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OGE Energy Corp. (NYSE:OGE)

Q3 2009 Earnings Call

October 30, 2009; 9:00 am ET

Executives

Pete Delaney - Chairman, President & Chief Executive Officer

Sean Trauschke - Vice President & Chief Financial Officer

Keith Mitchell - Chief Operating Officer

Todd Tidwell - Director of Investor Relations

Analysts

Reza Hatefi - Decade Capital

Jay Dobson - Wunderlich Securities

Brian Russo - Ladenburg Thalmann

David Frank - Catapult Capital

Jeffrey Coviello - Duquesne Capital Management

Brian Russo - Ladenburg Thalmann & Co.

Operator

Good morning. My name is Neithen and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE Energy Corporation earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)

Mr. Todd Tidwell, you may begin your conference.

Todd Tidwell

Thank you, Neithen. Good morning everyone and welcome to OGE Energy Corp’s third quarter 2009 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 several other members of the management team to address any questions that you may have.

In terms of the call today, we will first hear from Pete Delaney, followed by an explanation of the third quarter results from Sean, 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 www.oge.com. In addition, the conference call and 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.

I will now turn the call over to Pete Delaney for his opening remarks, Pete.

Pete Delaney

Thank you Todd and good morning everyone. Welcome to our third quarter earnings call. I will discuss our recent accomplishments and forward initiatives and our outlook for our businesses, and then turn over to Sean will review our financial results in more detail. The third quarter was a good quarter on several fronts. First we were able to reports solid earnings this quarter due largely to rate increases in Arkansas and Oklahoma despite unfavorable weather.

Our utility earnings benefiting from these regulatory actions were up some $17 million despite a negative weather variance of $7 million and on a consolidated basis net income for the quarter was down less than $3 million due to the growth in utility earnings, as earnings at Enogex were driven lower by a 46% drop in both commodity spreads realized and liquids prices. This commodity decline tends to match the fact that Enogex gathering processing and natural gas transportation business continued to grow and I’ll let Sean talk about that in more detail in a minute.

On the regulatory front we successfully settled two rate proceedings, around the last earnings call we had received regulatory approval for our $48 million rate case settlement, which has been implemented. The key component was the increase in the monthly customer charge from $6.50 to $13 a month accounting for $44 million of that increase, a good step directionally given our escalating demand side management efforts.

Secondly, we just recently settled with the Attorney General’s Office of Oklahoma Corporate Commission staff and the Oklahoma Industrial Group in regard to the rate recovery of our $270 million investment in the 101-megawatt OU Spirit Wind Farm. Administrative of law judge has recommended approval of the settlement, which is a key step toward approval by the Oklahoma Corporation Commission which we hope will occur in November as the farm should begin service by year end providing additional earnings of 2010.

This will have been the tenth rate matter settled within the last two years, good work in our opinion. Throughout the year I have been reporting that our economy in Oklahoma has not been affected, as much as other areas of the country and that storyline continues today. Unemployment in the Metro Oklahoma City area is about 6.8%, not where we want it, but still 3% below the nation. Our customer growth continues to be just under 1% year-to-date inline with historical levels.

Industrial sales, which have been down considerably seem to have stabilized this quarter based in part by the incremental 45 megawatts of new load that has already come online this year, with another nine megawatts expected by year end. Industrial sales were down some 15% for the third quarter. However, this is an improvement of last quarter’s negative variance of 16%.

As discussed on the last call, we expect this upward trend to continue as many of these new projects have come online the second half of the year. Another positive note, Mitsubishi Power Systems announced a new wind turbine manufacturing plant in our Fort Smith, Arkansas service area, which should add to our load in 2007.

All-in-all our economy continues to sustain itself in the face of lower natural gas prices and overall decline in the national economy. I think representative of the outlook of the leadership in the region is that the City Council of Oklahoma City has scheduled a vote in December to extend a $0.01 tax to invest approximately $800 million over the next seven years in the metro region, including the first phase of a rail system, which would be powered electrically.

The earnings impact from the rate case successes, only tell one side of the story. In addition to positioning us for continued earnings growth utility in 2010, they have laid the groundwork for our 2020 plan. As you may recall, our 2020 plan, which we announced several years ago provides for us to defer the need for additional fossil fuel generation until after 2020.

The four major components of that plan are the Redbud plant acquisition completed in late 2008, which provides generating capacity to cover load growth for several years. Second, the expansion of the transmission system to integrate wind resources, third, addition of considerable amount of wind generation to provide some capacity, but more importantly reduced our exposure to renewal standards, gas and CO2 pricing. Lastly, deploy Smart Grid as a platform for among other things, demand side management. We continue to make great progress on this plan.

The wind speed transmission line approved by the Oklahoma Corporation Commission in 2008 is expected to be completed at the end of the first quarter next year. This is one of the first major projects to complete as part of the region’s transmission build out to reduce congestion and provide capacity for the huge wind supply potential of Oklahoma, Kansas and Texas.

OG&E remains well positioned to participate in the transmission build out with additional 600 million of transmission investment planned over the next four years. To-date, over whether to use 765 or 345 KV lines continues, but in any event we’re hopeful that our Woodward to Guymon line in Oklahoma will be approved by the Southwest Power Pool in the near future. If constructed using either voltage it would represent an additional $250 million investment for OGE.

Our wind build out continues as planned in addition to the 101 megawatt of OU Spirit Wind Farm, we have purchased power agreements for our additional 280 megawatts, bringing our total wind nameplate capacity to 550 megawatts. We’re very pleased with the other costs for this up almost 400 megawatts of wind acquisition, which should prove to be an economic hedge against higher natural gas and CO2 emission costs, either of which we hope not to experience in the near future.

In our Positive Energy Smart Grid program recently received a major boost. First as part of the rate case, the Oklahoma Corporation Commission approved the $20 million Smart Grid pilot in Norman, Oklahoma providing for deployment of 45,000 and 2000 of smart meters in home area networks respectively.

This week the DOE rewarded a $130 million grant to OG&E to fund system wide deployment, the tenth largest award. We will begin the process of negotiating terms of the grant with the Department of Energy and expected to progress with the system wide deployment over next three years.

Our 2020 plans part of our effort to position for potential CO2 legislation and actively engaged at DEI and with our legislators in Washington concerned over the proposed that proposed legislation will overly burden our customers and regulatory process with costs. Some important changes sought are in line with EEI position, namely deferring the start date of any legislation to 2015, getting a 40% allocation of emission allowances to the industry inline with the industry’s emission levels and a reasonable price cap.

Turning to Enogex, we have made good progress toward our long term objective to move that business towards fixed fee based revenues. We’re beginning to see the benefit of moving a large processing contract from keep-whole to fixed fee. We expect our keep-whole with treating fees to be down to 20% of our processing portfolio, a considerable move from 47% in 2003 and our future earnings from the processing business will also benefit from the completion of 120,000 MMBtu per day, Clinton processing plant this month.

On the transportation side, this was the first full quarter of firm transportation revenues from the Midcontinent Express, interstate pipeline and from firm 311services in Eastern Oklahoma, which together contributed almost $5 million in revenue over the same quarter last year. We continue to see renewed levels of activity in our key unconventional production plays namely the Woodford, Granite, County Wash and Canna areas.

We continue to expect a 10% increase in volumes this year and a 5% to 7% increase in gathering volumes next year. The continued growth in gathering processing volumes mitigated the impact of a 46% drop in realized commodity spreads sustaining at a respectable 15% return on equity for the business. Both businesses are continuing to advance their positions as a result of their success on key initiatives.

I will now turn the call over to Sean to discuss the quarter in more detail, but before opening up the call to questions, I will discuss increasing our long term earnings growth rate outlook to 5% to 7%. Sean.

Sean Trauschke

Thank you, Pete. For the third quarter, we reported net income of $136.8 million or $1.40 per average diluted share as compared to net income of $139.5 million or $1.50 per average diluted share in 2008. The contribution by business unit on a comparative basis is listed on the slide. Before I discuss our two businesses, I would like to discuss the $0.09 variance at the holding company in energy marketing business.

Because commodity prices and spreads were low this quarter, we did not see the opportunity to cover our costs in the demand fees associated with various marketing contracts. This was a very different story in 2008, when prices were much higher. Year-to-date, the holding company in energy marketing group has posted a loss of $0.07 per share, and that is about what we would expect for the full year 2009.

Now, moving onto the utility, at OG&E, net income for the third quarter was $123.2 million or $1.26 per share as compared to net income of $107.1 million or $1.15 per share in 2008. Gross margin on revenues increased $40.6 million or 13.5%. I’ll provide more details of gross margin on the following slide.

Operation and maintenance expense increased $5.8 million primarily due to higher employee costs and increased spending on vegetation management, which is offset by an increase in revenue through the system hardening rider. Depreciation and amortization expense increased $9.6 million, primarily due to the Redbud Facility being placed into service and the amortization of regulatory assets.

Other income and expense created a positive variance of $10.3 million, in part due to higher allowance for equity funds used during construction in 2009, and higher participation in the guaranteed flat build program. Interest expense increased $4.1 million due to the higher levels of long term debt that were issued in 2008, partially offset by lower short term interest borrowings are and higher levels of capitalized interest.

Now turning to the drivers for gross margin, new revenues primarily from the Redbud Facility, storm cost recovery and system hardening riders increased the gross margin by $29.3 million. The Oklahoma and Arkansas rate case settlements increased the gross margin by approximately $26.4 million and the 2,500 new customers added this quarter increased gross margin by $2.8 million.

The residential and commercial sales are growing year-to-date on a weather normalized basis compared to 2008. While we have seen a 15% decline in industrial sales year-to-date versus last year, it does appear to have stabilized and we continue to see the new industrial load Pete mentioned earlier, come online in 2009.

Offsets to the higher gross margin, include milder weather, which reduced gross margin by approximately $11.2 million, compared to the third quarter of 2008, which was basically a normal weather quarter. Year-to-date, weather has decreased gross margin by $9.9 million compared to normal and $13.8 million compared to 2008.

In addition, lower demand and related revenues from non-residential customers decreased the gross margin by approximately $6.7 million.

Now, turning to Enogex, net income decreased $10.2 million or $0.12 per share in 2009 compared to 2008. The largest variance was the gross margin, which decreased by $15.3 million and I’ll discuss that on the following slide. Operation and maintenance expenses were $5.1 million lower in 2009, primarily due to lower labor costs compared to the same period in 2008.

Depreciation and amortization expense increased $2.6 million, primarily due to the system investments we’ve made over the past several years. Interest expense was $3.9 million higher compared to 2008, primarily due to interest expense associated with the issuance of the long term debt in June of this year.

Now looking at the drivers for gross margin, as you know processing spreads were 46% quarter-over-quarter as a result of processing business had lower gross margin contribution. However, the base business continues to grow as we have added transportation revenues through demand fees from MEP and Gulf Crossing.

These investments along with the storage demand fees and higher 311 of service rates increased gross margin $5.5 million for the quarter. We also continue to see volume growth in the gathering and processing business. Gathering volumes increased 6% quarter-over- quarter and 11% year-to-date. Gathering volumes and fees increased gross margin by $2.8 million for quarter.

Processing volumes have also grown over 10% for the quarter and 6% year-to-date. For more detailed variance explanation, I’d encourage you to review our 10-K filed this morning with the SEC. We have had a solid three quarters and despite the challenging economic environment and mild third quarter weather. We continue to expect to be towards the middle of our guidance for 2009 of $2.30 to $2.60 per share, assuming of course normal weather for the remainder of the year.

Looking at 2010 guidance, we expect earnings to be between $2.70 and $2.95 per share based on assumptions set forth in our third quarter 10-Q filed with the SEC this morning. Over the next couple of slides, I’ll discuss the 2010 earnings drivers for both OG&E and Enogex. Looking specifically at the utility, we project earnings of $2.10 to $2.20 per diluted share.

The 2010 gross margin assumes a 0.9% sales growth, it also assumes OU Spirit is approved and in service by January 1 and the wind speed transmission line is in service by April 1, 2010. Operating expenses will increase partly due to higher costs associated with the smart grid program, system hardening and OU Spirit, but again these are offset by increased revenues from their riders.

In addition, base O&M will increase, primarily due to higher pension and retiree medical costs. Higher depreciation will also occur as a result of additional plant and service. We have assumed issuance of long term debt in the amount of $250 million at the utility midyear, which is the primary driver for higher interest expense.

Another major variance from 2009 is the reduction in equity AFEDC as we place assets such as OU Spirit and wind fee into service and you given covering under these riders. Our effective tax rate at the utility is also expected to decrease due to the production tax credits associated with OU Spirit. Those credits are given back to customers by lower revenue requirement for the wind farm.

Now turning to Enogex, we project earnings of $0.64 to $0.86 cents per diluted share. We anticipate gross margin to be driven primarily from increased commodity and higher hedge prices in the processing business, gross and gathering volumes of 5% to 7%, a full year of MEP and Gulf Crossing and a full year of the new Clinton processing plant as processing volumes are projected to increase 12% over 2009.

Moving on, this slide clearly indicates our focus on utility and fee-based business. The key takeaway from this slide is that approximately 4% of forecasted gross margin are subject to commodity spreads and natural gas liquids prices. As we think about 2010, a simple sensitivity use is a 10% change in commodity spreads from the $5.15 per MMBtu value we gave you for the entire year is $4.5 million of net income or another way to look at it’s 1.5 % of the consolidated earnings per share of the company.

So you can see in 2010 we have very little exposure to commodity spreads at Enogex. Stable earnings growth along with conservative financial practices continued to be our focus. I’ll point out for those interested; we have posted supplemental processing information on our website this morning with hedging information through 2011 and a breakdown of projected processing margins for 2010.

I wanted to take a minute to discuss our capital spending plans. You’ll notice the heavy focus on utility and transmission capital expenditures over the next four years we have plans to invest over $600 million on transmission projects. This is where our focus will be for the next several years. We’re committed to our ratings and any additional capital projects that might require equity issuance would be accretive to earnings per share and support our long term growth plans.

In closing, I wanted to briefly touch upon our liquidity. As Pete mentioned in his early remarks, OGE has a strong financial profile and you can see in our projected consolidated cash profile, we have ample liquidity to fund our growth projects with over $800 million of available liquidity in 2010. At the same time, our credit metrics are improving as well. So despite this tough economic environment, we are growing earnings and dividends as well as strengthening the financial position of the company.

With that, I’ll turn the call back over to Pete.

Pete Delaney

Thank you, Sean. We have made great progress in positioning our businesses to execute our plans. I’m very pleased with the success of our financial regulatory and operational initiatives over the last few years and very appreciative of the hard work of our members and of course one could always ask for more constructive overall economic framework.

That said, as a result of our current outlook for our businesses, we are increasing our long term earnings outlook from 4% to 5% as we have publicly stated for several years to 5% to 7% on a consolidated basis. This increase is driven by a more favorable growth outlook for the utility largely due to plant transmission investment.

The growth rate for Enogex remains as we have expressed and served in past years. We continue to focus on growing the dividends subject to Board approval at a rate inline with the past several years. With the continued uncertainty in the overall financial and economic system, we plan on inherent to a conservative payout strategy to ensure sufficient liquidity to fund our investment program that will continue to drive shareholder value.

Now, I’ll turn the call back over to the operator, to hear your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Reza Hatefi - Decade Capital.

Reza Hatefi - Decade Capital

The gross target, the 5% to 7%, I guess in your 10-Q it says 5% to 7% from 2009 through 2012, which sort of implies 2012 is $2.90 or $3. Is it fair to look at it that way or am I just reading too much into that?

Sean Trauschke

No. I think the way to look at that is we were trying to articulate that’s a compounding our growth rate and so earnings are going to grow through 2012 off of the midpoint of 2009, 5% to 7%. So if our guidance is $2.70 to $2.95 this year we would expect and continued growth thereafter. I mean for 2010, our guidance would be $2.70 to $2.95 and we’re expecting growth beyond that as well.

Reza Hatefi - Decade Capital

So should we assume 5% to 7% off of the ‘09 midpoint or the ‘10 midpoint?

Sean Trauschke

I think you can use the ‘09 midpoint.

Operator

Your next question comes from Jay Dobson - Wunderlich Securities.

Jay Dobson - Wunderlich Securities

Question for you, Sean or Pete, the guidance now for ‘09 still at the midpoint leaves me just a little confused, when I look to the fourth quarter. You’ve done about $2.30 year-to-date and if I pick exactly the midpoint, that would suggest a $0.15 fourth quarter versus $0.29 a year ago and I think you said hold-co could be about flat in the fourth quarter, keeping that $0.07 loss where we are, so I’m just wondering what the rate increase and Enogex continuing to do, okay why $0.15 versus $0.29 would work mathematically?

Sean Trauschke

I believe we earned $0.23 in the fourth quarter last year, it was the number, Jay, not $0.29. So we’ve kind of targeted this to midpoint. Obviously, we’ve assumed normal weather and as you noticed in the third quarter and continuing in the fourth quarter, it’s still been mild and it’s a different economic environment this year. We didn’t see the full effects the fourth quarter of last year.

So we’re still targeting the midpoint there and we still have two months left to execute, so I wouldn’t anticipate that you’re going to see, there’s nothing concerning or deteriorating there, but I think we’re being very cautious and prudent. Pete, do you have anything to…

Pete Delaney

No. I agree. There’s nothing we expect that Enogex is going to continue to perform. Year-over-year, we will see a better comparison, because of course, processing spreads really came down in September of last year, but that being said, it’s still overall a fragile recovery we’ve seen, and I talked a little bit about, industrial sales were turning around. We tend not to get a lot of margin from that and so we’re just keeping with our cautious outlook for the remainder of the year.

Jay Dobson - Wunderlich Securities

So it’s fair to say that might be conservative, because I think the 23 you’re referring to, Sean, actually included the $0.06 charge for the termination of the potential JV, so 29 might be a clean number, but I could have my numbers wrong. Second thing, can you just talk about the longer term prospects for Enogex really on two accounts: First, is there greater ability to move the revenue stream towards fixed fee?

You’ve done a great job with that clearly, getting keep hold down to 20%, but is there more ability to do that? Second, just on the back of the JV that you didn’t do last year, is there other opportunities for that as we look forward?

Sean Trauschke

First, Jay, on the fixed fee question, there’s two parts of that as we talked about. One is the processing portfolio, that we have made some major movement in that direction. Optimally, our really mix as we think from an economic standpoint is a fixed fee and keep pole and to a lesser extent POL, based on our economic models. We do believe, we have opportunities, a lot of opportunities when we go from moving, I believe, our focus will be moving POL more into the fixed fee from an economic standpoint now that we have our keep poles.

Keep in mind the key pole does have a trading fee, which has a lot of value in it. So we do think as contracts are coming up over the next couple of years, we do have opportunities to move the POLs over to the fixed fee, which we think will give us a higher risk adjusted return on that portfolio. So, yes, there are opportunities there.

On the transportation side, again with MEP and Gulf Crossing, some major investments there and the firm 311, of course, we will always continue to try to get some firm intrastate service on our system, but that’s hard to predict with any certainty. We do have, on the other hand, a contract to supply AECI, which is a long term contract for serving a new power plant. I think it’s combined cycle natural gas plant, that would be at 2011.

We do have one other power plant contract too that will be opportunity to renegotiate as well, which we would anticipate would be able to increase that margin. So we do have some opportunities and we do expect to be able to within just our overall growth move more towards fixed fee, which we think is obviously a good thing from a risk adjustment return.

We like Enogex, we like where it’s positioned, we like where we’re positioned in the unconventional plays in the Mid Continent area. We continue to focus on our building shareholder value over the long term and making sure that we get full value that we think for Enogex and our stock price and we’ll continue to focus on that. I’m not going to exclude anything, but we really are not at this point in time working on anything that of that nature.

Operator

Your next question comes from Brian Russo - Ladenburg Thalmann

Brian Russo - Ladenburg Thalmann

Just a couple of questions on the utility the 0.9% load growth expected in ‘09, given your comments earlier in the call about some of the regional growth initiatives and some, new manufacturing plants that coming online down there can we expect an acceleration of that 0.9% growth post 2010, all those equal, of course?

Sean Trauschke

No. I think for planning perspective, we are not looking for an acceleration in our overall kilowatt hour sales growth outlook, particularly with our 20/20 plan, keep in mind we are going to be investing with our deployment on smart grid, we do have demand side management programs where we’re looking to, basically move load off-peak, but also for energy efficiency. So, of course we anticipate earning return on those investments, our demand side investments so right now we’re not forecasting any increase from our kilowatt hour sales. The 0.9, I think you’re referring to our customer growth rate.

Brian Russo - Ladenburg Thalmann

I’m sorry. I must have misunderstood. I thought that was lower growth.

Sean Trauschke

Is it sales, okay and so but we are staying with that number.

Brian Russo - Ladenburg Thalmann

Then just on the Enogex side, as you guys decrease your commodity exposure, I’m just curious why such a large range in the guidance. Is it a function of volumes or whether ethane is rejected or not?

Sean Trauschke

Primarily volumes

Brian Russo - Ladenburg Thalmann

So 5% gets you to the low end assuming a $5 plus Forex Spread and 7% gets you to the high end?

Sean Trauschke

We look at, a multitude of variables when we are looking at our guidance, and you do have commodity spreads, you do have volumes, you would have costs, O&M, interest costs and we put that in and look at our probably distribution and, those are the major drivers and that’s the types of range that we are getting within, of course reasonable probability, and so it’s really those combination of factors.

Brian Russo - Ladenburg Thalmann

On the realized commodity spread of a little over $5, could you break that down as to, what dollar value you hedged at versus what market spread you’re assuming?

Sean Trauschke

You’re talking about 2010?

Brian Russo - Ladenburg Thalmann

Yes.

Sean Trauschke

So our 2010 our hedges are at $5.05 and we have, the current forward curve on last week was at $5.96.

Brian Russo - Ladenburg Thalmann

Can you breakdown what percentage hedged versus un-hedged? Is that possible?

Sean Trauschke

Sure it’s right at 75% of the key pool volumes.

Brian Russo - Ladenburg Thalmann

Great and it seems like you’re paying down.

Pete Delaney

Brian, just to be clear that excludes ethane.

Brian Russo - Ladenburg Thalmann

Are you guys being conservative on ethane, because I think when we started 2009, you assumed ethane rejection, but as we moved through the year, you began to take ethane can you just give us kind of your outlook on that?

Pete Delaney

Keith Mitchell, our Chief Operating Officer of Enogex. Keith, you want to cover that?

Keith Mitchell

Yes, I know we’re just trying to look at forward curves both looking at the gas and ethane to see what we expect. Ethane is very difficult to predict it’s kind of a wild card as recovery and so, we have been fortunate enough to have some recovery months this year. Right now we are projecting to be in rejection most of 2010.

Brian Russo - Ladenburg Thalmann

Just also, could you give us a sense of what the sustainable debt level is at Enogex giving your current CapEx profile?

Pete Delaney

Brian, we have plans to refinance the $289 million maturity in January, so we are going to be looking at that here at the end of this year and early next year, and we have sufficient capacity in our revolver and but we don’t have any plans to issue any additional long term debt Enogex.

Brian Russo - Ladenburg Thalmann

So it’s self funding is what you’re saying?

Pete Delaney

Yes. I think that’s an easy way to look at it, we have sufficient capital. Enogex is producing sufficient capital to fund the investments and continue to growth the business.

Operator

Your next question comes from David Frank - Catapult Capital.

David Frank - Catapult Capital

I had a couple of questions for you. One was the 5% to 7% growth. Is that contingent upon you winning new transmission and/or other utility CapEx projects or is it executing on staff already in your forecast and contingent on things like the economy and such?

Pete Delaney

I think that is contingent on the forecast we’ve laid out, the 600 million of new transmission opportunities that’s been approved and committed. It certainly assumes normal weather and some help on the economy, but it does not anticipate or incorporate any new transmission or any new investments in other businesses.

David Frank - Catapult Capital

Then I think SPP staff made some recommendations for transmission projects recently. I think there was some comment in there regarding a proposal you and Xcel had? Can you give us some update on that? I don’t believe that was in your CapEx plan or...?

Pete Delaney

Everything in our CapEx plan, it’s known and committed and there were priority projects under review and my comments are, I think this is what you’re referring to, I referred to our Woodward to Guymon. I’m sure you know where Guymon is David, but Guymon is in the Panhandle of Texas pretty far away from here, but where excellent wind potential is and we have as you know, a joint venture with MidAmerican and AEP, that’s our Tallgrass line and that’s for 765 build out of that line.

Now I’m not exactly sure on the timing, but when the original priority projects came out that was not on the list. I think that their Oklahoma regulators among others have talked to the SPP and questioned given the wind potential out there, “Why that line is not a priority project.” My understanding is that the Southwest Power Pool is doing a wind, updating their wind integration study and that line will be reviewed and they may very well end up be back with us, we’re not sure of the, but we know it’s being looked at.

Either way, if it’s 765, we would be building that in Tallgrass with AEP and MidAmerican. If it’s 345, it’s not in the partnership and we will be building that ourselves. We believe that given the wind potential there, it’s a timing issue. That line will be needed at some point in time. Again, it’s just a timing issue, but that’s not in the $600 million that I referred to. Anything beyond the portfolio 3E, which is what is in there, which is approved, would be incremental.

David Frank - Catapult Capital

Last question, just on the, you have still a bit of your wind requirement is still outstanding. I think around 150 to 200 megawatts for the most recent RFPs. I think you’re looking to fill about 450 and you took in 300 and still waiting on a piece. I was wondering when we could hear something on that.

Pete Delaney

Again, we will be filing very shortly for the two purchase power agreements totaling 280 megawatts that we selected. There was a third project, which I think maybe you’re perhaps referring to is the build to own transfer that we had for an incremental 150 megawatts, I believe it was size wind farm and in our due diligence and negotiations, that didn’t really pass. We weren’t ultimately comfortable recommending that we move forward on that project.

We have planned for sometime to have two rounds at this point of wind development or acquisition. This is one of the first ones, though. We expect to be back again, for another 300 or so megawatts as we continue to build out that portfolio. We’ll see if we get any more clarity on our PS standards.

Our mandates out of Washington over the next couple of months, but at a minimum we’re going to be moving ahead with another RFP. The timing of that would probably be sometime in 2010, but that hasn’t been decided. As you know, part of the settlement on the OU wind farm is that we have to file our integrated resource plan. I think in January, and that we probably would not move to do anything on acquisition until that RFP plan is filed.

David Frank - Catapult Capital

So just to clarify, we shouldn’t expect any announcements regarding any build transfer own or however, you put it related to your utility anytime in the near future?

Pete Delaney

I would anticipate that’s correct.

Operator

Your next question comes from Jeffrey Coviello - Duquesne Capital Management.

Jeffrey Coviello - Duquesne Capital Management

A quick question on the ethane rejection point, I guess how much money roughly have you made from not rejecting the ethane this year versus what you had baked into the original assumptions at Enogex? I guess, how much if you don’t reject the ethane, about how much upside could there be?

Pete Delaney

Ethane is clearly the least profitable component and I don’t have the number here exactly how much we have made. I mean obviously, we look to optimize and as we do have a chance to recover, it’s kind of an option that we have. We have a chance to recover and make some incremental revenue we do, but that’s why it’s always kind of on the bubble of recovery and rejection because it is the least profitable of those components.

Jeffrey Coviello - Duquesne Capital Management

So I guess it’s a decent impact, but it’s not a huge impact to earnings at Enogex, if you shut it off or run the ethane through? Is that the right way to think about it?

Pete Delaney

That’s correct. It’s just really incremental optimization revenue. It’s probably on avenue less than $5 million for the year.

Operator

Your final question comes from Brian Russo - Ladenburg Thalmann & Co.

Brian Russo - Ladenburg Thalmann & Co.

Just one quick follow-up, are you expecting or assuming any corporate drag in the 2010 earnings guidance?

Sean Trauschke

Yes, we would expect that the holding company and ER would continue to have between $0.07 and $0.09 like they did on this year.

Operator

There are no further questions at this time.

Pete Delaney

Well, we certainly appreciate your participation on the call and your continued interest in OGE Energy. Have a great day and thank you.

Operator

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

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Source: OGE Energy Corp. Q3 2009 Earnings Call Transcript
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