Good day, ladies and gentlemen, and welcome to the OGE Corp. first quarter earnings conference call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Todd Tidwell. Sir, Please go ahead

Thank you, Danielle. Good morning, everyone, and welcome to OGE Energy Corp.'s First Quarter 2017 Earnings Call. I'm Todd Tidwell, Director of Investor Relations, and with me today I have Sean Trauschke, Chairman, 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 first quarter results and finally, as always, we will answer your questions. I would like to remind you that this conference call is being webcast, and you may follow along on our website at oge.com. In addition, the conference call and the accompanying slides will be archived following the call on that same website. Before we begin 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. It 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 a Regulation G reconciliation for gross margin in the appendix, along with projected capital expenditures and rate base. I will now turn the call over to Sean for his opening comments. Sean?

Thank you, Todd, and good morning, everyone, and thank you for joining us on today's call. Earlier this morning, we reported first quarter consolidated earnings of $0.18 per share, compared to $0.13 in 2016. The utility reported earnings of $0.08 per share and our portion of Enable's earnings were $0.10 per share. We have received approximately $35 million in distributions from Enable year to date, and yesterday, Enable announced the first quarter distribution of another $35 million, payable on May 30, of this year. Despite regulatory and weather challenges, the utility is on plan. Each day, we're adjusting, adapting and moving forward. I could not be more proud of the focus and determination of our team to press forward and create value for those that we serve. That dedication and commitment was demonstrated as recently as this past weekend, when severe storms moved through our service territory, taking down hundreds of poles and transformers and leaving thousands in the dark. Through hard work and determination, our members had the vast majority of customers restored within hours. And all those who could take power were restored Tuesday without an employee injury. My hats off to a great team effort. On the balance of the operations front, all of our ongoing environmental projects, including Mustang, are on schedule and on budget. I think it's important to note that these achievements were made while achieving best in class safety performance. For the first quarter, the utility had safety performance in the top quartile of the Southeastern Electric Exchange. And I'm proud of our team for working safely day in and day out. As most of, we received the final order for our Oklahoma rate case on March 20. The order granted an $8.8 million revenue increase and 9.5% ROE and lowered the annual…

Thanks, Sean, and good morning, everybody. For the first quarter, we reported net income of 36 million or $0.18 per share, as compared to net income of 25 million or $0.13 per share in 2016. The contribution by business unit on a comparative basis is listed on the slide. At OG&E, net income for the quarter was $16 million, or $0.08 per share as compared to net income of $6 million or $0.03 per share in 2016. The Oklahoma rate order has many moving parts. In its simplest form, depreciation was the main driver. Of the $0.08 of net income recorded in the first quarter, $0.06 was related to the change in depreciation rate. And of that $0.06, $0.04 was related to 2016, and $0.02 was related to 2017. First quarter gross margin at the utility decreased approximately $8 million, which I will discuss on the next slide. Now looking at other key drivers. The first quarter O&M expense increased $10 million, in part, due to higher marketing costs associated with demand-side management program rider, which has revenue offsets. O&M expense for the year is on plan. Depreciation decreased $22 million, primarily due to the reduction in depreciation rate as directed in the OCC's final order. AFUDC and other income together increased approximately $8 million. The increase in AFUDC and the associated tax gross-up up in other income are related to the increased investment in the environmental and Mustang modernization projects. Turning to the first quarter gross margin. Utility margins decreased approximately $8 million in the first quarter of 2017 compared to 2016. And the primary drivers for the reduction in gross margin are as follows. The net impact of the Oklahoma rate increase coupled with the reserves set up for the rate refund reduced margin by approximately $5 million.…

Thank you. [Operator Instructions] And our first question comes from Neel Mitra from Tudor, Pickering. Your line is now open. Please go ahead.

Just in regards to the Mustang modernization spend. How much have you spent so far on that project? And what is the total spend overall?

Sure, Neel. This is Steve. We've spent about $235 million to date, and then overall the project with AFUDC will be about $413 million.

And that's a project where you haven't gotten preapproval, right? It's one where you're going to go in for a rate case and you're doing it because the permits will expire. Is that the right way to look at it?

Yes, that's right Neel. We'll file that case later this year, November time frame. I think we sought preapproval with all of the other environmental upgrades. And at that time, the commission was really, as you'll recall, uncomfortable with giving preapproval and was uncomfortable granting a rider for their environmental cases somewhat. As a result, that puts us in a position where we're going to have pancake rate cases. And that's not unique to us. The other utilities in the state are doing the same thing. So yes, we will go file for approval and recovery of Mustang later this year.

And just worst case scenario, if you weren't to get approval and this new legislation were to pass and the commissioner were to change, would you be able to follow up on subsequent rate cases if you didn't get the outcome that you wanted?

Well, I -- that's a pretty extreme case there. But yes, I assume that's possible. I'd tell you that sitting here, I cannot think of any legitimate or valid reason Mustang would not be approved. Mustang has been a part of that community out there since the Eisenhower administration. The community is very supportive of it. We do not have quick start capacity on our system. So for storm restoration, being able to bring 420 megawatts on the grid inside 10 minutes is very helpful. The ability for us to manage or regulate voltages because of the significant intermittency of the renewable resources that are on our system is invaluable. And for those reasons, that's why the Southwest Power Pool thought the decision was a very good one to not only add CTs, but also to utilize that existing site. And what we think is the opportunity that we have to utilize existing infrastructure there in terms of substations, transmission interconnections, access to water and gas and a workforce, benefits customers. It actually saves customers money than a new build opportunity elsewhere. And so I'd come back to there's a lot of support for that plant, and it's the right decision.

Okay. Right, I agree. And then maybe just last question in regards to if Oklahoma doesn't improve to a large degree. Would you consider diversifying it? That doesn't necessarily mean M&A, although that could be one question, but maybe try to spend more in Arkansas like you alluded to, to basically balance your earnings between Oklahoma and other jurisdictions, which are currently a little bit more constructive.

Yes, I think the thesis there, Neel, is exactly right. We are going to allocate capital where we have line of sight and a fair return. We are going to continue to maintain the system, but a number of the forward leaning and progressive ideas that we had in thinking about the SmartHours program that was nationally recognized by Oklahoma. Things like that, that's where we won't be making those investments until we have clear line of sight to the recovery. And that's just fundamental. We can't invest if we're not going to be able to see a return, even if there is a great customer benefit for those investments.

And our next question comes from Anthony Crowdell from Jefferies. Your line is now open. Please go ahead.

Just to stay on the great topic of Oklahoma. What do you think has to happen for it to get better, the OCC?

Well, so Anthony, you've been kind of in this business a long time, and you know regulatory jurisdictions run in cycles. And you have peaks and valleys. And unfortunately, for us, we're in a valley at the same time we have significant [indiscernible] environmental compliance upgrades that we're trying to move through in. But I think there's kind of three points that I'd point out to you. One is, I mentioned in my remarks that we have solid relationships, we have a lot of communication, a lot of dialogue. We recognize with this significant rate activity, and we're not alone, that we've got to work with the staff and the commission to kind of time this so it can kind of move through the system efficiently. I think that's even more important now because of the level of activity. I do think that the legislation that is through -- going through the system there, to really address the efficiency and speed at which things are completed. I mean, I think by any record, it's not happening. And that's not an attack on anybody, it's just an opportunity for improvement. And that's typically what we do in business, what you do in your operation, Anthony. That's what we ought to expect of government agencies, too. But I think the last thing, Anthony, that I think can easily get lost in all of this is as core, the Oklahoma jurisdiction, OG&E in our jurisdiction, it's performing at a very, very high level. Our rates are significantly below the national average, some of the lowest in the nation, we're consistently recognized by J.D. Power as number 1 in their Customer Satisfaction ratings. We've been a leader in rolling out new products and services and developing new assets. And we think about our environmental record, not what it's going to be in 2025 or 2030, but what we're doing now. And our emissions based on our operations are significantly lower than they were five years ago. And I think the piece that you may not -- be readily available to you but I wanted to convey to you is, we are arguably the bedrock of the 276 communities we serve. I mean, we are one of the largest contributors to United Way, not only our current employees but our retirees volunteer in those communities, coaching little league, United Way Habitat -- whatever the opportunity is. And so they rely on our services. So when you put all of that together, we're doing what we need to be doing. And so ultimately, I believe, regulation -- constructive regulation has to catch up to kind of a company that's really doing things right.

Okay. I guess, just to make sure I understand, you had said that -- it seem that there's plenty of projects in Oklahoma, just that you are maybe hitting the pause button until the regulatory environment gets better. It's not a case that there's enough projects there.

No, we've got plenty, Anthony. And we've been very focused on recognizing that -- remember, we fought this environmental compliance. We did not want to make those investments. We would rather have made them around grid enhancements. But nevertheless, we had the court order, we had to do it. So we've been sensitive to that impact to the customer bill, because we're focused on trying to attract people to our service territory. But we've got plenty of opportunities and real customer enhancing opportunities, but we can't do that if we don't have clear line of sight to a constructive regulatory outcome.

Have you provided any -- the scope or the amount of dollars that the grid enhancing project -- for how many years that would be?

Sure. Anthony, I think what we said in the past, rather than just putting a full price on everything going forward, I think it would be in line with kind of our historical spend. So maybe in line with a spend right around $600 million a year, something like that. What it looks like historically. But certainly, in line also with our stated growth rate objectives.

Great. And just lastly, if you remember back in EEI in 2015, you gave us a 2019 rate base guidance bar, so when I look at Slide 15 today, there's no 2019. Is that just a factor of you waiting for clarity in Oklahoma? Or are there other moving pieces to it?

Yes, I think that is precisely what it is. And then, I can't remember back to 2015, Anthony.

Remember, we went out for drinks and you owed me a couple of drinks and you left early. You don't remember?

No, I really don't remember. No I don't remember that either. But no, on a serious note, Anthony, a lot of these, the timing of some of these projects moved around but at the end of the day, your point is exactly right. We are holding a lot of these incremental investments. When we went to EEI there, we fully expected to have a rider for the environmental plan and we expected to layer in some of these other projects. Now that we're going through a process, where we're having rate cases every year, we'll see at the end of that how that plays out before we start layering in any additional investments.

[Operator Instructions] And our next question comes from Brian Russo from Ladenburg Thalmann. Your line is now open. Please go ahead.

Based on your current CapEx forecast as disclosed in your presentation and less-than-constructive rate case outcomes, how confident are you in your utility EPS CAGR of 3% to 5%?

I believe we're very confident. Again, all we really need is line of sight to constructive regulation and then we'll just pivot on where the best return and benefit for both our customers and shareholders alike goes. But we're confident that we can meet those objectives going forward.

But can you meet the 3% to 5% with your current CapEx forecast? Or do you need to layer in additional projects to get there?

I mean we can, through 2019, but beyond that we would certainly have to make incremental investments.

Got it. Okay. And does your financing strategy change at all, given the lower depreciation and lower operating cash flow as a result?

No, it doesn't. We still don't see in the foreseeable future any need to issue any additional equity. We will, as we get through the environmental spend, layer on some additional debt, just to keep our metrics in line. I do believe we have in our Q that we'd have another financing of up to about 300 million in the second half of this year.

Okay, great. And based on your rate base disclosures, it looks like the FERC rate base obviously levels out in '18 versus '17. Are there any additional transmission opportunities out there?

No, not really, Brian. We were at the forefront of a lot of that transmission development and there's been a lot of transmission built in the Southwest Power Pool. And I think those opportunities are few and far between at this point.

Got it. And assuming there are no additional incremental project opportunities. Just based on your current CapEx forecast, and it looks like you'll be generating some strong free cash flow, even net of dividends in the 2019 time period. If there are no additional projects, what would you do with the -- the free cash flow? Would you consider buying back stock?

Well, I think we'll have -- certainly, that's a consideration. It would be unfortunate if we were in that position. I'd much rather invest that and grow. But we're not going to have cash sitting on the balance sheet.

Got it. Okay. And then what are the next milestones for this House Bill 1377? And when does the legislature end?

Yes, so it's been sent back to the House floor and there will be a full vote on the House floor, up or down vote, and that'll occur before the end of the month.

And when does the legislature end?

At the end of the month.

Okay got it. Thank you very much.

And our next question comes from John Barta from KeyBanc. Your line is now open. Please go ahead.

Can you talk a little about the mechanics of the legislation in Oklahoma? So once this task force gets up and running, what are the next steps? Is it like a technical conference or rule making or something? Or how should we think about that?

Yes, I think the way, this is really just a study group and to look at, again, what I said was, the structure of it. Should it be appointed or elected, for example. Or one of the things that we have that we are supportive of is this open meetings requirement. The problem is with three commissioners, they're not able to talk amongst themselves to kind of build the relationship with one another. So should you have more commissioners so that they can work together independently and still be in support of the open meetings request. Looking at budget, staffing, this agency was created in 1907, and their roles and obligations and responsibilities have expanded over the years. Are they looking at the right issues? Are they regulating the right industries? Are they staffed appropriately? Are they funded? And is the real mission aligned with the mission of the state? And so the idea would be this group of seven would certainly hear from all interested parties and make recommendations, and that is supposed to conclude in one year.

Okay. And then, I guess switching gears to Enable and CenterPoint. So I saw in the Q that they did not reply within the required time frame, so now the next date's July 15. So when that comes up, do they have to give you a yes or no? Or could they extend that out and look or shop for other offers? Or kind of where do we stand there?

Yes. I think this process is continuing just like it did last year. And so what I think CenterPoint has indicated is they were going to provide an update on their second quarter earnings call. And so that's probably the next gating item for an update on their process. And anything more than that, you probably have to ask CenterPoint.

Okay. And then just lastly, you mentioned some storms earlier this quarter. How many outages were there, roughly?

Well, so we had two in the last week that we had cumulative outages in excess of 40,000 customers each time.

And that concludes today's question-and-answer session. I would now like to turn the call back to Sean Trauschke for closing remarks.

Well, thank you all for joining us today. Thank you for your interest in OGE Energy Corp., and have a great day.