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OGE Energy Corp. (NYSE:OGE)

Q4 2011 Earnings Call

February 16, 2012 9:00 a.m. ET

Executives

Peter Delaney - Chairman and Chief Executive Officer

Sean Trauschke - Vice President and Chief Financial Officer

Todd Tidwell - Director of Investor Relations

Keith Mitchell - President, Enogex

Analysts

Ashar Khan - Visium Asset Management

Anthony Crowdell - Jefferies & Company

Greg Reiss - Catapult Capital Management

Brian Russo - Ladenburg Thalmann

Andrew Bischof - Morningstar

Stephen Huang - Carlson Capital

Craig Shere - Tuohy Brothers

James Dobson - Wunderlich Securities

Operator

Good day, ladies and gentlemen, and welcome to the OGE Energy Corp. Fourth Quarter Earnings Conference Call hosted by Todd Tidwell. My name Mamod and I am the event coordinator today. During the presentation your lines will remain on listen-only. (Operator Instructions) I would like to advise all parties that this conference is being recorded. And now, I would like to hand the call over to Todd Tidwell. Over to you sir.

Todd Tidwell

Thank you and good morning, everyone, and welcome to OGE Energy Corp’s fourth quarter 2011 earnings call. I am 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, followed by an explanation from Sean of fourth quarter and the year ending 2011 results. And finally, as always, we will answer your questions. Historically, we have provide earnings guidance for the current year on the fourth quarter call. However, due to the Oklahoma rate case we are going to wait until we receive the final commission order before releasing OGE’s consolidated 2012 guidance. But we will provide Enogex’s 2012 guidance. We expect the final Oklahoma rate orders sometime in March and we will provide consolidated guidance at that time.

I would like to remind you that this conference is begin webcast and you may follow along on our website at oge.com. In addition, the conference call and the accompanying slides will be archived following the call on that same website. Before we begin the presentation, I would like to direct your attention to the safe-harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements, and simply states that we cannot guarantee forward-looking financial results but this is our best estimate to date.

In addition, there is a Regulation G reconciliation for ongoing 2010 earnings results in the appendix along with projected capital expenditure. The Enogex processing supplement for 2012 has also been posted on our website under the investor relations tab. I will now turn the call over to Pete Delaney for this opening comments. Pete?

Peter Delaney

Thank you, Todd. Good morning, everyone, and welcome to our call. For 2011, we reported earnings of $3.45 a share, compared to ongoing earnings per share of $3.10 in 2010. As you know much of the increase in earnings was driven by record summer heat and in service territory. It was the year of operational accomplishments and a year of record investment in our businesses amounting to $1.4 billion. In addition to managing through the record summer heat, we made great progress on key projects with the 228-megawatt Crossroads wind farm and the 200 million a day South Canadian processing facility, now complete and fully operational.

Our electric transmission and smart grid project have advanced on schedule as well. And we are very pleased to have been recognized as the 2011 electric utility of the year by electric light and power, capping a year of many accomplishments. Enogex executed on its organic growth projects securing several large, long-term acreage dedications and completed the Cordillera midstream acquisition that positions us for continued growth around what is currently one of the most economic natural gas plays, the Granite Wash.

Several of these initiatives undertaken this past year help position us to deliver our long-term earnings growth target, and I will spend some time talking about them. The brevity of my 2011 review today does not reflect a lack of accomplishment or appreciation for the excellent work by our members in 2011 or rather the forward-looking nature of this call. As always, the commodity cycle moves through its paces and the operating environment continually changes around us. Some favorable some not. Requiring us to shift our tactics but not our long-term strategy. I am confident in this management team’s ability to manage our well-positioned portfolio of businesses to continue to produce earnings growth and value for shareholders.

At the utility, an important open items remains the rate case filed last summer. The hearings are complete and we are awaiting ALJ recommendation which we hope will be available in the coming days. As you know we requested a rate increase of $73 million predicated on by plant investment and operating expenses to maintain a high reliability and service standards our customers currently enjoy. The commission staff, attorney general’s office and others recommend a rate decrease. While the ALJ recommendation is not binding on the Oklahoma commissioners, we believe it does influence their decision making. An order is expected in March.

As you may know we have had some changes at the commission. We have a new Commissioner, Patrice Douglas, appointed by the Governor to replace Jeff Cloud, who resigned to pursue a career in private enterprise. This fall both Commissioner Douglas and Commissioner Anthony will stand for re-election.

As I mentioned at the outset, our SPP approved transmission expansion continues, we have $700 million of such projects at various stages of construction in our five-year forecast with two transmission lines to be completed this year. At the end of January, the SPP board approved additional transmission projects. We expect to receive notice to construct two lines within service dates of 2017 and 2018 of a cost of around $250 million to $300 million.

Compliance with pending environmental regulation remains at the forefront of our future investment drivers for the utility. Along with the pending regulations that could impact the utility, pre-regulations have the greatest potential impact. And I believe you are well versed in these regulations. Regional haze has the potential to require the largest investment and would have the greatest impact on our customers. In our case EPA has issued a federal implantation plan, providing for a five-year compliance timeline of 2017, that specified scrubbers as BART, overriding the State of Oklahoma’s plan which found low sulfur coal to be BART. One portion of the state implementation plan that the EPA agreed with, is the installation of low NOx burners.

There are currently judicial actions in progress around the regional haze issue. OG&E and the State of Oklahoma are seeking administrative stay request with the EPA. In addition, OG&E and the State of Oklahoma have also announced that they intend to petition for review of this determination in the U.S. Court of Appeals for the 10th circuit. It is difficult to determine the timing or probability of success in these court cases, but we will keep updated as they unfold.

Second, is the Casper rule, which was granted a stay in December with a hearing on the merits scheduled in April. OGE is also seeking review by the court of Oklahoma’s inclusion in Casper. While the courts did not specifically grant a stay for the supplemental states including Oklahoma, EPA has stated that the stay would encompass the supplemental states. If no changes are granted by the courts, OG&E will have until May of 2013 to be on compliance. Our short-term compliance plans could include re-dispatch low NOx burners, purchasing credits, purchasing power or a combination of these. You will recall that OG&E has already agreed to install low NOx for regional haze in the state implementation plan, although under a longer timeframe.

We are doing operational planning regarding the best approach to NOx burner installation, the estimated cost of the low NOx burners is approximately $16 million per unit. Finally, Mac rules are slated to go into effect today, require compliance in three years with a possible one year extension. Compliance for the Mac rules for OG&E primarily relates to mercury and acid gases. We believe that activated carbon injection and the use of DSI on a limited basis will allow us to comply. However, the extra year may be required to complete testing and installation. As I previously mentioned, we will keep you updated as the events unfold, 2012 will be a year where we will make some determinations on the environmental front.

Our grid deployment, as it relates to installation of smart meters, is in its third and final year. At this juncture almost 600,000 meters are installed, distribution automation investment continues through 2012 as well. We refer to the 2010-2012 period as our phase two of our program, which investment and operating expenses were covered under a regulatory rider but also guaranteed savings for the customers. This year we have embarked on the most ambitious volunteer demand response program seeking to enroll almost 40,000 customers, with a goal of shaving about 70 megawatts of the peak demand. We have experienced very positive customer feedback from our earlier pilots which demonstrated that customers have the capacity to deliver these types of savings.

Not only do we believe in the favorable economics of shifting peak load but also look to establish ways for our customers to mitigate the impact that environmental expenditures will have on their monthly bill. During the year, we will be determining the scope of phase three of our deployment which will be focused on expanding distribution and automation, utilizing information, new work processes and systems, to be more efficient providing reliable operations, the introduction of products and services as well the expansion of voluntary based demand response programs.

Turning to Enogex. As we noted in our recent 8-K, the steep drop in natural gas prices caused our 2011 volumes to grow less than we expected earlier in the year. We experienced 3% gathering volume growth and 3% processable volume growth in 2011. We would like to note that our projections are for higher growth rates in volumes in 2012, despite the 40% drop in natural gas prices since November which has slowed our volume growth projections from the leaner gas areas. In 2012, despite these impacts, we are projecting gathering and processing volume growth of around 6% to 10%, and at least 15% respectively, whether gross margin, EBITDA, or other measures that we expect to report growth.

The development of our Western Oklahoma processing header system, the long-term acreage dedications in natural gas rich basins, our equity partnership with ArcLight and a strong balance sheet position Enogex well to be successful in this low natural gas price environment. We are staying the course but that does not mean we will not make some tactical changes. In this environment we will scale back on capital spending and operating expenses where appropriate. We do not believe the $2.50 gas world is here to stay. The various forecasts indicate these prices may be with us a while. As we know markets work, and we expect supply and demand dynamics influence these price relationships longer-term, in the meanwhile we are positioned to be able to grow the business.

As part of our 2012 outlook, the economic backdrop in the heart of our Oklahoma service area remains strong. Oklahoma city and the state continue to perform well. Unemployment rate in the metro area is about 5%, one of the lowest in nation for large metro areas and the state unemployment is about 6%. We continue to add customers, 7000 to the system compared to last year. And industrial and oilfield sales continue to do well, driven primarily by the robust energy sector. On a more normal weather basis, megawatt hours sales continue to grow at levels consistent with our historical average. We are delaying the release of our consolidated earnings guidance for 2012 until we have a final order from the Oklahoma Commission. We have released Enogex guidance for 2012, and our portion of earnings is projected to be between $0.80 to $0.95 per share compared to earnings of $0.83 in 2011.

Enogex will see the benefit of higher volumes in gathering and processing businesses including a full-year of this new South Canadian plant, the partial year of the Wheeler plant. Of course the mid-year 2011 key pole to fixed conversion for a long-term acreage dedication reduces the processing margin. We are also anticipating the continued build-out of the Cordillera acquisition made last year. One of our major customers, Apache, has made significant investment in purchasing the drilling rights in that same area, which we believe is a good sign that economics in the play support producer drilling.

Now I would 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 fourth quarter, we reported net income of $36 million or $0.37 per share as compared to net income of $31 million or $0.31 per share in 2010. The contribution by business unit on a comparative basis for the fourth quarter is listed on the slide. And for the full year 2011, we reported net income of $343 million or $3.45 per share, as compared to ongoing net income of $307 million or $3.10 per share in 2010. Recall, the 2010 ongoing results excluded the onetime $0.11 per share charge for the Medicare Part D subsidy.

At OG&E, net income for the fourth quarter was $20 million or $0.20 per share as compared to net income of $12 million or $0.13 per share in 2010. Some of the primary drivers are as follows. Fourth quarter gross margin came in stronger as we saw an increase of $18 million or 8%. The biggest drivers were transmission revenues and revenues associated with various investments. Each increased gross margin by approximately $6 million. You will recall that the vast majority of the transmission costs are not borne by our retail customers but paid by SPP customers.

Customer growth and New Arkansas rates together added 4 million, while weather added another 3 million. As expected, operation and maintenance expenses came in on plan and flat to last year. You can see the other drivers on the slide as they are a result of additional assets being placed in the service and the long-term debt issuance we completed in May. Now looking at the full-year earnings details for the utility. OG&E reported net income for 2011, of $263 million or $2.65 per share, as compared to ongoing net income of $223 million or $2.25 per share in 2010. Some of the primary drivers are as follows. Gross margin increased to $88 million or 8%, and I will provide details of gross margin on the next slide.

Operation and maintenance expense increased by nearly $18 million. Almost $5 million of the increase came from riders with direct debt revenue offsets. The remaining amount of the increase was due to higher salaries and wages and contract professional services. Depreciation and amortization expense increase $7 million due to additional placed into service such as the Crossroads Wind Farm. Likewise, taxes other than income increased due to the higher property taxes associated with these new assets.

Overall, our operating expenses were approximately $10 million low then our guidance due to lower cost associated with riders that have direct revenue offsets such as smart grid and demand side management. Net other income and expense created $4 million positive variance, a result of higher equity AFUDC associated with the Crossroads Wind Farm. Interest expense increase to 8 million, resulting from the issuance of long-term debt in June of 2010, in May of 2011, partially offset by the debt AFUDC also associated with Crossroads. For the year, AFUDC debt was $10.4 million and AFUDC equity was $20 million.

Now turning to gross margin for the full year of 2011. The utility performed very well, and there were several items that contributed to the increase in gross margin. As you know, in 2011, we experienced record heat in our service territory. To put the heat in perspective, cooling degree days were 45% above normal and 19% above 2010. This translated into higher margins and earnings. Compared to 2010 weather contributed $27 million to gross margin, and net of the decrease in the guaranteed flat bill program, weather increased margins by $25 million.

Compared to normal, weather added $56 million of gross margin and $48 million net of the guaranteed flat bill program. So in summary, versus 2010, weather added $0.15 per share and versus normal weather, $0.30 per share. Another major driver was the recovery of many investments we have made such as the smart grid program, Crossroads and OU Spirit. Also contributing to higher gross margins were increased transmission revenues associated with our SPP projects. Customer growth on a weather normalized basis increased gross margin by $13 million. And although residential, commercial and industrial growth was close to our historical 1% on a weather normalized basis, we saw growth of 3.7% in oilfield sales and 5.7% in public authority.

Now turning to Enogex. For the fourth quarter Enogex earnings, OGE’s portion of those earnings per share decreased from $0.22 in 2010, to $0.19 in 2011. On the third quarter call, we were projecting the fourth quarter increase in earnings at Enogex based on 12% volume growth in the gathering and processing businesses. These higher projected volumes did not occur due to a decline in drilling activity, precipitated by the sudden and dramatic decline in natural gas prices. In response to the lower gas prices, producers pulled back their drilling rigs in the leaner gas areas, lowering gathering and processing volumes.

Fortunately, we did not see the lower growth rates in the liquids rich areas of the Granite Wash which has remained economic for producers even in this low price environment. Even though Enogex’s volume growth slowed, it nonetheless still grew quarter-over-quarter. And in fact gross margins increased by $2 million. Total gathering volumes did increase over 1%, and processing inlet volumes grew nearly 4%. Gross margins for the gathering and processing businesses were $36 million and $41 million compared to $29 million and $44 million in 2010 respectively.

The increase in gathering was in part due to higher volumes and the decline in the processing business was primarily due to lower key pole margins, resulting from the fixed-fee conversion of a major customer in July of 2011. The transportation and storage margins were basically flat contributing a combined gross margin of $37 million in both 2011 and 2010. You can see the other drivers for the quarter on the slide, including the increased ownership of Enogex by ArcLight during the fourth quarter.

Looking at the full-year, Enogex earnings per share to OGE decreased to $0.83 in 2011, compared to ongoing earnings of $0.94 per share in 2010. Operating expenses and the increased ownership percentage by our equity partner outpaced our growth in gross margins. Now let's take a look at some of the key drivers. Gross margin increased by $18 million or 4%, and I will discuss those drivers in a moment. Operation and maintenance expenses increased by $17 million in 2011, almost entirely as a result of system expansion. The increase included higher employee cost related to new hires and increased contract and professional services.

Depreciation and amortization expense increased almost $8 million due to higher levels of depreciable plant placed into service. Operating expenses came in on plan with the exception of the Cox City insurance proceeds. To date, we’ve received $17 million and the cost of replacement we estimated at $29 million. We are still working with our insurance providers to resolve our claim and a final resolution should occur this year. Interest expense was nearly $8 million lower compared to 2010 due to an increase in capitalized interest resulting from higher construction levels and the replacement of long-term debt in January of 2010 at a lower interest rate.

Net income at Enogex grew year-over-year, but because of the contribution from ArcLight late in the year, net income to OGE declined. Now turning to gross margin for 2011. For the year nearly all of the increase in Enogex’s gross margin came in the gathering and processing businesses, driven by higher commodity prices, increased condensate recoveries and higher gathering volumes. Although Enogex’s processing plant side decreased in inlet volumes, processable volumes, which include condensate actually increased 3% over 2010. Gathering volumes grew 3% and by the end of 2011, Enogex was gathering a record 1.36 trillion BTU per day.

As I mentioned earlier, condensate was also a major driver in the higher gross margins and contributed $41 million to gross margin, which was $11 million over 2010. Partially offsetting Enogex’s higher gross margin was the processing contract conversion of a major customer from key pole to fixed fee. Although terms are lower than current key pole spreads, Enogex secured additional long-term acreage dedication under this contract. Higher commodity prices also fueled Enogex’s margins as weighted average prices for NGLs increased from $0.96 per gallon in 2010, to $1.16 per gallon in 2011.

Plant efficiencies were also important to processing margins in 2011 in the form of higher recoveries and will be more so in 2012 as the new South Canadian plant was placed into service in the fourth quarter of 2011. Before turning to your questions, I would like to discuss Enogex’s earnings guidance for 2012. As Todd mentioned, we will provide consolidated and utility guidance once we have a final rate order in Oklahoma. We are projected OGE’s portion of Enogex to be between $0.80 and $0.95 per share compared to the $0.83 per share in 2011. And you can see our assumptions on the slide.

Enogex’s gross margin is expected to increase between $60 million to $75 million compared to 2011. The primary factors driving the projected increase are higher volumes in the gathering and the processing area. The 2012 gathering volume increase is projected to 6% to 10%, and 15% for the processing business. Looking forward to 2013, volume growth is projected to be 10% to 15% for gathering and 15% for processing as we look forward to the new McClure plant online in late 2013. New system expansions in Western Oklahoma and the Texas Panhandle are driving this growth. The 200 million per day South Canadian plant came online in the fourth quarter of 2011, and the $200 million a day Wheeler Texas facility is projected to be fully operational in the third quarter of this year. We did mention in our 8-K issued in January, that volume growth is slowing in our leaner gas regions due to low gas prices. That is still occurring and our growth projections for 2012 would have been greater if gas prices remained higher.

In response to the slowdown in drilling activity, our capital expenditures have been reduced by $165 million in 2012, associated with gathering and compressing in these lean gas areas. However, when gas prices rebound and volumes increase, we will invest the capital. I want to reiterate, that although capital expenditures have been reduced, we still forecast investing $300 million at Enogex in 2012, and have several other projects currently under review. The gross margin is growing, so are our operating expenses due the system expansion. Depreciation has the biggest operating expense impacted, expected to increase approximately $22 million in 2012.

O&M is forecasted to increase $11 million, and then finally, properties taxes will also increase due to the additional assets being placed in to service. Interest expense is projected to decline approximately $9 million at the mid-point due to expansion financing. We are not projecting any changes to ownership percentages during 2012. So in summary I want to emphasize that although some activity is slowing, Enogex’s footprint is well positioned for volume growth in this rich gas regions. And we have the financial strength and flexibility to continue growing volumes and earnings. So thank you for your support, we will now open up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ashar Khan of Visium. Over to your please.

Ashar Khan - Visium Asset Management

Can I ask just ask you, on a previous presentation you had given us a rate base number of the utility business of about $4.9 billion, is that still a good number to use for 2012?

Sean Trauschke

Yes, that’s a good number.

Ashar Khan - Visium Asset Management

That’s a good number. And so whatever the ROE comes out, out of the order, can you earn that ROE or should we assume that there could be like a 25 bps to 40 bps lag between the allowed and the earned ROE for footfall?

Sean Trauschke

You know, Ashar, obviously it depends on the ROE, for the first point. But you are very aware of how this works. We do have some regulatory lag inherent in our jurisdictions simply because when I look at our base CapEx it’s probably $100 million above what depreciation and amortization is.

Operator

Thank you for your question. The next question is from Anthony Crowdell of Jefferies. Over to you please.

Anthony Crowdell - Jefferies & Company

I guess two quick questions. One is, could you guys provide an update in Oklahoma of the rate case. I mean just I guess what staff has recommended and also in Enogex, when I guess you guys are through two different regions, you are like in west where you have guys have liquids rich, and east, I guess where it’s drier. Could you talk about what the breakeven point or where it’s profitable at certain gas prices.

Sean Trauschke

Okay. Maybe we will do the last one first and Keith you want to tackle...?

Peter Delaney

It’s Keith Mitchell, President of Enogex. Keith, if you would handle that.

Keith Mitchell

Sure. That’s right. We do have coverage with our Western Oklahoma processing at our rich areas in Western Oklahoma and panhandle Texas, a leaner area, kind of in the central part. You know a lot of that depends on the producers drilling costs. We certainly know that at $3 and below they are not going to be drilling the leaner gas area. What we believe to be it’s not an exact price, but we think it’s a $3.50 range they would probably look to develop those reserves.

On the rich areas, with the oil prices like they are, that’s really what's driving those economics and so we don’t anticipate the price begin down that low.

Sean Trauschke

Yeah, this is Sean. So as far as an update on the Oklahoma rate case. We are awaiting the ALJ recommendation. We would expect that anytime now. As far as the recommendations, as Pete mentioned, the staff and the attorney general have recommended actually a rate decrease. The ROE was as low as 9.8%. If you recall, we requested 11% ROE. And there are lot of adjustments. All parties suggest in these types of filings. But ROE was probably the biggest item.

Anthony Crowdell - Jefferies & Company

Okay. And I guess I just want to make sure I understand correctly. I guess going back to the, more of the Enogex. On the drier east region, you are looking more at like $3.50 gas, I guess, for the drillers for it to be profitable. And on the east, it seems like gas could be as low as a dollar, it’s just really driven by oil prices, is that accurate?

Peter Delaney

On the west side, we could have very low gas prices, that’s correct. And $3.50, again, it’s not exact number, I will tell you, part of that is the drilling costs. As these costs drill wells, if there is a decrease in rig activity and cost decrease, then that could change.

Anthony Crowdell - Jefferies & Company

Now, I guess, you guys have a header system that runs between, I guess, your processing facilities. I mean, can I think of, even if volumes decrease in the drier region, through this header system any development that’s going on in the wetter western, you could pump that to the processing facilities in the east. Is that accurate or no, there are some limitations?

Peter Delaney

That’s accurate. We have several plants on the Western Oklahoma processing header. Capacity that would have been used for the leaner gas that is now delayed in development, we can take rich gas from the rich gas development areas and move to those plants. And that is exactly our plan.

Operator

Thank you for your question. The next question is from Greg Reiss of Catapult Capital Management. Over to you please.

Greg Reiss - Catapult Capital Management

Just have a quick question on Enogex. I saw that the guidance range was pretty wide this year. Just wanted to see what are some of the moving parts that get us from the lower end to the higher end?

Sean Trauschke

Yeah, Greg, this is Sean. I believe the range is just like it was last year. I think we had roughly $0.15 range last year. And....

Greg Reiss - Catapult Capital Management

I thought it was $0.90 to $0.95 -- maybe I will just....

Sean Trauschke

We certainly narrowed that down as we went through the course of the year. We did tighten it. You are exactly right.

Greg Reiss - Catapult Capital Management

Got you. So just wanted to get a flavor of some of the things that ought to happen to kind of get you to the lower versus the higher end.

Sean Trauschke

Obviously, volumes would be a big driver there. If we saw some increased volume activity as Keith was mentioning, obviously if you saw some increasing commodity prices specifically in gas prices that encourage more drilling. That would currently, certainly, increase the earnings guidance range. Keith, would you add anything to that?

Keith Mitchell

Well, I think that we are still evaluating producers capital programs and their drilling programs and so certainly if they were to get into a large capital drilling program in one of our areas that would effect that.

Greg Reiss - Catapult Capital Management

Got it. So volume is really the biggest drive here and kind of the midpoint of your range assumes that the volume assumption is laid out on....

Peter Delaney

Yeah. And, Greg, I think it’s important to note, the volumes are increasing. They are just not increasing at the rate we originally forecasted. But they are increasing. So I don’t want to lose that point.

Greg Reiss - Catapult Capital Management

And currently, is ethane in rejection or are you recovering ethane.

Peter Delaney

We are in ethane recovery.

Keith Mitchell

There are a few plants that have access to Conway that we are looking at rejection.

Greg Reiss - Catapult Capital Management

Got it. And is there any way you would give us a breakout of how much of your volumes actually are able to get to Mt. Bellevue pricing versus Conway pricing. Is that something that’s been increasing?

Peter Delaney

We do expect that to increase, but Greg, we have not disclosed that.

Operator

Thank you for your question. The next question is from Brian Russo of Ladenburg Thalmann. Over to you please.

Brian Russo - Ladenburg Thalmann

Could you give us a sense of like what percent of processing and gathering volumes are derived from the leaner gas regions versus the liquids rich regions in the Granite Wash? Just trying to get a sense of how much exposure you have on a volume basis to the shut-ins that we have seen.

Keith Mitchell

If you look at all of our gathered volume, it’s about 20% would be from the lean areas. And of course as the rich gas growth than obviously that percentage of the rich gas comes up.

Brian Russo - Ladenburg Thalmann

Right. And just to follow-on that comment. You have seen a slow-down in the leaner gas areas, but have you seen an acceleration yet in the liquids rich areas which could create maybe an upward bias to your volumes as we move through the year?

Keith Mitchell

We have seen an increase in the activity in the rich areas. In fact some of the drilling rigs that were in the lean areas have just moved over into those areas. So we still see a lot of activity, both current and planned in the rich gas areas.

Brian Russo - Ladenburg Thalmann

Okay. So that kind of dynamic is encompassed in your volume growth guidance?

Keith Mitchell

That’s correct.

Peter Delaney

And, Brian, as I mentioned in my remarks, Apache made a $2.8 billion acquisition in that area of our Cordillera acquisition. And so that of course is a -- will be a big determinant of what Apache’s plans are, but we believe with that type of investment there, they clearly plan on drilling. So we are anxiously waiting for them to get in place and so things like that will have a big determinant on the volumes as well.

Brian Russo - Ladenburg Thalmann

Given that the midpoint of the Enogex guidance which is around $0.87-$0.88, I just curious that the volume growth is quite robust even in a challenging nat gas environment. And I just want to understand more, some of the positive and negative year-over-year drivers of that $0.83. Is it just slightly lower commodity price assumptions and is it, it seems like a bigger driver is the conversion to the fixed fee contract?

Sean Trauschke

Yeah, you know, Brian, I think the conversion, a full year of the conversion would be a big driver. I think the volume from our expectations originally was a driver for the fourth quarter, but maybe it would be helpful. Let me -- if I thought about some of the drivers for 2011, certainly volume growth, you talked about that. You talked about -- we brought South Canadian on at the end of fourth quarter, so we will have a full year of those processing efficiencies in our system. Certainly recall, that we brought Cox City plan back online in the third quarter, and we will have that in our fleet for the whole year.

The other thing is we have mentioned that the insurance proceeds, we’re still working with our insurance providers on that. And I guess offsetting that certainly would be commodity prices. You know NGL prices are about 10% lower in ’12 then they were in ’11. And then you have got the fixed fee conversions. And then the last point I would mention is, and as you know, ArcLight made a contribution in the fourth quarter of 2011 and so their ownership interest of 18.7 is expected for the entire year of 2012.

Brian Russo - Ladenburg Thalmann

Okay. Great. And just to clarify on the ArcLight ownership. Will they be making an equity contribution in 2012?

Sean Trauschke

We don’t have any plans for them to do that this year.

Brian Russo - Ladenburg Thalmann

Okay. And then just lastly on the utility side and the general rate case. I mean any thoughts on why it’s taken this long. I think original expectations were January, then February, now March. Just curious, because Oklahoma has a history of settling cases.

Peter Delaney

Brian, this is Pete. Procedurally, we went into the holidays there were more witnesses than originally planned. The proceeding went longer than originally planned, and so that contributed to a lot of it. We had a -- I guess January 24 was the technically 180 day period which we would have been able to or able to introduce rate subject to refund. We felt that given the fact that we needed a good decision, we needed a thorough decision. We put it on the record and let them know what we were going to waive and not to that this time.

And the ALJ is very thorough. That the next timeline is getting that report out. And so it’s just taken longer sometimes. It has sometimes, we go through the -- past the 180 days. I think our recent history as you said has been settlement which has sped up that process. But given the position of the parties in this case, we were not able to settle it at this point of the process. So it’s working its way through and we hope to get the ALJ report in the next week or so. That will, I think after about two weeks after that, it will be presented to the commissioners for consideration.

Brian Russo - Ladenburg Thalmann

Okay. And just lastly. Should we be concerned at all with the lost margin associated with the delay in the rate implementation or are you guys taking measures to kind of offset that maybe by managing your O&M etcetera?

Sean Trauschke

There will be some obviously but we don’t think it’s material considering this is January and February and not high margin months.

Operator

Thank you for your question. Andy Bischof of Morningstar is next. Over to you please.

Andrew Bischof - Morningstar

Most of my preparational questions have been answered. But maybe -- can you just shed any light how 2012 is kind of running up towards a weather normalized based, so far?

Peter Delaney

January was a lot milder than normal. But that’s about all we know.

Andrew Bischof - Morningstar

And then kind of more of a strategic question. What do you think is the likelihood that a Mac rule could face a legal challenge? And what grounds you think someone would base that legal challenge on?

Peter Delaney

I am not sure I am the right one from a legal standpoint to talk about the strength of the legal cases on the Mac challenge. I know for us, as I in our comments -- my comments, I want to highlight that for us the major issue is the regional haze. And that’s the real, will drive over potentially for scrubbers over $1 billion of investment. Five year timeline is very challenging for us. And that’s the one is really where, primary concern and large impact on our customers. The other ones and Mac, we believe we have the ability how to comply although we may need some additional time for compliance.

Operator

Thank you for your question. Stephen Huang of Carlson Capital is next. Over to you please.

Stephen Huang - Carlson Capital

Just one quick question on your ’13 volume growth assumptions that you guys indicated. The processing portion of the 15% increase, can you help us understand what type of breakdown that is in the volumes that you guys have. Is it mostly fixed fee or POP or, how should we think about it?

Sean Trauschke

It’s a mixture. You know it’s for the development of these rich gas areas. And we have some under POP some under POL, and some fixed fees. So it really is a mixture of that. And a lot of that depends on which producer and which contracts, where the drilling occurs.

Stephen Huang - Carlson Capital

But would the mix as a whole though be consistent with ‘ 12 or is it going to shift in a different direction?

Sean Trauschke

No, I think it would be very similar, as far as the mix.

Stephen Huang - Carlson Capital

And then I just want to come back again to the -- on Enogex for ’12. When I look at it here, you have gross margins on your processing side going up by $50is million, I am going to guess gathering is going to go up by $10 million to $15 million. I am trying to get a better understanding as to why net income is kind of flattish relative to going up more. Is the marketing business taking on more losses, is that what the expectation is? Is that where the differential?

Sean Trauschke

No, Stephen -- this is Sean -- no, we pointed out there as the business is growing we have more plant and service, we are obviously going to have higher depreciation expense. We are also constructing two 200 a day processing facilities, so we have more people, so O&M expenses going up. We will incur some additional debt albeit maybe on a short term basis. But there will be debt to finance some of this. We are seeing now lower commodity price environment. And then I have mentioned to Brian earlier, we have the fixed fee conversion which for full year of ’12 versus we had a half year of that in ’11.

And then the last thing was the ownership interest. As we mentioned before, we will have a full year of the 18.7% interest that ArcLight versus what really was 13% interest for ten months of 2011.

Stephen Huang - Carlson Capital

Right. Okay. And then....

Sean Trauschke

So I think your hypothesis is exactly right. Margins are growing, that’s what Pete and Keith were referring to. They are growing, it’s the items below that that are moving around. It’s the net to OGE that’s actually declining. If I thought about EBITDA, we are looking at $50 million-$60 million increase year-over-year on EBITDA.

Stephen Huang - Carlson Capital

Okay. And then on marketing though. Are you assuming kind of the similar to ’11, around $15 million of losses?

Sean Trauschke

No.

Stephen Huang - Carlson Capital

Is that going to zero, or is it going higher?

Sean Trauschke

No, it’s going to lower and -- yeah.

Stephen Huang - Carlson Capital

Okay. No, because other people have been divesting these businesses and because they continue to generate losses and I don’t know if this is a driver for you guys to maybe look to divest it.

Sean Trauschke

Yeah. And Stephen just to put a little color on that business. We have some long-term, what I would consider legacy transportation contracts on there. That have demand fees about $8 million a year. And that’s what's going on there and just with his low gas price environment there’s no basis around that.

Stephen Huang - Carlson Capital

When do those roll off?

Sean Trauschke

’14 and ’15, the lion’s share of those roll off.

Stephen Huang - Carlson Capital

So, you will get about $8 billion back in ’14 and ’15.

Sean Trauschke

Yes.

Stephen Huang - Carlson Capital

Great. Thank you.

Sean Trauschke

By the end of ’15 we will have $8 million of roll off. That’s correct.

Operator

Thank you for your question. Craig Shere of Tuohy Brothers is next. Over to you please.

Craig Shere - Tuohy Brothers

Two quick questions. One given the growth specially with the two additional processing units in the wetter gas area at Enogex. Could you see the business being at a critical mass by, I don’t know, sometime late next year or into 2014, to possibly sponsoring an MLP IPO or monetize in some other way. And the second question surrounds the $3.50 plus price point for economic dry gas drilling in kind of the Middle Eastern Oklahoma. Is your impression that this is kind of ubiquitous funding, ubiquitous (back) crews, ubiquitous drilling rigs and so if adjust in the money, they will drill. Or given a lot of the companies in the industry having a little trouble getting their arms around their CapEx funding as it is. Is it really a competitive return environment not an absolute return environment.

Peter Delaney

For that last question I am going to ask Keith to share his thoughts on that, who reads the tea leaves, I guess, of producers behavior.

Keith Mitchell

Okay, Pete. You know I think that certainly lot of producers have various inventories and portfolios of opportunities to drill. Those that have opportunities to drill oil rich plays they are certainly going to take an capital budget and capital program to work those. So to the extent they have a lot of those that will take away capital from some of these leaner areas. We see some that maybe don’t have as much of that opportunity, have more of a portfolio that’s still a lot of gas driven, then it’s really more a return where they want to spend that.

So I think that, as far as rigs and crews or capital budgets, those that have choices then, yeah, I think it is pretty much ubiquitous about that. But I do think that a lot of it depends on the producer, what their cash flow dependency is on gas now, so that’s extra capital budget. But also what's their inventory of opportunity, do they have some oil in their portfolio that they could drill.

Peter Delaney

Yeah, Craig, so there we try to throw out a number like $3.50 but as Keith said it’s each individual producers has their own different fact situation that will drive that either higher or lower. And so you really need to look at who is driving the drilling in each area. Back to the first question, as Sean talked a little bit about that, when there was question around our margins. We continue to invest in Enogex and obviously we have talked about our capital budget as recognized by our growing O&M. We have increased our investment in people. We have expanded or leadership, brining on more resources in business development. We have expanded the senior leadership the President and Chief -- separate roles of the President with Keith and the Chief Operating Officer.

So we are making substantial investments in the field as well. Originally, as you know, we were looking at very much higher projections or growth in 2012 and we made the hiring for that growth. Of course some of those tactical adjustments we will make in terms of our hiring were probably not nearly as aggressive down as they were. Given the change in our volume projections which still show growth but less than we expected. I think from a critical mass -- that we have critical mass. We have always -- our strategy is to continue to build sustainable business. Our moving toward fixed fee or bringing an ArcLight to increase our funding capability. And critical to our sustained growth are these large -- long-term, large acreage dedications. Like the Cordillera I would point to, which we believe as we see for numbers going forward, we think positions us well.

So everything we are doing to grow our business today and invest in our business which we continue to do so. Also, I think makes, whether the NMLP a more viable opportunity as well. I think everything we are doing to grow value as its own today with us an ArcLight, will also contribute to a more robust MLP. So we still have that option ahead of us. And we continue to look to make Enogex stronger and a more sustainable growth story which, again, I am sure to even make it a better story for, should we at some point of time decide to the MLP market.

Operator

Thank you for your question. The last question is from James Dobson of Wunderlich Securities. Over to you please.

James Dobson - Wunderlich Securities

We have had a lot of questions on this volume issue. And I thought the easiest way to punctuate is and at least get my mind clear, the guidance you have provided on Enogex, if in fact we see the volume trends in these drier gas basins continuing, and I am referring to the trends you disclosed in the 8-K. If they continue through the balance of 2012, that is included at least as within that range of guidance you have provided for 2012.

Sean Trauschke

Yes.

James Dobson - Wunderlich Securities

Perfect, that’s great. And then Sean, on the Cox City insurance proceeds. So is you are successful we would see another $12 million coming through $29 million net of the $17 received in ’11 coming through the Enogex income statement in 2012.

Sean Trauschke

That would be true. Obviously, we are still in discussions with our providers, but that’s where we sit today. So if we receive the full recovery of our estimated cost there would be another 12.

James Dobson - Wunderlich Securities

Okay. Perfect. And then over to the utility, on the transmission projects you are talking about, Pete, for 2017, 2018. I noticed in the CapEx slide, we sort of got nothing in ’15 or ’16 for transmission and I assume projects that would be coming on then, would in fact need some capital. So understand it’s early days and we need the letters and the like but how would the $250 million, $300 million spread over that timeframe if in fact you get these letters.

Peter Delaney

Yeah. First, you are right we haven’t got the notice to construct. And generally we will disclose and put into our approved projects only. But 2018, I think CapEx may start in ’16, maybe late ’15, Sean, and then ramp. So that would start to work in there. But we don’t have, I don’t think, any breakdown on that, how that line’s out right now. But, Sean, do you have anything to add to that.

Sean Trauschke

No. We will certainly add that to our schedule once we receive the NTC and we actually respond and accept those NTC. I guess, Jay, you are thinking about the same way Pete and I were thinking about it. It would kind of pick up right where the existing transmission projects we’re building today. Tail off and come to completion.

James Dobson - Wunderlich Securities

That’s great. And then on environmental -- I am sure you guys are thinking about best case and worst cases, all of us are. If we just sort of look at Sooner and Muskogee coal units, and then assume scrubber installation for regional haze, ACI and DSI from Mac, and low NOx burners. What amount of total CapEx are we thinking there?

Peter Delaney

So assuming four scrubbers and you’re probably looking at -- could be $1.5 billion of investment. Of course that’s going to be a difficult amount of investment to deploy operationally at one point in five years. It’s more than just spending money. You have operational plant -- as you know you have to take these plants offline to effect some of these changes and it’s going to be a real problem for us if we have to go that route. The trade-offs are we are -- on regional haze, again we are hopeful that we can get some relief from the legal side. And we do believe we have a strong case. Not just that it costs our customers a lot of money, we think that the regulations and the -- one of the condition is cost effectiveness. These numbers cost and the whole impact is not cost effective for BART. And we continue to stand by that position. So hopefully we can get some relief.

James Dobson - Wunderlich Securities

No, that’s great. And then last question, Sean, and I appreciate you don’t want to give guidance on the utility, but at the holding company, ongoing loss of about $0.09 in ’10. What would you expect for ’12?

Sean Trauschke

Well, so that was in ’10. And so ’10 had a couple of different items in there. So ’10 with the marketing business was part of the holding company but in addition to that we also made some contribution to our foundation in 2010. So for the year of 2011, we were right on plan with about a $0.03 loss. And other than some cost for some corporate services and things like that and the holding company debt we have up there. I don’t see any changes in there.

James Dobson - Wunderlich Securities

Got you. So a loss of $0.03 would probably be a good starting point for ’12?

Sean Trauschke

We gave you a guidance of $0.02 to $0.04 for 2011, and I don’t think the business is materially different in -- the holding company structure is any different in 2012.

Operator

Thank you. And with that I will hand it back to our presenters for a closing remark.

Peter Delaney

As always I would like to take the time to acknowledge our members for the dedication to keeping the company moving forward and I would like to thank you all for your continued interest in OGE Energy. Have a great day.

Operator

Thank you. Ladies and gentlemen your conference call now comes to an end. You may disconnect. Thank you very much.

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