NOTES TO
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
|
|
1.
|
Summary of Significant Accounting Policies
|
Organization
The Company is an energy and energy services provider offering physical delivery and related services for both electricity and natural gas primarily in the south central United States. The Company conducts these activities through two business segments: (i) electric utility and (ii) natural gas midstream operations. The accounts of the Company and its wholly owned subsidiaries are included in the Condensed Consolidated Financial Statements. All intercompany transactions and balances are eliminated in consolidation. The Company generally uses the equity method of accounting for investments where its ownership interest is between 20 percent and 50 percent and lacks the power to direct activities that most significantly impact economic performance.
The electric utility segment
generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas
.
Its operations
are conducted through OG&E
and
are subject to regulation by the OCC, the APSC and the FERC.
OG&E was incorporated in 1902 under the laws of the Oklahoma Territory
,
and is a wholly owned subsidiary of the Company.
OG&E is the largest electric utility in Oklahoma and its franchised service territory includes Fort Smith, Arkansas and the surrounding communities. OG&E sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution business.
The natural gas midstream operations segment represents the Company's investment in Enable through its wholly owned subsidiary OGE Holdings. Enable is engaged in the business of gathering, processing, transporting and storing natural gas. Enable's natural gas gathering and processing assets are strategically located in four states and serve natural gas production from shale developments in the Anadarko, Arkoma and Ark-La-Tex basins. Enable also owns a crude oil gathering business in the Bakken shale formation, principally located in the Williston basin of North Dakota. Enable's natural gas transportation and storage assets extend from western Oklahoma and the Texas Panhandle to Alabama and from Louisiana to Illinois.
Enable was formed effective May 1, 2013
by the Company, the ArcLight group and CenterPoint to own and operate the midstream businesses of the Company and CenterPoint. In the formation transaction, the Company and the ArcLight group contributed Enogex LLC to Enable and
the Company deconsolidated its previously held investment in Enogex Holdings and acquired an equity interest in Enable.
The Company's contribution of Enogex LLC to Enable met the requirements of being in substance real estate and was recorded at historical cost.
The general partner of Enable is equally controlled by CenterPoint and the Company, who each have 50 percent management ownership. Based on the 50/50 management ownership, with neither company having control, the Company began accounting for its interest in Enable using the equity method of accounting.
Basis of Presentation
The Condensed
Consolidated
Financial Statements included herein have been prepared by
the Company
, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however,
the Company
believes that the disclosures are adequate to prevent the information presented from being misleading.
In the opinion of management, all adjustments necessary to fairly present the
consolidated
financial position of
the Company
at
March 31, 2016
and
December 31, 2015
,
the results of its operations and cash flows for the
three months ended
March 31, 2016
and
2015
, have been included and are of a normal recurring nature except as otherwise disclosed.
Due to seasonal fluctuations and other factors,
the Company's
operating results for the
three months ended
March 31, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
or for any future period. The Condensed
Consolidated
Financial Statements and Notes thereto should be read in conjunction with the audited
Consolidated
Financial Statements and Notes thereto included in
the Company's
2015
Form 10-K.
Accounting Records
The accounting records of OG&E are maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the OCC and the APSC. Additionally,
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 flowback to customers in future rates. Management's expected recovery of deferred costs and flowback of deferred credits generally results from specific decisions by regulators granting such ratemaking treatment.
Certain prior year amounts have been reclassified to conform with the current year presentation.
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 following table is a summary of OG&E's regulatory assets and liabilities at:
|
|
|
|
|
|
|
|
(In millions)
|
March 31, 2016
|
December 31, 2015
|
Regulatory Assets
|
|
|
Current
|
|
|
Oklahoma demand program rider under recovery (A)
|
$
|
37.4
|
|
$
|
36.6
|
|
Other (A)
|
13.4
|
|
9.9
|
|
Total Current Regulatory Assets
|
$
|
50.8
|
|
$
|
46.5
|
|
Non-Current
|
|
|
Benefit obligations regulatory asset
|
$
|
240.0
|
|
$
|
242.2
|
|
Income taxes recoverable from customers, net
|
56.8
|
|
56.7
|
|
Smart Grid
|
43.6
|
|
43.6
|
|
Deferred storm expenses
|
30.9
|
|
27.6
|
|
Unamortized loss on reacquired debt
|
14.4
|
|
14.8
|
|
Other
|
17.1
|
|
17.3
|
|
Total Non-Current Regulatory Assets
|
$
|
402.8
|
|
$
|
402.2
|
|
Regulatory Liabilities
|
|
|
Current
|
|
|
Fuel clause over recoveries
|
$
|
63.2
|
|
$
|
61.3
|
|
Other (B)
|
3.7
|
|
7.5
|
|
Total Current Regulatory Liabilities
|
$
|
66.9
|
|
$
|
68.8
|
|
Non-Current
|
|
|
Accrued removal obligations, net
|
$
|
255.3
|
|
$
|
254.9
|
|
Pension tracker
|
22.0
|
|
17.7
|
|
Other (C)
|
1.0
|
|
1.0
|
|
Total Non-Current Regulatory Liabilities
|
$
|
278.3
|
|
$
|
273.6
|
|
|
|
(A)
|
Included in Other Current Assets on the
Condensed Consolidated
Balance Sheets.
|
|
|
(B)
|
Included in Other Current Liabilities on the
Condensed Consolidated
Balance Sheets.
|
|
|
(C)
|
Prior year amount of
$1.0 million
reclassified from deferred other liabilities to Non-Current Regulatory Liabilities
.
|
Management continuously monitors the future recoverability of regulatory assets.
When in management's judgment future recovery becomes impaired, the amount of the regulatory asset is adjusted, as appropriate.
If
OG&E
were required to discontinue the application of accounting principles for certain types of rate-regulated activities for some or all of its operations, it could result in writing off the related regulatory assets, which could have significant financial effects.
Investment in Unconsolidated Affiliate
The Company's investment in Enable is considered to be a variable interest entity because the owners of the equity at risk in this entity have disproportionate voting rights in relation to their obligations to absorb the entity's expected losses or to receive its expected residual returns. However, the Company is not considered the primary beneficiary of Enable since it does not have the power to direct the activities of Enable that are considered most significant to the economic performance of Enable. The Company accounts for its investment in Enable using the equity method of accounting. Under the equity method, the investment will be adjusted each period for contributions made, distributions received and the Company's share of the investee's comprehensive income adjusted for basis differences. The Company's maximum exposure to loss related to Enable is limited to the Company's equity investment in Enable as presented on the Company's Condensed Consolidated Balance Sheets at
March 31, 2016
. The Company evaluates its equity method investments for impairment when events or changes in circumstances indicate there is a loss in value of the investment that is other than a temporary decline.
The Company considers distributions received from Enable, which do not exceed cumulative equity in earnings subsequent to the date of investment, to be a return on investment which are classified as operating activities in the Condensed Consolidated Statements of Cash Flows. The Company considers distributions received from Enable in excess of cumulative equity in earnings subsequent to the date of investment to be a return of investment which are classified as investing activities in the Condensed Consolidated Statements of Cash Flows.
Asset Retirement Obligations
The following table summarizes changes to
the Company's
asset retirement obligations during the
three months ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions)
|
2016
|
2015
|
Balance at January 1
|
$
|
63.3
|
|
$
|
58.6
|
|
Accretion expense
|
0.7
|
|
0.6
|
|
Liabilities settled
|
—
|
|
(0.3
|
)
|
Balance at March 31
|
$
|
64.0
|
|
$
|
58.9
|
|
Accumulated Other Comprehensive Income (Loss)
The following tables summarize changes in the components of accumulated other comprehensive income (loss) during the
three months ended March 31, 2016
and
2015
. All amounts below are presented net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan and Restoration of Retirement Income Plan
|
|
Postretirement Benefit Plans
|
|
(In millions)
|
Net loss
|
Prior service cost
|
|
Net loss
|
Prior service cost
|
Total
|
Balance at December 31, 2015
|
$
|
(39.2
|
)
|
$
|
0.1
|
|
|
$
|
2.5
|
|
$
|
1.5
|
|
$
|
(35.1
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
0.8
|
|
—
|
|
|
—
|
|
(0.4
|
)
|
0.4
|
|
Balance at March 31, 2016
|
$
|
(38.4
|
)
|
$
|
0.1
|
|
|
$
|
2.5
|
|
$
|
1.1
|
|
$
|
(34.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan and Restoration of Retirement Income Plan
|
|
Postretirement Benefit Plans
|
|
(In millions)
|
Net loss
|
Prior service cost
|
|
Net loss
|
Prior service cost
|
Total
|
Balance at December 31, 2014
|
$
|
(36.8
|
)
|
$
|
0.1
|
|
|
$
|
(8.0
|
)
|
$
|
3.3
|
|
$
|
(41.4
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
0.4
|
|
—
|
|
|
0.2
|
|
(0.4
|
)
|
0.2
|
|
Balance at March 31, 2015
|
$
|
(36.4
|
)
|
$
|
0.1
|
|
|
$
|
(7.8
|
)
|
$
|
2.9
|
|
$
|
(41.2
|
)
|
The following table summarizes significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items in net income during the three months ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income (Loss) Components
|
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
|
Affected Line Item in the Statement Where Net Income is Presented
|
|
Three Months Ended March 31,
|
|
(In millions)
|
2016
|
2015
|
|
Amortization of defined benefit pension and restoration of retirement income plan items
|
|
|
|
Actuarial losses
|
$
|
(1.2
|
)
|
$
|
(1.2
|
)
|
(A)
|
|
(0.4
|
)
|
(0.8
|
)
|
Tax benefit
|
|
$
|
(0.8
|
)
|
$
|
(0.4
|
)
|
Net of tax
|
|
|
|
|
Amortization of postretirement benefit plan items
|
|
|
|
Actuarial losses
|
$
|
—
|
|
$
|
(0.4
|
)
|
(A)
|
Prior service cost
|
0.6
|
|
0.7
|
|
(A)
|
|
0.6
|
|
0.3
|
|
Total before tax
|
|
0.2
|
|
0.1
|
|
Tax expense
|
|
$
|
0.4
|
|
$
|
0.2
|
|
Net of tax
|
|
|
|
|
Total reclassifications for the period
|
$
|
(0.4
|
)
|
$
|
(0.2
|
)
|
Net of tax
|
|
|
(A)
|
These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (see Note 10 for additional information).
|
Reclassifications
Prior periods have been adjusted for the reclassification of
$16.8 million
of debt issuance costs from total deferred charges and other assets to Long-Term Debt in the
Condensed
Consolidated
Balance Sheets to be consistent with the 2016 presentation due to the adoption of ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs," as of
March 31, 2016
.
|
|
2.
|
Accounting Pronouncements
|
Revenue from Contracts with Customers.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". The new guidance was intended to be effective for fiscal years beginning after December 15, 2016. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. Reporting entities may choose to adopt the standard as of the original effective date. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method.
The Company
has yet to select a transition method or determine the impact on its
Condensed Consolidated
Financial Statements, however, the impact is not expected to be material.
Consolidation
.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810)". The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The new standard modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities along with eliminating the presumption that a general partner should consolidate a limited partnership. The new standard is effective for fiscal years beginning after December 15, 2015. The adoption of this new standard did not result in the consolidation of any non-consolidated entities.
Leases.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The main difference between current lease accounting and Topic 842 is the recognition of right-to-use assets and lease liabilities by lessees for those leases classified as operating leases under current accounting guidance.
Lessees, such as
the Company,
will need to recognize a right-of-use asset and a lease liability for virtually all of their leases, other than leases that meet the definition of a short-term lease. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs.
For income statement purposes, the Topic 842 retains a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense, while finance leases will result in a front-loaded expense pattern, similar to current capital leases. Classification of operating and finance leases will be based on criteria that are largely similar to those applied in current lease guidance, but without the explicit thresholds.
The new guidance is effective for fiscal years beginning after December 2018. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
The Company
has not determined the impact on its
Condensed Consolidated
Financial Statements, but anticipates an increase in the recognition of right-of-use assets and lease liabilities.
Investments.
In March 2016, the FASB issued ASU 2016-07, "Investments-Equity Method and Joint Ventures; Simplifying the Transition to the Equity Method of Accounting (Topic 323)." The amendments in ASU 2016-07 eliminate the requirement to retroactively adopt the equity method of accounting for a qualifying equity method investment. ASU 2016-07 requires equity method investors to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments in this ASU are effective for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2016.
The Company
does not believe this ASU will have any effect on its
Condensed Consolidated
Financial Statements.
Employee Share Based Payment Accounting.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share Based Payment Accounting," which amends ASC Topic 718, Compensation - Stock Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share based payments are accounted for and presented in the financial statements.
The new guidance among other requirements will require all of the tax effects related to share based payments at settlement (or expiration) to be recorded through the income statement. Currently, tax benefits in excess of compensation cost (“windfalls”) are recorded in equity, and tax deficiencies (“shortfalls”) are recorded in equity to the extent of previous windfalls, and then to the income statement. This change is required to be applied prospectively to all excess tax benefits and tax deficiencies resulting from settlements after the date of adoption of the ASU2016-09. Under the new guidance, the windfall tax benefit will be recorded when it arises, subject to normal valuation allowance considerations. This change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings. All tax related cash flows resulting from share based payments are to be reported as operating activities on the statement of cash flows, a change from the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. Either prospective or retrospective transition of this provision is permitted
.
ASU 2016-09 is effective for annual reporting
periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption will be permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption.
The Company
has not determined the impact on its
Condensed Consolidated
Financial Statements, however, the impact is not expected to be material.
|
|
3.
|
Investment in Unconsolidated Affiliate and Related Party Transactions
|
On March 14, 2013, the Company entered into a Master Formation Agreement with the ArcLight group and CenterPoint pursuant to which the Company, the ArcLight group and CenterPoint, agreed to form Enable to own and operate the midstream businesses of the Company and CenterPoint that was initially structured as a private limited partnership.
This transaction closed on May 1, 2013.
Pursuant to the Master Formation Agreement, the Company and the ArcLight group indirectly contributed
100 percent
of the equity interests in
Enogex LLC
to Enable.
The Company determined that its contribution of Enogex LLC to Enable met the requirements of being in substance real estate and was recorded at historical cost.
In April 2014, Enable completed an initial public offering of
25.0 million
common units resulting in Enable becoming a publicly traded Master Limited Partnership. At
March 31, 2016
, the Company owned
111.0 million
common units, or
26.3 percent
, of which
68.2 million
units were subordinated.
CenterPoint and the Company also own a
40 percent
and
60 percent
interest, respectively, in any incentive distribution rights to be held by the general partner of Enable following the initial public offering.
Distributions received from Enable were
$35.3 million
and
$34.3 million
during the
three months ended
March 31, 2016
and
2015
, respectively.
Related Party Transactions
Operating costs charged and related party transactions between the Company and its affiliate, Enable, are discussed below. The Company's interest in Enogex Holdings was deconsolidated on May 1, 2013.
On May 1, 2013, the Company and Enable entered into a Services Agreement, Employee Transition Agreement, and other agreements whereby the Company agreed to provide certain support services to Enable such as accounting, legal, risk management and treasury functions for an initial term ending on April 30, 2016. As of December 31, 2015, Enable terminated all support services except certain information technology, payroll and benefits administration. Under these agreements,
the Company charged operating costs to
Enable of
$1.3 million
and
$2.8 million
for
three months ended March 31, 2016
and
2015
, respectively. The Company
charges operating costs to OG&E
and Enable
based on several factors
.
Operating costs directly related to OG&E
and Enable
are assigned as such.
Operating costs incurred for the benefit of OG&E
and Enable
are allocated either as overhead based primarily on labor costs or using the "Distrigas" method.
Additionally, the Company agreed to provide seconded employees to Enable to support its operations for an initial term ending on December 31, 2014. In October 2014, CenterPoint, the Company and Enable agreed to continue the secondment to Enable for
192
employees that participate in the Company's defined benefit and retirement plans, beyond December 31, 2014. The Company billed Enable for reimbursement of
$7.1 million
and
$10.0 million
in the
three months ended March 31, 2016
and
2015
, respectively, under the Transitional Seconding Agreement for employment costs.
The Company had accounts receivable from Enable of
$2.9 million
as of
March 31, 2016
and
$1.7 million
as of
December 31, 2015
, for amounts billed for transitional services, including the cost of seconded employees.
Related Party Transactions with Enable
OG&E entered into a contract with Enable to provide gas transportation services effective May 1, 2014. This transportation agreement grants Enable the responsibility of delivering natural gas to OG&E’s generating facilities and performing an imbalance service. With this imbalance service, in accordance with the cash-out provision of the contract, OG&E purchases gas from Enable when Enable’s deliveries exceed OG&E’s pipeline receipts. Enable purchases gas from OG&E when OG&E’s pipeline receipts exceed Enable’s deliveries.
The following table summarizes related party transactions between OG&E and Enable during the
three months ended
March 31, 2016
, and
2015
.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions)
|
2016
|
2015
|
Operating Revenues:
|
|
|
Electricity to power electric compression assets
|
$
|
2.3
|
|
$
|
3.1
|
|
Cost of Sales:
|
|
|
Natural gas transportation services
|
$
|
8.8
|
|
$
|
8.8
|
|
Natural gas purchases/(sales)
|
1.5
|
|
2.5
|
|
Summarized Financial Information of Enable
Summarized unaudited financial information for 100 percent of Enable is presented below as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
Balance Sheet
|
March 31,
|
December 31,
|
(In millions)
|
2016
|
2015
|
Current assets
|
$
|
379
|
|
$
|
381
|
|
Non-current assets
|
10,870
|
|
10,857
|
|
Current liabilities
|
279
|
|
615
|
|
Non-current liabilities
|
3,123
|
|
3,092
|
|
|
|
|
|
|
|
|
|
Income Statement
|
Three Months Ended March 31,
|
(In millions)
|
2016
|
2015
|
Operating revenues
|
$
|
509
|
|
$
|
616
|
|
Cost of NGLs
|
195
|
|
292
|
|
Operating income
|
103
|
|
104
|
|
Net income
|
86
|
|
91
|
|
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
$28.3 million
and
$31.7 million
for the
three months ended March 31, 2016
and
2015
, respectively.
Equity in earnings of unconsolidated affiliates includes the Company's
share of Enable earnings adjusted for the amortization of the basis difference of the Company'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 Southeast Supply Header, LLC. 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 for the elimination of the Enogex Holdings fair value adjustments
, as described above.
The difference between the Company's investment in Enable and its underlying equity in the net assets of Enable was
$775.5 million
as of
March 31, 2016
.
The following table reconciles the Company's equity in earnings of its unconsolidated affiliates for the three months ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions)
|
2016
|
2015
|
OGE's share of Enable Net Income
|
$
|
21.3
|
|
$
|
23.8
|
|
Amortization of basis difference
|
2.9
|
|
3.5
|
|
Elimination of Enogex Holdings fair value and other adjustments
|
4.1
|
|
4.4
|
|
Equity in earnings of unconsolidated affiliates
|
$
|
28.3
|
|
$
|
31.7
|
|
|
|
4.
|
Fair Value Measurements
|
The classification of
the Company'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 lowest level of input that is significant to the fair value measurement. The three levels defined in the fair 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.
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 fair value measurement and unobservable (i.e., supported by little or no market activity).
Unobservable inputs reflect the
reporting 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 instruments measured at fair value on a recurring basis at
March 31, 2016
and
December 31, 2015
, except for long-term debt which is recorded at the carrying amount.
The following table summarizes the fair value and carrying amount of
the Company's
long-term debt at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
December 31, 2015
|
(In millions)
|
Carrying Amount
|
Fair
Value
|
Carrying Amount
|
Fair
Value
|
Long-Term Debt
|
|
|
|
|
OG&E Senior Notes
|
$
|
2,384.3
|
|
$
|
2,748.1
|
|
$
|
2,493.9
|
|
$
|
2,754.6
|
|
OG&E Industrial Authority Bonds
|
135.4
|
|
135.4
|
|
135.4
|
|
135.4
|
|
OG&E Tinker Debt
|
10.0
|
|
9.5
|
|
10.0
|
|
9.2
|
|
OGE Energy Senior Notes
|
99.6
|
|
99.9
|
|
99.5
|
|
99.9
|
|
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 Level 2 in the fair value hierarchy with the exception of the Tinker Debt in 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 Level 3 in the fair value hierarchy.
|
|
5.
|
Stock-Based Compensation
|
The following table summarizes
the Company's
pre-tax compensation expense and related income tax benefit for the three month
s
ended
March 31, 2016
,
and
2015
related to
the Company's
performance units and restricted stock
.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions)
|
2016
|
2015
|
Performance units
|
|
|
Total shareholder return
|
$
|
1.1
|
|
$
|
1.9
|
|
Earnings per share
|
0.6
|
|
0.5
|
|
Total performance units
|
1.7
|
|
2.4
|
|
Restricted stock
|
—
|
|
—
|
|
Total compensation expense
|
1.7
|
|
2.4
|
|
Less: Amount paid by unconsolidated affiliates
|
—
|
|
0.3
|
|
Net compensation expense
|
$
|
1.7
|
|
$
|
2.1
|
|
Income tax benefit
|
$
|
0.6
|
|
$
|
0.8
|
|
The Company
has issued new shares to satisfy restricted stock grants and payouts of earned performance units.
During the
three months ended March 31, 2016
,
there were
no
shares
of new common stock issued
pursuant to
the Company's
Stock Incentive Plan related to restricted stock grants (net of forfeitures) and payouts of earned performance units. During the
three months ended March 31, 2016
,
there were
901
shares of restricted stock
returned to
the Company
to satisfy tax liabilities.
The following table summarizes the activity of the Company's stock-based compensation during the
three months ended March 31, 2016
.
|
|
|
|
|
|
|
|
Units/Shares
|
Fair Value
Per Share
|
Grants
|
|
|
|
|
Performance units (Total shareholder return)
|
280,604
|
|
$
|
20.84
|
|
Performance units (Earnings per share)
|
93,533
|
|
$
|
26.59
|
|
The Company
file
s
consolidated income tax returns in the U.S. Federal jurisdiction and various state jurisdictions
.
With few exceptions,
the Company
is no longer subject to U.S. Federal tax examinations by tax authorities for years prior to
2012
or state and local tax examinations by tax authorities for years prior to
2011
.
Income taxes
are
generally allocated to each company in the affiliated group based on its stand-alone taxable income or loss.
Federal investment tax credits previously claimed on electric utility property have been deferred and are being amortized to income over the life of the related property.
OG&E earns both Federal and Oklahoma state tax credits associated with production from its wind farms
. In addition, OG&E and Enable earn
Oklahoma state tax credits associated with
their
investments in
electric generating
and
natural gas processing
facilities which further reduce
the Company's
effective tax rate.
Automatic Dividend Reinvestment and Stock Purchase Plan
The Company issued
no
shares of common stock under its Automatic Dividend Reinvestment and Stock Purchase Plan during the
three months ended March 31, 2016
. The Company may, from time to time, issue additional shares under its Automatic Dividend Reinvestment and Stock Purchase Plan or purchase shares traded on the open market. At
March 31, 2016
, there were
4,774,442
shares of unissued common stock reserved for issuance under the Company's Automatic Dividend Reinvestment and Stock Purchase Plan.
Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to the Company by the weighted average number of the Company's common shares outstanding during the period. In the calculation of diluted earnings per share, weighted average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. Potentially dilutive securities for the Company consist of performance units and restricted stock units. Basic and diluted earnings per share for the Company were calculated as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions)
|
2016
|
2015
|
Net Income
|
$
|
25.2
|
|
$
|
43.2
|
|
Average Common Shares Outstanding
|
|
|
Basic average common shares outstanding
|
199.7
|
|
199.5
|
|
Effect of dilutive securities:
|
|
|
Contingently issuable shares (performance and restricted stock units)
|
—
|
|
—
|
|
Diluted average common shares outstanding
|
199.7
|
|
199.5
|
|
Basic Earnings Per Average Common Share
|
$
|
0.13
|
|
$
|
0.22
|
|
Diluted Earnings Per Average Common Share
|
$
|
0.13
|
|
$
|
0.22
|
|
Anti-dilutive shares excluded from earnings per share calculation
|
—
|
|
—
|
|
At
March 31, 2016
, the Company
was in compliance with all of its debt agreements.
OG&E
Industrial Authority Bonds
OG&E has tax-exempt pollution control bonds with optional redemption provisions that allow the holders to request repayment of the bonds on any business day. The bonds, which can be tendered at the option of the holder during the next 12 months, are as follows:
|
|
|
|
|
|
|
|
SERIES
|
DATE DUE
|
AMOUNT
|
|
|
|
|
(In millions)
|
0.05%
|
-
|
0.39%
|
Garfield Industrial Authority, January 1, 2025
|
$
|
47.0
|
|
0.07%
|
-
|
0.43%
|
Muskogee Industrial Authority, January 1, 2025
|
32.4
|
|
0.05%
|
-
|
0.40%
|
Muskogee Industrial Authority, June 1, 2027
|
56.0
|
|
Total (redeemable during next 12 months)
|
$
|
135.4
|
|
All of these bonds are subject to an optional tender at the request of the holders, at
100 percent
of the principal amount, together with accrued and unpaid interest to the date of purchase. The bond holders, on any business day, can request repayment of the bond by delivering an irrevocable notice to the tender agent stating the principal amount of the bond, payment instructions for the purchase price and the business day the bond is to be purchased. The repayment option may only be exercised by the holder of a bond for the principal amount. When a tender notice has been received by the trustee, a third party remarketing agent for the bonds will attempt to remarket any bonds tendered for purchase. This process occurs once per week. Since the original issuance of these series of bonds in 1995 and 1997, the remarketing agent has successfully remarketed all tendered bonds. If the remarketing agent is unable to remarket any such bonds, OG&E is obligated to repurchase such unremarketed bonds. As OG&E has both the intent and ability to refinance the bonds on a long-term basis and such ability is supported by an ability to consummate the refinancing, the bonds are classified as long-term debt in
the Company's Condensed Consolidated
Financial Statements. OG&E believes that it has sufficient liquidity to meet these obligations.
|
|
9.
|
Short-Term Debt and Credit
Facilities
|
The Company
borrows on a short-term basis, as necessary, by the issuance of commercial paper and by borrowings under its revolving credit agreement.
As of
March 31, 2016
, the Company had
$187.5 million
of short-term debt compared to
no
short-term debt
at
December 31, 2015
,
at a weighted-average interest rate of
0.74 percent
. The following table provides information regarding the Company's revolving credit agreements and available cash at
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
Amount
|
Weighted-Average
|
|
|
Entity
|
Commitment
|
Outstanding (A)
|
Interest Rate
|
Maturity
|
|
(In millions)
|
|
|
|
|
OGE Energy (B)
|
$
|
750.0
|
|
$
|
187.5
|
|
0.74
|
%
|
(D)
|
December 13, 2018
|
(E)
|
OG&E (C)
|
400.0
|
|
1.7
|
|
0.95
|
%
|
(D)
|
December 13, 2018
|
(E)
|
Total
|
$
|
1,150.0
|
|
$
|
189.2
|
|
0.95
|
%
|
|
|
|
|
|
(A)
|
Includes direct borrowings under the revolving credit agreements, commercial paper borrowings and letters of credit at
March 31, 2016
.
|
|
|
(B)
|
This bank facility is available to back up the Company's commercial paper borrowings and to provide revolving credit borrowings. This
bank
facility
can also be used as
a
letter of credit
facility.
|
|
|
(C)
|
This bank facility is
available to back up OG&E's commercial paper borrowings and to provide revolving credit borrowings. This bank facility can also be used as a letter of credit facility.
|
|
|
(D)
|
Represents the weighted-average interest rate for the outstanding borrowings under the revolving credit agreements, commercial paper borrowings and letters of credit.
|
|
|
(E)
|
As of
March 31, 2016
, commitments
of
$16.3 million
and
$8.7 million
of the Company's and OG&E's credit facilities, respectively, 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
.
|
The Company's
ability to access the commercial paper market could be adversely impacted by a credit ratings downgrade or major market disruptions.
Pricing grids associated with
the Company's
credit
facilities
could cause annual fees and borrowing rates to increase if an adverse rating impact occurs. The impact of any future downgrade could include an increase in the costs of
the Company's
short-term borrowings, but a reduction in
the Company's
credit rating
s
would not result in any defaults or accelerations. Any future downgrade
could also lead to higher long-term borrowing costs and, if below investment grade, would require
the Company
to post collateral or letters of credit.
OG&E must obtain regulatory approval from the FERC in order to borrow on a short-term basis.
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.
|
|
10.
|
Retirement Plans and Postretirement Benefit Plans
|
The details of net periodic benefit cost, before consideration of capitalized amounts, of
the Company's
Pension Plan, the Restoration of Retirement Income Plan and the postretirement benefit plans included in the
Condensed Consolidated
Financial Statements are as follows:
Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
Restoration of Retirement
Income Plan
|
Postretirement Benefit Plans
|
|
Three Months Ended March 31,
|
Three Months Ended March 31,
|
Three Months Ended March 31,
|
(In millions)
|
2016
|
2015
|
2016
|
2015
|
2016
|
2015
|
Service cost
|
$
|
4.4
|
|
$
|
4.5
|
|
$
|
0.1
|
|
$
|
0.4
|
|
$
|
0.3
|
|
$
|
0.5
|
|
Interest cost
|
6.6
|
|
6.4
|
|
0.1
|
|
0.2
|
|
2.3
|
|
2.6
|
|
Expected return on plan assets
|
(10.5
|
)
|
(11.8
|
)
|
—
|
|
—
|
|
(0.6
|
)
|
(0.6
|
)
|
Amortization of net loss
|
4.2
|
|
4.3
|
|
0.2
|
|
0.1
|
|
0.5
|
|
3.4
|
|
Amortization of unrecognized prior service cost (A)
|
—
|
|
0.1
|
|
—
|
|
—
|
|
(2.2
|
)
|
(4.1
|
)
|
Total net periodic benefit cost
|
4.7
|
|
3.5
|
|
0.4
|
|
0.7
|
|
0.3
|
|
1.8
|
|
Less: Amount paid by unconsolidated affiliates
|
1.3
|
|
1.1
|
|
—
|
|
—
|
|
0.1
|
|
0.3
|
|
Net periodic benefit cost (B)
|
$
|
3.4
|
|
$
|
2.4
|
|
$
|
0.4
|
|
$
|
0.7
|
|
$
|
0.2
|
|
$
|
1.5
|
|
|
|
(A)
|
Unamortized prior service cost is amortized on a straight-line basis over the average remaining service period to the first eligibility age of participants who are expected to receive a benefit and are active at the date of the plan amendment.
|
|
|
(B)
|
In addition to the
$4.0 million
and
$4.6 million
of net periodic benefit cost recognized during the
three months ended March 31, 2016
and
2015
,
respectively,
the Company
recognized the following:
|
|
|
•
|
an increase in pension expense in the
three months ended March 31, 2016
and
2015
of
$2.3 million
and
$3.0 million
,
respectively, to maintain the allowable amount to be recovered for pension expense in the Oklahoma jurisdiction, which are included in the Pension tracker regulatory liability (see Note 1); and
|
|
|
•
|
an increase in postretirement medical expense in the
three months ended March 31, 2016
and
2015
of
$2.0 million
and
$1.4 million
,
respectively, to maintain the allowable amount to be recovered for postretirement medical expense in the Oklahoma jurisdiction, which are included in the Pension tracker regulatory liability (see Note 1).
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
(In millions)
|
2016
|
2015
|
Capitalized portion of net periodic pension benefit cost
|
$
|
1.2
|
|
$
|
0.8
|
|
Capitalized portion of net periodic postretirement benefit cost
|
0.1
|
|
0.5
|
|
|
|
11.
|
Report of Business Segments
|
The Company reports its operations in two business segments: (i) the electric utility segment, which is engaged in the generation, transmission, distribution and sale of electric energy, and (ii) natural gas midstream operations segment.
Intersegment revenues are recorded at prices comparable to those of unaffiliated customers and are affected by regulatory considerations.
The following tables summarize the results of the Company's business segments for the
three months ended
March 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Electric Utility
|
Natural Gas Midstream Operations
|
Other Operations
|
Eliminations
|
Total
|
(In millions)
|
|
|
|
|
|
Operating revenues
|
$
|
433.1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
433.1
|
|
Cost of sales
|
177.9
|
|
—
|
|
—
|
|
—
|
|
177.9
|
|
Other operation and maintenance
|
116.3
|
|
0.2
|
|
(2.6
|
)
|
—
|
|
113.9
|
|
Depreciation and amortization
|
76.7
|
|
—
|
|
1.8
|
|
—
|
|
78.5
|
|
Taxes other than income
|
23.6
|
|
—
|
|
1.3
|
|
—
|
|
24.9
|
|
Operating income (loss)
|
38.6
|
|
(0.2
|
)
|
(0.5
|
)
|
—
|
|
37.9
|
|
Equity in earnings of unconsolidated affiliates
|
—
|
|
28.3
|
|
—
|
|
—
|
|
28.3
|
|
Other income (expense)
|
5.3
|
|
—
|
|
0.3
|
|
(0.1
|
)
|
5.5
|
|
Interest expense
|
35.5
|
|
—
|
|
0.9
|
|
(0.1
|
)
|
36.3
|
|
Income tax expense (benefit)
|
2.3
|
|
10.1
|
|
(2.2
|
)
|
—
|
|
10.2
|
|
Net income
|
$
|
6.1
|
|
$
|
18.0
|
|
$
|
1.1
|
|
$
|
—
|
|
$
|
25.2
|
|
Investment in unconsolidated affiliates
|
$
|
—
|
|
$
|
1,187.4
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,187.4
|
|
Total assets
|
$
|
8,288.5
|
|
$
|
1,467.9
|
|
$
|
98.7
|
|
$
|
(331.8
|
)
|
$
|
9,523.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
Electric Utility
|
Natural Gas Midstream Operations
|
Other Operations
|
Eliminations
|
Total
|
(In millions)
|
|
|
|
|
|
Operating revenues
|
$
|
480.1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
480.1
|
|
Cost of sales
|
211.6
|
|
—
|
|
—
|
|
—
|
|
211.6
|
|
Other operation and maintenance
|
114.3
|
|
0.8
|
|
(3.4
|
)
|
—
|
|
111.7
|
|
Depreciation and amortization
|
73.8
|
|
—
|
|
2.1
|
|
—
|
|
75.9
|
|
Taxes other than income
|
23.1
|
|
—
|
|
1.4
|
|
—
|
|
24.5
|
|
Operating income (loss)
|
57.3
|
|
(0.8
|
)
|
(0.1
|
)
|
—
|
|
56.4
|
|
Equity in earnings of unconsolidated affiliates
|
—
|
|
31.7
|
|
—
|
|
—
|
|
31.7
|
|
Other income (expense)
|
2.9
|
|
—
|
|
2.5
|
|
—
|
|
5.4
|
|
Interest expense
|
36.8
|
|
—
|
|
0.6
|
|
—
|
|
37.4
|
|
Income tax expense (benefit)
|
6.3
|
|
8.1
|
|
(1.5
|
)
|
—
|
|
12.9
|
|
Net income
|
$
|
17.1
|
|
$
|
22.8
|
|
$
|
3.3
|
|
$
|
—
|
|
$
|
43.2
|
|
Investment in unconsolidated affiliates
|
$
|
—
|
|
$
|
1,315.7
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,315.7
|
|
Total assets
|
$
|
8,217.7
|
|
$
|
1,476.7
|
|
$
|
122.3
|
|
$
|
(332.4
|
)
|
$
|
9,484.3
|
|
|
|
12.
|
Commitments and Contingencies
|
Except as set forth below, in Note
13
and under "Environmental Laws and Regulations" in Item 2 of Part I
and in Item 1 of Part II
of this Form 10-Q, the circumstances set forth in Notes
14 and 15 to the Company's Consolidated
Financial Statements included in
the Company's
2015 Form 10-K appropriately represent, in all material respects, the current status of
the Company's
material commitments and contingent liabilities.
Environmental Laws and Regulations
The activities of
OG&E
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.
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
condensed
financial position or results of operations.
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
is
managing several significant uncertainties about the scope and timing for the acquisition, installation and operation of additional pollution control equipment and compliance costs for a variety of the EPA rules that are being challenged in court.
OG&E
is
unable to predict the financial impact of these matters with certainty at this time.
Federal Clean Air Act New Source Review Litigation
As previously reported, in July 2008, OG&E received a request for information from the EPA regarding Federal Clean Air Act compliance at OG&E's Muskogee and Sooner generating plants.
On July 8, 2013, the U.S. Department of Justice filed a complaint against OG&E in United States District Court for the Western District of Oklahoma alleging that OG&E did not follow the Federal Clean Air Act procedures for projecting emission increases attributable to eight projects that occurred between 2003 and 2006. This complaint sought to have OG&E submit a new assessment of whether the projects were likely to result in a significant emissions increase. The Sierra Club intervened in this proceeding. On August 30, 2013, the government filed a Motion for Summary Judgment and on September 6, 2013, OG&E filed a Motion to Dismiss the case. On January 15, 2015, the Court dismissed the complaints filed by the EPA and the Sierra Club. The Court held that it lacked subject matter jurisdiction over plaintiffs’ claims because plaintiffs failed to present an actual “case or controversy” as required by Article III of the Constitution. The court also ruled in the alternative that, even if plaintiffs had presented a case or controversy, it would have nonetheless “decline[d] to exercise jurisdiction.” The EPA and the Sierra Club did not file an appeal of the Court's ruling.
On August 12, 2013, the Sierra Club filed a separate complaint against OG&E in the United States District Court for the Eastern District of Oklahoma alleging that OG&E projects at Muskogee Unit 6 in 2008 were made without obtaining a prevention of significant deterioration permit and that the plant had exceeded emissions limits for opacity and particulate matter. The Sierra Club seeks a permanent injunction preventing OG&E from operating the Muskogee generating plant. On March 4, 2014, the District Court dismissed the prevention of significant deterioration permit claim based on the statute of limitations, but allowed the opacity and particulate matter claims to proceed. To obtain the right to appeal this decision, the Sierra Club subsequently withdrew a Notice of Intent to Sue for additional Clean Air Act violations and asked the District Court to dismiss its remaining claims with prejudice. On August 27, 2014, the District Court granted the Sierra Club's request. The Sierra Club appealed the District Court's dismissal of its prevention of significant deterioration claim to the United States Court of Appeals for the Tenth Circuit. On March 8, 2016, the Tenth Circuit affirmed the trial court's decision dismissing the Sierra Club's case. On March 21, 2016, the Sierra Club filed a request for rehearing en banc with the Tenth Circuit. On April 13, 2016, the Tenth Circuit denied the request for rehearing. OG&E cannot predict whether the Sierra Club will seek review of the case by the United States Supreme Court.
Air Quality Control System
On September 10, 2014, OG&E executed a contract for the design, engineering and fabrication of two circulating dry scrubber systems to be installed at Sooner Units 1 and 2. OG&E entered into an agreement on February 9, 2015, to install the dry scrubber systems. The dry scrubbers are scheduled to be completed by 2019. More detail regarding the dry scrubber project can be found under the “Pending Regulatory Matters”
in Note 13.
Other
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 Company's Condensed Consolidated
Financial Statements.
At the present time, based on current 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 statements and would not have a material adverse effect on
the Company's consolidated
financial position, results of operations or cash flows.
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13.
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Rate Matters and Regulation
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Regulation and Rates
Except as set forth below, the circumstances set forth in
Note 15 to the Company's Consolidated
Financial Statements included in
the Company's
2015 Form 10-K appropriately represent, in all material respects, the current status of
the Company's
regulatory matters.
Pending Regulatory Matters
Set forth below is a list of various proceedings pending before state or federal regulatory agencies. Unless stated otherwise, OG&E cannot predict when the regulatory agency will act or what action the regulatory agency will take. OG&E's financial results are dependent in part on timely and adequate decisions by the regulatory agencies that set OG&E's rates.
FERC Order No. 1000, Final Rule on Transmission Planning and Cost Allocation
On July 21, 2011, the FERC issued Order No. 1000, which revised the FERC's existing regulations governing the process for planning enhancements and expansions of the electric transmission grid along with the corresponding process for allocating the costs of such expansions. Order No. 1000 requires individual regions to determine whether a previously-approved project is subject to reevaluation and is therefore governed by the new rule.
Order No. 1000 directs public utility transmission providers to remove from the FERC-jurisdictional tariff and agreement provisions that establish any Federal "right of first refusal" for the incumbent transmission owner (such as OG&E) regarding transmission facilities selected in a regional transmission planning process, subject to certain limitations. However, Order No. 1000 is not intended to affect the right of an incumbent transmission owner (such as OG&E) to build, own and recover costs for upgrades to its own transmission facilities or to alter an incumbent transmission owner's use and control of existing rights of way. Order No. 1000 also clarifies that incumbent transmission owners may rely on regional transmission facilities to meet their reliability needs or service obligations. The SPP's pre-Order No. 1000 tariff included a "right of first refusal" for incumbent transmission owners and this provision has played a role in OG&E being selected by the SPP to build previous transmission projects in Oklahoma. On May 29, 2013, the Governor of Oklahoma signed House Bill 1932 into law which establishes a "right of first refusal" for Oklahoma incumbent transmission owners, including OG&E, to build new transmission projects with voltages under 300kV that interconnect to those incumbent owners' existing facilities.
The SPP has submitted compliance filings implementing Order No. 1000's requirements. In response, the FERC issued an order on the SPP filings that required the SPP to remove certain "right of first refusal" language from the SPP Tariff and the SPP Membership Agreement. On December 15, 2014, OG&E filed an appeal in the District of Columbia Court of Appeals challenging the FERC's order requiring the removal of the "right of first refusal" language from the SPP Membership Agreement. The court has not yet acted on OG&E's appeal.
The Company
cannot, at this time, determine the precise impact of Order No. 1000 on OG&E.
The Company
has no reason to believe that the implementation of Order No. 1000 will impact those transmission projects for which OG&E has received a notice to proceed from the SPP.
Oklahoma Demand Program Rider Review - SmartHours Program
In July 2012, OG&E filed an application with the OCC to recover certain costs associated with Demand Programs through the Demand Program Rider, including the lost revenues associated with the SmartHours program. The SmartHours program is designed to incentivize participating customers to reduce on-peak usage or shift usage to off-peak hours during the months of May through October, by offering lower rates to those customers in the off-peak hours of those months. Lost revenues are created by the difference in the standard rates and the lower incentivized rates. Non-SmartHours program customers benefit from the reduction of on-peak usage by SmartHours customers by the reduction of more costly on-peak generation and the delay in adding new on-peak generation.
In December 2012, the OCC issued an order approving the recovery of costs associated with the Demand Programs, including the lost revenues associated with the SmartHours program, subject to the Oklahoma PUD staff review.
In March 2014, the Oklahoma PUD staff began their review of the Demand Program cost, including the lost revenues associated with the SmartHours program. In November 2014, OG&E believed that it had reached an agreement with the Oklahoma PUD staff on the methodology to be used to calculate lost revenues associated with the SmartHours program and the amount of
lost revenue for 2013, which totaled
$10.1 million
. The agreement also included utilizing the same methodology for calculating lost revenues for 2014 and beyond.
In January 2015, OG&E implemented rates that began recovering the 2013 lost revenues (approximately
$10.0 million
annually), in accordance with the agreement that it believed had been reached with the Oklahoma PUD staff.
In April 2015, the Oklahoma PUD staff filed an application, seeking an order from the OCC, for determining the proper methodology for calculating lost revenues pursuant to OG&E’s Demand Program Rider, primarily affecting the SmartHours program lost revenues. In the application, the Oklahoma PUD staff recommends the OCC approve the Oklahoma PUD staff methodology for calculating lost revenues associated with the SmartHours program, which differs from the methodology that OG&E believes it agreed upon and which would result in recovery of lost revenue for 2013 of
$2.6 million
, a reduction of
$7.5 million
from the amount recorded by OG&E for 2013.
OG&E believes the methodology agreed to in November 2014 was consistent with the 2012 OCC order and it is probable that OG&E will recover
$10.1 million
of lost revenues associated with 2013,
$11.6 million
associated with 2014 and
$14.9 million
associated with 2015. Through March 31, 2016, OG&E had collected from its customers approximately
$12.6 million
of the
$36.6 million
of lost revenues for 2013, 2014 and 2015.
A hearing on the Oklahoma PUD staff’s application was heard by the ALJ on June 30, 2015 and July 1, 2015. On March 28, 2016, the ALJ issued her recommendation in the case. She found, among other things, that OG&E and the Oklahoma PUD staff had not reached an agreement on all aspects of the calculation of lost revenues, that OG&E’s methodology for calculating lost revenues was not consistent with the provisions of OG&E’s tariff, and that the PUD staff’s methodology for calculating lost revenues was proper. The ALJ recommended that the OCC order OG&E to adjust its calculation of SmartHours lost revenue for 2013 through 2015 consistent with the PUD staff’s methodology, but that such adjustment should only be applied on a prospective basis following the issuance of an order by the OCC. The ALJ’s recommendation is not clear on whether the phrase “on a prospective basis” would allow OG&E to recover the remaining
$24.0 million
of 2013, 2014 and 2015 lost revenues that OG&E recorded pursuant to its methodology, or only the amounts that OG&E has collected at the time of an OCC order.
The OCC can accept, modify or reject in whole or in part the ALJ’s recommendation. To the extent the OCC does not authorize OG&E to collect and retain the remaining lost revenue that it has recorded, OG&E will incur an impairment charge. OG&E is unable to predict what actions the OCC will take, or when the OCC will rule in this case.
Environmental Compliance Plan
On August 6, 2014, OG&E filed an application with the OCC for 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 sought approval of the ECP 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 asks the OCC to predetermine the prudence of its Mustang Modernization Plan which calls for replacing OG&E's soon-to-be retired Mustang steam turbines in late 2017 with 400 MWs of new, efficient combustion 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 to be approximately
$1.1 billion
.
Approximately seven months after OG&E filed its application, 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 exceptions 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 ALJ’s recommendation to pre-approve certain estimated costs of the environmental recovery plan, and the ALJ’s recommendation to defer all other cost recovery issues until the next general rate case.
On December 2, 2015, OG&E received an order from the OCC denying its plan to comply with the environmental mandates of the Federal Clean Air Act, Regional Haze and MATS. The OCC also denied OG&E's request for pre-approval of its Mustang Modernization Plan, revised depreciation rates for both the retirement of the Mustang units and the replacement combustion turbines and pre-approval of early retirement and replacement of generating units at its Mustang site, including cost recovery through a rider.
On December 11, 2015, OG&E filed a motion requesting modification of the OCC order for the purposes of approving only the ECP. OG&E did not seek modification to any other provisions of the OCC order, including cost recovery. OG&E also agreed that it would not implement a rider for recovery of the costs of the ECP until and unless authorized by the OCC in a subsequent proceeding.
On December 23, 2015, the OCC rejected, by a two to one vote, a proposal by Commissioner Dana Murphy to grant OG&E's December 11, 2015 motion.
On February 12, 2016, OG&E filed an application requesting the OCC to issue an order approving its decision to install dry scrubbers at the Sooner facility on or before May 2, 2016. OG&E's application does not seek approval of the costs of the dry scrubber project. Instead, the reasonableness of the costs would be considered after the project is completed and OG&E seeks recovery in its rates. At the hearing on OG&E's application to approve OG&E's decision to install dry scrubbers and in testimony filed in support of its application, OG&E stated that it would cancel the dry scrubber project if the OCC did not approve OG&E's application on or before May 2, 2016.
On April 28, 2016, the OCC approved the dry scrubber project and OG&E is proceeding with the project. Other parties to the proceeding have the opportunity to appeal the OCC's decision to the Oklahoma Supreme Court.
As of March 31, 2016, OG&E had incurred
$107.3 million
of construction work in progress on the dry scrubbers.
Fuel Adjustment Clause Review for Calendar Year 2014
On July 28, 2015, the OCC staff filed an application to review OG&E's fuel adjustment clause for calendar year 2014, including the prudence of OG&E's electric generation, purchased power and fuel procurement costs.
On April 7, 2016, a hearing was held in this matter, at which time the ALJ said she would recommend that the OCC find that for the calendar year 2014 OG&E’s electric generation, purchased power and fuel procurement processes and costs were prudent.
The Company
expects to receive an order from the OCC by the end of the second quarter 2016.
Integrated Resource Plans
In August 2015, OG&E initiated the process to update its IRP pursuant to the OCC rules. After engaging interested stakeholders in August and September, OG&E finalized the 2015 IRP and submitted it to the OCC on October 1, 2015. The 2015 IRP updated certain assumptions contained in the IRP submitted in 2014, but did not make any material changes to the ECP and other parts of the action plan contained in the IRP submitted in 2014.
Oklahoma Rate Case Filing
As previously reported in
the Company's
2015 Form 10-K, on December 18, 2015, OG&E filed a general rate case with the OCC requesting a rate increase of
$92.5 million
and a
10.25 percent
return on equity based on a common equity percentage of
53 percent
.
The rate case was based on a June 30, 2015 test year, and included recovery of
$1.6 billion
of electric infrastructure additions since its last general rate case in Oklahoma, the impact of the expiration of OG&E's wholesale contracts, increased operating costs such as vegetation management and increased recovery of depreciation and plant dismantlement of approximately
$8.0 million
. Each
0.25 percent
change in the requested return on equity affects the requested rate increase by approximately
$9.0 million
.
In late March 2016, the PUD Staff and other intervenors filed testimony in the case. The PUD Staff recommended a
$6.1 million
annual rate increase based on a return on equity of
9.25 percent
and a common equity percentage of
53 percent
.
Included in the PUD Staff recommendation is a reduction of
$33.0 million
to OG&E’s requested increase for depreciation and plant dismantlement.
The staff of the Oklahoma Attorney General made a recommendation to reduce rates
$10.8 million
based on a return on equity of
9.25 percent
and a common equity percentage of
50 percent
, as well as a recommendation to reduce rates
$13.7 million
based on a return on equity of
8.90 percent
and a common equity percentage of
53 percent
.
Included in the Attorney General's recommendation is a reduction of
$20.9 million
to OG&E’s requested increase for depreciation and plant dismantlement.
The Oklahoma Industrial Electric Consumers recommended a
$47.9 million
annual rate decrease based on a return on equity of
9.00 percent
and a common equity percentage of
53 percent
.
Included in the Oklahoma Industrial Electric Consumers' recommendation is a reduction of
$52.5 million
to OG&E’s requested increase for depreciation and plant dismantlement.
The hearings in this matter began on May 3, 2016. While there is no statutory deadline for the ALJ to make a recommendation or for the commission to issue a final order, OG&E is allowed to implement increased rates subject to refund, 180 days after the filing of its application on December 18, 2015.
Arkansas Rate Case Filing
OG&E intends to file a general rate case with the APSC by August 15, 2016.