OG&E 2015 Annual Report Download - page 14

OGE Energy Corp. 25
Common Stock
The฀Company฀does฀not฀expect฀to฀issue฀any฀common฀stock฀in฀2016฀
from฀its฀Automatic฀Dividend฀Reinvestment฀and฀Stock฀Purchase฀Plan.฀
See฀Note฀9฀of฀Notes฀to฀Consolidated฀Financial฀Statements฀for฀a฀
discussion฀of฀the฀Company’s฀common฀stock฀activity.
Distributions by Enable
Pursuant฀to฀the฀Enable฀limited฀partnership฀agreement,฀the฀amount฀of฀
distributions฀the฀Company฀received฀from฀Enable฀were฀$139.3฀million฀
and฀$143.7฀million฀during฀the฀years฀ended฀December฀31,฀2015฀and฀2014.
Critical Accounting Policies and Estimates
The฀Consolidated฀Financial฀Statements฀and฀Notes฀to฀Consolidated฀
Financial฀Statements฀contain฀information฀that฀is฀pertinent฀to฀
Management’s฀Discussion฀and฀Analysis.฀In฀preparing฀the฀Consolidated฀
Financial฀Statements,฀management฀is฀required฀to฀make฀estimates฀and฀
assumptions฀that฀affect฀the฀reported฀amounts฀of฀assets฀and฀liabilities฀
and฀disclosure฀of฀contingent฀assets฀and฀contingent฀liabilities฀at฀the฀
date฀of฀the฀Consolidated฀Financial฀Statements฀and฀the฀reported฀
amounts฀of฀revenues฀and฀expenses฀during฀the฀reporting฀period.฀
Changes฀to฀these฀assumptions฀and฀estimates฀could฀have฀a฀material฀
effect฀on฀the฀Company’s฀Consolidated฀Financial฀Statements.฀However,฀
the฀Company฀believes฀it฀has฀taken฀reasonable฀positions฀where฀
assumptions฀and฀estimates฀are฀used฀in฀order฀to฀minimize฀the฀negative฀
financial฀impact฀to฀the฀Compa y฀that฀could฀result฀if฀actual฀results฀vary฀
from฀the฀assumptions฀and฀estimates.฀In฀management’s฀opinion,฀the฀
areas฀of฀the฀Company฀where฀the฀most฀significant฀judgment฀is
exercised฀for฀all฀Company฀segments฀includes฀the฀determination฀of฀
Pension฀Plan฀assumptions,฀income฀taxes,฀contingency฀reserves,฀asset฀
retirement฀obligations฀and฀depreciable฀lives฀of฀property,฀plant฀and฀
equipment.฀For฀the฀electric฀utility฀segment,฀significant฀judgment฀is฀also
exercised฀in฀the฀determination฀of฀regulatory฀assets฀and฀liabilities฀and฀
unbilled฀revenues.฀The฀selection,฀application฀and฀disclosure฀of฀the฀
following฀critical฀accounting฀estimates฀have฀been฀discussed฀with฀the฀
Company’s฀Audit฀Committee.฀The฀Company฀discusses฀its฀significant
accounting฀policies,฀including฀those฀that฀do฀not฀require฀management฀to฀
make฀difficult,฀subjecti e฀or฀complex฀judgments฀or฀estimates,฀in฀Note฀1฀
of฀Notes฀to฀Consolidated฀Financial฀Statements.
Pension and Postretirement Benefit Plans
The฀Company฀has฀a฀Pension฀Plan฀that฀covers฀a฀significant฀amount฀of
the฀Company’s฀employees฀hired฀before฀December฀1,฀2009.฀Also,฀
effective฀December฀1,฀2009,฀the฀Company’s฀Pension฀Plan฀is฀no฀longer฀
being฀offered฀to฀employees฀hired฀on฀or฀after฀December฀1,฀2009.฀The฀
Company฀also฀has฀defined฀benefit฀postretirement฀plans฀that฀ ver฀a฀
significant฀amount฀of฀its฀empl yees.฀Pension฀and฀other฀postretirement฀
plan฀expenses฀and฀liabilities฀are฀determined฀on฀an฀actuarial฀basis฀and฀
are฀affected฀by฀the฀market฀value฀of฀plan฀assets,฀estimates฀of฀the฀
expected฀return฀on฀plan฀assets,฀assumed฀discount฀rates฀and฀the฀level฀
of฀funding.฀Actual฀changes฀in฀the฀fair฀market฀value฀of฀plan฀assets฀and฀
differences฀between฀the฀actual฀return฀on฀plan฀assets฀and฀the฀expected฀
return฀on฀plan฀assets฀could฀have฀a฀material฀effect฀on฀the฀amount฀of฀
pension฀expense฀ultimately฀recognized.฀The฀pension฀plan฀rate฀
assumptions฀are฀shown฀in฀Note฀12฀of฀Notes฀to฀Consolidated฀Financial฀
Statements.฀The฀assumed฀return฀on฀plan฀assets฀is฀based฀on฀
management’s฀expectation฀of฀the฀long-term฀return฀on฀the฀plan฀assets฀
portfolio.฀The฀discount฀rate฀used฀to฀compute฀the฀present฀value฀of฀plan฀
liabilities฀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฀funding฀requirements฀to฀the฀Pension฀Plan.฀
The฀following฀table฀indicates฀the฀sensitivity฀of฀the฀Pension฀Plan฀funded฀
status฀to฀these฀variables.฀
฀ ฀ Impact฀on
฀ Change฀ Funded฀Status
Actual฀plan฀asset฀returns฀ +/-฀1฀percent฀ +/-฀$5.8฀million
Discount฀rate฀ +/-฀0.25฀percent฀ +/-฀$14.1฀million
Contributions฀ +/-฀$10฀million฀ +/-฀$10.0฀million
Income Taxes
The฀Company฀uses฀the฀asset฀and฀liability฀method฀of฀accounting฀for฀
income฀taxes.฀Under฀this฀method,฀a฀deferred฀tax฀asset฀or฀liability฀is฀
recognized฀for฀the฀estimated฀future฀tax฀effects฀attributable฀to฀temporary฀
differences฀between฀the฀financial฀statement฀basis฀and฀the฀tax฀basis฀of
assets฀and฀liabilities฀as฀well฀as฀tax฀credit฀carry฀forwards฀and฀net฀
operating฀loss฀carry฀forwards.฀Deferred฀tax฀assets฀and฀liabilities฀are฀
measured฀using฀enacted฀tax฀rates฀expected฀to฀apply฀to฀taxable฀income฀
in฀the฀years฀in฀which฀those฀temporary฀differences฀are฀expected฀to฀be฀
recovered฀or฀settled.฀The฀effect฀on฀deferred฀tax฀assets฀and฀liabilities฀of฀
a฀change฀in฀tax฀rates฀is฀recognized฀in฀the฀period฀of฀the฀change.
The฀application฀of฀income฀tax฀law฀is฀complex.฀Laws฀and฀regulations฀
in฀this฀area฀are฀voluminous฀and฀often฀ambiguous.฀Interpretations฀and฀
guidance฀surrounding฀income฀tax฀laws฀and฀regulations฀change฀over฀
time.฀Accordingly,฀it฀is฀necessary฀to฀make฀judgments฀regarding฀income฀
tax฀exposure.฀As฀a฀result,฀changes฀in฀these฀judgments฀can฀materially฀
affect฀amounts฀the฀Company฀recognized฀in฀its฀Consolidated฀Financial฀
Statements.฀Tax฀positions฀taken฀by฀the฀Company฀on฀its฀income฀tax฀
returns฀that฀are฀recognized฀in฀the฀financial฀statements฀ ust฀satisfy฀a฀
more฀likely฀than฀not฀recognition฀threshold,฀assuming฀that฀the฀position฀
will฀be฀examined฀by฀taxing฀authorities฀with฀full฀knowledge฀of฀all฀
relevant฀information.
24 OGE Energy Corp.
2015 Capital Requirements, Sources of Financing
and Financing Activities
Total฀capital฀requirements,฀consisting฀of฀capital฀expenditures฀and฀
maturities฀of฀long-term฀debt,฀were฀$548.0฀million฀and฀contractual฀
obligations,฀net฀of฀recoveries฀through฀fuel฀adjustment฀clauses,฀were฀
$85.6฀million฀resulting฀in฀total฀net฀capital฀requirements฀and฀contractual฀
obligations฀of฀$633.6฀million฀in฀2015,฀of฀which฀$130.6฀million฀was฀to฀
comply฀with฀environmental฀regulations.฀This฀compares฀to฀net฀capital฀
requirements฀of฀$809.5฀million฀and฀net฀contractual฀obligations฀of฀
$88.2฀million฀totaling฀$897.7฀million฀in฀2014,฀of฀which฀$31.5฀million฀฀
was฀to฀comply฀with฀environmental฀regulations.
In฀2015,฀the฀Company’s฀sources฀of฀capital฀were฀cash฀generated฀from฀
operations,฀proceeds฀from฀the฀issuance฀of฀short฀and฀long-term฀debt,฀
proceeds฀from฀the฀sales฀of฀common฀stock฀and฀distributions฀from฀
Enable.฀Changes฀in฀working฀capital฀reflect฀the฀seasonal฀nature฀of฀the
Company’s฀business,฀the฀revenue฀lag฀between฀billing฀and฀collection฀
from฀customers฀and฀fuel฀inventories.฀See฀“Working฀Capital”฀for฀a฀
discussion฀of฀significant฀changes฀in฀net฀ orking฀capital฀requirements฀
as฀it฀pertains฀to฀operating฀cash฀fl w฀and฀liquidity.
The Dodd-Frank Act
Derivative฀instruments฀are฀utilized฀in฀managing฀OG&E’s฀commodity฀
price฀exposures.฀On฀July฀21,฀2010,฀President฀Obama฀signed฀into฀law฀
the฀Dodd-Frank฀Act.฀Among฀other฀things,฀the฀Dodd-Frank฀Act฀provides฀
for฀a฀new฀regulatory฀regime฀for฀derivatives,฀including฀mandatory฀
clearing฀of฀certain฀swaps฀and฀margin฀requirements.฀The฀Dodd-Frank฀
Act฀contains฀provisions฀that฀should฀exempt฀certain฀derivatives฀
end-users฀such฀as฀OG&E฀from฀much฀of฀the฀clearing฀requirements.฀The฀
regulations฀require฀that฀the฀decision฀on฀whether฀to฀use฀the฀end-user฀
exception฀from฀mandatory฀clearing฀for฀derivative฀transactions฀be฀
reviewed฀and฀approved฀by฀an฀“appropriate฀committee”฀of฀the฀Board฀of฀
Directors.฀On฀January฀12,฀2015,฀President฀Obama฀signed฀into฀law฀฀
an฀amendment฀to฀the฀Dodd-Frank฀Act฀that฀exempts฀from฀margin฀
requirements฀swaps฀used฀by฀end-users฀to฀hedge฀or฀mitigate฀
commercial฀risk.฀There฀are,฀however,฀some฀rulemakings฀that฀have฀no฀
yet฀been฀finali ed.฀Even฀if฀OG&E฀qualifies฀ or฀the฀end-user฀exception฀฀
to฀clearing฀and฀margin฀requirements฀are฀not฀imposed฀on฀end-users,฀฀
its฀derivative฀counterparties฀may฀be฀subject฀to฀new฀capital,฀margin฀฀
and฀business฀conduct฀requirements฀as฀a฀result฀of฀the฀new฀regulations,฀
which฀may฀increase฀OG&E’s฀transaction฀costs฀or฀make฀it฀more฀difficult
to฀enter฀into฀derivative฀transactions฀on฀favorable฀terms.฀OG&E’s฀
inability฀to฀enter฀into฀derivative฀transactions฀on฀favorable฀terms,฀or฀at฀
all,฀could฀increase฀operating฀expenses฀and฀put฀OG&E฀at฀increased฀
exposure฀to฀risks฀of฀adverse฀changes฀in฀commodities฀prices.฀The฀
impact฀of฀the฀provisions฀of฀the฀Dodd-Frank฀Act฀on฀OG&E฀cannot฀be฀
fully฀determined฀at฀this฀time฀due฀to฀uncertainty฀over฀forthcoming฀
regulations฀and฀potential฀changes฀to฀the฀derivatives฀markets฀arising฀
from฀new฀regulatory฀requirements.฀
Future Sources of Financing
Management฀expects฀that฀cash฀generated฀from฀operations,฀proceeds฀
from฀the฀issuance฀of฀long฀and฀short-term฀debt,฀proceeds฀from฀other฀
offerings฀and฀distributions฀from฀Enable฀will฀be฀adequate฀over฀the฀next฀
three฀years฀to฀meet฀anticipated฀cash฀needs฀and฀to฀fund฀future฀growth฀
opportunities.฀The฀Company฀utilizes฀short-term฀borrowings฀(through฀฀
a฀combination฀of฀bank฀borrowings฀and฀commercial฀paper)฀to฀satisfy฀
temporary฀working฀capital฀needs฀and฀as฀an฀interim฀source฀of฀financing
capital฀expenditures฀until฀permanent฀financing฀is฀ar anged.
Short-Term Debt and Credit Facilities
Short-term฀borrowings฀generally฀are฀used฀to฀meet฀working฀capital฀
requirements.฀The฀Company฀borrows฀on฀a฀short-term฀basis,฀as฀
necessary,฀by฀the฀issuance฀of฀commercial฀paper฀and฀by฀borrowings฀
under฀its฀revolving฀credit฀agreement.฀The฀Company฀has฀revolving฀฀
credit฀facilities฀totaling฀in฀the฀aggregate฀$1,150.0฀million.฀These฀bank฀
facilities฀can฀also฀be฀used฀as฀letter฀of฀credit฀facilities.฀Short-term฀debt฀
had฀no฀balance฀at฀December฀31,฀2015฀compared฀to฀a฀balance฀of฀
$98.0฀million฀at฀December฀31,฀2014.฀The฀average฀balance฀of฀short-term฀
debt฀in฀2015฀was฀$75.2฀million฀at฀a฀weighted-average฀interest฀rate฀of฀
0.46฀percent.฀The฀maximum฀month-end฀balance฀of฀short-term฀debt฀in฀
2015฀was฀$180.0฀million.฀At฀December฀31,฀2015,฀the฀Company฀had฀
$1,148.1฀million฀of฀net฀available฀liquidity฀under฀its฀revolving฀credit฀
agreements.฀OG&E฀has฀the฀necessary฀regulatory฀approvals฀to฀incur฀฀
up฀to฀$800.0฀million฀in฀short-term฀borrowings฀at฀any฀one฀time฀for฀a฀
two-year฀period฀beginning฀January฀1,฀2015฀and฀ending฀December฀31,฀
2016.฀At฀December฀31,฀2015,฀the฀Company฀had฀$75.2฀million฀in฀cash฀
and฀cash฀equivalents.฀See฀Note฀11฀of฀Notes฀to฀Consolidated฀Financial฀
Statements฀for฀a฀discussion฀of฀the฀Company’s฀short-term฀debt฀activity.
In฀December฀2011,฀the฀Company฀and฀OG&E฀entered฀into฀unsecured฀
fi e-year฀revolving฀credit฀agreements฀to฀total฀in฀the฀aggregate฀
$1,150.0฀million฀($750.0฀million฀for฀the฀Company฀and฀$400.0฀million฀for฀
OG&E).฀Each฀of฀the฀credit฀facilities฀contained฀an฀option,฀which฀could฀be฀
exercised฀up฀to฀two฀times,฀to฀extend฀the฀term฀for฀an฀additional฀year.฀In฀
the฀third฀quarter฀of฀2013,฀the฀Company฀and฀OG&E฀utilized฀one฀of฀these฀
one-year฀extensions,฀and฀received฀consent฀from฀all฀of฀the฀lenders,฀to฀
extend฀the฀maturity฀of฀their฀credit฀agreements฀from฀December฀13,฀2016฀
to฀December฀13,฀2017.฀In฀the฀second฀quarter฀of฀2014,฀the฀Company฀
and฀OG&E฀utilized฀their฀second฀extension฀to฀extend฀the฀maturity฀of฀their฀
respective฀credit฀facility฀from฀December฀13,฀2017฀to฀December฀13,฀
2018.฀As฀of฀December฀31,฀2015,฀commitments฀of฀approximately฀
$16.3฀million฀and฀$8.7฀million฀of฀the฀Company’s฀and฀OG&E’s฀credit฀
facilities,฀respectively,฀however,฀were฀not฀extended฀and,฀unless฀the฀
non-extending฀lender฀is฀replaced฀in฀accordance฀with฀the฀terms฀of฀the฀
credit฀facility,฀such฀commitments฀will฀expire฀December฀13,฀2017.