OGE Energy Corporation (OGE)

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OGE Energy Corporation (OGE)

Q3 2010 Earnings Conference Call

October 29, 2010 9 AM ET

Executives

Todd Tidwell – Director, IR

Pete Delaney – Chairman, President and CEO

Sean Trauschke – VP and CFO

Keith Mitchell – Senior VP and COO, Enogex LLC

Analysts

Anthony [ph]

Arlen Buchanan [ph]

Greg Reese [ph]

Rudy [ph]

Brian Russo – Ladenburg Thalmann & Co

Presentation

Operator

Good morning. My name is Alicia and I will be your conference operator for today. At this time I would like to welcome everyone to the OGE Energy Corp Q3 Earnings Call. (Operator Instructions). Thank you. Mr. Todd Tidwell, you may begin your conference.

Todd Tidwell

Thank you. Good morning, everyone, and welcome to OGE Energy Corp’s Q3 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 team to address any questions you may have. In terms of the call today we will first hear from Pete followed by an explanation of Q3 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 can 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. 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, everyone. Welcome to our Q3 earnings call. This morning I’ll update you on some of our more important initiatives and the outlook for our businesses, and Sean will review our financial results in more detail. Our Q3 consolidated operating results were $1.65 per share up from $1.40 compared to the Q3 of last year, with increased earnings at both the utility and midstream businesses. Utility earnings increased primarily due to hot summer weather and regulatory riders associated with various investments in the utility. Cooling degree days were 19% above normal and 30% above the cool summer of last year. These gains were tempered by higher operation and maintenance expenses. The extreme summer temperatures which produced five new system peaks strained our electrical system, particularly our generation, and my many thanks to our members for doing a great job of managing through those tough conditions.

We remain focused on controlling our operating costs and we have several initiatives focused on controlling costs. One of those as you know is our 2020 Plan, underway now for several years, that defers the need for any additional fossil fueled capacity for another ten years. Part of that effort is an effective demand response and distribution automation, both based on our SmartGrid deployment. As I will discuss later, we have committed to cost savings associated with that deployment.

To leap into a very topical discussion, in the face of ever-tightening environmental regulation of generation planning, our generation has a low embedded cost of about $180 per KW, excluding wind, reflecting the age of our fleet and the cost of the recent purchases in the last five years of about 1000 megawatts, for a combined cycle capacity for about $575 per KW. As a consequence, with the older units our operational and maintenance expenses will tend to be higher than that associated with a more modern fleet, especially during periods of extreme conditions. However, we do find great value for our customers in operating and maintaining the reliability of our low cost fleet.

As you know generational planning is a complex issue under normal circumstances and more so given the environmental regulations scheduled for release by the EPA late next year, and this will only be compounded by CO2 legislation which at this point in time seems to be less of a concern. But in regard to potential retrofits with pollution control equipment, we are looking at all of our options prior to committing the large capital outlay associated with scrubbing coal plants. In the meantime we will continue to invest in our plants to extend reliable service with an eye on these future outcomes. As always our primary focus will be on an approach that results in the lowest risk to our customers, which should deliver over the long run the lowest cost of power.

Several weeks ago we announced a transaction with ArcLight, which is expected to close Monday, selling just under 10% of Enogex for around $184 million. We are excited about the financial flexibility that this ongoing funding commitment provides us. We have already begun working with ArcLight to pursue additional opportunities together. Bottom line, we look for that partnership to accelerate our growth at Enogex.

Enogex had another solid quarter with earnings increasing 33% as we experienced record processed volumes. National gas liquids prices were also higher compared to the Q3 of last year, with year to date commodity spreads remaining fairly consistent, around $5.24 per MMBTU. Gathering volumes increased 6% and processing volumes grew 16% compared to the Q3 of last year.

Read the rest of this transcript for free on seekingalpha.com