OG&E 2010 Annual Report Download - page 33

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The Company generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. The
Company’s operations are subject to regulation by the OCC, the APSC and the FERC. The Company is a wholly-owned subsidiary of
OGE Energy which is an energy and energy services provider offering physical delivery and related services for both electricity and
natural gas primarily in the south central United States. The Company was incorporated in 1902 under the laws of the Oklahoma
Territory. The Company is the largest electric utility in Oklahoma and its franchised service territory includes the Fort Smith,
Arkansas area. The Company sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution
business.
Overview
Company Strategy
OGE Energy’s mission is to fulfill its critical role in the nation’s electric utility and natural gas midstream pipeline
infrastructure and meet individual customers’ needs for energy and related services in a safe, reliable and efficient manner. OGE
Energy intends to execute its vision by focusing on its regulated electric utility business and unregulated natural gas midstream
business. OGE Energy intends to maintain the majority of its assets in the regulated utility business, however, OGE Energy
anticipates significant growth opportunities for its natural gas midstream business.
The Company is focused on increased investment to preserve system reliability and meet load growth, leverage its
advantageous geographic position to develop renewable energy resources for wind generation and transmission, replace infrastructure
equipment, replace aging transmission and distribution systems, provide new products and services, provide energy management
solutions to the Company’s customers through the Smart Grid program and deploy newer technology that improves operational,
financial and environmental performance. The Company also is promoting demand-side management programs to encourage more
efficient use of electricity. If these initiatives are successful, the Company believes it may be able to defer the construction or
acquisition of any incremental fossil fuel generation capacity until 2020.
OGE Energy’s corporate strategy is to continue to maintain the diversified asset position of the Company and Enogex
focused on providing competitive energy products and services to customers primarily in the south central United States. OGE
Energy will continue to focus on growing products and services with limited or manageable commodity price exposure.
Summary of Operating Results
2010 compared to 2009. The Company reported net income of $215.7 million and $200.4 million in 2010 and 2009,
respectively, an increase of 15.3 million, or 7.6 percent, due to a higher gross margin primarily due to rate increases and riders and
warmer weather in the Company’s service territory partially offset by higher operation 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 in Note 7 of Notes to Financial Statements).
2009 compared to 2008. The Company reported net income of $200.4 million and $143.0 million in 2009 and 2008,
respectively, an increase of $57.4 million, or 40.1 percent, due to a higher 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 AEFUDC
partially offset by higher depreciation and amortization expense, higher interest expense and higher income tax expense.
Recent Developments and Regulatory Matters
Global Climate Change and Environmental Concerns
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 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 Company’s 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 renewable portfolio standards
would be expected to increase the region’s reliance on wind generation and other renewables. The Company believes it can leverage
its advantageous geographic position to develop renewable energy resources and transmission to deliver the renewable
energy. According to the DOE, Oklahoma ranks ninth among the best states for potential wind generation with 516,822 MWs of
potential installed capacity. Per a National Renewable Energy Laboratory map, the majority of Oklahoma’s wind resources are
located in the western
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