OGE Energy Corp (OGE) 2007 Q4 法說會逐字稿

Good morning. My name is [Fahea] and I will be your conference operator today. At this time, I would like to welcome everyone to the OGE Energy Corporation 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. [OPERATOR INSTRUCTIONS] Thank you. Mr. Hatfield, Senior Vice President and Chief Financial Officer, you may begin your conference.

Thank you. Good morning, and welcome everyone to OGE Energy Corp's fourth quarter 2007 earnings conference call. I'm Jim Hatfield, Senior Vice President and Chief Financial Officer. I have with me today Pete Delaney, Chairman, President, and CEO; Dan Harris, Senior Vice President and Chief Operating Officer of OGE Energy Corp and President of Enogex; Howard Motley, Vice President of Regulatory Affairs of OG&E; Steve Merrill, Vice President and CFO at Enogex; Mel Perkins, Vice President, Power Delivery, OG&E; and other members of the Management Team.

In terms of the call today, we'll hear first opening remarks from Pete Delaney; then, I will cover the year-end and fourth quarter results; we'll look at planned utility capital expenditures; cover 2008 outlook; Howard is going to give us a regulatory update; and then we'll close with Q&A. 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.

Also, before we begin, I'd 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'll now turn the call over to Pete Delaney. Pete?

Thanks, Jim. Good morning, everyone and thank you for joining us this morning. We're pleased to report another year of solid financial and operational performance in 2007. One of those operational accomplishments was the response to the December ice storm with a record 300,000 customers without power. The damage was extensive and widespread, centered in the metro region, and we were able to have an injury-free restoration effort over a 10-day period working in very difficult conditions.

In addition, OG&E won the J.D. Power number one ranking in the southeast region for residential customer satisfaction. And Enogex once again in 2007, they performed the first quartile in several categories with standout performance in safety, with a number two ranking in safety performance from the Gas Processes Association and also received an award for emission reduction from the Oklahoma Environmental Federation.

Financially, on a consolidated basis, we earned $2.64 per share in 2007, up from $2.45 a share from continuing operations in 2006.

At the utility, OG&E Energy, earnings were up -- were $1.75 per share, up from $1.62, benefiting again from several one-time items and from the Centennial Wind Farm that went into operation, offsetting weather that was cooler than last year. We also continue to see steady customer growth of 1%, as our economy here remains at this point in pretty good shape. We spent about $380 million at the utility - replace aging infrastructure, maintain our power plants, and expand our system to accommodate this customer growth. We will continue that program in 2008, and with the Redbud acquisition total capital investment could reach almost $800 million.

We are pleased to be able to enter into that purchase agreement for the Redbud power plant, which was being auctioned off in late 2007. So you know with the Oklahoma Corporation Commission rejection of our pre-approval filing for a new coal plant and giving the near-term need for base-load generation, options are really limited to natural gas combined cycle generation. And the Redbud plant is a 1,230 megawatt gas-fired combined cycle plant and is located near Oklahoma City. And we plan by year end to be operating the plant as a 51% owner.

The benefits of the purchase are many. A purchase price of about $695 per kW, lower than the cost of new construction; again, a good location near our load center; no construction risks; and several years of operating history. It is the next best alternative to our coal plant Red Rock. And we will seek pre-approval of the acquisition from a local Corporation Commission starting with a filing in mid-March, which should result, hopefully, in a Commission order by November, with a potential for us to close the acquisition by year-end. Also at the utility, we're moving ahead with the Commission, expanding our demand side management, energy efficiency, and wind power programs. We continue to work with the Oklahoma Corporation Commission on developing rules for recovery of these demand side management and energy efficiency expenditures.

We're also continuing to work on our plan that we announced to increase our wind generation in our system from 170 megawatts to date to about 770 megawatts over the next five years. And we plan to do that, first, with issuing an RFP for about 300 megawatts in the next several months. We also have a separate team at OG Energy Corporation that has been working on developing projects to bid into that RFP by OG&E.

These wind farms will also need transmission to efficiently get the wind energy from the western and northwestern Oklahoma to the load centers in the east. So we are proposing -- now propose to the southwest power pool that we construct a 345 KB line from Oklahoma City to our Woodford substation as a first step in a larger plan to bring wind energy all the way from the Oklahoma panhandle. We hope to get approval sometime in the first half of this year.

At the same time, we are supporting a bill currently in the Oklahoma legislature that would provide more clarity and hopefully certainty around recovery at the state level of transmission build related to the development of wind energy infrastructure or wind energy generation in the state.

Now, turning to Enogex in '07, they achieved record net income of $86 million, again due to a number of factors. Among them, growth and natural gas gathering volumes as a result of new well connects in many areas where we recently expanded our system, such as western Oklahoma, panhandle of Texas, and the Woodford Shale, and eastern Oklahoma. Processing margins also improved from record processing spreads and higher volumes. We also had a record performance out of the marketing group associated with the management of the Cheyenne Plains pipeline capacity.

We continue to see a lot of opportunity in natural gas gathering, processing, and transportation business segments in the mid-continent. And you can see that's evidenced by our growth capital spend, which increased from just around $25 million in 2006 to over $200 million in 2008. We expect these investments to produce higher earnings in both 2008 and 2009. And some of the expenditures we're making in 2000 -- this year, will not be completed -- the projects will not be completed until late 2008 or early 2009.

In the transmission segment, we're also encouraged by interest we're seeing in the open season we announced for firm transportation in the Woodford Shale area. As for the IPO with Enogex Partners, MLP, we continue to be committed to completing the offering, waiting, however, on a more constructive market. As you know, we delayed the IPO on January 24th due to the market conditions, which were extremely unfavorable.

So you can see from our capital spending plans and recent earnings, the fundamentals of the natural gas midstream industry remain positive. We're still in registration and plan on updating our S1 registration next month for 2007 financials.

In closing, we're executing on our business plan, focusing on capturing opportunities to grow our businesses and delivering on our promises to our customers. With the Redbud acquisition covering our near-term base load need, and it's approved by the OCC, our efforts will be focused on delaying the time until the next base load plant is needed, through energy efficiency and demand side management. Other important regulatory proceedings you'll hear about are related to the recovery expenditures related to the cancelled coal plant, the ice storm, and wind-related transmission investment.

Our Enogex business has substantial growth opportunities and we are effectively competing for our share of those opportunities, as evidenced by the higher capital budget. As always, we remain focused on the details of our business. And, again, thank you for your interest in the Company, but now I'll turn it over to Jim to provide more details on our financial performance in 2007. Jim?

Thank you, Pete. For 2007, we reported net income of $244.2 million, or $2.64 per diluted share, as compared to net income of $262.1 million, or $2.84 per diluted share in 2006. On a continuing operation basis, earnings increased 7.7% over the $2.45 per diluted share posted in 2006.

As a result of asset sales at Enogex in 2006, we will distinguish between net income and income from continuing operations throughout this presentation. The contribution by business unit on a comparative basis is as follows. OG&E, $1.75 versus $1.62 in 2006; Enogex, $0.93 versus $0.84 in 2006; holding company, a $0.04 loss versus a $0.01 loss in 2006; $2.64 versus $2.45 on a continuing op --

[TECHNICAL DIFFICULTY - OPERATOR INSTRUCTIONS]

You may begin, sir.

Thank you. Well, we're sorry about that. Obviously, technical difficulties on our end on the phone.

It was not a power outage.

It was not a power outage. That's correct. We're not in?

Yes, you are.

Okay, we're going to pick up where we left off, and we'll start on Slide 5. And we'll start with a breakdown of 2007 results for OG&E. At OG&E, net income was $161.7 million, or $1.75 per share, as compared to net income of $149.3 million, or $1.62 per share in 2006, an 8% increase in EPS. Some of the primary drivers are as follows.

Gross margin on revenues increased 1.8% to $810 million from $795.7 million. And I'll provide details of gross margin in a moment.

Operation and maintenance expense increased $4.2 million, or 1.35%. Increases in outside services, employee costs, and fees of permits were partially offset by a higher amount of capitalized labor due to the December 2007 ice storm. It is also important to note that approximately $4 million of O&M was capitalized in association with the ice storm that normally would have hit the P&L in December.

Depreciation increased $9.1 million, or 6.9%, primarily due to the Centennial Wind Farm being placed in service during January 2007.

Taxes, other than income, increased $2.9 million, or 5.5%, primarily due to increased ad valorem and payroll tax expense.

Net other income expense decreased by $2.5 million, primarily due to lower AFUDC equity in 2007, partially offset by the loss on the retirement of assets in 2006.

Interest expense decreased $5.2 million, or 8.7%, primarily due to a settlement with the IRS in 2007, resulting in the reversal of interest expense, which is partially offset by a one-time recognition of interest expense associated with a water storage facility in 2006. Additionally, higher levels of short-term debt were incurred for operations.

The income tax rate decreased from 36.2% in 2006 to 31.2% in 2007. The primary reason for the lower rate was due to renewable energy tax credits on the wind tower production from the Centennial Wind Farm.

Now looking at gross margin. The largest factor driving the increase in gross margin were higher rates totaling $25.1 million for the Centennial Wind Farm rider, Security rider, and the Arkansas rate case. Other factors contributing to the gross margin variance were new customer growth and other items in OG&E service territory, which increased gross margin by $9.7 million. For 2007, OG&E saw a 1% growth in customers, or over 7,000 new customers, with the majority of growth being in the residential class; increased peak demand by nonresidential customers, which increased gross margin by $9.4 million. And these increases in gross margin were partially offset by cooler weather in OG&E's service territory, resulting in approximately an 11% decrease in cooling degree days, as compared to 2006, contributing to a decrease of approximately $16.3 million, and price variance due to sales and customer mix which decreased the gross margin by approximately $13.6 million.

I'd like to touch briefly on the planned CapEx for the utility. This graph illustrates a $3 billion capital spending program that a utility expects to undertake over the next six years. The category of largest expenditures are shown in blue, which represent our infrastructure build-out in the distribution and transmission areas. This accounts for nearly $1.7 billion, followed by environmental and green at nearly $400 million, and of course our Redbud acquisition, planned for 2008, up $435 million.

If you put the capital spending projections in a rate base perspective, we project total Company rate base to increase from approximately $2.5 billion at the end of 2007 to approximately $4.3 billion in 2013. This represents a 72% increase in rate base, which offers a tremendous growth opportunity at the utility over the next six years. Howard will discuss our regulatory calendar later.

At Enogex, income from continuing operations was $86.2 million, or $0.93 per share, as compared to income from continuing operations of $77.5 million, or $0.84 per share in 2006, an 11% increase in EPS. As Pete alluded to, Enogex income from continuing operations represents record results. Some of the primary drivers are as follows.

Gross margin on revenues increased nearly 15% to $353.1 million from $307.4 million. I will provide details of that in a moment.

Operations and maintenance expense increased $17.4 million, or nearly 16%. Higher employee costs to support growth and an increase in outside services and materials and supplies expense were the primary drivers.

Interest income decreased $1.9 million from 2006, primarily due to the loss of interest income earned on cash investments as a result of the asset sales at Enogex in the prior year.

Other income decreased by $6.8 million, primarily as a result of a litigation settlement and gains on the sale of certain pipeline assets in the prior year.

The income tax rate was about the same at 38.3%.

Now looking at gross margin. Gross margin at Enogex increased from $307.4 million in 2006 to $353.1 million in 2007. Margins were up across all businesses. Margins in gathering and processing business increased by $28.3 million, or 17%, from $167.6 million in 2006 to $195.9 million in 2007. Primary drivers include higher [KPO] margins of $6.7 million; realized commodity spreads of $535 versus $399 in the prior year; $6.6 million in lower imbalance expense; higher prices for condensate, which increase margin by $4.6 million; and renegotiated contracts with more favorable terms increased margin approximately $6.2 million. Additionally, gathered volumes increased 7.1% and processing volumes increased 5.6%.

Marketing contributed approximately $24.5 million of Enogex's gross margin in 2007, as compared to approximately $14.2 million in 2006, an increase of approximately $10.3 million. The gross margin increase, primarily due to $25 million of realized gains from physical activity on the Cheyenne Plains transportation contract. As we stated before, we believe the Cheyenne Plains contribution is a 2007 event. It is not expected to be repeated in future years.

In the transportation and storage business, margins increased from $125.6 million in 2006 to $132.7 million in 2007, an increase of $7.1 million, or 5.7%. The increase in gross margin was primarily due to higher demand fees in the storage business, reflecting the impact of new contracts and a reduction in lower across-from-market adjustment to natural gas inventories. These increases were partially offset by increased imbalance liabilities.

In 2007, Enogex recorded a loss of $2.5 million on nonrecurring and timing items. The $2.5 million loss in storage we anticipate to reverse in the first quarter of 2008. This is compared to a $34.9 million gain in nonrecurring and timing items in 2006, primarily resulting from the gain on the sale of the Kinta assets.

Now, I'd like to briefly touch on a couple of items for the fourth quarter. For the fourth quarter, we reported net income of $37.6 million, or $0.40 per diluted share, as compared to net income of $22.1 million, or $0.24 per diluted share in 2006. The contribution by business unit on a comparative basis is as follows. OGE, $0.17 versus a loss of $0.01 in 2006; Enogex, $0.24 versus $0.25 in 2006; holding company, a $0.01 loss, flat in 2006; consolidated at $0.40 versus $0.24.

At OG&E, net income was $15.7 million, or $0.17 per share, as compared to a net loss of $1 million, or $0.01 per share in 2006. Some of the primary drivers are as follows. Gross margin on revenues increased 31.8% to $170.3 million from $129.2 million in 2006. I will point out that in last year's quarter we credited two customers approximately $26.7 million of additional fuel-related revenues that was not intended by the OCC rate order from December 2005.

Operation and maintenance expense increased $7.2 million, or 8.7%, primarily due to increased outside services employee costs, partially offset by increased labor activity associated with the December 2007 ice storm.

Depreciation increased $2.6 million, primarily a result of the Centennial Wind Farm being placed in service during January 2007. Net other income expense decreased by $6.8 million, primarily as a result of lower equity AIPDC in 2007. Interest expense decreased $7.1 million, primarily due to a settlement with the IRS resulting in a reversal of interest expense.

I'm not going to go through all of the factors on the screen, but you have the waterfall chart of the various impacts impacting gross margin of OG&E in the fourth quarter.

At Enogex, income from continuing operations was $22.2 million, or $0.24 per share, as compared to income from continuing operations at $23.1 million, or $0.25 per share, in 2006. Some of the primary drivers are as follows.

Gross margin increased from $85.8 million in 2006 to $97.7 million in 2007. That represents an increase of nearly 14%. And on the next slide we have the details of the gross margin.

Operation and maintenance expense increased $9.3 million, or 31%, primarily due to increased outside service costs associated with various system integrity projects and higher employee costs due to growth initiatives. Other income decreased $1.2 million from 2006, primarily due to the recognition of the minority interest in a token 2007. Other expense increased by $2 million, primarily from a gain on the sale of certain pipeline assets in 2006. And income tax rate was relatively flat from 37.9% in 2006 compared to 37.8% in 2007.

Looking at gross margin. Gross margin at Enogex increased from $85.8 million in 2006 to $97.7 million in 2007. Gathering and processing margins increased $21.7 million to $45.6 million in 2006 to $67.2 million in 2007, primarily due to processing margins, which increased $12.2 million, primarily due to [KPO] margin and condensate sales. Realized commodity spread of $7.28 versus $3.74 in 2006. Processing volumes increased 10.7%. Gathering margins increased $9.5 million, primarily due to the average price increase on fuel recoveries and higher natural gas margins due to higher prices in increased margin, due to renegotiated contacts and new business. For the quarter, gathered volumes increased 10%.

Transportation and storage margins decreased $8 million from $32.6 million in 2006 to $24.6 million in 2007. Transportation margins decreased $8.4 million, primarily due to a reduction in fuel reserve of $5.9 million in fourth quarter 2006, as no such item was recorded in 2007. Throughput volumes 9.2% compared to fourth quarter 2006. Storage margins increased 400,000, primarily due to new storage contracts and third party demand fees. Marketing margins decreased $1.8 million, primarily due to reduced gains on hedges, partially offset by the realized gain on Cheyenne Plains deliveries.

Looking now at 2008 outlook. Earnings guidance for 2008 is between $223 million and $242 million of net income, or $2.40 to $2.60 per diluted share, assuming approximately $93.1 million average diluted shares outstanding; cash flow from operations of between $483 million and $502 million; and an effective tax rate of 33.5%. You can see the guidance for each of the businesses. And I'll discuss the earnings assumptions over the next few slides.

OG&E's earnings guidance is between $145 million to $155 million, or $1.56 to $1.66 per diluted share. Key assumptions for 2008 are, at OG&E, we anticipate gross margin of approximately $829 million compared to $810 million in 2007, an increase of 2.3%. The key assumptions are normal weather patterns are experienced for the remainder of the year and gross margin on weather adjusted retail electric sales increase approximately 2%.

Looking at expenses. Operating expenses of approximately $536 million; interest costs of approximately $77 million; and an effective tax rate of approximately 31.1%. Capital expenditures for investment in OG&E's generation transmission and distribution system are approximately $789 million in 2008, which includes capital expenditures in the amount of approximately $435 million, associated with OG&E's planned acquisition of Redbud generating plant.

Enogex's earnings guidance is $83 million to $91 million, or $0.89 to $.98 per diluted share of the Company's common stock. Key assumptions underlying this guidance include [Dolan interject] anticipated gross margins of approximately $376 million to $390 million, an increase over 2007 of approximately 6 to 10%. The 2008 guidance includes transportation and storage gross margin contribution of approximately $141 million; gathering and processing gross margin contribution of approximately $235 million to $249 million. Key factors affecting the gathering and processing gross margin forecast are increase of 8% in gathered volumes over 2007; natural gas prices are 725 to 764 per MMBtu in 2008; realized commodity spreads are 548 to 609 per MMBtu in 2008, the realized commodity spread takes into account that 59% of processing volumes at fair price risk are hedged; weighted average natural gas liquid's prices are $1.20 to $1.27 per gallon in 2008; operating expenses of approximately $201 million; interest expense of approximately $30 million; and capital expenditures for investment in Enogex's pipeline system are approximately $292 million in 2008.

As shown, the projected loss of the holding company is between $4 million and $5 million, or $0.04 to $0.05 per diluted share, primarily due to interest expense related to long- and short-term debt borrowings.

That is the summary of the fourth quarter, full year, and outlook. And now I'll turn the call over to Howard Motley for a regulatory update. Howard?

Hey, thanks, Jim. The regulatory update this morning will cover ongoing and future activities in the Oklahoma jurisdiction. We'll be discussing the Red Rock purchase and pre-approval application we'll be filing in the future. We'll also be talking about the recovery of the Red Rock cancellation cost in the December 2007 ice storm cost restore service. And then we'll be talking about the fuel adjustment clause prudence review that's ongoing with the Oklahoma Commission. I will also briefly discuss the Company's regulatory plan for 2009 through 2012.

The foundation of OG&E's regulatory plan is the Oklahoma and Arkansas rate increases in 2006 and 2007, along with the Centennial and the Security riders. OG&E will also be requesting approval of a rider for the Redbud purchase, which will be discussed in a later slide. And Oklahoma rate case is targeted for 2000 --

Ladies and gentlemen, I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience. [TECHNICAL DIFFICULTY]

Well, we certainly apologize for that. We're going to just, again, continue where we were with Howard Motley going over the regulatory plan. Howard?

Yes, we're on Slide 23 of the regulatory plan. And at the end of that is where I was discussing is at the end of 2009, when we receive a new rate order from the Oklahoma Commission from a rate case, the rider for Centennial and Security and then the Redbud rider, if we're successful in getting pre-approval for Redbud this year in a rider, will terminate when we have all of the investment and costs associated with those projects in our base rates starting January 2010. And then subsequent to that rate case, we plan to file a rate case every other year in the -- or every year and alternate in the different retail jurisdictions in Oklahoma and Arkansas.

As far as the Redbud purchase, OGE is currently preparing its filing before the Oklahoma Commission to request pre-approval of the Redbud purchase and authorization of a recovery rider, like I said, until the 2009 rate case can be completed and new rates implemented. We plan to file this application around mid-March, and based on a 240-day statutory timing in Oklahoma under our pre-approval rules, the Commission should make their decision no later than mid-November.

Next slide is the Red Rock cancellation costs. In December 2007, the Company filed an application seeking recovery of about $14.7 million of Red Rock cancellation costs. We're asking the Commission to allow OG&E to sell SO2 credits and retain the profits to offset the cancellation costs. There's a procedure schedule. The parties will file responsive testimony on March 24th, and rebuttal testimony is due on April 15th. A settlement conference is scheduled for May 2nd. And if not settled, the hearing will begin on May the 7th. And the administrative law judge right now has targeted the issue, the report and recommendations to the commissioners, on June the 6th.

The next case we have out there are the issues December 2007 ice storm. Everyone knows we faced a very destructive ice storm in December 2007 that resulted in an overall cost of around $54, $55 million. About $19 million of that was capital. $34.5 million of that was an O&M expenditure to restore the service to our customers.

In the last Oklahoma rate case, the Commission authorized a regulatory asset to accrue storm costs in excess of $3.5 million annually and recover in the next rate case, which will be the 2007 -- 2009 case. Prior to December 2007 ice storm, the Company had already experienced $3.5 million of storm costs, therefore the entire amount of the $34.5 million has been accrued to a regulatory asset. And, as I mentioned, in our next rate case, we will include that for recovery in our future rates.

And the last activity going on at the Oklahoma Commission is our fuel adjustment clause prudence review. The Oklahoma staff annually files a review and audit of electric and gas utilities fuel cost adjustments in Oklahoma. The staff is currently auditing OG&E for calendar year 2006. The staff and other parties will file direct testimony May 15th; OG&E will file responsive testimony, if necessary, on June the 19th; and rebuttal testimony is scheduled to be filed on July 17th. The hearing is scheduled for August 21st.

I think it's just good to note that during our last three commission audits - 2003, 2004, and 2005 - there have been no challenges to the cost that we've passed through our clause and no refunds.

Back to you, Jim.

Thank you, Howard. As we officially close 2007, I'd like to state that we were pleased with operational and financial performance during the year. As we look forward to 2008, we approach a year from a position of financial strength. We have solid growth opportunities across both OG&E and Enogex and we continue to pursue balanced growth. We have sufficient liquidity to fund growth opportunities, as we have $1 billion of committed multi-year bank facilities. As we begin 2008, all of us at OGE Energy Corp are focused on the execution of the financial plan.

That ends our prepared remarks and we'd now take questions.

[OPERATOR INSTRUCTIONS] Judd Arnold, King Street

Could you, just going back to slide 24, could you talk a little bit more about the Redbud purchase and sort of what you went through? I mean, you ran the RFP and came up with Red Rock and obviously you didn't buy this through the RFP. Did you talk to the Commission beforehand while the auction was going on? And sort of what's your confidence level on getting this through?

The Red Rock, go back to the coal plant comment you made on the Red Rock, the Red Rock plant was a BSO request for a proposal for base load -- a base load need they had in the 2011 time period. And we had a base load need around the same time. And so we bid into their RFP and they selected our -- we proposed a partnership with them and they selected that in their RFP process. Of course, with the pre-approval, given the size of the project and given the issues associated with those types of facilities these days we thought that was a prudent thing to do. And, as you know, a 2 to 1 vote, that they did not approve that -- that coal plant. So from a standpoint of what your alternatives are at that point in time to meet that need, you really don't have any alternatives except for natural gas and then combined cycles facility given that you're going to run this plant 80, 75% of the time. That's really the most efficient -- the best next option that we have.

I guess it was fortunate in that the financial owner, it was not a strategic owner, they owned a portfolio of these merchant plants, decided to -- that they were going to sell their portfolio. We contacted them and said we wanted to participate in the process. Of course, we don't need 1,230 megawatts for our need and we quickly got together a partnership with GRDA, Grand River Dam Authority, and the Oklahoma Municipal Power Authority -- Agency to -- as our partners. And we were successful, I think, at a price of $695 per KW. In our own estimation, what I see out there is that there seems -- the consensus is the bill of combined cycle days is $900 to $1,000 per KW.

So I think from the standpoint of the purchase price and the fact of lack of construction risk, the fact that we do have that need, that need, we continue to see the growth here in Oklahoma. Our projections remain the same. We feel it's a very good purchase for us. We have asked for, again, pre-approval. We have 300 days to get an approval under the purchase of sale -- purchase agreement. And we have the ability that we have to -- that the order cannot be I think materially different. There is some standard in there that if in fact we're not -- that doesn't meet our requirement, we can -- we don't have to go ahead with the purchase of the Redbud facility.

I'll turn it over to Howard Motley. You asked a question about handicapping or how we felt about it. Howard, you're probably the closest to that situation at the Commission. What's your feeling at this time?

I think the key point that you made, the fixed price, that was a real issue in the Red Rock case that there wasn't -- they couldn't get a guaranteed fixed price or they were worried about the environmental issue with the coal. And then I think they even discussed Redbud as being an option that maybe we should have looked at a little more in the Red Rock case. So I think there's some thinking even that the gas may be the appropriate plan out there. And based on all of that, I think we have a very -- we're going to be more positive of a case in this case. There will be less intervention I believe and I think the commissioner is going to see that this mixed with our wind plan and a few options like that that we'll be well received with our application.

The short answer I guess is it doesn't matter that you bought this outside of an RFP process?

I think there will be some parties that could argue that. Of course, one of the parties that usually argue, that's Redbud. And they're in the game with us now and I think that the Commission really is going to look at the end results. The plan is below what it would cost to construct a plant like this. The risks of the construction price of the consumers are fixed. And I believe that the Commission knows that we do need power in the future. And I think that that will not have quite a role in this case as it did in the Red Rock case.

We do not have requirement to competitively bid and we did discuss -- they were aware that we were bidding on the Redbud facility. And so we kept them up to speed with what we were doing and the opportunity and the quick turnaround time and they were really briefed the whole way. So it was not a surprise to the commissioners.

[OPERATOR INSTRUCTIONS] Scott Engstrom, Blenheim Capital Management

Jim, just a couple of questions on the outlook for '08. One, I was wondering, you mentioned the 2% sales growth at the utility. Does that create a 2% margin growth as well?

No. I think, Scott, the key there is -- look at last year, we had 1% growth primarily that ran into the residential customer -- 1% customer growth. Obviously, the -- from a margin perspective, residential has more margin than other customer classes. So it's not a direct sales margin perspective.

Okay. Was there a significant, if I thought about it, '07 margins or just weather impacts on '07 at the utility, what -- can you quantify that versus normal?

Yes. We were about $3.6 million below normal weather in 2007.

That's pretax margin?

Yes.

Okay. So you would pick up the $3.6 million and then 2% sales growth on top of that?

Correct.

Okay. It just seems with the other assumptions in there it's hard to get down to your net numbers, but given somewhere close to 2% margin growth. But maybe I'll call up offline on that.

The other question I had is on Enogex's operating expenses. It's seen fairly decent growth going from, say, $170 million in '06; $190 million this year; up to the $200-plus you're talking about this year. Can you kind of talk about what's going on there and what's driving that?

Scott, the question is what's driving operating expenses and it's essentially the O&M costs associated with materials and supplies. And, of course, we have a lot of growth initiatives going on and that requires us to add people to support that growth initiative. And that's really the main drivers behind operating expense. It's really in the O&M category. Of course, you're going to get a little higher depreciation, a little higher ad valorem, as you continue to add plant, which we did significantly in '07 and look to do in '08 as well.

Okay. So it's primarily higher O&M that's supporting growth, not necessarily sort of organic higher costs to run the business.

No. That's correct. And, of course appreciation is going to be a big part of that as you have CapEx close to $300 million in '08.

All right. One last question I missed on the -- at the utility. The large jump in interest expense I assume is related to closing of Redbud. Is that right and do you have an assumption on -- is that kind of just a -- sort of a fill in the blank mid-year assumption on closing that or end of the year or is there some other factor driving the jump in interest expense?

Well, I think you have to look at '07 first to realize that we had the one-time IRS settlement, which drove down interest expense in 2007.

Yes.

And, then, we issued $200 million at the end of January. And we would probably look to issue $150 million of debt in the second half of the year. Our assumption at closing Redbud is in the November 30th sort of time frame. So the debt would be, associated with that, it would be later in the year.

There are no further questions at this time.

No other questions. Again, thank you all for the interest in the Company. We have a lot of growth opportunities. We're executing on our financial plan, as Jim said, and we feel very good about 2008. Thank you for your interest and have a good day. Thank you.

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