OGE Energy Corporation (OGE)

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OGE Energy Corp. (OGE)

Q4 2012 Results Earnings Call

February 27, 2013 9:00 AM ET

Executives

Todd Tidwell - Director, Investor Relations

Pete Delaney - Chairman, President and CEO

Sean Trauschke - Vice President and CFO

Keith Mitchell - President, Enogex

Analysts

Anthony Crowdell - Jefferies

Ashar Khan - Visium

Brian Russo - Ladenburg Thalmann

Andy Bischoff - Morningstar

Chris Ellinghaus - William Capital

Pu Chen - Talon Capital

Stephen Huang - Carlson Capital

Presentation

Operator

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

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

Todd Tidwell

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

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

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

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

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

Pete Delaney

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

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

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

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

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

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

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

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

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

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

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