OG&E 2011 Annual Report Download - page 18

16 OGE Energy Corp.
2010 Compared to 2009
Net income attributable to OGE Energy was $295.3 million, or $2.99
per diluted share, in 2010 as compared to $258.3 million, or $2.66 per
diluted share, in 2009. Included in net income attributable to OGE Energy
in 2010 was a one-time, non-cash charge of $11.4 million, or $0.11
per diluted share, related to the elimination of the tax deduction for the
Medicare Part D subsidy (as previously reported in the Company’s Form
10-Q for the quarter ended March 31, 2011). The increase in net income
attributable to OGE Energy of $37.0 million, or 14.3 percent, or $0.33
per diluted share, in 2010 as compared to 2009 was primarily due to:
•An increase in net income at OG&E of $15.3 million or 7.6 percent,
or $0.12 per diluted share of the Company’s common stock, due to a
higher gross margin primarily due to rate increases and riders and warmer
weather in OG&E’s service territory partially offset by higher other opera-
tion and maintenance expense, higher depreciation and amortization
expense and higher income tax expense mainly attributable to higher
pre-tax income and the elimination of the tax deduction for the Medicare
Part D subsidy discussed above;
•An increase in net income at Enogex of $29.8 million or 48.6 percent,
or $0.29 per diluted share of the Company’s common stock, due to a
higher gross margin primarily due to higher processing spreads, higher
NGLs prices, higher natural gas prices and increased volumes partially
offset by higher other operation and maintenance expense and higher
income tax expense mainly attributable to higher pre-tax income and
the elimination of the tax deduction for the Medicare Part D subsidy
discussed above; and
•An increase in the net loss at OGE Energy of $8.1 million, or $0.08 per
diluted share of the Company’s common stock, due to higher other
expense primarily attributable to an increase in charitable contributions
to OGE Energy’s charitable giving foundation in 2010 and higher income
tax expense mainly attributable to the elimination of the tax deduction
for the Medicare Part D subsidy discussed above partially offset by lower
interest expense primarily due to lower average commercial paper borrow-
ings and a lower average interest rate in 2010.
Recent Developments and Regulatory Matters
Global Climate Change, Environmental Concerns
and Related Opportunities
It is uncertain at this time whether, and in what form, Congress will
adopt legislation to restrict greenhouse gas emissions. In the absence
of such legislation, the U.S. Environmental Protection Agency (“EPA”)
has taken steps to regulate greenhouse gas emissions. Future legislation
or rules could require reductions of carbon dioxide and other greenhouse
gas emissions from generation facilities. This could result in significant
changes to the Company’s operations, significant capital expenditures
by the Company and a significant increase in the Company’s cost of
conducting business. The OG&E service territory is in central Oklahoma
and borders one of the nation’s best wind resource areas. 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 renew-
able portfolio standards would be expected to increase the region’s
reliance on wind generation and other renewables. The Company has
leveraged its advantageous geographic position to develop renewable
energy resources and transmission to deliver the renewable energy.
In January 2012, OG&E’s Crossroads wind farm in Dewey County,
Oklahoma (“Crossroads”) was placed in service and added to OG&E’s
wind power portfolio, which now includes potential wind generation of
up to of 780 megawatts (“MW”) (including wind power purchase agree-
ments). In addition, the SPP regional transmission organization has begun
to address the relative lack of transmission lines capable of bringing
renewable energy out of the wind resource area 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 significantly
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 constraints.
OG&E Crossroads Wind Farm
On July 29, 2010, OG&E received an order from the OCC authorizing
OG&E to recover from Oklahoma customers the cost to construct
Crossroads, with the rider being implemented as the individual turbines
are placed in service. The Crossroads wind farm was fully in service in
January 2012. As part of this project, on June 16, 2011, OG&E entered
into an interconnection agreement with the SPP for Crossroads which
allowed Crossroads to interconnect at 227.5 MWs.
OG&E 2011 Oklahoma Rate Case Filing
As part of the Joint Stipulation and Settlement Agreement reached
in OG&E’s 2009 Oklahoma rate case filing, the parties agreed that
OG&E would file a rate case on or before June 30, 2011. On May 27,
2011, OG&E requested an extension until the end of July 2011 for filing
the Oklahoma rate case. On July 28, 2011, OG&E filed its application
with the OCC requesting an annual rate increase of $73.3 million, or a
4.3 percent increase in its rates. OG&E is requesting a return on equity
of 11.00 percent based on a common equity percentage of 53 percent.
Each 0.10 percent change in the requested return on equity affects the
requested rate increase by $3.0 million. In its application, OG&E seeks
to recover increases in its operating costs and to begin earning on
approximately $500 million of new capital investments made on behalf
of its Oklahoma customers during the previous two and one-half years.
On November 9, 2011, the OCC Staff recommended a $6.2 million
annual rate decrease based on a return on equity of 9.81 percent and
a common equity percentage of 53 percent. The staff of the Oklahoma
Attorney General recommended a return on equity of 9.818 percent and
a common equity percentage of 49.5 percent. The staff of the Oklahoma
Attorney General did not recommend a specific revenue requirement,
but OG&E believes that adoption of the staff of the Oklahoma Attorney
General’s recommendations would result in a rate decrease. The Oklahoma
Industrial Electric Consumers recommended a $56 million annual rate