OGE Energy Corp OGE
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/27/2013

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

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

Todd Tidwell - IR Director: Thank you, Shakwana. Good morning to 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 an 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 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 EBITDA in the appendix along with our projected capital expenditures.

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

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Thank you, Todd. Good morning, everyone. Thank you for joining us this morning. We are pleased again to announce another year of solid financial performance as 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. 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 on budget and from the completion of the Crossroads Winds Farm early 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.

At Enogex, earnings fell $0.08 from $0.83 per share to $0.75 per share. The decline in earnings was driven by our growth initiatives, which result in high depreciation interest expense accounting for $0.21 of the lower earnings. In addition, the 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 margins increased $48 million driven by higher volumes in our gathering and processing businesses, which grew 4% and 24% respectively. These growth rates are in line with our guidance in the third quarter call, as volume growth offset significantly lower NGL prices.

In the past three years, we've invested in acreage dedications and liquids-rich basins to secure long-term growth. We've also focused on operational capabilities to support realized and planned volume growth and are managing through key pull processing contracts, expirations and conversion by renegotiating longer-term dedications under fixed new processing contracts. 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 than 1.5 trillion btus per day and processing volumes are up over 1 trillion btus per day, an increase of 40%, both are all-time record levels. With some of the commodity prices at cyclical lows, we are emphasizing more than ever our discipline around capital deployment and operating cost. In 2013 double digit growth in gathering and processing volumes is expected to keep OG&E share of EBITDA flat, offsetting the conversion of a keep-whole arrangement at year-end, and a projected 8% decline in NGL pricing from the 2012 average price. After 2013, we believe the headwinds of keep-hole contract conversions and declining commodity prices will be mostly behind us. As well in the case in 2012, higher depreciation, interest expense and lower ownership percentage will cause reduction and earnings contribution to 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. I remain excited about the opportunities ahead for Enogex and believe in our growth initiatives, and that it further positions us to maximize value on investment in Enogex.

Growth in EBITDA on establishing clarity around future EBITDA growth are important elements of positioning us to execute on long-term public market options. You all know well, our partnership with ArcLight has been about growing Enogex and positioning for the continued evolution of that business. Utility is entering the final stages of our transmission build out and our major projects should complete it by the end of 2014. This multiyear initiative will add $1.5 billion of transmission rate base. The real-time cash recovery of the FERC portion of these projects has greatly improved the quality of our earnings and has been a significant earnings driver at utility.

We do have two more lines scheduled for completion in 2018 and 2021. While the bulk of the transmission projects in our service area where we will be winding down we continue to evaluate alternative path for continued transmission investment opportunities. Our smart meter installation across our system is complete and we continue to focus on delivering value from our smart grid investment. One of those areas of value is demand response and our focus on the next phase of demand reduction. We were able to shave approximately brought 60 megawatts off our peak this past summer. Our goal is to reach 300 megawatts of demand reduction so that incremental baseload generation is not needed until 2020.

On the operating side, driving value from the data received from deployed technology is expected to enable us to provide better reliability and service while taking out cost. As our transmission winds down, our capital program will be increasingly driven by our regional haze compliance plan, oral argument before the Tenth Circuit Court on our regional haze lawsuit are scheduled for March 6th and we expect a decision by summer. There is a range of potential outcomes, of course, but we will be in a better position to get more specific regarding our compliance timeline once that comes known.

However, the MATS compliance deadline draws near and decisions will need to be made. Our recent tests have confirmed the ability of using low-level dry sorbent injection and ACI to meet required emissions level, matching our regional haze and MATS compliance strategies optimal for us since DSI can be used to reduce SO2 emissions as well. Our low-NOX burner installation is underway on seven of our units and we expect completion of that project by 2016 and the costs are approximately $100 million. Our $2.80 to $2.90 in 2013 earnings guidance for OG&E reflects continued growth.

At Enogex, we are going to primary focus on integrating our existing acreage dedications. Drilling rig activity remains consistent or higher than our earlier performed expectations as these dedications are in very prolific basins.

Keith Mitchell will now lead – will now provide a few comments on what we are seeing from producers in our area. Keith?

E. Keith Mitchell - President Enogex LLC: Thanks, Pete. As Pete mentioned, we remain focused on integrating our existing acreage dedications now over 2.5 million acres in very prolific basins of the Cleveland, Tonkawa, Southeast Cana or the SCOOP area, the Mississippi Lime and the Granite Wash area. Drilling activity remained strong and our monthly well connects are exceeding expectations. Rig counts have increased 20% over the last six month in our dedicated areas.

However, most of the rigs in the multizone areas of Western Oklahoma and Texas Panhandle are currently targeting the heavier oil pay zones. This is a result of higher relative returns and lower capital requirements. The difference in volumes to Enogex of these different zones is significant, for example, as the Tonkawa well may provide an initial production rate of less than 500,000 cubic feet a day compared to a well exporting to Granite Wash zone with initial production rate of approximately 6 million cubic feet a day and higher. That said, with the active and growing drilling activity on our dedications, our volume forecast for 2013 is still robust and we are projecting strong growth in both gathering and processing for the next two years.

We are growing nicely into the premier gathering and processing assets we've constructed over the last few years. Our producers are not only continuing to be very active drillers in our area, but also acquiring new acreage that we will have the opportunity to serve. Also the return of drilling more Granite Wash wells could significantly accelerate our volume growth projections. In the meantime, we remain confident in the ability of Enogex to deliver significant growth from this point forward.

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Thank you, Keith. Before turning the call over to Sean, I would like to say that overall we're pleased with our record 2012 consolidated financial results and our earnings were lower at Enogex, I believe our long-term growth prospect for the Midstream business has not changed. Our consolidated earnings guidance of $3.35 to $3.60 reflects the lower earnings estimate of Enogex, offset to some degree by continued growth of utility. I would note that OG&E's share of EBITDA is projected to be flat as Enogex absorbs cyclically low ethane and propane prices in the conversion of people contract at year-end.

Looking forward, volume growth should be the principal driver in gross margin with upside as ethane and propane prices return to the cyclical average. We remain committed to value creation for our shareholders and believe both businesses are well-positioned to create a good return for shareholders.

Reflecting that view we are asking our shareholders to double the number of our authorized shares at the annual shareholders meeting and the expectation for 2-for-1 stock split later this year. Our view is that stock split in subsequent additional shares outstanding will enhance our value of proposition to investor.

Thank you for your interest in OG&E, and now I'd like to turn the call over to Sean to review our financial performance in more detail.

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Thank you Pete and good morning. For the fourth quarter we reported net income of $39 million or $0.39 per share as compared to net income of $36 million or $0.37 per share in 2011. The contribution by business unit on a comparative basis is listed on the slide. For the full-year of 2012, we reported net income of $355 million or $3.58 per share, as compared to net income of $343 million or $3.45 per share in 2011.

Looking first at the fourth quarter results, at OG&E, net income for the quarter was $28 million or $0.28 per share as compared to net income of $20 million or $0.20 per share in 2011. Fourth quarter gross margin came in stronger as we saw an increase of $18 million or 7% in part driven by strong sales in the commercial oil field and industrial sectors.

Now looking at some the other key drivers; as we've mentioned on previous calls we're focused on controlling our O&M cost, which were basically flat for the quarter. Depreciation was $6 million higher for the quarter and the increase was due to additional assets being placed in the service, including two new transmission lines.

Net other income decreased primarily due to lower levels of equity and AFUDC in 2012 and likewise, the increase in interest expense is due in part due to lower AFUDC debt levels in 2012. Consistent with what we provided in our earnings guidance, our income tax rate was 22% in the fourth quarter compared to 36% in 2011. This lower effective tax rate was due to federal and state renewable energy tax credits associated with Crossroads Wind Farm. Please keep in mind that these tax credits are passed to the customers by lowering our revenue requirement for Crossroads.

Now, turning to the full year, at OG&E, net income for the year was $280 million or $2.83 per share as compared to net income of $263 million or $2.65 per share in 2011. The quality of our earnings was stronger in 2012 due to the real-time recovery of our transmission projects and our various grinders. Gross margins for 2012 came in stronger as we saw an increase of $64 million or 5%. Weather though positive compared to normal was much less of a factor compared to 2011.

I'll discuss gross margin on the next slide, but looking at some of the other drivers. Our O&M costs, increased $10 million or 2% for the year and, was higher in large part due to costs associated with riders that have a revenue offset. Said another way, net of riders, base O&M was basically flat year-over-year. Depreciation was $33 million higher in 2012. The increase was due to additional assets being placed in the service, including the Crossroads Wind Farm, two new transmission lines and implementation of our Smart Grid investments.

The decrease in net other income is due to lower level of equity AFUDC in 2012 and the increase in interest expenses due to additional long-term debt issued in 2011 and lower levels of AFUDC debt in 2012. Finally, the effective income tax rate decreased from 31% in 2011 to 25% in 2012. This was due to the federal energy renewable tax credit associated with the Crossroads Wind Farm.

As I mentioned earlier, utility margins were up for 2012 and there were four primary drivers for the increase in gross margin. First was the recovery of various utility investments including the Crossroads Wind Farm and Smart Grid. These increased gross margins by $54 million. The second, our SPP transmission project created a positive gross margin variance of $29 million. Third, growth from new and existing customers added another $16 million in gross margin. We added nearly 9,000 new customers to the system compared to 2011.

Finally, other items including the new rate in Oklahoma and Arkansas contributed $10 million in gross margin. On a weather normalized basis, residential megawatt hour sales grew at 1% and the largest area of growth was in the commercial sector, which increased 2% in 2012. Partially offsetting these increases was milder weather compared to 2011.

Looking closer at weather, cooling degree days were 22% above normal and compared to 2011, which was 45% above normal. The margin impact from fewer cooling degree days in 2012 compared to 2011 was approximately $45 million. Compared to normal, weather contributed $9 million of gross margin in 2012. Overall utility margins were up for 2012 despite a weather impact that was significantly lower than 2011.

Turning to fourth quarter Enogex earnings, gross margin grew $10 million or 9% in the quarter as gathering volumes increased 11% and process volumes increased 18%, despite lower natural gas prices and 15% drop in liquids prices. Interest expense increased $3 million in part due to higher debt levels used to fund our system expansion. Lastly, the impact of the increased ownership from our equity partner decreased earnings less than $0.01, as ArcLight made a $45 million contribution in the fourth quarter.

I do want to provide a little more color on the fourth quarter in which we had a handful of unusual items. You'll recall, in the fourth quarter of 2011, we had a gain on the insurance proceeds related to the Cox City, which contributed about $0.02 per share. In 2012, we increased the depreciation rates on certain assets and added true up with some natural gas and balances during the year. These items impacted Enogex's net income by approximately $0.06 attributable to OGE.

Turning to the full year 2012 Enogex earnings; on an EBITDA basis Enogex Holdings EBITDA increased by 14% to $292 million and OGE's portion of Enogex EBITDA increased by 6% to $237 million. Gross margin grew $48 million or 11% and I'll discuss gross margin on the next slide, but first I'd like to review some additional drivers for the year.

OGE's portion of Enogex earnings per share decreased from $0.83 in 2011 to $0.75 in 2012, due to the increased ownership in Enogex by OGE's equity partner, which averaged 19% in 2012 compared to 14% in 2011. Operating expenses increased $37 million for the year, driven by higher O&M, depreciation and property taxes related to the system expansion and growth. This $6 million variance for net other income occurred because we had a gain from the sale of the Harrah processing plant in 2011 and a non-cash charge for asset retirements in 2012. Finally, interest expense increased almost $10 million due to higher debt levels used to fund system expansion.

Turning to gross margin, Enogex's increasing gross margin came from the gathering and processing businesses as they continued to show solid growth. Gathering margins were up, driven by higher fees and volumes associated with expansion projects. Inlet volumes were also up, as we had a full year of service from the Cox City and South Canadian plant, along with the addition of the Wheeler plant in 2012. Process volumes grew 24% and condensate volumes increased 30% compared to 2011. Processing volume growth more than offset the impact from lower NGL prices.

NGL prices declined from a $1.16 per gallon in 2011 to $0.89 per gallon in 2012. Natural gas prices declined from $4.08 per MMbtu to $2.79 per MMbtu. Condensate margins were $55 million compared to $41 million in 2011 and gallons produced were 35 million compared to 27 million in 2011.

At the transportation business, the primary factors for lower gross margin were driven by the events in the fourth quarter I mentioned earlier and lower cross-haul revenues of approximately $2 million due to the drop in natural gas prices. Overall, margin continues to grow even as natural gas liquids prices have fallen more than 23%. We anticipate continued volume growth on our system, as we develop our existing acreage dedications.

Before answering your questions, I did want to discuss our guidance for 2013, which on a consolidated basis is between, $3.35 to $3.60 per share. Looking at the utility and assuming normal weather, we project earnings per share to be between $2.80 and $2.90 per share. At Enogex, our projection is between $0.55 to $0.75 per share. At the Holding Company, we are projecting a loss between $0.02 and $0.04 per share.

Now turning to look closer at some of the key assumptions for our businesses, at utility, the drivers for earnings growth are going to come from the $375 million to be invested in SPP projects and the 1.5% projected retail sales growth.

In addition, we received a notification from the Oklahoma Tax Commission in January indicating our Crossroads Wind Farm was only entitled to a 1% investment tax credit. Obviously we are disappointed by this because the rules were changed after we committed the capital. Nevertheless under the accounting rules, we may be required to book this one-time reserve of $0.05 in early 2013 and we've included that in our guidance assumptions. Therefore on a weather normalized basis and considering investment tax credit reserve, the midpoint of our 2013 earnings guidance is about $0.11 higher compared to 2012.

Turning to Enogex, 2013 EBITDA guidance is relatively flat with 2012 actuals. The drop in commodity prices and our conversions to fixed-fee were offset by an increase in volumes. Unfortunately we were anticipating more volume growth but as Pete mentioned, producers are targeting the Tonkawa zones when we were expecting some Granite Wash wells to be drilled. Still all of these are within our dedications. To be clear, the rig counts are increasing and volumes are still growing.

Back at the OGE level, earnings to OGE from Enogex will be down due to the investments we're making to grow this business. The two drivers for the lower earnings are depreciation and the increased ownership interest by ArcLight. Continued volume growth is expected and as we look at the business, today it has a fundamentally different business profile. A good example of this is the contract mix for 2013, a 10% move in NGL prices for the entire year is now a $5 million impact at OGE.

This concludes our prepared remarks. Now we'll open up the lines for your questions.

Transcript Call Date 02/27/2013

Operator: Anthony Crowdell, Jefferies & Company.

Anthony Crowdell - Jefferies & Company: I guess a question on the Enogex guidance and maybe two parts of it. One is, you had some new processing plants coming on last year. I believe maybe you have a new plant coming on in 2013. What do you forecast with these volume assumptions? What do you forecast? Is that like, I guess capacity utilization of those plants? Second, when I look at Gathering and Processing volumes, they're still healthy numbers, maybe some investors thought numbers could be higher. Is it a case of -- you had mentioned may be less drilling, but is there a function of it's just the law of large numbers that Enogex has grown to a part -- a size where double-digit growth is kind of getting very limited?

E. Keith Mitchell - President Enogex LLC: Your first question, we do have a plant coming online like this year, the McClure plant and we've brought on Wheeler in 2012. So what happens is we are utilizing those plants, the newer plants and then free up capacity on some of our other older plant. Then as the volumes continue to grow we'll continue to more fully utilize the capacity, and then when a new plant comes online that will create more capacity for continued growth. So, we're growing into these capacities that we're adding. So, we have good utilization on the newer plant, and then we'll back off on some of the older plants and as the volumes grow and then those will fill backup. As far as the drilling goes, we are seeing strong volume growth. There still a lot of drilling. As we mentioned, we are talking about 10% to 20% growth both this year and next year. Again, if you just take that on our throughput as Pete mentioned, we are over Bcf a day now in processing, so 10% to 20% is basically another whole plant. So we do see that continuing and even with the drilling that we are seeing, we are seeing less Granite Wash zones being targeted. Those zones are still there. They will be exploited at some point in time and we do have long-term acreage dedications. But right now producers seem to be more focused on more of the Tonkawa zones or the (indiscernible) zones, which we do get gas production from. That's why we still see growth, but not as much growth as we would see if they were drilling the Granite Wash wells. So, that could switch pretty much at any time as these producers look at their capital budgets and the zones that they want to target. Obviously, the Tonkawa wells being more oil is something that they are targeting because of just relative economics, Granite Wash wells are still very economic. But I think relative economics they are choosing the Tonkawa zones because of the oil and actually lower well costs for those type of wells. So we still see a lot of growth. We are still projecting 10% to 20%. If we have some return back to the Granite Wash or even some return into some of these other areas that are leaner then you could see that accelerate.

Anthony Crowdell - Jefferies & Company: What do you think like – what causes drillers to get back aggressively into the Granite Wash? Is it a natural gas price, I don’t know, above $3.50, is it NGL price above $0.90 a gallon, what causes the drillers to get back because, I know you had mentioned relative economics there better in the Tonkawa zones versus the Granite Wash, but you had given out slides earlier through the year where the economics still look great in the Granite Wash, if I guess they are favoring the other zone, what causes them to get back in the Granite Wash?

E. Keith Mitchell - President Enogex LLC: I think there's, multiple factors. I will tell you that the Tonkawa wells are lower CapEx and more oil, so that's why relative economics are higher. There's still a lot of good economics in Granite Wash and Granite Wash wells are being drilled just not as many on the percentage basis as what we would earlier project. That I think depends on the producer. With commodity prices being down, producers are certainly looking at their capital budgets and they're looking at their allocation of where they want to drill. So they are obviously going to prefer in the queue, the higher return. Also they can drill more wells if the well costs are lower, Tonkawa than they could if they are Granite Wash. So some producers that maybe don't have some of those choices, that may be all they have is more of a Granite Wash selection, they are still drilling Granite Wash. Other producers that have a lot of maybe Permian wells, Bakken wells, Tonkawa wells, they may not drill their Granite Wash zones for some time to come. Certainly the Granite Wash higher gas production, more NGL barrel, the condensate is of a different gravity, not as valuable as say, some of the oil produced from the Tonkawa. So it's all relative and every producer is in a little bit different position. Obviously with NGL prices depressed and as well as gas prices down, that puts them lower in the queue and therefore takes a little more capital or a producer with less options to choose that zone.

Anthony Crowdell - Jefferies & Company: Just because I'm not familiar with the geography in Oklahoma, is Tonkawa in the SCOOP zone, I think some E&P companies have maybe talked about that zone during this past summer, where is the Tonkawa zone or what's the SCOOP?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: That's a good question. You may recall when we did the acquisition from Cordillera, as well as the acquisition of gathering from Chesapeake, it's out in Western Oklahoma, Texas, Panhandle we call it that Greater Granite Wash area. There is multiple zones there and there are more zones than just the Tonkawa and Cleveland and the Granite Wash, there's other zones as well, which is really nice from the perspective of you've got a lot of production potential to come -- for many years to come, but as far -- they have also then choices as to which zones, but that's the area that's a lot of the Tonkawa, Cleveland zones are being drilled. The SCOOP or the Southeast Cana area is really more just the Cana Woodford, it's an extension of the Cana Woodford down further south and east. That is an area that continues to be very strong and we still see a lot of active drilling and additional potential acreage dedications down there.

Operator: Ashar Khan, Visium.

Ashar Khan - Visium: A question, you guys had mentioned that you would have $0.10 pretax gain on the sale of assets in the first quarter of '13, is that in the guidance or no?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Yes, it is.

Ashar Khan - Visium: Then Sean, can you just go over what I guess, I had more utility earnings. What kind of an ROE will the utility be earning at the midpoint of the range for the year?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: In '13 and in Oklahoma will be very close to its allowed return of 10.2%. Arkansas will be closer to about 6% and obviously, the FERC transmission will be at that rate, under formula rates at 11.1%.

Operator: Brian Russo, Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann: So just to be clear there is a gain at Enogex included in the guidance and there is a $0.05 negative for the reserve at the utility, in the utility guidance?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Yes. That’s right. Brian, year-over-year that gain we put that in there only because it occurred in January, we already know about it. But year-over-year looking back to 2012, we had the gains from the Cox City insurance settlement too, so they kind of offset.

Brian Russo - Ladenburg Thalmann: CapEx update, it looks like there is a little movement I think in 2015 utility CapEx and then quite a bit of increase at Enogex relative to prior disclosures. I was wondering, if you could just comment on the Enogex CapEx and what's driving that, and I assume that's why ArcLight is increasing their ownership budget? Just want to get a timing of when these new projects come online and when they can start contributing margin?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Yes. Yeah. I think it's – I'll let – I'll start and then I'll let Keith fill in here. But as Keith was explaining, a lot of this is related to we do not having a new plant. The 2013 capital is really related to completing the McClure plant. We do not have an additional plant in there, for this. A lot of this is building out the gathering and compression for the Western Oklahoma and Texas Panhandle expansions. We've talked a lot about the SCOOP area. We are deploying capital in that area as well. So a lot of that is really gathering and compression, just to kind of build out the system. I think Keith can give you an idea as far as the time it takes to build compressor stations in plants and things like that.

E. Keith Mitchell - President Enogex LLC: A lot of the capital as Sean mentioned, we are completing our McClure plant, which we project to come online at the end of this year. So there's a final build out of that throughout 2013. We are extending our header system down into the SCOOP area to connect that area into our Western Oklahoma, Texas, Panhandle processing header because of the volumes that we are seeing. Then there's a lot of – just as these volumes come on, again, we'll have the compression and well connects, and gathering systems to connect to these new volumes.

Brian Russo - Ladenburg Thalmann: So does this CapEx translate into volume growth that's supported in your '13 and '14 volume guidance assumptions or should we look at this investment as more of like a post 2014 type of contribution?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: I believe that you will see it in 2014. Some – for example, well connects, again you're talking about kind of more current month-to-month compressor stations, you're talking about timeframes of six months to 10 months. Then processing plants, we've been building McClure for a while and we're going to finish that up this year. It's an 18 month type process. So, I think with all of these investments we are looking at for 2013, you should see margin contributions in 2014.

Brian Russo - Ladenburg Thalmann: Can you remind us, what's kind of the 2013 utility rate base? If you could just break that down into the FERC piece versus the retail piece?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Brian, at the end of '13, we would expect Oklahoma rate base to be about $4 billion, okay? The Arkansas piece is probably just shy of $400 million and the FERC rate base will be about $700 million, and that's at the end of '13.

Brian Russo - Ladenburg Thalmann: So looks like $5.3 billion in total?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: So the interesting thing Brian, I think what's occurring here as we complete '13, this is kind of a big year -- another big year on the transmission front. Traditionally, we’ve spoken in terms of Oklahoma was roughly 85% of the total and Arkansas was 15%, which really occurring now is Oklahoma is about 80% and by the end of the year FERC will be about 15%, Arkansas will be about 5%.

Brian Russo - Ladenburg Thalmann: Earlier, there were comments on exploring public options for Enogex, so I was hoping you could elaborate on that a bit?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: We're always looking at those types of things and as we did, talked about the ArcLight, and our driver there as you know was to continue invest in Enogex to continue to position for a long-term growth and try to minimize during that growth period dilution to our shareholders. We think that you can hear from our 2.5 million acre dedication and the continued activity we're seeing when drilling that we've accomplished that and we're focusing on earnings and EBITDA. We're talking about here on a sort of growing into our assets as we're making these investments and the growth – volume growth shows up a little later. But we think that we understand that like what I mentioned was a clarity around EBITDA growth, particularly we look at public market option is important. We think we are establishing that. We've been asked about MLP many times. Of course, we are not going to comment in any specificity, I guess, on that type of thing, until we've really committed to proceeding forward. But clearly, we think we are moving in the right direction.

Brian Russo - Ladenburg Thalmann: Just on the MLP option versus just an outright sale. Is the sale still economical despite any kind of tax friction?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Well, let's say, any time, you look at a sale it's a typical different decision you make on selling any parts of your business. Of course, you are going to have depending on the tax basis any tax associated with that but that's in terms of the public offerings, the public options that I'm thinking about, that was not one of the ones.

Operator: Andy Bischof, Morningstar.

Andrew Bischof - Morningstar: I was wondering, if you could provide just a little clarity on building to maintain O&M expense in 2003 and beyond? You have regularly been able to maintain O&M so far?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Sure. Are you referring to the utility?

Andrew Bischof - Morningstar: Yes. The utility.

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Yes. So as we've done the last couple of years, we've done a very nice job, the folks have done a very nice job managing this and I will tell you the good news there is there hasn't been one big item that's really moved the needle. It's just been a lot of continuous improvement efforts where we have plans to continue that control of O&M, so that it does not exceed the rate of inflation going forward. Everybody is aligned and onboard in the Company and that's how we are focusing it. There's not a specific action or effort we're undertaking, it's just I think of it in terms of continuous improvement. Couple of examples, we've made great strides and managing our inventory, managing just the number of contractors or headcount that we have on the system. We are always looking for improvements on how we run our plants and our retail business. So, I think it's a concerted effort all across the board and every little bit is contributing.

Operator: Chris Ellinghaus, Williams Capital.

Christopher Ellinghaus - Williams Capital Research: Sean, you said something about weather versus normal in '12. Did you give a number for that?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: We did. So the weather impact in 2012 for normal was about $9 million of margin. The issue there is, remember how hot it was in 2011 Chris. It was probably $45 million of margin difference versus '11 because of just the extreme heat we had in '11. It was favorable to normal, but less than '11.

Christopher Ellinghaus - Williams Capital Research: Then on the Enogex tax-rate, it looks like the last couple of years, you've had a more below – it's been more in the 30%, 33% range. What do you see in 2013 that brings it back up to the more typical 37%, 38%?

E. Keith Mitchell - President Enogex LLC: I guess, Chris help me. I'm a little confused. I think we've been in that mid to high 30% range last couple of years at Enogex on tax rate.

Christopher Ellinghaus - Williams Capital Research: I just want to take a look at that again. Then what are you seeing in the OG&E growth front that gets you more to the 1.5%?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: The fourth quarter we began seeing significant growth in the commercial segment as well as the oilfield. Some industrial just existing customers, more demand and we've had some econometric models reviewed. We've been looking at that and so based on what we saw in the fourth quarter and what they're projecting, we’re seeing more growth in those specific areas.

Christopher Ellinghaus - Williams Capital Research: Is the oilfield push a big component of that?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Chris, your tax question, I'll have Todd follow-up with you, but we may be getting tangled up there on the minority interest, so we'll circle up with you.

Operator: Anthony Crowdell, Jefferies.

Anthony Crowdell - Jefferies & Company: Just a quick follow-up on Enogex. You guys are taking a pretax gain, what are you selling?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: No, we already sold it. So, back in January, we put out an 8-K announcing that we had converted a contract to a fixed fee agreement. Along with that, we had also, we picked up additional -- some acreage dedication in a longer-term. But one of the other pieces of that is we actually sold the low-pressures gathering system to this party and we recorded $10 million gain on 2nd January.

Anthony Crowdell - Jefferies & Company: So, if I'm just thinking of 2013, you have a nickel loss, non-recurring loss in first quarter to I guess in tax related to transmission and in first quarter, you are going to have a $10 million gain but that's Enogex, you guys or whatever your percentage is of that. Is that accurate?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Yes. Just to be clear. The $0.05 reserve we are taking is related to investment tax credits associated with the Crossroads Wind Farm. In short there, the investment tax credit is basically, we are allowed to take 2% for five years. We received a notice from the Tax Commission in January that they had reduced that to 1%. So that's the issue there. On the gain, the $10 million gain, again, $0.5 that's an after tax number. The $10 million gain at Enogex, that's a pretax number.

Anthony Crowdell - Jefferies & Company: That's Enogex portion, that's not OGE's portion. I mean, that's all of Enogex, right?

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Yes. That's our share.

Anthony Crowdell - Jefferies & Company: So it's roughly $0.06 positive or a nickel negative.

Sean Trauschke - VP and CFO, OGE Energy Corp., OG&E Electric Services: Let me back. I think I got – I think we are talking past each other. The $10 million was the total gain on that. Our share of that would be about 80%. But that's a pretax number.

Operator: (Pu Chen, Talon Capital).

Pu Chen - Talon Capital: Just a quick question on the transmission and transmission projects, kind of in the regional basis, post '14, I know you kind of talked about it in the past that there are some other things, I know you are only showing the committed and known projects, but how about some of the ones that maybe in backlog if you want to call that?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Right. So we've received two conditional notices to construct from the SPP for a couple of hundred million dollars for two lines coming into service in '19 and 2021. We've responded to those. We will build those. There is some – obviously with FERC Order 1000, those were conditional notices until that all is resolved there, but we will probably begin deploying capital in the '16, '17 timeframe.

Pu Chen - Talon Capital: One other question, just regarding the parent holding Company expenses, anything driving that in particular?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Po, we have a $100 million of debt at the Holding Company at 5% and that's a lot of it.

Operator: (Stephen Huang, Carlson Capital).

Stephen Huang - Carlson Capital: Couple of quick things here, on T&S, can you help us understand why it's declining earnings at transportation, storage and is that due to re-contracting lower prices and how do we should be thinking about 2014?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Okay, Keith, you want to talk a little bit about '13?

E. Keith Mitchell - President Enogex LLC: Sure, think that back to your first question, we had some crosshaul in '11 and some positive things in '11 that we didn't see occurring as well. I think for '13, we still see things relatively stable in T&S as (devised) to transportation. Storage margins are down a bit. I’m sure you've seen storage spreads are challenged, so we see it down a bit for '13, but relatively flat as far as the total segment.

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Stephen, maybe there's a bit of geography going on there too. You recall, we used to report a energy resources segment there. That was really a long-term transportation business where we took – had demand fees on those lines. We've consolidated all of that into this segment at transportation storage. So we have demand fees and because of the low natural gas prices, not really any basis. We have demand fees around $7 million or $8 million that we are really not able to recover.

Stephen Huang - Carlson Capital: Then can you help us understand -- last year, we had a little confusion on what you were using for NGL pricing in your guidance because you had rejections in the second half of the year. Can you help us understand the $0.82 that you're using in the guidance today? Are you assuming rejection of ethane for the full year, and that composite includes no ethane at all because ONEOK for example use $0.66 NGL composite, and I know everybody is different. So can you help us understand what your $0.82 is?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: So we have assumed ethane rejections for the entire year. However, there is a little bit of ethane in that margin there, but we have assumed rejection for the year.

Todd Tidwell - IR Director: Stephen, this is Todd. The $0.82 is derived from standard barrel even though we were going to be in rejection all year, so it does assume about 47% ethane, even though we were going to be in rejection. So the $0.82 pricing is based as if you are in full recovery. I saw the ONEOK at $0.66 yesterday and I think their barrel composition is a little bit different than ours and that's why their price is lower.

Stephen Huang - Carlson Capital: I just wanted to some clarity. So you are assuming ethane, this is a normal composite barrel even though your rejection for the whole year.

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Yes. That's correct.

Stephen Huang - Carlson Capital: Your rejection is for both, Conway and Belvieu.

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Yes.

Operator: (indiscernible) Baloise Asset Management.

Unidentified Analyst - Baloise Asset Management: This is actually (indiscernible) from Baloise Asset Management. Just curious about a few things first, in terms of your CapEx, does that include your group CapEx spending back to few years?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Yes. It does.

Unidentified Analyst - Baloise Asset Management: I mean thinking about the acreage dedication that you guys have, so like what is the kind of conservative do you think about like the CapEx spending for the like about $250 million every year for 2014-ish going forward?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Yes. That includes our build out of Southeast Cana, the SCOOP area. We've certainly have included in '13, our completion of the headers that we need as well as compression and well connect. We will then evaluate what we need to spend in '14 and '15, as we continue to see those volumes develop and we see the need for additional capacity. So we haven't necessarily included capital that may be needed if – depending on the rate at which that develops.

Unidentified Analyst - Baloise Asset Management: Then, when I think about the financing for all this CapEx, I think you guys have been spending like $0.5 billion every year in the past two years and it seems like to kind of do is keep this lean. How should I think about your methods in terms of financing going forward?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: So for 2013, the way we are looking at, if you think EBITDA, just shy of $300 million and CapEx is $455 million, we will have some minimum distributions coming out of Enogex. We are probably looking to – we've financed a lot of this with debt in 2012. We will rely on some contributions in 2013 and we've forecasted around a $100 million from ArcLight in 2013. The way we approach it is we do that on a quarterly basis. It will not come in and just sit there. We want to make sure that the money actually does go in and gets invested pretty quickly. Then depending on the outlook for 2014, we will make those financing decisions at that time.

Unidentified Analyst - Baloise Asset Management: Does that mean ArcLight will increase the share in Enogex?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Yes. They would move from where they are today at about 20% to 22%. That's our guidance and as we move through the year, we will adjust that accordingly.

Unidentified Analyst - Baloise Asset Management: Is that going to keep increasing going forward, do you keep spending in the emissions business?

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Certainly to the extent that we need additional funding to support these growth initiatives. Their ownership interest will increase but as Keith talked about, we've been adding a new processing plant each of the last three years and the timeframe for that's about 18 months. So now that those plants are coming into service, we would expect that we would have more real-time recovery of those expenditures and may not need as much in the future.

Operator: I would now like to turn the call over to Mr. Pete Delaney.

Peter B. Delaney - Chairman and CEO, OGE Energy Corp., OG&E Electric Services and CEO, Enogex LLC: Thank you, operator. In closing, I'd like to take a moment to thank the men and women at OGE Energy for their hard work and dedication and service to our customers and shareholders. I'd like to thank each of you for your continued interest in OGE Energy. Have a great day. Thank you.

Operator: Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.