OG&E 2014 Annual Report Download - page 8

12 OGE Energy Corp. OGE Energy Corp. 13
Marketplace, the SPP assumed balancing authority responsibilities for
its market participants. The SPP Integrated Marketplace functions as
a centralized dispatch, where market participants, including OG&E,
submit offers to sell power to the SPP from their resources and bid to
purchase power from the SPP for their customers. The SPP Integrated
Marketplace is intended to allow the SPP to optimize supply offers and
demand bids based upon reliability and economic considerations, and
determine which generating units will run at any given time for
maximum cost-effectiveness. As a result, OG&E’s generating units may
produce output that differs from OG&E’s customer load requirements.
Net fuel and purchased power costs are recovered through fuel
adjustment clauses.
Overview
Company Strategy
The Company’s mission, through OG&E and its equity interest in
Enable, is to fulfill its critical role in the nation’s electric utility and
natural gas midstream pipeline infrastructure and meet individual
customers’ needs for energy and related services focusing on safety,
efficiency, reliability, customer service and risk management. The
Company’s corporate strategy is to continue to maintain its existing
business mix and diversified asset position of its regulated electric
utility business and interest in a publicly traded midstream company,
while providing competitive energy products and services to customers
as well as seeking growth opportunities in both businesses.
OG&E is focused on:
• Providing exceptional customer experiences by continuing to improve
customer interfaces, tools, products and services that deliver high
customer satisfaction and operating productivity.
• Providing safe, reliable energy to the communities and customers we
serve. A particular focus is on enhancing the value of the grid by
improving distribution grid reliability by reducing the frequency and
duration of customer interruptions and leveraging previous grid
technology investments.
• Maintaining strong regulatory and legislative relationships for the
long-term benefit of our customers, investors and members.
• Continuing to grow a zero-injury culture and deliver top-quartile
safety results.
• Expanding transmission investments beyond traditional opportunities.
• Executing on the Company’s Environmental Compliance Plan.
• Ensuring we have the necessary mix of generation resources to
meet the long term needs of our customers.
• Continuing focus on operational excellence and efficiencies in order
to protect the customer bill.
Additionally, the Company wants to achieve a premium valuation of
its businesses relative to its peers, grow earnings per share with a
stable earnings pattern, create a high performance culture and achieve
desired outcomes with target stakeholders. The Company’s financial
objectives include a long-term annual earnings growth rate for OG&E
of three to five percent on a weather-normalized basis, maintaining a
strong credit rating as well as targeting dividend increases of
approximately 10 percent annually through 2019. The targeted annual
dividend increase has been determined after consideration of
numerous factors, including the largely retail composition of the
Company’s shareholder base, the Company’s financial position, the
Company’s growth targets and the composition of the Company’s
assets and investment opportunities. The Company also relies on cash
distributions from its investment in Enable to fund its capital needs and
support future dividend growth. The cash distributions from Enable are
expected to grow 3 percent to 7 percent in 2015 from the fourth quarter
2014 distribution. The Company believes it can accomplish these
financial objectives by, among other things, pursuing multiple avenues
to build its business, maintaining a diversified asset position, continuing
to develop a wide range of skills to succeed with changes in its
industries, providing products and services to customers efficiently,
managing risks effectively and maintaining strong regulatory and
legislative relationships.
Summary of Operating Results
2014 compared to 2013. Net income attributable to OGE Energy was
$395.8 million, or $1.98 per diluted share, in 2014 as compared to
$387.6 million, or $1.94 per diluted share, in 2013. The increase in net
income attributable to OGE Energy of $8.2 million, or 2.1 percent, or
$0.04 per diluted share, in 2014 as compared to 2013 was primarily
due to:
• an increase in net income at OGE Holdings of $2.4 million, or
2.4 percent, or $0.01 per diluted share of the Company’s common
stock, due partially to the accretive effect to OGE Holdings of Enable
partially offset by a reduction in deferred state income taxes in 2013
associated with a remeasurement of the accumulated deferred taxes
related to the formation of Enable;
• an increase in net income at OGE Energy of $6.4 million, or
$0.04 per diluted share of the Company’s common stock, primarily
due to decreased transaction expenses related to the formation of
Enable and a decrease in losses for the deferred compensation plan;
and
• a decrease in net income at OG&E of $0.6 million, or 0.2 percent, or
$0.01 per diluted share of the Company’s common stock, reflecting
an increase in depreciation expense due to additional assets being
placed in service in 2014, a decrease in gross margin related to
milder weather compared to 2013, an increase in other operation and
maintenance expense and an increase in interest expense related to
the issuance of debt. Partially offsetting these items was an increase
in wholesale transmission revenues, an increase in customer growth
and a decrease in incentive compensation.
2013 compared to 2012. Net income attributable to OGE Energy was
$387.6 million, or $1.94 per diluted share, in 2013 as compared to
$355.0 million, or $1.79 per diluted share, in 2012. The increase in net
income attributable to OGE Energy of $32.6 million, or 9.2 percent, or
$0.15 per diluted share, in 2013 as compared to 2012 was primarily
due to:
• an increase in net income at OG&E of $12.3 million, or 4.4 percent,
or $0.06 per diluted share of the Company’s common stock, driven
by higher gross margin primarily related to increased wholesale
transmission revenue and lower other operation and maintenance
expense, partially offset by higher interest expense related to the
issuance of debt in May 2013;
• an increase in net income at OGE Holdings of $25.8 million, or
34.8 percent, or $0.13 per diluted share of the Company’s common
stock, due partially to the accretive effect to OGE Holdings of its
investment in Enable since May 1, 2013 and a reduction in deferred
state income taxes, associated with a remeasurement of the
accumulated deferred taxes related to the formation of Enable. Also
contributing to the increase was the performance of Enogex for the
first four months of 2013. Compared to the same period of 2012,
earnings were higher for Enogex due to increased gathering rates
and volumes and inlet processing volumes associated with its
expansion projects and gas gathering assets acquired in August
2012. These increases were partially offset by lower NGLs prices,
lower keep-whole processing spreads and the contract conversion
of the Texas production volumes of one of Enogex’s five largest
customers from keep-whole to fixed-fee; and
• a decrease in net income at OGE Energy of $5.5 million, or $0.04 per
diluted share of the Company’s common stock, primarily due to
transaction expenses related to the formation of Enable as discussed
in Note 3 of Notes to Condensed Consolidated Financial Statements.
A more detailed discussion regarding the financial performance of
OG&E and the Natural Gas Midstream Operations can be found under
“Results of Operations” below.
2015 Outlook
Key assumptions for 2015 include:
OG&E
The Company projects OG&E to earn approximately $282 million to
$298 million, or $1.41 to $1.49 per average diluted share in 2015 and
is based on the following assumptions:
• Normal weather patterns are experienced for the remainder of
the year;
• Gross margin on revenues of approximately $1.375 billion to
$1.385 billion based on sales growth of approximately 1 percent
on a weather-adjusted basis;
• Approximately $114 million of gross margin is primarily attributed
to regionally allocated transmission projects;
• Operating expenses of approximately $844 million to $861 million,
with operation and maintenance expenses comprising 54 percent of
the total;
• Interest expense of approximately $146 million which assumes a
$5 million allowance for borrowed funds used during construction
reduction to interest expense;
• Other income of approximately $17 million including approximately
$9 million of allowance for equity funds used during construction; and
• An effective tax rate of approximately 27 percent.
OG&E has significant seasonality in its earnings. OG&E typically
shows minimal earnings in the first and fourth quarters with a majority
of earnings in the third quarter due to the seasonal nature of air
conditioning demand.
Gross Margin is defined by OG&E as operating revenues less fuel,
purchased power and certain transmission expenses. Gross margin
is a non-GAAP financial measure because it excludes depreciation
and amortization, and other operation and maintenance expenses.
Expenses for fuel and purchased power are recovered through fuel
adjustment clauses and as a result changes in these expenses are
offset in operating revenues with no impact on net income. OG&E
believes gross margin provides a more meaningful basis for evaluating
its operations across periods than operating revenues because gross
margin excludes the revenue effect of fluctuations in these expenses.
Gross margin is used internally to measure performance against
budget and in reports for management and the Board of Directors.
OG&E’s definition of gross margin may be different from similar terms
used by other companies.
Reconciliation of gross margin to revenue:
Twelve Months Ended
(Dollars in millions) December 31, 2015(A)
Operating revenues $2,188
Cost of sales 808
Gross Margin $1,380
(A) Based on the midpoint of OG&E earnings guidance for 2015.
OGE Enogex Holdings LLC
The Company projects cash distributions from its ownership interest
in Enable Midstream to be between approximately $139 million to
$142 million, and the earnings contribution to be approximately
$70 million to $80 million or $0.35 to $0.40 per average diluted share.
Consolidated OGE
The Company’s 2015 earnings guidance is between approximately
$352 million and $378 million of net income, or $1.76 to $1.89 per
average diluted share and is based on the following assumptions:
• Approximately 200 million average diluted shares outstanding;
• An effective tax rate of approximately 29 percent.