OG&E 2015 Annual Report Download - page 15

OGE Energy Corp. 27
Environmental฀regulation฀can฀increase฀the฀cost฀of฀planning,฀design,฀
initial฀installation฀and฀operation฀of฀OG&E’s฀facilities.฀Historically,฀
OG&E’s฀total฀expenditures฀for฀environmental฀control฀facilities฀and฀for฀
remediation฀have฀not฀been฀significant฀in฀relation฀to฀its฀consolidated
financial฀position฀or฀results฀of฀ope ations.฀The฀Company฀believes,฀
however,฀that฀it฀is฀likely฀that฀the฀trend฀in฀environmental฀legislation฀฀
and฀regulations฀will฀continue฀towards฀more฀restrictive฀standards.฀
Compliance฀with฀these฀standards฀is฀expected฀to฀increase฀the฀cost฀฀
of฀conducting฀business.฀Management฀continues฀to฀evaluate฀its฀
compliance฀with฀existing฀and฀proposed฀environmental฀legislation฀and฀
regulations฀and฀implement฀appropriate฀environmental฀programs฀in฀a฀
competitive฀market.฀
OG&E฀expects฀that฀environmental฀expenditures฀necessary฀to฀comply฀
with฀the฀environmental฀laws฀and฀regulations฀discussed฀below฀will฀
qualify฀as฀part฀of฀a฀pre-approval฀plan฀to฀handle฀state฀and฀Federally฀
mandated฀environmental฀upgrades฀which฀will฀be฀recoverable฀in฀
Oklahoma฀from฀OG&E’s฀retail฀customers฀under฀House฀Bill฀1910,฀฀
which฀was฀enacted฀into฀law฀in฀May฀2005.
It฀is฀estimated฀that฀OG&E’s฀total฀expenditures฀to฀comply฀with฀
environmental฀laws,฀regulations฀and฀requirements฀for฀2016฀will฀be฀
$195.9฀million,฀of฀which฀$178.3฀million฀is฀for฀capital฀expenditures.฀It฀is฀
estimated฀that฀OG&E’s฀total฀expenditures฀to฀comply฀with฀environmental฀
laws,฀regulations฀and฀requirements฀for฀2017฀will฀be฀approximately฀
$166.7฀million,฀of฀which฀$148.7฀million฀is฀for฀capital฀expenditures.฀฀
The฀amounts฀for฀OG&E฀above฀include฀capital฀expenditures฀for฀low฀
NOX฀burners฀and฀dry฀scrubbers.฀
Air
Federal฀Clean฀Air฀Act฀Overview
OG&E’s฀operations฀are฀subject฀to฀the฀Federal฀Clean฀Air฀Act฀as฀
amended,฀and฀comparable฀state฀laws฀and฀regulations.฀These฀laws฀and฀
regulations฀regulate฀emissions฀of฀air฀pollutants฀from฀various฀industrial฀
sources,฀including฀electric฀generating฀units,฀and฀also฀impose฀various฀
monitoring฀and฀reporting฀requirements.฀Such฀laws฀and฀regulations฀฀
may฀require฀that฀OG&E฀obtain฀pre-approval฀for฀the฀construction฀or฀
modification฀of฀ce tain฀projects฀or฀facilities฀expected฀to฀produce฀air฀
emissions฀or฀result฀in฀the฀increase฀of฀existing฀air฀emissions,฀obtain฀฀
and฀strictly฀comply฀with฀air฀permits฀containing฀various฀emissions฀and฀
operational฀limitations฀or฀install฀emission฀control฀equipment.฀OG&E฀
likely฀will฀be฀required฀to฀incur฀certain฀capital฀expenditures฀in฀the฀future฀
for฀air฀pollution฀control฀equipment฀and฀technology฀in฀connection฀฀
with฀obtaining฀and฀maintaining฀operating฀permits฀and฀approvals฀for฀฀
air฀emissions.
Regional฀Haze฀Control฀Measures
The฀EPA’s฀2005฀regional฀haze฀rule฀is฀intended฀to฀protect฀visibility฀in฀
certain฀national฀parks฀and฀wilderness฀areas฀throughout฀the฀United฀
States฀that฀may฀be฀impacted฀by฀air฀pollutant฀emissions.฀
On฀February฀18,฀2010,฀Oklahoma฀submitted฀its฀SIP฀to฀the฀EPA,฀
which฀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฀stations.฀The฀SIP฀also฀included฀a฀
waiver฀from฀BART฀requirements฀for฀all฀eligible฀units฀at฀the฀Horseshoe฀
Lake฀generating฀station฀based฀on฀air฀modeling฀that฀showed฀no฀
significant฀impact฀on฀visibility฀in฀near y฀national฀parks฀and฀wilderness฀
areas.฀The฀SIP฀concluded฀that฀BART฀for฀reducing฀NOX฀emissions฀at฀all฀
of฀the฀subject฀units฀should฀be฀the฀installation฀of฀low฀NOX฀burners฀with฀
overfired฀air฀(flue฀gas฀recirculation as฀also฀required฀on฀two฀of฀the฀
units)฀and฀set฀forth฀associated฀NOX฀emission฀rates฀and฀limits.฀
On฀December฀28,฀2011,฀the฀EPA฀issued฀a฀final฀ ule฀in฀which฀it฀
rejected฀the฀SO2฀portion฀of฀the฀Oklahoma฀SIP฀and฀issued฀a฀FIP฀in฀its฀
place.฀OG&E฀and฀the฀State฀of฀Oklahoma’s฀subsequent฀appeal฀of฀the฀
FIP฀with฀the฀Tenth฀Circuit฀of฀Appeals฀and฀the฀U.S.฀Supreme฀Court฀
ended฀on฀May฀27,฀2014฀when฀the฀Supreme฀Court฀denied฀OG&E’s฀
Petition฀for฀Certiorari,฀upholding฀the฀EPA’s฀FIP฀for฀SO2.฀The฀FIP฀
compliance฀date฀is฀now฀January฀4,฀2019.
On฀December฀9,฀2015,฀the฀EPA฀released฀a฀final฀ ule฀partially฀
disapproving฀the฀revisions฀to฀the฀2010฀Oklahoma฀SIP฀for฀Regional฀
Haze฀and฀promulgated฀FIPs฀in฀their฀place฀for฀Oklahoma฀and฀Texas.฀
The฀EPA฀disapproved฀portions฀of฀the฀Oklahoma฀SIP฀related฀to฀the฀
establishment฀of฀Reasonable฀Progress฀Goals฀for฀the฀Class฀I฀area฀
located฀within฀the฀state฀and฀promulgated฀revised฀Reasonable฀Progress฀
Goals฀based฀on฀the฀FIP฀implementation฀in฀Texas.฀As฀a฀result,฀no฀
further฀requirements฀are฀required฀in฀Oklahoma฀to฀meet฀the฀2018฀
Reasonable฀Progress฀Goals฀for฀Oklahoma.
On฀August฀6,฀2014,฀OG&E฀filed฀an฀application฀with฀the฀OCC฀ or฀
approval฀of฀its฀plan฀to฀comply฀with฀the฀EPA’s฀MATS฀and฀Regional฀Haze฀
FIP฀while฀serving฀the฀best฀long-term฀interests฀of฀customers฀in฀light฀of฀
future฀environmental฀uncertainties.฀The฀application฀seeks฀approval฀of฀
the฀environmental฀compliance฀plan฀and฀for฀a฀recovery฀mechanism฀for฀
the฀associated฀costs.฀The฀ECP฀includes฀installing฀dry฀scrubbers฀at฀
Sooner฀Units฀1฀and฀2฀and฀the฀conversion฀of฀Muskogee฀Units฀4฀and฀5฀to฀
natural฀gas.฀The฀application฀also฀asked฀the฀OCC฀to฀predetermine฀the฀
prudence฀of฀replacing฀OG&E’s฀soon-to-be฀retired฀Mustang฀steam฀
turbines฀in฀late฀2017฀with฀400฀MWs฀of฀new,฀efficient฀com ustion฀
turbines฀at฀the฀Mustang฀site฀in฀2018฀and฀2019฀and฀approval฀for฀a฀
recovery฀mechanism฀for฀the฀associated฀costs.฀OG&E฀estimates฀the฀
total฀capital฀cost฀associated฀with฀its฀environmental฀compliance฀plan฀
included฀in฀this฀application฀to฀be฀approximately฀$1.1฀billion.฀The฀OCC฀
hearing฀on฀OG&E’s฀application฀before฀an฀ALJ฀began฀on฀March฀3,฀2015฀
and฀concluded฀on฀April฀8,฀2015.฀Multiple฀parties฀advocating฀a฀variety฀of฀
positions฀intervened฀in฀the฀proceeding.฀
On฀June฀8,฀2015฀the฀ALJ฀issued฀his฀report฀on฀OG&E’s฀application.฀
While฀the฀ALJ฀in฀his฀report฀agreed฀that฀the฀installation฀of฀dry฀scrubbers฀
at฀Sooner฀Units฀1฀and฀2฀and฀the฀conversion฀of฀Muskogee฀Units฀4฀and฀5฀
to฀natural฀gas฀pursuant฀to฀OG&E’s฀ECP฀is฀the฀best฀approach,฀the฀ALJ’s฀
report฀included฀several฀recommendations.฀OG&E฀filed฀ xceptions฀to฀
the฀ALJ’s฀report฀and฀on฀July฀21,฀2015,฀Commissioner฀Bob฀Anthony฀
issued฀his฀deliberation฀statement฀that฀was฀consistent฀with฀many฀parts฀
of฀the฀ALJ’s฀report,฀including฀the฀ALJ’s฀support฀of฀OG&E’s฀ECP,฀the฀
26 OGE Energy Corp.
Asset Retirement Obligations
The฀Company฀has฀previously฀recorded฀asset฀retirement฀obligations฀
that฀are฀being฀amortized฀over฀their฀respective฀lives฀ranging฀from฀three฀
to฀74฀years.฀The฀inputs฀used฀in฀the฀valuation฀of฀asset฀retirement฀
obligations฀include฀the฀assumed฀life฀of฀the฀asset฀placed฀into฀service,฀
the฀average฀inflation฀ ate,฀market฀risk฀premium,฀the฀credit-adjusted฀risk฀
free฀interest฀rate฀and฀the฀timing฀of฀incurring฀costs฀related฀to฀the฀
retirement฀of฀the฀asset.
Regulatory Assets and Liabilities
OG&E,฀as฀a฀regulated฀utility,฀is฀subject฀to฀accounting฀principles฀for฀
certain฀types฀of฀rate-regulated฀activities,฀which฀provide฀that฀certain฀
incurred฀costs฀that฀would฀otherwise฀be฀charged฀to฀expense฀can฀be฀
deferred฀as฀regulatory฀assets,฀based฀on฀the฀expected฀recovery฀from฀
customers฀in฀future฀rates.฀Likewise,฀certain฀actual฀or฀anticipated฀credits฀
that฀would฀otherwise฀reduce฀expense฀can฀be฀deferred฀as฀regulatory฀
liabilities,฀based฀on฀the฀expected฀fl wback฀to฀customers฀in฀future฀rates.฀
Management’s฀expected฀recovery฀of฀deferred฀costs฀and฀fl wback฀of฀
deferred฀credits฀generally฀results฀from฀specific฀decisions฀ y฀regulators฀
granting฀such฀ratemaking฀treatment.
OG&E฀records฀certain฀incurred฀costs฀and฀obligations฀as฀regulatory฀
assets฀or฀liabilities฀if,฀based฀on฀regulatory฀orders฀or฀other฀available฀
evidence,฀it฀is฀probable฀that฀the฀costs฀or฀obligations฀will฀be฀included฀in฀
amounts฀allowable฀for฀recovery฀or฀refund฀in฀future฀rates.฀The฀benefit
obligations฀regulatory฀asset฀is฀comprised฀of฀expenses฀recorded฀which฀
are฀probable฀of฀future฀recovery฀and฀that฀have฀not฀yet฀been฀recognized฀
as฀components฀of฀net฀periodic฀benefit฀cost,฀including฀net฀loss฀and฀p ior฀
service฀cost.฀
Unbilled Revenues
OG&E฀recognizes฀revenue฀from฀electric฀sales฀when฀power฀is฀delivered฀
to฀customers.฀OG&E฀reads฀its฀customers’฀meters฀and฀sends฀bills฀to฀its฀
customers฀throughout฀each฀month.฀As฀a฀result,฀there฀is฀a฀significant
amount฀of฀customers’฀electricity฀consumption฀that฀has฀not฀been฀billed฀
at฀the฀end฀of฀each฀month.฀OG&E฀accrues฀an฀estimate฀of฀the฀revenues฀
for฀electric฀sales฀delivered฀since฀the฀latest฀billings.฀Unbilled฀revenue฀is฀
presented฀in฀Accrued฀Unbilled฀Revenues฀on฀the฀Consolidated฀Balance฀
Sheets฀and฀in฀Operating฀Revenues฀on฀the฀Consolidated฀Statements฀฀
of฀Income฀based฀on฀estimates฀of฀usage฀and฀prices฀during฀the฀period.฀฀
At฀December฀31,฀2015,฀if฀the฀estimated฀usage฀or฀price฀used฀in฀
the฀unbilled฀revenue฀calculation฀were฀to฀increase฀or฀decrease฀by฀
one฀percent,฀this฀would฀cause฀a฀change฀in฀the฀unbilled฀revenues฀
recognized฀of฀$0.3฀million.฀At฀December฀31,฀2015฀and฀2014,฀Accrued฀
Unbilled฀Revenues฀were฀$53.5฀million฀and฀$55.5฀million,฀respectively.฀
The฀estimates฀that฀management฀uses฀in฀this฀calculation฀could฀vary฀
from฀the฀actual฀amounts฀to฀be฀paid฀by฀customers.
Allowance for Uncollectible Accounts Receivable
Customer฀balances฀are฀generally฀written฀off฀if฀not฀collected฀within฀฀
six฀months฀after฀the฀final฀billing฀dat .฀The฀allowance฀for฀uncollectible฀
accounts฀receivable฀for฀OG&E฀is฀calculated฀by฀multiplying฀the฀last฀฀
six฀months฀of฀electric฀revenue฀by฀the฀provision฀rate.฀The฀provision฀rate฀
is฀based฀on฀a฀12-month฀historical฀average฀of฀actual฀balances฀written฀
off.฀To฀the฀extent฀the฀historical฀collection฀rates฀are฀not฀representative฀฀
of฀future฀collections,฀there฀could฀be฀an฀effect฀on฀the฀amount฀of฀
uncollectible฀expense฀recognized.฀Also,฀a฀portion฀of฀the฀uncollectible฀
provision฀related฀to฀fuel฀within฀the฀Oklahoma฀jurisdiction฀is฀being฀
recovered฀through฀the฀fuel฀adjustment฀clause.฀At฀December฀31,฀2015,฀
if฀the฀provision฀rate฀were฀to฀increase฀or฀decrease฀by฀10฀percent,฀this฀
would฀cause฀a฀change฀in฀the฀uncollectible฀expense฀recognized฀of฀
$0.1฀million.฀The฀allowance฀for฀uncollectible฀accounts฀receivable฀is฀a฀
reduction฀to฀Accounts฀Receivable฀on฀the฀Consolidated฀Balance฀Sheets฀
and฀is฀included฀in฀the฀Other฀Operation฀and฀Maintenance฀Expense฀฀
on฀the฀Consolidated฀Statements฀of฀Income.฀The฀allowance฀for฀
uncollectible฀accounts฀receivable฀was฀$1.4฀million฀and฀$1.6฀million฀฀
at฀December฀31,฀2015฀and฀2014,฀respectively.฀
Accounting Pronouncements
See฀Note฀2฀of฀Notes฀to฀Consolidated฀Financial฀Statements฀for฀
discussion฀of฀current฀accounting฀pronouncements฀that฀are฀applicable฀
to฀the฀Company.
Commitments and Contingencies
In฀the฀normal฀course฀of฀business,฀the฀Company฀is฀confronted฀with฀
issues฀or฀events฀that฀may฀result฀in฀a฀contingent฀liability.฀These฀฀
generally฀relate฀to฀lawsuits฀or฀claims฀made฀by฀third฀parties,฀including฀
governmental฀agencies.฀When฀appropriate,฀management฀consults฀with฀
legal฀counsel฀and฀other฀experts฀to฀assess฀the฀claim.฀If,฀in฀management’s฀
opinion,฀the฀Company฀has฀incurred฀a฀probable฀loss฀as฀set฀forth฀by฀
GAAP,฀an฀estimate฀is฀made฀of฀the฀loss฀and฀the฀appropriate฀accounting฀
entries฀are฀reflected฀in฀the฀Compa y’s฀Consolidated฀Financial฀
Statements.฀At฀the฀present฀time,฀based฀on฀available฀information,฀the฀
Company฀believes฀that฀any฀reasonably฀possible฀losses฀in฀excess฀of฀
accrued฀amounts฀arising฀out฀of฀pending฀or฀threatened฀lawsuits฀or฀
claims฀would฀not฀be฀quantitatively฀material฀to฀its฀financial฀statement ฀
and฀would฀not฀have฀a฀material฀adverse฀effect฀on฀the฀Company’s฀
consolidated฀financial฀position,฀results฀of฀ope ations฀or฀cash฀fl ws.฀฀
See฀Notes฀14฀and฀15฀of฀Notes฀to฀Consolidated฀Financial฀Statements฀฀
for฀a฀discussion฀of฀the฀Company’s฀commitments฀and฀contingencies.
Environmental Laws and Regulations
The฀activities฀of฀the฀Company฀are฀subject฀to฀numerous฀stringent฀and฀
complex฀Federal,฀state฀and฀local฀laws฀and฀regulations฀governing฀
environmental฀protection.฀These฀laws฀and฀regulations฀can฀change,฀
restrict฀or฀otherwise฀impact฀OG&E’s฀business฀activities฀in฀many฀ways฀
including฀the฀handling฀or฀disposal฀of฀waste฀material,฀future฀construction฀
activities฀to฀avoid฀or฀mitigate฀harm฀to฀threatened฀or฀endangered฀
species฀and฀requiring฀the฀installation฀and฀operation฀of฀emissions฀
pollution฀control฀equipment.฀Failure฀to฀comply฀with฀these฀laws฀and฀
regulations฀could฀result฀in฀the฀assessment฀of฀administrative,฀civil฀and฀
criminal฀penalties,฀the฀imposition฀of฀remedial฀requirements฀and฀the฀
issuance฀of฀orders฀enjoining฀future฀operations.฀OG&E฀believes฀that฀its฀
operations฀are฀in฀substantial฀compliance฀with฀current฀Federal,฀state฀
and฀local฀environmental฀standards.฀