OGE Energy Corp (OGE) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2016 OGE earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Todd Tidwell. You may begin.

Thank you, operator. Good morning, everyone, and welcome to OGE Energy Corp.'s fourth-quarter 2016 earnings call. I'm Todd Tidwell, Director of Investor Relations. 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. 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 oge.com. In addition, the conference call and the 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, along with projected capital expenditures.

I will now turn the call over to Sean for his opening remarks. Sean?

Thank you, Todd. Good morning, everyone, and thank you for joining us on the call today. I am pleased to announce that 2016 was a good year both operationally and financially for the utility. The Enable business also performed well, as their business environment continues to improve. We continue to deliver results and focus on what we can control.

Earlier this morning, we reported 2016 consolidated earnings of $1.69 per share compared to $1.36 in 2015. For the fourth quarter, earnings per share was $0.29 as compared to $0.15 last year. The big driver for the increase year over year was the impairment at Enable in 2015.

The utility reported earnings of $1.42 per share, with the milder-than-normal summer weather impacting earnings by about $0.02. As you know, the utility results do not include the impact of the rate relief requested in the Oklahoma general rate case. I will touch more on this in a moment, but we are optimistic a decision is forthcoming.

We do have a lot of good things happening at our Company and in our communities beyond just regulatory activities. Although regulatory is important, the main mission is on improving the product we provide to our customers and our communities. I could not be prouder of the focus and determination of the team to press forward and create real value for the communities we serve.

The utility's service territory is growing. In 2016, we added almost 9,000 customers to the system, maintaining customer growth at just over our historical growth rate of 1%. The Greater Oklahoma City economy continues to perform, with the unemployment rate at 4%.

On a statewide basis, as energy prices rebound, we are beginning to see economic activity pick up. With commodity prices improving, oilfield load is returning, with 141 new oilfield customers in 2016.

Looking at the year in review, the utility accomplished a great deal. First and foremost, I'm very proud to recognize the Company members for their safety performance in 2016. Quite frankly, it was a banner year.

In fact, our safety performance for 2016 was the best in our 115-year history. Just 10 years ago, we were experiencing 80-plus recordable incidents per year. We believe that a focus on safety not only matters to the lives of our members and their families, but it makes good business sense as well. So a shoutout to our workforce and for a great year, and let's keep it going.

In the past, we received numerous awards for a variety of activities, and 2016 was no different. We once again won the EEI's Emergency Recovery Award, the Keep Oklahoma Beautiful Vanguard award associated with our solar farm, the Cogent Reports and Market Strategies International Award for Customer Champions, and Community Service awards from the city of Muskogee, to name a few.

It's one of our core values at OGE is to be involved in all aspects of our communities. Whether through our charitable giving, volunteerism, or business leadership, we are committed to making the towns and cities where we work and live better.

On the operations front, all remaining environmental projects are on schedule and on budget, as well as the Mustang plant. Our generation fleet continued to perform well, highlighting the benefits customers realize through a diverse generation portfolio.

On the expense side, our O&M cost per customer as well as the average bill are virtually the same as they were five years ago. We continue to make sure every dollar counts. And we've said it before: it's not just one thing, but a mindset, a consistent focus of everyone at the Company. And last year, SNL ranked OG&E as having the lowest average electricity price in the nation.

OG&E's economic development efforts were also successful in 2016, as nearly 100 megawatts of new load was secured that will ramp up over the next couple of years. For 2017, several large new load projects are in various stages of negotiations and we are optimistic on that front.

We believe we play a fundamental role in bringing businesses and jobs to our service territory. Our commitment to low rates and reliable service play a key role in attracting new customers to our system.

In addition, we are in the process of deploying our [advanced] LED streetlights program for the city of Oklahoma City. This is another extension of our smart grid platform. As streetlights are replaced, they will be connected together on a network platform to increase system efficiency and improve our restoration responses.

Looking forward, as we complete our regional Haze and utility MATS environmental compliance programs, in an effort to protect the customer bill, we have delayed a number of grid-enhancing programs. These include low-voltage 69 transmission upgrades, underground cable replacement, and infrastructure investments to reduce outage durations for customers.

As an order of magnitude for the opportunities, you should expect CapEx levels consistent with what we've seen the last couple of years. Once we get through the environmental plans, we will begin, and in some cases resume, a number of these initiatives, assuming there is a constructive regulatory environment. We will keep you updated as we progress through these initiatives.

As I mentioned earlier, our 2016 results did not include an Oklahoma rate order. The Administrative Law Judge that heard the case issued a report in December recommending approximately $41 million revenue increase predicated on a 9.87% ROE. A hearing on the ALJ report was held on February 2, and while we await the final decision, we are confident in our case and optimistic regarding the ultimate outcome and receiving a final order soon.

Turning to Arkansas for a moment, we filed a rate case in September of 2016 seeking a $16.5 million increase. A hearing will be held in May and we fully expect an order in June of 2017, as they adhere to a strict regulatory schedule. In addition, that case was filed under Arkansas's new Formula Rates law, which, going forward, should increase the efficiency of cases even more.

Moving to Enable, what began as a very challenging year in 2016 ended very well, with strong investment-grade credit metrics and strong coverage ratios. Gathering and processing growth in the SCOOP and STACK plays allowed them to beat expectation, achieving the highest DCF since their formation and a distribution coverage ratio of 1.18 times. Considering that oil and natural gas prices hit 10-year lows in 2016, the business performed remarkably well.

In 2016 we received $141 million in cash distributions from Enable. In addition, valuation of the Midstream continues to recover, as total return was more than 90% in 2016. Enables strong balance sheet and expense reduction not only allowed them to weather the downturn, but positioned the business for future growth.

Enable also executed a 10-year fixed fee contract in the prolific STACK play and secured an additional 60,000 of acres dedicated to their system. Enable is clearly doing well and we are excited about the possibilities for the future. They will remain focused not only on growth, but also on investment-grade credit metrics and solid distribution coverage ratios.

One final comment on Enable is that we responded to another right-of-first offer or ROFO from CenterPoint regarding their strategic process for their interest in Enable. Similar to last time, we are not disclosing the specific terms, and the timeline is as follows. We responded to the ROFO on February 15. CenterPoint has until June 15 of this year to identify an offer which is 105% of our offer.

As we've stated many times in the past, OGE is committed to our Enable investment. They have great assets in prime locations, and we are excited about what the future holds and continue to be focused on growth in the distributions and the incentive distribution rights.

Switching gears a bit, we were pleased to see former Oklahoma Attorney General Scott Pruitt confirmed to lead the EPA. We know Scott and look forward to working with him in his new role.

And finally, I'd like to address potential implications of tax reform on the Company, based on our current 2017 guidance. Both the Trump administration and the House Republicans have advanced tax reform ideas that could impact our business, although still very early in the process.

The current proposals have really three common elements: reducing the corporate tax rate to 20% or 15%, the 100% expensing of capital investment for tax purposes, and the elimination of the interest expense deduction. These elements certainly would have different impacts, depending on whether we look at our regulated utility business or our nonregulated Midstream holdings.

The good news is that under any of the current proposals, OGE customers and shareholders alike will benefit. First, let's look at the utility. Because of the traditional ratemaking approach, reducing the corporate tax rate directly benefits customers by lowering the provision for income taxes and rates. A lower tax rate also creates an excess deferred tax position that would benefit customers over time.

At the same time, the utility's rate base would increase as well. We would consider this component of the proposed tax law as a win-win for both customers and OG&E, assuming we have the right regulatory mechanisms in place.

In conjunction with the lower tax rate, if 100% expensing of capital investments was adopted, it would still be positive for customers and OGE. In lieu of the 100% expensing of capital investments, we would advocate for the preservation of the interest deductibility, as it has a far greater benefit for customers.

Turning to the unregulated business, a lower corporate tax rate, regardless of the level, would create a one-time earnings benefit for OGE. And then on an ongoing basis, depending on the tax rate, earnings from Enable would increase between $0.08 and $0.11 per share if interest is deductible and between $0.04 and $0.07 per share if interest is not deductible.

Overall, the current proposals would be a positive for OGE and our customers. And obviously, this is very, very early in the process and there are many moving pieces. But as we stand here today, I want you to understand the key takeaways that we will have a benefit from the ownership in the Enable business as a result of tax reform.

We have a strong cash position to handle any customer givebacks resulting from a lower tax rate. And we have minimal holding company debt that would be exposed if interest expense is no longer deductible.

So we will be paying very close attention to tax reform as it takes shape. But we wanted to share our view of the implications of the plans that are currently being discussed.

In closing, I want to reiterate that overall, 2016 was a good year for the Company and I think we are well positioned for continued growth in 2017.

Thank you, and I'll now turn the call over to Steve to review our financial results in more detail. Steve?

Thank you, Sean. And good morning, everyone. For the fourth quarter, we reported net income of $58 million or $0.29 per share as compared to net income of $29 million or $0.15 per share in 2015. The contribution by business unit on a comparative basis is listed on the slide.

For the full year 2016, we reported earnings of $338 million or $1.69 per share as compared to net income of $271 million or $1.36 per share in 2015. At OG&E, net income for the quarter was $46 million or $0.23 per share as compared to net income of $20 million or $0.10 per share in 2015.

For the quarter, gross margin increased approximately $32 million. The primary drivers for the increase in gross margin included a $16 million increase in wholesale transmission revenues. This was in part due to an SPP settlement of revenue credits related to the Windspeed transmission line for the last nine years.

Weather was also more favorable than 2015, adding $14 million to gross margin. Compared to normal, weather contributed $2 million to margin for the quarter.

O&M increased approximately $6 million for the quarter due to higher professional service costs, partially offset by lower vegetation management and lower marketing and sales expenses. Depreciation expense increased by approximately $5 million for the quarter due to additional plant in service, including the ACI projects and the Mathewson to Cimarron transmission line. Finally, interest expense was $3 million lower due to an increase in allowance for borrowed funds and a decrease in interest from lower long-term debt.

Now turning to the full year, at OG&E, net income for the year was $284 million or $1.42 per share as compared to net income of $269 million or $1.35 per share in 2015. Gross margin for 2016 increased $47 million, which I will discuss on the next slide.

Looking at some of the key drivers for 2016, our O&M cost increased $25 million, primarily due to increased professional services and rider expenses which have revenue offsets. However, we did come in under our plan for 2016. Depreciation was $17 million higher this year, primarily due to additional assets that were placed into service.

Other income increased nearly $8 million, primarily due to higher AFUDC from higher construction work in progress. The balance is related to our environmental projects. Finally, income tax expense increased $10 million due to higher operating income and lower renewable energy credits from decreased wind production.

Turning to 2016 gross margin, utility margins increased approximately $47 million in 2016 compared to 2015. The primary drivers for the increase were as follows. Warmer summer weather translated into an increase of $21 million as compared to 2015. Compared to normal, weather reduced margin by $8 million.

Wholesale transmission revenues increased gross margin by approximately $20 million compared to 2015. The increase was primarily due to revenue credits associated with the Windspeed transmission line for the years 2008 through 2016.

Finally, riders for customer programs that have a direct expense offset contributed approximately $9 million. Partially offsetting these increases was the expiration of the wholesale power contract that reduced margins approximately $10 million compared to 2015. As we have said before, this item has been included in the Oklahoma general rate case.

Moving on to our environmental and Mustang modernization projects, investments for 2017 are largely comprised of the Sooner scrubber project and the Mustang CTs. All projects are on time and on budget. For the scrubbers, we have invested approximately $209 million through the end of the fourth quarter, and for the Mustang CTs, we have invested approximately $188 million.

Turning to our investment in Enable, in 2016, OGE received approximately $141 million in distributions. This slide highlights the importance of Enable as a cash vehicle for OGE. Put another way, the cash distributions received from Enable in 2016 are more than 2 1/2 times the earnings contribution. This is free, unencumbered cash flow for OGE to utilize for our CapEx programs and to support our dividend growth going forward.

As Sean mentioned earlier, Enable ended the year very well. They achieved their objectives of strengthening the balance sheet and improving coverage and are well positioned going into 2017.

Turning to the 2017 guidance, at the utility and assuming normal weather, we project earnings per share to be between $1.58 per share and $1.70. For the Midstream business, we are projecting the earnings contribution to be between $0.35 and $0.39 per average diluted share. We are projecting consolidated earnings between $1.93 and $2.09 per share.

Looking further into the assumptions for the utility, we anticipate new rates to take effect in Oklahoma and Arkansas in 2017. We are assuming gross margin on revenues to be between $1.47 billion to $1.485 billion, which is based on sales growth of approximately 1% on a weather-adjusted basis.

For the Oklahoma rate case, we are assuming $0.07 per share for rates implemented on July 1, 2016, through December 31, 2016, based on the findings in the ALJ report, including a 9.87% ROE.

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

This concludes our prepared remarks. We will now answer your questions.

(Operator Instructions) Joe Zhou, Avon Capital Advisors.

I might be the only question, actually -- it's Andy Levi -- because we just keyed in. It was nice to see good guidance. People were so pessimistic, but it was good guidance.

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

Sure. So as far as, Andy, as far as I think about OGE, we are intent on growing our Company. And I do expect and I'm focused on growing this Company. And we have a lot of organic growth opportunities in front of us and we're going to pursue those with great rigor.

I don't make a habit of talking about M&A or any of that activity. I'm not sure that that has always been fruitful for people to talk about, so we wouldn't comment on that. But I don't want to leave any doubt in your mind: it is our intention to grow this Company.

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

I want to leave it that we are intent and focused on growing the Company. And we will leave it at that. How's that?

Okay. You can answer it anyway you want, Sean.

Thank you.

You are the CEO.

I appreciate that.

And then just on Enable, I kind of tuned out for a second. So just where are we at, as far as the process? Just remind us. And I guess that process is still alive. Is that the way to look at it?

Yes. I would characterize it that yes, unfortunately it's still alive. It's continuing. And as I mentioned in my remarks, we did respond to another ROFO notice. And essentially CenterPoint has until June to conclude this round of the process.

And anything further as far as where they are in that process, I think really, in fairness, you need to talk to them. We are focused, along with Enable, to make sure that this is not a distraction to the business of Enable and making sure Enable continues to really perform well.

Okay. And you said June. Is there an exact date in June that it expires?

The 15th. Yes, the 15th.

Got it. Okay.

All right?

Yes, thank you, sir.

Brian Russo, Ladenburg Thalmann.

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

That is correct.

And that's $0.07?

That's what we included that would roll over into 2017 from 2016.

Okay, got it, got it. And then I've been reading about some House bills and Senate bills being proposed in Oklahoma, House Bill 1891 and Senate Bill 282, regarding interim rate increases.

And I just want to understand what's the motivation for this. Is it concerned with interim rates, or is it concerned that the OCC is taking so long to issue a final order that these interim rates are being charged to customers for an abnormal amount of time?

Right. No. Good question, Brian. And thank you for clarifying what those bills were, because I don't know them by number. But you are exactly right. Last July, we implemented rates. And this statute has been on the books since the early 1990s, and this is the very first time in 20-plus years we have ever implemented rates.

And so I've not spoken to the author of either one of these bills, but I did see a newspaper article where the author was quoted to basically say he was not focused on us or PSO, who implemented rates the previous year, but he is really focused on the process. So that gets to your point there of the delays and the frustration that seems to be mounting.

I would say this isn't personal. No one is to blame. We've talked many times that other companies, including us, including the commissioners and their staff, there's a lot of frustration for the delays that are occurring here. And we've done better in the past, and I think we are all focused on trying to get better.

The other point that I would say, and maybe you were alluding to this, but there are 10 bills that have been proposed in this legislative session speaking to the restructuring of the Commission. Now, I will tell you a number of those bills are shell bills that don't have a lot of specificity in them.

But nevertheless, I think it speaks to there's recognition and really alignment around the opportunity before us, that we can do a better job here and we are all in it together. And that's the first step of really moving things forward is that you have recognition and alignment of the opportunity.

So we will follow these. We are monitoring these. And as they take shape and form, we will be engaged. This is important to us. But to your original question about the interim rates, if I looked at the newspaper and his quotes, he was really focused on the process and how we got to this point. Not the actual implementation of the rates.

Okay, got it.

That help?

Yes, it's very helpful, thank you. And then the $0.04 of PTC recovery in 2017, is that just kind of like one-time 2017 impact? That's not like ongoing in terms of impacting your effective tax rate?

Actually, it would be ongoing. So we've got some PTCs that expired right at the end of last year, first part of this year. And so that impact -- other than waiting for a rate case, we need some mechanism from the Commission to get that into rates.

Our customers have been benefiting for those PTCs for 10 years, and now that they expire, we end up in an unrecovered situation because of those, and rate base needs to go up. So we are looking for an automatic mechanism.

So we are assuming that we will get those, that they may run through the fuel clause or some other rider mechanism. But as additional PTCs expire, the same issue would occur.

Okay, got it. And then just on another 2017 assumption on the utility, other income of $60 million? I get the $34 million of AFUDC, but what's the balance there? That looks kind of large.

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

Okay, great. And then I would imagine that the midpoint of the utility 2017 guidance assumes that 9.87% ROE?

That's correct.

Okay, great. Thank you.

Paul Ridzon, KeyBanc.

Midstream came in below guidance. I was looking for some kind of recovery of some of the hedge timing that was a drag earlier in the year. Did that not hit fourth quarter? Or is that pushed into 2017?

Yes, it pushed into 2017, Paul. They had -- at the end of the year, there were $43 million of unrealized hedge losses, so that impacted us. By the time it got to us and our ownership share, that was about $0.03, which would have put them right where we had planned. So it was about $11 million to us when it all said and done. So those would roll off.

Now, keep in mind, there's additional hedges for 2017. Depending on what commodity prices do, you could create more. Those unrealized hedging losses are actually a sign that commodities have improved and we should see that benefit in volumes increasing going forward.

So you took the mark to market hit in 2016 and some of those will be delivered at a profit in 2017?

Yes.

Got it. And then, just so I understand Oklahoma rates, your guidance is based upon recovering in calendar 2017 18 full months of the $41 million ALJ rec?

That is correct. Because we put interim rates in place July 1, that preserves those earnings going forward.

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

It would be retroactive to July 1, when we put the interim rates in. July 1 of 2016.

And the interim was $41 million annualized?

Based on the ALJ report. We put in interim rates for about $69 million of recovery on an annual basis. The ALJ report that we are pointing to was about $43 million, $45 million. So that is what you could expect the benefit to be based on on a go-forward basis. And that's ultimately where the $0.07 related to the 6 months in 2016 comes from that we point to in our guidance.

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

That's correct. And that's an annual number.

Yes, yes. Thank you very much.

Paul Patterson, Glenrock Associates.

So I apologize for being a little slow here, but I'm not completely clear about how the Oklahoma rate case impacts 2017 versus 2016. Could you please help me out here? I guess what I don't understand is why is there -- it appears that there's a benefit from the 6 months in 2016, in 2017. Is that correct?

That is correct. What we did -- while we implemented interim rates, we reserved the vast majority of those earnings pending an outcome from the Commission. So essentially, we didn't book any income from putting the interim rates in place, but it preserves that income.

So when the order does come, we will then be able to book whatever earnings are associated with the final order in 2017. But it will go back to July 1, 2016.

Okay, just wanted to make sure I understood it. And then it looks like it's based on what the ALJ basically -- the ALJ's report?

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

Okay, thanks for helping me there. And then the PTC -- where is that, how is that recovery to be determined? It sounds like it's a pretty straightforward thing. Is that a separate case? I can't recall.

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

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

Right. That's correct.

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

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

Okay. But would that be an automatic thing that you guys would be able to -- it's clearly an expense. That would be an expense that would hit you guys, I would assume.

Yes, but that's a tax that we would pass through.

Okay. But would you need a regulatory approval to pass it through, or is it something kind of --

No, we pass those taxes through today, similar taxes.

Okay, just wanted to make sure. And then basically Andy Levi's question -- in terms of just M&A philosophy, how should we -- when you say you want to grow the Company, how should we think about like the issue of a near-term accretion versus dilutions or strategic versus non?

It's kind of a general statement to say we want to grow the Company. I'm just wondering if you have any other M&A philosophy you might want to share with us.

Well, I think whatever investments you make, there has to be some value creation. And I think that speaks to broader than just accretion dilution. There has to be some real long-term value benefit that is created.

And so I'm not sure I'm adding anything to your thesis there, Paul. But my view is that when you do something, it ought to be able to stand on its own. And I would point to -- and in the past couple years, as we've done things with our Midstream investment, those stood on their own.

It was obvious, the value that was created and the rationale and the thesis of what we did. And I think that's how I think about things is whatever capital you deploy, it ought to be able to stand on its own. It ought to be obvious.

Okay, fair enough. And then Scott Pruitt -- any thoughts about what kind of changes we might see with respect to EPA or any thoughts?

No. I don't think -- there's a lot of discussion out there what he may or may not do. But I think Scott will be good for the EPA and I think he will be good for the country.

And one of the things that I really appreciated about Scott was that he was focused on the rule of law. And his premise was you can't have these agencies just making up and interpreting their own rules. It has to go through a legislative process. You cannot bypass the legislature.

And I think that's important. And from my standpoint, I think just having a little more consistency so you are not having a compounding flood of regulation on top of regulation coming at us is helpful.?

Okay, fair enough.

And the last thing, just so -- and it goes -- I don't think I should have to say this. But we as a company, and I know Scott shares this view, we are all for a cleaner and healthier environment. We are not opposed to anything that would make the environment better. This is more about just consistency and the rule of law.

Okay, great. Thanks so much.

Stephen D'Ambrisi, Castleton Investments.

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

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

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

About 32%, 31%-32%.

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

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

Okay, all right. That's basically everything. Thanks very much, guys.

Anthony Crowdell, Jefferies.

Sean, I guess I'll start out -- when you were talking about street lighting, LED lighting, grid enhancements, you had said that you would -- I don't know if it was execute on the plan, assuming constructive regulatory environment. Do you feel you are there now in a constructive regulatory environment?

Well, I don't think we are quite there yet. From a timing standpoint, things are taking a long time. And we've got to have that certainty that there is recoverability of it.

We are very optimistic on the structural changes and the improvements that have occurred in Arkansas. And so we think there's great opportunity for additional investments in Arkansas now that we have -- we expect to have some clarity around that regulatory recovery process.

And Anthony, the other point is we were very cognizant of the rate impact because of the environmental plans we had to implement. And so, to be honest with you, we deferred or delayed that to try to smooth that out a bit from a customer impact.

And so we will resume that, assuming that there's a constructive regulatory environment. And so that will be -- it's not really a point in time today to make that decision. It's probably a point in time to make that 18 months from now.

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

Well, we are going to file for the Mustang approval -- we are going to file again for Mustang at the end of this year. And then we will follow up that again in 2018 with the recovery of the scrubbers. So we will have two more rate cases in Oklahoma. In Arkansas, we filed under that formula rate plan, and we expect that to be handled that way, those projects handled that way.

What I was trying to convey there is, Anthony, we feel confident we have a lot of investment opportunities around our grid to support our customers. And we don't think that we have a deficit of capital opportunities to really enhance the product.

What I was saying, though, was we will fill that in after we get through this environmental plan. And I was trying to articulate there that I would expect, if you were trying to model something, it on average to look similar to what we've done the last couple years.

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

Call it $600 million-$700 million.

$600 million-$700 million? Okay. If I could switch gears to the CenterPoint, I guess you made an offer and CenterPoint has until June 15 to come back, I guess, with an offer that's 105% better than OG's offer. Do you state if the offer you made is just you guys? Or is that with a partner that you make the offer for Enable?

Yes, we did that similar to last time, with a partner.

Okay, great. I don't have any other questions, and thanks for taking these.

Charles Fisherman (sic), Morningstar.

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

Well, I'm not sure I understand your question, Charles. But there's nothing in the forecast or guidance that came out of Enable that would imply that distributions will go down. And Enable will issue their guidance.

But I would expect longer term and the distributions we expect to increase. And then ultimately, we expect as they grow their distributions, that's cash flow, we would eventually get into the incentive distribution rights and we would have 60% of those.

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

Right. But it's more of a -- that tax will impact earnings, not cash, from Enable.

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

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

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

Joe Zhou, Avon Capital Advisors.

It's Andy again. So just back on the question on the tax rate for Enable that was 42% and then 32% for this year, how should we think about that going forward as far as just for modeling purposes? Because obviously, it makes a difference in the earnings per share that come up.

Is there a way to -- you talked about bonus depreciation as one of the factors. As you look into 2017, 2018, or 2019, is there a way to give us some guidance on is that tax rate going to be consistent, is it going to continue to move around?

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

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

I think that's right.

Okay. Thank you very much.

Noah Hauser, Nuveen.

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

Yes. So through the first process, that process ended in January. And then CenterPoint sent us another ROFO notice.

Is that because they had received another offer or --?

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

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

Shahriar Pourreza, Guggenheim Partners.

So I think the famous Andy Levi has asked all my questions. But let me -- when you sort of just elaborate a little bit on growing the Company and M&A a little bit, I'm kind of curious.

When you mean grow the Company, is this more of a function of increasing your position, your interest in a Midstream or an Enable, or is it a function of looking at traditional wires businesses? Can you just elaborate a little bit on that? Because you've done organic.

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

Got it. And then just lastly, you touched on the CapEx and what a normal level of spending should be a couple years. But how should we think about the growth trajectory, just given where organic opportunities are?

And if you get past the environmental spending and you reinitiate a lot of some of the wires businesses, should we think about this being supportive of your growth or something that could be incremental, especially as you get out of a politically sensitive time of year, obviously, with your rate proceedings?

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

Okay. At a minimum?

Yes.

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

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

All right. Great, guys. Congrats on the guide.

Joe Zhou, Avon Capital Advisors.

I just wanted to respond to Shahriar. No, I'm teasing. I do actually have one more question. And again, I'm kind of slow at certain things, so this is one thing I'm slow at.

So on Enable, just again back to that. So just to understand the process completely, so CenterPoint came to you and said that they have an offer? Is that what you are saying?

No, no.

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

Well, I doubt that, Andy. You are pretty sharp. But the process was that CenterPoint gave us notice of their intent to for -- under our partnership agreement, of a right-of-first offer before they were commencing a process. And they've just reinitiated it.

As far as do they have something or not, that is something you need to ask CenterPoint. But what was the driver or the catalyst was the idea that under the partnership agreement, that time period had expired, and they needed to -- they felt they needed to initiate that process again.

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

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

Well, okay. See, I guess I'm not that dumb.

No, you've got it.

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

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

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

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