Good day, ladies and gentlemen and welcome to Q1 2015 OGE Energy Earnings Conference Call. My name is Sandra and I am your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Todd Tidwell. Please go ahead, sir.

Thank you, Sandra. Good morning, everyone and welcome to OGE Energy Corp’s first quarter 2015 earnings call. I am Todd Tidwell, and with me today, I have Pete Delaney, Chairman and CEO of OGE Energy; Sean Trauschke, President of OGE Energy; and Steve Merrill, CFO of OGE Energy. In terms of the call today, we will first hear from Pete, followed by a regulatory update from Sean and an explanation from Steve of first quarter results. And finally, as always we will answer your questions. I would like to remind you that this conference is being webcast and you may follow along on our website at oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same website. Before we begin the presentation, I would like to direct your attention to the Safe Harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to-date. I would also like to remind you that there is Reg G reconciliation for gross margin in the Appendix, along with projected capital expenditures. I will now turn the call over to Pete Delaney for his opening comments. Pete?

Thank you, Todd. Good morning, everyone and thank you for joining us on today’s call. We reported first quarter utility earnings of $0.09 a share, which is down slightly from $0.10 per share in 2014, but is in line with our 2015 full year guidance with utility. While these results are in line with plan, the vast majority of our earnings is we must always remember in the next two quarters. Consolidated earnings for the quarters were $0.22 per share compared to $0.25 in 2014 also in line with our previous guidance for the year. Compared to consolidated earnings, our cash distributions from Enable are a really more important metric to us, as regards to our financial plan. Enable quarterly distributions were $34 million in the first quarter, up about 9% from the initial distribution rate at the time of the Enable IPO last April. Despite the impact of lower commodity prices on the gathering and processing business, we do expect distribution growth from Enable to continue this year. While the economy – Oklahoma economy has been impacted of course by falling commodity prices, our service area appears to remain on sound footing. The local sector has seen job losses of about 8% since the start of ‘15. However, unemployment rate as of March 2015 for Oklahoma City and the state remains well below 4%, one of the lowest in the nation. And the utility continues to add customers at a rate consistent with our historical growth rate of 1% and that’s about more than 8,000 customers having added to the system since the first quarter of 2014. At the utility, the focus is on executing our environmental compliance plan and our activities related to leveraging our smart grid infrastructure to improve work processes, continue to drive operational improvements and…

Thank you, Pete and good morning. Before we get into the environmental compliance effort, I think it is important to acknowledge the storms, which hit our communities last night, multiple tornadoes, high winds, significant rainfall, causing property damage, well closures and flooding and our thoughts and prayers go out to those communities impacted. We are busy on the restoration efforts and I am proud of the men and women who have been working safely through the night to restore the system and help the communities in which we serve. This is what we do. Pete gave a good overview on the history of the case. And now, I want to update you on what has happened recently. Closing arguments for the hearings on our environmental compliance plan took place yesterday and there were no surprises, as the parties reiterated their filed positions. We feel like our case is strong and non-compliance is not an option. Now, the proceeding goes to the ALJ and we hope to receive his report in June. And after that, it goes to the Commissioner for final approval. We feel like we have a very strong case presented by our very own experts. We are a company with a strong track record of success as we have been in business for 113 years. Our system is highly reliable. We have rates well below the national average, numerous customer satisfaction awards and a strong environmental track record. Turning to Arkansas, we will file for recovery next week with the Arkansas Commission under Act 310 and hope to begin recovery as early as the June billing cycle. Our filing will include our environmental expenditures to-date with the ability to re-file every 6 months as additional expenditures occur. As you know, Arkansas recently amended Act 310 accelerating recovery for…

Thanks, Sean and good morning. For the first quarter, we reported net income of $43 million, or $0.22 per share as compared to net income of $49 million, or $0.25 per share in 2014. You will notice that the holding company had earnings of $0.02 per share. This is primarily due to a gain from the deferred compensation plan and we are not projecting this to continue. The contribution by business unit on a comparative basis is listed on the slide. At OG&E, net income for the quarter was $17 million or $0.09 per share as compared to net income of $21 million or $0.10 per share in 2014. First quarter gross margin at the utility increased approximately $2 million, which I will discuss on the next slide. Looking at other key drivers for the quarter, O&M is on plan for the year. The first quarter variance was $3 million lower in part due to the timing of scheduled power plant maintenance. Depreciation increased $10 million primarily due to three large transmission lines that were added in the last 12 months part of the over $800 million of plant placed into service in 2014. Interest expense increased $3 million due to the $250 million debt issuances that occurred in both March and December of last year. Turning to first quarter gross margin, utility margins were up approximately $2 million for the first quarter of 2015 compared to 2014 despite significantly less favorable weather. Looking at the three primary drivers for the change in gross margin first was new customer growth, contributing $5 million, which did include one-time customer rate migration of approximately $1 million. We added over 8,000 new customers to the system as compared to the first quarter of 2014 growing at our historical rate of 1%. Second, changes…

[Operator Instructions] And your first question comes from Matt Tucker from KeyBanc Capital Markets. Please go ahead.

Hi, guys. Good morning.

Good morning.

Could you provide a little more color on the environmental costs that you plan to file for in Arkansas and also if could you elaborate a little bit on what you like about the new ratemaking process there?

Sure, Matt. This is Sean. So, the filing that we are going to make next week in Arkansas is really to pick up the low NOx burners that are in service. To put it in perspective, it’s pretty small. It’s roughly $0.16 to the average residential customer’s bill per month. So, it’s really small. We haven’t really got too far down, but I think it’s a good way to begin that process. What we really like about the Arkansas legislation was two fronts. One, on their Act 310, which is the environmental mandates, they have expanded that to actually have a looking forward component to that, where you actually, these planned expenditures you could begin to file for that as well. We are not including that in this filing right now. The one we are going to make next week, we don’t plan to make this one, but we will pick that up on the next filing that we make six months from now. The other piece of that was the formula rate legislation and where they really tried to articulate a more prescriptive formula for not only determining the ROE, but determining the recovery of items and more of a formula plan to help reduce some of that lag. And we view this as positive there as well, but we also view the opportunity for us to address the hypothetical capital structure that is in Arkansas as well that causes us the most issue.

Okay, thanks. And then switching gears a little bit, it looks like from Enable within the contribution there, between the amortization, the basis difference and the elimination of the Enogex fair value, those items totaled about $8 million versus I think about $5 million last year. Is this a good run-rate to assume for these items for the rest of this year?

Yes, it’s about $0.02 a quarter. So, the run-rate sticks around that. The $8 million is the better number. So, it’s about $0.02 a quarter is what you ought to assume.

Great, thanks. And then finally sorry to hear about the storms that hit your service territory last night, is it something that we should expect could create unusually large storm restoration costs for the second quarter or is this kind of consistent with these types of things are kind of common for the second quarter there?

Unfortunately, it is pretty common for the April-May timeframe. And so I don’t see any wild variance from previous years.

Got it. Thanks, guys. That’s all for me.

Okay.

Thank you. Your next question comes from Brian Russo from Ladenburg Thalmann. Please go ahead.

Hi, good morning.

Hi, good morning Brian.

I am just curious, how much are you under-earning in Arkansas and what percent of your rate base is attributable to Arkansas?

The rate base attributable to Arkansas is only about 7%. We are probably earning slightly below 7% at this time. So, we definitely are under-earning at that point, but it’s again only about 7% of our rate base.

Okay. And Pete earlier you commented on customer growth and the unemployment rate in economy, just – what’s your outlook given what we have seen in the energy sector?

Yes. We – again, the numbers came out and we obviously especially in the more rural areas as opposed to our metro, with the field services and the contractors and the servicing companies got hit more so than the companies, there have some – been some layoffs in the metro area, but what we have seen is that a recycling. In other words, what we have – our employment rates has been so low. There has been businesses, their number one issue has been able to hire people, because of the low unemployment rate here. And what we have been seeing is that these businesses, the people that are no longer in the energy industry are finding jobs in other areas. We are also seeing our customer growth remains the same. We are seeing a lot of potential growth in some bigger loads. And so we haven’t seen any real – on a net basis, we haven’t seen any real big drops from specific plants. And if there has been one or two, we have got new plants coming in. So, everything really appears to – from the economy I think we maybe expected at this point to see little bit more softness than we have, but so it’s been holding. And we are very pleased to see how the economy is holding in there. So, it’s a little bit more diversified teams and I would say pent up demand in other areas seems to be keeping us on track.

Okay. And then, it seems the House Bill 1910, the language is somewhat vague and that there seems to be a lot of different interpretations of it, with the testimonies filed in this compliance filing. And I am just curious, why should Mustang get a rider and why should a rider be granted outside of the context of a rate case, if you don’t mind?

Sure. So, Brian, this is Sean. On Mustang, what we have decided there is we have gone through this. We see this opportunity there to preserve this vital site for the state. And these units we have talked before, how old they are, they were nearing retirement. Pete talked about their current cycling that’s actually accelerating their retirement dates as well. As far as the rider, the point is this is what we tried to do in our filing is we filed this with the commission to provide the opportunity. We suggest that they should look strongly at CWIP with the idea to minimize the rate impact. We also wanted to propose this rider for Mustang from a transparency perspective. They knew exactly where we were headed, what we were doing and give them the opportunity to begin a glide path on the recovery of those items as well. The other point is from your perspective as we go out and raise capital, you look at that, you value that risk proposition. So, if we were going to go out and sell securities to help fund that that helps. And so we thought that was a good way to lower the overall cost to customers and that’s what we were focused on. And we think it’s appropriate. It’s allowed under the statute and we think it’s a good idea.

Brian, we don’t know if you are referring to the different parts of that statute. And one part was for recovery of state and federal environmental and the other was for pre-approval of – clearly spelled out for new generation to be pre-approved by commission. And again, the legislature I think unanimously passed that bill. At the time people viewed, it made a lot of sense and so we are taking – we are going down that path.

Alright, great. Thank you very much.

Thank you. We have another question for you and this comes from Charles Fishman from Morningstar. Please go ahead.

Thank you. I noticed the capital expenditures for environmental scrubbers are projected to – I can’t tell if it’s – the total amount has changed or it’s just an acceleration of the project and/or maybe you are refining some of the costs. Could you just explain what’s going on there?

Yes, this is Steve. Nothing has changed. That’s just the timing difference moving some dollars in from ‘16 into ‘15 to about a $15 million change. So, that’s all that’s going on there, but our projections haven’t changed.

Okay, thank you. And the second question I had was referred to some of the increasing in gross margin was rate migration, I was wondering if you would give a little more color to what exactly has happened there?

Sure. It’s really just customers changing rate plans that can have an impact on margin. It’s difficult to estimate and project what they will do, but it’s just movement back and forth within the different rate designs.

So, is that typically residential or commercial or?

Commercial.

Okay, thank you very much.

You are welcome.

Thank you. We have another question for you and this one comes from Michael Dandurand, and he is from Goldman Sachs. Please go ahead.

Hey, guys. Congrats on the good quarter. I think most of my questions have been asked already. Just on your outlook for 2015, I know it’s a pretty good quarter, but so – and obviously, it’s super early in the year. Do you guys typically provide updates throughout the year? And if so when would that be in reference to guidance?

We would when – if there is a significant change, typically, it would be the third quarter. Keep in mind we have only earned about 3% of our earnings per share for the year up to this point. Second and third quarter are where significant earnings come into play and typically late second quarter and then mainly in the third quarter.

Okay, got it. That’s all I have.

Thank you. We have another question for you. This one is from Jay Dobson and he is from Wunderlich Securities. Please go ahead.

Good morning.

Good morning.

Hey, Jay.

How are you, Sean, Pete, Steve? Quick question on Oklahoma, I will probably throw this to Sean and you can figure out who should answer it. So, we are waiting on the environmental decision hopefully this summer. Talk about rate case outlook, when that might be filed on the heels of and sort of how – what that might look like in rough terms?

Sure. So, Jay, the way we are going to approach that is this is – when we finally implement the rate impact for the environmental compliance plan, we get that implemented in rates. Depending on when that is, then we will proceed with filing the Oklahoma case. And so what I want to make sure of though is if we receive an order, I want to make sure that we incorporate the latest completed quarter of financial information and take the 6 month look forward from that point on. So, if we received an order in late June or early July and we finally guide in the rates, I want to incorporate the second quarter actuals as the basis for the filing. And so, we want to true that up as real-time as we can. So, the rate case will just be as long as it takes us to close the books for the quarter and make the necessary filings. Remember, the rate case had three components to it. It has, one, we have the statutory requirement in House Bill 1910 to file a case within 24 months. That’s where we are going to check that box with this case. The other piece was we have that expiring wholesale contract with one of the co-ops that expires in June of this year. So, we need to get that back in rates. So, to your point there, that’s about 300 megawatts with an embedded cost of about $240 a KW. So, that’s real value to our customers. And then the other piece of that, Steve mentioned in his prepared remarks, the transmission recovery of the retail component of those transmission lines that are in service. So, we want to pick those up and that was about roughly $100 million of assets.

That’s great. Yes, no, that’s perfect.

Okay.

And then to Arkansas understanding its early days in asking you to go out here and hypothesize a little bit, but if we were to assume a reasonable outcome in the rate case you might file, would the regulatory mechanisms established under recent legislation allow you to stay out in Arkansas? I mean, I guess, it’s as much a CapEx question as much as anything?

Yes, it really goes with your forecast but – and where you are. And so our goal is not – our goal is to make sure that we earn our allowed return there. And so considering we have got a lot of balls in there. So, I don’t think it’s – we are not approaching it from a stay-out or come-in perspective. We are approaching it from making sure we have got the right recovery mechanisms to earn our allowed return.

Got it. I guess maybe then asking it in a different way, do you anticipate and again I am asking you to assume a reasonable outcome, can you get to something close to your allowed return in a single case?

Jay, the largest component or issue we have in Arkansas is the use of the hypothetical capital structure. And we look at our actual capital structure, that’s closer to 53, 47. And the hypothetical structure that’s used in Arkansas is significantly lower than that. So, right out of the gate, we are 60, 70 basis points below our allowed. So, once we address that, I believe we have a very strong opportunity there to earn our allowed return.

That’s super. And then last question, Steve, on the holdco was it the entire $0.02 that was that sort of non-referring element on deferred comp?

Yes, that would be – yes, you just consider that the whole thing, yes.

Perfect. Hey, thank you very much for the time.

Thanks, Jay.

Thank you. We have another question for you and this one is from Anthony Crowdell, and he is from Jefferies. Please go ahead.

Hey, good morning. Sorry, I jumped in late. I just – I wasn’t sure if you addressed it early, but it seems like there is opposition with Mustang. If Mustang is not included in this environmental plan, can you add that in that the rate filing, the subsequent rate filing that you would have at OG&E?

Sure, sure. And again, what we asked was for pre-approval of Mustang and so if, in your scenario there, if they elected not to pre-approve it, there would be other opportunities.

Yes. And I guess really getting ahead of myself, if you think about the utility over the last several years, you guys had a tremendous transmission build up – really fortified the grade there. You are now going through a period of really fortifying your generation. If I look at 2018, 2019 as you are winding that down, you have given us clarity on the dividend out for 2019, what is the next leg of CapEx for the utility?

Yes, you are getting this out beyond our 5-year window there.

Right, yes.

But let me just say that, that is something that we are spending a great deal of time thinking about and considering a lot of different options today in anticipation of what exactly are we going to do in ‘19 and ‘20 and what that looks like. And so as we move forward, we are going to talk more about that, but I want to convey to you that, that’s exactly what we are spending a lot of our time on is from a strategic standpoint, what does that look like?

Great, thanks for taking my question. I really appreciate that.

Thanks, Anthony.

Thank you. We have a final question for you. And this is from Chris Shelton from Millennium Partners. Please go ahead.

Hey, good morning guys.

Good morning, Chris.

Good morning, Chris.

A quick follow-up question just on the modeling on the environmental CapEx, it looks like some of the CapEx look forward for me into ‘16 and ‘17, just wanted to see what was kind of driving that?

It’s really just timing of the spend. So, the total really hasn’t changed, but it’s just a timing issue of when we expect the payments to occur. We have been moving along, signing contracts, procuring equipment and so that will tend to move around a little bit, but that’s all that is, is timing.

Got it. It’s a product of kind of selecting vendors, things like that.

Correct.

And then as far as presuming you don’t get a rider and you have to – and you recover this through kind of the normal ratemaking progress, would you be able to include kind of partial plan and to make note of measurables into the cases, I guess or?

Into – you mean into – are you talking about in the rate case?

Yes. Based on the upcoming rate case, you will spend X amount of dollars on the environmental income.

No, I think we would just be accruing ACDC and it probably wouldn’t be part of a rate case activity, but we haven’t made that filing, but we don’t view that as something that would be in there.

Okay. Alright, that was it. Thanks guys. I appreciate it.

Thanks, Chris.

Thank you. I have no more questions. So, I will hand the call back to Pete Delaney.

Thank you, operator. Well, I would like to take a moment to thank all of our members for their commitment to safety at all times, especially during the storm season. And I want to thank all of you for your continued interest in the company. We are adjourned. Have a great day. Thank you.