OGE Energy Corp (OGE) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the OGE Energy Corporation's fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Todd Tidwell. You have the floor, sir.

Thank you, Andrew. Good morning, everyone, and welcome to OGE Energy Corp's fourth-quarter 2015 earnings call.

I'm Todd Tidwell, Director of Investor Relations; and with me today I have 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 at our website at OGE.com. In addition, the conference call and accompanying slides will be archived following the call, on that same website.

Before we begin the presentation, I would like to direct your attention to the Safe Harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements, and 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 and ongoing earnings in the appendix, along with projected capital expenditures.

I will now turn the call over to Sean 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 2015 ongoing consolidated earnings of $1.71 per share compared to $1.98 in 2014. For the fourth quarter, earnings per share was $0.15 as compared to $0.29 last year. For the year, the utility reported $1.35 per share, with the mild summer weather impacting earnings by about $0.09.

Enable Midstream issued cash distributions to OGE of approximately $140 million in 2015. While we were disappointed in the unit performance of Enable, it is providing the cash to OGE to help support our dividend and capital plans. As we've said before, Enable is strong enough and will manage through this cycle.

Lastly, we're not going to comment on CenterPoint's recent announcement regarding their Enable interest. Any comments from us would be speculative in nature and is just not appropriate.

Turning to the utility, our service territory remains strong, despite the pressure from the current commodity cycle. In 2015, we added almost 10,000 customers to the system, continuing customer growth at our historical rate of roughly 1%. As we all know, the significant drop in commodity prices has had an impact on our business, as well as our community. Fortunately, state and local economies are much more diversified than they have been in the past.

The latest economic statistics for the Oklahoma City's unemployment rate is just under 4%, and the state at just over 4%. With that said, energy companies in Oklahoma have announced layoffs that are expected to increase our unemployment rate. We are closely monitoring the impact of low energy prices on the state economy, and will keep you posted if and when we begin to see a significant change in our sales growth.

I would like to provide you an update on our regulatory events in both Arkansas and Oklahoma. In Oklahoma, we filed a general rate case in December, with a test year ending June 30, 2015. And as we've discussed before, the case focuses on two main issues.

First, OG&E has terminated a wholesale generation contract for the benefit of retail customers that we're requesting to put into rates. The second will be to recover plant put into service since our last rate case, including the retail portion of several transmission lines that OG&E has constructed at SPP's direction over the past few years.

Also in Oklahoma, we've filed an application two weeks ago asking for approval of OG&E's decision to install scrubbers at the Sooner plant. Lacking regulatory certainty, OG&E has suspended work on the current scrubber contracts until May 2 to give the commission time to consider our application.

We believe construction would have to resume at this time in order to meet the January 4, 2019 compliance deadline. Without commission approval of our application, we will cancel the scrubber equipment and installation contracts, and make plans to convert the Sooner coal units to natural gas. We believe that converting these units would sacrifice the recognized benefits of fuel diversity and the typical cost advantage of the Sooner coal units compared to their operation, if they were converted.

Moving to Arkansas, you know, we've made our second filing under Act 310 to recover the fifth low NOx burner placed into service, as well as the four ACI systems. The filing was made in January, and rates were put into effect this month.

We will continue to update the filing every six months as additional compliance investments are placed into service. We also plan to file a general rate case in Arkansas this summer.

Now let me provide you with an update on our environmental compliance progress to-date. Five of the seven low NOx burners are in service, and I would point out that they were in service on time and on budget. The remaining two will be completed this year to meet the Spring 2017 compliance deadline. The ACI systems are in service -- again, on time and on budget, and are undergoing final testing as we speak.

Finally, the Supreme Court decision this month stays the implementation of the Clean Power Plan pending the final judicial outcome in the courts. Oklahoma Attorney General, Scott Pruitt played a leading role in securing the stay from the Supreme Court. We will continue to monitor development of the Clean Power Plan in order to best position our Company in the future. Keeping in mind, we are reconfiguring our fleet between now and 2019, and we continue to evaluate how our units operate in the Southwest power pool day-ahead market.

Since our last call, we certainly have had a great deal happening in the Company, beyond just regulatory activities. Although regulatory is an important aspect, the main mission is on improving the product we provide to our customers. And I am very proud of the focus and determination of the team to continue to press forward and create value for our customers.

Late in 2015, we had two ice storms. And once again, our members' performance was not only outstanding, but safe. The storms produced a high volume of outages, with roughly 25% of all of our customers experiencing outage at one time or another. Operationally, our combined cycle plants continue to deliver outstanding reliability and performance and in fact, their capacity factors for the year was in the top quartile for the industry.

Turning to transmission, we brought forward in our plans the construction of Windspeed 2, from completion in early 2021 to a completion date of mid-2018. This is a126-mile, $190 million transmission line from OG&E's Woodward district to our Cimarron substation.

When we sponsored and constructed the original Windspeed line in 2010, we saw the need for an additional line. And we bought 200 feet of right-of-way and built compact structures with the ability to place a second line in that right-of-way in the future. We chose the most economical way to build out to Woodward and still provide for a second circuit in the future.

As a result of this proactive planning, these two single-phase lines will require 100 less feet of right-of-way over the 120 miles. This project is being completed, at the direction of Southwest Power Pool, to alleviate the congestion issues out in western Oklahoma.

We also continue to look for ways in which technology will improve the customer experience. Earlier this month, our customers saw improved functionality with the second release of our estimated time of restoration project. This technology aims to proactively communicate to customers during outages. Customers will now see an outage alert with estimated restoration times when they sign into their account.

Then just this week, we went live with an upgraded call center technology platform, providing more options for our customers. We strive to maintain a customer focus in everything that we do, and believe it is enhanced services like this that have led to our number-one J.D. Power Residential Customer Satisfaction ratings for three years in a row.

On the cost side, we continue to focus on controlling costs and increasing efficiency. And as a point of reference, our own end-cost per customer is lower today than it was in 2011. We continue to believe our businesses are strong and well-positioned for the long-term growth and value creation.

We are on plan to achieve our utility long-term growth rate of 3% to 5%, and to continue to grow our dividend of 10% through 2019. It is an exciting time, and we have challenges, but as a Management team and as a Company, we're committed to executing on our strategy and continuing to grow our business.

So with that, I'll turn it over to Steve to review the results. Steve?

Thanks, Sean, and good morning, everyone.

For the four quarter, we reported net income of $29 million or $0.15 per share as compared to net income of $58 million or $0.29 per share in 2014. The contribution by business unit on a comparative basis is listed on the slide. I'd like to point out that the Holding Company loss is primarily due to expenses for new office space to consolidate Oklahoma City personnel, and interest expense at the Holding Company.

And for the full-year 2015, we reported ongoing earnings of $342 million or $1.71 per share as compared to net income of $396 million or $1.98 per share in 2014. In OG&E, net income for the quarter was $20 million or $0.10 per share as compared to net income of $37 million or $0.19 per share in 2014.

For the quarter, gross margin decreased approximately $25 million, primarily due to weather, lower wholesale transmission revenues, and the expiration of our wholesale generation contract -- partially offset by new customer growth. Looking closer at weather, heating degree days were 18% below last year and 21% below normal, contributing to a decreased margin of $17 million as compared to the fourth quarter of 2014.

Now looking at other key drivers, operating expenses were up slightly, driven by higher depreciation, partially offset by lower O&M costs. Income tax expense decreased $7 million due to lower net income.

Now turning to the full year, at OG&E, net income for the year was $269 million or $1.35 per share as compared to net income of $292 million or $1.46 per share in 2014. Gross margin for 2015 decreased $15 million, which I'll discuss on the next slide.

Looking at some of the key drivers for 2015, our O&M cost decreased $9 million or 2% for the year, as we continue to focus on operational efficiencies to control costs. Depreciation was $29 million higher this year, primarily due to additional assets that were placed into service.

Other income increased nearly $9 million, primarily due to increased margins from the Guaranteed Flat Bill program, and an increase in the tax gross-up related to higher AEFUDC. Finally, income tax expense decreased $7 million or 6%, primarily due to lower pretax income, partially offset by a reduction of federal tax credits.

Turning to 2015 gross margin, utility margins decreased approximately $15 million in 2015 compared to 2014. The primary drivers for the reduction in gross margin were as follows. Mild summer weather, which translated into $20 million in lower gross margin as compared to 2014.

Compared to normal, weather reduced margin by $28 million. On June 30, we had a wholesale power contract that expired, reducing margin by approximately $12 million for the year. As we said before, this item has been included in the general rate case that was recently filed in Oklahoma.

Finally, lower wholesale transmission revenues decreased margin by $20 million for the year, primarily due to an adjustment of the SPP formula rate to reflect a continuation of bonus depreciation. Partially offsetting those reductions were, growth from new customers added an additional $21 million in gross margin.

We added nearly 9,800 new customers to the system compared to 2014. Finally, $14 million of gross margin was associated with change in sales and customer mix.

Moving on to the Environmental and Mustang modernization spend, investments for 2016 are largely comprised of Sooner scrubbers and the Mustang CTs. There's a small amount for low NOx, as five of the seven of those units have been completed to date. ACI construction wrapped up in 2015, to be ready for the April 2016 compliance date.

The Muskogee natural gas conversion project spending will begin in 2018. As we have said before, we plan to run those coal units as long as we can, for the benefit of our customers.

Turning to our investment, Enable. Enable made cash distributions of approximately $139 million to OG&E in 2015. The fourth-quarter 2015 distribution rate of $0.318 per unit was an increase of 3% over the fourth quarter of 2014.

Turning to 2016 guidance at the utility, and assuming normal weather, we projected earnings per share to be between $1.44 to $1.50 per share. And for the midstream business, we are projecting earnings contribution to be between $0.28 and $0.33 per average diluted share. We are projecting consolidated earnings to be between $1.72 to $1.83 per share.

Looking further into the assumptions for the utility, we anticipate new Oklahoma rates will go into effect mid-2016. We're assuming gross margin on revenues to be between $1.405 billion and $1.415 billion, which is based on sales growth of approximately 1% on a weather-adjusted basis.

It is also important to remember that OG&E has significantly seasonality in its earnings. OG&E typically shows minimal earnings in the first and fourth quarters, with the majority of earnings in the third quarter, due to the seasonal nature of air-conditioning demand.

That concludes our prepared remarks today. We will now answer your questions. Andrew?

(Operator Instructions)

Our first question comes from the line of Anthony Crowdell from Jefferies. Your line is open.

Hey, good morning, guys. Sean, I don't mean to come in pretty hot the first question, but --

(Laughter) Good morning, Anthony.

Good morning. After the debate last night, I'm all charged up (laughter). I'll save the Enable questions for everyone else, since you're probably not going to answer them.

But a question on strategy, and I guess the uncertainty that the regional haze plan has placed over the stock. If I think about it, back in 2013, the regional haze requirement was issued, the utility joined forces to stay fighting it, but you created regulatory uncertainty over the stock. The Company estate lost the battle, you had to comply with the federal requirements. And investors thought the uncertainty was lifted.

So now we move to December 2015, you guys file for pre-approval of the costs, the commission denies it, and it says that they are just denying the pre-approval and not the plan. So then I go three weeks later, Christmas break, you guys make another filing, take a second bite at the apple for approval of just the plan and the commission still denies it.

Why keep this regulatory uncertainty going into 2016? It's obvious the commission -- you've already got two bites of the apple. Whether it's fuel diversity, or whatever it is, they are not valuing it. Why not just lift the uncertainty and go to gas?

Right, okay. Well, thanks for the question, Anthony. So a couple of things that are going on there. You're exactly right. They have denied our request twice -- two of the commissioners have. One commissioner has been supportive of it. I would also point out that the ALJ report approved the plan, the Attorney General is supportive of the plan, the public utility division is supportive of the plan.

One of the concerns that one of the commissioners expressed was, we used the legislation House Bill 1910, that we've talked about previously. One of the commissioners was concerned about that, didn't like the use of that. But that's why this legislation was put in place, was for events just like this, for federal mandates. Nevertheless, did not like that.

So what we've done is, we filed this last -- and this is it. But we filed this last filing, and this is just about Sooner. And what the uncertainty is, is we're looking for that clarity. Because we do have a lot of support in the state, and in these filings, for our plans. For whatever reason, the orders don't support that. Nevertheless, all commissioners have supported our plan in one fashion or another during the testimony. They have supported fuel diversity, supported our plan. So there's some uncertainly there just in, the orders don't line up with all of the support.

Second thing on Sooner. So we have just made this under the general authority of the commission -- we're not filing under 1910. And quite frankly, this is just a referendum on the Sooner plan. We've got two options. In order to run it past January 2019, we can either scrub it or convert it. We believe the scrub plan is the right thing to do. And we're doing this under their general authority, and we have asked for their decision. So Anthony, your point is, it's not going on. It will come to an end here in May.

We are committed that the scrubber is the right thing to do. We believe it's the right thing to do. We have a lot of support for it. But nevertheless, those two denials that you referenced, it puts us in a very difficult position. When we finish the scrubber project and come in for recovery, those two denials -- the scales aren't really level. And we will have to overcome that. And I think that's a risk that we're not going to take.

Is there a drop-dead date? I don't know, May 1 or -- just in case the proceeding gets delay? I know that the commission has been very busy with earthquakes. It's like, May 10, and if it's not happening, we're not going forward?

We requested an order by May 2. So what we've done here is, when we went back to all of our suppliers and we negotiated kind of a stop-work. And basically, we stopped the flow of funds, because we're getting ready to mobilize with the scrubber work in a real material way. We stopped that. We suspended work until May. But we -- obviously in order to maintain the schedule, that can't go on forever. So May 2 is kind of the date we requested a response by.

Great, thanks for taking my question, guys.

Thanks, Anthony. Take care.

Our next question comes from the line of Neel Mitra from Tudor, Pickering. Your line is open.

Hey, good morning

Hey, good morning, Neel.

The question on the Sooner application. So we didn't get the pre-approval late 2015, and you obviously made the filing for Sooner specifically. Has anything changed in the regulatory environment that would kind of hint that they are more willing to pre-approve the plan? Or are you just trying to basically break it down piece by piece, so it's easier to pre-approve those costs?

Well, I think a couple of things have changed. There was some concern around utilizing 1910, so we've removed that. We've taken that off the table. As you know, there was a lot of intervenors that were interested in doing different things. But that doesn't have anything to do with the Sooner decision.

So what we did is, we removed the concern around the House Bill 1910, and we simplified this and just made this about Sooner. So that kind of removes a lot of the concerns and questions from some of the intervenors out there.

But you know, to Anthony's previous point, we did litigate this and support the Attorney General and the state all the way through. So we do believe in this path, and we are looking for some clarity and some support here.

Got it. And then secondly, you're talking about possibly not going forward with the scrubbers, and going forward with conversion to gas. Does that eliminate risk? Because I know that Chairman Anthony has noted that he does favor fuel diversity. So does a lower cost necessarily preempt a higher chance of approval, or is it just less is on the table?

You know, Neel, you just mentioned something. Therein lies the clarity we're seeking. Because you're exactly right. Chairman Anthony has been a strong proponent of fuel diversity, and really understands and values that diversity. Nevertheless, he was one of the denying votes.

And so that's why we're seeking this clarity, and making sure we've had many discussions, to make sure that we understand what exactly was the concern, is the concern. And we've think we've addressed that with this filing. But we will see.

Got it. And then last question, on Enable. Obviously your partners are looking at different strategies for their state. How does that affect your interest in MLP and how you view that investment going forward?

So we like this investment. We have a clear use of the cash coming out of Enable. That's why we created this entity, to become a source of cash for our Company. We've earmarked that for our capital investment and our dividend. So it doesn't change our thinking on this.

And to be honest with you, you know, I don't think the announcement that was made was positive for us or Enable. But nevertheless, we're going to continue to move forward. And as far as anything that CenterPoint is thinking -- and I don't want to suggest that we don't have a good relationship, we do have a good relationship. But this was CenterPoint's announcement, and they need to speak to it.

Got it, okay. Thank you very much.

Thanks, Neel, take care.

Our next question comes from the line of Charles Fishman from Morningstar. Your line is open.

Good morning.

Good morning.

There's obviously going to be substantial costs that have been incurred already at Sooner, as well as penalties, if you decide to cancel the scrubber project and go gas. Do you have a ballpark number for that?

And then my follow-up would be, is there any precedent in Oklahoma for recovery of those costs? And how confident are you that they can be recovered?

To-date, we've invested $130 million into the Sooner project. That's the number right there. As I said before, we suspended work and there is precedent for recovering that, and we are confident that we would recover that.

With penalties, would that $130 million go up significantly?

Yes, that's where we are today, is $130 million. And we don't think it would materially change from that number.

Okay. And then my second question was on ongoing Holdco expenses. You indicated this year was -- or, excuse me, 2015. Those expenses included an office building retro. Is there a number you could throw out for an ongoing Holdco?

Yes, ongoing, it would be flat. I mean, it would be zero. So this was a one-off for this year.

Thank you. That' s all I have.

Thank you.

Our next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.

Good morning.

Good morning, Paul.

Just a couple of things. When we spoke last, at the last quarterly call, I recall you guys were willing to potentially proceed without the approval. What changed with respect to -- well, what changed?

Yes, so we were willing to proceed without the implementation of the rider. We did not anticipate a denial of the plan or in pre-approval of the plan. So Paul, my concern here is, is that when we bring the scrubbers in to recover them in 2018, I don't know what the administration will look like, I don't know what the dynamics will be, but these two denials of the scrubber plan will kind of tilt the scales against us. And I think that's a risk we're not going to take.

Fair enough. Makes a lot of sense. And then with respect to, I guess, to follow up on the earlier questions, I mean, in terms of -- I mean, I realize that this House bill -- let me put it this way. Do you get any sense that there is an issue of rate fatigue, or something else there more fundamentally happening in terms of this kind of CapEx expense?

Or do you feel it's simply something such as this House Bill that you're talking about, as the procedural process you guys have been under. That they don't care for that. Do you follow what I'm saying?

Yes, I don't know that it's a -- I would put it all on this House Bill 1910. That was one desire or position of one commissioner. And I don't know that it's rate fatigue. I think it's just the fact that this was very large, this is very complicated.

This was an environmental mandate. It's been going on for many years, as we tried to litigate this. And Paul, I think a lot of this is, there were a lot of intervenors in this proceeding, who have every right to share their opinion, but I think it's really muddied the water a lot.

Okay. Now, yesterday, the OCC voted to deny a motion to dismiss?

Yes.

Any comment on that? What should we look into that? Is that simply a procedural thing? It's hard for us to tell, being a --

Sure. So this is on the Sooner plan. And I believe the Sierra Club had filed a motion to dismiss this request we made. And the commissioners voted against it.

Okay. But we should read anything into that as potentially being more receptive? Or there was a motion, and they just simply said no to that?

Correct.

Okay.

We're not forecasting any more. (laughter)

Okay, well, switch to Enable. You guys mentioned how the cash flow is important to you and stuff. Given the outlook that's happened there with commodity prices and everything else, how should we think about, just in general, the strategic significance of this business vis-a-vis the rest of the Company? In other words, why is this important for OG&E to have?

Yes, so we value this for -- from a cash standpoint. And that's how we look at Enable. That's why we created the MLP. We look at it truly on a cash basis. And we looked at it in terms of utilizing another source of cash.

And we're utilizing some of those distributions to support our dividend and our capital investment at the utility. And that has eliminated the need for any equity.

Okay. So if it were to go away, I guess we would have to assume there will be a bigger demand for equity? Would there be any impairment or issues associated with the dividend?

You jumped ahead of me, Paul. Where's it going? What do you mean if it goes away?

Well, I mean, we've got a very low commodity price. I'm just wondering if there's a diminution with respect to distributions going forward?

So Paul, we received last year about $140 million. And Enable did not put out distribution guidance, but they're going to update that quarterly. But you know, if Enable just kept it flat, we're very comfortable with that position. Even if they went down to the MQD, that's not a material amount to us.

This is not the sole source of our support of the dividend, or funding our capital expenditures. So we feel extremely confident in our ability to manage through this plan without issuing equity, and maintaining our dividend growth rate.

Excellent. Thanks a lot, guys.

Thanks, Paul. Take care.

Our next question comes from the line of Paul Ridzon from KeyBanc. Your line is open.

Good morning.

Good morning.

Is the $17 million gross margin hit form weather versus normal, or versus 2014?

For the quarter, it's about the same. For the quarter or for normal, it's about the same. If you go on an annual basis, it's about $20 million less -- $28 million less than normal, and only $20 million from last year. Between quarter and normal, if you're just looking at the fourth quarter in isolation, it's roughly about $17 million for both.

Can you just review, you have legislation that supports pre-approval or rider? I mean what are your legal -- what, can you litigate this with the commission? Or what is your strategy?

Well, the legislation basically provided that, to the extent that we had an environmental mandate, that we could file the request approval of the plan, and we would have the right -- it was our right to implement a rider. So one of the concerns coming out of the commission was that the Commissioner did not want to approve the plan, because they were concerned about us implementing the rider.

That was our legal right. So on the grounds of not wanting us to implement the rider, voted against approving the plan.

The law does not require pre-approval, it allows the rider if it is pre-approved?

Right.

Got it, okay. And then just the current commodity strip, is that within the bookends you contemplated when you say you stress-tested the model?

Yes, sure was.

Very good. Thank you very much.

Thanks.

Our next question comes from the line of Joe Zhou from Avon Capital Advisors. Your line is open.

Good morning.

Good morning.

So just a follow-up from Paul Patterson's question. I know you look at Enable as a source of cash. However, I just want to ask, on the earning side, your 2016 guidance indicates roughly a 25% decrease year over year from your 2015 Enable earnings.

However, this morning, your guidance indicates approximately only 15% of decrease year over year. So would you please help me understand why there's a difference? Thank you.

Sure. Good question. I can't speak to the CenterPoint guidance. What I would tell you is, we took the public guidance that Enable put out there, and we took our proportional ownership of that guidance, and as you know we have some amortization that actually increases the earnings contribution to us about $0.08.

But our number is straight from Enable. So we're using that based on our LP ownership interest. So I can't speak to the CenterPoint guidance.

Okay. It seems like -- I don't know, maybe I'll ask them the same question. But maybe they are taking the same method of population too. I just want to understand that.

I don't know. I can't answer. I haven't looked at that guidance, and I don't know what they've done. But I want to be very clear. What we did is, we took the Enable guidance and took our proportional share of that, and that's what's represented here.

Great. Well, thank you very much.

You're welcome. Have a great day.

Thank you. Our next question comes from the line of Sarah Akers from Wells Fargo. Your line is open.

Hey, good morning.

Hey, good morning, Sarah.

So as we think about the 2016 utility guidance, can you just help us understand what level of regulatory lag you expect to see in the first half of the year? And then the potential uplift in the earned ROE when new rates become effective?

Sure. As far as lag, if you look at really the key components that are in the rate case, you've got the AVEC contract that, after tax, is about $11 million. You've got transmission, the retail portion of the transmission, that's about $8.5 million. And then you'd take a half-year of those, because we would expect to have rates in place the second half of the year. And then the environmental is about $6 million after-tax. So full-year, it's about $0.06 for AVEC, about $0.04 for transmission, and environmental is about $0.03. You can assume about half of that.

And then I didn't catch your question on ROE. What was your question?

Just in terms of in the back half of the year, what type of earned ROE would you expect, once new rates are effective?

Yes, we're not going to comment on that. It depends on what order we get and what ROE we're allowed.

Sure. And then after this case, assuming no enhanced recovery mechanisms are approved, when would you plan to file again for rate relief, just to pick up the rest of that environmental plan and Mustang modernization?

Sure. The next rate case would come towards the end of 2017, and would pick up the remaining two low NOx burners, and then pick up our Mustang CTs. We would time that to minimize any lag associated with that. But you could expect a filing towards the end of 2017.

Okay, so for new rates effective mid-2018, at least on an interim basis?

That's correct.

Got it. And then where are you in terms of evaluating new wins for the portfolio, and does the CPP stay impact your thinking at all there?

So Sarah, this is Sean. The CPP doesn't really impact our thinking. The stay -- our thinking on new generation, with the plans we were undertaking with respect to regional haze, we thought we were in pretty good shape if the CPP plan went forward. We look at a lot of resources all the time, but we've got a lot on our plate right here, and [oil] recovery. And we're focused on that.

Got it. And the last question -- is there anything on the legislative front related to either energy policy or rate recovery that we should be keeping an eye on here?

Nothing on rate recovery. We talked about it. The state is faced with a pretty sizable deficit. And so there's a lot of legislation floating around that we're very involved with, with respect to taxes and incentives and things like that. So I don't think at this stage, there's anything that surfaced that is paramount. But we'll certainly keep you posted

Got it. Thank you.

Think you.

Thank you. Our next question comes from the line of Brian Russo from Ladenburg Thalmann. Your line is open.

Hi, good morning.

Hey, good morning, Brian.

Could you just talk about the different amount of investments of installing scrubbers at Sooner versus converting it to gas? What's the dollar amount they'll do there?

Yes, so the Sooner scrubbers was probably in the $450 million, $500 million range. We've not done a lot of work with respect to converting the Sooner plant to natural gas. If we use Muskogee as a proxy -- because we are converting that plant -- it's probably in order of magnitude around $100 million.

But we haven't done a lot of engineering studies, or done a whole lot of work -- obviously we don't think it's the right thing to do. But nevertheless, that's kind of the change there. And then you add the $130 million that we've invested up to this date, to comply with the plan.

Okay. And in the event that you do convert Sooner to gas, how do you backfill that delta in the CapEx to maintain your CAGR?

Brian, we feel pretty good about our CAGR. And we don't really think about it in terms of how we would backfill. We're always looking for opportunities. But our CAGR is in -- we're okay.

And just to confirm, that 3% to 5%, is that a utility EPS figure?

Yes, that's utility.

Okay, great. And approximately what percent of your annual margin, assuming weather-normal, do you incur in the third and fourth quarter?

It's probably around 90% in the third and fourth quarters. So the vast majority -- I'm sorry, second and third is where it all comes from. So the tails are on the first and fourth quarter.

Okay, so 2Q and 3Q is 90%?

That's correct.

Okay. And what was the EPS impact of that office renovation that you mentioned earlier in the fourth quarter -- what out of the $0.05?

It was about $0.04 of it.

Okay, great. And then just on Enable, could you maybe elaborate on the ownership structure? Do you have right of first refusal if your [GTLP] partner decides to, say, spin their interest off or do an outright sale?

Yes, we do. So in the partnership agreement, we have -- there are ROFO and ROFR rights, to the extent that one party was going to sell or do something with their interest or received an offer for that. So that's provided for.

And just to remind us, you're 50% of the GP?

50% of the GP, and we own 60% of the IDRs.

Okay, great. Thank you very much.

Hey, thanks, Brian. Take care.

Our next question comes from the line of Jay Dobson from Wunderlich. Your line is open.

Sean, how are you?

Hey, great, Jay. How are you doing?

Great, thanks. Just a quick follow-up on the last question regarding CapEx. Talk a little bit about in the event, on or about May 2, you decide not to go forward with this Sooner scrubber, and CapEx is -- call it a couple $300 million or $400 million lower -- where do you think that you take that CapEx to backfill?

What are we doing? Obviously you're going to have the gas conversion, which will take up maybe $100 million of that. But what will we do -- so it's sort of a little more granularity on how to we get to the growth rate in the absence of Sooner CapEx on scrubber?

Jay, I appreciate the question, because I think it's important. And I think we look at this maybe a little bit differently. Our investments -- we're were focused on creating value for our customers. We want to keep our rates low. And so our philosophy is, I want it to be positive for customers as well.

And when we were faced with this regional haze, this isn't how we wanted to invest our dollars, with this regional haze compliance. We have been very active on our grid, trying to increase those products and services and functionality to our customers. And so to the extent that we did not have to utilize the balance sheet on compliance, we would probably focus there.

But again, I want to convey, we're not thinking about trying to invest just to grow earnings. We are really trying to create value here for our customers. I think that benefits us on the long run. And we think are growth rate is fine either way.

And I think the other point that I would make to you, Jay, is this. And this was not the reason we did it -- it was just because it was value-enhancing. But we did bring, as Steve mentioned, the transmission line forward. We're going to bring that in sooner rather than later. So that will actually fill some of that gap, as you called it, by itself.

Got you. Maybe to ask a question differently, because I appreciate the answer. And I think most people on the phone would agree with you that the customer proposition has to be at the heart of what you're doing. So I wasn't at all suggesting that we just sort of throw it away.

I think where I'm sort of going is, in the absence of that spend, what is the best use of that cash? Is it customer systems, is it -- you said transmission. Is there more of transmission? Is there wind? Is it better not to spend it? That's sort of where I'm going. What are the best customer propositions in the absence of the Sooner scrubber?

I think it's -- and I would add in there, it's probably an opportunity -- it reduces our financing requirements as well, on the debt side.

Absolutely, so (multiple speakers)

Yes, I don't think we're at the point -- and again Jay, I believe to scrub those Sooner units, we are still committed to that. We believe it's the right decision. I said before, there is a lot of support for that scrubber plant.

I think it is the right thing to do. So we do have this filing out there, and I think to the extent we're not successful, we will provide more clarity around capital going forward. But this is where we're at, and we're focused on the scrubbers.

Great, I appreciate it. Look forward to May 2.

Thanks, Jay. Take care.

It looks like we have a follow-up from Paul Ridzon from KeyBanc. Your line is open.

Just a quick accounting question. Why was the renovation not capitalized?

Oh, on the billing? Yes, actually we were looking at consolidating our personnel, and we were going to be the anchor tenant in a new building. And we -- just with the economy changing, we decided and made the wise decision not to move forward on that. So these were capitalized costs.

Okay. Thank you.

Thank you. And we have a question from the line of Will Chang from [L&D] Capital. Your line is open.

Thank you. It's actually [Reza Hettessey]. Could you talk about your balance sheet and whether, if you go forward with this scrubber CapEx or not -- you guys have a pretty strong balance sheet, especially if the CapEx gets reduced -- what you'll be looking to do with your stronger balance sheet?

I think as it relates to the utility, we're going to continue to grow, and invest in what I'd call our customer-enhancing and value-enhancing opportunities. I think we're going to look at some opportunities around our grid and around our system. We do have -- as we look at our fleet, we do have retirements coming out in the future, so we're going to have to provide more generation in the future.

And you know, as far as the balance sheet, we worked hard to get here. This has been a very long journey, and we intend to keep that balance sheet very strong. Because it's times like these why you work hard to create a strong balance sheet. This is what gets you through some of these cycles. And so I think we're going to continue doing what we've been doing, I think, is the short answer.

If the CapEx is reduced, if the scrubbers don't happen, is buyback an option? Or you'd just be pushing to find new projects that need to be worked on?

I don't think those are viable options. I think we're going to continue to press forward, and were going to find good opportunities within our utility jurisdiction to continue to grow.

Thank you.

Thanks.

Thank you. That's all the time that we have for questions for today. I would like to turn the call back over to Sean Trauschke for closing remarks.

Well, thank you. And I thank all of you for joining us today. We appreciate your support. And then to everyone here at the Company, thank you again for your focus and dedication, and have a great and safe day.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program, and you may all disconnect your telephone lines at this time. Everyone have a great day.