Good morning and welcome to the Second Quarter 2019 OGE Energy's Earnings Conference call. At this time, all participants are in a listen-only mode. Latter 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. At this time, I would like to turn the conference call over to Mr. Todd Tidwell. You may begin.

Thank you, operator. Good morning everyone and welcome to OGE Energy Corp's second quarter 2019 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 second 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 ogeenergy.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 a Regulation G reconciliation for gross margin in the appendix. I will now turn the call over to Sean Trauschke for his opening comments. Sean?

Thank you, Todd. Good morning everyone and thank you for joining us on today's call. Earlier this morning, we reported second quarter consolidated earnings of $0.50 per share compared to $0.55 per share in 2018. The utility earnings of $0.37 per share and our portion of Enable's earnings were $0.13 per share. Both businesses continue to perform well and are on plan for the year. Steve will discuss the details in a moment. But right now, I want to highlight our second quarter achievements. During the quarter, we added more than 8,000 new customers compared to the second quarter last year. New customer sales growth was approximately 2%. This is the fifth quarter we've seen new customer additions around this two percent mark. Obviously, this is positive and helps offset energy efficiency. It does appear our rates and economic development efforts are paying dividends. All of this comes together, as you know, in terms of load growth. As I've mentioned on previous calls, we are clearly in closely watching these positive trends, which could increase load growth above our historical 1%. The latest economic statistics put Oklahoma's unemployment rate at 3.2%, which is on par with the national average, and our largest load center Oklahoma City unemployment is below 3%. Overall, our service territory is strong from an economic standpoint. For example, Pratt & Whitney just announced the multi-million dollar expansion operations at Tinker Air Force Base. In addition, there are over a dozen other companies that have announced new investment or expansion of the existing facilities in our service territory. Our rates and high reliability are often cited as primary factors in their decision-making process. Operationally, we continue to perform very well in the second quarter despite historic flooding and mild weather. The mild weather affected earnings by $0.06…

Thanks, Sean, and good morning everyone. For the second quarter, we reported net income of $100 million or $0.50 per share as compared to net income of $111 million or $0.55 per share in 2018. The contribution by business unit on a comparative basis is listed on the slide. At OG&E, net income for the quarter was $75 million or $0.37 per share in 2019 as compared to net income of $92 million or $0.46 per share in 2018. Second quarter gross margin at the Utility decreased approximately $23 million, which I will discuss on the next slide. Looking at the other key drivers, second quarter O&M expense increased approximately $3 million primarily due to the timing of work performed when compared to last year. O&M expense for the year is on plan. Depreciation expense increased $3 million, and Equity AFUDC decreased approximately $5 million, as certain projects were completed and assets were placed into service. Interest expense decreased $6 million primarily due to lower average debt costs. Finally, income tax expense decreased $7 million due to lower pre-tax income. Turning to the second quarter gross margin, utility margins decreased approximately $23 million for the quarter, largely due to mild weather. Compared to the second quarter of 2018, cooling degree days were 38% lower, reducing margin by $24 million, compared to normal mild weather reduced margins by $17 million for the quarter. Partially offsetting the mild weather, new customer growth increased gross margin by approximately $3 million. Before we move on to Enable, I want to touch on the regulatory schedule. For the Oklahoma rate review as Sean mentioned, we received the ALJ report in July that recommended approval of the stipulation. The hearing on exceptions was held this week, and we expect an order soon. In Arkansas, we received…

[Operator Instructions] Our first question coming from the line of Julien Dumoulin-Smith with Bank of America. Your line is open.

Hey, good morning. Can you hear me? A - Sean Trauschke Hey, great, Julien, how are you this morning?

Great, absolutely. Thanks for taking the time. Hey, listen. So, well, first off, great progress on the regulatory front. I'd be curious how do you think about the evaluating prospects of further capital investment, and just refreshing that budget given the significant progress you all have seen of late, especially this year?

Yeah. So I think the short answer is we're working with our customers and everyone over the commission staff about how to proceed forward with this plan. We're going to come up with an arrangement there. And then as we've done in the past, we'll continue to update our investment outlook there. But first things first, we want to get the order in hand for the Sooner projects, and then we'll follow that up with subsequent filings and updates to our capital expenditures.

And I suspect, would this principally have a focus on grid month?

Absolutely. I think we've said before, while we were going through this environmental compliance plan, we probably -- we slowed down a lot of our leading technology advancements that we were adopting. We were one of the first out there to put the smart meters out there, and we've slowed that down. So, in my mind, while we're still probably a little bit ahead of others, we're behind. And I want us to kind of catch back up, and we think there is a lot of good things we can do that will actually benefit our customers. And I think the other point I'd make here, just from a regulatory perspective, I think these are different filings, you know, before we were making large investments that were lumpy, that were to comply with the federal government mandates. These are things that people are going to be able to recognize the real benefit for in terms of their operational savings.

Excellent. And perhaps if I could follow that in brief, we've seen some of your regional peers talk and have good success with respect to some of these voluntary renewable tariff, where are you in that thought process at all, if at all?

We're probably where we are right now is we're in really good shape from a generation standpoint, and really focused on more customer-facing activities than tariffs are become a bad word.

No, I'm sorry but like a voluntary program for those who opt to pursue renewables for their own merit?

Yeah, well, okay, so I misunderstood your question. That's exactly how we've set up our solar program, it's a subscription arrangement where customers that want to subscribe and take their energy from a solar farm. We're building those solar farms for them on a community basis on the distribution system where they can have access to it. And that seems to be working pretty well.

Got it. But that's not a meaningful driver, it sounds like of your capital outlook for the time...

No, I mean it's going to be incremental as we go. It will all be incremental. It's not in there now but it'll all be incremental as we build up customer subscriptions.

Excellent. Hey, thank you all for the time and best of luck.

Well, thanks, Julien.

Our next question coming from the line of Greg Gordon with Evercore ISI. Your line is open.

Hey, good morning.

Hi, good morning, Greg.

How are you doing? So looking at the guidance for the year, I know that it looks like Enable is going to be at the low end of the earnings guidance range, and look I'm -- I have empathy for the fact that you guys focus more on the cash flow that...

Right.

That Enable generates for you rather than the earnings any given year. That being said, just doing math, it would seem like you'd have to get to the higher end of the guidance range for the utility business to hit the midpoint of guidance for this fiscal year. So can you give us a sense of within the guidance range for the utility, given that the summer is almost but not completely behind us? What the drivers are and where you think you'll be on the utility guidance range for the year?

Sure, Greg. I mean, what we said is we're affirming our guidance at the utility and consolidated. Keep in mind that approximately 70% of our earnings occur in the second half of the year. So I'm not of the opinion summer's over, 55% of that happens in the next few months. So we've got a lot of year ahead of us, but we feel really good about where we are at the utility and on a consolidated basis.

Okay. I just a little bit concerned because consensus is that $2.14 and that, given that you've said Enable would likely be at the low end of the range. You'd have to be towards the high end of the range to the utility to get to that number notwithstanding the fact that your guidance range compensates for a lot of that uncertainty, right?

That's correct. But I will just affirm we feel very good about where we are at the utility on a consolidated basis.

Okay. And the second question is, you've obviously done a yeoman's work over the last several years, getting to a good place with the regulator in Oklahoma, as evidenced by your last rate decision and the pending decision. And to dovetail on Julien's question, your guidance for the utility is 4% to 6% rate base and earnings growth in part because Enable such a robust cash flow generator, you don't need to issue equity. Do you see as you think about the deployment of all these new technologies, which I agree with you or you have a very, very significant customer benefits, the ability to perhaps grow faster than 6% while still delivering good bill outcomes for customers, or is there just a practical limit to how much you can spend in any given year, and that the alternative is just, it gives us some comfort and the longevity of your capital spend or is it some combination of both?

Yeah, so I mean that's a great question, Greg. And let me kind of try to -- I think the last, the latter part of your question was, was really spot on. We're very comfortable and we have a long list of objectives. So we're not short on investment opportunities that we see. So the real issue we're dealing with them, we're going to work with our customers, and the commission and staff and everybody is over what period we have these opportunities. Okay. So we certainly could do a lot more sooner, we could spread that over four or five years. It really is going to boil down to the recovery mechanisms and the customer benefits, and the timing of that. But I don't think there is a shortage of investment opportunities, we're very bullish on that element. I think what we're working through now with all of the interested parties is how we spread that over the investment horizon.

And last question before I cede the floor. What do you think that the timeline is and or the milestones might be for us to get a sense of how that is shaking out, and when we might get an update from you, given the conversations you're having with all the other relevant parties as to where we shake out in that sort of, the duration of the spend and the size of the spend?

Right. And I think you're going to see us be more forthcoming after we get the final order for Sooner Muskogee plans, we're going to begin talking more and more about what's next.

Thank you, guys. Have a good morning.

Thanks, see you.

[Operator Instructions] Our next question coming from the line of Insoo Kim with Goldman Sachs. Your line is open.

Insoo. Hello?

Our next question coming from the line of Shar Pourreza with Guggenheim Partners.

Hey, good morning guys.

Hi, good morning, Shar.

Can you just -- most of my questions were answered, but just around the grid mod in Oklahoma, and you guys sort of think about four to six, and incremental capital. Can you just remind us if there is any amount of placeholder CapEx you guys have in that growth rate in Oklahoma around grid mod. So when you guys sort of present your plan and you bring it forward, is there an amount that you guys have already kind of sort of reserved in that number?

Yeah, so, Shar, the way I would answer that is we aren't necessarily solving for the CapEx that's necessary to meet that growth rate, what we're focused on is those projects that bring the maximum customer benefit. I think those projects are more than adequate to hit our growth rate. And I think you can just do the math and know what that delta is on that, we have actually greater opportunities in that. We just want to ensure that we're bringing results to our customers, that's our focus.

Got it. But just to make sure that when you guys, is there a placeholder for grid mod already in...

So, yes, there is some grid mod in those CapEx plan already.

What I want to make sure, so when you sort of announced whatever plan there is, there is a net amount that you've already included in your plan for...

That's correct.

...grid. Okay, thank you. That's one question, and then how is the weather so far in July?

Weather was good, it was basically normal for July and the heat index is about 105 today, so August is heating up.

Excellent. Thanks, guys. That was really it, thanks so much.

Thanks, Shar, take care.

And our next question coming from the line of David Peters with Wolfe Research. Your line is open.

Hey, good morning.

Hey, good morning, David.

I'm just curious now with some Enable starting to grow its distribution again, I'm just curious if you guys think that's sustainable, and maybe when you might expect to see some realization of the value in the IDRs. And then just related, kind of any updated thoughts now with CenterPoint opting to kind of maintain their investment in the partnership?

Sure. So we certainly were pleased to see the distribution increase. Enable has done a very good job of managing through a difficult cycle. Their distribution coverage ratio has grown significantly. And two of the major, I'd say, overhangs or headwinds that Enable had are gone. I mean there was a lot of concern about ArcLight's ownership, they've exited the position. That's positive for Enable. Certainly, the CenterPoint 13D that was previously out there, was a bit of a headwind for Enable, that's gone. That's a positive development. So, Enable felt like the time was right to grow the distribution. [Indecipherable] kind of future distribution growth, I'm going to leave that to Enable to speak to that growth. We're certainly excited about this distribution growth. We'd like to see more as you pointed out, it's not going to take much more to step into the IDRs, and that's real value. As you know, we have 60% of those IDRs, and I want to see that value realized for the benefit of the OGE shareholders. And so, that's what really we're focused on. I can't really speak to the future direction of Enable distributions right now. I mean, that's better served for Enable but we're hopeful that distributions will continue to grow. We want to see that value realized. That helps?

Thanks, yeah, absolutely. Thank you.

Okay.

Our next question coming from the line of Insoo Kim with Goldman Sachs. Your line is open.

Thank you and apologies, earlier I actually hung up the phone while trying to mute myself.

I think I can't say I've never done that.

It's the end of earnings season, so a little bit out there. Just, I don't know if this was covered while was out but in terms of the dividend, just getting on the back of the upcoming maybe growth forecast that you guys will be giving post this rates case, what we get an updated dividend growth and/or payout of forecast in tandem with the rate base growth assumptions?

Yeah, I think you should expect that. We're, as we said before, we're targeting kind of an 8% to 10% total return, and with kind of a CapEx outlook that coincides with the dividend outlook as well.

Understood. And then in your utility jurisdiction, I know the business and customer exposure to those in the oil and gas industry is more limited, probably less than 10% of your customer base. But just given some of the more recent headwinds faced by the industry and then in that area, are you seeing any indications of growth slowing down or customers moving away?

No, we really haven't. And I think your assessment there, it's less of a component of our overall customer mix than it once was. So the economy is much more diversified, but we've actually seen positive movement in that sector only from if nothing more from electrification of compression and things like that. So we're actually seeing positive results out of that business.

Understood. Thank you very much.

Thank you. Take care.

And at this time I am showing no further questions, I would like to turn the conference call back over to Mr Sean Trauschke for closing remarks.

Okay, thank you. And thank you to all of you for being on the call today, and most importantly, thank you for your interest in OGE Energy. Have a great day.

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