OGE Energy Corporation (OGE)

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OGE Energy Corp. (OGE)

Q3 2012 Earnings Call

November 7, 2012 9:00 am ET

Executives

Peter Delaney – President, Chief Executive Officer

Sean Trauschke – Chief Financial Officer

Keith Mitchell – President, Enogex

Todd Tidwell – Director, Investor Relations

Analysts

Anthony Crowdell – Jefferies & Co.

Ashar Khan – Visium Asset Management

Brian Russo – Ladenburg Thalmann

Jay Dobson – Wunderlich Securities

Sarah Akers – Wells Fargo

Presentation

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2012 OGE Energy Earnings conference call. My name is Jenade and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Todd Tidwell. Please proceed.

Todd Tidwell

Thank you, Jenade, and good morning everyone, and welcome to OGE Energy Corp.’s Third 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 an explanation from Sean of third quarter 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 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, that this is our best estimate today. In addition, there is a Regulation G reconciliation for EBITDA in the appendix, along with projected capital expenditures.

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

Peter Delaney

Thank you, Todd. Good morning. For the third quarter of 2012, we reported earnings of $1.87 per share compared to $1.80 in 2011. Year-to-date earnings were $3.20 per share, ahead of last year’s $3.09 per share for the same period, and our consolidated earnings guidance for $3.40 to $3.60 per average diluted share is unchanged for 2012. We are on track and remain comfortable with our guidance.

Regarding the third quarter, higher earnings were driven primarily by the solid performance at the utility. Although weather was above normal, quarter-over-quarter earnings were negatively affected by milder temperatures compared to the record summer heat in 2011. Higher earnings this year reflect the higher quality of earnings at the utility. Compared to 2011, in addition to positive weather and the AFEDC impact, 2012 earnings were based primarily on real-time cash recovery of transmission projects and other investments, customer growth, and only a slight benefit from weather.

In Enogex, we are integrating the Chesapeake Energy acquisition into our operations and among other things looking to minimize the capital required to meet their production needs. As with the Cordillera acquisition, we are in the building infrastructure phase that precedes the gathering of the natural gas volumes. Volumes, while up for the year 2%, were slightly down for the quarter. Gathering revenues still increased this quarter due to higher rates. This is contrast to processing volumes of 24% in the third quarter, reflecting the completion of the South Canadian Wheeler plants, the return to service of the Cox City plant, and the liquid rich nature of the production. These higher processing volumes and gathering revenues more than offset the decline in processing margins resulting from lower commodity prices.

While gathering volumes are below earlier projections, the fundamentals continue to look strong. Volumes are still growing, just not at the rate we had projected. This is a result of the Chesapeake deal closing later than expected and the number of wells connected at closing was lower than anticipated. In addition, several of the large acreage dedications have several zones with producers concentrating on oil. While natural gas volume projections are lower, our processing volumes are higher than expected and our condensate volumes associated with oil-focused drilling are higher as well. Sean will discuss this in more detail.

O&M expense control has been a focus of ours, as reflected in the quarter’s results. We have major initiatives underway at both businesses to keep our costs in check. Going forward, we have many opportunities to invest in the company, and cost control is fundamental to bringing value to our customers and investors alike. Capital investment is required, of course, to develop acreage dedications such as those announced by Enogex in recent months, and cost control will reduce the time required until these capital investments turn into earnings growth.

At the utility, the transmission projects are translating into earnings growth today with transmission margins up some $21 million year-to-date. By the end of 2014, as you know, we will have over 1.5 billion of transmission rate base. Perhaps more transformational is investment at the utility as our smart meter deployment is nearing completion. I’ve mentioned before our primary mission now is to extract as much value operationally from that investment. A key part of the smart grid program is our demand response goal of realizing about 300 megawatts of peak demand savings, lowering peak demand by providing customers their hourly energy usage information, day-ahead variable pricing, and ability to control their usage. We have about 35,000 customers signed up on that program, on track with expectations. We were able to shave about 70 megawatts off our peak this summer, which was an important first step in our goal of allowing us to defer the need to increase our generating capacity past 2020. We’re also looking to continue to control costs by developing and leveraging off new capabilities developed from automated metering infrastructure.

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