Todd Tidwell - Director of IR Sean Trauschke - President and CEO Steve Merrill - CFO.

Neel Mitra - Tudor, Pickering Anthony Crowdell - Jefferies Brian Russo - Ladenburg Thalmann John Barta - KeyBanc.

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?.

electricity, oil, gas, telecom and the like. For far too long, the agencies had to deal with repeated budget and resource issues, which limits its ability to adjudicate their expanding responsibilities. To our knowledge, this is the first full review of the agency since its creation in 1907.

It's a great opportunity to see what improvements can be made. The bill passed unanimously in both the House of Representatives and the Senate, and it's sent back to the House for approval by month end. The bill has strong support from many in the state and OG&E is also fully supportive of this bill.

I do want to be clear, that this bill is not intended to, in some way, undermine the OCC, but rather a legitimate effort to make things better for both customers, regulators and those of us regulated. As I mentioned on our last call, there were 10 bills filed to review the OCC at the beginning of this legislative session.

We monitored those and we engaged and began supporting this bill well before we received our final order from the commission on March 20. This is what businesses and great companies do. They adapt and they adjust and they continually work to get better.

And I want you to know that's what we are doing, and I see no reason why we should not expect that of a governmental agency. I am confident that Oklahoma regulation will improve. It's not going to happen overnight. But as we progress through our plan cases in '17 and '18, improvement is expected. Moving on to Enable's financial results.

On their earnings call yesterday, Enable reported strong results for the first quarter and they also announced some commercial successes, including a new agreement with the producer to deliver 400 million cubic feet a day of rich gas from the Anadarko Basin to North Texas, providing a critical market access.

Enable continues to see strong operational performance, with sustained rig activity in the Anadarko and the Ark La Tex basin contributing to higher volumes across Enable's system. Natural gas gathered volumes, increased by 8.2% and natural gas process volumes increased by 5% for the quarter.

So as a sponsor of Enable, we continue to be pleased with their performance and excited by the significant upside for that business as the commodity cycle continues to recover. Last but not the least, the Enable board approved quarterly distributions earlier this week of which $35 million will be distributed to OGE.

We have often highlighted the importance of Enable's cash flow to OGE, and these distributions are now more important than ever, given the recent OCC order reducing our cash flow by $36 million annually, due to lower depreciation rates. Before turning the call over to Steve, I want to address future investments and capital allocation.

Looking forward, as we complete our Regional Haze and utility MATS environmental compliance programs and in an effort to protect the customer bill, we have delayed a number of grid-enhancing programs.

Once we get through the environmental plans, we will begin and, in some cases, resume a number of these initiatives when there is a constructive regulatory environment. And we now have line of sight to improved, earned ROE potential in Arkansas as well the mechanism for timely recovery.

As such, we will pursue these investment opportunities in Arkansas. For Oklahoma, we will wait to gain clarity following the Mustang case. We will continue to deploy capital in the most prudent and efficient manner. And as I said earlier, the Oklahoma order reaffirms our focus on continuous improvement in these challenging times.

We continually look at our cost structure, seeking innovative solutions in shaping our business for a better future. The bottom line is we continue our commitment to growing OGE and are fortunate to have a balance sheet and multiple sources of cash that allows for that growth. Though circumstances change, we are accomplishing what we set out to do.

We are on plan to achieve our long-term growth rate at the utility, and we're on plan to continue to grow our dividend at an industry leading rate of 10% a year through 2019. And we are committed to executing on our strategy to continue growing our business, growing our communities and creating long-term shareholder value for all of you.

So thank you, and I'll now turn the call over to Steve to review our financial results.

Steve?.

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.

The reserve was set up for the demand program rider as we are still working through the refund mechanism and rate schedule for this program. We simply ran out of time. We expect resolution for this item in the second quarter. Weather translated into $5 million of lower gross margin as compared to the first quarter of 2016.

Weather for the quarter reduced margin approximately $4 million compared to normal. Partially offsetting these reductions was new customer growth, which contributed $2 million in gross margin. We added over 8,000 new customers to the system compared to the first quarter 2016, maintaining our historical customer growth rate of 1%.

The Oklahoma City economy continues to do well, with an unemployment rate just under 4%. On a statewide basis, unemployment is on par with the national average of 4.7%. Moving on to our regulatory schedule. As we've said before, our plan is to file a rate case in the fourth quarter of this year to pick up the Mustang modernization project.

The investment for Mustang is approximately $425 million, including AFUDC. The test year will be ending June 2017, with rates implemented in mid 2018. We will file again in the fourth quarter of 2018 to pick up the scrubbers and the Muskogee gas conversion.

The project investments are approximately 545 million and 70 million, respectively, inclusive of AFUDC. The test year will be ending June 30, 2018, with rates implemented mid 2019. In Arkansas, we anticipate the first formula rate plan filing would be October 1, 2018, with rates implemented in April of 2019.

The annual filings will follow the same cadence. Turning to our investment in Enable. For the first quarter of 2017, Enable Midstream made cash distributions of approximately $35 million, the same amount received in the first quarter of 2016.

Enable also contributed earnings of $20 million or $0.10 per share, compared to $18 million or $0.09 per share in 2016. Enable had a solid first quarter and their financial metrics are strong. Net income attributed to limited partner increased 40% over the first quarter of 2016.

This was primarily due to higher gross margin in the gathering and processing and transportation and storage segments, partially offset by higher interest expense and higher depreciation and amortization expense. They ended the quarter with a distribution coverage ratio of 1.2 times.

Enable remains focused on controlling costs and deploying capital efficiently. Turning to 2017 guidance. At the utility, and assuming normal weather, we project earnings per share to be at the low end of the earnings range of $1.58 to $1.70 per average diluted share, based on the Oklahoma Corporation Commission rate order.

Guidance includes approximately $0.06 per share for rates implemented on July 1, 2016, through December 31, 2016. The 2017 full year impact of the rate order is approximately $0.14. For the midstream business, we're projecting earnings contribution to be between $0.35 and $0.39 per average diluted share.

We're also projecting to be at the lower end of consolidated earnings range of $1.93 and $2.09 per share. This concludes our prepared remarks. We will now answer your questions..

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..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day..