OG&E 2015 Annual Report Download - page 26

OGE Energy Corp. 49
Level฀2฀inputs฀are฀inputs฀other฀than฀quoted฀prices฀in฀active฀markets฀
included฀within฀Level฀1฀that฀are฀either฀directly฀or฀indirectly฀observable฀
at฀the฀reporting฀date฀for฀the฀asset฀or฀liability฀for฀substantially฀the฀full฀
term฀of฀the฀asset฀or฀liability.฀Level฀2฀inputs฀include฀quoted฀prices฀for฀
similar฀assets฀or฀liabilities฀in฀active฀markets฀and฀quoted฀prices฀for฀
identical฀or฀similar฀assets฀or฀liabilities฀in฀markets฀that฀are฀not฀active.฀
Level฀3฀inputs฀are฀prices฀or฀valuation฀techniques฀for฀the฀asset฀or฀
liability฀that฀require฀inputs฀that฀are฀both฀significant฀to฀the฀ air฀value฀
measurement฀and฀unobservable฀(i.e.,฀supported฀by฀little฀or฀no฀market฀
activity).฀Unobservable฀inputs฀reflect฀the฀repo ting฀entity’s฀own฀
assumptions฀about฀the฀assumptions฀that฀market฀participants฀would฀฀
use฀in฀pricing฀the฀asset฀or฀liability฀(including฀assumptions฀about฀risk).
The฀Company฀had฀no฀financial฀inst uments฀measured฀at฀fair฀value฀
on฀a฀recurring฀basis฀at฀December฀31,฀2015฀and฀2014,฀except฀for฀
long-term฀debt฀which฀is฀valued฀at฀the฀carrying฀amount.฀The฀fair฀value฀฀
of฀the฀Company’s฀long-term฀debt฀is฀based฀on฀quoted฀market฀prices฀฀
and฀estimates฀of฀current฀rates฀available฀for฀similar฀issues฀with฀similar฀
maturities฀and฀is฀classified฀as฀L vel฀2฀in฀the฀fair฀value฀hierarchy฀with฀
the฀exception฀of฀the฀Tinker฀Debt฀which฀fair฀value฀was฀based฀on฀
calculating฀the฀net฀present฀value฀of฀the฀monthly฀payments฀discounted฀
by฀the฀Company’s฀current฀borrowing฀rate฀and฀is฀classified฀as฀L vel฀3฀in฀
the฀fair฀value฀hierarchy.฀The฀Company’s฀long-term฀debt฀is฀recorded฀at฀
the฀carrying฀amount.฀The฀following฀table฀summarizes฀the฀fair฀value฀and฀
carrying฀amount฀of฀the฀Company’s฀long-term฀debt฀at฀December฀31,฀
2015฀and฀2014.฀
฀2015฀ 2014
฀Carrying Fair฀ Carrying฀ Fair
December฀31฀(In฀millions)฀Amount Value฀ Amount฀ Value
Long-Term฀Debt฀
OG&E฀Senior฀Notes฀ $2,510.2 $2,754.6฀ $2,509.7฀ $2,957.7
OG&E฀Industrial฀฀
฀ Authority฀Bonds฀ 135.4 135.4฀ 135.4฀ 135.4
OG&E฀Tinker฀Debt฀ 10.0 9.2฀ 10.2฀ 10.3
OGE฀Energy฀Senior฀Notes฀ 100.0 99.9฀ 100.0฀ 99.9
5. Derivative Instruments and Hedging Activities
The฀Company฀is฀exposed฀to฀certain฀risks฀relating฀to฀its฀ongoing฀
business฀operations.฀The฀primary฀risk฀managed฀using฀derivatives฀
instruments฀is฀interest฀rate฀risk.฀The฀Company฀is฀also฀exposed฀to฀฀
credit฀risk฀in฀its฀business฀operations.฀
Interest Rate Risk
The฀Company’s฀exposure฀to฀changes฀in฀interest฀rates฀primarily฀relates฀
to฀short-term฀variable-rate฀debt฀and฀commercial฀paper.฀The฀Company฀
manages฀its฀interest฀rate฀exposure฀by฀monitoring฀and฀limiting฀the฀
effects฀of฀market฀changes฀in฀interest฀rates.฀The฀Company฀may฀utilize฀
interest฀rate฀derivatives฀to฀alter฀interest฀rate฀exposure฀in฀an฀attempt฀to฀
reduce฀the฀effects฀of฀these฀changes.฀Interest฀rate฀derivatives฀are฀used฀
solely฀to฀modify฀interest฀rate฀exposure฀and฀not฀to฀modify฀the฀overall฀
leverage฀of฀the฀debt฀portfolio.฀
฀
Credit Risk
The฀Company฀is฀exposed฀to฀certain฀credit฀risks฀relating฀to฀its฀ongoing฀
business฀operations.฀Credit฀risk฀includes฀the฀risk฀that฀counterparties฀
who฀owe฀the฀Company฀money฀or฀energy฀will฀breach฀their฀obligations.฀If฀
the฀counterparties฀to฀these฀arrangements฀fail฀to฀perform,฀the฀Company฀
may฀be฀forced฀to฀enter฀into฀alternative฀arrangements.฀In฀that฀event,฀the฀
Company’s฀financial฀results฀could฀be฀ad ersely฀affected฀and฀the฀
Company฀could฀incur฀losses.฀
Income Statement Presentation Related to Derivative Instruments
The฀Company฀had฀no฀derivative฀instruments฀included฀in฀its฀
Consolidated฀Statements฀of฀Income฀in฀2015฀or฀2014.฀The฀following฀
tables฀present฀the฀effect฀of฀derivative฀instruments฀on฀the฀Company’s฀
Consolidated฀Statements฀of฀Income฀in฀2013.
Derivatives in Cash Flow Hedging Relationships
฀ ฀ Amount
฀ Amount฀ Reclassified฀fro
฀ Recognized฀ Accumulated฀Other
฀ in฀Other฀ Comprehensive฀ Amount
฀ Comprehensive฀ Income฀(Loss)฀ Recognized
(In฀millions)฀ Income฀ into฀Income฀ in฀Income
Natural฀Gas฀Financial฀฀
฀ Futures/Swaps฀ $(0.2)฀ $฀ 5.2฀ $—
Interest฀Rate฀Swap฀ —฀ (0.2)฀ —
฀ Total฀ $(0.2)฀ $฀ 5.0฀ $—
Derivatives Not Designated as Hedging Instruments
฀ Amount฀Recognized฀
(In฀millions)฀ in฀Income
Natural฀Gas฀Physical฀Purchases/Sales฀ $(6.1)
Natural฀Gas฀Financial฀Futures/Swaps฀ 1.0
฀ Total฀ $(5.1)
6. Stock-Based Compensation
In฀2013,฀the฀Company฀adopted,฀and฀its฀shareholders฀approved,฀the฀
Stock฀Incentive฀Plan.฀The฀Stock฀Incentive฀Plan฀replaced฀the฀2008฀Plan฀
and฀no฀further฀awards฀will฀be฀granted฀under฀the฀2008฀Plan.฀Under฀the฀
Stock฀Incentive฀Plan,฀restricted฀stock,฀restricted฀stock฀units,฀stock฀
options,฀stock฀appreciation฀rights฀and฀performance฀units฀may฀be฀
granted฀to฀officer ,฀directors฀and฀other฀key฀employees฀of฀the฀Company฀
and฀its฀subsidiaries.฀The฀Company฀has฀authorized฀the฀issuance฀of฀up฀
to฀7,400,000฀shares฀under฀the฀Stock฀Incentive฀Plan.
The฀following฀table฀summarizes฀the฀Company’s฀pre-tax฀
compensation฀expense฀and฀related฀income฀tax฀benefit฀ or฀the฀years฀
ended฀December฀31,฀2015,฀2014฀and฀2013฀related฀to฀the฀Company’s฀
performance฀units฀and฀restricted฀stock.
Year฀ended฀December฀31฀(In฀millions)฀2015฀ 2014฀ 2013
Performance฀units฀
Total฀shareholder฀return฀ $ 7.6 ฀ $฀ 8.3฀ $฀ 8.4
Earnings฀per฀share฀ 0.7฀ 3.7฀ 2.3
Total฀performance฀units฀ 8.3฀ 12.0฀ 10.7
Restricted฀stock฀ 0.1฀ —฀ 0.4
Total฀compensation฀expense฀ 8.4฀ 12.0฀ 11.1
Less:฀Amount฀paid฀by฀฀
฀ unconsolidated฀affiliate ฀ 0.5฀ 3.6฀ 3.1
Net฀compensation฀expense฀ $ 7.9 ฀ $฀ 8.4฀ $฀ 8.0
Income฀tax฀benefi ฀ $ 3.1 ฀ $฀ 3.3฀ $฀ 3.1
The฀Company฀has฀issued฀new฀shares฀to฀satisfy฀stock฀option฀
exercises,฀restricted฀stock฀grants฀and฀payouts฀of฀earned฀performance฀
units.฀In฀2015,฀2014฀and฀2013,฀there฀were฀82,046฀shares,฀
494,637฀shares฀and฀548,344฀shares,฀respectively,฀of฀new฀common฀
stock฀issued฀pursuant฀to฀the฀Company’s฀Stock฀Incentive฀Plan฀related฀to฀
exercised฀stock฀options,฀restricted฀stock฀grants฀(net฀of฀forfeitures)฀and฀
payouts฀of฀earned฀performance฀units.฀In฀2015,฀there฀were฀1,070฀shares฀
of฀restricted฀stock฀returned฀to฀the฀Company฀to฀satisfy฀tax฀liabilities.
48 OGE Energy Corp.
when฀OG&E’s฀pipeline฀receipts฀exceed฀Enable’s฀deliveries.฀The฀
following฀table฀summarizes฀related฀party฀transactions฀between฀OG&E฀
and฀Enable฀during฀the฀years฀ended฀December฀31,฀2015,฀2014฀and฀the฀
eight฀months฀ended฀December฀31,฀2013.
฀Year Ended December 31,
(In฀millions)฀2015฀ 2014฀ 2013
Operating฀Revenues:
฀ Electricity฀to฀power฀electric฀฀
฀ compression฀assets฀ $13.8฀ $13.3฀ $฀ 7.7
Cost฀of฀Sales:
Natural฀gas฀transportation฀services฀ $35.0฀ $34.9฀ $23.2
Natural฀gas฀storage฀services฀ —฀ 4.4฀ 8.6
Natural฀gas฀purchases฀(sales)฀ 7.6฀ 8.7฀ 14.8
Summarized Financial Information of Enable
Summarized฀unaudited฀financial฀in ormation฀for฀100฀percent฀of฀Enable฀
is฀presented฀below฀for฀the฀years฀ended฀December฀31,฀2015฀and฀2014฀
and฀for฀the฀eight฀months฀ended฀December฀31,฀2013.฀
Balance Sheet฀Year Ended December 31,
(In฀millions)฀2015฀ 2014
Current฀assets฀ $ 381฀ $฀ ฀ ฀438
Non-current฀assets฀ 10,857฀ 11,399
Current฀liabilities฀ 615฀ 671
Non-current฀liabilities฀ 3,092฀ 2,344
Income Statement฀Year Ended December 31,
(In฀millions)฀2015฀ 2014฀ 2013
Operating฀revenues฀ $2,418฀ $3,367฀ $2,123
Cost฀of฀natural฀gas฀and฀฀
฀ natural฀gas฀liquids฀ 1,097฀ 1,914฀ 1,241
Operating฀income฀(loss)฀ (712)฀ 586฀ 322
Net฀income฀(loss)฀ (752)฀ 530฀ 289
The฀formation฀of฀Enable฀was฀considered฀a฀business฀combination,฀
and฀CenterPoint฀was฀the฀acquirer฀of฀Enogex฀Holdings฀for฀accounting฀
purposes.฀Under฀this฀method,฀the฀fair฀value฀of฀the฀consideration฀paid฀
by฀CenterPoint฀for฀Enogex฀Holdings฀is฀allocated฀to฀the฀assets฀acquired฀
and฀liabilities฀assumed฀on฀May฀1,฀2013฀based฀on฀their฀fair฀value.฀
Enogex฀Holdings’฀assets,฀liabilities฀and฀equity฀have฀accordingly฀been฀
adjusted฀to฀estimated฀fair฀value฀as฀of฀May฀1,฀2013,฀resulting฀in฀an฀
increase฀to฀Enable’s฀equity฀of฀$2.2฀billion.฀Due฀to฀the฀contribution฀of฀
Enogex฀LLC฀to฀Enable฀meeting฀the฀requirements฀of฀being฀in฀substance฀
real฀estate฀and฀the฀recording฀the฀initial฀investment฀at฀historical฀cost,฀฀
the฀effects฀of฀the฀amortization฀and฀depreciation฀expense฀associated฀
with฀the฀fair฀value฀adjustments฀on฀Enable’s฀results฀of฀operations฀have฀
been฀eliminated฀in฀the฀Company’s฀recording฀of฀its฀equity฀in฀earnings฀฀
of฀Enable.
The฀Company฀recorded฀equity฀in฀earnings฀of฀unconsolidated฀
affiliates฀of฀$15.5฀million฀and฀$172.6฀million฀ or฀the฀years฀ended฀
December฀31,฀2015฀and฀2014,฀respectively.฀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,฀as฀described฀above.
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.
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
Enable฀tests฀its฀goodwill฀for฀impairment฀annually฀on฀October฀1,฀or฀
more฀frequently฀if฀events฀or฀changes฀in฀circumstances฀indicate฀that฀฀
the฀carrying฀value฀of฀goodwill฀may฀not฀be฀recoverable.฀Goodwill฀is฀
assessed฀for฀impairment฀by฀comparing฀the฀fair฀value฀of฀the฀reporting฀
unit฀with฀its฀book฀value,฀including฀goodwill.฀Subsequent฀to฀the฀
completion฀of฀the฀October฀1,฀2014฀annual฀goodwill฀impairment฀test฀and฀
previous฀interim฀assessment฀as฀of฀December฀31,฀2014,฀the฀crude฀oil฀
and฀natural฀gas฀industry฀was฀impacted฀by฀further฀commodity฀price฀
declines,฀which฀consequently฀resulted฀in฀decreased฀producer฀activity฀฀
in฀certain฀regions฀in฀which฀Enable฀operates.฀Based฀on฀the฀decline฀in฀
producer฀activity฀and฀the฀forecasted฀impact฀on฀future฀periods,฀in฀
addition฀to฀an฀increase฀in฀the฀weighted฀average฀cost฀of฀capital,฀Enable฀
determined฀that฀the฀impact฀on฀its฀forecasted฀operating฀profits฀and฀cash
fl ws฀for฀its฀gathering฀and฀processing฀and฀transportation฀and฀storage฀
segments฀for฀the฀next฀fi e฀years฀would฀be฀significantly฀reduced ฀As฀a฀
result,฀when฀Enable฀performed฀the฀first฀step฀of฀its฀an ual฀goodwill฀
impairment฀analysis฀as฀of฀October฀1,฀2015,฀it฀determined฀that฀the฀
carrying฀value฀of฀the฀gathering฀and฀processing฀and฀transportation฀and฀
storage฀segments฀exceeded฀fair฀value.฀Enable฀completed฀the฀second฀
step฀of฀the฀goodwill฀impairment฀analysis฀comparing฀the฀implied฀fair฀
value฀for฀those฀reporting฀units฀to฀the฀carrying฀amount฀of฀that฀goodwill฀
and฀determined฀that฀goodwill฀for฀those฀units฀was฀completely฀impaired฀
in฀the฀amount฀of฀$1,086.4฀million฀as฀of฀September฀30,฀2015.฀
Accordingly,฀the฀Company฀recorded฀a฀$108.4฀million฀pre-tax฀charge฀
in฀the฀third฀quarter฀of฀2015฀for฀its฀share฀of฀the฀goodwill฀impairment,฀as฀
adjusted฀for฀the฀basis฀differences.฀
4. Fair Value Measurements
The฀classification฀of฀the฀Compa y’s฀fair฀value฀measurements฀requires฀
judgment฀regarding฀the฀degree฀to฀which฀market฀data฀is฀observable฀or฀
corroborated฀by฀observable฀market฀data.฀GAAP฀establishes฀a฀fair฀value฀
hierarchy฀that฀prioritizes฀the฀inputs฀used฀to฀measure฀fair฀value฀based฀
on฀observable฀and฀unobservable฀data.฀The฀hierarchy฀categorizes฀the฀
inputs฀into฀three฀levels,฀with฀the฀highest฀priority฀given฀to฀quoted฀prices฀
in฀active฀markets฀for฀identical฀unrestricted฀assets฀or฀liabilities฀(Level฀1)฀
and฀the฀lowest฀priority฀given฀to฀unobservable฀inputs฀(Level฀3).฀Financial฀
assets฀and฀liabilities฀are฀classified฀in฀their฀entirety฀based฀on฀the฀l west฀
level฀of฀input฀that฀is฀significant฀to฀the฀ air฀value฀measurement.฀The฀
three฀levels฀defined฀in฀the฀ air฀value฀hierarchy฀are฀as฀follows:
Level฀1฀inputs฀are฀quoted฀prices฀in฀active฀markets฀for฀identical฀
unrestricted฀assets฀or฀liabilities฀that฀are฀accessible฀at฀the฀
measurement฀date.