☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission File Number:1-1097
Oklahoma Gas and Electric Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H(2).
OKLAHOMA GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Oklahoma
73-0382390
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
321 North Harvey
P.O. Box 321
Oklahoma City, Oklahoma73101-0321
(Address of principal executive offices)
(Zip Code)
405-553-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
N/A
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.☑Yes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).☑Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☑
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ Yes ☑ No
At September 30, 2019, there were 40,378,745 shares of common stock, par value $2.50 per share, outstanding, all of which were held by OGE Energy Corp. There were no other shares of capital stock of the registrant outstanding at such date.
The following is a glossary of frequently used abbreviations that are found throughout this Form 10-Q.
Abbreviation
Definition
2018 Form 10-K
Annual Report on Form 10-K for the year ended December 31, 2018
2017 Tax Act
Tax Cuts and Jobs Act of 2017
AES
AES-Shady Point, Inc.
APSC
Arkansas Public Service Commission
ASC
FASB Accounting Standards Codification
ASU
FASB Accounting Standards Update
CO2
Carbon dioxide
CSAPR
Cross-State Air Pollution Rule
Dry Scrubber
Dry flue gas desulfurization unit with spray dryer absorber
Enable
Enable Midstream Partners, LP, a midstream partnership formed between OGE Energy and CenterPoint Energy, Inc.
EPA
U.S. Environmental Protection Agency
FASB
Financial Accounting Standards Board
Federal Clean Water Act
Federal Water Pollution Control Act of 1972, as amended
FERC
Federal Energy Regulatory Commission
FIP
Federal Implementation Plan
GAAP
Accounting principles generally accepted in the U.S.
MATS
Mercury and Air Toxics Standards
MW
Megawatt
MWh
Megawatt-hour
NAAQS
National Ambient Air Quality Standards
NOX
Nitrogen oxide
OCC
Oklahoma Corporation Commission
OG&E
Oklahoma Gas and Electric Company, wholly owned subsidiary of OGE Energy
OGE Energy
OGE Energy Corp., parent company of OG&E
Pension Plan
Qualified defined benefit retirement plan
QF
Qualified cogeneration facility
Regional Haze Rule
The EPA's Regional Haze Rule
Restoration of Retirement Income Plan
Supplemental retirement plan to the Pension Plan
SIP
State Implementation Plan
SO2
Sulfur dioxide
SPP
Southwest Power Pool
System sales
Sales to OG&E's customers
U.S.
United States of America
ii
FORWARD-LOOKING STATEMENTS
Except for the historical statements contained herein, the matters discussed in this Form 10-Q, including those matters discussed within "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," areforward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "believe," "estimate," "expect," "intend," "objective," "plan," "possible," "potential," "project" and similar expressions. Actual results may vary materiallyfrom those expressed in forward-looking statements. In addition to the specific risk factors discussed within "Item 1A. Risk Factors" inOG&E's 2018 Form 10-Kand"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations"herein, factors that could cause actual results to differ materiallyfrom the forward-looking statementsinclude, but are not limited to:
•
general economic conditions, including the availability of credit, access to existing lines of credit, access to the commercial paper markets, actions of rating agencies and their impact on capital expenditures;
•
the ability ofOG&E and OGE Energyto access the capital markets and obtain financing on favorable terms as well as inflation rates and monetary fluctuations;
•
the ability to obtain timely and sufficient rate relief to allow for recovery of items such as capital expenditures, fuel costs, operating costs, transmission costs and deferred expenditures;
•
prices and availability of electricity, coal and natural gas;
•
business conditions in the energy industry;
•
competitive factors, including the extent and timing of the entry of additional competition in the markets served byOG&E;
•
the impact on demand for our services resulting from cost-competitive advances in technology, such as distributed electricity generation and customer energy efficiency programs;
•
technological developments, changing markets and other factors that result in competitive disadvantages and create the potential for impairment of existing assets;
•
factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages, unusual maintenance or repairs; unanticipated changes to fossil fuel, natural gas or coal supply costs or availability due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline system constraints;
•
availability and prices of raw materials for current and future construction projects;
•
the effect of retroactive pricing of transactions in the SPP markets or adjustments in market pricing mechanisms by the SPP;
•
federal or state legislation and regulatory decisions and initiatives that affect cost and investment recovery, have an impact on rate structures or affect the speed and degree to which competition entersOG&E'smarkets;
•
environmental laws, safety laws or other regulations that may impact the cost of operations or restrict or change the wayOG&Eoperates its facilities;
•
changes in accounting standards, rules or guidelines;
•
the discontinuance of accounting principles for certain types of rate-regulated activities;
•
the cost of protecting assets against, or damage due to, terrorism or cyberattacks and other catastrophic events;
•
creditworthiness of suppliers, customers and other contractual parties;
•
social attitudes regarding the utility industry;
•
identification of suitable investment opportunities to enhance shareholder returns and achieve long-term financial objectives through business acquisitions and divestitures;
•
increased pension and healthcare costs;
•
costs and other effects of legal and administrative proceedings, settlements, investigations, claims and matters, including, but not limited to, those described in this Form 10-Q;and
•
other risk factors listed in the reports filed byOG&Ewith the Securities and Exchange Commission, including those listed within"Item 1A.Risk Factors"in OG&E's2018 Form 10-K.
OG&Eundertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
(In millions)
2019
2018
2019
2018
OPERATING REVENUES
Revenues from contracts with customers
$
739.2
$
684.5
$
1,717.7
$
1,710.1
Other revenues
16.2
14.3
41.4
48.4
Operating revenues
755.4
698.8
1,759.1
1,758.5
COST OF SALES
234.0
244.4
625.3
663.6
OPERATING EXPENSES
Other operation and maintenance
130.0
121.1
370.3
352.2
Depreciation and amortization
94.1
81.1
260.8
240.8
Taxes other than income
22.3
21.9
66.8
66.2
Operating expenses
246.4
224.1
697.9
659.2
OPERATING INCOME
275.0
230.3
435.9
435.7
OTHER INCOME (EXPENSE)
Allowance for equity funds used during construction
1.0
6.7
3.7
20.0
Other net periodic benefit income (expense)
(0.7
)
0.5
(0.3
)
(9.5
)
Other income
2.0
3.6
4.5
10.2
Other expense
(2.4
)
(0.6
)
(3.9
)
(2.0
)
Net other income (expense)
(0.1
)
10.2
4.0
18.7
INTEREST EXPENSE
Interest on long-term debt
37.5
40.2
101.9
119.5
Allowance for borrowed funds used during construction
(0.6
)
(3.3
)
(2.2
)
(9.8
)
Interest on short-term debt and other interest charges
1.1
0.9
4.0
4.6
Interest expense
38.0
37.8
103.7
114.3
INCOME BEFORE TAXES
236.9
202.7
336.2
340.1
INCOME TAX EXPENSE
9.7
18.8
14.9
32.9
NET INCOME
$
227.2
$
183.9
$
321.3
$
307.2
Other comprehensive income, net of tax
—
—
—
—
COMPREHENSIVE INCOME
$
227.2
$
183.9
$
321.3
$
307.2
The accompanying Notes to CondensedFinancial Statements are an integral part hereof.
2
OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSEDSTATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(In millions)
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
321.3
$
307.2
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization
260.8
240.8
Deferred income taxes and investment tax credits, net
8.7
57.2
Allowance for equity funds used during construction
(3.7
)
(20.0
)
Stock-based compensation expense
3.7
3.4
Regulatory assets
(48.1
)
(4.8
)
Regulatory liabilities
(32.1
)
(3.7
)
Other assets
2.8
2.0
Other liabilities
1.1
(0.3
)
Change in certain current assets and liabilities:
Accounts receivable and accrued unbilled revenues, net
(78.6
)
(56.8
)
Fuel, materials and supplies inventories
8.0
14.9
Fuel recoveries
(44.8
)
37.5
Other current assets
8.9
25.3
Accounts payable
(54.1
)
(37.9
)
Income taxes payable - parent
2.6
(22.5
)
Other current liabilities
(13.1
)
75.2
Net cash provided from operating activities
343.4
617.5
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (less allowance for equity funds used during construction)
(476.5
)
(413.8
)
Net cash used in investing activities
(476.5
)
(413.8
)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt
296.4
396.0
Payment of long-term debt
(250.0
)
(250.0
)
Changes in advances with parent
99.9
(349.7
)
Net cash provided from (used in) financing activities
146.3
(203.7
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
13.2
—
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
—
—
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
13.2
$
—
The accompanying Notes to CondensedFinancial Statements are an integral part hereof.
3
OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSEDBALANCE SHEETS
(Unaudited)
September 30,
December 31,
(In millions)
2019
2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
13.2
$
—
Accounts receivable, less reserve of $1.7 and $1.7, respectively
226.5
172.9
Accrued unbilled revenues
87.6
62.6
Advances to parent
217.0
319.5
Fuel inventories
43.6
57.6
Materials and supplies, at average cost
93.5
126.7
Fuel clause under recoveries
48.7
2.0
Other
16.6
25.5
Total current assets
746.7
766.8
OTHER PROPERTY AND INVESTMENTS
4.9
5.0
PROPERTY, PLANT AND EQUIPMENT
In service
12,656.0
11,988.7
Construction work in progress
125.2
376.4
Total property, plant and equipment
12,781.2
12,365.1
Less: accumulated depreciation
3,826.1
3,727.4
Net property, plant and equipment
8,955.1
8,637.7
DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets
304.7
285.8
Other
8.3
9.2
Total deferred charges and other assets
313.0
295.0
TOTAL ASSETS
$
10,019.7
$
9,704.5
The accompanying Notes to CondensedFinancial Statements are an integral part hereof.
4
OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSEDBALANCE SHEETS (Continued)
(Unaudited)
September 30,
December 31,
(In millions)
2019
2018
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable
$
149.4
$
215.0
Customer deposits
82.7
83.6
Accrued taxes
60.6
44.0
Accrued interest
35.7
44.5
Accrued compensation
24.5
33.8
Long-term debt due within one year
—
250.0
Fuel clause over recoveries
2.2
0.3
Other
75.8
86.8
Total current liabilities
430.9
758.0
LONG-TERM DEBT
3,194.7
2,896.9
DEFERRED CREDITS AND OTHER LIABILITIES
Accrued benefit obligations
129.0
137.9
Deferred income taxes
926.4
892.7
Deferred investment tax credits
7.1
7.2
Regulatory liabilities
1,233.3
1,270.7
Other
170.1
137.8
Total deferred credits and other liabilities
2,465.9
2,446.3
Total liabilities
6,091.5
6,101.2
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDER'S EQUITY
Common stockholder's equity
1,035.4
1,031.8
Retained earnings
2,892.8
2,571.5
Total stockholder's equity
3,928.2
3,603.3
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$
10,019.7
$
9,704.5
The accompanying Notes to CondensedFinancial Statements are an integral part hereof.
5
OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSEDSTATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Unaudited)
(In millions)
Shares Outstanding
Common Stock
Premium on Common Stock
Retained Earnings
Total
Balance at December 31, 2018
40.4
$
100.9
$
930.9
$
2,571.5
$
3,603.3
Net income
—
—
—
19.6
19.6
Stock-based compensation
—
—
1.0
—
1.0
Balance at March 31, 2019
40.4
$
100.9
$
931.9
$
2,591.1
$
3,623.9
Net income
—
—
—
74.5
74.5
Stock-based compensation
—
—
1.0
—
1.0
Balance at June 30, 2019
40.4
$
100.9
$
932.9
$
2,665.6
$
3,699.4
Net income
—
—
—
227.2
227.2
Stock-based compensation
—
—
1.6
—
1.6
Balance at September 30, 2019
40.4
$
100.9
$
934.5
$
2,892.8
$
3,928.2
Balance at December 31, 2017
40.4
$
100.9
$
926.3
$
2,428.5
$
3,455.7
Net income
—
—
—
31.3
31.3
Stock-based compensation
—
—
1.0
—
1.0
Balance at March 31, 2018
40.4
$
100.9
$
927.3
$
2,459.8
$
3,488.0
Net income
—
—
—
92.0
92.0
Stock-based compensation
—
—
1.1
—
1.1
Balance at June 30, 2018
40.4
$
100.9
$
928.4
$
2,551.8
$
3,581.1
Net income
—
—
—
183.9
183.9
Dividends declared on common stock
—
—
—
(185.0
)
(185.0
)
Stock-based compensation
—
—
1.3
—
1.3
Balance at September 30, 2018
40.4
$
100.9
$
929.7
$
2,550.7
$
3,581.3
The accompanying Notes to CondensedFinancial Statements are an integral part hereof.
6
OKLAHOMA GAS AND ELECTRIC COMPANY
NOTES TO CONDENSEDFINANCIAL STATEMENTS
(Unaudited)
1.
Summary of Significant Accounting Policies
OG&E's significant accounting policies are detailed in "Note 1. Summary of Significant Accounting Policies" in OG&E's 2018 Form 10-K. Changes to OG&E's accounting policies as a result of adopting ASU 2016-02, "Leases (Topic 842)," and the related ASU 2018-01 and ASU 2018-11 are discussed in Notes 2 and 4 in this Form 10-Q.
Organization
OG&Egenerates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. Its operationsare subject to regulation by the OCC, the APSC and the FERC. OG&E was incorporated in 1902 under the laws of the Oklahoma Territory. 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.OG&E is a wholly owned subsidiary of OGE Energy, a holding company with investments in energy and energy services providers offering physical delivery and related services for both electricity and natural gas primarily in the south-central U.S.
Basis of Presentation
The CondensedFinancial Statements included herein have been prepared by OG&E, 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, OG&E 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 thefinancial position of OG&E atSeptember 30, 2019andDecember 31, 2018, the results of its operations for the three and nine months endedSeptember 30, 2019and2018 and its cash flows for thenine months endedSeptember 30, 2019 and 2018have been included and are of a normal, recurring nature except as otherwise disclosed. Management also has evaluated the impact of events occurring afterSeptember 30, 2019up to the date of issuance of these Condensed Financial Statements, and these statements contain all necessary adjustments and disclosures resulting from that evaluation.
Due to seasonal fluctuations and other factors, OG&E'soperating results for thethree and nine months endedSeptember 30, 2019are not necessarily indicative of the results that may be expected for the year endingDecember 31, 2019or for any future period.The CondensedFinancial Statements and Notes thereto should be read in conjunction with the auditedFinancial Statements and Notes thereto included in OG&E's 2018 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.
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.
7
The following table is a summary of OG&E's regulatory assets and liabilities.
September 30,
December 31,
(In millions)
2019
2018
REGULATORY ASSETS
Current:
Fuel clause under recoveries
$
48.7
$
2.0
Production tax credit rider over credit (A)
4.6
6.9
Oklahoma demand program rider under recovery (A)
—
6.4
Other (A)
4.4
3.2
Total current regulatory assets
$
57.7
$
18.5
Non-current:
Benefit obligations regulatory asset
$
168.0
$
188.2
Deferred storm expenses
64.5
36.5
Sooner Dry Scrubbers
20.8
4.5
Smart Grid
20.2
25.6
Unamortized loss on reacquired debt
10.8
11.4
Arkansas deferred pension expenses
7.8
6.8
Other
12.6
12.8
Total non-current regulatory assets
$
304.7
$
285.8
REGULATORY LIABILITIES
Current:
Reserve for tax refund and interim surcharge (B)
$
21.2
$
15.4
SPP cost tracker over recovery (B)
7.3
16.8
Oklahoma demand program rider over recovery (B)
4.8
—
Fuel clause over recoveries
2.2
0.3
Transmission cost recovery rider over recovery (B)
0.7
2.7
Other (B)
3.4
1.4
Total current regulatory liabilities
$
39.6
$
36.6
Non-current:
Income taxes refundable to customers, net
$
912.3
$
937.1
Accrued removal obligations, net
313.9
308.1
Pension tracker
1.0
18.7
Other
6.1
6.8
Total non-current regulatory liabilities
$
1,233.3
$
1,270.7
(A)
Included in Other Current Assets in theCondensedBalance Sheets.
(B)
Included in Other Current Liabilities in theCondensedBalance Sheets.
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 or liabilities, which could have significant financial effects.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
8
2.
Accounting Pronouncements
Recently Adopted Accounting Standards
Leases.In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The main difference between prior lease accounting and Topic 842 is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under current accounting guidance. Lessees, such as OG&E, 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 is equal to the present value of lease payments. The asset is based on the liability, subject to adjustment for items such as initial direct costs.For income statement purposes, Topic 842 retains a dual model, requiring leases to be classified as either operating or finance. Operating leases result in straight-line expense, while finance leases result in a front-loaded expense pattern, similar to prior capital leases. Classification of operating and finance leases is based on criteria that are largely similar to those applied in prior lease guidance but without the explicit thresholds. OG&E adopted this standard in the first quarter of 2019 utilizing the modified retrospective transition method.
Various practical expedients for the application of Topic 842 were approved, and OG&E elected to apply the below:
•
a package of practical expedients allowing entities to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases;
•
an option that permits an entity to elect a transitional practical expedient, to be applied consistently, to not evaluate under Topic 842 land easements that exist or expired before the entity's adoption of Topic 842 and that were not previously accounted for as leases under ASC 840, "Leases"; and
•
an option that permits an entity to elect to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, provided that if an entity elects this additional (and optional) transition method, the entity will provide the required Topic 840 disclosures for all periods that continue to be reported under Topic 840.
OG&E evaluated its current lease contracts and, at January 1, 2019, recognized $32.3 million and $36.9 millionof operating lease right-of-use assets and liabilities, respectively, for railcar and wind farm landleases in the CondensedBalance Sheet. The new standard did not have a material impact on OG&E's 2019 periods within the CondensedStatements of Income. Further, OG&E evaluated its existing processes and controls regarding lease identification, accounting and presentation and implemented changes as necessary in order to adequately address the requirements of Topic 842. Additional information regarding OG&E's adoption of Topic 842 can be found in OG&E's 2018 Form 10-K.
Issued Accounting Standards Not Yet Adopted
Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Information." The amendments in this update require entities to measure all expected credit losses of financial assets held at a reporting date based on historical experience, current conditions and reasonable and supportable forecasts in order to record credit losses in a more timely manner. ASU 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for fiscal years beginning after December 2019 and will be applied utilizing a modified-retrospective approach. Early adoption is permitted. OG&E continues to evaluate the impact of this ASU and does not believe it will have a material effect on its CondensedFinancial Statements.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 2019 and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. OG&E continues to evaluate the impact of this ASU on its CondensedFinancial Statements.
9
3.
Revenue Recognition
The following table disaggregates OG&E's revenues from contracts with customers by customer classification. OG&E's operating revenues disaggregated by customer classification can be found in "Results of Operations" within "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions)
2019
2018
2019
2018
Residential
$
318.9
$
281.0
$
692.4
$
694.6
Commercial
172.9
150.8
383.7
386.6
Industrial
66.8
67.2
172.0
174.6
Oilfield
58.6
52.4
156.9
140.1
Public authorities and street light
65.7
58.7
150.2
151.5
System sales revenues
682.9
610.1
1,555.2
1,547.4
Provision for rate refund
(2.3
)
13.5
(2.9
)
(6.2
)
Integrated market
12.8
16.9
29.8
38.7
Transmission
36.7
33.2
112.6
109.2
Other
9.1
10.8
23.0
21.0
Revenues from contracts with customers
$
739.2
$
684.5
$
1,717.7
$
1,710.1
4.
Leases
OG&E evaluates all contracts under Topic 842 to determine if the contract is or contains a lease and to determine classification as an operating or finance lease. If a lease is identified, OG&E recognizes a right-of-use asset and a lease liability in its Balance Sheets. OG&E recognizes and measures a lease liability when it concludes the contract contains an identified asset that OG&E controls through having the right to obtain substantially all of the economic benefits and the right to direct the use of the identified asset. The liability is equal to the present value of lease payments, and the asset is based on the liability, subject to adjustment, such as for initial direct costs. Further, OG&E utilizes an incremental borrowing rate for purposes of measuring lease liabilities, if the discount rate is not implicit in the lease. To calculate the incremental borrowing rate, OG&E starts with a current pricing report for OG&E's senior unsecured notes, which indicates rates for periods reflective of the lease term, and adjusts for the effects of collateral to arrive at the secured incremental borrowing rate. As permitted by Topic 842, OG&E made an accounting policy election to not apply the balance sheet recognition requirements to short-term leases and to not separate lease components from nonlease components when recognizing and measuring lease liabilities. For income statement purposes, OG&E records operating lease expense on a straight-line basis.
Based on its evaluation of all contracts under Topic 842, as described above, OG&E concluded it has operating lease obligations for railcar leases and wind farm land leases.
Operating Leases
OG&E Railcar Lease Agreement
Effective February 1, 2019, OG&E renewed a railcar lease agreement for 780 rotary gondola railcars to transport coal from Wyoming to OG&E's coal-fired generation units. Rental payments are charged to fuel expense and are recovered through OG&E's fuel adjustment clauses. On February 1, 2024, OG&E has the option to either purchase the railcars at a stipulated fair market value or renew the lease. If OG&E chooses not to purchase the railcars or renew the lease agreement and the actual fair value of the railcars is less than the stipulated fair market value, OG&E would be responsible for the difference in those values up to a maximum of$6.8 million.
OG&E Wind Farm Land Lease Agreements
OG&E has operating leases related to land for Centennial, OU Spirit and Crossroads wind farms with terms of 25 to 30 years. The Centennial lease has rent escalations which increase annually based on the Consumer Price Index. While lease liabilities are not remeasured as a result of changes to the Consumer Price Index, changes to the Consumer Price Index are treated as variable
10
lease payments and recognized in the period in which the obligation for those payments was incurred. The OU Spirit and Crossroads leases have rent escalations which increase after five and 10 years. Although the leases are cancellable, OG&E is required to make annual lease payments as long as the wind turbines are located on the land. OG&E does not expect to terminate the leases until the wind turbines reach the end of their useful life.
Financial Statement Information and Maturity Analysis of Lease Liabilities
Operating lease cost was$1.3 millionand$3.8 millionfor thethree and nine months ended September 30, 2019, respectively.Payments for operating lease obligations were$4.1 millionfor the year ended December 31, 2018.
The following table presents amounts recognized for operating leases in OG&E's 2019 CondensedCash Flow Statement and Balance Sheet and supplemental information related to those amounts recognized, as well as a maturity analysis of OG&E's operating lease liabilities.
Nine Months Ended
(In millions)
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
$
4.3
Right-of-use assets obtained in exchange for new operating lease liabilities
$
10.7
(Dollars in millions)
September 30, 2019
Right-of-use assets at period end (A)
$
40.4
Operating lease liabilities at period end (B)
$
45.2
Operating lease weighted-average remaining lease term (in years)
13.6
Operating lease weighted-average discount rate
3.9
%
Future minimum operating lease payments as of: (In millions)
September 30, 2019
December 31, 2018 (C)(D)
2019
$
0.6
$
21.1
2020
5.3
2.9
2021
5.2
2.9
2022
5.2
2.9
2023
5.2
2.9
Thereafter
37.8
37.6
Total future minimum lease payments
59.3
$
70.3
Less: Imputed interest
14.1
Present value of net minimum lease payments
$
45.2
(A)
Included in Property, Plant and Equipment in the 2019 CondensedBalance Sheet.
(B)
Included in Other Deferred Credits and Other Liabilities in the 2019 CondensedBalance Sheet.
(C)
Amounts included for comparability and accounted for in accordance with ASC 840, "Leases."
(D)
At the end of the railcar lease term, which was February 1, 2019, OG&E had the option to either purchase the railcars at a stipulated fair market value or renew the lease. OG&E renewed the lease effective February 1, 2019. If OG&E chose not to purchase the railcars or renew the lease agreement and the actual fair value of the railcars was less than the stipulated fair market value, OG&E would have been responsible for the difference in those values up to a maximum of$16.2 million.
5.
Related Party Transactions
OGE Energy charges operating costs to OG&Ebased on several factors, and operating costs directly related to OG&Eare assigned as such. Operating costs incurred for the benefit of OG&E are allocated either as overhead based primarily on labor costs or using the "Distrigas" method, which is a three-factor formula that uses an equal weighting of payroll, net operating revenues and gross property, plant and equipment.
11
OGE Energy charged operating costs to OG&E of $37.0 million and $35.1 million during the three months endedSeptember 30, 2019 and 2018, respectively, and $109.9 million and $102.6 million during the nine months ended September 30, 2019 and 2018, respectively.
As discussed in OG&E's 2018 Form 10-K, Enable provides gas transportation services to OG&E pursuant to an agreement that 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 thethree and nine months endedSeptember 30, 2019 and 2018.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions)
2019
2018
2019
2018
Operating revenues:
Electricity to power electric compression assets
$
4.5
$
4.7
$
12.1
$
12.2
Cost of sales:
Natural gas transportation services
$
9.4
$
8.8
$
33.5
$
26.3
Natural gas (sales) purchases
$
(1.1
)
$
0.1
$
(5.4
)
$
2.6
6.
Fair Value Measurements
The classification of OG&E'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).
OG&E had nofinancial instruments measured at fair value on a recurring basis atSeptember 30, 2019 and December 31, 2018.The following table summarizes the carrying amount and fair value of OG&E's financial instruments at September 30, 2019 and December 31, 2018, as well as the classification level within the fair value hierarchy.
September 30,
December 31,
2019
2018
(In millions)
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Classification
Long-term Debt (including Long-term Debt due within one year):
Senior Notes
$
3,049.7
$
3,580.0
$
3,001.9
$
3,178.2
Level 2
OG&E Industrial Authority Bonds
$
135.4
$
135.4
$
135.4
$
135.4
Level 2
Tinker Debt
$
9.6
$
10.3
$
9.6
$
8.7
Level 3
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7.
Stock-Based Compensation
The following table summarizes OG&E's pre-tax compensation expense and related income tax benefit during thethree and nine months endedSeptember 30, 2019 and 2018related to OGE Energy's performance units and restricted stock for OG&E employees.
Three Months Ended September 30,
Nine Months Ended September 30,
(In millions)
2019
2018
2019
2018
Performance units:
Total shareholder return
$
0.8
$
0.6
$
2.3
$
2.1
Earnings per share
0.8
0.7
1.1
1.3
Total performance units
1.6
1.3
3.4
3.4
Restricted stock
0.1
—
0.3
—
Total compensation expense
$
1.7
$
1.3
$
3.7
$
3.4
Income tax benefit
$
0.4
$
0.4
$
0.9
$
0.9
During thethree and nine months endedSeptember 30, 2019, OGE Energy issued to OG&E employees an immaterial number of shares and164,794shares, respectively, of new common stock pursuant to OGE Energy's Stock Incentive Plan to satisfy restricted stock grants and payouts of earned performance units.
8.
Income Taxes
OG&E is a member of an affiliated group that files consolidated income tax returns in the U.S. federal jurisdiction and various state jurisdictions.With few exceptions, OG&E is no longer subject to U.S. federal examinations by tax authorities for years prior to 2016 or state and local tax examinations by tax authorities for years prior to2015. 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 will be 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 and earns Oklahoma state tax credits associated with its investments in electric generating facilities which further reduce OG&E's effective tax rate.
9.
Long-Term Debt
AtSeptember 30, 2019, OG&E was in compliance with all of its debt agreements.
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 included in the following table.
Series
Date Due
Amount
(In millions)
1.30%
-
2.50%
Garfield Industrial Authority, January 1, 2025
$
47.0
1.34%
-
2.35%
Muskogee Industrial Authority, January 1, 2025
32.4
1.36%
-
2.48%
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, at100 percentof 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
13
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 OG&E's CondensedBalance Sheets. OG&E believes that it has sufficient liquidity to meet these obligations.
Issuance of Long-Term Debt
In June 2019, OG&E issued $300.0 million of 3.30 percent senior notes dueMarch 15, 2030. The proceeds from the issuance were added to OG&E's general funds to be used for general corporate purposes, including to repay short-term debt (including debt pertaining to the acquisition of the River Valley plant) and to fund ongoing capital expenditures and working capital.
10.
Short-Term Debt and CreditFacility
OG&E has a$450.0 millionrevolving credit facility that matures on March 8, 2023. This facility is available to back up OG&E's commercial paper borrowings, to provide revolving credit borrowings and can also be used as a letter of credit facility. At September 30, 2019, there were $0.3 million supporting letters of credit outstanding at a weighted-average interest rate of 1.15 percent. There were no outstanding commercial paper borrowings at September 30, 2019.
AtSeptember 30, 2019, there were $217.0 million in advances to OGE Energy compared to $319.5 million at December 31, 2018. OG&E has an intercompany borrowing agreement with OGE Energy whereby OG&E has access to up to$350.0 millionof OGE Energy's revolving credit amount. This agreement has a termination date of March 8, 2023. At September 30, 2019, there were no intercompany borrowings under this agreement.
OGE Energy's and OG&E's ability to access the commercial paper market could be adversely impacted by a credit ratings downgrade or major market disruptions.Pricing grids associated withOGE Energy's and OG&E'screditfacilitiescould 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 ofOGE Energy's and OG&E'sshort-term borrowings, but a reduction inOGE Energy's and OG&E'scredit ratings would not result in any defaults or accelerations.Any future downgrade of OG&Ecould also lead to higher long-term borrowing costs and, if below investment grade, would requireOG&Eto 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 millionin short-term borrowings at any one time for a two-year period beginning January 1, 2019 and ending December 31, 2020.
11.
Retirement Plans and Postretirement Benefit Plans
In accordance with ASC Topic 715, "Compensation - Retirement Benefits," a one-time settlement charge is required to be recorded by an organization when lump sum payments or other settlements that relieve the organization from the responsibility for the pension benefit obligation during the plan year exceed the service cost and interest cost components of the organization's net periodic pension cost. During the first nine months of 2019, OG&E experienced an increase in both the number of employees electing to retire and the amount of lump sum payments paid to such employees upon retirement, which resulted in OG&E recording pension settlement charges of$13.2 million. The pension settlement charge did not require a cash outlay by OG&E and did not increase OG&E's total pension expense over time, as the charge was an acceleration of costs that otherwise would be recognized as pension expense in future periods.
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Net Periodic Benefit Cost
The following table presents the net periodic benefit cost components, before consideration of capitalized amounts, of OG&E's portion of OGE Energy's Pension Plan, Restoration of Retirement Income Plan and postretirement benefit plans that are included in the CondensedFinancial Statements. Service cost is presented within Other Operation and Maintenance, and interest cost, expected return on plan assets, amortization of net loss, amortization of unrecognized prior service cost and settlement cost are presented within Other Net Periodic Benefit Income (Expense) in OG&E's CondensedStatements of Income. OG&E recovers specific amounts of pension and postretirement medical costs in rates approved in its Oklahoma rate reviews. In accordance with approved orders, OG&E defers the difference between actual pension and postretirement medical expenses and the amount approved in its last Oklahoma rate review as a regulatory asset or regulatory liability. These amounts have been recorded in the Pension tracker in the regulatory assets and liabilities table in Note 1 and within Other Net Periodic Benefit Income (Expense) in OG&E's CondensedStatements of Income.
Pension Plan
Restoration of Retirement Income Plan
Three Months Ended
Nine Months Ended
Three Months Ended
Nine Months Ended
September 30,
September 30,
September 30,
September 30,
(In millions)
2019
2018
2019
2018
2019
2018
2019
2018
Service cost
$
2.3
$
2.4
$
6.7
$
7.4
$
—
$
—
$
0.1
$
0.1
Interest cost
3.5
4.5
11.7
13.2
—
0.1
0.1
0.2
Expected return on plan assets
(7.2
)
(8.0
)
(20.7
)
(24.9
)
—
—
—
—
Amortization of net loss
3.3
3.0
9.7
9.1
0.1
0.1
0.3
0.4
Settlement cost
1.7
8.6
12.9
8.6
0.3
—
0.3
—
Total net periodic benefit cost
3.6
10.5
20.3
13.4
0.4
0.2
0.8
0.7
Plus: Amount allocated from OGE Energy
0.9
2.7
3.5
3.7
0.2
0.7
0.4
1.0
Net periodic benefit cost
$
4.5
$
13.2
$
23.8
$
17.1
$
0.6
$
0.9
$
1.2
$
1.7
In addition to the net periodic benefit cost amounts presented in the above table for the three and nine months ended September 30, 2019 and 2018, OG&E also recognized the following:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions)
2019
2018
2019
2018
Increase (decrease) of pension expense to maintain allowed recoverable amount in Oklahoma jurisdiction (A)(B)
$
1.5
$
—
$
(0.2
)
$
7.8
Deferral of pension expense related to pension settlement charges: