OGE Energy Corp. (OGE) Q4 2007 Earnings Report, Transcript and Summary

Good morning. My name is Tikia and I will be your conference operator today. At this time, I'd like to welcome everyone to the OGE Energy Corporation’s 2007 earnings conference call. [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 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, 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'll cover the year-end and fourth quarter results, we will look at plant 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 of 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 of 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 the ten-day period working in very difficult conditions. [inaudible] OG&E won the JD Power Number One ranking in the Southeast region for residential customer satisfaction. Enogex, once again, in 2007, they performed the first quartile in several categories with standout performance in safety, with the Number Two ranking in Safety Performance from the Gas Processors Association and also receiving 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 at $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 continued 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 to replace aging infrastructure, maintain our power plants, and expand our system to come accommodate those customer growth. We will continue that program in 2008 and with the Redbud acquisition, full capital investment can reach almost $800 million. We are pleased to be able to enter into a purchase agreement for the Redbud power plant, which was being optioned off in late 2007. 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, our options are really limited to natural gas combined cycle generation. 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 plan as a 51% owner. The benefits of 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 risk, and several years of operating history. It's the next best alternative to our coal plant Red Rock. And we'll seek pre-approval of the acquisition from Oklahoma Corporation Commission starting with the filing in mid-March, which should result, hopefully, in a commission order by November, with the 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 are continuing to work with the Oklahoma Corporation Commission on developing rules of 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 today to about 770 megawatts over the next five years. And we plan to do that first through issuing an RFP for about 300 megawatts in the next several months. We also have a separate team at OGE Energy Corporation that's been working on developing projects to bid into that RFP by OG&E. These wind farms are also... need transmission to efficiently get the wind energy from the western and northwestern Oklahoma to the load centers in the east. So, we're proposing and have proposed that Southwest Power Pool that we construct at 345-kV line from Oklahoma City to our Woodward 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 the bill currently in the Oklahoma legislature that would provide more clarity and hopefully certainty around recovery of the state level Transmission Bill 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 a due to a number of factors. Among them, growth in natural gas gathering volumes, a result of new well connects and many areas where we recently expanded our system such as western Oklahoma, Panhandle 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 at the marketing group associated with the management of the Cheyenne Plains pipeline capacity. We continue to see a lot of opportunities in natural gas gathering processing and transportation business segments in the mid-continent. And you can see that’s evidenced by our gross 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 this year will not be completed.., the projects will not be completed till late 2008 or early 2009. And in transmission segment, we are also encouraged by interests we are seeing in the open season we announced for firm transportation in the Woodford Shale area. As for the IPO of Enogex Partners MLP, we continue to be committed to completing the offering, weighing however on a more constructive market. As you know, we delayed the IPO on January 24 due to the market conditions, which were extremely unfavorable. As you can see from our capital spending plans and recent earnings, the fundamentals of the natural gas tremendously [ph] remain positive. We're still in registration and plan on updating our S-1 registration next month for 2007 financials. In closing, we are executing on our business plan, focused 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 its approved by the OCC, our efforts will be focused on delaying the time until the next base load plants needed through energy efficiency and demand side management. Other important regulatory proceedings you will hear about are related to the recovery expansions related to the cancelled canceled [ph] coal plant, the ice storm, and wind related transmissions. Our Enogex business has substantial growth opportunities and we're effectively competing for a 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 the interest in the company. But, now I'll turn 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, our 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 in 2006… $2.64 versus $2.45 on a continuing operation... we will start on slide 5 and we will 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 will provide details of gross margin in a moment. Operation and maintenance expense increased $4.2 million or 1.3%. Increases in outside services, employee costs and 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 [inaudible] 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 a reversal of interest expense, which was partially offset by an 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 power production from the Centennial Wind Farm. Now, looking at gross margin. The largest factor driving an 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 variants 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 non-residential customers, which increased gross margin by $9.4 million. And these increases in gross margin were partially offset by cooler weather in OG&E service territory resulting in an approximate 11% decrease in cooling degree days as compared to 2006, contributing to a decrease of approximately $16.3 million in price variance due to sales and customer mix, which decreased 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 utility expects to under take 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 in green at nearly $400 million, and of course the Redbud acquisition, planned for 2008, of $435 million. To put the capital spending projections in a rate base perspective, we project total company rate base to increase from approximate $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 in 2006, 11% increase in EPS. As Steve 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% of $353.1 million from $307.4 million. I'll provide details of that in a moment. Operation and maintenance expense increased $17.4 million or nearly 16%. Higher employee costs to support growth and an increase in outside services of materials and supplies expense were the primary drivers. Interest income decreased $1.9 million from 2006, primarily due to a 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 a sale of stable 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 2007. Primary drivers include higher keep-whole margins of $6.7 million, realized commodity spreads of 535 versus 399 in the prior year, $6.6 million of lower imbalance expense, higher prices for [inaudible], which increased 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 increased 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, a reduction and lower cost of market adjustment to natural gas inventories. These increase were partially offset by increased imbalance liabilities. In 2007, Enogex recorded a loss of $2.5 million on non-recurring 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 non-recurring and timing items in 2006, primarily resulting from the gain on the sale of the Kinta assets. Now, I 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. In contribution by business unit on a comparative basis is as follows. OG&E, $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 $0.40 versus $0.24. At OG&E, net income was $15.7 million or $0.17 per share as compared to net loss of $1 million or $0.01 per share in 2006. Some of the primarily 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 than in our last year's quarter we credited to customers approximately $26.7 million of additional fuel related revenues that was not intended by OCC rate order from December 2005. Operational and maintenance expense increased $7.2 million or 8.7%, primarily due to increased outside service employee costs, partially offset by increased labor activity associated with the December 2007 ice storm. Depreciation increased $2.6 million, primarily a result of 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 AFUDC in 2007. Interest expense decreased $7.1 million, primarily due to a settlement with the IRS resulting in a reversal of interest expense. I am 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 in 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 operation of $23.1 million or $0.25 per share in 2006. Some of the primary drivers of 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%. The next slide we have the details of 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 [ph] 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 from $45.6 million in 2006 to $67.2 million in 2007, primarily due to processing margins which increased $12.2 million, primarily due to keep-whole margin and [inaudible] 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 and increased margins, due to renegotiated contracts and new business. For the quarter gathered volumes increased 10%. Transportation and storage margin decreased $8 million from $32.6 million in 2006 to $24.6 million in 2007. Transportation margin decreased $8.4 million, primarily due to a reduction in fuel reserve of $5.9 million in fourth quarter of 2006 as no such item was recorded in 2007. Throughput volumes increased 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. An effective tax rate of 33.5%. You can see the guidance for each of the businesses and I'll discuss our 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 to increase approximately 2%. Looking at expenses, operating expenses of approximately $536 million, interest cost of approximately $77 million, 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 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 $0.98 per diluted share of the company's common stock. Key assumptions underlying this guidance include total Enogex's 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, an increase of 8% in gathered volumes over 2007, natural gas prices are at $7,25 to $7.64 per MMBtu in 2008, realized commodity spreads are $5.48 to $6.09 per MMB2 in 2008. The realized commodity spread takes into account that 59% of processing volumes of their price risk are hedged. Weighted average natural gas liquids 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 from investment in Enogex's pipeline system are approximately $292 million in 2008. As shown, the projected loss at 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 a summary of the fourth quarter, full-year, and outlook. And now, I will turn the call over to Howard Motley for a regulatory update. Howard? Howard W. Motley Jr. - Vice President, Regulatory Affairs, OG&E Electric Services: Thanks Jim. The regulatory update this morning will cover ongoing and future activities in the Oklahoma jurisdiction. We will be discussing a Red Rock purchase and pre-approval application we’ll be filing in the future. I will also be taking about the recovery of the Red Rock cancellation cost and the December 2007 ice storm cost to restore service. And then we will 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 the 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. An Oklahoma rate case is targeted for 2008… we are on slide 23, the regulatory plan and the end of that is where I was discussing is, at the end of 2009, we will 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 are successful in getting pre-approval for Redbud this year and a rider will terminate, when we have all of the investment and cost associated with those projects in our base rates starting January of 2010. And then subsequent to that rate case, we plan to file a rate case every other year…. every year in alternate in the different retail jurisdictions in Oklahoma and Arkansas. As far as the Redbud purchase, OG&E is currently preparing its filing before the Oklahoma Commission to request pre-approval of the Redbud purchase and authorization of 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, the Red Rock cancellation cost in December 2007, the company filed an application seeking recovery of about $14.7 million of Red Rock cancellation cost. We are asking the commission to allow OG&E to sell SO2 credits and retain the profits to offset the cancellation cost. There is a procedural schedule, the parties will file responsive testimony on March 24, and rebuttal testimony is due on April 15. A settlement conference is scheduled for May 2, and if not settled, the hearing will begin on May 7, and the Administrative Law Judge right now has targeted the issue, the report and recommendations to commissioners on June 6. The next case we have out there is the… the issue 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 million, $55 million, about $19 million of that was capital, $34.5 million of that was O&M expenditures to restore the service to our customers. In the last Oklahoma rate case, the commission authorized a regulatory asset to accrue storm cost in excess of $3.5 million annually and recover in the next rate case, which will be the 2009 case. Prior to December 2007 ice storm, the company had already experienced $3.5 million of storm cost, therefore the entire amount of $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 field 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 on May 15, OG&E will file a responsive testimony if necessary on June 19, and rebuttal testimony is scheduled to be filed on July 17. The hearing is scheduled for August 21. I think it's good to note that during our last three commission audits, 2003, 2004 and 2005, there have been no challenges to the cost that passed through the 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 the 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 at 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. Question and Answer

[Operator Instructions]. Your first question comes from [inaudible].

Hi guys. Could you... just going back to slide 24, could you talk a little bit more about the Redbud purchase and the sort of what you went through? I mean, you RFP and came up with Red Rock and obviously you did 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 plant was a PSO request for proposal for a base load need they had in the 2011 time period, and we had a baseline 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 facilities these day, we thought that a prudent thing to do. As you know, [inaudible] that they did not approve that at coal plant. So, from a standpoint of what the alternatives were at that point in time to meet that need, you really don’t have any alternatives except for natural gas and then combined cycle facility, given that you're going to run this plant 80%, 75% at a 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 the portfolio of these merchant plants decided that they were going to sell that 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, to as our partners and we were successful, I think, at a price of $695 per KW. In our own estimation, what we see out there is that, it seems the consensus is the build combined cycle today is $900 to $1000 per KW. So, I think from a standpoint of the purchase price and the fact of lack of construction risk, in fact, that we do have that need, we are trying to see the growth here in Oklahoma, our projections remain the same. We feel that it is a very good purchase for us. We have asked for again pre-approval. We have 300 days to get an approval under the purchase agreement, and we have the ability in order to not be, I think, materially different… there is some standard in there that… it’s in fact, we are not… that doesn't meet our requirement, we don't have to go head with the purchase of the Redbud facility. I will turn it over to Howard Motley, you asked a question about memorable handicapping, how we thought about. Howard, you are probably closest to that situation of the commission, what’s your feeling at this time? Howard W. Motley Jr. - Vice President, Regulatory Affairs, OG&E Electric Services: I think the key point that you made, the fixed price, that was a real issue in the Red Rock case there wasn't a... they couldn't get a guaranteed fixed price, so they were worried about it, an environmental issue with the coal, and then I think that they even discussed Redbud as being an option, that maybe we should look at a little more in the Red Rock case. So, I think, there is some thinking even that the guess maybe the appropriate plant out there. Based on all of that, I think we have a very… we are going to be more positive of a case in this case. There will be less intervention I believe and I think the commission is going to see that this mixed with our wind plan and a few options like that we 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. They are in the game with us now and I think the commission really is going to look at the end result. The plant is the below what it would cost to construct a plant like this. The risk and construction price to the consumers are fixed. I believe that the commission knows that we do need power in the future and I think that will not have quite a role in this case as in the Red Rock cases. Howard W. Motley Jr. - Vice President, Regulatory Affairs, OG&E Electric Services: We did not have requirement to competitively did and we did discuss… they were aware that we were bidding on the Redbud facility, so we kept them up to speed what we were doing. The opportunity and quick turnaround time, they were really briefed the whole way. So, it was not a surprise to the commissioners.

Thanks so much guys.

[Operator instructions] Your next question comes from Scott Engstrom with Glennhymn Capital Management.

Good morning. Jim, just a couple of question 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 ran to 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… I thought about '07 margins, just weather impacts on '07 at the utility level. Can you quantify that versus normal?

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

That's pre-tax margin?

Yes.

Okay. So you had… 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 some more close to 2% margin growth, but… maybe I will call up offline on that. The other question I had is on Enogex operating expenses, has seen fairly decent growth, growing from say $170 million in '06, to $190 million this year, up to the $200 million plus you are 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 cost associated with materials and supplies and of course we have a lot of growth initiative going on and that requires us to add people to support that growth initiative, and that's really the main drivers behind operating expenses. Really in the O&M category, of course you are going to get a little higher depreciation, a little higher [inaudible] as you continue as planned, 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 organic higher cost to run the business.

That's correct. And of course depreciation is going to be a big part of that as you have CapEx close to $300 million in '08.

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 fill in the blank… a mid-year assumption on closing that or end of the year or is there some other factor driving the jump in interest expense?

I think you’d have to look at '07 first, realize that we had the one-time IRS settlement, which drove down interest expenses in 2007 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 of the closing Redbud is in the November 30, sort of, timeframe. So, the debt would be associated with that would be later in the year.

Okay, thanks a lot guys.

There are no further questions at this time.

No other question again the... thank you all for your interest in the company. We have a lot of growth opportunities. We are 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.