OG&E 2013 Annual Report Download - page 21

OGE Energy Corp. 15
2013 Compared to 2012
OG&E’s operating income increased $35.9 million, or 7.3 percent, in
2013 as compared to 2012 primarily due to a higher gross margin, lower
other operation and maintenance expense and lower depreciation and
amortization expense partially offset by higher taxes other than income.
Gross Margin
Gross Margin is defined by OG&E as operating revenues less fuel,
purchased power and 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, purchased power and transmission expenses 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 perform-
ance 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.
Operating revenues were $2,262.2 million in 2013 as compared to
$2,141.2 million in 2012, an increase of $121.0 million, or 5.7 percent.
Cost of sales were $965.9 million in 2013 as compared to $879.1 million
in 2012, an increase of $86.8 million, or 9.9 percent. Gross margin was
$1,296.3 million in 2013 as compared to $1,262.1 million in 2012, an
increase of $34.2 million, or 2.7 percent. The below factors contributed
to the change in gross margin:
(In millions) $ Change
Wholesale transmission revenue(A) $«44.9
New customer growth 10.9
Other 1.8
Non-residential demand and related revenues 0.1
Quantity variance (primarily weather) (6.4)
Price variance(B) (17.1)
Change in gross margin $«34.2
(A) Increased primarily due to higher investments related to certain FERC approved transmission
projects included in formula rates.
(B) Decreased primarily due to sales and customer mix.
Cost of sales for OG&E consists of fuel used in electric generation,
purchased power and transmission related charges. Fuel expense
was $672.7 million in 2013 as compared to $642.4 million in 2012, an
increase of $30.3 million, or 4.7 percent, primarily due to higher natural
gas prices. OG&E’s electric generating capability is fairly evenly divided
between coal and natural gas and provides for flexibility to use either
fuel to the best economic advantage for OG&E and its customers. In
2013, OG&E’s fuel mix was 53 percent coal, 40 percent natural gas
and seven percent wind. In 2012, OG&E’s fuel mix was 52 percent coal,
42 percent 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
agreements. Transmission related charges were $25.6 million in 2013
as compared to $13.7 million in 2012, an increase of $11.9 million, or
86.9 percent, primarily due to higher SPP charges for the base plan
projects of other utilities.
Variances in the actual cost of fuel used in electric generation and
certain purchased power costs, as compared to the fuel component
included in the cost-of-service for ratemaking, are passed through to
OG&E’s customers through fuel adjustment clauses. The fuel adjustment
clauses are subject to periodic review by the OCC, the APSC and the
FERC. The OCC, the APSC and the FERC have authority to review the
appropriateness of gas transportation charges or other fees OG&E pays
to its affiliate, Enable.
Operating Expenses
Other operation and maintenance expenses were $438.8 million in
2013 as compared to $446.3 million in 2012, a decrease of $7.5 million,
or 1.7 percent. The below factors contributed to the change in other
operations and maintenance expense:
(In millions) $ Change
Employee benefits(A) $(12.3)
Total salaries and wages(B) (6.5)
Temporary labor «(2.3)
Contract professional services (primarily smart grid)(C) (1.7)
Other «0.6
Other marketing and sales expense (primarily lower
demand-side management initiatives)(C) 1.2
Administrative and assessment fees (primarily SPP
Administration Fees) «2.2
Software expense (primarily smart grid)(C) 2.7
Capitalized labor «8.6
Change in other operation and maintenance expense $÷(7.5)
(A) Decreased primarily due to lower recoverable amounts of pension expense and postretirement
medical expense allowed in the August 2012 rate case, a decrease in medical expense, and a
decrease in worker’s compensation accruals.
(B) Decreased primarily due to lower salaries and wages as a result of lower headcount in 2013
and a decrease in incentive pay, partially offset by annual salary increases and an increase in
overtime wages related to 2013 storms.
(C) Includes costs that are being recovered through a rider.
Depreciation and amortization expense was $248.4 million in 2013
as compared to $248.7 million in 2012, a decrease of $0.3 million, pri-
marily due to the amortization of the deferred pension credits regulatory
liability and a decrease in the amortization of the storm regulatory asset
(see Note 1). These decreases in depreciation and amortization expense
were partially offset by:
•Increases in depreciation rates from the August 2012 rate case; and
•Additional assets being placed in service throughout 2013 and 2012,
including the Sooner-Rose Hill and Sunnyside-Hugo transmission projects,
which were fully in service in April 2012, the smart grid project which
was completed in late 2012 and the Cleveland to Sooner transmission
project which was fully in service in February 2013.
Taxes other than income was $83.8 million in 2013 as compared to
$77.7 million in 2012, an increase of $6.1 million, or 7.9 percent, primarily
due to higher ad valorem taxes.