OGE Energy Corp (OGE) 2006 Q3 法說會逐字稿

Good morning, my name is Kanisha, and I will be your conference operator today. At this time, I would like to welcome to the OGE Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Hatfield, Senior Vice President and Chief Financial Officer. Sir, you may begin your conference.

Thank you, and good welcome everyone to OGE Energy Corp.'s Third Quarter Conference Call. I'm Jim Hatfield, Senior Vice President and Chief Financial Officer, OGE Energy Corp.

I have with me today Steve Moore, Chairman, President and CEO; Pete Delaney, Executive Vice President and Chief Operating Officer; Howard Motley, Director of Regulatory Affairs and Strategy for OG&E; and Danny Harris, Senior Vice President of Energy Corp and President and CEO of Enogex; and several members of the management team here to address questions as well.

In terms of the call, we'll start with comments from Steve Moore. I'll cover third quarter results. I'll also cover the 2006 and 2007 outlook. Howard is going to cover the regulatory proceedings we have going in both Oklahoma and Arkansas and then, we'll end with Q&A.

Before we begin, I want to remind everybody that we have prepared slides to accompany our webcast so it'd be easier to follow the numbers to get to that point. And also, before we begin, I'd like to direct your attention the Safe Harbor statement regarding forward-looking statements. That's slide two of our presentation.

And then with that, I'd like to turn the call over to Steve Moore. Steve?

Thanks, Jim. I'd like to apologize, in advance. I have a spot of laryngitis but I do appreciate you joining the call and I appreciate your interest in the Company.

Today, we will discuss our solid third quarter results and discuss what we see on our horizon, and as always, we will answer your questions.

In the third quarter, we reported higher earnings in both our utility and pipeline businesses, as OGE Energy earned $1.31 per diluted share. OG&E contributed $1.16 and Enogex continuing operations added $0.14.

At OG&E, good discipline in our operations. Today, we'll estimate our customers' needs under extreme conditions and also to benefit from customer growth in a strong economy. We have had 35 days over 100 degrees this summer and our customers set a number at a very all-time record for their electricity demand. The heavy strain on our system highlighted the need to invest in new capacity and replace aging equipment. At Enogex, we're capturing value from the natural gas processing business and from strong, organic growth on the pipeline system. We're continuing to see robust activity in all areas of the pipeline business, especially, in demand for gas transportation service and in the connection of new-producing wells to our system.

We have completed the first five of a major expansion into Texas on the west side of the Enogex pipeline network and we're continuing to pursue opportunities in new-producing areas. On the regulatory front, we are working on the Arkansas rate case and preparing to file for approval of our new power plant project. Howard Motley is here to provide an update on this and other regulatory cases in just a moment.

You will recall that we have asked for a $13 million rate increase in Arkansas, which will be our first increase there in 23 years. We expect a hearing during the fourth quarter and for any approved rate change to take effect next year. At the same time, we are proceeding with plans to partner with AEP PSO and the Oklahoma Municipal Power Authority to invest about $1.8 billion in a 950-megawatt generating unit at OG&E Sooner power plant location.

Later, during the fourth quarter, we plan to file our proposal. Working under Okalahoma's new law that they will [they will assess to] seek pre-approval for state regulators before we invest in such a major asset. We look forward to working with our partners and regulators to bring this project online in 2011.

Finally, we're almost ready to add more renewable energy to the grid from our new 120-megawatt Centennial Wind Farm project. It's a $200-million project that [want] pre-approval, earlier this year, here in Okalahoma. The Arkansas Public Service Commission is recommending that part of the project be included in our Arkansas rate base as well. Our target is to begin production at Centennial by year-end. This, of course, is in addition to 50 megawatts of wind power we've been providing to our customers since 2003.

It's an exciting time of growth and success for our Company and certainly, we appreciate your continued interest and support. While I am pleased to have reported solid results for the third quarter, we are resetting our earnings guidance for 2006. Please note that this change does not relate to the fundamentals of our business. Instead, [unintelligible] the change is due, in large part, to various timing issues at Enogex.

Once again, I thank you for your interest in OGE Energy and I'll turn the program back to Jim. Jim?

Thank you, Steve. As we go to slide four, we'll see for the third quarter, we reported net income of 121.4 million, or $1.31 per diluted share, as compared to net income of 111 million, or $1.22 per diluted share in the third quarter 2005, a 7.4% increase.

The contribution by business unit on a comparative basis is OG&E, the utility $1.16 versus $1.09, 6.4% increase; Enogex from continuing operations, $0.14 versus $0.12 or a 17% increase; holding company, with a slight gain, versus a $0.04 loss in 2005; continuing operations, $1.32 versus $1.17 are up 12.8%; discontinued ops, which, of course, are the Ozark assets sold in October of 2005 in [unintelligible] gathering assets sold in May of 2006 contributed $0.05 last year, versus a loss of $0.01 this year, $.1.31 versus $1.22.

As we turn to slide five, we see the details for OG&E. Net income of 107.4 million, or $1.16 per share, as compared to 99.4 million, or $1.09 per share in the third quarter of 2005. Gross margin on revenues was up 30.5 million, or 10.7%, to 315.1 million, compared to 284.6 million at third quarter 2005.

On the slide, you see the major factors driving improved gross margin. The rate increase comprised 58% of the gross increase in the third quarter. In terms of weather, just one comment. Cooling-degree days were 8% above last year's quarter, however, they were 46% below last year in the month of September, and therefore, we see no weather effect in the third quarter year over year.

On slide six, you see the expenses partially offsetting the increase in gross margin were higher expenses, and you can see the various increases on the slide there. One thing I would like to point out that the largest variance was net interest expense, which increased 5.9 million over the 2005 quarter, mainly due to a one-time recognition of interest expense associated with the water storage agreement. This was partially offset by a decrease in interest expense, a result of a deposit made with the IRS.

In terms of Enogex, we go to slide seven. We reported net income 12.1 million, or $0.13 per share, compared to 15 million, or $0.17 per share in the third quarter of 2005. As stated earlier, income from continuing operations was 12.7 million, or $0.14 per share, compared to 10.3 million, or $0.12 per share in the third quarter of 2005.

During the second quarter, gross margins increased to 66.8 million, up 6 million from 60.8 million in the third quarter of 2005, or about 9.9%, and again, you see the increase primarily due to the turnaround in marketing business from 2005.

Some detail on gross margin, if we turn to slide eight. During the third quarter, transportation and storage margins were 2.5 million lower than the same period last year. Really, the factors impacting transportation and storage were really timing in nature. The first one is a decrease of gross margin due to lower costs of market adjustment related to storage of natural gas. That's a timing issue, as we wrote down the inventory at $3.52 MMbtu. The other is a decrease due to an increase in the fuel over recovery.

If you remember, we transitioned to zone fuel rates in 2006 where we de-coupled the east and west side of the system. We now have over recoveries on the east side--in the east zone, which we now do not recognize as net income but we would defer those. Partially offset by some better in-balance management on the gas pipeline as well as increase due to commodity and high and low price of revenues on the transportation and storage segment.

If we turn to slide nine, gathering and processing gross margins are approximately 41.7 million, an increase of 3.5% over last year's quarter. Main increase is in keep-whole margins, $7.1 million from a gross margin perspective really relate to two items. One is obviously the favorable commodity spread in the keep-whole environment, as well as we were in an ethane rejection in the third quarter of 2005, so we had increased volumes associated with keep-whole volumes as well. Partially offsetting that was the decrease in fuel recoveries, as I mentioned earlier, again, impacting the gathering business. I will point out that volumes quarter-over-quarter were up 5% as we're seeing increased activity on our system.

And then marketing gross margins were up 7.1 million. You see the factors there but primarily, we had a negative gross margin in 2005 related to marked-to-market on storage and we see a more normal quarter in 2006.

In terms of expenses, on slide ten, we see O&M increase 3.9 million, however, partially offset by net interest expense which fell 3.1 million. Again, we have higher levels of cash investments result of asset sales and good cash flow and it results in expenses essentially flat quarter-over-quarter.

In terms of non-reoccurring items, you see those on slide 11, third quarter 2006, we had a decrease of about $800,000 net income on items we don't consider to be reflective of the ongoing profitability; that is, really, the discontinued operations in a small impairment charge taken in the third quarter, as compared to an increase in 4.7 million last year which related to the discontinued operations.

I want to go to slide 12 now and talk about the 2006 financial outlook. As we had previously reported, we were looking for diluted earnings per share of $2.25 to $2.40. We have revised that guidance to $2.15 to $2.25. Really, the utility remains unchanged at $1.46 to $1.51 per share with the change coming from the nine months of actuals for the Company and then lower expectations at Enogex primarily due to the timing and delay of income recognition at Enogex. First, we have gathering and processing volumes associated with new business on the system which, as we redeploy capital on the growth areas, we're seeing a slower ramp-up in new volumes than we had anticipated. And that's a timing issue as we will see those 2007. We talked about the lower cost to market write-down in operational storage and then we had the under recovery of fuel.

In addition, we see lower commodity spreads reducing projected earnings is in the processing business and as you can see on the--there's no material change to any of the utility assumptions for 2006.

We go to slide 13. Just a little bit about the outlook and really the change in those key assumptions. Again, relating to timing of revenue recognition, we now anticipate gross margin to 2.90 to 2.94 million, as compared to original of 312 million to 327 million.

We had slightly higher operating expenses really related to continued operations of the pipeline. On slide 14's our commodity assumption for 2006. We see commodity spreads of about $4.00 for the year. That assumes a natural gas price of about $6.09 as well as liquids prices of $1.13, down slightly from our prior guidance.

At the holding Company, we now see lower-than-expected loss. Really, result of a decrease in the effective tax rate and lower interest expense, due to lower levels of short-term debt. I will say this, before we move to 2007, as it relates to the 2006 outlook, and Steve mentioned this, the fundamentals remain strong. I think the resetting of the guidance reflects timing of those items that I mentioned earlier.

As we look to 2007 outlook, on slide 15, we see earnings of $2.30 to $2.50 on a diluted share basis. Of that, the utility is $1.67, $1.75. That would be up about 15% from 2006. And Enogex of $0.68 or $0.78, essentially flat year-over-year, the 2.30 to 2.50 being about a 9% increase over prior year. You see some of the key utility assumptions there on the slide. Of course, normal weather. We see about 2% growth KDBH sales or gross margin. Of course, Howard is going to talk about this. We have an Arkansas rate increase pending. We have the wind rider up 22.6 million in Oklahoma. We see a slightly lower operating expense as we anticipate a pension settlement charge in the fourth quarter of 2006 and we see slightly higher interests costs. And CapEx at the utility expected to be about 325 million in 2007, not including the Red Rock generating facility.

On slide 16, we see the guidance as it relates to Enogex--$0.68 or $0.78 or 63 million to 72 million per share. Again, we talked about timing. We do see higher storage demand fees as a marketplace where storage is strong. We do increased volumes in gathering and processing. Gathered volumes anticipated to be up 6% 2007, however, offset by the lower commodity spreads in the processing business and slightly higher operating expenses.

We anticipate gross margin of approximately 312 million to 328 million, compared 290 million to 294 million in 2006 which would be a 9% increase. Operating expense is up about 11 million and we do see slightly higher net interest expense in 2007 due to lower interest income as Enogex continues to pay a strong dividend to the holding company and redeploy capital. We see CapEx at Enogex in 2007 approximately $80 million to $90 million. We continue to see opportunities to invest in our core growth areas around the existing Enogex system.

On slide 17, some of the commodity price assumptions. We would anticipate realized commodity spreads at 2.69 to 3.21. That encompasses a natural gas price at 6.33 to 6.62 and a liquids price at $0.93 to $1.02 and if you look at that, compared to 2006, you see slightly higher gas prices and slower lower NGL prices which obviously, has an impact on the processing margins.

Holding company guidance, we expect a loss of $0.03 to $0.05 per share or about $3.3 million to $4 million in 2007. And now I'd like to turn the call over to Howard Motley for discussion of regulatory. Howard?

Yeah, thanks, Jim. We have several ongoing cases in Oklahoma and the Arkansas jurisdiction. On the first slide, we're going to talk about the Arkansas rate case, the status of that, the Centennial Wind Project in Oklahoma and Arkansas and then our Red Rock coal plant, our filing for pre-approval in Oklahoma and then our security application that we're going to making this month in November.

As far as the Arkansas rate case, on July this year, July 28, the Company filed its application for a $13.5 million rate increase. We requested 11.75 return on equity and a $306 million rate base. The test year was calendar year 2005 and then we went out a period to December 31, 2006 for pro forma adjustments to rate base and expenses. The staff filed the recommendations on October 19 and OG&E's rebuttal testimony is due November 9, next week. The hearing is scheduled to begin on December 19, 2006 and we expect the Commission Order no later than the second quarter of 2007.

The next slide is kind of a summary of the rate case recommendations. As you can see, the--where we, OG&E, requested a $306 million rate base, the staff's recommended 295 million and the Attorney General's consultant recommended 303 million. There wasn't a lot of difference in the investment or working capital if that were included in rate base. One of the major differences was return on equity where we asked for 11.75, the staff recommended 10% and the Attorney General recommended 9.5%. And that's somewhere around a $3 million difference between the staff and the OG&E's rate case for return on equity.

As far as the capital structure, the Company had 56% in their common equity piece of the capital structure. Staff recommended a hypothetical 49% and the Attorney General 51% and that's about a 1.1 million, 1.2 million differential between staff and the OG&E case. As far as the bottom-line recommendations on rate increase, the Company asked for 13.5. The staff recommended 5.7 and the Attorney General, $6.4 million.

The next slide is our Centennial project and in February of last year, 2006, OG&E filed testimony requesting the Oklahoma Commission to approve the construction and ownership of 120-megawatt wind energy project to Centennial. Our estimated capital cost at that time was about 200 million, and as part of our proposal, OG&E requested a rider that will immediately recover the Company's authorized rate of return, depreciation, ad valorem taxes and O&M expense.

On April 28 of last year, a couple months after the application, the Oklahoma Commission issued an Order approving the project for us to build the project and also a rider that would recover the cost I just discussed and return and if the Company completes the project by December 31, we'll have a tariff already approved that would initially recover 22.6 million starting in January of 2007.

This year--then later in June, June 8, OG&E filed application for approval of the Centennial Wind Project in the Arkansas jurisdiction and this was a separate application, trying to get approval of the Centennial, before we moved into the rate case. That didn't get processed on a timely basis but we did give enough information to the staff that when they filed their testimony in the OG&E rate case, a few weeks ago, on October 19, they did recommend and propose the Commission approve 11% of their portion of the Centennial project and included that in our rate case filings. So in the 5.4 million that they recommended 2 million and that is for the Centennial piece of the wind project.

The next slide is our Red Rock coal plant. I think Steve mentioned earlier about how we're looking at going forward with that. We need pre-approval in our Oklahoma jurisdiction first but it's a joint effort with PSO to build this 950-megawatt coal plant, and PSO and OG&E we'll be taking separate regulatory paths in the Oklahoma jurisdiction. OG&E will file a pre-approval application under Commission rules that are based on a new Oklahoma law that allows us to go in for pre-approval and seek a possible recovery mechanisms and a fixed dollar amount for building the coal plant. We, right now, are targeting a December filing date with the Oklahoma Commission to ask for that pre-approval and the Commission will act on that within 240 days or about 8 months of the filing date.

Finally, the security application or our security rider in Oklahoma. Several years ago, we were authorized a security rider for different types of investment that we make for infrastructure security and the Company is currently receiving 2.4 million in revenues through an Oklahoma Commission-authorized security rider. And these revenues provide a return on security expenditures for pre-approved projects. We'll also be filing an application in early November, the next week or so, requesting the Commission, the Oklahoma Commission to approve the Company's updated security plan. By the Commission rules, on a regular basis, we update the Commission on the security of our infrastructure and with that, we can file a new plan and ask for increased investments and increased revenues.

The updated plan will include an additional 20.2 million of security expenditures. Some of these are for cost overruns, about $7 million for projects already approved and about 12 million or 13 million for new security projects that we're proposing that we need to secure our facilities. The Oklahoma revenues, with the new 20 million, will about $2.8 million, so that would be additional revenues above the currently-authorized 2.4 million, and we expect a decision from the Oklahoma Commission in the late second quarter of 2007 on the 20 million security projects.

With that, back to Jim.

Thank you, Howard. In closing, as we look back on the third quarter, we are pleased with our solid financial performance for the quarter. As we look ahead, we see guidance in 2007 of $2.30 to $2.50 per share, or about a 9% increase over 2006. We continue to execute on our strategy with asset diversity, an integral part of that strategy. Our focus at the utility will be the completion of the Centennial Wind Project on time and on budget, so the rider will become effective, completing the Arkansas rate case, and obtaining approval for the Red Rock coal plant. And at Enogex, we continue to pursue growth opportunities. And most of all, we look for the best way to redeploy capitol. We have lots of opportunity for the Company to provide reliable products and services for customers and ultimately, add value from a shareowner perspective. However, we must continue to execute.

And that concludes our prepared remarks. Now, we'd like to answer any questions you may have.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster.

Your first question from Scott Engstrom of Satellite Management.

Good morning.

Hey, Scott, how are you?

Good, hey Jim. Just a real kind of fine-point question. the guidance for the full year at the utility, using a round number of 135 million and sort of year-to-date of 150 million implies kind of a 15 million loss there in the fourth quarter which I think you had a slight positive net income in 4Q '05. is there something going on there? Are you guys kind of under promising? Is there some major O&M you're going to do in the fourth quarter to kind of match up with the good gross margin year you've had or--

Well, Scott, that's a great question, man. The answer to that is, if you remember, in the third quarter, we put into the guidance the possibility of a $20 million settlement charge related to the pension plan, which is an accounting entry related to the pension plan and the amount of lump sums paid out of that plan. Again, it's a non-cash charge and all that does is accelerate forward the future costs associated with the pension plan that'd been deferred the OCI and the liability accounts.

That's the major item that would be a reduction to fourth quarter net income as it relates to the utility. You know, we see that charge now being somewhere 18 million and 21 million in the aggregate with most of that being at the util.

Okay, and that'll--you're saying that's going to hit in the fourth quarter then?

Yes.

Yeah, okay.

And that is, again, and that's a one-time charge for the utility.

And built into that, full-year guidance then, obviously, as well?

Yes. Absolutely.

Okay, great. Thanks.

Your next question from the Jeff Coviello of Duquesne Capital.

Hi, who are you?

Good, how are you?

Good. I just wanted to ask you if you could walk us through what the current rate base is at the utility, I guess, in the Oklahoma jurisdiction?

The Oklahoma jurisdiction rate base?

Yeah.

At the utility?

Yeah.

The components of it?

Or the total rate is 1.--

[Unintelligible]

--.7 million in the 2004 rate case and we would have been adding over depreciation about 100 million a year plus wind on top of that would be another 200. So we would end up with total of about $2 million, considering some of that would go into the Arkansas jurisdiction as well.

Okay, so about 2 billion?

Yeah, roughly.

Great and then just to clarify on the point with the Enogex origin or the revenue recognition being moved from, it sounds like it '06 to '07. Is that right? I was just wondering because I know you lowered '06 based on that. I was wondering the amount was that moved into '07.

I didn't hear all the question but if your question was what amount reduced '06 and doesn't move into '07, the answer is yes, it does. We would see the lower cost of market write-down is about 6.4 million--and these are pre-tax numbers--

Okay.

That really is a markdown of inventory just based on the [nine max] and that we would realize that pick-up when we withdraw physically. The other is the over/under recovered fuel issue is about 3.6 million. Again, that's pre-tax and then from a gathering and process volumes, we see about 8 million pre-tax of volumes that where the ramp-up rates are a little bit slower than we thought they'd be, initially, in '06. We have that incorporated into our '07 guidance about 6% growth in gathered volumes in 2007.

Great. Great, thank you very much.

Yep, thank you.

Your next question is from Doug Fischer of AG Edwards.

Good morning, Jim.

Hey, Doug, how are you?

Fine. Weather for the year, versus normal, can you give us some indication as to how much over the first nine months, versus normal weather has been in--has impacted earnings and then are you saying that you're expecting the issues that you mentioned earlier to fully reverse in '07 and therefore, the bump-up is in the guidance? Is that what you're saying?

Let me take the last question first. Did we--is the question, '07 guidance has been, even though we hadn't issued it before, would reflect the shift from '06 to '07?

The items that you just discussed. You're assuming--

Yes.

--the full reversal, shall we say, and positive impact in '07.

Yeah, if you look at, again, the things related to storage, you would, assuming of course that you would withdraw, you would get that impact in 2007. So the answer is generally yes, we would see that sort of reversing itself and being incorporated in the '07 guidance.

And then the weather issue.

You know the weather in 2006 year-to-date is around $28 million or so, with not much of an impact, as we've said, in the third quarter year-over-year, although that 28 million's related to normal weather and we were 16% warmer than normal in third quarter.

So is that a pre-tax or post-tax [number]?

Pre-tax.

Okay and then obviously, there's been some significant [hesitation] in the cost of coal plants due a variety of issues. How do you deal with that issue as you pre-file and is the number that's going to be [unintelligible] likely to be larger than what you had originally announced for Red Rock?

I think it'll be very similar to how we did the Centennial Wind Farm. We put an escalation factor or kind of a soft cap on it. In other words, we have an estimate and then we put a percentage for escalation above that and we're developing those numbers now with consultants to determine what we believe the price would be but when we go into the Commission, we'll be talking about, not only the current costs today but also escalations of costs and maybe some type of a cap that gives us a little head room in building the facility for approval of that cost.

So Howard, just remind me, you're at risk for costs above whatever the Commission approves or--

Yeah, you're at risk for it but even like in the Centennial case, if we went above the case that they set, we have the right in the settlement agreement to go back in and ask for that improve and explain why those escalated costs were and why they were prudent and we would be asking for the same type of terms in the Red Rock application.

Okay, thank you. That concludes my questions.

Your next question comes from Reza Hatefi of Polygon.

Thank you. One question with the wind project, with the $22 million rate increase you got for that, and on top of that, you get the wind tax credit. Is that all sort of lumped together when the Commission decided on the return on it, on the ROE?

Yes, the wind tax credit was part of the case with the Commission Centennial. It offset part of our revenue requirement.

Okay and could you give us an update on the whole MLP issue?

Well, you know, the update from last time is we continued to evaluate the options to maximize shareowner value. We talked about, in the context of Enogex, MLP would be an option under consideration. Again, the benefits to shareowners impacted by many things holding Enogex and MLP, including marketing multiples of MLPs, cash flow earnings impact on OG&E stock and we continue to look at all these options and others in evaluating strategy.

It's an ongoing review. Even when we're in a position, we'll recommend to the Board for their consideration, any change in the current. You know, and as we've said before, our focus is on increasing shareowner value, to continue this process. It's not discreet. And in the current environment, we believe in the fundamentals of the business and remain focused on growing that business while we're continuing to look at other options that may be out there.

And just finally, one question on the follow-up on the rollover from some of the Enogex income from '06 to '07, it added to, I think, to around 18 or some million. Is that--I'm just trying to look out farther. Is that sort of like a one-time benefit to '07 which--but then going into like 2008 or 2009, we'd have to kind of take that out of normal--

Well, Reza, you asked a question that is predicated on predicting commodity prices and I think, if you look back historically, you would see, on a quarter-to-quarter basis, we would have an up-and-down impact on that are reflective of changes in the [nine max]. So while it certainly rolls forward into 2007, from 2006, we have--to the extent we inject gas into storage, and are subject to commodity price fluctuations, that may, again, reverse next year in the third quarter and there's no impact on 2007.

I think the important thing to focus on, as well, is the impact to new business. That would be ongoing. That's where we have contractual benefits to acreage dedications and it's just a matter of the ramp time of producers and drilling the wells and go back to 6% projected increase in gathered volumes as reflective of the strong fundamentals in the business going forward.

Thank you very much.

Yeah.

Your next question is from David Frank of [unintelligible] Capital.

Yeah, hi, good morning.

Good morning, David.

Jim, could you give us a little--some of your thoughts on El Paso's decision to withdraw from the pipeline for going across the [unintelligible]? What your thoughts are maybe for partnering with somebody else is likely but that you'll somehow be involved with another pipe or--

Yeah, David, I'm going to--Dan Harris is here who's COO at Enogex and I'm going to let him sort of respond to the El Paso announcement as well as the environment.

David, I might just start with just the overall environment for pipeline capacity. I don't think there's any doubt that given some of the capacity constraints to take gas from the mid-continent market back east but there will a project built at some point.

There are a lot of different parties out there moving around today, trying to determine what the best market groups are for the customers that are involved and El Paso, of course, went out and had a particular game plan and as you know, we were a part of that from at least a capacity standpoint. And at the end of the day, they just weren't able to garner enough dedication to support the level of project that they wanted from all the mid-continent producers.

And so the--if you look forward though, there are other parties still moving forward on the same type of concept but with maybe a little bit different twist to it in the termination points for market outlet and we believe that we're in a very strong position to play a part of one or more projects.

And as far--okay, so you do see something developing for yourselves at some point probably?

I would say there's a high probability of that.

Do you think it would be on the same type of magnitude or is it too early to--

You know, what we're going to do there, David, is that we provide a service for our customers in aggregating volumes and we do have a very flexible pipeline network that makes it strong strategically, from that perspective. So we're going to be following our customers' leads and trying to support them in the way it helps gets them the best net [unintelligible].

Okay and I guess, just going back to Reza's question on the MLP, what--I mean, I understand enhancing shareholder value and of course, we're all for that but what are some of the milestones or objectives or what is it that you're looking at, in making a decision that you feel you need to achieve first? Or is it about developing a strategy of an MLP being an acquisition vehicle or what do you think still needs to happen here?

I think what our goals are [this Pete Delaney, David] on looking at Enogex, is we have a lot of growth opportunities that we're seeing in the mid-continent which as you know is our major area of operations at this point. We have expanded to the western part of that system into Texas and see opportunities there with our expansion and at the same time, we have--are embarking on a quite substantial investment program with utility, with the potential coal plant which we do have to get a regulatory order that is acceptable to us, from a financial standpoint, before we proceed in investing any major dollars in that program. And so that still remains to be seen obviously. We remain optimistic but we're just starting that process. And so we have a lot of growth opportunities obviously in both businesses and we want to evaluate and make sure that we're in the best situation, in terms of cost to capital and what have you and valuation of the market so finance those growth opportunities. So that's a major focus of ours, again, because of the different valuations that are out there. And so that's some of the considerations and a lot of objectives of our study at this point.

So if you feel if there's continued regulated growth opportunities--I don't want to put words in your mouth. I'm getting the sense that maybe you'd prefer to allocate your capital and resources down that road, as long as you continue to have opportunities there, versus going the MLP route or--

No, I mean the--we all understand the MLP's corporate holding--not corporate holding. Holding it in that format has some advantages, it seems from a cost to capital and there is substantial growth we see at Enogex and there may be a better way to finance that growth than through [comp and] stock.

I see. Okay, great. Well, thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] We have a follow-up question from Reza Hatefi of Polygon.

Thank you. Just another question on the MLP scenario is I guess being that Enogex has some [unintelligible] exposure, how would you--I mean, even if you were going to potentially entertain the idea of MLPing it, would you have to sort of minimize the commodity exposure in order to kind of make it palatable for MLP investors who are basically depending on a specific yield, I guess, [that] the distributions on MLP would be more secure?

At our current business plan and what we have been focused on is continuing to look at ways, particularly in the processing side, through our mixture of contract portfolio to move volatility and lock in processing spreads over the long term and that's regardless of whether Enogex is a corporate entity or an MLP. We have, over the years, I think made substantial progress and particularly when we instituted in our contracts for keep-whole [treating] fees, to remove at least a large part or a significant portion of the downside volatility.

On the MLP standpoint, at this--when you look at what's out there, across the marketplace, you have varying MLPs with varying degrees of volatility in their cash flow stream as--you know some of them have degrees of reliance on commodity spreads as well. It's our take, in this mark environment, is that the market does not seem to be--that we would not have to make any substantial changes at this point. However, I'll just say a part of our business strategy is to look at how to lock in those spreads so that we can achieve the sustainable and repeatable results and capture that margin year after year. So regardless of what we do, moving forward, we're going to continue to focus on removing that volatility from the business.

Thank you very much.

Your next question is from Peter Hark of Talon Capital.

Yes, good morning, everybody. Hi.

Hi, Peter.

Hey, Jim and Steve. Just again, on the Enogex, I want to make sure I understand this right. It seems like you've taken like $18 million worth of charges here in the third quarter and that would have hurt your earnings around $0.10 or $0.15 which kind of explains the decline in '06 guidance but then--is it really right to think that that's going to be recreated, let's say, or carried over into '07? Isn't it really just the over recovery fuel deferral? You know, isn't that the timing difference that we're picking up on the transportation side?

Well, Peter, on that point, I guess, on the over recovered fuel, we're just deferring now on a comparative basis to what used to show up as margin until such point as we recover that. From a book perspective, that's intended to sort of net zero over time.

So we see about a recovery of 4.3 million, on a comparative basis, in '07 on fuel. I think, to the extent, if you think about the lower cost of market and my point of if we go physical, to the extent you don't withdraw that gas, yeah, that may not show up in '07. We think the new business will--is incorporated in the guidance and the fact that we see 6% gathering increases, as well as a pick-up in process about 9%. But the other big factor here is all the benefits that we've talked about have been impacted by lower commodities price which has a negative impact on processing.

Right. Right. Actually, to my second question, is the 6% volume growth--I was hoping you could kind of add some flavor on how you're going to grow that business. I mean where's the volume growth exactly coming from?

[Peter, this is Dan Harris] Pete Delaney was describing earlier the various expansion projects that we've put in place and we have dedicated acreages in most of those areas. So it's not a matter of if the drilling or the wells will come to us. They will. It's a matter of timing.

As you are probably aware, in the producing community, today, there's a real shortage of availability of rigs at times and what we've found is that some of the drilling programs are just being delayed a little bit, just given the timing and availability of doing those things.

I see, okay. Do you have projected EBITDA for Enogex for '07?

We have not put EBITDA as part of our guidance. No, Peter.

Okay, what about an ongoing depreciation run rate there? Do you have that handy?

Depreciation at Enogex runs--it's been running at roughly $40 million a year. We'll see a slight pick-up in that--

Right.

--as we continue to add CapEx over that.

Okay, well, that'd be like 45 or 50 or is it just mod--like 10% increase or something?

It's about 45.

Okay, great. Thanks.

Yeah, in that range.

Then on the assumptions for '07 on the utilities side, on the wind especially, you are going to get this rider, I guess, in Oklahoma. It's going to add, I guess, $20 million to $25 million but what are the offsetting expenses from--if we're going to look at wind as a business, let's say?

Well, what we do have--and let me say that rider will not go into effect until we have 90% of the [unintelligible] up and operating into 2007. From an expense perspective, you have incorporated in that recovery, you have about $2.5 million of O&M and you have about 2 million of ad valorem tax associated with that. So we're in the vicinity of about 3.5 min. or 4 min. on O&M which would be, again, fully recovered in the context of the rider.

Right. Right, got you. Well, that's perfect. Thanks, Jim, appreciate that.

There are no further questions at this time.

I would like to thank you for your interest in the Company for joining us in this call this morning. Have a great day.

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