OGE Energy Corp (OGE) 2005 Q4 法說會逐字稿

Good morning, my name is Jessica and I will be your conference operator today. At this time I would like to welcome everyone to the 2005 earnings release conference call. [OPERATOR INSTRUCTIONS] Mr. Hatfield, you may begin your conference.

Thank you. Good morning and welcome to OGE Energy Corp.'s fourth quarter 2005 conference call. I am Jim Hatfield, Senior Vice President and Chief Financial Officer of OGE Energy Corp. I have with me today Steve Moore, Chairman, President, Chief Executive Officer of OGE Energy Corp, Pete Delaney, Executive Vice President and Chief Operating Officer OGE Energy Corp, and Howard Motley, Director of Regulatory Affairs and Strategy, OG&E, and several other members of the management team to address questions. In terms of the call today, we'll start first with comments from Mr. Moore. I'll cover 2005 results, looking first at the full year and then the fourth quarter. I'll discuss 2006 outlook. Howard Motley will give an overview of the regulatory proceedings. Then we'll end with question and answers.

Before we begin, I want to remind everybody that we have prepared slides to accompany our webcast, so it will be easier to follow numbers when we get to that point. 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 can not guarantee forward-looking financial results but this is our best estimate to date. And with that out of the way, I would now like to turn it over to Steve Moore for his comments. Steve.

Thanks, Jim and welcome. We appreciate your joining us on our 2005 earnings call. Today we'll discuss our results for the fourth quarter and for the full year 2005. We will tell you what we're focussed on in the year ahead, including our earnings outlook for 2006, and as always, there will be time for your questions. As we announced this morning, OGE Energy earned $2.32 per diluted share in 2005. Even without the asset sale by Enogex in the fourth quarter, earnings were $1.83 per diluted share, a 10% increase from 2004. In the fourth quarter, earnings from continuing operations were $0.20 per diluted share compared with $0.07 last year. Jim will go over all the details for you in just a moment, but certainly we are pleased to be reporting earnings growth for the third year in a row. Our electric utility and our unregulated natural gas pipeline complement each other very well. Last year at this time, we discussed how high our earnings at Enogex had offset lower earnings at OG&E during 2004. This year, the roles are reversed.

More favorable weather and customer growth enabled OG&E to increase earnings in 2005, while Enogex results from continuing operations were lower. In the year ahead, both companies will continue to be sharply focussed on improving their existing operations, while also pursuing strategies for growth. We are pleased to have a new law here in Oklahoma, which we call House Bill 1910, which enables us to seek regulatory approval of major construction expenses before projects begin. For OG&E recovery of infrastructure investments is vital to our business. We have learned it's not always easy, but we do have an order for a $42 million rate increase here in Oklahoma. It was a very difficult case for us last year, occurring in a time of serious concern about high fuel prices and high customer bills. But if we are able to have electric system, the rate decreases we've had for the last 20 years simply could not go on forever and our regulators, fortunately, realized that. Looking ahead, we will file a general rate case this year in Arkansas. Remember, about 10% of our utility business in Arkansas is located in Arkansas. So that's another opportunity for us.

In Oklahoma, we will present a significant new wind power project to our corporation commission. 120 megawatts this time, which we would own. This will more than triple our wind-generating capacity. Howard Motley is here to discuss this project and other regulatory activities we see coming up this year. We'll hear from him in just a few minutes. It's also important to note that OG&E's growth opportunities are not restricted to the regulatory arena. Customer growth has been steady in the OG&E service area. We are competing effectively for lots of new business and we must continue this good work to grow our customer base. At Enogex we will continue our repositioning program in 2006.

We've sold the Arkansas Interstate Pipeline and we continue to evaluate other pipeline assets on our system. We intend to invest the proceeds from asset sales in new opportunities to grow revenues and earnings. There's a lot of drilling and new natural gas production here in the mid-continent and we are working to capture new opportunities for our pipeline business. Times are good here in our part of the country, and as a Company we like our position. As always, we face our share of challenges, but we're pleased with how things are going. And we're confident about our prospects for growth and success in the year ahead. And as always, I'd like to thank you for your support and your continued interest in our Company. Now I'll turn the call back over to Jim. Jim?

Thank you, Steve. We'll start first with 2005 results, and as Steve said, we reported net income of $211 million or $2.32 per diluted share, as compared to net income of 153.5 million or $1.73 per diluted share in 2004. On a continuing basis, we earned $1.83, a 10% increase over the $1.66 result posted in 2004. As a result of the asset sales at Enogex, we'll try to distinguish between net income and income from continuing operations. The contributions by business unit on a comparative basis is as follows: OG&E $1.43 versus $1.22 in 2004; Enogex $0.50 versus $0.62 in 2004; the Holding Company with a $0.10 loss versus $0.18 loss in 2004. On a continuing operation basis $1.83 versus $1.66, a 10.2% increase. Discontinued operations were $0.49 in 2005 versus $0.07 in 2004. Reported consolidated earnings, $2.32 versus $1.73.

Looking first at the utility, OG&E had net income of 129.7 million or $1.43 per share, as compared to net income of 107.6 million or $1.22 per share in 2004, a 17% increase in earnings per share. Gross margin on revenues increased to 726.5 million from 663.9 million. The major factors impacting gross margin were favorable weather and OG&E's service territory during the summer of 2005, which increased gross margin by 33.4 million. Cooling degree days were 18% above last year and 13% above normal in 2005. The price quantity variance of 13.2 million, which includes growth from existing customers, growth from new residential and commercial customers of 6.6 million, and industrial customer growth of 5.8 million. Other miscellaneous items accounted for 3.6 million increase in gross margin. O&M expenses increased 7.3 million or about 2.4% from the 2004 level. The largest increase came from a 3.1 million increase in pension and benefit costs and 2 million in increased materials expense.

Depreciation expense increased to 134.4 million from 122.7 million, or 11.7 million, due to a higher level of depreciable plant, including the half year of the McClain plant. Other income was down 8.1 million or $0.06 per share, primarily due to the reversal of asset sales gain recognized in 2004. Net interest expense was up 9.8 million or $0.08 a share, due to an increase in rates and interest associated with the debt of the McClain plant, which was on for a half a year. Partially offsetting these decreases to earnings were a lower effective tax rate at 2005 versus 2004, 29% compared to 33% 2004, a combination of various items including reduction in tax accruals and state tax credits. At Enogex, net income was 89.8 million or $0.99 per share in 2005, as compared to 60.7 million or $0.69 per share in 2004. Income from continuing operations was 44.9 million or $0.50 per share in 2005, as compared 54.7 million or $0.62 per share in 2004. At Enogex, 2005 gross margins decreased 20.2 million or 7% to 257.9 million from 278.1 million in 2004. This decrease is primarily due to lower margins in the transportation, storage, and marketing segments.

Looking at gross margins, transportation and storage contributed approximately 99.1 million of Enogex's gross margin, as compared to approximately 114.5 million in 2004, a decrease of approximately 15.4 million or 13%. The various factors impacting gross margins were a reduction of 20.5 million due to storage, fuel gas losses, increased costs associated with natural gas purchases and sales, increased costs in electric compression, reduced fuel recoveries due to timing, and system fuel volumes now recorded in the gathering and processing business, as well as a 2.1% decrease from reduced demand fees. Partially offsetting these variances were higher across all prices and volumes of about 5.3 million, and about 1.5 million increase due to commodity and interruptible revenues. For 2005, gathering and processing gross margins increased 16.3 million over 2004. Gathering gross margins were 14.6 million higher in 2005 as compared to 2004.

Higher gross margins were the result of contractual fuel gains and higher gas prices, fuel over-recoveries now being recorded in this business that were formerly in transportation and storage of about 4 million, and higher volumes associated with low-pressure gathering compression and dehydration. Continued strong natural gas prices resulted in new well connect increasing from 258 in 2004 to 272 in 2005, about a 5% increase. Processing margins increased 1.7 million, primarily due to higher condensate margins partially offset by lower keep whole margins due to lower natural gas prices. Marketing margins decreased by 21.1 million in 2005 as compared to the prior year, mainly due to less favorable market conditions, the accounting correction for park and loan transactions which was booked in the second quarter, and loss due to the Cheyenne Plains transportation agreement. Partially offsetting these were a gain of 3.2 million in storage. O&M increased 3.2 million or $0.02 per share, primarily due to higher outside service costs, software implementation and pipeline integrity expenses.

Depreciation expense and net interest expense were relatively flat year-over-year. Income tax expense decreased 9.5 million, due to lower taxable income, reduction in prior period accruals, partially offset by decrease in Oklahoma state tax credits of about 1.6 million. Discontinued operations, up 44.9 million, is comprised of three major components. We had the gain on the sale of the Enogex Arkansas Pipeline Steve mentioned earlier, 36.7 million. We had gain on the sale of our joint venture of 1.8 million. Then we had net income from those operations of 6.4 million through the first 10 months of 2005. During the year ended December 31, 2005, Enogex had an increase in net income of approximately 40.2 million relative to various items that the Company does not consider to be reflective of the ongoing profitability of Enogex's business. Those increases composed of the discontinued operations of 6.4 and the 38.5 million on the sale of assets, partially offset by the park and loan transaction, 4.7 million.

During the year ended December 31, 2004, Enogex had an increase in net income of approximately 10 million related to items that the Company does not consider to be reflective of the ongoing profitability of the business. And you see those items listed on the screen. That sums up 2005. Now I'd just like to briefly touch upon the fourth quarter. For the quarter, we reported net income of 56.1 million or $0.61 per diluted share, as compared to 9.7 million or $0.10 per diluted share in the fourth quarter of 2004. The contribution by business unit on a comparative basis is as follows; OG&E a positive contribution of $0.03 versus a loss of $0.16 in 2004; Enogex $0.19 versus $0.30; Holding Company a $0.02 loss versus a $0.07 loss in 2004; Continuing operations, consolidated $0.20 versus $0.07; Discontinued operations in the quarter $0.41 versus $0.03 in 2004; Reported consolidated diluted earnings per share of $0.61 versus $0.10. Looking at OG&E, net income of 2.3 million or $0.03 per share compared to the loss of 14.1 million or $0.16 per share in the fourth quarter of 2004.

Gross margins were up 18.5 million for the quarter year-over-year, you see driven by growth and weather. O&M expenses were down 14.1 million or $0.11 per share, primarily due to decrease outside services and labor expense, partially offset by higher pension and benefit costs. Other income was down 4.2 million, primarily due to the sale of the E&P properties in 2004. And net interest expense was 12 million, up 5 million from 2004, due to higher interest rates and interest expense associated with the McClain plant. We also had higher tax benefit in the fourth quarter compared to the prior year. Looking at Enogex, net income of 55.4 million or $0.61 a share, compared to 30.1 million or $0.34 a share in 2004. Income from continuing operations was 17.6 million or $0.20 per share as compared 26.9 million or $0.31 per share in 2004. Gross margins were down 17 million from 92.2 million to 75.2 million, with a positive variance in gathering and processing offset by transportation and storage and marketing.

Looking at transportation and storage, down 7.2 million for the quarter. You see the various items driving down gross margins and you see those listed on the screen. Gathering and processing margins were up 2.8 million. Gathering was up 7.7 million due to the increased contractual gains and natural gas sales margin and revenue improvements in the business. Processing margin was down 4.9 million due to decreased keep whole margins. We were in ethane rejection for pretty much all of November and December. And marketing was down 12.6 million quarter over quarter. Operating expenses at Enogex in the quarter were up 3.3 million. Really, again, related to the outside service costs and software installation. Net interest expense increased $800,000 quarter over quarter. Income tax expense was down 13.1 million due to lower pretax income and reduction in the prior period accruals. And discontinued operations were 34.8 million or $0.38 a share, primarily due to the $36.7 million gain on the sale of Enogex Arkansas Pipeline.

And during the three months ended December 31, 2005, we had an increase in net income of approximately 38 million related to various items we do not consider to be reflective of the ongoing profitable of Enogex's business. You see those on the screen coming from discontinued operations. We compare that to three months ended December 31, 2004, where we had an increase in net income of about 3.2 million. You see those items on the screen, as well. Now I'd like to briefly look at the 2006 outlook. The Company's earnings guidance is 159 million to 169 million of net income or $1.75 to $1.85 per share, assuming approximately 91.2 million average diluted shares outstanding. The outlook includes earnings guidance of 124 to 128 million or $1.36 to $1.40 per share at OG&E. Guidance at the utility includes a rate increase of 42.3 million and margin growth of approximately 2%. The margin increase will be offset by increased operating expenses due to increased labor expenses and additional expenses associated with a full year of the McClain plant.

Capital expenditures are planned to be approximately 237 million for electric system expansion and reliability upgrades in 2006. Enogex guidance is 44 to 48 million, or $0.48 to $0.53 per share. Total Enogex gross margin of 272 million to 279 million compare with approximately 258 million in 2005. Transportation and storage, gross margin approximately 116 million compared to approximately 99 million in 2005. The increase in gross margin is primarily attributable to a reduction in fuel losses in 2005. Gathering and processing gross margin of 147 to 154 million, as compared to approximately 156 million in 2005. Gross margin increase in Enogex's gathering and processing business in 2006 is primarily due to continued efforts to increase margins from the negotiation of both new contracts and replacement contracts. Volume in Enogex's gathering and processing business we expect to remain flat. Commodity spreads are $1.95 to $2.22 per MMBtu in 2006, as compared to $2.55 for MMBtu in 2005, with average natural gas liquids prices $0.94 to $1.16 per gallon in 2006, as compared to $1.02 per gallon in 2005.

Enogex's gathering and processing business is assumed to have 277 new well connections in 2006. Gross margins from Enogex's marketing business is approximately $9 million as compared to approximately 3 million in 2005. Operating and maintenance expenses increased approximately 7 million due to increased employee and benefit costs. Interest expense remains relatively flat in 2006. And capital expenditures for investments in Enogex's pipeline system are approximately 60 million in 2006. Earnings guidance at the Holding Company expected to be a loss of between 7 and $9 million or $0.08 to $0.10 per share. And with that, I'd now like to turn it over to Howard Motley for an update on regulatory activities. Howard?

Thank you, Jim. As mentioned by Steve Moore in his opening remarks, last year we had a rate case in Oklahoma and we were facing very high gas prices. And also a trend of rate reductions for a couple of decades. But in December, 2005, the Oklahoma commission issued an order in OG&E's rate case that was favorable, especially looking -- facing the high gas prices and the rate reduction trend. Then when you would compare the results of the case to the recommendations, the recommendations ranged from a 13.1 million increase by staff to a 31.3 million rate reduction recommended by an industrial consumer group. The attorney general's consultant recommended a 24.4 million rate reduction. Based on the record, the administrative law judge recommended the commission to approve a 42.7 million rate increase. And after the commission reviewed the record and the administrative law judge's recommendation, the commission issued an order granting a 42.3 million rate increase. And it also allowed a 4% interest on unrecovered fuel costs. The commission order authorized a 10.75% return on equity and a 55.7% common equity ratio.

We thought that was very positive in Oklahoma. And the new rates were implemented in January, 2006. We feel with the things we were facing in Oklahoma in 2005, we were successful in reversing the rate reduction trend and receiving a reasonable rate increase. This year we're preparing for the Arkansas rate case. As mentioned earlier, it's 10 to 12% of our business. And that will give us an opportunity to bring in new revenues. The Company is currently in the process of developing a revenue requirement for the Arkansas jurisdiction. The test year will be calendar year 2005, without a period adjustment through December 31, 2006. In Arkansas, they allow us to reach out a year to pick up the investment that Jim was just talking about, over 200 million in 2006, and other operating expense increases. We plan to file that rate increase in Arkansas mid-year. And based on the -- in Arkansas there's a statutory timetable of 10 months. So we should be able to implement new rates in Arkansas the second quarter of 2007.

Also mentioned today already was our Win Energy project. We've signed a contract to construct and own 120 megawatts of Win Energy. We plan to file testimony at the commission next week sometime and ask for pre-approval of that construction and ownership. The estimated cost of the project is 200 million. And as part of the proposal, the Company will also request the commission to authorize a rider that will immediately recover the Company's rate of return, the authorized return in the last rate case based on the 10.75 return on equity, depreciation, [avlon] taxes, and O&M expense. And one thing we are explaining to the commission is that the project itself is good for consumers, and the Company, as an investment on a long-term basis. But we cannot go forward or progress forward unless the commission approves all the inclusive requests, including the automatic rider for recovery.

Another activity that's going on in Oklahoma is the Oklahoma review of our fuel adjustment clause. This is done every year. Right now the Oklahoma commission staff just completed its audit of the Company fuel cost adjustment for calendar years 2003 and 2004. On the slide it says the staff filed testimony on March 16th. They actually filed a few days ago on February 16th. But in their testimony, they stated that the audit was not a prudence review, but all those Company's calculations were made correctly. The testimony further stated that staff did not identify any problems with affiliate transactions and that they were very happy that OG&E was a low-cost provider to customers in Oklahoma. Responsive testimony, which will be other parties and OG&E, will be filed March 16th, and then if rebuttal testimony is necessary, that will be filed April 12th. And then the fuel review will go to hearing on May 11th of this year. Back to you, Jim.

Thank you, Howard. In closing, 2005 was a good year for the Company, as we executed on many of our goals. We posted strong financial performance helped by warmer than normal summer weather and a strong commodity price environment. We received our first rate increase in 20 years from the Oklahoma Corporation Commission. And new rates went into effect in January of this year. We also completed the sale of our interest in the NOARK pipeline, allowing us to focus on more strategic assets. Finally, our consolidated debt-to-capital ratio declined to 50% and we upsized our revolving credit facility to $750 million. As we look forward to 2006, and we are starting from a strong financial position, we begin our Arkansas rate case and focus on investment in both our utility and midstream business. At the utility, we will target investment using pre-approval mechanisms and look to profitable reinvestment of proceeds from asset sales at Enogex. We will continue to evaluate the portfolio of assets at Enogex and focus on those assets, areas where we have a strategic or competitive advantage. That concludes our prepared remarks. We'd now like to open the floor and answer any questions you may have.

[OPERATOR INSTRUCTIONS] And your first question is from Jonathan Rojewski

Hi, good morning, everyone. Thanks for taking my call. A couple quick questions. One, were there any other gains or losses that one might consider sort of one-time and not ongoing that were not highlighted in today's release?

No, everything we had is incorporated in the release.

Okay. Great. Then Jim, you gave some pretty good detail on Enogex for the 2006 financial outlook. But you ran through it pretty quickly. I was wondering if you could humor me and kind of run through those again, from slide 23.

Sure. Again, I'll just go over all of it. The guidance is 44 million to $48 million net income or 48 to 53 per share. We look for gross margins in the transportation and storage business to be up approximately $116 million compared to 99 million in 2005, really being driven by reduction in fuel losses in 2006. The gathering business we see up slightly due to higher gas prices on contractual fuel and continuing to improve our portfolio of contracts. In processing, we see down year-over-year, really by narrower processing spreads. We achieved 255 in 2005 and we expect somewhere between $1.95 to $2.22 in 2006. And that's assuming liquids prices of $0.94 to $1.16 per gallon. And then 277 new well connects. In terms of expenses, we see --

Sorry, Jim. You said 96 to $1.16 for NGLs in '06. And that was versus what in '05?

$1.02.

1.02. Okay. And then the frac spread that you guys have in the '06 numbers versus '05?

It's a $1.95 to $2.22. And then we achieved $2.55 in '05.

Then the gross margin on the gathering business, what's embedded in the '06 versus '05?

What's embedded is 277 well connects in '06. And just continue to improve a portfolio of contracts and higher retained contractual fuel gains than prior year. But gathering would be up slightly year-over-year.

Absolutely. Okay. Great. Then what tax rate are you guys -- I mean, you had a lower tax rate for '05 than '04. Was wondering sort of what's in '06?

We're assuming an effective tax rate of 36.3%.

Okay. Great. Thanks a lot.

Yes. Thank you, Jonathan.

Your next question is from Reza Hatefi.

Good morning. Got a question on the frac spread. What kinds of frac spread are you currently seeing at the present moment?

Well, we take a snapshot in time. Last Friday we were at $2.96 on February 17th. Again, that's just a snapshot one day in time.

Then you commented -- just trying to gather on how you go about making your assumptions for the whole year guidance. Do you sort of use experience and just try to have an annual sort of a number? Or how do you come up with the annual number that you bake into the guidance, I guess?

We have a market risk committee which helps us with our risk management. And they look at the NYMEX forward, crude oil forward, they get other services, and then they use those services and their view of the marketplace. And then we probability weight that over the course of the year to come up with an annual price.

And what kind of volumes are you projecting for next year versus '05, I guess?

In terms of gathering?

Exactly.

Yeah, gathering should be up about 3%.

Okay.

I'm sorry, gathering was up 3% this year. It is going to be flat next year. Flat. Yes. It was up 3% this year.

Great. What is the status of the two pipeline projects. The -- I guess the Twin Basin and the Connector pipeline. I guess my understanding was one of them was to come on in early '07 and the second one to come on in early '08.

Those are both development projects, but I'll let Dan Harris, President of Enogex, talk about the status. Dan?

Yes. We're still working on the Twin Basin prospect. It's still what I consider to be early in the game for that one. A lot of work to still be done. But also a lot of opportunities that we see in that area. And just to remind you, that was one of our more strategic moves for diversification of geographic basins. The Continental Connector project is also in the development phase. That's a joint venture between us and El Paso. And El Paso and our groups are working together right now really in the scoping exercise. We've gone out and done a lot of work with our customers, both at El Paso and Enogex. And we're seeing a lot of interest in it. But it's really at the stage of just trying to scope the customers' needs, how much gas they want to bring on, at what point and where they want to go to. And there's also the issue of working out the desirable terms for their customers. So it's still early in the phase, but still has a positive outlook.

What kind of capital do you expect to put in for each of though two projects?

That right now is still up in the air because of the scoping process. We have a really broad range that we haven't disclosed at this point because it's not realistic to put a number on that right now.

Great. Thank you very much.

Your next question is from Paul Debbas.

Hi. I'm also looking for some numbers from 2006. What is total Company CapEx and total Company depreciation and amortization?

Total Company CapEx, we're going to have about 247 at the utility, about 60 at Enogex. So somewhere around 310 to 315 on a consolidated basis when you include software and other things at the Holding Company. And then depreciation in 2006 is going to be approximately 45 million at Enogex and about 140 million at the utility, so about 185 or so.

Okay. You have any financing plans for this year?

Based on our CapEx program, the only thing we would do would be to issue some long-term debt at OG&E. But we're -- the balance of capital structure at 56% equity.

Do you know how much you would issue and when that would be?

It's less than $100 million, Paul.

Okay. And do you have any expectations for interest expense this year and the overall growth in O&M expense?

The overall growth at O&M expense at the utility is up about roughly 3.4% or so, which has a lot to do with the full year of McClain. And at Enogex, it's going to be up about 5 to 6% based on, again, increased labor and payroll costs.

Okay. And I think you mentioned that interest expense at Enogex would be flat for the year. What about for the utility and the Holding Company?

Well, the utility's going to be up about 14 million, $15 million, reflecting, as you remember, the utility has the tax-exempt floating rate debt. And we expect higher interest rates for the year. The fact that we issued debt in 2005 and then we're going to have the full year McClain because, as you know, that was a regulatory asset through July 8th.

All right, thank you.

You're welcome.

Your next question is from Doug Fischer.

My questions have been asked, thank you.

You have a follow-up from Reza Hatefi.

I might have missed this earlier in the call but the wind farm project. Could you refresh us again on total CapEx and, I guess, it's supposed to be a carve-out where it's kind of carve-out rate increase where you get the return on it starting in '07. Am I understanding it correctly?

Yes. I'll address the capital question. It's about $180 million plus transmission expenses, which is still a known based on the Southwest power full study. Then Howard, you want to explain the regulatory mechanism?

Yes. The regulatory recovery mechanism will just be a recovery rider that will be an automatic rider that would be implemented after the project is in service and commercial and producing wind energy. The commission approved a rider similar to that in December of 2004 for our security expenditures. And what it does, it's like a mini rate case. You take your investment times your rate of return taxes, you add in your O&M and depreciation for recovery of the investment. And then you project your kilowatt hours for the next year and come up with a rate per kilowatt hour. And that's just surcharged to the customers just like your fuel adjustment clause or the security rider. So it would be like a mini rate case through a rider.

And this is supposed to come on line in beginning of '07, is that correct?

Yes. And I also want to point out and clarify, our CapEx number at the utility does not include this project. So that would be 180 on top of the 247 if it's approved.

Great. And what was your utility CapEx in '05?

It was $255 million.

So sort of staying flat, I guess.

Yeah. Pretty much.

Great, thank you very much.

Your next question is from Jeff Cobiello.

Hi, it's Zach Shriver. How are you? You may have already covered this. Jeff passed the ball to me, had to hop on another call. But just real quick, can you just go over where we are on frac spreads? I thought I heard 2.96. What kind of levels are embedded in your guidance? And then if you could also just sort of talk to us about some of the basis differentials on the natural gas market and how those basis differentials are impacting you in the realized frac spreads. If I'm thinking about it right, I guess the fact that Katy and Waha traded a big discount for Henry Hub should theoretically be helping you in lowering your costs of goods sold. I just don't know if the natural gas liquid side out in that region are basing trades at a commensurate equal discount to sort of the indices.

Well, let me take the processing spread first. We do have $2.96 is what was last Friday, is what we were achieving. I'd just keep in mind that that is a point in time.

Sure.

We have in our guidance for 2006 $1.94 to $2.22 is the spread.

$1.94 to $2.22.

2.22, yes. And then, of course, we achieved 2.55 last year over the course of the year. And, Dan, you want to talk a little about the bases issue.

I separate those two issues when we talk about the basis spread and the impact that has. It really doesn't impact us from processing business, but more from our cross-haul business on the transportation segment. Certainly, when we see the higher basis spreads across our system, that makes it a favorable cross-haul environment. And you saw in the numbers that we had a positive results from that in 2005. Also expect for positive environment in 2006. Jim, I think, did a good job in just talking about what our assumptions are for the commodity spread relative to process.

So we ought to just be looking at -- is it still Katy and Waha or are there other basins we ought to be looking at and just sort of monitoring the frac spread?

Well, the frac spread is just literally the price of gas that we see on our system. It doesn't have anything to do with -- .

I think from a -- when we look at gas price, we're looking at Panhandle Eastern.

Okay, thank you. And then --

It's sort of a pricing mechanism for us.

We have a basket of indices that we use.

Okay. And then as far as this cross-haul opportunity, which basis spread should I be looking at that sort of depicts the economic value of your transportation?

I don't have the exact points here. It's basically just looking at the price of gas on the west side of our system, which would be anything recorded as western points. And then the gas prices on the east side of our system. Cross-haul across our system is just that localized.

Okay. And then I thought I heard you say less than $100 million earlier, I think it was in response to Paul Debbas' question. Was that for financing needs? What was that for?

Yes, Paul's question was what financing plans did we have. Again, wind does not end these numbers. But based on 247 at the utility, we would issue some long-term debt to keep our capital structure at 56% equity, 44% debt. That would be less than $100 million. At the utility.

And if you did the wind, could you debt finance that or would that sort of bring you to the equity capital market?

Well, the wind under the rider, as we envision it in Oklahoma, it would be 56% equity, 44% debt and we'd finance it accordingly.

And that's how much again, 150 million?

180 million.

Great. Thanks so much for putting up with the questions.

Mr. Hatfield: No problem, Zach. Thanks, bye.

You have a follow-up question from Doug Fischer.

Mr. Fischer: Thanks. Good morning, Jim, and company.

Good morning, Doug.

With regard to -- the frac spread, obviously, is higher than your budget right now. And you talked about how you can lock in some of that for a limited period going forward, but you don't go -- there's not a good way to lock that in going forward very much. Can you talk a little bit about that, again, and reaffirm that that's the case and how far forward can you go to lock in some of that?

Well, we have locked in some of our keep whole exposure, as far out as the third and fourth quarter for a keep whole exposure. In terms of liquids, what we typically do when we hedge is we sell physical forwards. We've done small volumes into the third quarter. But it's a very illiquid market. Hard for us to get large volumes very far out there. So that's sort of how we approach that. And just to point out the fourth quarter in 2005 processes spreads were $1.86. So our guidance reflects, like I said earlier, sort of where we are and views of both natural gas and crude oil and liquids prices. And just what we expect over the course of the year.

Would you say that your assumptions are shaded to the conservative side or sort of just -- ?

We do probability-weighted assumptions and, again, if you took last week's price, it's conservative. You took fourth quarter price it's above that. So, we just put the assumption out there and everybody can look at it for themselves.

Fair enough. Thank you, Jim.

Thank you, Doug.

And you have another follow-up from Reza Hatefi.

Just wanted to clarify something on an earlier question. Talking about the financing for the wind farm. You could in a sense just inject some debt capital or equity from the parent to the utility and wouldn't necessarily have to issue equity to the public markets, correct?

That's a great plan. Thanks for asking that because our plan is not to issue new equity. But it would be to inject equity at the Holding Company. As you know, our financials are very strong. We have no short-term debt right now, 50/50 capital. And with that capital right now flowing in from Enogex, with the asset sales, our ability to do that is very good. And that's what our plans would be.

Great. Thank you very much.

And there are no further questions at this time.

I would like to thank each and every one of you for your interest in the Company. And have a great day.

Thanks.

This concludes today's conference call. You may now disconnect.