OGE Energy Corporation (OGE)

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OGE Energy Corp. (OGE)

Q2 2010 Earnings Call Transcript

August 5, 2010 9:00 am ET

Executives

Todd Tidwell – Director, IR

Pete Delaney – Chairman, President and CEO

Sean Trauschke – VP and CFO

Analysts

David Frank [ph]

Brian Russo – Ladenburg Thalmann & Co.

Jay Dobson – Wunderlich Securities, Inc.

Presentation

Operator

Good morning. My name is Caroline [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE Energy second quarter 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) Thank you. Todd Tidwell, you may begin your conference.

Todd Tidwell

Thank you. Good morning, everyone, and welcome to OGE Energy Corp's second quarter 2010 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 chain to address any questions that you may have. In terms the call today, we will first hear from Pete, followed by an explanation of second 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 Web site at www.oge.com. In addition, the conference call and the company slides will be archived following the call on that Web site.

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 earnings guidance in the appendix, along with 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, and welcome to our second quarter earnings call. This morning, I'll discuss our recent accomplishments and our important initiatives, our outlook for our businesses. And Sean will review in more detail the financial results.

Our second quarter results from operations were $0.78 a share, up from $0.72, compared to the second quarter of last year. And I'm pleased to report increased earnings of both utility and midstream business. Utility earnings increased primarily due to higher approved rates associated with the significant capital invested to maintain system reliability and to be able to provide additional renewal energy resources to our customers. However, the earnings impact was tempered by higher operating expenses, primarily resulting from plant maintenance. You may remember, on the first quarter earnings call, we projected higher O&M expenses for the remainder of the year.

At Enogex, earnings increased 44% as we experienced record volumes in the gathering business, record volumes in the processing business as well as higher natural gas liquid prices, compared to the second quarter of last year. Gathering volumes increased more than 6%. And processing volumes grew nearly 19%, compared to last year.

However, natural gas liquids sold and produced increased by almost 50% from 120 million gallons to 179 gallons during that same time, so processing margins were up $21 million, including a doubling of the fixed fee volumes further reducing the volatility of that contribution looking forward. This is all to demonstrate the continuation of robust drilling activity in the very liquids rich basins of Western Oklahoma, where we are very competitively positioned. Producers have indicated that these basins are their most profitable drilling areas, including the shale plays.

Moving on to the Oklahoma economy, it continues to remain stronger than most of the country. The Oklahoma City and state unemployment rates are 6.7% and 6.9%, respectively, both well below the national average. However, like much of the country, state and local governments are under spending pressure as tax revenues have declined.

Year-to-date, we've added over 2,800 customers to the system, which is an annualized growth rate of about 0.7% per year, slightly below our historical average of just under 1% per year. We've also added about 5 megawatts and new industrial load this year and projecting additional 12 megawatts during the second half. Our industrial load increased for the fourth consecutive quarter. And industrial sales were up 9% since June of last year. And while not official, we believe a new peak substantially above our previous last peak that occurred in 2006 was met this week. We are very encouraged by this recovery in sales, but remain cautious regarding the overall economic outlook.

Since our last call, we have executed several significant milestones in progressing forward our smart grid, our transmission, and wind generation portfolio initiative, first, our $366 million system-wide smart grid rollout, which included a $127 million of federal stimulus funds that was approved by the Oklahoma Corporation Commission on July 1. As you know, the implementation of smart grid is a critical component of our strategy to reach out – to reach our demand response goals to advance our customer relationships and improve operations through improved reliability, yet providing for a $22 million reduction and OEM implementation is complete. We expect this improved program will be fully implemented by the end of 2013.

Second, the $450 million Crossroads Wind Farm was approved just last week, and should be operational in late 2011. As in the smart grid case, we are very pleased to have reached another settlement for the OCC to approve. The project was upsized from 198 megawatts to 228 megawatts following the Southwest Power Pool to approve interconnection requests last Friday. Like our smart grid program, Crossroads provided significant savings projected to start in 2013 to our customers over the life of the project.

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