and that would be my expectation.

Nikhil Chopra – Trust Company of the West

But it’s a long-term doubt, using bond with the guarantees will go at some point or…

David M. McClanahan

Yeah. The guarantee goes right after three years.

Nikhil Chopra – Trust Company of the West

Okay, okay. Thank you.

Operator

Your next question comes from Greg Haas with Hart Energy Research.

Greg Haas – Hart Energy Research

Congratulations and thanks for picking up the question here. I have a quick question about, to what extent, maybe you can talk to us about how far you’ll rotate into the oil patch and essentially, we’ve seen the Bakken, the upstream is certainly rotating pretty heavily into the oil directed drilling, how far will you go and ultimately, would that include either loading or offloading rail facilities or will it be mostly pipeline in an even, what can you discuss about how that may change your fee versus margin exposure. Thanks for the questions.

David M. McClanahan

Yeah, we’ll ask Keith and then maybe Greg can come on that as well. Keith?

Keith Mitchell

Sure, I think that each of us have been pursuing projects in the way of crude oil gathering, NGL gathering, and how far downstream we take that? We’re really trying to provide solutions for customers as we all know the producers are trying to be as oil focused and liquid focused just possible, that’s where a lot of the activities are, I think we’re blessed to have a lot of those activities being right under footprint that will be, but we’ll also have good relationship with customers that are allowing us to go beyond that footprint and provide similar services.

So I think that we want to provide solutions, I think we both in organizations have proven they can provide solutions for producer customers, and we have enjoyed that and we continue to expand on that, so exactly where that will lead us, and how far downstream that will lead, I think we’ll have to be in discussions with our customers on that, but certainly that’s an area that we are looking to expand, and Greg, I did know, if you’d like to add to that.

C. Gregory Harper

Yeah thank you Keith, I’ll echo what Keith said, for example we’re already looking at Tuscaloosa Marine, not just Bakken, but we’re in Tuscaloosa Marine with EnCana, as they prove out of that play. So Keith mentioned something that has been true to our heart is customer relationships and taking those customer relationships and going with them to other areas, is how we like and doing things especially when we are stepping out our footprint, and I just see more those opportunities because as David mentioned in his remarks or in a comment, we have very little not just market customer overlap, but also producer customer overlaps. So we have a great opportunity to leverage off our track record of execution, executing projects on time and on budget, and in going with the broader range of supply producers to other supply basins.

Greg Haas – Hart Energy Research

Well fantastic, that’s great color of Tuscaloosa Marine is a little closer to the Gulf Coast refiners than Bakken, that’s for sure, so…

C. Gregory Harper

I’d also mentioned that from the rail offloading and unloading, Waskom facility we did install rail offloading and unloading paths, I guess a year and half ago and we are already doing that activity.

Greg Haas – Hart Energy Research

I am sorry, which place is that in?

C. Gregory Harper

Waskom. That is the North East Texas area, Cotton Valley, but it’s bringing in crude oil from Bakken that we are offloading and blending at the Waskom facility.

Greg Haas – Hart Energy Research

Very good. Very good to hear about. Thanks for the colors guys.

Operator

Our next question is from Dan Hynes with Salient Partners.

Dan Hynes – Salient Partners, L.P.

Yeah, I was wondering, is there any previously announced information on Enogex CapEx program if the public available and also what kind of multiples of EBITDA that CapEx could achieve?

Peter B. Delaney

Yes. It’s all available on our website at oge.com under the investor tab and we have provided all of the guidance around the EBITDA, commodity sensitivity and CapEx.

Dan Hynes – Salient Partners, L.P.

Okay. And your story out with a conservative debt to EBITDA ratio, I don’t perceive that you will stay there or do you have any kind of – can you give us any color on what you are comfortable with longer term for the entity?

Peter B. Delaney

That’s really kind of – that’s how we value the deal and how we are going to begin operations.

Dan Hynes – Salient Partners, L.P.

Thank you.

Operator

Our next question is from Carl Kirst with BMO Capital.

Carl L. Kirst – BMO Capital Markets

Thanks guys. Sorry. Just wanted a quick clarification, I think this is actually perhaps answered, but with respect to the IPO at this point, we can’t really comment whether it would be primary shares or secondary shares?

Gary L. Whitlock

Correct, meeting center.

Carl L. Kirst – BMO Capital Markets

Okay, all right.

Gary L. Whitlock

Yeah, it’s correct.

Carl L. Kirst – BMO Capital Markets

All right, thanks guys.

Operator

Our final question comes from John Edwards with Credit Suisse.

John D. Edwards – Credit Suisse Securities LLC

Yes, thanks for letting me follow-up. I just wanted to make sure, I understand little bit better the tax and accounting, you indicated in that hand out, you were going to go equity and income method. So you're not going to consolidate that to CNP even with the 59%. And then I guess as far as the distributions, I am just trying to figure how we should think about this, will it be taxed on the income piece of the MLP or the distributions that you will receive coming back. I am just trying to sort through that.

Gary L. Whitlock

Well, this is Gary, let's take the first part, we did expect both companies to consolidate on the equity method of accounting. Therefore on a line-by-line basis it will be deconsolidated and consolidated on an equity basis. As to the second question, yes distributions are made back to the respective parent, there is a tax impact to that.

John D. Edwards – Credit Suisse Securities LLC

Okay

Gary L. Whitlock

So, just partnership accountings.

John D. Edwards – Credit Suisse Securities LLC

Right, okay so the distribution is coming back to the parent, that's the piece that would be taxed or is it the equity and income piece? I am just trying to….

Gary L. Whitlock

It will be a proportion and it will be a proportion of pick up of the earnings profits and earnings of that industry profits and also it’s the earnings of that industry. I think best to do this, let us address when we have our respective calls, we can provide a lot more clarity of both the accounting and then the expected pick up in terms of earnings and profits for both companies.

John D. Edwards – Credit Suisse Securities LLC

Okay.

Gary L. Whitlock

See you then.

John D. Edwards – Credit Suisse Securities LLC

All right, thank you.

Carla Kneipp

At this time, we will end the call. Both CenterPoint Energy and OGE Energy want to thank you for participating today. Have a good day.

Operator

This concludes the conference call. Thank you for your participation.

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