OG&E 2013 Annual Report Download

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2013 Annual Report
Focus Forward

Table of contents

  • Page 1
    Focus Forward 2013 Annual Report

  • Page 2
    ... our vision of being the industry leader with a passion for helping customers, developing members and delivering shareholder value. Looking back at 2013 and beyond, our focus has been steely. It's been well defined and well executed. Looking ahead, we will continue to innovate. We will persevere. We...

  • Page 3
    ... OGE OGE Energy Corp. (NYSE: OGE), with headquarters in Oklahoma City, is the parent company of Oklahoma Gas and Electric Company (OG&E), a regulated electric utility, and holds a 28.5 percent limited partner interest and 50 percent general partner interest in Enable Midstream Partners, LP (Enable...

  • Page 4
    ... but the costs of coal and natural gas were rising. We set a goal - to defer building any new, incremental fossil-fueled generation until at least the year 2020. In support of the 2020 plan, we implemented Smart Grid technology, began a multi-billion dollar investment in new transmission, added wind...

  • Page 5
    ... customers with new products and services that revolutionize home and business energy usage management and customer experiences. And our sight remains focused on higher earnings and dividend increases for our shareholders. Peter B. Delaney Chairman, President and Chief Executive Officer OGE Energy...

  • Page 6

  • Page 7
    ... electricity demand, they meet other strategic objectives to remain the preferred energy source for our customers. Just as we help customers save money on higher summer bills, we'll use our smart grid platform for new products and services that will help customers with their home energy management...

  • Page 8
    ... platform item in 2013 and at the top of the list for positioning OGE Energy for future earnings growth and cash flow. Headquartered in OKC, the new partnership forms one of the largest natural gas midstream companies in the U.S., serving major producing basins and markets. The strategic combination...

  • Page 9

  • Page 10

  • Page 11
    ...interactive website that allows customers to view their energy usage, compare it to their neighbors' and see an estimate of their upcoming bill. Coupled with our SmartHours® variable-peak pricing plan and a programmable communicating thermostat, customers have a whole new level of energy management...

  • Page 12
    ...As new Federal Energy Regulatory Commission rules are implemented, introducing increased competition for transmission construction, OG&E will develop new business models and capabilities to effectively compete in the transmission market. Our forward strategy is to bid on building, or partnering with...

  • Page 13

  • Page 14
    ... Vice President, Retail Energy Jean C. Leger, Jr. Vice President, Utility Operations Michael R. Mathews Vice President, Power Delivery Operations Cristina F. McQuistion Vice President, Strategic Planning, Performance Improvement and Chief Information Officer Jerry A. Peace Chief Generation Planning...

  • Page 15
    OGE Energy Corp. Annual Report 2013 Financial Section (As included in the Company's Form 10-K filed with the SEC on February 25, 2014) OGE Energy Corp. 9

  • Page 16
    ... OGE Energy Corp, parent company of Enogex Holdings (prior to May 1, 2013) and 28.5 percent owner of Enable Midstream Partners Federal Occupational Safety and Health Act of 1970 Qualified defined benefit retirement plan Price risk management Public Utility Division Staff of the Oklahoma Corporation...

  • Page 17
    ... May 1, 2013, OGE Energy, the ArcLight group and CenterPoint Energy, Inc., formed Enable Midstream Partners, LP to own and operate the midstream businesses of OGE Energy and CenterPoint. In the formation transaction, OGE Energy and ArcLight group contributed Enogex LLC to Enable and the Company...

  • Page 18
    ... regulated electric utility business and unregulated natural gas midstream business while providing competitive energy products and services to customers primarily in the south central United States as well as seeking growth opportunities in both businesses. OG&E is focused on increased investment...

  • Page 19
    ... assets being placed in service and lower allowance for equity funds used during construction related to higher levels of construction costs for the Crossroads wind farm in 2011; • An increase in net income of Enogex LLC of $0.7 million, which was offset by an $8.9 million increase in net income...

  • Page 20
    ... Oilfield Public authorities and street light Sales for resale System sales Off-system sales Total sales Number of customers Weighted-average cost of energy per kilowatt-hour (cents) Natural gas Coal Total fuel Total fuel and purchased power Degree days (A) Heating - Actual Heating - Normal Cooling...

  • Page 21
    ... natural gas and six percent wind. Purchased power costs were $267.6 million in 2013 as compared to $223.0 million in 2012, an increase of $44.6 million, or 20.0 percent, primarily due to an increase in purchases in the energy imbalance service market and short-term power OGE Energy Corp. 15

  • Page 22
    ... the recovery of investments, including the Crossroads wind farm and smart grid. (B) Increased primarily due to the inclusion of construction work in progress in transmission rates for specific FERC approved projects that previously accrued allowance for funds used during construction. (C) Increased...

  • Page 23
    ...energy tax credits recognized associated with the Crossroads wind farm and lower pre-tax income in 2012 as compared to 2011. OGE Holdings (Natural Gas Midstream Operations) (In millions, December 31) Effective May 1, 2013, the Company deconsolidated its previously held investment in Enogex Holdings...

  • Page 24
    ...elimination of the Enogex Holdings fair value adjustments. These increases in other operation and maintenance expense were partially offset by: • Decreased costs for soil remediation projects; and • Lower contract technical and professional services expense and materials and supplies expense due...

  • Page 25
    ... due to the deconsolidation of Enogex Holdings on May 1, 2013 partially offset by higher transmission revenue, an increase in billings for reimbursable construction costs and an increase in billings to partners of jointly-owned power plants, The balance of Accounts Payable was $251.0 million and...

  • Page 26
    ...in 2012 from transmission revenue and the recovery of investments including the Crossroads wind farm and smart grid partially offset by milder weather in 2012; and • An increase in gathered volumes and NGLs volumes at Enogex LLC during 2012 as compared to 2011 partially offset by lower natural gas...

  • Page 27
    ...one-year extension which was granted by the Oklahoma Department of Environmental Quality. As noted above, OG&E is currently planning to utilize activated carbon injection for the removal of mercury at each of its five coal-fired units, the capital costs of which are estimated to be approximately $20...

  • Page 28
    ...same time, corporate bond yields, which are used in determining the discount rate for future pension obligations, increased. During both 2013 and 2012, OGE Energy made contributions to its Pension Plan of $35 million to help ensure that the Pension Plan maintains an adequate funded status. The level...

  • Page 29
    ... of other businesses and/or development of projects, actions by rating agencies, inflation, changes in environmental laws or regulations, rate increases or decreases allowed by regulatory agencies, new legislation and market entry of competing electric power generators. OGE Energy Corp. 23

  • Page 30
    ... Reinvestment and Stock Purchase Plan, funding for growth opportunities at Enogex through the ArcLight group, distributions from Enogex Holdings and distributions from Enable. Changes in working capital reflect the seasonal nature of the Company's business, the revenue lag between billing and...

  • Page 31
    ...is based generally on rates of high-grade corporate bonds with maturities similar to the average period over which benefits will be paid. The level of funding is dependent on returns on plan assets and future discount rates. Higher returns on plan assets and an increase in discount rates will reduce...

  • Page 32
    ... obligations include the assumed life of the asset placed into service, the average inflation rate, market risk premium, the credit-adjusted risk free interest rate and the timing of incurring costs related to the retirement of the asset. Hedging Policies From time to time, OG&E may engage in...

  • Page 33
    ... portion of the uncollectible provision related to fuel within the Oklahoma jurisdiction is being recovered through the fuel adjustment clause. At December 31, 2013, if the provision rate were to increase or decrease by 10 percent, this would cause a change in the uncollectible expense recognized of...

  • Page 34
    ... set forth the state's plan for compliance with the Federal regional haze rule. The SIP was subject to the EPA's review and approval. The Oklahoma SIP included requirements for reducing emissions of NOX and SO2 from OG&E's seven BART-eligible units at the Seminole, Muskogee and Sooner generating...

  • Page 35
    ... Air Act New Source Review Litigation As previously reported, in July 2008, OG&E received a request for information from the EPA regarding Federal Clean Air Act compliance at OG&E's Muskogee and Sooner generating plants. In recent years, the EPA has issued similar requests to numerous other electric...

  • Page 36
    ... emissions from newly-constructed fossil fuel-fired electric generating units. The proposed New Source Performance Standards sets separate standards for natural gas combined cycle units and coal-fired generating units. As directed by President Obama's June 25, 2013, Climate Action Plan, the EPA also...

  • Page 37
    ... and its habitat are located in potential development areas of the Company, the impact of a final decision to list this species as threatened cannot be determined at this time. Waste OG&E's operations generate wastes that are subject to the Federal Resource Conservation and Recovery Act of 1976 as...

  • Page 38
    ... to, changes in interest rates and commodity prices. The Company's exposure to changes in interest rates relates primarily to short-term variable-rate debt and commercial paper. The Company is exposed to commodity prices in its operations. Risk Oversight Committee Management monitors market risks...

  • Page 39
    ... 31) 2013 2012 2011 Operating revenues Electric Utility operating revenues Natural Gas Midstream Operations operating revenues (note 1) Total operating revenues Cost of sales Electric Utility Fuel and purchased power Natural Gas Midstream Operations cost of sales and fuel (note 1) Total cost of...

  • Page 40
    ... for sale of equity investment Less: Comprehensive income attributable to noncontrolling interests Less: Deconsolidation of Enogex Holdings Total comprehensive income attributable to OGE Energy The accompanying Notes to Consolidated Financial Statements are an integral part hereof. $393.8 $385...

  • Page 41
    ... assets Accounts payable Accounts payable - unconsolidated affiliates Fuel clause over recoveries Other current liabilities Net cash provided from operating activities Cash flows from investing activities Capital expenditures (less allowance for equity funds used during construction) Investment in...

  • Page 42
    ... supplies, at average cost Deferred income taxes Fuel clause under recoveries Assets held for sale Other Total current assets Other property and investments Investment in unconsolidated affiliates Other Total other property and investments Property, plant and equipment In service Construction work...

  • Page 43
    ... loss, net of tax Treasury stock, at cost Total OGE Energy stockholders' equity Noncontrolling interests Total stockholders' equity Total liabilities and stockholders' equity The accompanying Notes to Consolidated Financial Statements are an integral part hereof. $÷«439.6 251.0 44.7 70...

  • Page 44
    ... Common stock, par value $0.01 per share; authorized 450.0 shares; and outstanding 198.5 and 197.5 shares, respectively Premium on common stock Retained earnings Accumulated other comprehensive loss, net of tax Treasury stock, at cost, 0.1 and 0.1 shares, respectively Total OGE Energy stockholders...

  • Page 45
    ...partners Deconsolidation of Enogex Holdings Deferred income taxes attributable to contributions from noncontrolling interest partners 2-for-1 forward stock split Balance at December 31, 2013...The accompanying Notes to Consolidated Financial Statements are an integral part hereof. OGE Energy Corp. 39

  • Page 46
    ... May 1, 2013, OGE Energy, the ArcLight group and CenterPoint Energy, Inc., formed Enable Midstream Partners, LP to own and operate the midstream businesses of OGE Energy and CenterPoint. In the formation transaction, OGE Energy and ArcLight group contributed Enogex LLC to Enable and the Company...

  • Page 47
    ... assets Current Fuel clause under recoveries Oklahoma demand program rider under recovery(A) Crossroads wind farm rider under recovery(A) Other(A) Total current regulatory assets Non-current Benefit obligations regulatory asset Income taxes recoverable from customers, net Smart Grid Deferred storm...

  • Page 48
    ... meters. The costs recoverable from Oklahoma customers for system-wide deployment of smart grid technology and implementing the smart grid pilot program were capped at $366.4 million (inclusive of the U.S. Department of Energy grant award of $130.0 million) subject to an offset for any recovery...

  • Page 49
    ... risk within the meaning of the applicable utility regulation, customers will be required to provide a security deposit. Fuel Inventories Fuel inventories for the generation of electricity consist of coal, natural gas and oil. OG&E uses the weighted-average cost method of accounting for inventory...

  • Page 50
    ...2012 OGE Energy (holding company) Property, plant and equipment OGE Energy property, plant and equipment OG&E Distribution assets Electric generation assets (A) Transmission assets (B) Intangible plant Other property and equipment OG&E property, plant and equipment Enogex Natural gas transportation...

  • Page 51
    ... formation of Enable on May 1, 2013, the Company has no obligations at December 31, 2013 under OGE Holdings' asset retirement obligations previously disclosed in the Company's 2012 10-K. (B) Due to changes to OG&E's asset retirement obligations related to its wind farms as a result of changes in the...

  • Page 52
    ... price for that hour. The SPP purchases and sales are not allocated to individual customers. OG&E records the hourly sales to the SPP at market rates in Operating Revenues and the hourly purchases from the SPP at market rates in Cost of Sales in its Consolidated Financial Statements. Fuel Adjustment...

  • Page 53
    ...have been combined into the natural gas midstream operations segment and have been restated for all prior periods presented. Effective May 1, 2013, the Company deconsolidated its previously held investment in Enogex Holdings and acquired an equity interest in Enable. accumulated other comprehensive...

  • Page 54
    ... to Enable its equity interests in each of (i) CenterPoint Energy Gas Transmission Company, LLC, a Delaware limited liability company that is an interstate pipeline that provides natural gas transportation, storage and pipeline services to customers principally in Arkansas, Louisiana, Oklahoma and...

  • Page 55
    ... and OGE Energy contributed $9.1 million to Enogex LLC in order to pay down short-term debt. At December 31, 2013, OGE Energy, through its wholly owned subsidiary OGE Holdings, holds 28.5 percent of the limited partner interests in Enable. CenterPoint has certain put rights, and Enable has certain...

  • Page 56
    ...of the Enogex Holdings fair value adjustments described above. (In millions, eight months ended December 31) 2013 (In millions, eight months ended December 31) 2013 Operating Revenues: Electricity to power electric compression assets Cost of Sales: Natural gas transportation services Natural gas...

  • Page 57
    ... various quoted prices in active markets that result in management's best estimate of fair value. These contracts are classified as Level 3. The impact to the fair value of derivatives due to credit risk is calculated using the probability of default based on Standard & Poor's Ratings Services and...

  • Page 58
    ... 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. 6. Derivative Instruments and Hedging Activities The Company is exposed to certain risks relating to its ongoing business operations...

  • Page 59
    ... due to the marketing of natural gas volumes purchased via Enogex's processing contracts, which are not derivative instruments and are excluded from the table above. The following tables present the effect of derivative instruments on the Company's Consolidated Statement of Income in 2012. Amount...

  • Page 60
    ..., 2013, the Company had no derivative instruments that contain credit-risk related contingent features. In the event Moody's Investors Services or Standard & Poor's Ratings Services were to lower the Company's senior unsecured debt rating to a below investment grade rating, at December 31, 2012, the...

  • Page 61
    ... estimated on the grant date using a lattice-based valuation model that factors in information, including the expected dividend yield, expected price volatility, risk-free interest rate and the probable outcome of the market condition, over the expected life of the performance units. Compensation...

  • Page 62
    ...the following table. 2013 2012 2011 Shares of restricted stock granted Fair value of restricted stock granted 5,940 $29.71 10,824 $÷26.72 35,804 $÷24.41 A summary of the activity for the Company's performance units and restricted stock at December 31, 2013 and changes in 2013 are shown in the...

  • Page 63
    ... over the life of the related property. OG&E earns both Federal and Oklahoma state tax credits associated with production from its wind farms. In addition, OG&E and Enable earn Oklahoma state tax credits associated with their investments in electric generating and natural gas processing facilities...

  • Page 64
    ...liabilities Accelerated depreciation and other property related differences Investment in Enogex Holdings Investment in Enable Midstream Partners Company pension plan Income taxes refundable to customers, net Regulatory asset Bond redemption-unamortized costs Derivative instruments Total non-current...

  • Page 65
    ...31, 2013, there were 3,845,503 shares of unissued common stock reserved for issuance under the Company's Automatic Dividend Reinvestment and Stock Purchase Plan. Earnings Per Share Basic earnings per share is calculated by dividing net income attributable to OGE Energy by the weighted average number...

  • Page 66
    ... Master Formation Agreement and Enogex LLC's $400.0 million revolving credit facility was terminated. The Company's ability to access the commercial paper market could be adversely impacted by a credit ratings downgrade or major market disruptions. Pricing grids associated with the Company's credit...

  • Page 67
    ... used to measure the Company's benefit obligation at the end of the year and include benefits attributable to estimated future employee service. (In millions) Projected Benefit Payments 2014 2015 2016 2017 2018 After 2018 $93.2 82.0 76.7 71.7 64.7 270.1 Plan Investments, Policies and Strategies...

  • Page 68
    ... BBB- by Moody's Investors Services, Standard & Poor's Ratings Services or Fitch Ratings. The portfolio may invest up to 10 percent of the portfolio's market value in convertible bonds as long as the securities purchased meet the quality guidelines. The purchase of any of the Company's equity, debt...

  • Page 69
    ...an investment grade rating at or above Baa3 or BBB- by Moody's Investors Services, Standard & Poor's Ratings Services or Fitch Ratings. (C) This category represents units of participation in a commingled fund that primarily invested in stocks of international companies and emerging markets. (D) This...

  • Page 70
    ... benefit cost to be recognized in the Consolidated Statements of Income in future periods. (In millions, December 31) 2013 Level 1 Level 3 2013 2012 Group retiree medical insurance contract (A) Mutual funds investment U.S. equity investments Money market funds investment Total Plan investments...

  • Page 71
    ... gross benefit payments the Company expects to pay related to its postretirement benefit plans, including prescription drug benefits. Pension Plan (In millions, December 31) 2013 2012 Change in benefit obligation Beginning obligations Service cost Interest cost Plan amendments Plan settlements...

  • Page 72
    ... to the date as of which such information is presented. The obligation also includes future medical benefits expected to be paid to current employees participating in the Company's Group Long-Term Disability Plan and their dependents, as defined in the Company's Medical Plan. 66 OGE Energy Corp.

  • Page 73
    ...investment funds selected by the participant. In 2013, those investment options included a Company Common Stock fund, whose value was determined based on the stock price of the Company's Common Stock. The Company accounts for the contributions related to the Company's executive officers in this plan...

  • Page 74
    ... 2013, OGE Energy deconsolidated its interest in Enogex Holdings LLC and began accounting for its interest in Enable using the equity method of accounting. The Company's business is now divided into two segments for financial reporting purposes as follows: (i) electric utility and (ii) natural gas...

  • Page 75
    ... required to make annual lease payments as long as the wind turbines are located on the land. OG&E does not expect to terminate the leases until the wind turbines reach the end of their economic life. OGE Energy Noncancellable Operating Lease On August 29, 2012, OGE Energy executed a five-year lease...

  • Page 76
    ... Plant is used. Enogex Energy Resources LLC Commitments As a result of the formation of Enable on May 1, 2013 and the Company's deconsolidation of Enogex Holdings, the Company has no obligations included in its Consolidated Financial Statements at December 31, 2013 under OGE Holdings' noncancellable...

  • Page 77
    ...discussion of the Company's environmental matters. Federal Clean Air Act New Source Review Litigation As previously reported, in July 2008, OG&E received a request for information from the EPA regarding Federal Clean Air Act compliance at OG&E's Muskogee and Sooner generating plants. In recent years...

  • Page 78
    ... of the cost to construct the Crossroads wind farm, effective retroactively to August 1, 2012. The costs will be recovered through the Energy Cost Recovery Rider. Fuel Adjustment Clause Review for Calendar Year 2011 16. Rate Matters and Regulation Regulation and Rates OG&E's retail electric tariffs...

  • Page 79
    ... No. 1000, Final Rule on Transmission Planning and Cost Allocation On July 21, 2011, the FERC issued Order No. 1000, which revised the FERC's existing regulations governing the process for planning enhancements and expansions of the electric transmission grid in a particular region, along with the...

  • Page 80
    ... rate authorization for any market-based rates sales outside of the SPP's energy imbalance service market. On May 2, 2013, the FERC issued an order accepting OG&E's June 2012 triennial market power update. Due to the seasonal fluctuations and other factors of the Company's businesses, the operating...

  • Page 81
    ... information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), OGE Energy Corp.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated...

  • Page 82
    ... Board, President and Chief Executive Officer Scott Forbes Controller and Chief Accounting Officer Sean Trauschke Vice President and Chief Financial Officer REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders OGE Energy Corp. We have audited OGE Energy...

  • Page 83
    ... of the investment in the Company's common stock and each index was $100 at Dec. 31, 2008, and that all dividends were reinvested. As of Dec. 31, 2013, the closing price of the Company's common stock on the New York Stock Exchange was $33.83. OGE Energy Corp. S&P 500 Index S&P 1500 Utilities Sector...

  • Page 84
    ... Electric customers Megawatt-hour sales (millions) Megawatt generating capability - year end (thousands) Megawatt peak demand (thousands) Fuel mix (generation only, by kilowatt-hours generated) Natural gas Coal Wind Cost (in kilowatt-hours - cents) Natural gas Coal Weighted average Total gas...

  • Page 85
    ... P.O. Box 30170 College Station, TX 77842-3170 Phone toll free: 1-888-216-8114 Internet account access: www.computershare.com/investor Stock Purchase Plan This plan offers a convenient and economical way to purchase OGE Energy Corp. common stock. Plan materials are available on the Internet at www...

  • Page 86
    P.O. Box 321 Oklahoma City, Oklahoma 73101-0321 (405) 553-3000