OGE Energy Corp (OGE) 2006 Q4 法說會逐字稿

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE quarterly earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. Hatfield, you may begin your conference.

Thank you. Good morning, everyone. Welcome to OGE Energy Corp.'s fourth-quarter 2006 conference call. I am Jim Hatfield, Senior Vice President and Chief Financial Officer of OGE Energy Corp. And I have with me today Steve Moore, Chairman and CEO; Pete Delaney, President and Chief Operating Officer; Dan Harris, Senior Vice President, OGE Energy Corp. and President of Enogex; Howard Motley, Vice President of Regulatory Affairs, OG&E; and several other members of the management team to address questions.

In terms of the call today, we will hear first comments from Steve Moore. I will review 2006 and fourth-quarter results, touch on the 2007 outlook. Howard will discuss the regulatory proceedings. I will discuss our focus for 2007. And finally, we will answer your questions.

Before we begin, I want to remind everyone that we have prepared slides to accompany our webcast so it will be easier to follow the numbers when we get to that point, and you can find those at www.oge.com.

Before I turn it over to Steve, 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.

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

Thank you, Jim, and thanks to each and every one of you for participating in our call this morning. Today, we will talk about our 2006 results, our record 2006 results, and our plans for 2007 and beyond. And as always, we will answer your questions.

In 2006, we had record earnings, $2.45 per diluted share from continuing operations. Jim has all the details for full year and the fourth quarter, but I can tell you we are hitting on all cylinders. Our careful strategy of balanced growth, asset diversity and skill development is serving our customers and our shareowners well.

OG&E contributed $1.62 per share to the bottom line, and Enogex contributed $0.84 a share. These are solid results, and every one of our 3000 employees is to be congratulated for the part they have played in making this possible.

A key component of our vision is to be recognized for operational excellence and strong financial performance. That recognition is here -- in 2006, the OG&E stock price reached levels that we had never seen before. We have increased the dividend and the stock remains near historic highs. But as always, much work remains to be done. We are looking ahead to our $3.3 billion plan to expand capacity, increase reliability and enhance the environmental performance of our utility business while keeping our rates below the national average.

At the [bottom-line] company, we are sharply focused on opportunities for disciplined growth, and there are many, ranging from organic growth close to home to geographic expansion in neighboring regions, with new partnerships and infrastructure projects to help link it altogether. And as always, we are advancing an emphasis across our businesses focused on safety, integrity and continuous improvement.

As I have said many times before, our path to growth and success is clear, but that doesn't mean it will be easy. We have challenges to overcome as we seek to preserve a delicate balance between quality, service and reasonable costs to our customers. Big investments are needed throughout our electric system. Getting them approved, [mailed] and paid for will require skill and determination. At the same time, we have decisions to make and strategies to execute as we strike the appropriate balance of risk and reward for our shareowners. Again, not easy. But this month, as we celebrate our 105th anniversary, we are reminded that our track record is strong and our strategy is sound and successful.

I want to thank you again for your interest and confidence in OGE Energy and turn the call back over to Jim.

Thank you, Steve. For 2006, we reported net income of $262.1 million or $2.84 per diluted share as compared to net income of $211 million or $2.32 per diluted share in 2005. On a continuing operations basis, we earned $2.45, a 38% increase over the $1.77 result posted in 2005. As a result of asset sales at Enogex in 2005 and 2006, I will focus on income from continuing operations throughout this presentation.

The contribution by business unit on a comparative basis is as follows -- OG&E, $1.62 versus $1.43, a 13% increase; Enogex, $0.84 versus $0.44, a 91% increase; the holding company, $0.01 loss versus a $0.10 loss in 2005, a 90% increase; consolidated, $2.45 versus $1.77, up 38%.

Looking first at OG&E, net income was $149.3 million or $1.62 per share as compared to net income of $129.7 million or $1.43 per share in 2005, a 13% increase in earnings per share. Some of the primary drivers are as follows -- gross margin on revenues increased 9.5% to $795.7 million from $726.5 million in 2005. I will discuss the components of the increase in gross margin in a moment.

Operation of maintenance expense increased $7.3 million or 2.4%. Higher employee costs, parent company allocations, bad debt expense and a legal settlement were partially offset by a decrease in outside services and higher amounts of capitalized labor. The Company also realized [AFEDC] equity in 2006 as compared to none in 2005, primarily the result of the Centennial windfarm construction.

Other income increased by $6.8 million, primarily due to tax benefit associated with the AFEDC equity and the 2005 reclassification of a prior year's gain due to a regulatory liability. Other expense increased by $7.2 million, primarily the result of a retirement of a generating asset in 2006.

Interest expense increased $12.9 million or 27.3%, primarily due to a one-time recognition of interest expense associated with a water storage agreement in the third quarter; higher interest expense associated with the McClain plant acquisition, which was booked as a regulatory asset for the first half of 2005; higher short-term interest due to increased borrowing. These higher costs were partially offset by an increase in AFEDC debt and lower interest expense related to a tax matter.

The income tax rate increased from 28.8% to 36.2% in 2006, the primary reason being the ESOP dividend deduction moved to the holding company in 2006, previously recorded at OG&E in prior years.

Looking at gross margin, the largest factor related to the increase in gross margin was a price variance of $47.6 million, primarily due to the $42.3 million rate increase granted by the Oklahoma Corporation Commission in December 2005. New rates went into effect January of '06. Other factors contributing to the gross margin variance were customer growth, $10.9 million; increased peak demand by industrial customers, $6.7 million; warmer weather as compared to 2005; increased gross margins by $6.2 million; cooling degree days were 15% higher in 2006 as compared to 2005; and other miscellaneous items decreased margin by $2.2 million.

At Enogex, income from continuing operations was $77.5 million or $0.84 per share as compared to income from continuing operations of $40 million or $0.44 per share in 2005, a 91% increase in earnings per share. Some of the primary drivers are as follows -- gross margin on revenues increased 27% to $307.4 million from $242 million in 2005, and I will provide details of the gross margin here in a moment. Operation and maintenance expense increased $13.4 million or nearly 14%, driven primarily by higher employee costs and higher materials and supplies. Interest income increased $8.2 million from 2005, primarily due to income earned on cash investments as a result of asset sales at Enogex, where we are waiting to deploy capital.

Other income increased $6.9 million, primarily as a result of a litigation settlement and a gain on certain pipeline assets. And the income tax rate increased from 33.9% in 2005 to 38.2% in 2006, primarily the benefit of deferred taxes in 2005.

Now looking at gross margin, gross margin at Enogex increased from $242 million in 2005 to $307.4 million in 2006, with each business contributing to higher gross margins. Margins in the gathering and processing business increased by $27.4 million, or just over 19%, from $140.2 million in 2005 to $167.6 million in 2006. The primary driver includes higher keep-whole margins of $33.5 million, realized commodity spreads of $3.99 in 2006 versus $2.55 in 2005, and also higher volumes of gas processed, higher contractual fuel gains as a result of a reduction in the Company's overrecovered position. Increases were partially offset by a $13.8 million recognition of imbalanced expense previously recorded in transportation and storage now recorded in gathering. [Mass key] in gathering, or the fact that volumes were up 6.5% in 2006 over 2005, are a result of our continuing to build new business through stepouts.

In the transportation and storage business, margins increased from $99.1 million in 2005 to $125.6 million in 2006, an increase of $26.5 million or 26.7%. Better management of gas pipeline imbalances and imbalance expense previously recognized in the gathering business increased margins by 11.5. Higher high- and low-pressure revenues, primarily due to higher volumes and rates, increased margin by about $6.2 million.

We had the accounting estimate, which reduced inventory in 2005 we did not have in 2006 -- that was $5.7 million. We had higher recoveries of fuel and we had a storage hedging gain increase margin by about $3.5 million in 2006.

Marketing contributed about $14.2 million of gross margin in 2006 as compared to approximately $2.7 million in 2005, an increase of approximately $11.5 million, primarily due to gains in storage activity, which increased margin $13.2 million. We had the park and loan accounting procedure correction in 2005, which reduced margins $7.7 million in that year. We also had favorable market conditions on transportation contracts, which increased by about $7.6 million. Offsetting these were a lower cost of market adjustment in storage, which reduced 2006 by about $9.9 million, and just over lower overall business activity on physical trading.

For 2006, Enogex's net income, including discontinued ops, was approximately $113.5 million. During 2006, Enogex had an increase in net income of approximately $41.2 million relating to various items that the Company does not consider to be reflective of the ongoing profitability of Enogex's business. And you can see these items here on the screen.

These increases in net income on the screen were partially offset by a small impairment charge during 2006. For 2005, we had an increase in net income of approximately $45.3 million related to various items we do not consider reflective of the ongoing profitability of the businesses, and you see those on the screen.

I'd also like to point out not in this number, we do have timing associated with hedging gains as well. In 2006, we had $6.7 million of net income of hedge gains compared to $1.6 million of hedge gain in 2005, and these would be hedge gains where we will realize cash in a future period.

So that is 2006. I would like to just briefly touch upon the quarter, in which we had net income of $22.1 million or $0.24 per share as compared to net income of $56.1 million or $0.62 per diluted share in 2005. From a continued operations basis, we earned $0.24 per share compared to $0.19 per share in 2005, a 26% increase in the quarter.

The contribution by the business unit on a comparative basis is as follows -- OG&E, a loss of $0.01 versus a $0.03 pop in 2005; Enogex, $0.25 versus $0.18 in 2005, a 39% increase; holding company with a loss of $0.02 in 2005, flat in 2006, $0.24 versus $0.19, a 26% improvement; discontinued operations of $0.43 in 2005, none in 2006. On a consolidated basis, $0.24 in 2006 versus $0.62 in 2005.

At OG&E, the net loss was $1 million or $0.01 per share as compared to net income of $2.3 million or $0.03 per share in 2005. Some of the primary drivers are as follows -- gross margin on revenues decreased 6.2% to $129.2 million from $137.7 million in 2005, and I have a slide detailing gross margin in a moment.

Operation and maintenance expense increased $3.6 million or 4.6% -- higher employee costs and material supplies, partially offset by a decrease in professional services. The Company also realized $1.6 million in AFEDC equity in 2006, again the result of the Centennial windfarm construction.

Other income increased by $7.5 million, primarily a result of the reclassification of an asset sale in 2004 to regulatory liability in 2005, and a gross-up on AFEDC equity. And interest expense was up about $1.2 million, 9.4%, primarily due to higher levels of long-term debt and higher commercial paper rates.

Looking at gross margin, gross margin was approximately $129.2 million during the three months ended December 31, 2006, compared to approximately $137.7 million during the same period in 2005, a decrease of approximately $8.5 million or 6.2%. The decrease was primarily the result of a December adjustment to credit of approximately $26.7 million of additional fuel-related revenues that was not intended by the SEC rate order from December 2005, partially offset by higher revenues from sales mix.

Other margin -- we had industrial customers up $3.2 million, really due to higher peak demand; increased customer growth, about $2.1 million; and we had decreased usage, the result of warmer than normal weather -- heating degree days were 10% below last year, which lowered margin about $3 million.

At Enogex, income from continuing operations was $23.1 million or $0.25 per share as compared to net income from continuing operations of $16.7 million or $0.18 per share in 2005, a 39% increase in EPS. Some of the primary drivers are as follows -- gross margin was the largest variance, as margin increase from $71.7 million in 2005 to $85.8 million in 2006, an increase of nearly 20%. I will discuss gross margin on the next slide.

Operation and maintenance expense increased about $800,000; again, higher employee costs and materials and supplies was the driver. Interest income was up about $800,000 from 2005, again due to higher levels of earned on cash investment. Other income increased by $1.2 million, primarily from the gain on the sale of certain pipeline assets, and we had an income tax rate increase from 23.7% to 37.9%, the benefit of deferred tax in 2005.

Looking at gross margin, at Enogex, increased from $71.7 million in 2005 to $85.8 million in 2006. Gathering and processing increased $9.1 million, from $36.5 million in 2005 to $45.6 in 2006, primarily due to higher commodity spreads in processing. We realized keep-whole spreads of $3.78 in 2006 as compared to $1.86 in 2005.

Gathering margins were down $1.8 million, primarily due to the imbalance of costs transferred from the transportation business. We also had, again, 6.5% increase in gathered volumes quarter over quarter. Transportation and storage margins increased $9 million, from $23.6 million in 2005 to $32.6 million in 2006. Transportation was up $7.2 million due to increased demand fees, high- and low-pressure fees, and decrease in field reserve. And storage margin was up $1.8 million due to new storage contracts. Marketing margin decreased $4 million in the quarter, due primarily to decreased gains in physical trading.

Just for the quarter, analysis of the Enogex nonrecurring items, you see them on the screen -- $600,000 in fourth quarter 2006 versus $38.8 million in 2005, from the gain on assets and discontinued operations in the prior period.

For 2007, we are reiterating the Company's previously stated earnings guidance of $213 million to $231 million of income from continuing operations, or $2.30 to $2.50 per diluted share, assuming $92.5 million average diluted shares outstanding; cash flow of operations between $336 million and $354 million; and an effective tax rate of 32.6 million.

The Company is currently projecting earnings toward the lower half of the guidance due to the refinements of our prior estimates based on 2006 audited financial results and numerous other factors. At the utility, these factors include reduced tariffs from fuel-related costs, slight delay in implementing the Centennial windfarm rider, and increased depreciation expense offset in part by higher anticipated margin growth.

At Enogex, the key factor was the recognition of mark-to-market gains in the marketing business for the fourth quarter of 2006 that were previously anticipated for the first quarter of 2007.

In terms of 2007 outlook and specific assumptions, OG&E, we are looking at gross margin of approximately $819 million compared to $796 million. Primary factors are normal weather patterns, gross margin on weather-adjusted retail electric sales, increases of approximately 2%, the Arkansas rate increase of approximately $5 million beginning in the first half of 2007, and wind power rider of approximately $21 million in Oklahoma.

At expenses, operating expense increase of approximately $28 million due to higher employee costs and depreciation expense. Interest costs increase approximately $7 million, primarily due to higher levels of long- and short-term debt. $11 million in tax credits associated with the Centennial windfarm, and capital expenditures from investment in OG&E's generation, transmission and distribution system are projected to be $427 million in 2007, which includes $94 million anticipated for the Red Rock plant.

2007 Enogex guidance includes anticipated gross margins of approximately $312 million to $328 million as compared to $307 million realized in 2006; transportation and storage margin contribution of approximately $136 million compared to $125 million in 2006. As compared to 2006, margins are projected to be up around $11 million, primarily due to the storage business as a result of new contracts and higher fees.

Gathering and processing gross margin contribution of approximately $168 million to $183 million as compared to $168 million in 2006. Gross margin in Enogex's gathering and processing business and 2007 is based primarily on lower commodity spreads, offset by higher contractual gains and an increase in volumes of about 13% in Enogex's gathering business due to growth in new business.

I will discuss our commodity price assumptions on the next slide. Marketing, gross margin contribution of approximately $9 million, lower than the $14 million for 2006, primarily as a result of the timing and the hedging gains. Other expenses increase approximately $16 million due to increased employee costs associated with new business growth and higher depreciation. Other income decreases approximately $16 million, the result of lower interest income due to the redeployment of cash. Interest expense remains relatively flat year over year, and capital investment for Enogex's pipeline system, about $125 million.

Looking at our commodity price assumptions, realized commodity spreads between $2.69 to $3.21 per MMBTU in 2007 compared to $3.99 per MMBTU in 2006. We assume gas prices of $6.33 to $6.62 in '07 compared to $6.04 in 2006 and liquids prices of $0.93 to $1.02 per gallon in 2007 compared to $1.10 per gallon in 2006.

For 2007, the earnings guidance for the holding company reflects an expected loss of approximately $3 to $4 million or $0.03 to $0.05 per diluted share, primarily due to interest charges at the holding company.

And now I would like to turn the podium over to Howard Motley. Howard?

Thanks, Jim. The regulatory update today will cover the Arkansas Commission's decision in the rate case and the handling of the Centennial wind project in both the Arkansas and Oklahoma jurisdictions. The status of OG&E's Homeland Security rider application and the Red Rock application currently before the Oklahoma Commission will also be discussed. Last, OG&E's regulatory plan through 2012 will be outlined in this presentation.

On July 28, 2006, the Company filed an application for a $13.5 million rate increase in the Arkansas jurisdiction. In November 2006, the parties reached a settlement in that case. A hearing was held on December 19, and the Arkansas Commission issued an order on January 5, 2007, approving the settlement agreement and authorized a $5.4 million rate increase. These new rates were implemented in February 2007.

In February 2006, OG&E filed an application requesting the Oklahoma Commission to approve the construction and ownership of a 120 megawatt wind energy project. As part of the proposal, OG&E also requested a rider that would immediately recover the Company's authorized rate of return, depreciation, [applicable] taxes and O&M expense. On April 28 of 2006, the Oklahoma Commission issued an order approving the wind project, and a rider designed to recover an initial $22.6 million annually from our Oklahoma customers. The rider was implemented in February of this year and will recover approximately $20.1 million during the rest of this calendar year over 11 months.

In Arkansas, the $1.7 million revenue requirement that is associated with Centennial was included in the rate increase we just implemented February 1.

The Company is currently receiving $2.9 million annually in revenues through an Oklahoma Commission-authorized security rider from our Oklahoma customers. These revenues provide a rate of return on security capital expenditures and recovery of related expenses on preapproved projects.

On December 15, 2006, OG&E filed an application requesting the Oklahoma Commission to approve the Company's updated security plan. The updated plan includes an additional $18.5 million of security capital expenditures for expanded authorized projects and several new security projects. The Oklahoma incremental annual revenue requirement is $2.7 million. A hearing is scheduled on our new updated plan for May 30, 2007, and a Commission decision is expected sometime during the third quarter of this year.

On January 17 this year, OG&E filed for preapproval to build the Red Rock coal plant under Commission rules that are based on a new Oklahoma law for preapproval. The Company also requested a rider, just like the one we did in the Centennial case, to recover the carrying costs on the construction expenditures up to a capped level of $789 million. Under the rules, the Commission will issue an order on this application within 240 days of the filing date. However, in the application, the Company has requested the Commission to expedite their decision process and issue an order by July 20 of 2007.

In summary, as illustrated in this chart, OG&E has implemented rates increases in both the Oklahoma and Arkansas jurisdictions within the last 13 months. Additionally, in Oklahoma, two recovery riders for the Centennial wind project and the Homeland Security investments have been implemented. And based on Oklahoma Commission order, OG&E is required to file a rate case and implement new rates no later than January 2010.

The Centennial and the security riders will simultaneously terminate when rates are implemented which include the cost of these two projects from our 2010 rate increase. The Company's Red Rock application requests a recovery rider to be effective until a rate case is concluded and new rates are implemented to recover the cost of that coal plant. Subsequent to the 2010 rate case, we will also be filing other rate cases in Oklahoma and the Arkansas jurisdiction to recover our projected $3.3 billion planned capital expenditures over the next six years.

Back to you, Jim.

Thank you, Howard. Before we go to Q&A, I would like to review our focus for 2007. Looking at the utility, obviously we have a great deal going on, but first and foremost for 2007 we will be obtaining an acceptable OCC order for the approval of the Red Rock plant and associated rider. We believe this is a critical step in the process of providing long-term, low-cost power to our customers.

In addition, we began the initial phase of our six-year construction plan, in which we will spend nearly $2 billion over six years on the upgrade and expansion of our system. This will ensure the service reliability our customers have come to expect.

Additionally, we anticipate filing a plan next month with the state of Oklahoma that will address regional haze. We would hope to have our plan approved in 2007. We have evaluated various scenarios and envision the same preapproval process on environmental spend that we are undertaking for Red Rock. And finally, as always, we continue to improve efficiencies by leveraging technology and improving work processes to enhance service quality and reduce costs.

Moving on to Enogex, we continue to see many things happening in our unregulated business. This is a period in which we have numerous growth opportunities to expand our business and increase value for customers and shareowners. We will proceed on projects in a disciplined manner. We continue to evaluate what is the best corporate structure for Enogex, including an MLP. At this time, we have not reached a conclusion, but continue to evaluate our options. As we has stated before, there's no timetable for this, but it is a continuing process. We see many exciting opportunities in 2007, and we look forward to executing on our plans and communicating our progress to you throughout the year.

That concludes our prepared remarks. We'd now like to answer any questions you may have.

(OPERATOR INSTRUCTIONS). Doug Fischer.

A couple of questions. First, on the MLP question, I know you made that statement -- maybe you could just elaborate for us why the process is taking time. And the reinvestment issue is one that is on our minds, if you were to do an MLP. And how does that link or not link with Red Rock? And how does the emerging carbon concerns play into the approval of Red Rock?

Doug, this is Pete Delaney. I'm going to talk about the carbon issues that you have raised in Red Rock. We have the Red Rock application. We have our permits, air permits filed with the DEQ. And Red Rock, we expect, is and will be in compliance with all known environmental regulations on the books today, of course. It will be in compliance with regional haze, which is an issue here in Oklahoma because we are under the regional haze requirements.

The carbon issues, when we evaluate the Red Rock plant versus our alternatives, we incorporate into our economic analysis CO2 assumptions. And that is part of our risk analysis and that is part of our regulatory filing that was filed with the Oklahoma Corporation Commission. We expect that will be subject to discussion. But we fully incorporated that into our risk analysis.

Red Rock is an ultrasupercritical power plant. It is only one of four that is under development in the country out of some 150 coal plants that are planned, although it's probably realistic to assume that a lot less than 150 of those planned units will ever get into operation.

So being an ultrasupercritical plant, it operates at higher temperatures and higher pressures than your supercritical plant. It has a better heat rate, better efficiency and therefore lower emissions than the other coal plants. So we think from an environmental standpoint, it's the most friendly, proven technology for us in our geographic area. And we are proceeding ahead.

How did IGCC figure into your analysis?

IGCC figured into our analysis looking at the same cost, the variable cost, reliability issues that we looked at all of our alternatives. And of course, we know it is 20% more expensive than some of the other coal options. We have reliability issues, cost concern -- uncertainties. We burn low-sulphur coal out of Wyoming. It is most applicable to us here in Oklahoma in terms of cost and transportation. It raises additional issues. And we would obviously like to embrace something that has that quality if it is the right thing for our customers.

Our analysis showed at this point in time, given the decisions we have to make and the fact that the Southwest power pool will be out of baseload capacity around the time we are looking to bring this baseload plant in, that that was our best option.

And then how does that dovetail or not dovetail with the MLP decision?

We have got a pretty strong balance sheet, a conservative capital structure, and we are setting our dividend payout ratio, as you know. Our goal is to keep it below 65% to be able to finance Red Rock. And all our other capital expenses program, as Steve mentioned, of course -- a critical part of that is our preapproval case. We will be looking at that and where we come out on that. We have asked for a [CDIBIP] rider.

And I know you know how important that is to maintaining our financial quality during a major construction cycle. We have been through those construction cycles before. We see what happens to the industry during those types of cycles. And so we were very happy to have that preapproval legislation last year. This is our first filing under that legislation, that House Bill 1910 that we refer to. And that is the primary, I think, driver that factors into our financing around our plan. Also, we expect that for our environmental regional haze expenditures, we will have [CBIP] riders for those as well.

(OPERATOR INSTRUCTIONS). Reza Hatefi.

It seems like there is a substantial amount of CapEx at Enogex over the next few years. How should we think about that in terms of that CapEx also contributing to EBITDA or margins going forward?

This is Dan Harris. We have definitely increased our CapEx spending over time. We are still pretty consistent with what I would call our base maintenance CapEx, just the capital required to keep assets up and running and repaired. I believe it is around 74% of our capital that we have targeted. And Jim mentioned the $125 million number is basically all new growth projects. And so the numbers that Jim talked about also in our forecast are reflective of putting new growth projects into play.

And what is the maintenance CapEx again at Enogex?

It is about $25 to $30 million. What we consider maintenance would be just investing in the system to keep it at our standards.

With the cost pressures right now, as everybody is seeing out in this industry, the $30 million mark is probably appropriate for right now.

And so the incremental CapEx, what kind of returns should we think about that as far as return on invested capital?

We have a 50/50 capital structure at Enogex. You think about -- a lot of these investments are going to be in the stepout projects. So they are going to be consistent with the current Enogex business mix. And of course, as we continue to look at expanding the transportation pipeline system, you would get returns that would be less impacted by processing spreads.

So we look for returns that are consistent with the Enogex business mix currently, and you would have to understand and adjust somewhat for commodity price swings when you're thinking about that business.

And the mark-to-market that you were expecting to have in 2007 that you took in the fourth quarter of '06 -- how much was that?

The mark-to-market in the fourth quarter -- there was about $8 million of -- really it's storage gains that were for the first part of 2007, which based on the gas prices we booked in 2006.

$8 million -- is that pretax or post-tax?

Pretax.

And just finally, can you explain again the part from the press release -- I think you might have mentioned it, but the collections of fuel-related cost? I'm kind of confused on what that means going forward.

I will talk about exactly what it was. As you know, in December 2005, we had a rate order from the Oklahoma Corporation Commission. And we implemented tariffs from that rate case that were approved by the Commission, designed to -- or the intent of that rate increase was $42.3 million. As we went to close the books for 2006, we couldn't reconcile the preliminary earnings with other statistical evidence.

So we went back and analyzed all factors, including the tariffs that were filed and approved as part of their order. And we determined that we were collecting and properly recording amounts authorized by the tarriffs, yet we determined there was an error in the design of our rate tariffs that was enabling us to recover approximately $27 million throughout the year of fuel-related revenues in excess of what was intended by the order.

So there is a compelling legal argument under the so-called filed rate doctrine that would permit us to keep these revenues, since they were approved tariffs. But we recognized this wasn't the right course and voluntarily filed with the Commission adjustments to our approved tarriffs and agreed to credit our Oklahoma retail customers through our fuel clause of $27 million plus interest in 2007 and 2008. So it was essentially a flaw in the approved tariffs. And we were able to collect through fuel more than what was intended. So we are just crediting that back to customers.

So did that add to earnings in 2006 that will be subtracted from earnings in '07 and '08?

No. There was no addition to earnings in 2006.

And will that be a negative impact to earnings in '07, '08 as you --

No. What we did was in December we booked a regulatory liability or essentially in the fuel clause overcollection. And we will just be collecting it, giving it back to fuel in prior periods. As you look at 2006 as a whole, there is no impact; 2007, 2008, no impact.

And what is the latest frac spread you are seeing?

We're seeing about 285 to about 278 as of last week.

Doug Fischer.

Jim, the adjustment to these tariffs, am I right to -- my understanding from your press release is that the original guidance for '07 in early November seemed to take the benefit of this adjustment into effect. Is that accurate?

Well, to some degree. I think as we look back at November guidance, there was some amount of this over -- [sort of] this fuel issue in our gross margin calculation. As we have gone back and looked at guidance again, we see really just a slight reduction in gross margin at the utility. So I wouldn't say it had a material effect.

We are projecting about 819; I think November we were about 822. What we have seen throughout the year which really offset that is a little higher growth than we had envisioned as opposed to sort of less benefit of the weather.

And what are your financing plans for 2007?

Well, at this point, the only thing we have certainty on is we will issue long-term debt at the utility. And that is really just the finalizing the financing for the wind project. That equity was really provided by cash flow into the holding company down to the utility. I think everything else is going to be dependent upon what happens at Red Rock and to some extent environmental. If those go forward, there may be other financings, but at this point all we can say with certainty is the long-term debt.

And what kinds of equipment, etc., do you put on to deal with the haze issue? What are we talking about?

We're really doing scrubbers.

At what units?

We will file next month, but at this point it looks like four of our coal units will need to have scrubbers on them.

Is that in the $3.3 billion?

Yes.

And then the ice storm, what is the impact of that? Talk to us a little bit about that.

The numbers I have at this point, the total cost to us -- and I say was to us, some costs will be done later, some permanent repairs -- but we project it will be around $15 to $18 million. Most of that is capital. So just a small impact to O&M.

And is the O&M expensed right away? Remind us how that is dealt with in Oklahoma.

Yes, it is expensed right away in Oklahoma as part of our ongoing cost of doing business.

And is there a reserve that helps absorb that or--?

No, we budget every year for storms. Obviously, we have had years where we have had the benefits of less storms. And so it's part of doing business in Oklahoma.

And you haven't sort of blown through the budgeted amounts yet with this storm?

No, we're --

Early in the year.

As we look at guidance, really the storm had no impact on us, guiding to the lower half. It had more to do with the mark-to-market, which pulled net income out of '07 into '06.

Reza Hatefi.

It looks like it was just me and Doug. It looks like on one of your slides, part of your regulatory plan is the Oklahoma rate increase in 2010. So this kind of implies that you won't be filing a full rate case at any time until probably 2009 timeframe?

I think what we're looking at as we are trying to get in place the different riders like for security, Centennial, Red Rock, that will keep us whole on a lot of our capital investment, if at some point in time before 2010 it looks like the earnings are being reduced to a level that is unacceptable, we have the ability to go in and file an application and include that capital expenditures and ask for rate relief. 2010 will be the last time or will be the furthest out that we would file a rate increase.

And that is in there because we are required with the wind agreement we had is to file a rate increase for case in 2009. So like Howard said, we are not prohibited from going in earlier, but right now, that is what we would envision based on the business plan.

And I just wanted to confirm again, on the fuel-related tarriffs that we were talking about earlier, because it's sort of misleading in the press release because the press release says approximately $16.7 million of net income impact. But I guess earlier, you said it didn't actually have any impact in '06 and will not have an impact in '07/'08. I just want to confirm that.

Yes, there is no net income impact for full year 2006. The impact was in the fourth quarter of booking the regulatory liability.

So it's sort of like a one-time --

Yes, sir.

(multiple speakers) liability causing that $16 million drag.

So if you look at the year as a whole, we booked a liability. So no impact on full year '06, no impact going forward.

So looking next fourth quarter of 2007, when we are doing our quarters, it would kind of be looked upon as a one-time within the -- when we are trying to gauge year-over-year quarters, in a sense.

Yes, that is correct.

(OPERATOR INSTRUCTIONS). And we have no further questions at this time.

Thank you very much for your interest in the Company and for joining us this morning. Good day.

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