OG&E 2014 Annual Report Download - page 25

46 OGE Energy Corp. OGE Energy Corp. 47
initial investment at historical cost, the effects of the amortization and
depreciation expense associated with the fair value adjustments on
Enable’s results of operations have been eliminated in the Company’s
recording of its equity in earnings of Enable.
OGE Energy recorded equity in earnings of unconsolidated affiliates
of $172.6 million and $101.9 million for the twelve months ended
December 31, 2014 and the eight months ended December 31, 2013,
respectively. Equity in earnings of unconsolidated affiliates includes
OGE Energy’s share of Enable earnings adjusted for the amortization
of the basis difference of OGE Energy’s original investment in Enogex
and its underlying equity in net assets of Enable. The basis difference
is the result of the initial contribution of Enogex to Enable in May 2013,
and subsequent issuances of equity by Enable, including the IPO in
April 2014 and the issuance of common units for the acquisition of
CenterPoint’s 24.95 percent interest in SESH. The basis difference is
being amortized over approximately 30 years, the average life of the
assets to which the basis difference is attributed. Equity in earnings
of unconsolidated affiliates is also adjusted for the elimination of the
Enogex Holdings fair value adjustments, as described above.
The difference between the Company’s investment in Enable and
its underlying equity in the net assets of Enable was $1.0 billion as
of December 31, 2014.
The following table reconciles OGE Energy’s equity in earnings of
its unconsolidated affiliates for the years ended December 31, 2014
and 2013.
Year Ended December 31,
(In millions) 2014 2013
OGE’s share of Enable Net Income $143.1 $ 82.1
Amortization of basis difference 14.0 9.4
Elimination of Enogex Holdings fair value
and other adjustments 15.5 10.4
OGE’s Equity in earnings of unconsolidated affiliates $172.6 $101.9
4. Fair Value Measurements
The classification of the Company’s fair value measurements requires
judgment regarding the degree to which market data are observable or
corroborated by observable market data. GAAP establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value based on
observable and unobservable data. The hierarchy categorizes the inputs
into three levels, with the highest priority given to quoted prices in active
markets for identical unrestricted assets or liabilities (Level 1) and the
lowest priority given to unobservable inputs (Level 3). Financial assets and
liabilities are classified in their entirety based on the lowest level of input that
is significant to the fair value measurement. The three levels defined in the
fair value hierarchy are as follows:
Level 1 inputs are quoted prices in active markets for identical
unrestricted assets or liabilities that are accessible at the
measurement date.
Level 2 inputs are inputs other than quoted prices in active markets
included within Level 1 that are either directly or indirectly observable
at the reporting date for the asset or liability for substantially the full
term of the asset or liability. Level 2 inputs include quoted prices for
similar assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not active.
Level 3 inputs are prices or valuation techniques for the asset or
liability that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market
activity). Unobservable inputs reflect the reporting entity’s own
assumptions about the assumptions that market participants would
use in pricing the asset or liability (including assumptions about risk).
The Company had no financial instruments measured at fair value
on a recurring basis at December 31, 2014 and December 31, 2013.
The carrying value of the financial instruments included in the
Consolidated Balance Sheets approximates fair value except for
long-term debt which is valued at the carrying amount. The fair value
of the Company’s long-term debt is based on quoted market prices
and estimates of current rates available for similar issues with similar
maturities and is classified as Level 2 in the fair value hierarchy. The
following table summarizes the fair value and carrying amount of the
Company’s financial instruments at December 31, 2014 and
December 31, 2013.
2014 2013
Carrying Fair Carrying Fair
December 31 (In millions) Amount Value Amount Value
Long-Term Debt
OG&E Senior Notes $2,509.7 $2,957.7 $2,154.5 $2,405.0
OG&E Industrial
Authority Bonds 135.4 135.4 135.4 135.4
OG&E Tinker Debt 10.2 10.3 10.3 9.1
OGE Energy Senior Notes 100.0 99.9 99.9 103.1
5. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing
business operations. The primary risk managed using derivatives
instruments is interest rate risk. The Company is also exposed to
credit risk in its business operations.
Interest Rate Risk
The Company’s exposure to changes in interest rates primarily relates
to short-term variable-rate debt and commercial paper. The Company
manages its interest rate exposure by monitoring and limiting the
effects of market changes in interest rates. The Company may utilize
interest rate derivatives to alter interest rate exposure in an attempt to
reduce the effects of these changes. Interest rate derivatives are used
solely to modify interest rate exposure and not to modify the overall
leverage of the debt portfolio.
Credit Risk
The Company is exposed to certain credit risks relating to its ongoing
business operations. Credit risk includes the risk that counterparties
that owe the Company money or energy will breach their obligations. If
the counterparties to these arrangements fail to perform, the Company
may be forced to enter into alternative arrangements. In that event, the
Company’s financial results could be adversely affected and the
Company could incur losses.
Income Statement Presentation Related to Derivative Instruments
The Company had no derivative instruments included in its
Consolidated Statement of Income in 2014. The following tables
present the effect of derivative instruments on the Company’s
Consolidated Statement of Income in 2013.
Derivatives in Cash Flow Hedging Relationships
Amount
Amount Reclassified from
Recognized Accumulated Other
in Other Comprehensive Amount
Comprehensive Income (Loss) Recognized
(In millions) Income into Income in Income
Natural Gas Financial
Futures/Swaps $(0.2) $ 5.2 $—
Interest Rate Swap — (0.2) —
Total $(0.2) $ 5.0 $—
Derivatives Not Designated as Hedging Instruments
Amount Recognized
(In millions) in Income
Natural Gas Physical Purchases/Sales $(6.1)
Natural Gas Financial Futures/Swaps 1.0
Total $(5.1)
The following tables present the effect of derivative instruments on
the Company’s Consolidated Statement of Income in 2012.
Derivatives in Cash Flow Hedging Relationships
Amount
Amount Reclassified from
Recognized Accumulated Other
in Other Comprehensive Amount
Comprehensive Income (Loss) Recognized
(In millions) Income into Income in Income
Natural Gas Financial
Futures/Swaps $0.5 $ 5.2 $—
Interest Rate Swap — (0.4) —
Total $0.5 $ 4.8 $—
Derivatives Not Designated as Hedging Instruments
Amount Recognized
(In millions) in Income
Natural Gas Physical Purchases/Sales $(11.7)
Natural Gas Financial Futures/Swaps 1.1
Total $(10.6)
For derivatives designated as cash flow hedges in the tables above,
amounts reclassified from Accumulated Other Comprehensive Income
(Loss) into income (effective portion) and amounts recognized in
income (ineffective portion) for the year ended December 31, 2012,
if any, are reported in Operating Revenues. For derivatives not
designated as hedges in the tables above, amounts recognized in
income for the year ended December 31, 2012, if any, are reported in
Operating Revenues.
6. Stock-Based Compensation
In 2013, the Company adopted, and its shareowners approved, the
2013 Stock Incentive Plan. The 2013 Plan replaced the 2008 Plan and
no further awards will be granted under the 2008 Plan. Under the 2013
Stock Incentive Plan, restricted stock, restricted stock units, stock
options, stock appreciation rights and performance units may be
granted to officers, directors and other key employees of the Company
and its subsidiaries. The Company has authorized the issuance
of up to 7,400,000 shares under the 2013 Stock Incentive Plan.
The following table summarizes the Company’s pre-tax
compensation expense and related income tax benefit for the years
ended December 31, 2014, 2013 and 2012 related to the Company’s
performance units and restricted stock.
Year ended December 31 (In millions) 2014 2013 2012
Performance units
Total shareholder return $ 8.3 $ 8.4 $ 8.0
Earnings per share 3.7 2.3 4.2
Total performance units 12.0 10.7 12.2
Restricted stock — 0.4 0.6
Total compensation expense 12.0 11.1 12.8
Less: Amount paid by
unconsolidated affiliates 3.6 3.1 —
Net compensation expense $ 8.4 $ 8.0 $12.8
Income tax benefit $ 3.3 $ 3.1 $ 4.9
The Company has issued new shares to satisfy stock option
exercises, restricted stock grants and payouts of earned performance
units. In 2014, 2013 and 2012, there were 494,637 shares,
548,344 shares and 849,110 shares, respectively, of new common
stock issued pursuant to the Company’s stock incentive plans related
to exercised stock options, restricted stock grants (net of forfeitures)
and payouts of earned performance units. In 2014, there were
2,901 shares of restricted stock returned to the Company to satisfy
tax liabilities.
Performance Units
Under the Stock Incentive Plan, the Company has issued performance
units which represent the value of one share of the Company’s
common stock. The performance units provide for accelerated vesting
if there is a change in control (as defined in the Stock Incentive Plan).
Each performance unit is subject to forfeiture if the recipient terminates
employment with the Company or a subsidiary prior to the end of the
three-year award cycle for any reason other than death, disability or
retirement. In the event of death, disability or retirement, a participant
will receive a prorated payment based on such participant’s number of
full months of service during the award cycle, further adjusted based
on the achievement of the performance goals during the award cycle.
The performance units granted based on total shareholder return are
contingently awarded and will be payable in shares of the Company’s
common stock subject to the condition that the number of performance
units, if any, earned by the employees upon the expiration of a
three-year award cycle (i.e., three-year cliff vesting period) is
dependent on the Company’s total shareholder return ranking relative
to a peer group of companies. The performance units granted based
on earnings per share are contingently awarded and will be payable
in shares of the Company’s common stock based on the Company’s
earnings per share growth over a three-year award cycle (i.e.,
three-year cliff vesting period) compared to a target set at the time of
the grant by the Compensation Committee of the Company’s Board of
Directors. All of these performance units are classified as equity in the
Consolidated Balance Sheet. If there is no or only a partial payout for
the performance units at the end of the award cycle, the unearned
performance units are cancelled. Payout requires approval of the
Compensation Committee of the Company’s Board of Directors.
Payouts, if any, are all made in common stock and are considered
made when the payout is approved by the Compensation Committee.