OGE Energy Corp. (OGE) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2016 OGE Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Todd Tidwell. You may begin.

Thank you, Operator. Good morning everyone, and welcome to OGE Energy Corp's fourth quarter 2016 earnings call. I'm Todd Tidwell, Director of Investor Relations and with me today are Sean Trauschke, President and CEO of OGE Energy Corp and Steve Merrill, CFO of OGE Energy Corp. In terms of the call today, we will first hear from Sean, followed by an explanation from Steve of year-end and fourth 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 Web site at oge.com. In addition, the conference call and the accompanying slides will be archived following the call on that same Web site. Before we begin the presentation, I would like to direct your attention to the Safe Harbor statements 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 today. I would also like to remind you that there is Regulation G reconciliation for gross margin in the appendix along with projected capital expenditures. I will now turn the call over to Sean for his opening remarks. Sean?

Thank you, Todd. Good morning, everyone and thank you, for joining us on the call today. I'm pleased to announce that 2016 was a good year, both operationally and financially for the utility. Enable business also performed well as their business environment continues to improve. We continue to deliver results and focused on what we can control. Earlier this morning, we reported 2016 consolidated earnings of $1.69 per share compared to $1.36 in 2015. For the fourth quarter earnings per share was $0.29 as compared to $0.15 last year. The big driver for the increase year-over-year was the impairment at Enable in 2015. The utility reported earnings in the $1.42 per share with the milder than normal summer weather impacting earnings by about $0.02. As you know, the utility results do not include the impact of the rate relief requested in the Oklahoma general rate case. I will touch more on this in a moment, but we’re optimistic a decision is forthcoming. We do have a lot of good things happening at our Company and in our communities, beyond just regulatory activities. Although, regulatory is important, the main mission is on proving the product we provide to our customers and our communities. I cannot be prouder of the focus and determination of the team to press forward and create real value for the communities we serve. The utility service territory is growing. In 2016, we added almost 9,000 customers to the system, maintaining customer growth at just over our historical growth rate of 1%. The greater Oklahoma City economy continues to perform with the unemployment rate is 4%. On a state-wide basis, as energy prices rebound, we are beginning to see economic activity pick-up. With commodity prices improving, oil field load is retuning with 141 new oil field customers in 2016. Looking at the year-end review, the utility accomplished a great deal. First and foremost, I'm very proud to recognize the Company members for their safety performance in 2016. Quite frankly, it was a banner year. In fact, our safety performance for 2016 was the best in our 115 year history. Just 10 years ago, we were experiencing 80 plus reportable incidents per year. We believe that our focus on safety not only matters to the lives of our members and their families but it makes good business sense as well. So, shout out to our workforce and for great year and let's keep it going. In the past, we received numerous awards for a variety of activities, and 2016 was no different. We once again won the EIIs Emergency Recovery Award, the Keep Oklahoma Beautiful Vanguard Award associated with our solar farm, the Cogent Reports and Market Strategies International Award for Customer Champions, and Community Service Awards from the City of Muskogee to name a few. It's one of our core values at OGE is to be involved in all aspects of our communities, whether through our charitable giving, voluntarism or business leadership, we are committed to making the towns and cities where we work and live better. On the operations front, all remaining environmental projects are on-schedule and on-budget, as well as the Mustang plant. Our generation fleet continued to perform well, highlighting the benefits customers realize through a diverse generation portfolio. On the expense side, our O&M cost per customer as well as the average deal are virtually the same as they were five years ago. We continue to make sure every dollar counts. And we said it before it's not just one thing but a mindset of consistent focus of everyone as the Company. And last year S&L ranked OG&E as having the lowest average electricity price in the nation. OG&E's economic development efforts were also successful in 2016 as nearly 100 megawatts of new load was secured that will ramp up over the next couple of years. For 2017, several large new load projects are in various stages of negotiations, and we're optimistic on that front. We believe we play a fundamental role in bringing businesses and jobs to our service territory. Our commitment to low rates and reliable service play a key role in attracting new customers to our system. In addition, we're in the process of deploying our enhanced LED street lights program for the city of Oklahoma City. This is another extension of our smart grid platform. As streetlights are replaced, they will be connected together on a network platform to increase system efficiency and improve our restoration responses. Looking forward, as we complete our regional haze and utility maths environmental compliance program in an effort to protect the customer bill, we have delayed a number of grid enhancing programs. These include low voltage 69 transmission upgrades, underground cable replacement and infrastructure investments to reduce outage durations for customers. As an order of magnitude for the opportunities, you should expect CapEx levels consistent with what we’ve seen the last couple of years. Once we get through the environmental plans, we will begin and in some cases resume, a number of these initiatives assuming there's a constructive regulatory environment. We'll keep you update as we progress through these initiatives. As I mentioned earlier, our 2016 results did not include an Oklahoma rate order. The administrative law judge that heard the case issued a report in December recommending approximately $41 million revenue increase predicated on a 9.87 ROE. A hearing on the ALJ report was held on February 2nd, and while we await the final decision, we are confident in our case and optimistic regarding the ultimate outcome and receiving a final order soon. Turning to Arkansas for a moment, we filed a rate case in September of 2016, seeking a $16.5 million increase. A hearing will be held in May, and we fully expect an order in June of 2017 as they adhere to a strict regulatory schedule. In addition, that case was filed under Arkansas’ new formula rates law which, going forward, should increase the efficiency of cases even more. Moving to Enable, what began as a very challenging year in 2016 ended very well with strong investment grade credit metrics and strong coverage ratios. Gathering and processing growth in the SCOOP and STACK plays allowed them to beat expectations achieving the highest DCF since their formation, and a distribution coverage ratio of 1.18 times. Considering that oil and natural gas prices hit 10 year lows in 2016, the business performed remarkably well. In 2016, we received $141 million in cash distributions from Enable. In addition, valuation of the midstream continues to recover as total return was more than 90% in 2016. Enable's strong balance sheet and expense reduction not only allowed them to weather the downturn but position the business for future growth. Enable also executed a 10 year fixed fleet contract in the prolific STACK play and secured an additional 60, 000 of acreage dedicated to their system. Enable is clearly doing well, and we're excited about the possibilities for the future. They will remain focused not only on growth but also on investment grade credit metrics and solid distribution coverage ratios. One final comment on Enable is that we responded to another right of first offer or ROFO from CenterPoint regarding their strategic process for their interest in Enable. Similar to last time, we are not disclosing the specific terms and the timeline is as follows; we responded to the ROFO in February 15th and CenterPoint has until June 15th of this year to identify an offer, which is 105% of our offer. As we've stated many times in the past, OGE is committed to our Enable investment; they have great assets and prime locations; and we are excited about what the future holds and continue to be focused on growth in the distributions and incentive distribution rights. Switching gears a bit, we were pleased to see former Oklahoma Attorney General, Scott Pruitt, confirmed to lead the UPA. We know Scott and look forward to working with him in his new role. And finally, Id' like to address potential implications of tax reform on the Company, based on our current 2017 guidance. Both the Trump administration and the House Republican have advanced tax reform ideas that could impact our business. Although, still very early in the process. The current proposals have really three common elements; reducing the corporate tax rate to 20% or 15%; the 100% expensing of capital investment for tax purposes; and the elimination of the interest expense deduction. These elements certainly would have different impacts depending on whether we look at our regulated utility business or non-regulated mainstream holdings. The good news is that under any of the current proposals, OGE customers and shareholders like will benefit. First, let's look at the utility. Because of the traditional rate making approach reducing the corporate tax rate directly benefits customers by lowering the provision for income taxes and rates. Lower tax rate also creates an excess deferred tax position that would benefit customers over-time. At the same time, the utility's rate base would increase as well. We would consider this component as a proposed tax law as a win-win for both customers and OG&E, assuming we have the right regulatory mechanisms in place. In conjunction with the lower tax rate, if 100% extension of capital investments was adopted, it would still be positive for customers in OGE. In lieu of the 100% expensing of capital investments, we would advocate for the preservation of the interest deductibility as it has a far greater benefit for customers. Turning to the unregulated business, a lower corporate tax regardless of the level will create a one-time earnings benefit for OGE. And then on an ongoing basis, depending on the tax rate, earnings from Enable would increase between $0.08 and $0.11 per share if interest is deductible between $0.04 and $0.07 per share if interest is not deductible. Overall, the current proposals would be a positive for OGE and our customers. And obviously, this is very, very early in the process and there are many moving pieces. But as we are standing here today I want you to understand the key takeaways that we will have a benefit from the ownership in Enable business as a result of tax reform. We have a strong cash position to handle any customer give-backs resulting from a lower tax rate. And we have minimal holding company debt that would be exposed if interest expense is no longer deductible. So, we’ll be paying very close attention to tax reform as it takes shape, but we want to share our view of the implications of the plans that are currently being discussed. In closing, I want to reiterate that overall 2016 was a good year for Company, and I think we're well position for continued growth in 2017. Thank you. And I'll now turn the call over to Steve to review our financial results in more details. Steve?

Thanks, Sean, and good morning, everyone. For the fourth quarter, we reported net income of $58 million or $0.29 per share as compared to net income of $29 million or $0.15 per share in 2015. The contribution by business unit on a comparative basis is listed on the slide. For the full year 2016, we reported earnings of $338 million or $1.69 per share as compared to net income of $271 million or $1.36 per share in 2015. At OG&E, net income for the quarter was $46 million or $0.23 per share as compared to net income of $20 million or $0.10 per share in 2015. For the quarter, gross margins increased approximately $32 million. The primary drivers for the increase in gross margin included $16 million increase in wholesale transmission revenues. This was in part due to an SPP settlement of revenue credits related to the Windspeed transmission line for the last nine years. Weather was also more favorable than 2015, adding $14 million to gross margin. Compared to normal, weather contributed $2 million after margin for the quarter. O&M increased approximately $6 million for the quarter due to higher professional service costs, partially offset by lower vegetation management and lower marketing and sales expenses. Depreciation expense increased by approximately $5 million for the quarter due to additional plant in service, including the ACI projects and the Mathewson to Cimarron transmission line. Finally, interest expense was $3 million lower due to an increase in allowance for borrowed fund and a decrease in interest from lower long-term debt. Now turning to the full year, at OG&E, net income for the year was $284 million or $1.42 per share as compared to net income of $269 million or $1.35 per share in 2015. Gross margin for 2016 increased $47 million, which I will discuss on the next slide. Looking at some of the key drivers for 2016, our O&M cost increased $25 million, primarily due to increased professional services and rider expenses which have revenue offsets. However, we did come in under our plan for 2016. Depreciation was $17 million higher this year, primarily due to additional assets that were placed into service. Other income increased nearly $8 million, primarily due to higher AFUDC from higher construction work-in-progress balances related to our environmental projects. Finally, income tax expense increased $10 million due to higher operating income and lower renewable energy credits from decreased wind production. Turning to 2016 gross margin, utility margins increased approximately $47 million in 2016 compared to 2015. The primary drivers for the increase were as follow; warmer summer weather translated into an increase of $21 million as compared to 2015 compared to normal weather reduced margin by $8 million; wholesale transmission revenues increased gross margin by approximately $20 million compared to 2015; the increase was primarily due to revenue credits associated with Windspeed transmission line for the years 2008 through 2016. Finally, riders for customer programs that have a direct expense offset contributed approximately $9 million. Partially offsetting these increases was the expiration of wholesale power contract that reduced margins approximately $10 million compared to 2015. As we have said before, this item has been included in the Oklahoma general rate case. Moving on to our environmental and Mustang modernization projects, investments for 2017 are largely comprised of the Sooner scrubber project in the Mustang CTs. All projects are on-time and on budget. For the scrubbers, we have invested approximately $209 million through the end of the fourth quarter and for the Mustang CTs, we've invested approximately $188 million. Turning to our investment in Enable, in 2016, OGE received approximately $141 million in distributions. This slide highlights the importance of Enable as a cash vehicle for OGE. Put another way, the cash distributions received from Enable in 2016 are more than 2.5 times the earnings contribution. This is free unencumbered cash flow for OGE to utilize for our CapEx programs and to support our dividend growth going forward. As Sean mentioned earlier, Enable ended the year very well. They achieved their objectives of strengthening the balance sheet and improving coverage, and are well positioned going into 2017. Turning to the 2017 guidance, at the utility and assuming normal weather, we project earnings per share to be between $1.58 per share and $1.70. For the midstream business, we're projecting the earnings contribution to be between $0.35 and $0.39 per average diluted share. We're projecting consolidated earnings between $1.93 and $2.09 per share. Looking further into the assumptions for the utility, we anticipate new rates to take us back in Oklahoma and Arkansas in 2017. We're assuming gross margin on revenues to be between $1.47 billion to $1.485 billion, which is based on sales growth of approximately 1% on a weather-adjusted basis. For the Oklahoma rate case, we are assuming $0.07 per share for rates implemented on July 1, 2016 through December 31, 2016, based on the findings in the ALJ report including a 987 ROE. It is also important to remember that OG&E has significant seasonality in its earnings. OG&E typically shows minimal earnings in the first and fourth quarters with the majority of the earnings in the third quarter due to the seasonal nature of air conditioning demand. This concludes our prepared remarks. We'll now answer your questions.

Thank you [Operator Instructions]. And our first question comes from the line of Joe Zhou from Avon Capital Advisors. Your line is open.

Actually it's Andy Levi. I just have one question, just answer it anyway you want. But is this something that’s kind of in my circles as far as discussions about the Company has come up. Could you talk about OGE in the context of M&A and what if any, aspirations you have of getting the Company larger or not?

Andy, as far as I think about OGE, we are intent on growing our Company. And I do expect and focused on growing this Company. And we have a lot of organic growth opportunities in front of us, and we're going to pursue those with great rigor. I don’t make a habit of talking about M&A or any of that activity. I'm not sure that that's always been fruitful for people to talk about. So, we wouldn’t comment on that. But there is -- I don’t want to leave any doubt in your mind that is our intention to grow this Company.

Because the impression that I think people have is that, yes, obviously you want to grow the Company organically. But that if there were an opportunity that made sense you would grow the Company through acquisition. And that you don’t want an answer, or how you want to leave that?

I want to leave it that. We're intent focused on growing the Company, and we’ll leave it at that.

And then just -- you can answer it anyway you want, you’re the CEO. And then just on Enable, I kind of tuned out for a second, so just kind of where we at, as far as the process, just remind us. And I guess that process is still alive. Is that the way to look at it?

Yes, I would characterize that, yes it's -- unfortunately, it's alive it's continuing. And as I mentioned in my remarks, we did respond to another ROFO notice, and essentially CenterPoint has till June to conclude this round of the process. And anything further, as far as where they are in that process, I think really in fairness you need to talk to them. We are focused along with the Enable to make sure that this is not a distraction to the business of Enable, and making sure Enable continues to really perform well.

And you said June, is there an exact date in June that you can expose?

Yes, 15th.

And our next question comes from the line of Brian Russo from Ladenburg Thalmann. Your line is open.

Just a clarification, so the $1.69 that you reported in 2016, which was below the guidance range of $1.72 to $1.83 is the primary driver of that is the absence of the GAAP EPS from the interim rates?

That is correct.

And that $0.07?

Yes, that’s what we included that would roll over into 2017 from 2016.

And then reading about some house bills and senate bills being proposed in Oklahoma, house bill 1891 and senate bill 282, regarding interim rate increases; and I just want to understand what's the motivation for this. Is it to concern with interim rates or is it to concern that the OCC is taking so long to issue a final order that these interim rates are being charged to customers for an abnormal amount of time?

Good question Brain, and thank you for clarifying what those bills were, because I don’t know them by number. But you’re exactly right. Last July, we implemented rates. And this statute has been on the books since the early 90s, and this is the very first time in 20 plus years we've ever implemented rates. And so I've not spoken to the author of either one of these bills, but I did see a news paper article where the author was quoted to basically say, it's not focused on us and/or PSO implemented rates the previously year, but is really focused on the process. And so that gets to your point there of the delays and the frustration that seems to be mounting. I would say this isn’t personal, no one is to blame. We've talked many times that other companies, including us and including the commissioners and their staff, there is a lot of frustration for the delays that are occurring here in. And we've done better in the past, and I think we're all focused on trying to get better. The other point that I would say, and may be you're alluding to this, but there are 10 bills that have been proposed in this legislative session, speaking to the restructuring of the commission. Now, I will tell you a number of those bills are show bills. They don’t have a lot of specificity in them. But nevertheless, I think it speaks to there is a recognition, and really alignment around the opportunity before us that we can do a better job here, and we’re all in it together. And that’s the first step of really moving things forward is that you have recognition on alignment of the opportunity. So, we will follow these. We're monitoring these. And as they take shape and form, we will be engaged. This is important to us. But to your original question about the interim rates, if I looked at the news paper and his quotes, he was really focused on the process and how we got to this point, not the actual implementation of the rates.

And then the $0.04 of PTC recovery in 2017 is that just like one-time 2017 impact that’s not like ongoing in terms of impacting your effective tax rate?

Brain its Steve. Actually it would be ongoing. So we’ve got some PTCs that expired right at the end of last year first part of this year. And so that impacts, other than waiting for a rate case, we need some mechanism from the commission to get that into rates, or customers have been benefiting for those PTCs for 10 years. And now that they expire, we end up in an unrecovered situation because of those rates based needs to go up. So, we're looking for an automatic mechanism. So we're assuming that we’ll get those that they may run through the field fall or some other rider mechanism. But as additional PTCs expire, the same issue would occur.

Then just on another 2017 assumption on the utility, other income about $60 million. I get the $34 million by AFUDC. But what’s the balance there that looks large?

It should primarily be driven by AFUDC, especially we're coming into the peak of our spend so you would really see that increase quite a bit in 2017.

Then, I would imagine that the mid points of the utility 2017 guidance assumes that 987 ROE?

That’s correct.

Thank you. And our next question comes from the line of Paul Ridzon from KeyBanc. Your line is open.

Midstream came in below guidance. I was looking for some recovery of some the hedge timing that you -- with a drag earlier in the year. Did that not hit fourth quarter or is that pushed into '17?

Yes, it pushed into '17 Paul. This is Steve. They had, at the end of the year there were $43 million of unrealized hedge losses. So that impacted us. By the time it got to us in our ownership share that was about $0.03, which we would have put them right where we had planned. So, it's about $11 million to us when it all said and done. So, those would roll-off. Now keep in mind, there's additional hedges for '17. And depending on what commodity prices do, you could create more. Those unrealized hedging losses are actually a sign that commodities have improved and we should see that benefit and volumes increasing going forward.

So, you took the mark-to-market hit in '16 and some of those will be delivered at a profit in '17?

Yes.

And then just so I understand Oklahoma rates. Your guidance is based upon recovering in calendar 17-18 full months of the $41 million ALJ rep?

That is correct, because we put interim rights in place July 1st that preserves those earnings going forward.

And so when you do get the order, that should be retroactive to January 1 plus the interim?

It'd be retroactive to July 1st when we put the interim rates in, July 1st…

And the interim was $41 million annualized?

Based on the ALJ report, we put in interim rates for about $69 million of recovery on an annual basis. The ALJ report that we're pointing to was about $43 million, $45 million, so that is what you could expect the benefit to be based-on on a go forward basis. And that's also more than $0.07 related to the six months in 2016 comes from that we point to in our guidance.

So, if you guys have been allowed to collect that proposed interim you would have refunded the delta between $69 million and $43 million or $45 million?

That's correct.

Thank you. And our next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.

So, I apologize for being a little slow here, but I'm not completely clear about how the Oklahoma rate case impacts 2017 versus 2015. Could you please help me out here? What is the -- I guess what I understand is why is there -- it appears that there's a benefit from the six months in 2016 in 2017. Is that correct?

That is correct. What we did -- while we implemented interim rates, we reserved the vast majority of those earnings pending an outcome from the commission. So, essentially, we didn't book any income from putting the interim rates in place, but it preserves that income. So when the order does come, we'll then be able to book whatever earnings are associated with the final order, in 2017. But it'll go back to July 1, 2016.

Just want to make sure I understood it. And then it looks like it's based on what the ALJ basically, the ALJ's report?

That's correct. It's all we really have to point to right now, and then to give you sensitivity as to how that might work whether it goes up or down.

Then the PTC, where is that -- I mean, how is that recovery to be determined or I mean it sounds like it's a pretty straight forward thing. Is that a separate case I just don’t -- I can't recall?

No, we ask for a mechanism in this current rate case. We ask for either a rider, or we ask those go through the fuel clause. We believe they match-up directly with the wind productions, so the fuel clause is a pretty obvious place for those that go. But that's in this 2016 rate case.

So, it's all in there, it's all part of it?

Right, that's correct.

And then there is also a bill in the governor’s budget to tax, I think, wind production. Does that have any impact on you guys? Or is that also to be -- how should we think about that if that were to pass?

Well, the governor did propose a plan to improve the financial situation within the state, and they are forecasting another budget shortfall. And so the proposal was to tax wind production, and that was one of many services that were proposed. And we’ll cross that bridge if that's when we get there, but that's part of the legislative process. But I don’t view that as a big issue right now.

But I mean, would that be sort of an automatic thing that you guys would be able to -- clearly, at expense, that will be the expense that would hit you guys, I would assume.

Yes. But that's a tax that we would pass through.

Would you need a regulatory approval to pass it through, or is this something…

We pass those taxes through today, similar taxes.

And then basically Andy Levi’s question, I mean, in terms of just M&A philosophy. How should we, I mean, when you say you want to grow the Company. Is there any -- how should we think about like the issue with near-term accretion versus dilutions or strategic versus non -- I mean a general statement to say you want to grow the Company. I'm just wondering if you have any other M&A philosophy you might want to share with us?

Well, I think whatever investments you make, there has to be some value creation. And I think that speaks to broader than just accretion dilution, there has to be some real long-term value benefits that is created. And so I'm not sure I'm adding anything to your thesis there, Paul. But my view is that when you do something, it ought to be able to stand on its own. And I would point to and in the past couple of years, as we've done things with the midstream investment, those stood on their own. It was obvious to value that was created and rational, and the thesis of what we did. And I think that's how I think about things as whatever capital you deploy, it ought to be able to stand and stand on its own.

And then sell-through it, any thoughts about what kind of changes we might see with respect to EPA, or any thoughts?

No, I don’t think there is -- there is a lot of discussion out there, what you may or may not do. But I think Scott will be good for the EPA, and I think he’ll be good for the country. And one thing is that I really appreciated about Scott was he was focused on the rule of law. And he pretty much was you can have these agencies just making up and interpreting their own rules. It has to go through a legislative process, you cannot bypass the legislature. And I think that’s important. And from my standpoint, I think just having a little more consistency. So you're not having a compounding flood of regulation on top of regulation coming at us, it's helpful. And the last, just so, and it goes, I don’t think I should have to say this. But we as a Company, and I know Scott shares this view, we're all for a cleaner and healthier environment. We’re not opposed to anything to that would make the environment better. This is more about just consistency in the rule of law.

Thank you. And our next question comes from the line of Stephen D'Ambrisi from Castleton Investments. Your line is open.

Just quickly on your Enable guidance. If I use Enable's net income guidance of $315 million to $385 million, apply your ownership percentage, and add-in the amortizations and O&Ms at levels that you’ve seen historically. I'm getting to an EPS range of like $0.31 to $0.36 versus guidance of $0.35 to $0.39. Is there something that I'm missing either on the amort or on the tax side?

We probably need to factor in what the actual effective tax rate is. But we're right in line with our guidance when we apply that math. We aren’t doing anything outside of what Enable has provided and that’s where we end up with the range that we put forward.

What is the tax rate? Because I guess last year, it looked like it was 42% that you guys are taking. So, what's the tax rate assumed in Enable guidance this year?

About 31%, 32%...

And what's driving the year-over-year change?

Just we're a consolidated tax payers, so it's all the bonus depreciation, it's everything that factors into our overall tax position.

Thank you. And our next question comes from the line of Anthony Crowdell from Jefferies. Your line is open.

Sean, I guess I’ll start out. When you were talking about street lighting, LED lighting, good enhancements, you had said that you would I know if it was execute on the plan, assuming constructive regulatory environment. Do you feel you're there now in a constructive regulatory environment?

Well, I don’t think we're quite there yet from a timing standpoint. Things are taking a long time, and we’ve got to have that certainty that there is recoverability. But we are very optimistic on the structural changes and the improvements that have occurred in Arkansas. And so, we think there is great opportunity for additional investments in Arkansas now that we have -- we expect to have some clarity around that regulatory recovery process. And Anthony the other point is we were very cognizant of the rate impact because of the environmental plans we had to implement. And so, to be honest with you, we deferred or delayed that to try to smooth that out of it from a customer impact. And so we will resume that, assuming that there's a constructive regulatory environment. And so that'll be -- it's not really a point in time today to make that decision, it's probably point in time to make that 18 months from now.

So just to follow that up, when I look at the slide of CapEx, projected environmental and Mustang modernization, and try to time that with the next filing in Oklahoma. It's roughly 18 months a time I should think about when you may file again in Oklahoma?

Well, we're going to file for the Mustang approval -- we're going to file again for Mustang at the end of this year and then we'll follow up that again in 2018 with the recovery of the scrubbers. So, we will have two more rate cases in Oklahoma. In Arkansas, we filed under that formula rate plan and we expect that to be handled that way. Those projects handle that way. What I was trying to convey there is, Anthony, we feel confident we have a lot of investment opportunities around our grid to support our customers. And we don't think that we have a deficit of capital opportunities to really enhance the product. What I was saying though was we will fill that in after we get through this environmental plan.

Okay…

And what I was trying to articulate there that I would expect if you were trying to model something on average to look similar to what we've done the last couple of years.

So a run rate is -- I don't know. Hold on, it's the last slide…

Call it $600 million $700 million.

If I could switch gears to the CenterPoint, I guess you made an offer and CenterPoint has until June 15th to come back, I guess, with an offer that's 105% better than OGE's offer. Do you state if the offer you made is just you guys, or is that with a partner that you make the offer for Enable?

We did that similar to the last time with a partner.

Thank you. And our next question comes from the line of Charles Fishman from Morningstar. Your line is open.

The only question I had left was just I haven't heard anything that would specifically change the cash flow coming from an MLP to the unitholder or sponsor in any of the proposals. So therefore, really, the cash flow coming from Enable under just about any scenario that’s been talked about shouldn't change. Is that correct?

I'm not sure I understand your question, Charles. But there is nothing in the forecast or guidance that came out of Enable that would imply the distributions will go down. And Enable will issue their guidance, but I would expect longer-term distributions we expect to increase. And then ultimately we expect, as they grow their distributions, that's cash flow, we would eventually get into the incentive distribution rights and we would have 60% of those.

But under any of the proposed tax law changes, there's really nothing that changes the cash flow coming from Enable? Obviously, your tax rate could change.

Right, but it's more of -- that tax flow impact earnings not cash from Enable.

So really your 10% dividend target, annual dividend increase target, really is not -- the Enable piece is locked in, pretty much. It's just what happens potentially if there are some changes that impact you at the consolidated level. That's the only thing that could happen. Am I looking at that properly?

I think, yes. Our dividend policy was through 2019 to 10%. And obviously, tax reform has a big impact, but our cash position, our projected cash position, is very strong. And we don’t see any negative implications of tax reform on our cash position, our ability to fund our programs and pay dividend.

I realize this is very fluid, but thanks for your comments. That's all I had.

Thank you. And we do have a follow-up question from the line of Joe Zhou from Avon Capital Advisors. Your line is open.

It's Andy again. So, just back on the question on the tax rate for Enable that was 42% and then 32% for this year. How should we think about that going forward as far as just for modeling purposes, because obviously it makes a difference in the earnings per share that come up, is there a way to -- you talked about bonus depreciation as one of the factors. As you look into ‘17, ‘18, or ‘19, is there a way to give us some guidance on, is that tax rate going to be consistent, is it going to continue to move around?

So absent tax reform, I would anticipate that the effective rate would stay somewhat consistent. It may change slightly if bonus depreciation is phased out. But if you look at tax reform, what we would see is a significant drop in our overall effective rate if they go with the 20% rate, we could go to the mid-teens on an effective tax rate. And if you go down to 15%, it could drop in through the low-teens.

But basically what you are saying is absent any tax reform, which is a big statement that basically the low 30% is what we should be modeling?

I think that's right.

Thank you. And our next question comes from the line of Noah Hauser from Nuveen Investments. Your line is open.

I just had a quick question on the second ROFO that you guys responded to. Was there a triggering event for you guys to submit the second offer? Or is this just part of the process?

Due to the first process that process ended in January, and then CenterPoint sent us another ROFO notice.

Is that because they had received another offer or…

No. Well, again you need -- I think they need to answer that .But the reality is under the partnership agreement they had 120 days to find another offer and then the process start over again, if they elect to initiate and they have.

Okay, that makes sense. And then, I guess that was really what I was going for. I appreciate it, guys. Thanks for the time.

Thank you. And our next question comes from the line of Shahriar Pourreza from Guggenheim Partners. Your line is open.

So I think the famous Andy Levi has asked all my questions. But let me -- when you sort of just elaborate a little bit on growing the Company and M&A a little bit, I'm kind of curious. When you mean grow the Company, is this more of a function of increasing your position, your interest in a Midstream or an Enable? Or is it a function of looking at traditional wires businesses? So, could you just elaborate a little bit on that, because you've done organic?

My view of this is we recognize that we are utility Company that happens to own a piece of a midstream company that’s here in our service territory. But as far as who we are and what we are, we're utility a Company. And so I think all of our investments would be focused around utility type regulated assets.

And then just lastly, I think you touched on the CapEx and what a normal level of spending should be a couple years. But how should we think about the growth trajectory, just given where organic opportunities are? And if you get past the environmental spending and you reinitiate a lot of some of the wires businesses. Should we think about this being supportive of your growth, or something that could be incremental, especially as you get out of a politically sensitive time of year, obviously, with your rate proceedings?

Well, I think in a minimum, it will be supportive of the growth.

At a minimum?

Yes.

So I'm going to just tweak it and ask an Andy question. Can you breach it?

Well let us -- we’ll cross that bridge when we get there.

Thank you. And we do have a follow-up question from the line of Joe Zhou from Avon Capital Advisors. Your line is open.

I just wanted to respond to Shahriar. No, I'm teasing. I do actually have one more question. And again, I'm kind of slow at certain things, so this is one thing I'm slow at. So, on Enable, just again back to that. So, just to understand the process completely, so CenterPoint came to you and said that they have an offer. Is that what you are saying?

No…

Can you just explain the process, so I can understand it? I'm sure everyone else does, but I don't.

Well, I’d doubt that Andy, you're pretty sharp. The process was that CenterPoint gave us notice of their intent to employ under our partnership agreement of a right of first offer before they were commencing a process, and they've been initiated. As far as do they have something or not that is something you need to ask CenterPoint. But what was the driver or the catalyst was the idea that under the partnership agreement that time period had expired and they needed to, they felt they needed to initiate that process again.

So I'm still a little -- so the time frame expired. So, they did not have to give you a ROFO. But because they want to continue the process, whatever that process is and whatever stage it's at, they had to provide this ROFO to you. Is that -- am I saying that correctly?

That's a good way to say it, Andy.

Okay. See, I guess I'm not that dumb.

No, you’re not…

It just takes me a little while. Okay, thank you very much.

Thank you. At this time, I'm showing no further questions in the queue. I would like to turn the call back over to Sean Trauschke for closing remarks.

Well, thank you. And just once again I just want to thank everyone here at the Company for their dedication and commitment to really doing a great job in 2016, and what we'll accomplish in 2017. And for those of you on the call, thank you for joining us and thank you for your interest in the Company. And have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, you may now disconnect. Everyone have a great day.