OG&E 2015 Annual Report Download - page 9

OGE Energy Corp. 15
2015 compared to 2014. OG&E’s฀net฀income฀decreased฀$23.1฀million,฀
or฀7.9฀percent,฀in฀2015฀as฀compared฀to฀2014฀primarily฀due฀to฀higher฀
depreciation฀expense฀and฀lower฀gross฀margin฀partially฀offset฀by฀higher฀
other฀income฀and฀an฀increase฀in฀allowance฀for฀equity฀funds฀used฀in฀
construction.
Gross฀Margin
Operating฀revenues฀were฀$2,196.9฀million฀in฀2015฀as฀compared฀to฀
$2,453.1฀million฀in฀2014,฀a฀decrease฀of฀$256.2฀million,฀or฀10.4฀percent.฀
Cost฀of฀sales฀were฀$865.0฀million฀in฀2015฀as฀compared฀to฀
$1,106.6฀million฀in฀2014,฀a฀decrease฀of฀$241.6฀million,฀or฀21.8฀percent.฀
Gross฀margin฀was฀$1,331.9฀million฀in฀2015฀as฀compared฀to฀
$1,346.5฀million฀in฀2014,฀a฀decrease฀of฀$14.6฀million,฀or฀1.1฀percent.฀
The฀below฀factors฀contributed฀to฀the฀change฀in฀gross฀margin:฀
(In฀millions)฀ $฀Change
Quantity฀variance฀(primarily฀weather)฀(A)฀ $(25.8)
Wholesale฀transmission฀revenue฀(B)฀ (19.8)
Expiration฀of฀AVEC฀contract฀(C)฀ (11.5)
Industrial฀and฀oilfield฀sale ฀ (4.5)
Other฀ 2.1
Non-residential฀demand฀and฀related฀revenues฀ 3.7
Price฀variance฀(D)฀ 19.8
New฀customer฀growth฀ 21.4
฀ Change฀in฀gross฀margin฀ $(14.6)
(A)฀฀The฀overall฀cooling฀degree฀days฀decreased฀two฀percent฀in฀2015฀compared฀to฀2014฀
with฀August฀decreasing฀by฀14฀percent.฀
(B)฀฀Decreased฀primarily฀due฀to฀a฀true฀up฀for฀the฀base฀plan฀projects฀in฀the฀SPP฀formula฀
rate฀for฀2014฀and฀2015฀as฀well฀as฀a฀reduction฀in฀the฀point-to-point฀credits฀shared฀with฀
retail฀customers.฀
(C)฀฀On฀June฀30,฀2015,฀the฀wholesale฀power฀contract฀with฀AVEC฀expired.฀
(D)฀฀Increased฀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฀$458.5฀million฀in฀2015฀as฀compared฀to฀$627.5฀million฀in฀2014,฀฀
a฀decrease฀of฀$169.0฀million,฀or฀26.9฀percent,฀primarily฀due฀to฀lower฀
natural฀gas฀prices฀offset฀by฀higher฀natural฀gas฀used฀as฀well฀as฀less฀
coal฀burned฀offset฀by฀higher฀coal฀prices.฀In฀2015,฀OG&E’s฀fuel฀mix฀was฀
49.0฀percent฀coal,฀44.0฀percent฀natural฀gas฀and฀seven฀percent฀wind.฀฀
In฀2014,฀OG&E’s฀fuel฀mix฀was฀61.0฀percent฀coal,฀32.0฀percent฀natural฀
gas฀and฀seven฀percent฀wind.฀Purchased฀power฀costs฀were฀$362.6฀million฀
in฀2015฀as฀compared฀to฀$444.1฀million฀in฀2014,฀a฀decrease฀of฀
$81.5฀million,฀or฀18.4฀percent,฀primarily฀due฀to฀a฀decrease฀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฀$43.9฀million฀in฀2015฀as฀compared฀to฀
$35.0฀million฀in฀2014,฀an฀increase฀of฀$8.9฀million,฀or฀25.4฀percent,฀
primarily฀due฀to฀higher฀SPP฀charges฀for฀the฀base฀plan฀projects฀of฀
other฀utilities.
The฀actual฀cost฀of฀fuel฀used฀in฀electric฀generation฀and฀certain฀
purchased฀power฀costs฀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฀affiliat ,฀Enable.
Operating฀Expenses
Other฀operation฀and฀maintenance฀expenses฀were฀$444.5฀million฀฀
in฀2015฀as฀compared฀to฀$453.2฀million฀in฀2014,฀a฀decrease฀of฀
$8.7฀million,฀or฀1.9฀percent.฀The฀below฀factors฀contributed฀to฀the฀
change฀in฀other฀operations฀and฀maintenance฀expense:
(In฀millions)฀ $฀Change
Additional฀capitalized฀labor฀(A)฀ $(9.2)
Maintenance฀at฀power฀plants฀(B)฀ (7.0)
Professional฀service฀contracts฀(C)฀ (2.1)
Other฀ (1.0)
Employee฀benefit ฀(D)฀ 1.0
Other฀marketing,฀sales฀and฀commercial฀(E)฀ 2.8
Salaries฀and฀wages฀(F)฀ 6.8
฀ Change฀in฀other฀operation฀and฀maintenance฀expense฀ $(8.7)
(A)฀฀Decreased฀primarily฀due฀to฀more฀capital฀projects฀and฀storm฀costs฀exceeding฀the฀
$2.7฀million฀threshold,฀which฀were฀moved฀to฀a฀regulatory฀asset.฀
(B)฀฀Decreased฀primarily฀due฀to฀less฀work฀at฀the฀power฀plants.฀
(C)฀฀Decreased฀primarily฀due฀to฀decreased฀engineering฀services.
(D)฀฀Increased฀primarily฀due฀to฀higher฀medical฀costs฀incurred฀partially฀offset฀by฀lower฀
pension฀costs.
(E)฀฀Increased฀primarily฀due฀to฀higher฀demand฀side฀management฀customer฀payments.฀
(F)฀฀Increased฀primarily฀due฀to฀annual฀salary฀increases฀and฀increased฀overtime฀related฀฀
to฀storms.
Depreciation฀and฀amortization฀expense฀was฀$299.9฀million฀in฀2015฀
as฀compared฀to฀$270.8฀million฀in฀2014,฀an฀increase฀of฀$29.1฀million,฀or฀
10.7฀percent,฀primarily฀due฀to฀additional฀assets฀being฀placed฀in฀service,฀
along฀with฀an฀increase฀resulting฀from฀the฀amortization฀of฀deferred฀
pension฀credits฀and฀post-retirement฀medical฀regulatory฀liabilities฀฀
which฀were฀fully฀amortized฀in฀July฀2014฀and฀amortization฀of฀deferred฀
storm฀costs.฀
Additional฀Information
Allowance฀for฀Equity฀Funds฀Used฀During฀Construction.฀Allowance฀for฀
equity฀funds฀used฀during฀construction฀was฀$8.3฀million฀in฀2015฀as฀
compared฀to฀$4.2฀million฀in฀2014,฀an฀increase฀of฀$4.1฀million฀or฀
97.6฀percent,฀primarily฀due฀to฀higher฀construction฀work฀in฀progress฀
balances฀resulting฀from฀increased฀spending฀for฀environmental฀projects.฀
Other฀Income.฀Other฀income฀was฀$13.3฀million฀in฀2015฀as฀compared฀
to฀$4.8฀million฀in฀2014,฀an฀increase฀of฀$8.5฀million,฀primarily฀due฀to฀
increased฀guaranteed฀flat฀bill฀margins฀and฀an฀increase฀in฀the฀tax฀ ross฀
up฀related฀to฀higher฀allowance฀for฀funds฀used฀during฀construction.฀
Income฀Tax฀Expense.฀Income฀tax฀expense฀was฀$104.8฀million฀in฀
2015฀as฀compared฀to฀$111.6฀million฀in฀2014,฀a฀decrease฀of฀
$6.8฀million,฀or฀6.1฀percent,฀primarily฀due฀to฀lower฀pretax฀income฀
partially฀offset฀by฀a฀reduction฀in฀Federal฀tax฀credits.
฀
14 OGE Energy Corp.
Reconciliation of Gross Margin to Revenue
Year฀Ended฀December฀31,฀(Dollars฀in฀millions)฀ 2016(A)
฀ Operating฀revenues฀ $2,162
฀ Cost฀of฀sales฀ 752
Gross฀Margin฀ $1,410
(A)฀ ฀Based฀on฀the฀midpoint฀of฀OG&E฀earnings฀guidance฀for฀2016.
Results of Operations
The฀following฀discussion฀and฀analysis฀presents฀factors฀that฀affected฀฀
the฀Company’s฀consolidated฀results฀of฀operations฀for฀the฀years฀ended฀
December฀31,฀2015,฀2014฀and฀2013฀and฀the฀Company’s฀consolidated฀
financial฀position฀at฀December฀31,฀2015฀and฀2014 ฀The฀following฀
information฀should฀be฀read฀in฀conjunction฀with฀the฀Consolidated฀
Financial฀Statements฀and฀Notes฀thereto.฀Known฀trends฀and฀
contingencies฀of฀a฀material฀nature฀are฀discussed฀to฀the฀extent฀
considered฀relevant.
Year฀ended฀December฀31฀
(In฀millions฀except฀per฀share฀data)฀2015฀ 2014฀ 2013
Net฀income฀attributable฀฀
฀ to฀OGE฀Energy฀ $ 271.3฀ $฀ ฀ 395.8฀ $฀ ฀ 387.6
Basic฀average฀common฀฀
฀ shares฀outstanding฀ 199.6฀ 199.2฀ 198.2
Diluted฀average฀common฀฀
฀ shares฀outstanding฀ 199.6฀ 199.9฀ 199.4
Basic฀earnings฀per฀average฀฀
฀ common฀share฀attributable฀฀
฀ to฀OGE฀Energy฀common฀฀
฀ shareholders฀ $ 1.36฀ $฀ ฀ ฀ 1.99฀ $฀ ฀ ฀ 1.96
Diluted฀earnings฀per฀average฀฀
฀ common฀share฀attributable฀฀
฀ to฀OGE฀Energy฀common฀฀
฀ shareholders฀ $ 1.36฀ $฀ ฀ ฀ 1.98฀ $฀ ฀ ฀ 1.94
Dividends฀declared฀฀
฀ per฀common฀share฀ $1.05000฀ $0.95000฀ $0.85125
Results by Business Segment
Year฀ended฀December฀31฀
(In฀millions)฀2015฀ 2014฀ 2013
Net฀Income฀attributable฀to฀OGE฀Energy
OG&E฀(Electric฀Utility)฀ $268.9฀ $292.0฀ $292.6
OGE฀Holdings฀(Natural฀฀
฀ Gas฀Midstream฀Operations)฀(A)฀9.4฀ 102.3฀ 99.9
Other฀Operations฀(B)฀(7.0)฀ 1.5฀ (4.9)
Consolidated฀net฀income฀฀
฀ attributable฀to฀OGE฀Energy฀ $271.3฀ $395.8฀ $387.6
(A)฀฀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.฀฀
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฀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.฀
(B)฀฀Other฀Operations฀primarily฀includes฀the฀operations฀of฀the฀holding฀company฀and฀
consolidating฀eliminations.
The฀following฀operating฀results฀analysis฀by฀business฀segment฀includes฀
intercompany฀transactions฀that฀are฀eliminated฀in฀the฀Consolidated฀
Financial฀Statements.
OG&E (Electric Utility)
Year฀ended฀December฀31฀(Dollars฀in฀millions)฀฀2015฀ 2014฀฀ 2013
Operating฀revenues฀฀ $2,196.9฀ $2,453.1฀ $2,262.2
Cost฀of฀sales฀฀ 865.0฀ 1,106.6฀ 965.9
Other฀operation฀and฀maintenance฀฀ 444.5฀ 453.2฀ 438.8
Depreciation฀and฀amortization฀฀ 299.9฀ 270.8฀ 248.4
Taxes฀other฀than฀income฀฀ 87.1฀ 84.5฀ 83.8
฀ Operating฀income฀฀ 500.4฀ 538.0฀ 525.3
Allowance฀for฀equity฀funds฀used
฀ during฀construction฀฀ 8.3฀ 4.2฀ 6.6
Other฀income฀฀ 13.3฀ 4.8฀ 8.1
Other฀expense฀฀ 1.6฀ 1.9฀ 4.6
Interest฀expense฀฀ 146.7฀ 141.5฀ 129.3
Income฀tax฀expense฀฀ 104.8฀ 111.6฀ 113.5
฀ Net฀income฀฀ $ 268.9฀ $฀฀ 292.0฀ $฀ ฀292.6
Operating฀revenues฀by฀classificatio
Residential฀฀ $ 896.5฀ $฀฀ 925.5฀ $฀ ฀901.4
Commercial฀฀ 535.0฀ 583.3฀ 554.2
Industrial฀฀ 190.6฀ 224.5฀ 220.6
Oilfield ฀ 162.8฀ 188.3฀ 176.4
Public฀authorities฀and฀street฀light฀฀ 194.2฀ 220.3฀ 214.3
Sales฀for฀resale฀฀ 21.7฀ 52.9฀ 59.4
฀ System฀sales฀revenues฀฀ 2,000.8฀ 2,194.8฀ 2,126.3
Off-system฀sales฀revenues฀฀ 48.6฀ 94.1฀ 14.7
Other฀฀ 147.5฀ 164.2฀ 121.2
฀ Total฀operating฀revenues฀฀ $2,196.9฀ $2,453.1฀ $2,262.2
Reconciliation฀of฀gross฀margin฀to฀revenue:
฀ Operating฀revenues฀฀ $2,196.9฀ $2,453.1฀ $2,262.2
฀ Cost฀of฀sales฀฀ 865.0฀ 1,106.6฀ 965.9
Gross฀margin฀฀ $1,331.9฀ $1,346.5฀ $1,296.3
MWH฀sales฀by฀classificatio ฀(in฀millions)
Residential฀฀ 9.2฀ 9.4฀ 9.4
Commercial฀฀ 7.4฀ 7.2฀ 7.1
Industrial฀฀ 3.6฀ 3.8฀ 3.9
Oilfield ฀ 3.4฀ 3.4฀ 3.4
Public฀authorities฀and฀street฀light฀฀ 3.1฀ 3.2฀ 3.2
Sales฀for฀resale฀฀ 0.5฀ 1.0฀ 1.2
฀ System฀sales฀฀ 27.2฀ 28.0฀ 28.2
Off-system฀sales฀฀ 1.7฀ 2.2฀ 0.4
฀ Total฀sales฀฀ 28.9฀ 30.2฀ 28.6
Number฀of฀customers฀฀ 824,776฀ 814,982฀ 806,940
Weighted-average฀cost฀of฀energy
฀ per฀kilowatt-hour฀–฀cents
Natural฀gas฀฀ 2.529฀ 4.506฀ 3.905
Coal฀฀ 2.187฀ 2.152฀ 2.273
Total฀fuel฀฀ 2.196฀ 2.752฀ 2.784
Total฀fuel฀and฀purchased฀power฀฀ 2.874฀ 3.493฀ 3.178
Degree฀days(A)
Heating฀–฀Actual฀฀ 3,038฀ 3,569฀ 3,673
Heating฀–฀Normal฀฀ 3,349฀ 3,349฀ 3,349
Cooling฀–฀Actual฀฀ 2,071฀ 2,114฀ 2,106
Cooling฀–฀Normal฀฀ 2,092฀ 2,092฀ 2,092
(A)฀฀
Degree฀days฀are฀calculated฀as฀follows:฀The฀high฀and฀low฀degrees฀of฀a฀particular฀day฀
are฀added฀together฀and฀then฀averaged.฀If฀the฀calculated฀average฀is฀above฀65฀degrees,฀
then฀the฀difference฀between฀the฀calculated฀average฀and฀65฀is฀expressed฀as฀cooling฀
degree฀days,฀with฀each฀degree฀of฀difference฀equaling฀one฀cooling฀degree฀day.฀If฀the฀
calculated฀average฀is฀below฀65฀degrees,฀then฀the฀difference฀between฀the฀calculated฀
average฀and฀65฀is฀expressed฀as฀heating฀degree฀days,฀with฀each฀degree฀of฀difference฀
equaling฀one฀heating฀degree฀day.฀The฀daily฀calculations฀are฀then฀totaled฀for฀the฀
particular฀reporting฀period.