Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Todd Tidwell – IR Manager

Peter Delaney – Chairman and CEO

Sean Trauschke – VP and CFO

Keith Mitchell – COO, Enogex

Analysts

Brian Russo – Ladenburg Thalmann

Anthony Crowdell – Jefferies

OGE Energy Corp. (OGE) Q2 2011 Earnings Call August 4, 2011 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2011 OGE Energy Earnings Conference Call. My name is Keesha will be your conference operator today. At this time all participants are in listen-only mode. We will conduct a question-and-answer towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to hand the conference over to Mr. Todd Tidwell, Director of Investor Relation. Please proceed sir.

Todd Tidwell

Thank you, Keesha. Good morning, everyone, and welcome to OGE Energy Corp.’s second quarter 2011 earnings call. I’m Todd Tidwell, Director of Investor Relations. And with me today I have Pete Delaney, Chairman and CEO of OGE Energy Corp.; Sean Trauschke, Vice President and CFO of OGE; 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, followed by an explanation of second quarter results and an overview of the Oklahoma rate filing 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 comments. Pete?

Peter Delaney

Thank you, Todd. Good morning, everyone and welcome to call. This quarter’s finance performance was driven extraordinary hot summer weather and to a lesser extent increased NGL pricing. As of this call we have experienced 40 days of day time highs in Oklahoma City since June 14 over 100 degrees.

Normally we would have about 10 days per year over 100 degrees, so this summer is really shaping up to be one of the hottest on record in Oklahoma. Enogex is on plan to meet the financial target again by NGL prices over the prior year. Operationally we are making good progress on key initiatives in both businesses as you may recall this is the major build year for us with a record 1.4 billion capital budget.

In the second quarter we reported earnings $1.04 per share compared to $0.78 in the second quarter of 2010. And so the gross margins were higher primarily for the quarter due to the hot weather I mentioned, regulatory riders associated with pre-approved utility investments and new customer growth. This higher gross margin was partially offset by higher operating expenses.

We established a new all-time peak demand, last couple of days that peak demand has been about 7000 megawatts. This is an unprecedented 400 megawatt increase in our peak demand over last year’s record peak. We believe obviously, this huge increase in the peak driven by the weather as opposed to growth, that our plants will be analyzing that data.

As an extreme weather condition our infrastructure systems and members are seriously challenged by report that operations have been able to meet the demand of our service with minimum disruption. You may recall from our prior quarter call, we’ve increased our spent last year as part of a mechanical integrity plan. Those investments have really paid off so far and the performance of our power plants in meeting record demand.

The recovery of infrastructure investments is a key component of our regulatory filing made with the Oklahoma Corporation Commission. Rate case we have invested approximately 500 million in our utility to maintain a high level viable electric service which resolved and a $285 million increase rate base from which we are not currently earnings a return. We have a requested a base rate increase of 73 million. Sean will get into the details later.

And then in the past Howard Motley, our Vice President of Regulatory Affairs, who unexpectedly passed away several weeks ago, we would be reviewing our plans. I would like to recognize his contribution particularly to the regulatory success of this company. I did want to update you on some of our initiatives at the utility associated with the largest investment program in our company’s history is now $1.4 billion. That amount approximately $1 billion is related to the utility. So far major projects on track to be completed on operating in either 2011 or 12 as planned.

Transmission investment for this year is over $250 million and these projects are progressing at various stages of planning and design. The 228 megawatt Crossroads wind farm is moving forward. A majority of the turbines are expected to be in service by the end of this year. This market rollout on schedule is over 350,000 smart meters now in place.

On the regulatory front, there Arkansas Rate Case was solved in June with new base rate increase of $8.8 million implemented that same month. We received I think yesterday an order approving the settlement reached in our Smart Grid filing in Arkansas which will allow us to complete our deployment system wide.

On the regional haze front, aside from final comments with EPA in May stating our recommendation for the approval of our state plan as opposed to the federal plan not much has changed with the final rule not expect until November. We are evaluating the impact of the Cross-State Air Pollution Rule, which now proposes that six additional states, including Oklahoma, is subject to ozone season NOx regulation. We continue to work through the best possible solutions to comply not only of regional haze with Mac and any other expected environmental regulation.

On the economic front Oklahoma City and the State continues to perform better than the nation. Our unemployment rate in the metro area is about 5.7%, the lowest and one of the lowest in the nation for large metro areas and the state unemployment rate is about 5.3%. We continue to add customers 7,000 to the system compared to the second quarter of ‘10 and industrial and oilfield sales continued to do well driven primarily by the robust energy sector.

Turning to Enogex, the midstream business performed well in the second quarter. Gross margins were up in all segments. Our gathering volume increase of 2% over the prior year does not yet fully reflect our growth potential. But we are still in the early stages of some recently contracted growth areas.

We still are holding to our projections of year-over-year gathering volumes increases of 5% to 7%. Processing volumes were down 8% compared to last year due to the Cox City plant outage while gross margin was about $11 million higher due to NGL pricing that was 44% higher.

Natural gas liquid prices averaged $1.24 per gallon compared to $0.86 last year. The same prices were a main driver has become a place with feedstock for North American cracker operators who are due to higher price of Naphtha. We expect the Cox City plant back online in the third quarter this year. And through volume growth for the quarter was below guidance for the year, we still expect to meet our volume growth targets.

Our two new processing plants are on plan to be operational in 2012 to handle our increasing market share, new gathering and processing volumes in the midcontinent. We continue on our path of moving the processing portfolios composition towards fix fee arrangements to reduce volatility in our cash flows. Of course at these record NGL price levels, there would be a short term trade off of margin to establish longer term sustainable growth positions.

We talked about before we continue to negotiate the extension of a major contract as part of a fixed fee conversion. Our focus remains on building long term value for our shareholders. We continue to work multiple new gathering of processing opportunity for Enogex in our footprint. The Board recently proved more than $300 million of capital expenditures associated with acreage dedications.

For the first time in many years as I can remember we have a full fleet of projects already identified for 2012 by the summer of the prior year reflecting the type of growth we have in our areas. The result of recent wins we have now about $800 million of growth capital projects at Enogex through 2013.

Part of our plan, $1.4 billion total capital investment program we’re focusing on executing our capital project, the processing plants, the transmission lines, wind farms, our smart grid deployment as well as managing our costs, meeting customer expectations and processing our rate case.

We are very pleased to be awarded the J.D. Power Award for highest residential customer satisfaction reigning in the South East region. This reflects improvement of our liability, our customer response, interaction with field members, et cetera point being it takes many feet to our organizations to create that experience and my thanks to many of our members who are working hard to execute on many projects as well as our day to day operations.

Closing the rate case file last month, the Crossroad wind farm, the transmission lines and new acreage dedications and processing plant expansions sets the stage for 2012. Although the weather cannot be expected to be as favorable next year, we are more importantly focused on continuing to get our milestone on key business initiatives that position us to meet our long term 5% to 10% earnings growth target.

Now I’d like to turn the call over to Sean to review our financial performance in more detail. Sean?

Sean Trauschke

Thank you, Pete and good morning. For the second quarter, our net income was $103 million or $1.04 per average diluted share as compared to net income of $77.3 million or $0.78 per share for the second quarter of 2010. The contribution by business unit on a comparative basis is listed on the slide.

Turning to OG&E, net income for the quarter was $78.6 million or $0.79 per share as compared to net income of $60 million or $0.61 per share in 2002.

Gross margin increased $32.4 million or nearly 12% and I’ll touch on gross margin on the next slide. Some of the other drivers are as follows: Operation & Maintenance expense increased by $9 million of which $2.5 million was associated with riders that have revenue offsets and the remaining drivers include higher employee costs including overtime costs related to the April storms.

This higher O&M costs were partially offset by lower postretirement benefit expenses due to the Retiree Medical Plan modification we discussed earlier this year.

Depreciation and amortization expense increased $1.5 million, primarily due to additional assets being placed in the service. Taxes other than income increased $1.6 million, primarily as a result of higher add long taxes. Net other income increased by $3.6 million, primarily due to an increase in equity AFUDC attributed to construction costs associated with the Crossroads Wind Farm. Finally, interest expense increased $2.1 million, primarily due to an increase in interest on long term debt that was issued last summer and in May of this year.

Turning to gross margin, the increase of $32.4 million compared to the same period in 2010. The main driver for the higher gross margin was the weather. It is been extremely hot so far for this summer and cooling degree days with 20% higher than last year and 62% above normal. The average daily temperature in June was 84.2 degrees which was 8.3 degrees higher than average.

Our weather increased gross margins $18.1 million compared to last year and $24.1 million compared to normal for the second quarter. Various drivers increased the gross margin by $5.6 million in addition to higher transmission revenues of $4 million as we begin to include CWRT in transmission rates instead of booking AFUDC.

Finally, new customer growth and other items increased gross margin by $4.7 million. Customer growth continued at just below 1% compared to 2010 as nearly 7,000 new customers were added to this system. Kilowatt hours sales growth increased 5.9% primarily due to the weather and on a weather normalized basis, sales increased 1%.

Now turning to Enogex. OGE’s share net income for the quarter was $25 million or $0.25 per share as compared to net income of $18.6 million or $0.19 per share in 2010. Gross margin increased by $15 million, and I’ll discuss those drivers in a moment. Some of the other drivers are as follows: Operational & Maintenance expense increased by $3.3 million in 2011, primarily due to higher employee and contractor costs.

Net other income increased $3.7 million due to sale of the Harrah Processing Plant and associated gathering assets in the second quarter of 2011. Interest expense was $1.7 million lower compared to 2010 and part due to lower debt levels. And finally, ArcLight’s 13% ownership reduced pre-tax earnings by approximately $5.8 million.

Looking at gross margin, they increased $15 million in the second quarter of 2011 compared to 2010. Higher natural gas liquids price was the main driver as processing gross margins increased by $10.6 million. Average natural gas liquids prices increased 44% quarter-over-quarter or maybe $0.06 cents per gallon to $1.24 per gallon.

Also adding to the higher processing margins for higher commentate volumes and prices, which increased gross margins by $3.9 million. Partially offsetting the higher processing gross margins were lower processing volumes due to the outage of the Cox City plant, which is expected to be back online in the third quarter.

Gathered volumes continued to increase as the quarter-over-quarter growth was 2% and June set a record for all time gathered volumes. For a more detailed explanation of the earnings drivers for OGE, I would refer you to the company’s second quarter 10-Q filed with the SEC this morning. In addition, I would refer you to the appendix to this presentation where we have provided a updated CapEx table. As Keith mentioned in his remarks, we have increased our CapEx outlook for Enogex and we’re excited about the many opportunities we have there.

Before moving on to the Oklahoma Lake filing, I would like to update you on where we are regarding regulatory initiatives at the utility with the exception of the Oklahoma Rate Case, all of our 2011 regulatory initiatives are complete or are awaiting commission approval.

Just yesterday, we received the order on Arkansas proving the Smart Grid rule up and we work very hard to execute our plan of building the necessary infrastructure and make key investments in the renewables and transmission to serve our customers and shareholders a lot. We are looking forward to our opportunities in the future for the utility. We are pleased with our progress as we reflect on a Multi-Year Utility Growth Plan.

Now turning to the Oklahoma Rate filing, as you know we filed our rate case last week and are requesting $73.3 million increase in base rates. The key components are 11% ROE on 53% equity. Since our last filing, rate basis increased approximately $565 million, but nearly $280 million of the increase in rate bases covered in the form of routers. The routers have helped to mitigate rate changes for customers. The remaining $285 million is the rate base addition we are requesting in the case. The other half of the rate request is for operating expenses.

As we’ve mentioned several times in the past, one of the main drivers is the maintenance of our power plant. We feel that this provides good value for our customers and they are certainly benefiting from that during this record fee. Even with the proposed rate increase, our rates will still remain below the national average and we are working hard as the management team to keep them that way.

And finally as always ROE will be a major component in the case and the sensitivity with ROEs for every 10 basis point change revenues will change approximately $3 million and net income approximately $2 million. We expect the new rates to be in place after the first of the year.

Before we answer your questions, I would like to address our 2011 outlook. It has been a very hot summer and earnings year-to-date have been positively impacted $0.22 per share from the weather. We saw a record heat in July and a record heat has continued thus far in August. So it is difficult for us to tell you just how much the weather would drive earnings especially in the third quarter which is our largest from an earnings perspective.

At the end of the third quarter, we will provide you with an updated earnings guidance range. We do know that given where we are at the end of June we expect to exceed the top end of our previously issued earnings guidance of $3.00 to $3.20 per share, assuming no other changes to our previous assumptions.

This concludes our prepared remarks. Now we’ll open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Brian Russo with Ladenburg Thalmann. Please proceed.

Brian Russo – Ladenburg Thalmann

Hi, good morning.

Sean Trauschke

Hi, good morning Brian.

Brian Russo – Ladenburg Thalmann

It’s nice to see the Enogex CapEx starting to trend significantly higher and I’m just curious if maybe you could talk in more detail on any specific projects and I don’t know maybe the types of returns you expect? And then how does ArcLight’s current 30% ownership play into the incremental CapEx spend?

Peter Delaney

Hey Brian, it’s Pete. I’m going to turn the first part of the call over to Keith Mitchell, Enogex’s Chief Operating Officer and I think Sean will then address the ArcLight ownership percentage.

Keith Mitchell

Yeah. We’ve been working hard and we have been able to expand our system. We’ve done a lot of activity in our area with the Cana Woodford primarily as well as the Granite Wash and so we’ve been continuing to get additional acreage dedications as well as keep line of sight to a lot of extra growth even where we have acreage dedications. So we do anticipate our CapEx to be continuing to grow.

Brian Russo – Ladenburg Thalmann

Are these gathering in processing projects and what type of projects and type of contracts are we looking at?

Peter Delaney

Yes, it’s gathering projects with compression. Lot of compression gathering lines and then that feeds into our processing headers and as, you know, we are expanding our processing capacity. So the processing plant expansions that we are doing will also support that.

Brian Russo – Ladenburg Thalmann

The process agreements that were not key poles, those are fixed fee PLP I believe?

Peter Delaney

That’s correct, its fixed fee or PLL PLP.

Keith Mitchell

And Brian this is Shawn. Regarding, the contributions from ArcLight and OGE to fund this CapEx, we haven’t specified the exact funding percentage or contributions, and the way it’s work through is we’re going to analyze the timing of those cash flows and we will certainly exhaust the cash on hand that interjects.

First, and then to the extent that additional capital is required from ORE and ArcLight OGE decide between and 10 and 50% of the new contribution how much will fund and then ArcLight will fund the rest will certainly provide you all of that clarity and when we release 2012 guidance, but right now what we want to do is we have committed to these projects we are going to be begun building those projects and we’ll certainly layout these funding plan and the contribution schedule once we finalize that at the end of the year.

Brian Russo – Ladenburg Thalmann

Is it safe to assume that you don’t need any OGE external equity to fund this?

Peter Delaney

Well, I think at the present time I think I would argue that the using ArcLight as the funding source for equity is cheaper from OGE common stock. And so we are looking at in terms of what the cheapest source of equity for us. But, at the same time we are also focused on making sure that we continue to create shareholder value in grow our earnings. So right now, we planned to use that funding vehicle to ArcLight.

Brian Russo – Ladenburg Thalmann

Okay, great. And you mentioned 5% I think gathering volume growth, year-over-year I would imagine that’s likely to accelerate next year and beyond with the committed projects?

Sean Trauschke

Brian, this is Sean. Yeah, we haven’t provided any future guidance around assumption around gathering or processing volumes. Needless to say, gathering volumes were up 2% year-to-date over what was considered a pretty big year last year. And we are still expecting 5 to 7. So we are anticipating a big increase for the back half of this year and so we will certainly provide our ‘12 update around volumes and all of our other assumptions.

Brian Russo – Ladenburg Thalmann

Okay. And books of NGL pricing are you seeing for the remainder of the year?

Sean Trauschke

For the remainder of the year we are seeing close to $1 and that assumes that – is in recovery.

Brian Russo – Ladenburg Thalmann

Okay. And then switching gears to the utility, can you just give us more detail as to where we are with the EPA and FIP as the Attorney General filed the lawsuit and is there any timing on when the judge might issue a state that kind of stop the clock?

Sean Trauschke

We aren’t having – really have been we are not – there is no timeline on the suit filed by the Attorney General and again that rule push back November and everything else gone on to EPA, what we – really that’s happened. We filed our comments in mid July, we are continuing to do the work, we need to do to figure out how our path is going to move forward to address all this regulations and as you know I mentioned my comments that the new transport rule, cost state rule, we are meeting with the state today I think it is for the time of the impact of that if Oklahoma is included and so there is a lot of uncertainly yet and all implications were clear for the State of Oklahoma should that proposed rule move forward but that’s really nothing really new report.

Brian Russo – Ladenburg Thalmann

Okay.

Sean Trauschke

Of our standpoint.

Brian Russo – Ladenburg Thalmann

And just to clarify on the guidance, on the utility side, the guidance are exceeding the high end of the utility guidance is based on year-to-date as of June 30th weather so anything in July and in the third quarter would be incremental to you guys already exceeding the high end?

Sean Trauschke

Yes, Brian this is Sean. Yes that’s correct. And we’ve picked that $0.22 of additional earnings from the weather year-to-date. And we are on plan. All of our assumptions are still valid for the utility. We’ve just picked up this – picked up this whether benefit this Pete and I remarked July was a continuation of what we saw on the second quarter and even this week in August, the first week in August it’s been incredibly hard as well. So your assessment there is that this will be incremental is correct.

Brian Russo – Ladenburg Thalmann

Okay. Do you guys have some rates so that hot weather in 3Q has kind of a bigger margin benefit then hot weather in 2Q?

Sean Trauschke

Yes I think the way I’d say that is we have summer rates that impacts the summer more than does weather.

Brian Russo – Ladenburg Thalmann

Okay. And lastly on Enogex, remind us what the original NGO assumption in your original guidance was?

Sean Trauschke

$0.90 a gallon.

Brian Russo – Ladenburg Thalmann

Okay. Thanks a lot guys.

Sean Trauschke

All right thanks Brian.

Operator

(Operator Instructions) The next question comes from the line of Anthony Crowdell with Jefferies. Please proceed.

Anthony Crowdell – Jefferies

Good morning just I guess a quick follow up on Brian with EPA rules are you sure of those you guys have two – I think – and Muskogee both of them scrubbed I guess what sort of environment controls do you have on them?

Sean Trauschke

Muskogee are uncurbed.

Anthony Crowdell – Jefferies

Do you have, have you used – or anything on those plants or there is no really Michigan trials – like cross five border controls?

Sean Trauschke

No I think we would continue to look at what we can do to comply, but scrubbed and uncurbed and we bought further sell for coal, we have been well within the – we are able to build our admissions target one thing we have done is continued to track that and reduce our efforts from those units to make sure we comply. As you know we besides regional aids that were EPAs look at the – resource review we’ve got – so do you know Anthony there is no doubt that the actions we are going to take with regard to those coal play in terms of having two invested in we will take that – well with the pending rules.

Anthony Crowdell – Jefferies

Is there any illusion to think that any of that without enclosure would not put on, would not be included in rate base, if it did seem that the right place we have to be – so what if there is any – there is some – that would not be the case?

Sean Trauschke

Well, that’s not right we aren’t have the 1910. What you have asked 2007 is that correct. That’s been longer that talks about, I believe to dollar associated to federal state regulator – regulations and gives a lot of support for recovery from the regulators for that instance. So we – this issue is well understood.

The commission is very much engaged and we have a statement implementation plan that – give the flexibility in regards to our coal plants. Commission is on board, I believe with that plan is stated meditation plan and favors that as well, settlement implication plans, again that something that we would be force to do and the comply with federal law. And generally the regulatory process should cover those costs.

Anthony Crowdell – Jefferies

So any I just want to make sure, I guess your utility forecasted CapEx does not include any type of emission controls on these two plans, that would be incremental to what you already announced?

Sean Trauschke

That’s correct.

Anthony Crowdell – Jefferies

Great and the last question I know Jack, I am not sure how much is impacting on one of calls yesterday, there is a pipeline being both right now between I guess Conway and now Bellevue and I guess the intend there is maybe to lessen that differential that certainly going on there. I mean how will impact Enogex or do you not even think that the differential changes with adjusted the stand hills pipeline, with Southern hills pipeline?

Sean Trauschke

Yeah, this is Keith. There is certainly is been additional reduction come on in the Bakken up in Dakota as well Rockies and then the Mid-Continent. So that’s created the need for additional capacity from Conway Kansas down to Bellevue. So we view this is a good thing those pipes people on those businesses continue to expand their capacity so that they can get down to the petrochemical markets on the Gulf Coast.

Anthony Crowdell – Jefferies

Great. Thanks for your time guys.

Sean Trauschke

Thank you.

Operator

And there are no further questions in queue at this time. I would now like to hand the conference back over to Pete for any closing remarks.

Peter Delaney

Thank you, operator. I want to thank everybody again for joining our call. Thank you for your continued interest in OGE Energy. And have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect your lines. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: OGE Energy's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts