OG&E 2009 Annual Report Download - page 37

The Company continues to pursue additional renewable energy and the construction of associated transmission facilities
required to support this renewable expansion. The Company also is promoting Demand Side Management programs to encourage
more efficient use of electricity. See Note 13 of Notes to Financial Statements (Conservation and Energy Efficiency Programs) for a
further discussion. If these initiatives are successful, the Company believes it may be able to defer the construction of any incremental
fossil fuel generation capacity until 2020.
Increases in generation and the building of transmission lines are subject to numerous regulatory and other approvals,
including appropriate regulatory treatment from the OCC and, in the case of transmission lines, the SPP. Other projects involve
installing new emission-control and monitoring equipment at the Company’s existing power plants to help meet the Company’s
commitment to comply with current and future environmental requirements. For additional information regarding the above items
and other regulatory matters, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Environmental Laws and Regulations” and Note 13 of Notes to Financial Statements.
Summary of Operating Results
2009 compared to 2008. The Company reported net income of approximately $200.4 million and $143.0 million in 2009
and 2008, respectively, an increase of approximately $57.4 million, primarily due to a higher gross margin on revenues (“gross
margin”), primarily due to rate increases and riders partially offset by milder weather and lower demand and related revenues by non-
residential customers, and a higher allowance for equity funds used during construction (“AEFUDC”) partially offset by higher
depreciation and amortization expense, higher interest expense and higher income tax expense.
2008 compared to 2007. The Company reported net income of approximately $143.0 million and $161.7 million in 2008
and 2007, respectively, a decrease of approximately $18.7 million, primarily due to higher operation and maintenance expense, higher
depreciation and amortization expense, higher other expense and higher interest expense partially offset by a higher gross margin due
to increased rates from various regulatory riders implemented in 2008 and lower income tax expense.
Recent Developments and Regulatory Matters
Changes in Capital Markets
The volatility in global capital markets experienced in late 2008 and early 2009 led to a reduction in the value of long-term
investments held in OGE Energy’s pension trust and postretirement benefit plan trusts. However, since the end of the first quarter of
2009, the market values have partially recovered from the decline in value experienced in late 2008 and early 2009.
Global Climate Change and Environmental Concerns
There is a growing concern nationally and internationally about global climate change and the contribution of emissions of
greenhouse gases including, most significantly, carbon dioxide. This concern has led to increased interest in legislation at the Federal
level, actions at the state level, as well as litigation relating to greenhouse gas emissions. In June 2009, the U.S. House of
Representatives passed legislation that would regulate greenhouse gas emissions by instituting a cap-and-trade-system, in which a cap
on U.S. greenhouse gas emissions would be established starting in 2012 at a level three percent below the baseline 2005 level. The cap
would decline over time until in 2050 it reaches 83 percent below the baseline level. Emission allowances, which are rights to emit
greenhouse gases, would be both allocated for free and auctioned. In addition, the legislation contains a renewable energy standard of
25 percent by the year 2025 and an energy efficiency mandate for electric and natural gas utilities, as well as other requirements.
Legislation pending in the U.S. Senate proposes to regulate greenhouse gas emissions by instituting a cap-and-trade-system, with
primarily the same target levels proposed by the House bill; however, the proposed Senate bill is more aggressive in its 2020 target – a
reduction to 20 percent below 2005 levels by 2020 (versus 17 percent in the House bill). It is uncertain at this time whether, and in
what form, such legislation will ultimately be adopted. If legislation or regulations are passed at the Federal or state levels in the
future requiring mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities to address climate change,
this could result in significant additional capital expenditures and compliance costs.
Uncertainty surrounding global climate change and environmental concerns related to new coal-fired generation development
is changing the mix of the potential sources of new generation in the region. Adoption of renewable portfolio
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