# OGE ENERGY CORP. (OGE) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from OGE ENERGY CORP.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1021635/000102163522000037/oge-20211231.htm Accession: 0001021635-22-000037 Filing date: 2022-02-24 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/OGE/ All MD&A years: /company/OGE/mda/ Next year: /company/OGE/mda/fy2022/ (FY 2022) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following combined discussion is separately filed by OGE Energy and OG&E. However, OG&E does not make any representations as to information related solely to OGE Energy or the subsidiaries of OGE Energy other than itself. Introduction OGE Energy is a holding company with investments in energy and energy services providers offering physical delivery and related services for electricity in Oklahoma and western Arkansas and natural gas, crude oil and NGLs across the U.S. OGE Energy conducts these activities through two business segments: (i) electric utility and (ii) natural gas midstream operations. The accounts of OGE Energy and its wholly-owned subsidiaries, including OG&E, are included in OGE Energy's consolidated financial statements. All intercompany transactions and balances are eliminated in such consolidation. OGE Energy generally uses the equity method of accounting for investments where its ownership interest is between 20 percent and 50 percent and it lacks the power to direct activities that most significantly impact economic performance. Electric Utility Operations. OGE Energy's electric utility operations are conducted through OG&E, which generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. OG&E's rates 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 OGE Energy. 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. Natural Gas Midstream Operations. In February 2021, Enable entered into a definitive merger agreement with Energy Transfer, pursuant to which all outstanding common units of Enable were to be acquired by Energy Transfer in an all-equity transaction. The transaction closed on December 2, 2021, and under the terms of the merger agreement, OGE Energy received 95,389,721 common units of Energy Transfer for OGE Energy’s 110,982,805 common units of Enable. Upon the transaction closing, OGE Energy owned approximately three percent of Energy Transfer's outstanding limited partner units in lieu of the 25.5 percent interest in Enable that it previously owned. For periods prior to December 2, 2021, OGE Energy's natural gas midstream operations segment represented OGE Energy's investment in Enable, which OGE Energy accounted for as an equity method investment. Formed in 2013, Enable was primarily engaged in the business of gathering, processing, transporting and storing natural gas primarily in the south central U.S. Upon the closing of the Energy Transfer and Enable merger, OGE Energy's natural gas midstream operations segment represents OGE Energy's investment in Energy Transfer's equity securities and legacy Enable seconded employee pension and postretirement costs. The investment in Energy Transfer's equity securities is held through wholly-owned subsidiaries and ultimately OGE Holdings. At December 31, 2021, OGE energy owned 95.4 million, or approximately three percent, of Energy Transfer's limited partner units. OGE Energy does not have significant influence over Energy Transfer, as OGE Energy does not own general partner units in or have board representation at Energy Transfer. As such, OGE Energy accounts for its investment in Energy Transfer as an investment in equity securities under ASC 321, "Investments - Equity Securities" and records its investment at fair value through net income each reporting period. As part of the transaction, Energy Transfer also acquired the general partner interests of Enable from OGE Energy and CenterPoint for cash consideration. OGE Energy intends to exit the midstream segment in a prudent manner. 27 Energy Transfer's business is impacted by commodity prices which have experienced significant volatility in recent years. Commodity prices impact the drilling and production of natural gas and crude oil in the areas served by Energy Transfer's systems, and the volumes on Energy Transfer's systems can be negatively impacted if producers decrease drilling and production in those areas served. A decrease in volumes on Energy Transfer's systems due to a decrease in drilling or production by Energy Transfer's producer customers could decrease the cash flows from Energy Transfer's systems. In addition, Energy Transfer's processing arrangements expose them to commodity price fluctuations. A portion of OGE Energy's earnings and operating cash flows depend on the performance of, and distributions from, Energy Transfer. Energy Transfer is subject to a number of risks, including the reliance on the drilling and production decisions of others and the volatility of natural gas, NGLs and crude oil prices. The effects of COVID-19, including negative impacts on demand and commodity prices, could exacerbate these risks, as experienced in 2020. If any of those risks were to occur or reoccur, OGE Energy's business, financial condition, results of operations or cash flows could be materially adversely affected. On January 25, 2022, Energy Transfer announced a 15 percent increase in its quarterly cash distribution, resulting in a distribution of $0.175 per unit on its outstanding common units that was paid on February 18, 2022. Overview Strategy OGE Energy's purpose is to energize life, providing life-sustaining and life-enhancing products and services, while honoring its commitment to strengthen communities. Its business model is centered around growth and sustainability for employees (internally referred to as "members"), communities and customers and the owners of OGE Energy, its shareholders. OGE Energy is focused on: •delivering top-quartile safety results, while enabling members to deliver improved value to their communities, customers and shareholders; •transforming the customer experience by centering decisions on customer impact that will drive customer operations, communications and the digital experience including increased personalization and self-service; •providing safe, reliable energy to the communities and customers it serves, with a particular focus on enhancing the value of the grid by improving reliability and resiliency; •leading economic development and job growth by attracting new and diverse businesses to improve the infrastructure of the communities in Oklahoma and Arkansas; •ensuring the necessary mix of generation resources to meet the long-term capacity needs of our customers, with a progressively cleaner generation portfolio; •maintaining customer rates that are some of the most affordable in the country by continuing focus on innovation, intellectual curiosity and execution with excellence; •delivering on earnings commitments to shareholders to enhance access to lower-cost debt and equity capital that is needed to deploy infrastructure for the long-term economic health of its communities; •having strong regulatory and legislative relationships, built on integrity, for the long-term benefit of our customers, communities, shareholders and members; and •developing and growing our members to be able to provide a greater contribution to the company's success, while also improving their own lives. OGE Energy is focused on creating long-term shareholder value by targeting the consistent growth of earnings per share of five to seven percent at the electric utility, supported by strong load growth enabled by low customer rates and a strategy of investing in lower risk infrastructure projects that improve the economic vitality of the communities it serves in Oklahoma and Arkansas. OGE Energy plans to fully exit its natural gas midstream operations segment by prudently selling its Energy Transfer units. OGE Energy will continue to utilize cash distributions from its natural gas midstream operations segment and reinvest the proceeds from the sale of Energy Transfer units to help fund its business. In the next five years, OGE Energy expects to continue to grow the dividend, targeting a dividend payout ratio of 65 to 70 percent based on utility earnings. Over the next several years, OGE Energy expects earnings per share growth to exceed the dividend growth rate to help achieve this target. OGE Energy's financial objectives also include maintaining investment grade credit ratings and providing a strong and reliable dividend for shareholders. OGE Energy's long-term sustainability is predicated on providing exceptional customer experiences, investing in grid improvements and increasingly cleaner generation resources, environmental stewardship, strong governance practices and caring for and supporting its members and communities. 28 Recent Developments Winter Storm Uri In February 2021, Winter Storm Uri resulted in record winter peak demand for electricity and extremely high natural gas and purchased power prices in OG&E's service territory. Both the OCC and APSC have approved regulatory mechanisms for OG&E's recovery of the significant fuel and purchased power costs associated with Winter Storm Uri, as further discussed in Note 16 within "Item 8. Financial Statements and Supplementary Data." As of December 31, 2021, OG&E has recorded regulatory assets of $747.9 million and $88.9 million for the Oklahoma and Arkansas jurisdictional portions, respectively, of fuel and purchased power costs incurred during Winter Storm Uri. In March 2021, OGE Energy entered into a $1.0 billion unsecured 364-day term loan agreement and borrowed the full $1.0 billion to help cover the significant fuel and purchased power costs incurred during Winter Storm Uri. In May 2021, OGE Energy and OG&E each issued $500.0 million in senior notes, and using these proceeds, OGE Energy repaid $900.0 million of the $1.0 billion term loan, as further described in Notes 11 and 12 within "Item 8. Financial Statements and Supplementary Data." In December 2021, OGE Energy repaid the remaining $100.0 million outstanding that was borrowed under the term loan agreement. The Oklahoma and Arkansas legislatures have both passed legislation that would help alleviate the immediate burden on customers and OGE Energy by securitizing the cost impacts from Winter Storm Uri. The securitization of these costs could spread out the recovery of the costs over a longer period of time at a lower finance carrying charge. On April 26, 2021, OG&E filed an application seeking OCC approval to securitize its costs related to Winter Storm Uri, and on October 8, 2021, OG&E filed a settlement agreement between OG&E, the Public Utility Division Staff of the OCC, the Oklahoma Industrial Energy Consumers, the OG&E Shareholders Association and Walmart Inc. The settling parties agreed the OCC should issue a financing order authorizing the securitization of $760.0 million, which includes estimated finance costs and is subject to change for carrying costs, any updates from the SPP settlement process and actual securitization issuance costs. The settlement agreement was approved by the OCC on December 16, 2021. Further discussion can be found in Note 16 within "Item 8. Financial Statements and Supplementary Data." COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the U.S. and world. Currently, COVID-19 vaccines are available to all Oklahoma and Arkansas residents, and the Registrants have provided on-site access to COVID-19 vaccines to their employees. One of the Registrants' top priorities is to protect their employees and their families, as well as their customers and communities. The Registrants have established a team to monitor cases and update the Registrants' response and are taking precautionary measures as directed by health authorities and local and federal governments. This team also determines whether any occupancy reductions or closures are necessary to help ensure the health and safety of the Registrants' employees and customers. The OCC and the APSC both issued accounting orders allowing the Registrants to defer for recovery the incremental costs incurred for pandemic-related safety measures and the incremental bad debt resulting from COVID-19. These orders are further discussed in the Registrants' 2020 Form 10-K. In September 2021, President Biden announced an executive order requiring federal contractors to require that their employees be fully vaccinated against COVID-19 (the "vaccine mandate"). At this time, the Registrants will not be required to incorporate the language of the vaccine mandate into OG&E's area-wide service contracts, and therefore, the Registrants are not deemed federal contractors for these purposes. Consequently, the Registrants do not currently have to comply with the vaccine mandate. In September 2021, President Biden also announced a proposed new rule requiring all employers with at least 100 employees to require that their employees be fully vaccinated against COVID-19 or tested weekly (the "testing mandate"). On January 25, 2022, OSHA announced it is currently focusing on implementing a permanent COVID-19 healthcare standard, similar to the testing mandate. If the Registrants are subject to any such mandates or new standards, it could result in employee attrition, which could adversely affect the Registrants' business and results of operations. The ultimate impact of COVID-19 on operations and financial performance in future periods remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic and potential government actions to prevent and manage disease spread, which cannot be predicted. The ongoing global COVID-19 pandemic and related governmental and business responses continue to have an impact on the Registrants' operations, supply chains and end-user customers. The Registrants have experienced raw material inflation, logistical challenges and certain component shortages. The timing and extent of the financial impact from the COVID-19 pandemic is still uncertain, and the Registrants cannot predict the magnitude of the impact to the results of their business and results of operations. 29 OG&E's Regulatory Matters Completed regulatory matters affecting current period results are discussed in Note 16 within "Item 8. Financial Statements and Supplementary Data." Summary of OGE Energy 2021 Operating Results Compared to 2020 OGE Energy's net income was $737.3 million, or $3.68 per diluted share, in 2021 as compared to a net loss of $173.7 million, or $0.87 per diluted share, in 2020. The increase in net income of $911.0 million, or $4.55 per diluted share, in 2021 as compared to 2020 is further discussed below. As the merger between Enable and Energy Transfer closed on December 2, 2021, the majority of the operating results for OGE Holdings for the year ended December 31, 2021 was impacted by Enable. •An increase in net income at OG&E of $20.6 million, or $0.10 per diluted share of OGE Energy's common stock, was primarily due to higher operating revenues driven by strong load growth, increased revenues from the recovery of capital investments and more favorable weather (excluding impacts of recoverable fuel, purchased power and direct transmission expense not impacting earnings), partially offset by losses from the Guaranteed Flat Bill program during Winter Storm Uri, higher depreciation and amortization expense due to additional assets being placed into service and higher income tax expense. •Net income at OGE Holdings of $385.0 million, or $1.92 per diluted share of OGE Energy's common stock, during the year ended December 31, 2021 compared to net loss of $515.0 million, or $2.58 per diluted share of OGE Energy's common stock, during the year ended December 31, 2020 was primarily due to a $344.4 million gain ($264.8 million after tax) on the Enable merger transaction that closed on December 2, 2021 and an increase in equity earnings of Enable, which was driven by increased net income from Enable's business resulting primarily from higher average natural gas sales prices and higher average market prices for NGL products, as well as the 2020 impact of lower equity in earnings of Enable related to impairments, as adjusted for basis differences, partially offset by an increase in income tax expense and other expense. •An increase in net loss of other operations (holding company) of $9.6 million, or $0.05 per diluted share of OGE Energy's common stock, was primarily due to higher other expense and lower income tax benefit in 2021. A more detailed discussion regarding the financial performance for the year ended December 31, 2021 as compared to December 31, 2020 can be found under "Results of Operations" below. A discussion of the financial performance for the year ended December 31, 2020 compared to December 31, 2019 for OGE Energy and OG&E can be found within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Registrants' 2020 Form 10-K. 2022 Outlook Key assumptions for 2022 include: OG&E OG&E is projected to earn approximately $375 million to $395 million, or $1.87 to $1.97 per average diluted share, with a midpoint of $385 million, or $1.92 per average diluted share, in 2022 and is based on the following assumptions: •normal weather patterns are experienced for the year; •operating revenues growth driven by total retail load growth between 3.5 percent and 5.0 percent (weather normalized) and new rates related to OG&E's general rate review take effect in Oklahoma by July 1, 2022; •operating expenses of approximately $1.029 billion to $1.035 billion, with operation and maintenance expenses comprising approximately 47 percent of the total; •net interest expense of approximately $160 million to $162 million which assumes a $3 million allowance for borrowed funds used during construction reduction to interest expense and assumes a debt issuance at OG&E of $300 million in the second half of 2022; •other income approximately flat including approximately $4.5 million of allowance for equity funds used during construction; •income before taxes of approximately $442 million to $466 million; and •an effective tax rate of approximately 15 percent. OG&E has significant seasonality in its earnings. OG&E typically shows minimal earnings in the first and fourth quarters with a majority of its earnings in the third quarter due to the seasonal nature of air conditioning demand. 30 Consolidated OGE Energy OGE Energy is not issuing guidance for its natural gas midstream operations segment and therefore is not issuing 2022 consolidated earnings guidance; other consolidated assumptions include: •approximately 200.5 million average diluted shares outstanding; and •a loss of $2 million to $4 million, or one to two cents per average diluted share, at the holding company. Results of Operations The following discussion and analysis presents factors that affected the Registrants' results of operations for the years ended December 31, 2021 and 2020 and the Registrants' financial positions at December 31, 2021 and 2020. The following information should be read in conjunction with the financial statements and notes thereto. Known trends and contingencies of a material nature are discussed to the extent considered relevant. [[GREPCENT_TABLE]] [["OGE Energy","Year Ended December 31,"],["(In millions except per share data)","2021","2020"],["Net income (loss)","$","737.3","","$","(173.7)"],["Basic average common shares outstanding","200.1","","200.1"],["Diluted average common shares outstanding","200.3","","200.1"],["Basic earnings (loss) per average common share","$","3.68","","$","(0.87)"],["Diluted earnings (loss) per average common share","$","3.68","","$","(0.87)"],["Dividends declared per common share","$","1.62500","","$","1.58000"]] [[/GREPCENT_TABLE]] Results by Business Segment [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["(In millions)","2021","2020"],["Net income (loss):"],["OG&E (Electric Utility)","$","360.0","","$","339.4"],["OGE Holdings (Natural Gas Midstream Operations) (A)","385.0","","(515.0)"],["Other operations (B)","(7.7)","","1.9"],["OGE Energy net income (loss)","$","737.3","","$","(173.7)"]] [[/GREPCENT_TABLE]] (A)Net income for the year ended December 31, 2021 includes the $344.4 million gain ($264.8 million after tax) recognized for the Enable merger transaction, as further discussed in Note 5 within "Item 8. Financial Statements and Supplementary Data." In March 2020, OGE Energy recorded a $780.0 million impairment ($589.6 million after tax) on its investment in Enable, as further discussed in Notes 5 and 7 within "Item 8. Financial Statements and Supplementary Data." (B)Other operations primarily includes the operations of the holding company and consolidating eliminations. The following discussion of results of operations by business segment includes intercompany transactions that are eliminated in OGE Energy's consolidated financial statements. 31 OG&E (Electric Utility) [[GREPCENT_TABLE]] [["Year Ended December 31 (Dollars in millions)","2021","2020"],["Operating revenues","$","3,653.7","","$","2,122.3"],["Fuel, purchased power and direct transmission expense","2,127.6","","644.6"],["Other operation and maintenance","464.7","","464.4"],["Depreciation and amortization","416.0","","391.3"],["Taxes other than income","99.3","","97.2"],["Operating income","546.1","","524.8"],["Allowance for equity funds used during construction","6.7","","4.8"],["Other net periodic benefit expense","4.3","","3.1"],["Other income","7.1","","5.0"],["Other expense","1.8","","2.6"],["Interest expense","152.0","","154.8"],["Income tax expense","41.8","","34.7"],["Net income","$","360.0","","$","339.4"],["Operating revenues by classification:"],["Residential","$","1,342.1","","$","869.0"],["Commercial","766.9","","479.4"],["Industrial","328.2","","197.3"],["Oilfield","316.8","","172.3"],["Public authorities and street light","289.5","","176.9"],["System sales revenues","3,043.5","","1,894.9"],["Provision for rate refund","\u2014","","3.8"],["Integrated market","468.9","","49.6"],["Transmission","140.2","","143.3"],["Other","1.1","","30.7"],["Total operating revenues","$","3,653.7","","$","2,122.3"],["MWh sales by classification (In millions)"],["Residential","9.6","","9.5"],["Commercial","6.8","","6.3"],["Industrial","4.2","","4.2"],["Oilfield","4.2","","4.2"],["Public authorities and street light","2.9","","2.8"],["System sales","27.7","","27.0"],["Integrated market","1.6","","2.0"],["Total sales","29.3","","29.0"],["Number of customers","879,447","","867,389"],["Weighted-average cost of energy per kilowatt-hour (In cents)"],["Natural gas (A)","11.907","","2.077"],["Coal","1.935","","1.821"],["Total fuel (A)","6.833","","1.863"],["Total fuel and purchased power (A)","6.892","","2.117"],["Degree days (B)"],["Heating - Actual","3,281","","3,303"],["Heating - Normal","3,452","","3,354"],["Cooling - Actual","1,896","","1,804"],["Cooling - Normal","1,912","","2,095"]] [[/GREPCENT_TABLE]] (A)Increased primarily due to both higher market prices related to increased natural gas prices and elevated pricing from Winter Storm Uri in 2021. (B)Degree days are calculated as follows: The high and low degrees of a particular day are added together and then averaged. If the calculated average is above 65 degrees, then the difference between the calculated average and 65 is expressed as cooling degree days, with each degree of difference equaling one cooling degree day. If the calculated average is below 65 degrees, then the difference between the calculated average and 65 is expressed as heating degree days, with each degree of difference equaling one heating degree day. The daily calculations are then totaled for the particular reporting period. The calculation of heating and cooling degree normal days is based on a 30-year average and updated every ten years, which most recently occurred in 2021. 32 OG&E's net income increased $20.6 million, or 6.1 percent, in 2021 as compared to 2020. The following section discusses the primary drivers for the increase in net income in 2021 as compared to 2020. Operating revenues increased $1,531.4 million, or 72.2 percent, in 2021 as compared to 2020, primarily driven by the below factors. [[GREPCENT_TABLE]] [["(In millions)","$ Change"],["Fuel, purchased power and direct transmission expense (A)","$","1,483.0"],["Price variance (B)","43.7"],["Quantity impacts (primarily weather) (C)","22.1"],["Non-residential demand and related revenues","8.1"],["New customer growth","7.2"],["Industrial and oilfield sales","4.1"],["Other","3.2"],["Wholesale transmission revenue (D)","(7.2)"],["Guaranteed Flat Bill program (E)","(32.8)"],["Change in operating revenues (F)","$","1,531.4"]] [[/GREPCENT_TABLE]] (A)These expenses are generally recoverable from customers through regulatory mechanisms and are offset in Fuel, Purchased Power and Direct Transmission Expense in the statements of income, as further described below. The primary drivers of the increase in fuel, purchased power and direct transmission expense during the period are further detailed in the table below. (B)Increased primarily due to increased recovery through rider mechanisms, such as the Storm Cost Recovery Rider and the Oklahoma Demand Program Rider. (C)Increased primarily due to a 5.1 percent increase in cooling degree days and a 1.0 percent decrease in heating degree days. (D)Decreased primarily due to a reserve of $5.0 million plus estimated interest related to SPP transmission Z2 credits that are not passed through to customers through rider or formula rate mechanisms, as further discussed in Note 16 within "Item 8. Financial Statements and Supplementary Data." (E)Decreased primarily due to the loss from the Guaranteed Flat Bill program related to Winter Storm Uri. The Guaranteed Flat Bill program allows qualifying customers the opportunity to purchase their electricity needs at a set monthly price for an entire year, which resulted in those customers not being allocated incremental fuel and purchased power costs incurred during Winter Storm Uri. (F)Operating revenues were negatively impacted by COVID-19 in 2020. The above increases include positive impacts as customers have returned to more normal usage patterns during 2021. Fuel, purchased power and direct transmission expense for OG&E consists of fuel used in electric generation, purchased power and transmission related charges. As described above, the actual cost of fuel used in electric generation and certain purchased power costs are generally recoverable from OG&E's customers through fuel adjustment clauses. The fuel adjustment clauses are subject to periodic review by the OCC and the APSC. OG&E's fuel, purchased power and direct transmission expense increased $1,483.0 million, primarily driven by the below factors. [[GREPCENT_TABLE]] [["(In millions)","","$ Change","% Change"],["Fuel expense (A)","","$","786.4","","*"],["Purchased power costs:"],["Purchases from SPP (B)","","691.6","","*"],["Wind","","(1.5)","","(2.6)","%"],["Other","","2.2","","28.0","%"],["Transmission expense","","4.3","","6.0","%"],["Change in fuel, purchased power and direct transmission expense","","$","1,483.0"]] [[/GREPCENT_TABLE]] *    Change is greater than 100 percent (A)Increased primarily due to higher natural gas costs and higher fuel costs related to Winter Storm Uri. (B)Increased primarily due to both higher market prices related to increased natural gas prices and elevated pricing from Winter Storm Uri. 33 Other operation and maintenance expense increased $0.3 million, or 0.1 percent, primarily driven by the below factors. [[GREPCENT_TABLE]] [["(In millions)","$ Change","% Change"],["Contract technical and construction services (A)","$","9.2","","21.3","%"],["Vegetation management","5.5","","16.4","%"],["Other","(1.6)","","(0.7)","%"],["Capitalized labor","(5.1)","","(4.2)","%"],["Payroll and benefits","(7.7)","","(3.0)","%"],["Change in other operation and maintenance expense","$","0.3"]] [[/GREPCENT_TABLE]] (A)Increased primarily due to intentional cost reduction and the delay of certain projects due to COVID-19 in 2020. Depreciation and amortization expense increased $24.7 million, or 6.3 percent, primarily due to additional assets being placed into service and increased amortization of the regulatory asset related to storms. Income tax expense increased $7.1 million, or 20.5 percent, reflecting additional income taxes primarily related to higher pretax income. OGE Holdings (Natural Gas Midstream Operations) On December 2, 2021, Energy Transfer completed its previously announced acquisition of Enable. Prior to the Enable and Energy Transfer merger closing, OGE Energy's natural gas midstream operations segment included its equity method investment in Enable. Subsequent to December 2, 2021, OGE Energy's natural gas midstream operations segment includes its investment in Energy Transfer's equity securities and legacy Enable seconded employee pension and postretirement costs. [[GREPCENT_TABLE]] [["","","","Year Ended December 31,"],["(In millions)","2021","2020"],["Operating revenues","","","$","\u2014","","$","\u2014"],["Fuel, purchased power and direct transmission expense","","","\u2014","","\u2014"],["Other operation and maintenance","","","1.6","","1.7"],["Taxes other than income","","","0.2","","0.4"],["Operating loss","","","(1.8)","","(2.1)"],["Equity in earnings (losses) of unconsolidated affiliates (A)","","","169.8","","(668.0)"],["Gain on Enable/Energy Transfer transaction, net","","","344.4","","\u2014"],["Other expense (B)","","","(26.4)","","(2.9)"],["Income (loss) before taxes","","","486.0","","(673.0)"],["Income tax expense (benefit)","","","101.0","","(158.0)"],["Net income (loss) attributable to OGE Holdings","","","$","385.0","","$","(515.0)"]] [[/GREPCENT_TABLE]] (A)In March 2020, OGE Energy recorded a $780.0 million impairment on its investment in Enable, as further discussed in Notes 5 and 7 within "Item 8. Financial Statements and Supplementary Data." (B)Includes an $8.6 million unrealized loss ($6.6 million after tax) that OGE Energy recognized on its investment in Energy Transfer's equity securities for the period of December 2, 2021 through December 31, 2021. OGE Holdings' net income of $385.0 million compared to net loss of $515.0 million for the period of January 1, 2021 through December 2, 2021 and the year ended December 31, 2020, respectively, was primarily due to the gain recognized for the Enable merger transaction in 2021 and the 2020 impact of the impairment of OGE Energy's investment in Enable, as discussed in Note 5 within "Item 8. Financial Statements and Supplementary Data." Additional drivers of the increase in net income in 2021 compared to 2020 are presented below. OGE Holdings' income tax expense increased $259.0 million primarily due to higher pre-tax income, partially offset by state deferred tax adjustments related to OGE Energy's midstream investments including a reduction in state deferred tax liabilities resulting from the Energy Transfer merger. 34 Enable In light of the Energy Transfer and Enable merger closing on December 2, 2021, the below discussion presents income statement information for the period of January 1, 2021 through December 2, 2021 as compared to the year ended December 31, 2020. The latest available information regarding discussion of the primary drivers for Enable's 2021 operating results is for the period of January 1, 2021 through September 30, 2021, which can be found in Enable's Form 10-Q for the quarterly period ended September 30, 2021. See Note 5 within "Item 8. Financial Statements and Supplementary Data" for the reconciliation of Enable's net income to OGE Energy's equity in earnings (losses) of unconsolidated affiliates. The following table presents summarized income statement information of Enable for the period of January 1, 2021 through December 2, 2021 compared to the year ended December 31, 2020. [[GREPCENT_TABLE]] [["","Period of January 1, 2021 through December 2, 2021","Year Ended"],["(In millions)","December 31, 2020"],["Total revenues","$","3,466","","$","2,463"],["Cost of natural gas and NGLs (excluding depreciation and amortization)","$","1,959","","$","965"],["Operating income","$","634","","$","465"],["Net income","$","461","","$","52"]] [[/GREPCENT_TABLE]] The following table presents summarized information regarding Enable's income statement changes for the period of January 1, 2021 through December 2, 2021 compared to the year ended December 31, 2020, and the corresponding impact those changes had on OGE Energy's equity in earnings of Enable. See Note 5 within "Item 8. Financial Statements and Supplementary Data" for further discussion of OGE Energy's former equity method investment in Enable. The increase in Enable's net income was primarily driven by the below factors. [[GREPCENT_TABLE]] [["(In millions)","","","Income Statement Change at Enable","Impact to OGE Energy's Equity in Earnings"],["Total revenues","","","$","1,003","","$","255.8"],["Cost of natural gas and NGLs (excluding depreciation and amortization shown separately)","","","$","994","","$","(253.5)"],["Operation and maintenance, General and administrative (A)","","","$","(88)","","$","18.3"],["Depreciation and amortization","","","$","(38)","","$","9.7"],["Impairments of property, plant and equipment and goodwill (B)","","","$","(28)","","$","4.4"],["Interest expense","","","$","(25)","","$","6.4"],["Equity in earnings (losses) of equity method affiliate, net (C)","","","$","217","","$","9.5"]] [[/GREPCENT_TABLE]] (A)Included in Enable's operation and maintenance and general and administrative expenses for the year ended December 31, 2020 is a $20.0 million loss on retirement of an Ark-La-Tex gathering system. OGE Energy recorded a $1.0 million pre-tax charge for its share of Enable's loss on retirement, as adjusted for basis differences. (B)Included in the $28.0 million of impairments recorded by Enable for the year ended December 31, 2020 is a $12.0 million goodwill impairment and a $16.0 million impairment for certain long-lived assets. OGE Energy recorded a $4.4 million pre-tax charge for its share of Enable's goodwill and long-lived asset impairments, as adjusted for basis differences. (C)Included in Enable's equity in earnings (losses) of equity method affiliate, net for the year ended December 31, 2020 is a $225.0 million impairment on Enable's SESH equity method investment. OGE Energy recorded an $11.5 million pre-tax charge for its share of Enable's equity method investment impairment, as adjusted for basis differences. 35 Liquidity and Capital Resources Cash Flows OGE Energy [[GREPCENT_TABLE]] [["Year Ended December 31 (In millions)","2021","2020","","$ Change","% Change"],["Net cash (used in) provided from operating activities (A)","$","(313.3)","","$","712.8","","","$","(1,026.1)","","*"],["Net cash used in investing activities (B)","$","(749.1)","","$","(654.9)","","","$","(94.2)","","14.4","%"],["Net cash provided from (used in) financing activities (C)","$","1,061.3","","$","(56.8)","","","$","1,118.1","","*"]] [[/GREPCENT_TABLE]] *Change is greater than 100 percent (A)Changed primarily due to an increase in vendor payments, including payments for fuel and purchased power costs related to Winter Storm Uri. (B)Changed primarily due to increased spending on grid modernization projects at OG&E. (C)Increased primarily due to increases in long-term and short-term debt to provide additional liquidity for the increased fuel and purchased power costs incurred by OG&E related to Winter Storm Uri. Working Capital Working capital is defined as the difference in current assets and current liabilities. OGE Energy's working capital requirements are driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to and the timing of collections from OG&E's customers, the level and timing of spending for maintenance and expansion activity, inventory levels and fuel recoveries. The following discussion addresses changes in OGE Energy's working capital balances at December 31, 2021 compared to December 31, 2020. Income Taxes Receivable decreased $5.5 million, or 67.9 percent, primarily due to current year tax expense accruals in excess of the receivables accrued as of December 31, 2020. Fuel Inventories increased $4.1 million, or 11.2 percent, primarily due to higher coal and gas purchases. Fuel Clause Recoveries moved from an over recovery position of $28.6 million as of December 31, 2020 to an under recovery balance of $151.9 million as of December 31, 2021, primarily due to lower recoveries from OG&E retail customers as compared to the actual cost of fuel and purchased power. In October 2021, OG&E implemented a revised fuel recovery tariff to begin recovery of the 2021 fuel under recovery balance as well as to incorporate an adjustment for higher forecasted 2022 fuel costs. The increase in the tariff was approximately 7.5 percent for an average residential customer. Other Current Assets increased $32.1 million, or 77.9 percent, primarily due to an increase in SPP deposits, under-recovered riders and prepayments, partially offset by the SPP transmission formula rate true-up. Short-term Debt increased $391.9 million, primarily due to increased fuel and purchased power costs and working capital needs. OGE Energy borrows on a short-term basis, as necessary, by the issuance of commercial paper and borrowings under its revolving credit agreements and term credit agreements. Accounts Payable increased $22.5 million, or 8.9 percent, primarily due to the timing of vendor payments. Accrued Compensation increased $6.6 million, or 21.2 percent, primarily due to higher accruals for incentive compensation based on company performance in 2021. 2021 Capital Requirements, Sources of Financing and Financing Activities OGE Energy's total capital requirements, consisting of capital expenditures and maturities of long-term debt, were $778.6 million, and contractual obligations, net of recoveries through fuel adjustment clauses, were $1.0 million, resulting in total net capital requirements and contractual obligations of $779.6 million in 2021. This compares to net capital requirements of $650.6 million and net contractual obligations of $0.9 million totaling $651.5 million in 2020. 36 In 2021, OGE Energy's primary sources of capital were cash generated from operations, proceeds from the issuance of long- and short-term debt and distributions from Enable. Changes in working capital reflect the seasonal nature of OGE Energy's business, the revenue lag between billing and collection from customers and fuel inventories. See "Working Capital" for a discussion of significant changes in net working capital requirements as it pertains to operating cash flow and liquidity. The Dodd-Frank Act Derivative instruments have been used at times in managing OG&E's commodity price exposure. The Dodd-Frank Act, among other things, provides for regulation by the Commodity Futures Trading Commission of certain commodity-related contracts. Although OG&E qualifies for an end-user exception from mandatory clearing of commodity-related swaps, these regulations could affect the ability of OG&E to participate in these markets and could add additional regulatory oversight over its contracting activities. Future Material Cash Requirements OGE Energy's primary, material cash requirements are related to acquiring or constructing new facilities and replacing or expanding existing facilities at OG&E. Other working capital requirements are expected to be primarily related to maturing debt, operating lease obligations, fuel clause under and over recoveries and other general corporate purposes. OGE Energy generally meets its cash needs through a combination of cash generated from operations, short-term borrowings (through a combination of bank borrowings and commercial paper) and permanent financings. Capital Expenditures The following table presents OGE Energy's estimates of capital expenditures for the years 2022 through 2026. These capital investments are customer-focused and targeted to maintain and improve the safety and reliability of OG&E's distribution and transmission grid and generation fleet, enhance the ability of OG&E's system to perform during extreme weather events and to serve OG&E's growing customer base. [[GREPCENT_TABLE]] [["(In millions)","2022","2023","2024","2025","2026","Total"],["Transmission","$","175","","$","180","","$","190","","$","225","","$","225","","$","995"],["Oklahoma distribution & grid advancement","520","","540","","545","","515","","515","","2,635"],["Arkansas distribution","25","","20","","20","","20","","20","","105"],["Generation","150","","130","","110","","110","","110","","610"],["Other","80","","80","","85","","80","","80","","405"],["Total","$","950","","$","950","","$","950","","$","950","","$","950","","$","4,750"]] [[/GREPCENT_TABLE]] Additional capital expenditures beyond those identified in the table above, including additional incremental growth opportunities, will be evaluated based upon the requirements of OG&E's power supply, transmission and distribution operational teams and the expected resultant customer benefits. OG&E is evaluating infrastructure investments incremental to the amounts above related to new generation capacity needs as outlined in its October 2021 IRP, as well as additional grid investments to address customer growth and grid resiliency. The continued progression of, and global response to, the COVID-19 outbreak has increased and may continue to increase the risk of delays in construction activities and equipment deliveries related to OGE Energy's capital projects, including potential delays in obtaining permits from government agencies, resulting in potential deferral of capital expenditures. 37 Contractual Obligations The following table presents OGE Energy's total contractual obligations for the next five years, which include long-term debt, operating leases and purchase obligations and commitments, at December 31, 2021. For further detail of OGE Energy's long-term debt, operating leases and purchase obligations and commitments, including information for maturities beyond the next five years, see the statements of capitalization, Note 4 and Note 15, respectively, within "Item 8. Financial Statements and Supplementary Data." [[GREPCENT_TABLE]] [["(In millions)","2022","2023","2024","2025","2026","Total"],["Total contractual obligations","$","161.7","","$","1,114.1","","$","105.9","","$","188.3","","$","94.7","","$","1,664.7"],["Amounts recoverable through fuel adjustment clause (A)","(155.6)","","(108.6)","","(88.0)","","(81.5)","","(82.0)","","(515.7)"],["Total contractual obligations, net","$","6.1","","$","1,005.5","","$","17.9","","$","106.8","","$","12.7","","$","1,149.0"]] [[/GREPCENT_TABLE]] (A)Includes expected recoveries of costs incurred for OG&E's railcar operating lease obligations, OG&E's minimum fuel purchase commitments and OG&E's expected wind purchase commitments. The actual cost of fuel used in electric generation (which includes the operating lease obligations for OG&E's railcar leases shown in Note 4 within "Item 8. Financial Statements and Supplementary Data") and certain purchased power costs are passed on to OG&E's customers through fuel adjustment clauses. Accordingly, while the cost of fuel related to operating leases and the vast majority of minimum fuel purchase commitments of OG&E noted in Notes 4 and 15, respectively, within "Item 8. Financial Statements and Supplementary Data" may increase capital requirements, such costs are generally recoverable through fuel adjustment clauses and have little, if any, impact on net capital requirements and future contractual obligations. The fuel adjustment clauses are subject to periodic review by the OCC and the APSC. Otherwise, as discussed above, OGE Energy expects to meet these cash requirement needs through cash generated from operations, short-term borrowings and permanent financings. Pension and Postretirement Benefit Plans At December 31, 2021, 17.7 percent of the Pension Plan investments were in listed common stocks with the balance primarily invested in corporate fixed income and other securities, U.S. Treasury notes and bonds and mutual funds as presented in Note 13 within "Item 8. Financial Statements and Supplementary Data." During 2021, actual returns on the Pension Plan were $48.4 million, compared to expected return on plan assets of $34.1 million. During the same time, corporate bond yields, which are used in determining the discount rate for future pension obligations, increased. Funding levels are dependent on returns on plan assets and future discount rates. OGE Energy made a contribution to its Pension Plan of $40.0 million and $20.0 million in 2021 and 2020, respectively. OGE Energy does not expect to make any contributions to the Pension Plan in 2022. OGE Energy could be required to make additional contributions if the value of its pension trust and postretirement benefit plan trust assets are adversely impacted by a major market disruption in the future. The following table presents the status of OGE Energy's Pension Plan, the Restoration of Retirement Income Plan and the postretirement benefit plans at December 31, 2021 and 2020. These amounts have been recorded in Accrued Benefit Obligations with the offset in Accumulated Other Comprehensive Loss (except OG&E's portion, which is recorded as a regulatory asset as discussed in Note 1 within "Item 8. Financial Statements and Supplementary Data") in the balance sheets. The amounts in Accumulated Other Comprehensive Loss and those recorded as a regulatory asset represent a net periodic benefit cost to be recognized in the statements of income in future periods. [[GREPCENT_TABLE]] [["","Pension Plan","Restoration of Retirement Income Plan","Postretirement Benefit Plans"],["December 31 (In millions)","2021","2020","2021","2020","2021","2020"],["Benefit obligations","$","502.9","","$","654.6","","$","5.9","","$","7.8","","$","137.3","","$","144.5"],["Fair value of plan assets","486.0","","570.3","","\u2014","","\u2014","","44.3","","47.6"],["Funded status at end of year","$","(16.9)","","$","(84.3)","","$","(5.9)","","$","(7.8)","","$","(93.0)","","$","(96.9)"]] [[/GREPCENT_TABLE]] As a result of the merger between Enable and Energy Transfer, OGE Energy's seconding agreement with Enable was terminated. OGE Energy retains the obligations to the accrued benefits of these employees as of the termination of the contract. For further discussion, see Note 6 within "Item 8. Financial Statements and Supplementary Data." 38 Common Stock Dividends OGE Energy's dividend policy is reviewed by the Board of Directors at least annually and is based on numerous factors, including management's estimation of the long-term earnings power of its businesses. Prior to the approval of a change in the dividend in 2021, the Board of Directors reviewed a recommendation from management of an increase in the quarterly dividend to $0.41 per share from $0.4025 per share and subsequently approved the recommendation to become effective with the dividend payment in October 2021. Financing Activities and Future Sources of Financing Management expects that cash generated from operations, proceeds from the issuance of long- and short-term debt, proceeds from the sales of common stock to the public through OGE Energy's Automatic Dividend Reinvestment and Stock Purchase Plan or other offerings will be adequate over the next three years to meet anticipated cash needs and to fund future growth opportunities. In addition, distributions from Energy Transfer will be utilized to meet anticipated cash needs until OGE Energy exits its investment in Energy Transfer's equity securities. OGE Energy utilizes short-term borrowings (through a combination of bank borrowings and commercial paper) to satisfy temporary working capital needs and as an interim source of financing capital expenditures until permanent financing is arranged. In December 2021, the Registrants each entered into a new $550.0 million credit facility for working capital and general corporate purposes. For further discussion, see "Short-Term Debt and Credit Facilities" below and Note 12 within "Item 8. Financial Statements and Supplementary Data." Short-Term Debt and Credit Facilities OGE Energy borrows on a short-term basis, as necessary, by issuance of commercial paper and borrowings under its revolving credit agreements and term credit agreements. On December 17, 2021, OGE Energy and OG&E entered into new, unsecured five-year revolving credit facilities totaling $1.1 billion ($550.0 million for OGE Energy and $550.0 million for OG&E), which can also be used as letter of credit facilities. The following table presents information about OGE Energy's revolving credit agreements as of December 31, 2021. [[GREPCENT_TABLE]] [["(Dollars in millions)","December 31, 2021"],["Balance of outstanding supporting letters of credit","$","0.4"],["Weighted-average interest rate of outstanding supporting letters of credit","1.15","%"],["Net available liquidity under revolving credit agreements","$","612.7"],["Balance of cash and cash equivalents","$","\u2014"]] [[/GREPCENT_TABLE]] The following table presents information about OGE Energy's total short-term debt activity for the year ended December 31, 2021. [[GREPCENT_TABLE]] [["(Dollars in millions)","Year Ended December 31, 2021"],["Average balance of short-term debt","$","568.6"],["Weighted-average interest rate of average balance of short-term debt","0.51","%"],["Maximum month-end balance of short-term debt","$","1,443.4"]] [[/GREPCENT_TABLE]] In March 2021, OGE Energy entered into a $1.0 billion unsecured 364-day term loan agreement to provide additional liquidity to help cover the increased fuel and purchased power costs incurred by OG&E during Winter Storm Uri. In May 2021, $900.0 million of the $1.0 billion term loan was repaid using the proceeds from the senior notes issued by both OGE Energy and OG&E, as further described below. In December 2021, OGE Energy repaid the remaining $100.0 million outstanding that was borrowed under the term loan agreement. See Note 12 within "Item 8. Financial Statements and Supplementary Data" for further discussion of the Registrants' short-term debt activity. 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, 2021 and ending December 31, 2022. 39 Issuance of Long-Term Debt In May 2021, OGE Energy issued $500.0 million of 0.703 percent senior notes, and OG&E issued $500.0 million of 0.553 percent senior notes. Each series is due May 26, 2023 but may be redeemed by OGE Energy or OG&E after November 26, 2021 at a price equal to 100 percent of the principal amount of the senior notes being redeemed, plus any accrued and unpaid interest. The proceeds from these issuances were used to repay $900.0 million of the $1.0 billion term loan OGE Energy entered into in March 2021 to help cover the fuel and purchased power costs incurred by OG&E during Winter Storm Uri. In the second half of 2022, OG&E expects to issue $300.0 million in long-term debt to support its current year capital investment plan. Securitization of Oklahoma Winter Storm Uri Extreme Purchase Costs In April 2021, OG&E filed an application with the OCC seeking its approval to securitize OG&E's costs related to Winter Storm Uri. In October 2021, OG&E filed a settlement agreement between OG&E, the Public Utility Division Staff of the OCC, the Oklahoma Industrial Energy Consumers, the OG&E Shareholders Association and Walmart Inc. The settling parties agreed the OCC should issue a financing order authorizing the securitization of $760.0 million, which includes estimated finance costs and is subject to change for carrying costs, any updates from the SPP settlement process and actual securitization issuance costs. On December 16, 2021, the settlement agreement was approved by the OCC. For further discussion, see Note 16 within "Item 8. Financial Statements and Supplementary Data." Security Ratings [[GREPCENT_TABLE]] [["","Moody's Investors Service","","S&P's Global Ratings","","Fitch Ratings"],["","Rating","Outlook","","Rating","Outlook","","Rating","Outlook"],["OG&E Senior Notes","A3","Stable","","A-","Negative","","A","Stable"],["OG&E Commercial Paper","P2","Stable","","A2","Negative","","F2","Stable"],["OGE Energy Senior Notes","Baa1","Stable","","BBB+","Negative","","BBB+","Stable"],["OGE Energy Commercial Paper","P2","Stable","","A2","Negative","","F2","Stable"]] [[/GREPCENT_TABLE]] On March 3, 2021, S&P's Global Ratings revised their ratings outlook on both OGE Energy and OG&E from stable to negative. S&P's Global Ratings indicated that the revised outlooks reflect their expectation for weaker financial measures directly associated with the significant increase in fuel and purchased power costs as a result of Winter Storm Uri, the uncertainty regarding timely recovery of those costs and the associated refinancing risk related to the 364-day $1.0 billion term loan. For OGE Energy, S&P's Global Ratings indicated the revised outlook also reflected their expectation of execution risk associated with the closing of Energy Transfer's acquisition of Enable. On February 9, 2022, Moody's Investors Service revised their ratings outlook on both OGE Energy and OG&E to stable from negative. Moody's Investors Service indicated that the revised outlooks reflect their expectation that OG&E will recover about 99 percent of the costs incurred during Winter Storm Uri in Oklahoma through the issuance of securitization bonds by the ODFA, as authorized by the finance order approved on December 16, 2021 by the OCC. Access to reasonably priced capital is dependent in part on credit and security ratings. Generally, lower ratings lead to higher financing costs. Pricing grids associated with OGE Energy'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 OGE Energy's short-term borrowings, but a reduction in OGE Energy's credit ratings 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 OGE Energy to post collateral or letters of credit. A security rating is not a recommendation to buy, sell or hold securities. Such rating may be subject to revision or withdrawal at any time by the credit rating agency, and each rating should be evaluated independently of any other rating. Future financing requirements may be dependent, to varying degrees, upon numerous factors such as general economic conditions, abnormal weather, load growth, commodity prices, acquisitions of other businesses and/or development of projects, actions by rating agencies, inflation, changes in environmental laws or regulations, rate increases or decreases allowed by regulatory agencies, new legislation and market entry of competing electric power generators. 40 Common Stock OGE Energy does not expect to issue any common stock in 2022 from its Automatic Dividend Reinvestment and Stock Purchase Plan. See Note 10 within "Item 8. Financial Statements and Supplementary Data" for a discussion of OGE Energy's common stock activity. Distributions by Enable and Energy Transfer During the years ended December 31, 2021, 2020 and 2019, Enable made distributions of $73.4 million, $91.7 million and $144.0 million, respectively, to OGE Energy. On January 25, 2022, Energy Transfer announced a 15 percent increase in its quarterly cash distribution, resulting in a distribution of $0.175 per unit on its outstanding common units that was paid on February 18, 2022. Critical Accounting Policies and Estimates The financial statements and notes thereto contain information that is pertinent to Management's Discussion and Analysis. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Changes to these assumptions and estimates could have a material effect on the financial statements. The Registrants believe they have taken reasonable positions where assumptions and estimates are used in order to minimize the negative financial impact to the Registrants that could result if actual results vary from the assumptions and estimates.  In management's opinion, the areas where the most significant judgment is exercised for the Registrants include the determination of Pension Plan assumptions, income taxes, contingency reserves, asset retirement obligations, regulatory assets and liabilities, unbilled revenues and the allowance for uncollectible accounts receivable. The selection, application and disclosure of the following critical accounting estimates have been discussed with the Audit Committee of OGE Energy's Board of Directors. The Registrants discuss their significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates, in Note 1 within "Item 8. Financial Statements and Supplementary Data." Pension and Postretirement Benefit Plans OGE Energy has a Pension Plan that covers a significant amount of its employees, including OG&E's employees, hired before December 1, 2009. Effective December 1, 2009, OGE Energy's Pension Plan is no longer being offered to employees hired on or after December 1, 2009. OGE Energy also has defined benefit postretirement plans that cover a significant amount of its employees, including OG&E's employees. Pension and other postretirement plan expenses and liabilities are determined on an actuarial basis and are affected by the market value of plan assets, estimates of the expected return on plan assets, assumed discount rates and the level of funding. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets could have a material effect on the amount of pension expense ultimately recognized. The Pension Plan rate assumptions are shown in Note 13 within "Item 8. Financial Statements and Supplementary Data." The assumed return on plan assets is based on management's expectation of the long-term return on the plan assets portfolio. The discount rate used to compute the present value of plan liabilities is based generally on rates of high-grade corporate bonds with maturities similar to the average period over which benefits will be paid. Funding levels are dependent on returns on plan assets and future discount rates. Higher returns on plan assets and an increase in discount rates will reduce funding requirements to the Pension Plan.  The following table presents the sensitivity of the Pension Plan funded status to these variables. [[GREPCENT_TABLE]] [["","Change","Impact on Funded Status"],["Actual plan asset returns","+/- 1 percent","+/- $4.9 million"],["Discount rate","+/- 0.25 percent","+/- $9.7 million"],["Contributions","+/- $10 million","+/- $10.0 million"]] [[/GREPCENT_TABLE]] 41 Income Taxes The Registrants use the asset and liability method of accounting for income taxes. Under this method, a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences between the financial statement basis and the tax basis of assets and liabilities as well as tax credit carry forwards and net operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of the change. The application of income tax law is complex. Laws and regulations in this area are voluminous and often ambiguous. Interpretations and guidance surrounding income tax laws and regulations change over time. Accordingly, it is necessary to make judgments regarding income tax exposure. As a result, changes in these judgments can materially affect amounts the Registrants recognized in their financial statements. Tax positions taken by the Registrants on their income tax returns that are recognized in the financial statements must satisfy a more likely than not recognition threshold, assuming that the position will be examined by taxing authorities with full knowledge of all relevant information. In May 2021, Oklahoma enacted a reduction of the corporate income tax rate to four percent from the previous six percent. This rate reduction took effect on January 1, 2022. A revaluation of the Registrants' state deferred tax liabilities was completed in May 2021 to reflect this lower tax rate. Additionally, in connection with the Enable and Energy Transfer merger, OGE Energy's state deferred tax liabilities were revalued. See Note 9 within "Item 8. Financial Statements and Supplementary Data" for further discussion. Commitments and Contingencies In the normal course of business, the Registrants are 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 Registrants have 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 financial statements. Asset Retirement Obligations OG&E has recorded asset retirement obligations that are being accreted over their respective lives ranging from five to 68 years. The inputs used in the valuation of asset retirement obligations include the assumed life of the asset placed into service, the average inflation rate, market risk premium, the credit-adjusted risk free interest rate and the timing of incurring costs related to the retirement of the asset. Regulatory Assets and Liabilities OG&E, as a regulated utility, is subject to accounting principles for certain types of rate-regulated activities, which provide that certain incurred costs that would otherwise be charged to expense can be deferred as regulatory assets, based on the expected recovery from customers in future rates. Likewise, certain actual or anticipated credits that would otherwise reduce expense can be deferred as regulatory liabilities, based on the expected 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. Management continuously monitors the future recoverability of regulatory assets. When in management's judgement future recovery becomes impaired, the amount of the regulatory asset is adjusted, as appropriate. Unbilled Revenues OG&E recognizes revenue from electric sales when power is delivered to customers. OG&E measures its customers' metered usage and sends bills to its customers throughout each month. As a result, there is a significant amount of customers' electricity consumption that has not been billed at the end of each month. OG&E accrues an estimate of the revenues for electric sales delivered since the latest billings. Unbilled revenue is presented in Accrued Unbilled Revenues in the balance sheets and in Operating Revenues in the statements of income based on estimates of usage and prices during the period. At December 31, 2021, if the estimated usage or price used in the unbilled revenue calculation were to increase or decrease by one 42 percent, this would cause a change in the unbilled revenues recognized of $0.6 million. At December 31, 2021 and 2020, Accrued Unbilled Revenues were $65.0 million and $67.7 million, respectively. The estimates that management uses in this calculation could vary from the actual amounts to be paid by customers. Allowance for Uncollectible Accounts Receivable Customer balances are generally written off if not collected within six months after the final billing date. The allowance for uncollectible accounts receivable for OG&E is generally calculated by multiplying the last six months of electric revenue by the provision rate, which is based on a 12-month historical average of actual balances written off and is adjusted for current conditions and supportable forecasts as necessary. To the extent the historical collection rates, when incorporating forecasted conditions, are not representative of future collections, there could be an effect on the amount of uncollectible expense recognized, such as in response to COVID-19 impacts. Also, a portion of the uncollectible provision related to fuel within the Oklahoma jurisdiction is being recovered through the fuel adjustment clause. At December 31, 2021, if the provision rate were to increase or decrease by 10 percent, this would cause a change in the uncollectible expense recognized of $0.2 million. The allowance for uncollectible accounts receivable is a reduction to Accounts Receivable in the balance sheets and is included in Other Operation and Maintenance Expense in the statements of income. The allowance for uncollectible accounts receivable was $2.4 million and $2.6 million at December 31, 2021 and 2020, respectively. Accounting Pronouncements As discussed in Note 2 within "Item 8. Financial Statements and Supplementary Data," the Registrants believe that recently adopted and recently issued accounting standards that are not yet effective do not appear to have a material impact on the Registrants' financial position, results of operations or cash flows upon adoption. Commitments and Contingencies In the normal course of business, the Registrants are 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 Registrants have 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 financial statements. At the present time, based on available information, the Registrants believe 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 their financial statements and would not have a material adverse effect on their financial position, results of operations or cash flows. See Notes 15 and 16 within "Item 8. Financial Statements and Supplementary Data" and "Item 3. Legal Proceedings" for further discussion of the Registrants' commitments and contingencies. 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, planning for future construction activities to avoid or mitigate harm to threatened or endangered species and requiring the installation and operation of emissions or 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. Management believes that all of the Registrants' operations are in substantial compliance with current federal, state and local environmental standards. President Biden's Administration has taken a number of actions that adopt policies and affect environmental regulations, including issuance of executive orders that instruct the EPA and other executive agencies to review certain rules that affect OG&E with a view to achieving nationwide reductions in greenhouse gas emissions. OG&E is monitoring these actions which are in various stages of being implemented. At this point in time, the impacts of these actions on the Registrants' results of operations, if any, cannot be determined with any certainty. Environmental regulation can increase the cost of planning, design, initial installation and operation of OG&E's facilities. Management continues to evaluate its compliance with existing and proposed environmental legislation and regulations and implement appropriate environmental programs in a competitive market. 43 Air OG&E's operations are subject to the Federal Clean Air Act of 1970, as amended, and comparable state laws and regulations. These laws and regulations regulate emissions of air pollutants from various industrial sources, including electric generating units and also impose various monitoring and reporting requirements. Such laws and regulations may require that OG&E obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of existing air emissions, obtain and strictly comply with air permits containing various emissions and operational limitations or install emission control equipment. OG&E likely will be required to incur certain capital expenditures in the future for air pollution control equipment and technology in connection with obtaining and maintaining operating permits and approvals for air emissions. OG&E is working cooperatively with federal and state environmental agencies to create emission limits for OG&E's operations that are consistent with legal requirements for protecting health and the environment while being cost effective for OG&E to implement. Although various court proceedings are pending that challenge the validity or stringency of rules issued by federal and state environmental agencies, OG&E is not currently a party to any of these proceedings. At this time, OG&E does not anticipate additional material capital expenditures for compliance with the existing rules. In July 2020, the ODEQ notified OG&E that the Horseshoe Lake generating units would be included in Oklahoma's second Regional Haze implementation period evaluation of visibility impairment impacts to the Wichita Mountains. OG&E submitted an analysis of all potential control measures for NOx on these units to the ODEQ. The ODEQ was to identify any cost-effective control measures in a Regional Haze State Implementation Plan to be submitted to the EPA for approval by July 31, 2021. It is unknown at this time what the outcome, or any potential material impacts, if any, will be from the evaluations by OG&E, the ODEQ and the EPA. OG&E continues to monitor these processes and their possible impact on its operations. Future rules could adopt additional reductions in the emissions budget for Oklahoma or the areas where OG&E's facilities are located. In particular, OG&E monitors possible changes in legal standards for emissions of greenhouse gases, including CO2, sulfur hexafluoride and methane, including the Biden Administration's target of a 50 to 52 percent reduction in economy-wide net greenhouse gas emissions from 2005 levels by 2030 with full decarbonization of the electric power industry fully by 2035. If legislation or regulations are passed at the federal or state levels in the future requiring mandatory reductions of CO2 and other greenhouse gases at OG&E's facilities, this could result in significant additional compliance costs that would affect OG&E's future financial position, results of operations and cash flows if such costs are not recovered through regulated rates. OG&E has reduced carbon dioxide emissions by over 40 percent compared to 2005 levels, and during the same period, emissions of ozone-forming NOx have been reduced by approximately 70 percent and emissions of SO2 have been reduced by approximately 85 percent. OG&E expects to further reduce carbon dioxide emissions to 50 percent of 2005 levels by 2030. To comply with the EPA rules, OG&E converted two coal-fired generating units at the Muskogee Station to natural gas, among other measures. OG&E's deployment of Smart Grid technology helps to reduce the peak load demand. OG&E is also deploying more renewable energy sources that do not emit greenhouse gases. In October 2021, OG&E issued its most recent IRP to the OCC and APSC that proposes to expand its renewable generation fleet, including the development of additional solar resources beginning in 2023. OG&E has leveraged its geographic position to develop renewable energy resources and completed transmission investments to deliver the renewable energy. The SPP has authorized the construction of transmission lines capable of bringing renewable energy out of the wind resource areas in western Oklahoma, the Texas Panhandle and western Kansas to load centers by planning for more transmission to be built in the area. In addition to increasing overall system reliability, these new transmission resources should provide greater access to additional wind resources that are currently constrained due to existing transmission delivery limitations. Endangered Species Certain federal laws, including the Bald and Golden Eagle Protection Act, the Migratory Bird Treaty Act and the Endangered Species Act, provide special protection to certain designated species. These laws and any state equivalents provide for significant civil and criminal penalties for unpermitted activities that result in harm to or harassment of certain protected animals and plants, including damage to their habitats. If such species are located in an area in which OG&E conducts operations, or if additional species in those areas become subject to protection, OG&E's operations and development projects, particularly transmission, wind or pipeline projects, could be restricted or delayed, or OG&E could be required to implement expensive mitigation measures. 44 On June 1, 2021, the USFWS published a proposed rule to list two distinct population segments of the lesser prairie chicken; the southern distinct population segment located in west Texas and eastern New Mexico is proposed as endangered status, and the northern distinct population located in northwest Texas, Oklahoma, Kansas and Colorado is proposed to be listed as threatened status with a 4(d) rule which would prohibit take of the chicken, such as destroying its habitat by building a transmission line or substation, without a permit or special authorization from the USFWS. The final rule for the listing decision is expected to occur in June 2022. On November 9, 2021, the USFWS published a proposed rule to list the Alligator Snapping Turtle as threatened under the Endangered Species Act, along with a 4(d) rule that would provide conservation to the species. The habitat located within the OG&E service territory is limited to eastern Oklahoma and western Arkansas; however, the USFWS is proposing to exempt incidental take by industry for operation and maintenance and other routine activities that are conducted by using best management practices that reduce incidental take and conserve the habitat. The final rule for the listing decision is expected to occur in November 2022. Waste OG&E's operations generate wastes that are subject to the Federal Resource Conservation and Recovery Act of 1976 as well as comparable state laws which impose detailed requirements for the handling, storage, treatment and disposal of waste. Over 95 percent of the ash from OG&E's Muskogee and Sooner facilities was recovered and sold to the concrete and cement industries in the last three years, and in 2021, River Valley became OG&E's third power plant to enter an agreement to have its fly ash reused. Using ash in this way also helps cement manufacturers minimize their impact on the environment by avoiding the need to extract and process other natural resources. Based on estimates from the American Coal Ash Association, OG&E fly ash reuse helped avoid over three million tons of CO2 emissions in the last 14 years. OG&E has sought and will continue to seek pollution prevention opportunities and to evaluate the effectiveness of its waste reduction, reuse and recycling efforts. In 2021, OG&E obtained refunds of $3.3 million from the recycling of scrap metal, salvaged transformers and used transformer oil. This figure does not include the additional savings gained through the reduction and/or avoidance of disposal costs and the reduction in material purchases due to the reuse of existing materials. Similar savings are anticipated in future years. Water OG&E's operations are subject to the Federal Clean Water Act and comparable state laws and regulations. These laws and regulations impose detailed requirements and strict controls regarding the discharge of pollutants into state and federal waters. In 2015, the EPA issued a final rule addressing the effluent limitation guidelines for power plants under the Federal Clean Water Act. The final rule establishes technology- and performance-based standards that may apply to discharges of six waste streams including bottom ash transport water. Compliance with this rule will occur by 2023; however, on April 12, 2017, the EPA granted a Petition for Reconsideration of the 2015 Rule. On October 13, 2020, the EPA published a final rule to revise the technology-based effluent limitations for flue gas desulfurization waste water and bottom ash transport water. On August 3, 2021, the EPA published notice in the Federal Register that it will undertake a supplemental rulemaking to revise the effluent limitation guidelines rule after completing its review of the October 2020 rule. The existing effluent limitation guidelines will remain in effect while the EPA undertakes this new rulemaking. OG&E is evaluating what, if any, compliance actions are needed but is not able to quantify with any certainty what costs may be incurred. OG&E expects to be able to provide a reasonable estimate of any material costs associated with the rule's implementation following issuance of the permits from the State of Oklahoma. Since the purchase of the Redbud facility in 2008, OG&E's average use of treated municipal effluent for all of the needed cooling water at Redbud and McClain is approximately 2.5 billion gallons per year. This use of treated municipal effluent offsets the need for fresh water as cooling water, making fresh water available for other beneficial uses like drinking water, irrigation and recreation. Site Remediation The Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state laws impose liability, without regard to the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances into the environment. Because OG&E utilizes various products and generates wastes that are 45 considered hazardous substances for purposes of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, OG&E could be subject to liability for the costs of cleaning up and restoring sites where those substances have been released to the environment. At this time, it is not anticipated that any associated liability will cause a significant impact to OG&E. For further discussion regarding contingencies relating to environmental laws and regulations, see Note 15 within "Item 8. Financial Statements and Supplementary Data." 46