OG&E 2015 Annual Report Download - page 10

OGE Energy Corp. 17
Interest฀Expense.฀Interest฀expense฀was฀$141.5฀million฀in฀2014฀฀
as฀compared฀to฀$129.3฀million฀in฀2013,฀an฀increase฀of฀$12.2฀million,฀฀
or฀9.4฀percent,฀primarily฀due฀to฀a฀$9.1฀million฀increase฀in฀interest฀฀
on฀long-term฀debt฀related฀to฀a฀$250.0฀million฀debt฀issuance฀that฀
occurred฀in฀May฀2013,฀a฀$250.0฀million฀debt฀issuance฀that฀occurred฀฀
in฀March฀2014฀and฀an฀additional฀$250.0฀million฀debt฀issuance฀that฀
occurred฀in฀December฀2014฀partially฀offset฀by฀the฀early฀redemption฀฀
of฀$140.0฀million฀senior฀notes฀in฀August฀2014.฀In฀addition,฀there฀was฀฀
a฀$2.0฀million฀increase฀reflecting฀a฀reduction฀in฀2013฀interest฀ xpense฀
related฀to฀tax฀matters฀offset฀by฀a฀decrease฀in฀the฀allowance฀for฀
borrowed฀funds฀used฀during฀construction฀of฀$1.0฀million.฀
Income฀Tax฀Expense.฀Income฀tax฀expense฀was฀$111.6฀million฀฀
in฀2014฀as฀compared฀to฀$113.5฀million฀in฀2013,฀a฀decrease฀of฀
$1.9฀million,฀or฀1.7฀percent.฀The฀reduction฀reflects฀l wer฀pretax฀income฀
partially฀offset฀by฀a฀reduction฀in฀state฀tax฀credits฀recognized฀during฀the฀
year฀and฀an฀increase฀in฀Federal฀credits฀recognized.฀
OGE Holdings (Natural Gas Midstream Operations)
Year Ended December 31,
(In฀millions)฀2015฀ 2014฀ 2013
Operating฀revenues฀ $ ฀—฀ $฀ ฀ ฀—฀ $630.4
Cost฀of฀sales฀ —฀ —฀ 489.0
Other฀operation฀and฀maintenance฀ 7.5฀ 1.2฀ 60.9
Depreciation฀and฀amortization฀ —฀ —฀ 36.8
Taxes฀other฀than฀income฀ —฀ —฀ 10.5
฀ Operating฀income฀(loss)฀ (7.5)฀ (1.2)฀ 33.2
Equity฀in฀earnings฀of฀฀
฀ unconsolidated฀affiliate (A)฀15.5฀ 172.6฀ 101.9
Other฀income฀ 0.4฀ —฀ 10.2
Other฀expense฀ —฀ —฀ 1.3
Interest฀expense฀ —฀ —฀ 10.6
Income฀tax฀expense฀ (1.0)฀ 69.1฀ 26.9
฀ Net฀income฀ 9.4฀ 102.3฀ 106.5
Less:฀Net฀income฀attributable฀฀
฀ to฀noncontrolling฀interests฀ —฀ —฀ 6.6
฀ Net฀income฀attributable฀to฀OGE฀Holdings฀ $ 9.4฀ $102.3฀ $฀ 99.9
(A)฀ ฀In฀September฀2015,฀the฀Company฀recorded฀a฀$108.4฀million฀pre-tax฀charge฀for฀its฀
share฀of฀the฀goodwill฀impairment,฀as฀adjusted฀for฀the฀basis฀difference.฀See฀Note฀3฀for฀
further฀discussion฀of฀Enable’s฀goodwill฀impairment.
Effective฀May฀1,฀2013,฀the฀Company฀deconsolidated฀its฀previously฀
held฀investment฀in฀Enogex฀Holdings฀and฀acquired฀a฀28.5฀percent฀
equity฀interest฀in฀Enable฀(26.3฀percent฀as฀of฀December฀31,฀2015)฀
which฀is฀being฀accounted฀for฀using฀the฀equity฀method฀of฀accounting.฀
Prior฀to฀May฀1,฀2013,฀the฀Company฀reported฀the฀results฀of฀Enogex฀
Holdings฀in฀the฀natural฀gas฀midstream฀operations฀segment.
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฀LLC฀
and฀its฀underlying฀equity฀in฀net฀assets฀of฀Enable.฀The฀basis฀difference฀
is฀the฀result฀of฀the฀initial฀contribution฀of฀Enogex฀LLC฀to฀Enable฀in฀May฀
2013,฀and฀subsequent฀issuances฀of฀equity฀by฀Enable,฀including฀the฀
initial฀public฀offering฀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฀ or฀the฀
elimination฀of฀the฀Enogex฀Holdings฀fair฀value฀adjustments.
The฀difference฀between฀OGE฀Energy’s฀investment฀in฀Enable฀and฀its฀
underlying฀equity฀in฀the฀net฀assets฀of฀Enable฀was฀$783.5฀million฀as฀of฀
December฀31,฀2015.
Reconciliation of Equity in Earnings of Unconsolidated Affiliates
The฀following฀table฀reconciles฀OGE฀Energy’s฀equity฀in฀earnings฀of฀its฀
unconsolidated฀affiliates฀ or฀the฀years฀ended฀December฀31,฀2015฀
and฀2014.
฀Year Ended December 31,
(In฀millions)฀2015฀ 2014
OGE’s฀share฀of฀Enable฀Net฀Income฀(Loss)฀ $(16.0)฀ $143.1
Amortization฀of฀basis฀difference฀ 13.5฀ 14.0
Elimination฀of฀Enogex฀Holdings฀fair฀value฀฀
฀ and฀other฀adjustments฀ 18.0฀ 15.5
Equity฀in฀earnings฀of฀unconsolidated฀affiliate ฀ $ 15.5฀ $172.6
The฀following฀table฀represents฀summarized฀financial฀in ormation฀of฀
Enable฀for฀2014฀and฀2015:
Enable Results of Operations
Year Ended December 31,
(In฀millions)฀2015฀ 2014
Operating฀revenues฀ $2,418฀ $3,367
Cost฀of฀natural฀gas฀and฀natural฀gas฀liquids฀ 1,097฀ 1,914
Operating฀income฀(loss)฀ (712)฀ 586
Net฀income฀(loss)฀ $ (752)฀ $฀ ฀530
Year Ended December 31, 2015 as Compared to
Year Ended December 31, 2014
The฀table฀set฀forth฀below฀illustrates฀the฀impact฀of฀the฀operating฀results฀
of฀Enable฀for฀the฀years฀ended฀December฀31,฀2015฀and฀2014.
Year Ended December 31,
(In฀millions)฀2015฀ 2014
Operating฀revenues฀ $ —฀ $฀฀฀—
Cost฀of฀natural฀gas฀and฀natural฀gas฀liquids฀ —
฀—
Other฀operation฀and฀maintenance฀ 7.5฀ 1.2
Depreciation฀and฀amortization฀ —
฀—
Taxes฀other฀than฀income฀ —
฀—
฀ Operating฀income฀(loss)฀ (7.5)฀ (1.2)
Equity฀in฀earnings฀of฀฀
฀ unconsolidated฀affiliate (A)฀15.5฀ 172.6
Other฀income/(expense)฀ 0.4
฀—
฀ Income฀before฀taxes฀ 8.4฀ 171.4
Income฀tax฀expense฀(benefit ฀ (1.0)฀ 69.1
฀ Net฀income฀attributable฀to฀OGE฀Holdings฀ $ 9.4฀ $102.3
(A)฀ ฀The฀Company฀recorded฀a฀$108.4฀million฀pre-tax฀charge฀during฀the฀third฀quarter฀of฀
2015฀for฀its฀share฀of฀the฀goodwill฀impairment,฀as฀adjusted฀for฀the฀basis฀differences.฀
See฀Note฀3฀for฀further฀discussion฀of฀Enable’s฀goodwill฀impairment.
OGE฀Holdings’฀earnings฀before฀taxes฀decreased฀$163.0฀million,฀฀
or฀95.1฀percent,฀for฀the฀year฀ended฀December฀31,฀2015฀as฀compared฀
to฀the฀same฀period฀of฀2014฀primarily฀due฀to฀a฀decrease฀in฀equity฀in฀
earnings฀of฀Enable฀of฀$157.1฀million.฀In฀addition฀to฀the฀goodwill฀
impairment,฀Enable’s฀gathering฀and฀processing฀business฀segment฀
reported฀a฀decrease฀in฀operating฀income฀primarily฀from฀a฀decrease฀in฀
gross฀margin,฀an฀increase฀in฀depreciation฀and฀amortization฀expense฀
16 OGE Energy Corp.
2014 compared to 2013. OG&E’s฀net฀income฀decreased฀$0.6฀million,฀
or฀0.2฀percent,฀in฀2014฀as฀compared฀to฀2013฀primarily฀due฀to฀higher฀
gross฀margin,฀which฀was฀almost฀offset฀by฀higher฀other฀operations฀and฀
maintenance฀expense,฀higher฀depreciation฀and฀amortization฀expense,฀
and฀interest฀expense.
Gross฀Margin
Operating฀revenues฀were฀$2,453.1฀million฀in฀2014฀as฀compared฀to฀
$2,262.2฀million฀in฀2013,฀an฀increase฀of฀$190.9฀million,฀or฀8.4฀percent.฀
Cost฀of฀sales฀were฀$1,106.6฀million฀in฀2014฀as฀compared฀to฀
$965.9฀million฀in฀2013,฀an฀increase฀of฀$140.7฀million,฀or฀14.6฀percent.฀
Gross฀margin฀was฀$1,346.5฀million฀in฀2014฀as฀compared฀to฀
$1,296.3฀million฀in฀2013,฀an฀increase฀of฀$50.2฀million,฀or฀3.9฀percent.฀
The฀below฀factors฀contributed฀to฀the฀change฀in฀gross฀margin:฀
(In฀millions)฀ $฀Change
Wholesale฀transmission฀revenue฀(A)฀ $฀43.8
New฀customer฀growth฀ 13.8
Price฀variance฀(B)฀ 6.8
Non-residential฀demand฀and฀related฀revenues฀ 1.4
Other฀ (1.7)
Quantity฀variance฀(primarily฀weather)฀ (13.9)
฀ Change฀in฀gross฀margin฀ $฀50.2
(A)฀ ฀Increased฀primarily฀due฀to฀higher฀investments฀related฀to฀certain฀FERC฀approved฀
transmission฀projects฀included฀in฀formula฀rates.
(B)฀ ฀Increased฀due฀to฀higher฀rider฀revenues฀primarily฀from฀the฀Oklahoma฀Demand฀
Program฀rider,฀the฀Oklahoma฀Storm฀Recovery฀rider฀and฀the฀Arkansas฀Demand฀
Program฀rider฀partially฀offset฀by฀lower฀rider฀revenues฀from฀the฀Oklahoma฀Crossroads฀
rider,฀Oklahoma฀Smart฀Grid฀rider,฀Oklahoma฀System฀Hardening฀rider฀and฀the฀
Arkansas฀Crossroads฀rider.
Cost฀of฀sales฀for฀OG&E฀consists฀of฀fuel฀used฀in฀electric฀generation,฀
purchased฀power฀and฀transmission฀related฀charges.฀Fuel฀expense฀฀
was฀$627.5฀million฀in฀2014฀as฀compared฀to฀$672.7฀million฀in฀2013,฀a฀
decrease฀of฀$45.2฀million,฀or฀6.7฀percent,฀primarily฀due฀to฀lower฀natural฀
gas฀used฀offset฀by฀higher฀natural฀gas฀prices.฀In฀2014,฀OG&E’s฀fuel฀mix฀
was฀61฀percent฀coal,฀32฀percent฀natural฀gas฀and฀seven฀percent฀wind.฀
In฀2013,฀OG&E’s฀fuel฀mix฀was฀53.0฀percent฀coal,฀40.0฀percent฀natural฀
gas฀and฀seven฀percent฀wind.฀Purchased฀power฀costs฀were฀
$444.1฀million฀in฀2014฀as฀compared฀to฀$267.6฀million฀in฀2013,฀an฀
increase฀of฀$176.5฀million,฀or฀66.0฀percent,฀primarily฀due฀to฀an฀
increase฀in฀purchases฀from฀the฀SPP,฀reflecting฀the฀impact฀of฀OG&E s฀
participation฀in฀the฀SPP฀Integrated฀Marketplace,฀which฀began฀on฀
March฀1,฀2014.฀Transmission฀related฀charges฀were฀$35.0฀million฀in฀
2014฀as฀compared฀to฀$25.6฀million฀in฀2013,฀an฀increase฀of฀$9.4฀million,฀
or฀36.7฀percent,฀primarily฀due฀to฀higher฀SPP฀charges฀for฀the฀base฀plan฀
projects฀of฀other฀utilities.฀
Operating฀Expenses
Other฀operation฀and฀maintenance฀expenses฀were฀$453.2฀million฀฀
in฀2014฀as฀compared฀to฀$438.8฀million฀in฀2013,฀an฀increase฀of฀
$14.4฀million,฀or฀3.3฀percent.฀The฀below฀factors฀contributed฀to฀the฀
change฀in฀other฀operations฀and฀maintenance฀expense:
(In฀millions)฀ $฀Change
Reduction฀in฀capitalized฀labor฀(A)฀ $11.4
Corporate฀overhead฀and฀allocations฀(B)฀ 4.0
Contract฀professional฀services฀(primarily฀marketing฀services)฀ 3.8
Ongoing฀maintenance฀at฀power฀plants฀ 3.5
Other฀marketing,฀sales฀and฀commercial฀(C)฀ 2.3
Software฀expense฀(D)฀ 2.3
Fees,฀permits฀and฀licenses฀(E)฀ 2.3
Vegetation฀management฀(F)฀ (4.5)
Employee฀benefit ฀(G)฀ (4.9)
Salaries฀and฀wages฀(H)฀ (5.8)
฀ Change฀in฀other฀operation฀and฀maintenance฀expense฀ $14.4
(A)฀ ฀Portion฀of฀labor฀costs฀capitalized฀into฀projects฀decreased฀as฀a฀result฀of฀less฀work฀
performed฀on฀storm฀restoration.฀
(B)฀ ฀Increased฀primarily฀due฀to฀higher฀allocated฀costs฀from฀the฀holding฀company฀resulting฀
from฀the฀formation฀of฀Enable฀during฀2013.฀
(C)฀ ฀Increased฀primarily฀due฀to฀demand฀side฀management฀customer฀payments฀which฀are฀
recovered฀through฀a฀rider฀partially฀offset฀by฀a฀reduction฀in฀media฀services฀expense.฀
(D)฀ ฀Increased฀as฀a฀result฀of฀higher฀expenditures฀related฀to฀Smart฀Grid฀software.฀
(E)฀ ฀Increased฀primarily฀due฀to฀higher฀SPP฀administration฀and฀assessment฀fees.฀
(F)฀ ฀Decreased฀primarily฀due฀to฀increased฀spending฀on฀system฀hardening฀in฀2013฀which฀
includes฀costs฀that฀are฀being฀recovered฀through฀a฀rider.฀
(G)฀ ฀Decreased฀primarily฀due฀to฀lower฀pension฀expense,฀postretirement฀and฀other฀benefit .฀
(H)฀ ฀Decreased฀primarily฀due฀to฀incentive฀compensation฀and฀lower฀overtime฀wages฀
partially฀offset฀by฀higher฀regular฀salaries฀and฀wages.฀
Depreciation฀and฀amortization฀expense฀was฀$270.8฀million฀in฀2014฀
as฀compared฀to฀$248.4฀million฀in฀2013,฀an฀increase฀of฀$22.4฀million,฀฀
or฀nine฀percent,฀primarily฀due฀to฀additional฀transmission฀assets฀being฀
placed฀in฀service฀throughout฀2013฀and฀2014,฀along฀with฀an฀increase฀
resulting฀from฀the฀amortization฀of฀the฀deferred฀pension฀credits฀
regulatory฀liability฀which฀was฀fully฀amortized฀in฀July฀2014.฀These฀were฀
offset฀by฀the฀pension฀regulatory฀asset฀which฀was฀fully฀amortized฀in฀
July฀2013.฀
Additional฀Information
Allowance฀for฀Equity฀Funds฀Used฀During฀Construction.฀Allowance฀฀
for฀equity฀funds฀used฀during฀construction฀was฀$4.2฀million฀in฀2014฀฀
as฀compared฀to฀$6.6฀million฀in฀2013,฀a฀decrease฀of฀$2.4฀million฀or฀
36.4฀percent,฀primarily฀due฀to฀lower฀construction฀work฀in฀progress฀
balances฀resulting฀from฀transmission฀projects฀being฀placed฀in฀service฀
in฀2014.฀
Other฀Income.฀Other฀income฀was฀$4.8฀million฀in฀2014฀as฀compared฀
to฀$8.1฀million฀in฀2013,฀a฀decrease฀of฀$3.3฀million฀or฀40.7฀percent,฀
primarily฀due฀to฀decreased฀margins฀recognized฀in฀the฀guaranteed฀flat
bill฀program฀during฀2014฀as฀a฀result฀of฀cooler฀weather฀in฀the฀first
quarter฀as฀compared฀to฀the฀same฀period฀in฀2013฀along฀with฀a฀decrease฀
in฀the฀tax฀gross฀up฀related฀to฀the฀allowance฀for฀equity฀funds฀used฀
during฀construction.฀
Other฀Expense.฀Other฀expense฀was฀$1.9฀million฀in฀2014฀as฀
compared฀to฀$4.6฀million฀in฀2013,฀a฀decrease฀of฀$2.7฀million฀or฀
58.7฀percent,฀primarily฀due฀to฀decreased฀charitable฀donations฀
during฀2014.฀