U.S. Markets open in 38 mins

Edited Transcript of OGE earnings conference call or presentation 22-Feb-18 2:00pm GMT

Q4 2017 OGE Energy Corp Earnings Call

OKLAHOMA CITY Feb 23, 2018 (Thomson StreetEvents) -- Edited Transcript of OGE Energy Corp earnings conference call or presentation Thursday, February 22, 2018 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* R. Sean Trauschke

OGE Energy Corp. - Chairman, CEO & President

* Stephen E. Merrill

OGE Energy Corp. - CFO

* Todd Tidwell

OGE Energy Corp. - Director of IR

================================================================================

Conference Call Participants

================================================================================

* Andrew Levi

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research

* Michael Jay Lapides

Goldman Sachs Group Inc., Research Division - VP

* Paul Thomas Ridzon

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Shahriar Pourreza

Guggenheim Securities, LLC, Research Division - MD and Head of North American Power

* Stephen D'Ambrisi

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the OGE Energy Corp. Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Todd Tidwell. Sir, please go ahead.

--------------------------------------------------------------------------------

Todd Tidwell, OGE Energy Corp. - Director of IR [2]

--------------------------------------------------------------------------------

Thank you, Liz, and good morning to everyone, and welcome to the OGE Energy Corp.'s Fourth Quarter 2017 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 on 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 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 Reg G reconciliation for gross margin in the Appendix along with projected capital expenditures.

I will now turn this call over to Sean for his opening comments. Sean?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Thank you, Todd, and good morning, everyone, and thank you for joining us on today's call. Earlier this morning, we reported 2017 consolidated earnings of $3.10 per share. Excluding the positive impacts of tax reform from our investment in Enable, OGE had consolidated earnings of $1.92 for 2017 compared to $1.69 per share in 2016. Steve will discuss the details of the full year earnings and the fourth quarter a bit later.

However, the financial numbers are only part of the story for the year. We had a tremendous operational performance in 2017. It was another year of outstanding achievements and awards earned by our dedicated members. This was the second consecutive year of record safety performances. We managed through 10 significant storm restorations, assisted with the restoration efforts in Texas and Florida, and we currently have dozens of crews in Puerto Rico, all without injuries. Once again, the utility received the EEI Emergency Assistance Award for the 12th time since 1999. Market Strategies International Cogent Reports named OG&E the Utility Customer Champion as well the Utility Environmental Champion. We are recognized as one of Forbes' 100 most trustworthy companies.

And from -- locally, from the sector of energy, environment, we received the Water for Excellence Award for our low-volume wastewater project to Mustang. And finally, the company was named the top contributor to the 2017 United Way Pacesetter Campaign.

And these are all true testament to the hard work and commitment of our team. Not only are they making a difference where they live and work, they are performing exceedingly well on the job in building new infrastructure and demonstrating a focus on continuous improvement. Behind that dedication and focus, the utility is coming to the conclusion of the largest investment program in our history, and 2017 was the largest single year in that program.

Few of the highlights, the 10-megawatt Covington solar farm is in service. The Windspeed II, that's a 126-mile transmission line, has been energized. We debuted My OGE Alerts, which provides alerts via text and e-mail for billing, payment and restoration updates to our customers. As a result of the key grid investments we've made, customer reliability saw an 11-minute improvement over 2016, despite a more challenging weather year. And our baseload units continued to see improvement and we saw a 15% improvement in availability this year.

And lastly, we've talked a lot about the Sooner and Mustang investments. These together close to $1 billion, are on schedule and well under budget. Simply put, it's really been a great year. Our service territory continues to grow with 8,000 new customers, attractive rates and high customer satisfaction are contributing factors in our ability to secure 36 new projects, greater than -- each greater than 1 megawatt. And all told, these added 250,000 megawatt hours last year. And this is in addition to our historical average of 1% customer growth.

Yet this performance was not a 1-year event. Back in 2014, when we originally established our utility growth rate and our 10% annual dividend increase through 2019, we had a number of key assumptions, including constructive regulation and higher commodity prices. Despite these headwinds, and I'm proud to say we continued to deliver, we continued to deliver the earnings growth and we expect more to come, we continued to deliver dividend growth and we expect more to come, we've maintained our strong credit quality. And we've done all of this without any common equity issuances.

And 2017 wasn't all headwinds. In December, the President signed comprehensive tax reform that has been and will be a topic for discussion. For us, tax reform is a positive. Tax reform will be beneficial to our customers and accretive to shareholders of OGE. At the utility, tax reform will lower the revenue requirements and create headroom to make customer-enhancing investments. On a consolidated level, it is beneficial as it lowers the tax rate from the earnings attributable to our ownership in Enable. We worked hard to maintain a strong financial position that gives us this flexibility and helps us weather financial challenges that may come.

As you know, we filed a rate review with the Oklahoma Commission in January and the primary purpose of the filing is the recovery of the Mustang Energy Center. The impact of these units was immediately felt as the SPP calls on them regularly. The Arkansas Commission has already ruled that these Mustang units are in the public interest. In the case, we are requesting a 9.9% ROE and a change in some of the depreciation rates. We delayed the filing to incorporate the benefits of tax reform. And because of this, the total rate change comes to $1.9 million with residential customers not seeing an increase. I am optimistic the order will be timely. As we have seen with recent rulings in the state, we expect this to be timely. And we will file another case in Oklahoma at the end of 2018 for recovery of the Sooner Scrubbers. We will also make our first Arkansas Formula Rate filing in October.

Before moving on to Enable, I did want to provide an update to our investment plans and long-term growth rate. We do have line of sight to 4% to 6% growth from 2018 as the base year. And we've spoken of these projects over the past several calls and are growing more comfortable with the regulatory environments in both states to lay out our longer-term plans. The majority of these projects are grid modernization, implementing technology to leverage our smart grid investments. And we'll continue to increase the resiliency and reliability of our system. Additionally, these investments will help minimize the bill impacts as rates are expected to rise roughly 1% per year on the average customer bill. We are also committed to providing our owners with fair returns that they expect. And I am confident that the regulatory environment is moving in the right direction and that we can continue to invest in the state and improve the customer experience in Oklahoma, similar to what we are doing currently in Arkansas.

On to Enable. Steve and I could not be more proud of the management team and employees that continue to create value for our company. Net income attributable to partners increased $124 million from 2016. Gathering volumes increased for 8 straight quarters, and Enable is -- currently has 49 rigs on its system, highlighting their prime acreage dedications in the SCOOP and STACK areas. They exceeded guidance projections for EBITDA, DCF and net income, at the same time funding growth projects primarily with internally generated funds, all the while maintaining a 1.2 distribution coverage ratio and adjusted EBITDA ratio of 3.75 for the year. Really outstanding. In addition, Enable distributions to OGE were another $140 million for the year.

So before turning the call over to Steve, I do want to reiterate how pleased I am with the performance of both businesses. As a management team, we are creating a vision and executing on our plan that will provide benefits for our customers, our shareholders and the communities in which we live and serve. So thank you, and I'll now turn the call over to Steve to review our financial results for the quarter and the full year. Steve?

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Sean, and good morning. For the fourth quarter, we reported net income of $295 million or $1.48 per share as compared to net income of $58 million or $0.29 per share in 2016. As a result of 2017 Tax Reform, the holding company includes a charge of $10.5 million or $0.05 per share due to the remeasurement of deferred taxes. This was related to the deferred tax assets associated with benefit point cost. Enable also includes a gain of $245.2 million or $1.23 per share due to the remeasurement of deferred taxes at the lower rate. The contribution by business unit on a comparative basis is listed on the slide.

For the full year 2017, we reported earnings of $619 million or $3.10 per share as compared to net income of $338 million or $1.69 per share in 2016. In total, tax reform accounts were $235 million or an additional $1.18 per share in 2017 resulting from our investment in Enable. At OG&E, net income for the quarter was $42 million or $0.21 per share as compared to net income of $46 million or $0.23 per share in 2016. For the quarter, gross margin increased $5 million in part due to more favorable weather. O&M increased $10 million for the quarter primarily due to higher vegetation management.

Depreciation expense decreased by $4 million for the quarter due to lower depreciation rates approved in the Oklahoma rate order, partially offset by additional plant in service. Depreciation expense -- excuse me, net -- other income increased by $11 million for the quarter due primarily to higher AFUDC and the tax gross-up related to the investment in Mustang Energy Center and the Sooner Scrubbers. Finally, income tax expense increased $13 million primarily due to fewer tax credits.

Now turning to the full year. At OG&E, net income for the year was $306 million or $1.53 per share as compared to net income of $284 million or $1.42 per share in 2016. As a reminder, 2017 includes $0.06 per share from 2016 earnings due to the timing of the last Oklahoma rate review order. Gross margin for 2017 decreased $16 million, which I'll discuss on the next slide.

Looking at some of the key drivers for 2017, our O&M cost increased $16 million primarily due to higher vegetation management as a result of the Oklahoma rate order, which also had an -- included a revenue offset. Taking that into account, base O&M was up less than 1%. Depreciation was $36 million lower this year due to lower depreciation rates, offset by additional plant in service. Net other income increased $46 million primarily due to higher AFUDC and the associated tax gross-up due to higher construction work in progress, balances related to our Mustang and environmental projects. And finally, income tax expense increased $27 million due to higher operating income and lower tax credits earned.

Turning to the 2017 gross margin, utility margins decreased $16 million in 2017 compared to 2016. This was due in part to cooler summer weather. Weather translated into a decrease of $15 million as compared to 2016 and compared to normal weather-reduced margin by $44 million.

As Sean said, we are providing a new long-term growth rate of 4% to 6% with 2018 as the base year. We have updated our capital expenditures through 2022. What's new to the plan is the addition of grid-modernization investments. These investments average approximately $215 million per year starting in 2019. These projects are focused on reliability, resiliency and technology upgrades around our distribution system and leverage the investments we've already made to our smart grid. Many of these projects were put on hold as we work through the environmental Compliance investment cycle.

Turning to regulatory. We filed a rate case in Oklahoma on January 16 to seek recovery of the $390 million investment in the modernization of our Mustang facility. The primary drivers for the rate review include Mustang's revenue requirement of $38 million. We have also included depreciation expense of $56 million, restoring our previous depreciation rates and including plant dismantlement and escalation cost. Finally, the change in our current ROE of 9.5% to our requested 9.9% is approximately $12 million. Offsetting these increases is a reduction to pension expense of $27 million, revenue growth of $30 million and income tax reform of $54 million. With this proposal, residential customers will not see an increase in rates.

The company initially planned to seek a rate increase of $70 million to recover our investment. Following President Trump's signing of tax reform in December, we delayed our filing from late December to ensure customers benefited from the lower tax rate.

Moving on to our regulatory schedule. We plan to file another rate case in the fourth quarter of this year to recover our investments in the scrubbers and the Muskogee gas conversion. We anticipate the first scrubber unit to be in service by the end of the second quarter of 2018. The scrubber project investment is $542 million inclusive of AFUDC. The test year will be ending September 2018, with rates implemented mid-2019.

In Arkansas, we anticipate the first Formula Rate planned filing will be October 1, 2018, with rates implemented in April of 2019. The first Formula Rate filing will be used for the recovery of Mustang.

Turning to our investment in Enable. OGE Energy Holdings received a cash distribution from Enable Midstream of approximately $141 million and contributed earnings of $324 million or $1.62 per diluted share in 2017 compared to earnings of $54 million, $0.27 per diluted share in 2016. The Enable board approved an LP distribution of $0.318 per unit that will be paid February 27.

Enable had a record-setting year in 2017. Record operational performance with the highest natural gas gathered and process volumes, highest NGLs produced and highest natural gas transported volumes. On the financial side, they had their highest adjusted EBITDA and highest DCF to date. The Enable management team has grown the business with cost discipline and capital efficiency. They ended the year with a strong balance sheet, meeting their objectives for leverage at 3.75x and distribution coverage of 1.2x. They have reaffirmed their 2018 outlook, and the success they saw in 2017 is already filtering into the new year.

As Sean mentioned, tax reform is positive for our customers and OGE. OGE will benefit from the ownership in the Enable business. The reduction of Enable's deferred tax liability was an earnings benefit of $1.23 this quarter. On an ongoing basis, earnings from Enable will increase approximately $0.08 per share due to the lower tax rate. Our strong balance sheet allows us to flow back the reduction in deferred taxes to our utility customers without issuing additional equity. While interest expense deductibility remains at the utility, OGE has no significant holding company debt.

Turning to 2018 guidance. At the utility and assuming normal weather, we project earnings per share to be between $1.43 and $1.53 per share. For the Midstream business, we are projecting the earnings contribution to be between $0.48 and $0.52 per average diluted share. And we are projecting consolidated earnings between $1.90 and $2.05 per share. Looking further into our assumptions for the utility, we anticipate new rates taking effect in Oklahoma by October 1. And we're assuming gross margin on revenues to be between $1.38 billion to $1.39 billion, which is based on sales growth of approximately 1% on a weather-adjusted basis. As you can see looking at the assumptions, the midpoint of utility guidance has decreased compared to 2017.

In 2017, we had AFUDC, and with Mustang in service and the first scrubber planned to be online by July 1, the guidance reflects the impact of losing AFUDC and increased depreciation without rate relief. It is also important to remember the OG&E has significant 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. This concludes our prepared remarks. We'll now answer your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Shar Pourreza with Guggenheim Partners.

--------------------------------------------------------------------------------

Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [2]

--------------------------------------------------------------------------------

So, Sean, super healthy jump in CapEx. What is -- I guess, the first question is, what is giving you a sense that Oklahoma's going to do the right thing? We've always thought you'd use the Mustang case as sort of that bogey on whether you would revisit CapEx or redirect CapEx. So you've got 2 big rate cases here. I guess, the question is, is it a function of the fact that tax reform is minimal impacting the customers, so it's giving you that sense of confidence? Or there is indications from conversations you're having with the commission that's leading you to have this sense?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Well, good question. So I think, first and foremost, we've been having extensive dialogue with the commission. There was a number of cases over there. But there is some positive momentum there. I mean, we look at -- some of the recent cases have been 400, 500 days. And the most recent order was out just over 200 days. So I think the commission has taken some steps to improve the efficiency of what's going on over there, and we're really focused on getting orders out in a timely manner. And I think you touched on it. I mean, we've always felt strongly about the Mustang case just because of where it is and what it's doing. But now with the additional benefits of tax reform and being able to offset that, the investment there with the lower tax rate for customers, I think it's a much smoother process going forward.

--------------------------------------------------------------------------------

Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [4]

--------------------------------------------------------------------------------

Okay. That's helpful. And then just no need for incremental equity. So the higher capital program puts your FFO to debt metrics at what level now?

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [5]

--------------------------------------------------------------------------------

Right in that 22%, 23% range, which is -- which would maintain our current ratings. So we come into that in a very strong position and able to support that CapEx.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research [7]

--------------------------------------------------------------------------------

So quick question here a little bit. Obviously, you've done -- you increased CapEx pretty meaningfully here on the resiliency front. Can you talk a little bit about the allocation between Arkansas and Oklahoma, just to give us a little bit of sense of the breakdown?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [8]

--------------------------------------------------------------------------------

Sure. So the first couple years, it's going to be primarily in Arkansas. Our rate filings in Arkansas will be the Arkansas portion of both the Mustang and Sooner Scrubber work. But thereafter, most probably in the order of magnitude about $60 million a year.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research [9]

--------------------------------------------------------------------------------

The $60 million a year is...

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [10]

--------------------------------------------------------------------------------

For Arkansas. It's Arkansas. And the rest would be Oklahoma.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research [11]

--------------------------------------------------------------------------------

Got it. All right. Excellent. And then can you comment a little bit where is the Governor's task force in Oklahoma? Any progress there, any commentary?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

Sure. Just -- I know the task force has met a few times. They've -- their consultant has conducted some interviews with various people. They schedulize that, that they'll make a preliminary report to the task force this summer. And I think the final recommendation is scheduled for November 8.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research [13]

--------------------------------------------------------------------------------

Excellent. And then maybe to just kind of summarize things a little bit. Obviously, raising CapEx but against the backdrop of a pretty strong balance sheet still amid of tax reform. How much more could you possibly raise your capital spend should you get a more constructive outcome on the rate case? I mean, how are you thinking about the potential to reinvest or accelerate that investment?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [14]

--------------------------------------------------------------------------------

Yes. I think it -- we look at -- the investment thesis is we continue to be, I think, pretty prudent allocators of capital and I think there has to be a value proposition. So we look at the investment to the extent that we can create some real value from a customer standpoint. We have a good list of opportunities under consideration to the extent that we have constructive regulation. And we have good line of sight to the benefits to customers, certainly.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities, & Alternative Energy Equity Research [15]

--------------------------------------------------------------------------------

Got it. Anything in particular you would be looking at potentially that is sort of incremental or not? I mean, I don't know if there's any -- particularly a thing come out there?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [16]

--------------------------------------------------------------------------------

No. I think it's all going to be around -- on the grid.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Our next question comes from the line of Paul Ridzon with KeyBanc.

--------------------------------------------------------------------------------

Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [18]

--------------------------------------------------------------------------------

Just -- you indicated no equity in '18. I assume, kind of given your credit metrics, you can do this CapEx without meaningful equity?

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [19]

--------------------------------------------------------------------------------

That's correct. We would not anticipate any equity in the planning horizon or in support of the CapEx plan that we've laid out through 2022.

--------------------------------------------------------------------------------

Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [20]

--------------------------------------------------------------------------------

When you say no equity, that no DRIP or any employee programs? Just we can assume a flat share count?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [21]

--------------------------------------------------------------------------------

Absolutely.

--------------------------------------------------------------------------------

Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [22]

--------------------------------------------------------------------------------

Okay. And then, have you had any discussions with Oklahoma around the depreciation issue? And I know you've got a big ask in your current rate case, just kind of wondering what's happened in the background there?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [23]

--------------------------------------------------------------------------------

No. I think we've had discussions about the depreciation issue. And I think it's acknowledged that the actual useful lives of a lot of these assets are a lot shorter than what we're recovering those assets in this most recent case. So that's going to be an ongoing effort. I don't anticipate an immediate fix to that. But I think we're going to work on that over time.

--------------------------------------------------------------------------------

Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [24]

--------------------------------------------------------------------------------

And I apologize if this was in your presentation somewhere, but dividend beyond '19, should we just kind of think of that as in line with the 4% to 6%?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [25]

--------------------------------------------------------------------------------

Yes. I think that's certainly something we're going to update next year. And -- but that's a consideration against other investment opportunities we have.

--------------------------------------------------------------------------------

Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [26]

--------------------------------------------------------------------------------

And then lastly, Steve, I missed -- you indicated that '17 benefit is from some '16 interim rates. What was that amount?

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [27]

--------------------------------------------------------------------------------

It was $0.06. So if you recall, we didn't get the order in time to book those earnings into 2016. So those flowed over the 6 months related to 2016. The back half actually got recorded in 2017 and that was $0.06.

--------------------------------------------------------------------------------

Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [28]

--------------------------------------------------------------------------------

And then you also discussed some other issues that kind of have a -- pointing to a down year OG&E versus '17. Can you just review those again?

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [29]

--------------------------------------------------------------------------------

Yes. It's really -- if you think about it, in 2017, we were recording AFUDC on both Mustang and Sooner. And that will -- now that the Mustang units are in service, we are unable to record AFUDC until we get rate relief. But we've had to start depreciating those assets. We're having to expense ad valorem taxes and the same thing will happen with the first unit in Sooner, which will be in service by July 1. So we'll lose that AFUDC and begin depreciating and expensing ad valorem on -- or property taxes on that first unit.

--------------------------------------------------------------------------------

Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [30]

--------------------------------------------------------------------------------

So Mustang should be fixed by the end of the year, then Sooner will bleed a little bit into next year?

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [31]

--------------------------------------------------------------------------------

That's correct. And you'll also have -- you'll -- the second unit won't begin -- won't get rate relief until mid-2019 because that unit will go into service at the end of 2018. And we'll follow rate case. We won't get rate relief until midyear on that second unit.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Our next question comes from the line of Joe Zhou with Avon Capital Advisors.

--------------------------------------------------------------------------------

Andrew Levi, [33]

--------------------------------------------------------------------------------

It's Andy Levi. So just on the incremental CapEx, I guess it's really all grid mod, and I apologize if you discussed this already because I was on another call. But grid mod reliability, resiliency, technology and other, is that all kind of where you have to go through a rate case to recover that? Or is there any type of track or anything like that, that you can recover in Oklahoma?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [34]

--------------------------------------------------------------------------------

Well, in Oklahoma, there would -- right now, we don't have a writer or a tracker for that. So they would require some type of regulatory action in Oklahoma. And then obviously, in Arkansas, we have the Formula Rate mechanism.

--------------------------------------------------------------------------------

Andrew Levi, [35]

--------------------------------------------------------------------------------

Okay. And then I don't know if you do somewhere in the handout, but what's the breakdown on that between Arkansas and Oklahoma?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [36]

--------------------------------------------------------------------------------

Yes. So the first couple of years, Andy, the -- we will allocate some of those capital dollars from the Mustang and Sooner Scrubbers to Arkansas. But thereafter, probably about $60 million of the incremental capital will go to Arkansas.

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [37]

--------------------------------------------------------------------------------

And Andy, we broke all that out in our CapEx table, it's in the 10-K and it's also in the presentation.

--------------------------------------------------------------------------------

Andrew Levi, [38]

--------------------------------------------------------------------------------

Yes. I was just talking about on the resiliency, the grid mod.

--------------------------------------------------------------------------------

Stephen E. Merrill, OGE Energy Corp. - CFO [39]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Andrew Levi, [40]

--------------------------------------------------------------------------------

Because that's right, that's not broken out, is it?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [41]

--------------------------------------------------------------------------------

Not on the grid modernization. That's correct.

--------------------------------------------------------------------------------

Andrew Levi, [42]

--------------------------------------------------------------------------------

Right. Right. So that's what I was wondering on how much is Arkansas and how -- and so should we just kind of base that on your earnings breakdown on those jurisdictions?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [43]

--------------------------------------------------------------------------------

Yes. I think you ought to assume that if you're looking at the total capital expenditures, Arkansas has been increased to about $60 million.

--------------------------------------------------------------------------------

Andrew Levi, [44]

--------------------------------------------------------------------------------

Okay. And again, just sticking on that same side, the grid mods and all that. Should that be less controversial than kind of what you've been -- the big chunks like with Mustang and Sooner?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [45]

--------------------------------------------------------------------------------

Yes. I think it's a lot easier to articulate the real customer benefits and we're hoping to mitigate the bill impact significantly with these investments. And recall, what we were dealing with was a federal mandate. I mean, with the Sooner Scrubbers, that was -- we fought that for many, many years. So generation, as you well know, is, quite frankly, the really the toughest decision we have to make because you're making long-term investments. And you're making a -- taking a view on technology and commodity prices and policy. And there's always going to be people that have different views. And in this business, you're making long-term investments and you have to take the long-term view of things. And so I think your thesis is exactly right. I think these grid investments will be a lot less controversial. We'll be able to articulate and demonstrate the real customer benefits not just on the bill but in the resiliency and reliability of the system.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Our next question comes from the line of Stephen D'Ambrisi with Castleton Investment.

--------------------------------------------------------------------------------

Stephen D'Ambrisi, [47]

--------------------------------------------------------------------------------

I just had -- just a quick clarification. The long term -- new long-term growth rate, is that an earnings growth rate? Or is that a rate-based CAGR? Or can you just tell me what that is, I guess?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [48]

--------------------------------------------------------------------------------

Yes, it's an earnings growth rate.

--------------------------------------------------------------------------------

Stephen D'Ambrisi, [49]

--------------------------------------------------------------------------------

Okay. And have you -- do you guys -- and that's just at the utility and there is no consolidated growth rate?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [50]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Our next question comes from the line of Michael Lapides with Goldman Sachs.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [52]

--------------------------------------------------------------------------------

Couple of easy ones. First of all, are you assuming you get the deferral for the Sooner Scrubbers similar to how AEP did it for their environmental project on the coal plants? And does that deferral -- if you get it, does that cover both D&A and O&M?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [53]

--------------------------------------------------------------------------------

We are assuming that we get regulatory asset treatment on the Sooner Scrubbers. And you're correct to point out PSO got similar treatment on their environmental assets. It doesn't necessarily cover all of the D&A and the equity return, but it certainly softens the blow quite a bit.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [54]

--------------------------------------------------------------------------------

Got it. Second, and I know you've gotten a lot of questions on CapEx and I hate to do this, but I'm actually looking at the K and I'm looking at the CapEx table in the K. And starting in 2019, you outlined about $180 million to $280 million a year and it varies by year from '19 to '22 in grid mod and reliability and resiliency spend. I just want to make sure I want to focus only on that line. Are you saying that in '19 and maybe '20, the bulk of that line is in that spend? So $200 million, $190 million is Arkansas? Or is a lot of that Oklahoma?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [55]

--------------------------------------------------------------------------------

No, a lot of that is Oklahoma, Michael. I think what we were saying, if you're looking at the total capital expenditures, it would be applied to Arkansas. It is now up to about $60 million.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [56]

--------------------------------------------------------------------------------

Okay. Are you worried about jumping the gun a little bit in Oklahoma? Because what you're really rolling out here is a major uptick in capital spend. And I would argue if we just take some of the data points we've gotten from Oklahoma, your last rate case, the ALJ and the PSO rate case, which was a difficult ALJ recommendation according to the owner of PSO, the wind catcher decision, are you concerned at all about, kind of, cart before the horse a little bit, about investing a lot of capital and yet still having significant regulatory lag on that capital?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [57]

--------------------------------------------------------------------------------

So I think your points are well made. I think there have been some data points that were not constructive. I am encouraged by the momentum we've seen in the improvement in timeliness. And regulatory outcomes are very important to our investment decisions. And so having a clear line of sight to the recovery is a very big criteria. And so Michael, I think your -- the way you ought to think about this is, we're going to have the opportunity to see how the Mustang case plays out. But as our expectation, that's going to go very well. And to the extent that we have an event that changes, that will adjust accordingly. But we are -- I think it's our job to manage this, and I'm confident it's going to continue to get better. But we haven't deployed the capital yet, Michael. So I think that's the point. We've teed up for '19.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [58]

--------------------------------------------------------------------------------

Got it. And last question, Sean, if I remember correctly, there was actually a history in Oklahoma of having trackers or having kind of mechanisms that reduce regulatory lag. I think you may have had it on AMI, maybe something else over the years. Do you plan on or have you requested grid mod or resiliency-related trackers? Or is that something in kind of your regulatory plan for the next year or so?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [59]

--------------------------------------------------------------------------------

I think there's -- I think that's something that we're seriously contemplating. You're exactly right. Your memory is on top of things as always because we used to have a lot of writers and trackers and the like. And what that does, You're right, the benefit to us is it minimize the regulatory lag and it kind of allows us to deploy the capital for the customer benefit much faster. The benefit to the commission is you do not have pancake rate cases all across and so you don't create that workload or backlog over there at the commission. And so we moved away from the writers and trackers, and so the result was we had a lot of rate cases, not just us but others. And so it piles up over there. And so I think that issue has been recognized and it probably is a good environment to begin having the discussion for writers and trackers again.

--------------------------------------------------------------------------------

Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [60]

--------------------------------------------------------------------------------

And is that a discussion you can do in this ongoing rate case? Or is that something that requires a separate docket or even legislation?

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [61]

--------------------------------------------------------------------------------

Yes, a separate docket. Legislation's not required for that and the commission has the full authority to do that. They've done that before. And so that would just be a separate docket.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

And I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Trauschke for any closing remarks.

--------------------------------------------------------------------------------

R. Sean Trauschke, OGE Energy Corp. - Chairman, CEO & President [63]

--------------------------------------------------------------------------------

Okay. Thank you, Liz. And thank you all for your interest and your time this morning. And I wish all of you a great day and talk to you next quarter.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

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