XNYS:OGE OGE Energy Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:OGE (OGE Energy Corp): Fair Value Estimate
Premium
XNYS:OGE (OGE Energy Corp): Consider Buying
Premium
XNYS:OGE (OGE Energy Corp): Consider Selling
Premium
XNYS:OGE (OGE Energy Corp): Fair Value Uncertainty
Premium
XNYS:OGE (OGE Energy Corp): Economic Moat
Premium
XNYS:OGE (OGE Energy Corp): Stewardship
Premium
 
                                    

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012

OR
 
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____

Commission File Number: 1-12579
OGE ENERGY CORP.
(Exact name of registrant as specified in its charter)
Oklahoma
 
73-1481638
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

321 North Harvey
P.O. Box 321
Oklahoma City, Oklahoma 73101-0321
(Address of principal executive offices)
(Zip Code)

405-553-3000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  R  Yes   £  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   R  Yes   £  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  R
Accelerated filer  £
Non-accelerated filer    £ (Do not check if a smaller reporting company)
Smaller reporting company  £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  £  Yes   R  No

At March 31, 2012, there were 98,591,411 shares of common stock, par value $0.01 per share, outstanding.

 



OGE ENERGY CORP.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS

 
Page
 
 
Part I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
Part II - OTHER INFORMATION
 
 
 
 
 
 
 
 
 


i


GLOSSARY OF TERMS

The following is a glossary of frequently used abbreviations that are found throughout this Form 10-Q.
Abbreviation
Definition
2011 Form 10-K
Annual Report on Form 10-K for the year ended December 31, 2011
APSC
Arkansas Public Service Commission
ArcLight group
Bronco Midstream Holdings, LLC, Bronco Midstream Holdings II, LLC, collectively
Atoka
Atoka Midstream LLC joint venture
BART
Best Available Retrofit Technology
Company
OGE Energy, collectively with its subsidiaries
Cordillera
Cordillera Energy Partners III, LLC
Crossroads
OG&E's Crossroads wind farm in Dewey County, Oklahoma
Dry Scrubbers
Dry flue gas desulfurization units with Spray Dryer Absorber
EBITDA
Earnings before Interest, Taxes, Depreciation and Amortization
Enogex
OGE Holdings, collectively with its subsidiaries
Enogex LLC
Enogex LLC, collectively with its subsidiaries
Enogex Holdings
Enogex Holdings LLC, the parent company of Enogex LLC and a majority-owned subsidiary of OGE Holdings
EPA
U.S. Environmental Protection Agency
FERC
Federal Energy Regulatory Commission
GAAP
Accounting principles generally accepted in the United States
MMBtu
Million British thermal unit
MMcf/d
Million cubic feet per day
MW
Megawatt
MWH
Megawatt-hour
NGLs
Natural gas liquids
NOX
Nitrogen oxide
NYMEX
New York Mercantile Exchange
OCC
Oklahoma Corporation Commission
OER
OGE Energy Resources LLC, wholly-owned subsidiary of Enogex LLC
Off-system sales
Sales to other utilities and power marketers
OG&E
Oklahoma Gas and Electric Company
OGE Holdings
OGE Enogex Holdings, LLC, wholly-owned subsidiary of OGE Energy and parent company of Enogex Holdings
Oxbow
Oxbow Midstream, LLC
Pension Plan
Qualified defined benefit retirement plan
PRM
Price risk management
SIP
State implementation plan
SO2
Sulfur dioxide
System sales
Sales to OG&E's customers
TBtu/d
Trillion British thermal units per day

ii


FORWARD-LOOKING STATEMENTS

Except for the historical statements contained herein, the matters discussed in this Form 10-Q, including those matters discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to certain risks, uncertainties and assumptions.  Such forward-looking statements are intended to be identified in this document by the words "anticipate", "believe", "estimate", "expect", "intend", "objective", "plan", "possible", "potential", "project" and similar expressions.  Actual results may vary materially from those expressed in forward-looking statements. In addition to the specific risk factors discussed in "Item 1A. Risk Factors" in the Company's 2011 Form 10-K and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" herein, factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:

general economic conditions, including the availability of credit, access to existing lines of credit, access to the commercial paper markets, actions of rating agencies and their impact on capital expenditures;
the ability of the Company and its subsidiaries to access the capital markets and obtain financing on favorable terms;
prices and availability of electricity, coal, natural gas and NGLs, each on a stand-alone basis and in relation to each other as well as the processing contract mix between percent-of-liquids, percent-of-proceeds, keep-whole and fixed-fee;
business conditions in the energy and natural gas midstream industries;
competitive factors including the extent and timing of the entry of additional competition in the markets served by the Company;
unusual weather;
availability and prices of raw materials for current and future construction projects;
Federal or state legislation and regulatory decisions and initiatives that affect cost and investment recovery, have an impact on rate structures or affect the speed and degree to which competition enters the Company's markets;
environmental laws and regulations that may impact the Company's operations;
changes in accounting standards, rules or guidelines;
the discontinuance of accounting principles for certain types of rate-regulated activities;
whether OG&E can successfully implement its Smart Grid program to install meters for its customers and integrate the Smart Grid meters with its customer billing and other computer information systems;
the cost of protecting assets against, or damage due to, terrorism or cyber attacks;
advances in technology;
creditworthiness of suppliers, customers and other contractual parties;
the higher degree of risk associated with the Company's nonregulated business compared with the Company's regulated utility business; and
other risk factors listed in the reports filed by the Company with the Securities and Exchange Commission including those listed in "Item 1A. Risk Factors" and in Exhibit 99.01 to the Company's 2011 Form 10-K.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

1


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended
 
March 31,
(In millions except per share data)
2012
2011
OPERATING REVENUES
 
 
Electric Utility operating revenues
$
426.7

$
422.1

Natural Gas Midstream Operations operating revenues
414.0

418.4

Total operating revenues
840.7

840.5

COST OF GOODS SOLD (exclusive of depreciation and amortization shown below)
 
 
Electric Utility cost of goods sold
183.6

207.5

Natural Gas Midstream Operations cost of goods sold
301.7

325.7

Total cost of goods sold
485.3

533.2

Gross margin on revenues
355.4

307.3

OPERATING EXPENSES
 
 
Other operation and maintenance
147.6

138.3

Depreciation and amortization
86.6

74.0

Impairment of assets
0.2


Gain on insurance proceeds
(7.5
)

Taxes other than income
30.2

27.1

Total operating expenses
257.1

239.4

OPERATING INCOME
98.3

67.9

OTHER INCOME (EXPENSE)
 
 
Interest income

0.1

Allowance for equity funds used during construction
1.9

4.4

Other income
7.7

6.3

Other expense
(1.9
)
(2.3
)
Net other income
7.7

8.5

INTEREST EXPENSE
 
 
Interest on long-term debt
39.2

35.4

Allowance for borrowed funds used during construction
(1.1
)
(2.3
)
Interest on short-term debt and other interest charges
2.0

1.0

Interest expense
40.1

34.1

INCOME BEFORE TAXES
65.9

42.3

INCOME TAX EXPENSE
18.4

12.6

NET INCOME
47.5

29.7

Less: Net income attributable to noncontrolling interests
10.4

4.9

NET INCOME ATTRIBUTABLE TO OGE ENERGY
$
37.1

$
24.8

BASIC AVERAGE COMMON SHARES OUTSTANDING
98.3

97.7

DILUTED AVERAGE COMMON SHARES OUTSTANDING
98.8

99.1

BASIC EARNINGS PER AVERAGE COMMON SHARE
 
 
ATTRIBUTABLE TO OGE ENERGY COMMON SHAREHOLDERS
$
0.38

$
0.25

DILUTED EARNINGS PER AVERAGE COMMON SHARE
 
 
ATTRIBUTABLE TO OGE ENERGY COMMON SHAREHOLDERS
$
0.38

$
0.25

DIVIDENDS DECLARED PER COMMON SHARE
$
0.3925

$
0.3750

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.

2


OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
March 31,
(In millions)
2012
2011
Net income
$
47.5

$
29.7

Other comprehensive income (loss), net of tax
 
 
Pension Plan and Restoration of Retirement Income Plan:
 
 
Amortization of deferred net loss, net of tax of $0.4 million and $0.4 million, respectively
0.8

0.5

Amortization of prior service cost, net of tax of $0 and ($0.1) million, respectively

0.2

Postretirement plans:
 
 
Amortization of deferred net loss, net of tax of $0.3 million and $0.5 million, respectively
0.5

0.2

Amortization of deferred net transition obligation, net of tax of $0 and ($0.1) million, respectively

0.1

Amortization of prior service cost, net of tax of ($0.3) million and ($0.3) million, respectively
(0.5
)
(0.6
)
Prior service cost arising during the period, net of tax of $0 and $6.2 million, respectively

10.7

Deferred commodity contracts hedging (gains) losses reclassified in net income, net of tax of ($1.7) million and $3.2 million, respectively
(3.3
)
6.6

Deferred commodity contracts hedging losses, net of tax of $0 and ($2.0) million, respectively

(5.1
)
Deferred interest rate swaps hedging losses reclassified in net income, net of tax of $0.1 million and $0.1 million, respectively
0.1

0.1

Other comprehensive income (loss), net of tax
(2.4
)
12.7

Comprehensive income
45.1

42.4

Less:  Comprehensive income attributable to noncontrolling interest for sale of equity investment

(1.7
)
Less:  Comprehensive income attributable to noncontrolling interests
9.5

6.0

Total comprehensive income attributable to OGE Energy
$
35.6

$
38.1






















 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.

3


OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
March 31,
(In millions)
2012
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
Net income
$
47.5

$
29.7

Adjustments to reconcile net income to net cash provided from operating activities
 
 
Depreciation and amortization
86.6

74.0

Impairment of assets
0.2


Deferred income taxes and investment tax credits, net
18.4

12.6

Allowance for equity funds used during construction
(1.9
)
(4.4
)
Loss on disposition of assets
0.5

0.3

Gain on insurance proceeds
(7.5
)

Stock-based compensation
(11.8
)
(2.3
)
Price risk management assets
(0.5
)
0.7

Price risk management liabilities
(4.9
)
3.2

Regulatory assets
5.6

6.0

Regulatory liabilities
(3.4
)
2.8

Other assets
2.4

1.7

Other liabilities
5.2

1.3

Change in certain current assets and liabilities
 
 
Accounts receivable, net
54.8

8.1

Accrued unbilled revenues
6.0

6.3

Fuel, materials and supplies inventories
3.3

16.1

Gas imbalance assets
(4.0
)
(2.1
)
Fuel clause under recoveries
1.8

0.6

Other current assets
(6.3
)
6.2

Accounts payable
(59.2
)
(43.1
)
Gas imbalance liabilities
(1.5
)
1.4

Fuel clause over recoveries
31.5

(4.5
)
Other current liabilities
(42.5
)
(38.3
)
Net Cash Provided from Operating Activities
120.3

76.3

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
Capital expenditures (less allowance for equity funds used during construction)
(311.1
)
(195.0
)
Reimbursement of capital expenditures 
9.7

11.3

Proceeds from insurance
6.1


Proceeds from sale of assets
0.2

1.7

Net Cash Used in Investing Activities
(295.1
)
(182.0
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Increase in short-term debt
212.2

92.2

Issuance of common stock
3.7

4.1

Contributions from noncontrolling interest partners

73.5

Repayment of line of credit

(25.0
)
Distributions to noncontrolling interest partners
(5.6
)
(0.8
)
Dividends paid on common stock
(38.5
)
(36.6
)
Net Cash Provided from Financing Activities
171.8

107.4

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(3.0
)
1.7

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
4.6

2.3

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
1.6

$
4.0







The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.

4


OGE ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, 2012 (Unaudited)
December 31, 2011
ASSETS
 
 
CURRENT ASSETS
 
 
Cash and cash equivalents
$
1.6

$
4.6

Accounts receivable, less reserve of $2.5 and $3.8, respectively
269.2

322.5

Accrued unbilled revenues
53.3

59.3

Income taxes receivable
8.3

8.3

Fuel inventories
96.3

100.7

Materials and supplies, at average cost
88.3

87.2

Price risk management
4.1

3.5

Gas imbalances
5.8

1.8

Deferred income taxes
37.3

32.1

Fuel clause under recoveries

1.8

Other
37.2

30.9

Total current assets
601.4

652.7

OTHER PROPERTY AND INVESTMENTS, at cost
49.2

46.7

PROPERTY, PLANT AND EQUIPMENT
 
 
In service
10,597.4

10,315.9

Construction work in progress
501.6

499.0

Total property, plant and equipment
11,099.0

10,814.9

Less accumulated depreciation
3,394.4

3,340.9

Net property, plant and equipment
7,704.6

7,474.0

DEFERRED CHARGES AND OTHER ASSETS
 
 
Regulatory assets
500.5

507.9

Intangible assets, net
134.6

137.0

Goodwill
39.4

39.4

Price risk management
0.2

0.3

Other
44.6

48.0

Total deferred charges and other assets
719.3

732.6

TOTAL ASSETS
$
9,074.5

$
8,906.0





















The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.

5


OGE ENERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In millions)
March 31, 2012 (Unaudited)
December 31, 2011
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
CURRENT LIABILITIES
 
 
Short-term debt
$
489.3

$
277.1

Accounts payable
304.8

388.0

Dividends payable
38.7

38.5

Customer deposits
68.8

67.6

Accrued taxes
26.2

42.3

Accrued interest
35.5

54.8

Accrued compensation
36.6

47.8

Price risk management
0.5

0.4

Gas imbalances
8.3

9.8

Fuel clause over recoveries
39.2

7.7

Other
67.4

64.5

Total current liabilities
1,115.3

998.5

LONG-TERM DEBT
2,737.3

2,737.1

DEFERRED CREDITS AND OTHER LIABILITIES
 
 
Accrued benefit obligations
365.6

360.8

Deferred income taxes
1,674.6

1,651.4

Deferred investment tax credits
5.5

6.1

Regulatory liabilities
237.0

230.7

Deferred revenues
40.7

40.8

Price risk management

0.1

Other
88.1

61.2

Total deferred credits and other liabilities
2,411.5

2,351.1

Total liabilities
6,264.1

6,086.7

COMMITMENTS AND CONTINGENCIES (NOTE 13)


STOCKHOLDERS' EQUITY
 
 
Common stockholders' equity
1,022.3

1,035.3

Retained earnings
1,573.2

1,574.8

Accumulated other comprehensive loss, net of tax
(42.1
)
(40.6
)
Treasury stock, at cost
(0.3
)
(6.2
)
Total OGE Energy stockholders' equity
2,553.1

2,563.3

Noncontrolling interests
257.3

256.0

Total stockholders' equity
2,810.4

2,819.3

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
9,074.5

$
8,906.0















The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.

6


OGE ENERGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)



(In millions)
Common Stock
Premium on Common Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Treasury Stock
Total
Balance at December 31, 2011
$
1.0

$
1,034.3

$
1,574.8

$
(40.6
)
$
256.0

$
(6.2
)
$
2,819.3

Comprehensive income (loss)
 
 
 
 
 

 
 
Net income


37.1


10.4


47.5

Other comprehensive income (loss), net of tax



(1.5
)
(0.9
)

(2.4
)
Comprehensive income (loss)


37.1

(1.5
)
9.5


45.1

Dividends declared on common stock


(38.7
)



(38.7
)
Issuance of common stock

3.7





3.7

Stock-based compensation and other

(16.7
)


(2.6
)
5.9

(13.4
)
Distributions to noncontrolling interest partners




(5.6
)

(5.6
)
Balance at March 31, 2012
$
1.0

$
1,021.3

$
1,573.2

$
(42.1
)
$
257.3

$
(0.3
)
$
2,810.4

 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
1.0

$
968.2

$
1,380.6

$
(60.2
)
$
110.4

$

$
2,400.0

Comprehensive income (loss)
 
 
 
 
 
 
 
Net income


24.8


4.9


29.7

Other comprehensive income (loss), net of tax



13.3

(0.6
)

12.7

Comprehensive income (loss)


24.8

13.3

4.3


42.4

Dividends declared on common stock


(36.7
)



(36.7
)
Issuance of common stock

4.1





4.1

Stock-based compensation

(2.4
)




(2.4
)
Contributions from noncontrolling interest partners

29.1



44.4


73.5

Distributions to noncontrolling interest partners




(0.8
)

(0.8
)
Deferred income taxes attributable to contributions from noncontrolling interest partners

(11.2
)




(11.2
)
Balance at March 31, 2011
$
1.0

$
987.8

$
1,368.7

$
(46.9
)
$
158.3

$

$
2,468.9















The accompanying Notes to Condensed Consolidated Financial Statements are an integral part hereof.

7


OGE ENERGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Summary of Significant Accounting Policies

Organization

The Company 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 conducts these activities through four business segments:  (i) electric utility, (ii) natural gas transportation and storage, (iii) natural gas gathering and processing and (iv) natural gas marketing.  All significant intercompany transactions have been eliminated in consolidation.

The electric utility segment generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas.  Its operations are conducted through OG&E and 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.  OG&E is the largest electric utility in Oklahoma and its franchised service territory includes the Fort Smith, Arkansas area.  OG&E sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution business.

Enogex is a provider of integrated natural gas midstream services.  Enogex is engaged in the business of gathering, processing, transporting, storing and marketing natural gas.  Most of Enogex's natural gas gathering, processing, transportation and storage assets are strategically located in the Arkoma and Anadarko basins of Oklahoma and the Texas Panhandle.  Enogex's operations are organized into three business segments: (i) natural gas transportation and storage, (ii) natural gas gathering and processing and (iii) natural gas marketing. At March 31, 2012, the Company indirectly owns an 81.3 percent membership interest in Enogex Holdings, which in turn owns all of the membership interests in Enogex LLC, a Delaware single-member limited liability company.  The Company continues to consolidate Enogex Holdings in its Condensed Consolidated Financial Statements as OGE Energy has a controlling financial interest over the operations of Enogex Holdings.  Also, Enogex LLC holds a 50 percent ownership interest in Atoka.  The Company consolidates Atoka in its Condensed Consolidated Financial Statements as Enogex acts as the managing member of Atoka and has control over the operations of Atoka.

Basis of Presentation

The Condensed Consolidated Financial Statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to prevent the information presented from being misleading.
In the opinion of management, all adjustments necessary to fairly present the consolidated financial position of the Company at March 31, 2012 and December 31, 2011, the results of its operations for the three months ended March 31, 2012 and 2011 and the results of its cash flows for the three months ended March 31, 2012 and 2011, have been included and are of a normal recurring nature except as otherwise disclosed.

Due to seasonal fluctuations and other factors, the Company's operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any future period. The Condensed Consolidated Financial Statements and Notes thereto should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in the Company's 2011 Form 10-K.
   
Accounting Records

The accounting records of OG&E are maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the OCC and the APSC.  Additionally, OG&E, as a regulated utility, is subject to accounting principles for certain types of rate-regulated activities, which provide that certain actual or anticipated 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.


8

                                    

OG&E records certain actual or anticipated costs and obligations as regulatory assets or liabilities if it is probable, based on regulatory orders or other available evidence, that the cost or obligation will be included in amounts allowable for recovery or refund in future rates.

The following table is a summary of OG&E's regulatory assets and liabilities at:
(In millions)
March 31, 2012
December 31, 2011
Regulatory Assets
 
 
Current
 
 
Fuel clause under recoveries
$

$
1.8

Other (A)
24.7

14.2

Total Current Regulatory Assets
$
24.7

$
16.0

Non-Current
 

 

Benefit obligations regulatory asset
$
352.1

$
359.2

Income taxes recoverable from customers, net
54.4

54.0

Smart Grid
39.4

37.2

Deferred storm expenses
21.7

23.8

Unamortized loss on reacquired debt
13.9

14.2

Deferred Pension expenses
7.9

9.1

Other
11.1

10.4

Total Non-Current Regulatory Assets
$
500.5

$
507.9

Regulatory Liabilities
 

 

Current
 

 

Fuel clause over recoveries
$
39.2

$
7.7

Smart Grid rider over collections (B)
24.8

24.3

Other (B)
13.9

13.7

Total Current Regulatory Liabilities
$
77.9

$
45.7

Non-Current
 

 

Accrued removal obligations, net
$
211.2

$
208.2

Pension tracker
25.8

22.5

Total Non-Current Regulatory Liabilities
$
237.0

$
230.7

(A)
Included in Other Current Assets on the Condensed Consolidated Balance Sheets.
(B)
Included in Other Current Liabilities on the Condensed Consolidated Balance Sheets.    
  
Management continuously monitors the future recoverability of regulatory assets.  When in management's judgment future recovery becomes impaired, the amount of the regulatory asset is adjusted, as appropriate.  If OG&E were required to discontinue the application of accounting principles for certain types of rate-regulated activities for some or all of its operations, it could result in writing off the related regulatory assets, which could have significant financial effects.
             
Business Combination

As previously reported in the Company's 2011 Form 10-K, on September 23, 2011, Enogex entered into the following agreements: an agreement with Cordillera, Oxbow and West Canadian Midstream LLC pursuant to which Enogex agreed to acquire 100 percent of the membership interest in Roger Mills Gas Gathering, LLC, an Oklahoma limited liability company that owns an approximately 60-mile natural gas gathering system located in Roger Mills County and Ellis County, Oklahoma; an agreement with Cordillera and Oxbow pursuant to which Enogex agreed to acquire an approximately 30-mile natural gas gathering system located in Roger Mills County, Oklahoma; and agreements with Cordillera and other producers pursuant to which such producers agreed to provide Enogex with long-term acreage dedication in the area served by the gathering systems encompassing approximately 100,000 net acres. The gathering systems are located in the Granite Wash area. The aggregate purchase price for these transactions was $200.4 million, which was paid in cash primarily from contributions from OGE Energy and the ArcLight group as well as cash generated from operations and bank borrowings. The transactions closed on November 1, 2011. During the three months ended March 31, 2012, the purchase price allocation for this transaction was finalized and no adjustments were required to the previously reported purchase price allocation in the Company's 2011 Form 10-K.




9

                                    

Property, Plant and Equipment

Enogex Cox City Plant Fire

On December 8, 2010, a fire occurred at Enogex's Cox City natural gas processing plant destroying major components of one of the four processing trains, representing 120 MMcf/d of the total 180 MMcf/d of capacity, at that facility. The damaged train was replaced and the facility was returned to full service in September 2011. The total cost necessary to return the facility back to full service was $29.6 million. In the fourth quarter of 2011, Enogex received a partial insurance reimbursement of $7.4 million and recognized a gain of $3.0 million on insurance proceeds. In March 2012, Enogex reached a settlement agreement with its insurers in this matter. As a result of the settlement agreement, Enogex received additional reimbursements of $6.1 million during the three months ended March 31, 2012 and $1.5 million in April 2012. Enogex recognized a gain of $7.5 million on insurance proceeds during the three months ended March 31, 2012.
   
Asset Retirement Obligation

The following table summarizes changes to OG&E's asset retirement obligations related to its wind farms due to a change in the assumption related to the timing of removal used in the valuation of the asset retirement obligations.
(In millions)
 
Balance at January 1, 2012
$
24.8

Accretion expense
0.4

Revisions in estimated cash flows
26.7

Balance at March 31, 2012
$
51.9


Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of accumulated other comprehensive loss at March 31, 2012 and December 31, 2011 attributable to OGE Energy. At both March 31, 2012 and December 31, 2011, there was no accumulated other comprehensive loss related to Enogex's noncontrolling interest in Atoka.
 
March 31,
December 31,
(In millions)
2012
2011
Pension Plan and Restoration of Retirement Income Plan:
 
 
Net loss
$
(41.3
)
$
(42.1
)
Prior service cost
(0.1
)
(0.1
)
Postretirement plans:
 
 
Net loss                                                                                              
(14.9
)
(15.4
)
Prior service cost
8.5

9.0

Net transition obligation
(0.1
)
(0.1
)
Deferred commodity contracts hedging gains

3.3

Deferred interest rate swaps hedging losses
(0.6
)
(0.7
)
Total accumulated other comprehensive loss
(48.5
)
(46.1
)
Less:  Accumulated other comprehensive loss attributable to noncontrolling interests
(6.4
)
(5.5
)
Accumulated other comprehensive loss, net of tax
$
(42.1
)
$
(40.6
)

2.
Accounting Pronouncement

In May 2011, the Financial Accounting Standards Board issued "Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which reconciled differences between U.S. GAAP and International Financial Reporting Standards and clarified existing disclosure requirements about fair value measurement as set forth in previously issued accounting guidance in this area.  The new standard requires additional disclosures relating to the valuation processes used by the Company related to its fair value measurements using significant unobservable inputs (Level 3), as well as the sensitivity of the fair value measurement to the changes in unobservable inputs. The new standard is applicable to all entities that are required or permitted to measure or disclose the fair value of an asset, a liability or an instrument classified in a reporting entity's shareholders' equity in the financial statements. The new standard is effective for interim and

10

                                    

annual reporting periods beginning after December 15, 2011, and should be applied prospectively.  Early adoption of this new standard was not permitted. The Company adopted this new standard effective January 1, 2012. The Company had no Level 3 assets or liabilities at March 31, 2012.

3.
Noncontrolling Interests
  
Pursuant to the Enogex Holdings LLC Agreement, Enogex Holdings makes quarterly distributions to its partners. The following table summarizes the quarterly distributions during the three months ended March 31, 2012.
(In millions)
OGE Holdings Portion
ArcLight group's Portion
Total Distribution

First quarter 2012
$
24.4

$
5.6

$
30.0


Enogex LLC made no distributions during the three months ended March 31, 2012 to its Atoka partner, as there is no minimum distribution requirement related to Atoka.

4.
Fair Value Measurements
 
The classification of the Company's fair value measurements requires judgment regarding the degree to which market data are observable or corroborated by observable market data. GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value based on observable and unobservable data. The hierarchy categorizes the inputs into three levels, with the highest priority given to quoted prices in active markets for identical unrestricted assets or liabilities (Level 1) and the lowest priority given to unobservable inputs (Level 3).  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The three levels defined in the fair value hierarchy and examples of each are as follows:
 
Level 1 inputs are quoted prices in active markets for identical unrestricted assets or liabilities that are accessible at the measurement date. Instruments classified as Level 1 include natural gas futures, swaps and option transactions for contracts traded on the NYMEX and settled through a NYMEX clearing broker.
 
Level 2 inputs are inputs other than quoted prices in active markets included within Level 1 that are either directly or indirectly observable at the reporting date for the asset or liability for substantially the full term of the asset or liability.  Level 2 inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.  Instruments classified as Level 2 include over-the-counter NYMEX natural gas swaps, natural gas basis swaps and natural gas purchase and sales transactions in markets such that the pricing is closely related to the NYMEX pricing.
 
Level 3 inputs are prices or valuation techniques for the asset or liability that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). Unobservable inputs reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). 
 
The Company utilizes the market approach in determining the fair value of its derivative positions by using either NYMEX published market prices, independent broker pricing data or broker/dealer valuations.  The valuations of derivatives with pricing based on NYMEX published market prices may be considered Level 1 if they are settled through a NYMEX clearing broker account with daily margining.  Over-the-counter derivatives with NYMEX based prices are considered Level 2 due to the impact of counterparty credit risk.  Valuations based on independent broker pricing or broker/dealer valuations may be classified as Level 2 only to the extent they may be validated by an additional source of independent market data for an identical or closely related active market. In certain less liquid markets or for longer-term contracts, forward prices are not as readily available. In these circumstances, contracts are valued using internally developed methodologies that consider historical relationships among various quoted prices in active markets that result in management's best estimate of fair value.  These contracts are classified as Level 3.
 
The impact to the fair value of derivatives due to credit risk is calculated using the probability of default based on Standard & Poor's Ratings Services and/or internally generated ratings.  The fair value of derivative assets is adjusted for credit risk.  The fair value of derivative liabilities is adjusted for credit risk only if the impact is deemed material.
 

11


Contracts with Master Netting Arrangements

Fair value amounts recognized for forward, interest rate swap, option and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement may be offset.  The reporting entity's choice to offset or not must be applied consistently.  A master netting arrangement exists if the reporting entity has multiple contracts, whether for the same type of conditional or exchange contract or for different types of contracts, with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. Offsetting the fair values recognized for forward, interest rate swap, option and other conditional or exchange contracts outstanding with a single counterparty results in the net fair value of the transactions being reported as an asset or a liability in the Condensed Consolidated Balance Sheets.  The Company has presented the fair values of its derivative contracts under master netting agreements using a net fair value presentation.
 
The following tables summarize the Company's assets and liabilities that are measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 as well as reconcile the Company's commodity contracts fair value to PRM Assets and Liabilities on the Company's Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011. There were no Level 3 investments held at March 31, 2012 or December 31, 2011.
March 31, 2012
(In millions)
Commodity Contracts
Gas Imbalances (A)
 
Assets
Liabilities
Assets (B)
Liabilities (C)
Quoted market prices in active market for identical assets (Level 1)
$
52.8

$
54.8

$

$

Significant other observable inputs (Level 2)
5.0

0.9

3.3

6.8

Total fair value
57.8

55.7

3.3

6.8

Netting adjustments
(53.5
)
(55.2
)


Total
$
4.3

$
0.5

$
3.3

$
6.8

 
 
 
 
 
December 31, 2011
(In millions)
Commodity Contracts
Gas Imbalances (A)
 
Assets
Liabilities
Assets
Liabilities (C)
Quoted market prices in active market for identical assets (Level 1)
$
57.1

$
52.3

$

$

Significant other observable inputs (Level 2)
4.2

1.2

1.8

7.8

Total fair value
61.3

53.5

1.8

7.8

Netting adjustments
(57.5
)
(53.0
)


Total
$
3.8

$
0.5

$
1.8

$
7.8

(A)
The Company uses the market approach to fair value its gas imbalance assets and liabilities, using an average of the Inside FERC Gas Market Report for Panhandle Eastern Pipe Line Co. (Texas, Oklahoma Mainline), ONEOK (Oklahoma) and ANR Pipeline (Oklahoma) indices.
(B)
Gas imbalance assets exclude fuel reserves for under retained fuel due from shippers of $2.5 million at March 31, 2012 with no comparable item at December 31, 2011, which fuel reserves are based on the value of natural gas at the time the imbalance was created and which are not subject to revaluation at fair market value.
(C)
Gas imbalance liabilities exclude fuel reserves for over retained fuel due to shippers of $1.5 million and $2.0 million at March 31, 2012 and December 31, 2011, respectively, which fuel reserves are based on the value of natural gas at the time the imbalance was created and which are not subject to revaluation at fair market value.
 
The following table summarizes the Company's assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2011. There were no Level 3 investments held at March 31, 2012 or December 31, 2011.
 
Commodity Contracts
(In millions)
Assets
Balance at January 1
$
13.3

Total gains or losses
 
     Included in other comprehensive income
(4.8
)
Settlements
(3.3
)
Balance at March 31
$
5.2



12


The following table summarizes the fair value and carrying amount of the Company's financial instruments, including derivative contracts related to the Company's PRM activities, at March 31, 2012 and December 31, 2011.
 
March 31, 2012
December 31, 2011
(In millions)
Carrying Amount 
Fair
Value
Carrying Amount 
 Fair
Value
Price Risk Management Assets
 
 
 
 
Energy Derivative Contracts
$
4.3

$
4.3

$
3.8

$
3.8

Price Risk Management Liabilities
 
 
 
 
Energy Derivative Contracts
$
0.5

$
0.5

$
0.5

$
0.5

Long-Term Debt
 
 
 
 
OG&E Senior Notes
$
1,903.9

$
2,301.7

$
1,903.8

$
2,383.8

OGE Energy Senior Notes
99.8

106.4

99.8

108.5

OG&E Industrial Authority Bonds
135.4

135.4

135.4

135.4

Enogex LLC Senior Notes
448.2

490.7

448.1

497.9

Enogex LLC Revolving Credit Agreement
150.0

150.0

150.0

150.0


The carrying value of the financial instruments on the Condensed Consolidated Balance Sheets not otherwise discussed above approximates fair value except for long-term debt which is valued at the carrying amount.  The valuation of the Company's energy derivative contracts was determined generally based on quoted market prices.  However, in certain instances where market quotes are not available, other valuation techniques or models are used to estimate market values.  The valuation of instruments also considers the credit risk of the counterparties.  The fair value of the Company's long-term debt is based on quoted market prices and estimates of current rates available for similar issues with similar maturities.
 
5.
Derivative Instruments and Hedging Activities

The Company is exposed to certain risks relating to its ongoing business operations.  The primary risks managed using derivatives instruments are commodity price risk and interest rate risk. The Company is also exposed to credit risk in its business operations.
 
Commodity Price Risk
 
The Company primarily uses forward physical contracts, commodity price swap contracts and commodity price option features to manage the Company's commodity price risk exposures. Commodity derivative instruments used by the Company are as follows:

NGLs put options and NGLs swaps are used to manage Enogex's NGLs exposure associated with its processing agreements;
natural gas swaps are used to manage Enogex's keep-whole natural gas exposure associated with its processing operations and Enogex's natural gas exposure associated with operating its gathering, transportation and storage assets;
natural gas futures and swaps and natural gas commodity purchases and sales are used to manage OER's natural gas exposure associated with its storage and transportation contracts; and
natural gas futures and swaps, natural gas options and natural gas commodity purchases and sales are used to manage OER's marketing and trading activities.
 
Normal purchases and normal sales contracts are not recorded in PRM Assets or Liabilities in the Condensed Consolidated Balance Sheets and earnings recognition is recorded in the period in which physical delivery of the commodity occurs.  Management applies normal purchases and normal sales treatment to: (i) commodity contracts for the purchase and sale of natural gas used in or produced by Enogex's operations, (ii) commodity contracts for the sale of NGLs produced by Enogex's gathering and processing business, (iii) electric power contracts by OG&E and (iv) fuel procurement by OG&E.
 
The Company recognizes its non-exchange traded derivative instruments as PRM Assets or Liabilities in the Condensed Consolidated Balance Sheets at fair value with such amounts classified as current or long-term based on their anticipated settlement.  Exchange traded transactions are settled on a net basis daily through margin accounts with a clearing broker and, therefore, are recorded at fair value on a net basis in Other Current Assets in the Condensed Consolidated Balance Sheets.


13


Interest Rate Risk
 
The Company's exposure to changes in interest rates primarily relates to short-term variable-rate debt and commercial paper.  The Company manages its interest rate exposure by monitoring and limiting the effects of market changes in interest rates.  The Company utilizes interest rate derivatives to alter interest rate exposure in an attempt to reduce the effects of these changes.  Interest rate derivatives are used solely to modify interest rate exposure and not to modify the overall leverage of the debt portfolio.

Credit Risk
 
The Company is exposed to certain credit risks relating to its ongoing business operations. Credit risk includes the risk that counterparties that owe the Company money or energy will breach their obligations. If the counterparties to these arrangements fail to perform, the Company may be forced to enter into alternative arrangements. In that event, the Company's financial results could be adversely affected and the Company could incur losses.

Cash Flow Hedges
 
For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the change in fair value of the derivative instrument is reported as a component of Accumulated Other Comprehensive Income and recognized into earnings in the same period during which the hedged transaction affects earnings.  The ineffective portion of a derivative's change in fair value or hedge components excluded from the assessment of effectiveness is recognized currently in earnings. The Company measures the ineffectiveness of commodity cash flow hedges using the change in fair value method whereby the change in the expected future cash flows designated as the hedge transaction are compared to the change in fair value of the hedging instrument.  Forecasted transactions, which are designated as the hedged transaction in a cash flow hedge, are regularly evaluated to assess whether they continue to be probable of occurring.  If the forecasted transactions are no longer probable of occurring, hedge accounting will cease on a prospective basis and all future changes in the fair value of the derivative will be recognized directly in earnings.
 
The Company designates as cash flow hedges derivatives used to manage commodity price risk exposure for Enogex's NGLs volumes and corresponding keep-whole natural gas resulting from its natural gas processing contracts (processing hedges) and natural gas positions resulting from its natural gas gathering and processing, pipeline and storage operations (operational gas hedges).  The Company also designates as cash flow hedges certain derivatives used to manage natural gas commodity exposure for certain natural gas storage inventory positions. Enogex had no instruments designated as cash flow hedges at March 31, 2012.
 
Fair Value Hedges
 
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedge risk are recognized currently in earnings.  The Company includes the gain or loss on the hedged items in Operating Revenues as the offsetting loss or gain on the related hedging derivative.
 
At March 31, 2012 and December 31, 2011, the Company had no derivative instruments that were designated as fair value hedges.
 
Derivatives Not Designated As Hedging Instruments
 
Derivative instruments not designated as hedging instruments are utilized in OER's asset management, marketing and trading activities.  For derivative instruments not designated as hedging instruments, the gain or loss on the derivative is recognized currently in earnings.
 

14


At March 31, 2012, the Company had the following derivative instruments that were not designated as hedging instruments.
(In millions)
Gross Notional Volume (A)
 
Purchases
Sales
Natural gas (B)
 
 
Physical (C)(D)
10.6

42.6

Fixed Swaps/Futures
69.8

70.7

Options
16.0

13.0

Basis Swaps
25.8

28.0

(A)
Natural gas in MMBtu's.  
(B)
92.6 percent of the natural gas contracts have durations of one year or less, 2.9 percent have durations of more than one year and less than two years and 4.5 percent have durations of more than two years.
(C)
Of the natural gas physical purchases and sales volumes not designated as hedges, the majority are priced based on a monthly or daily index and the fair value is subject to little or no market price risk.
(D)
Natural gas physical sales volumes exceed natural gas physical purchase volumes due to the marketing of natural gas volumes purchased via Enogex's processing contracts, which are not derivative instruments and are excluded from the table above.

Balance Sheet Presentation Related to Derivative Instruments

The fair value of the derivative instruments that are presented in the Company's Condensed Consolidated Balance Sheet at March 31, 2012 are as follows:
 
 
Fair Value
Instrument
Balance Sheet Location
Assets       
Liabilities
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments 
 
 
 
Natural Gas
 
 
 
Financial Futures/Swaps
Current PRM
$
0.1

$
0.1

 
Other Current Assets
53.2

55.0

Physical Purchases/Sales
Current PRM
4.1

0.5

 
Non-Current PRM
0.2


Financial Options                                       
Other Current Assets
0.2

0.1

Total (A)
$
57.8

$
55.7

(A)
See Note 4 for a reconciliation of the Company's total derivatives fair value to the Company's Condensed Consolidated Balance Sheet at March 31, 2012.


15


The fair value of the derivative instruments that are presented in the Company's Condensed Consolidated Balance Sheet at December 31, 2011 are as follows:
 
 
Fair Value
Instrument
Balance Sheet Location
Assets       
Liabilities
 
 
(In millions)
Derivatives Designated as Hedging Instruments 
 
 
 
Natural Gas
 
 
 
Financial Futures/Swaps
Other Current Assets
$
5.2

$
0.3

Total
$
5.2

$
0.3

 
 
 
 
Derivatives Not Designated as Hedging Instruments 
 
 
 
Natural Gas
 
 
 
Financial Futures/Swaps
Current PRM
$
0.4

$

 
Other Current Assets
49.9

49.9

Physical Purchases/Sales
Current PRM
3.1

0.4

 
Non-Current PRM
0.3

0.1

Financial Options
Other Current Assets
2.4

2.8

Total
$
56.1

$
53.2

Total Gross Derivatives (A)
$
61.3

$
53.5

(A)
See Note 4 for a reconciliation of the Company's total derivatives fair value to the Company's Condensed Consolidated Balance Sheet at December 31, 2011.

Income Statement Presentation Related to Derivative Instruments
 
The following tables present the effect of derivative instruments on the Company's Condensed Consolidated Statement of Income for the three months ended March 31, 2012.
 
Derivatives in Cash Flow Hedging Relationships
(In millions)
Amount Recognized in Other Comprehensive Income
Amount Reclassified from Accumulated Other Comprehensive Income into Income


Amount Recognized in Income
Natural Gas Financial Futures/Swaps
$
0.3

$
5.2

$

Total
$
0.3

$
5.2

$


Derivatives Not Designated as Hedging Instruments

(In millions)
Amount Recognized in Income
Natural Gas Physical Purchases/Sales
$
(2.4
)
Natural Gas Financial Futures/Swaps
0.4

Total
$
(2.0
)
     
The following tables present the effect of derivative instruments on the Company's Condensed Consolidated Statement of Income for the three months ended March 31, 2011.
 
Derivatives in Cash Flow Hedging Relationships
(In millions)

Amount Recognized in Other Comprehensive Income
Amount Reclassified from Accumulated Other Comprehensive Income into Income


Amount Recognized in Income
NGLs Financial Options
$
(6.8
)
$
(2.5
)
$

Natural Gas Financial Futures/Swaps
(0.2
)
(7.3
)

Total
$
(7.0
)
$
(9.8
)
$


16


Derivatives Not Designated as Hedging Instruments
(In millions)
Amount Recognized in Income
Natural Gas Physical Purchases/Sales
$
(2.1
)
Natural Gas Financial Futures/Swaps
(0.2
)
Total
$
(2.3
)
 
For derivatives designated as cash flow hedges in the tables above, amounts reclassified from Accumulated Other Comprehensive Income into income (effective portion) and amounts recognized in income (ineffective portion) for the three months ended March 31, 2012 and 2011, if any, are reported in Operating Revenues. For derivatives not designated as hedges in the tables above, amounts recognized in income for the three months ended March 31, 2012 and 2011, if any, are reported in Operating Revenues. 

Credit-Risk Related Contingent Features in Derivative Instruments

In the event Moody's Investors Services or Standard & Poor's Ratings Services were to lower the Company's senior unsecured debt rating to a below investment grade rating, at March 31, 2012, the Company would have been required to post $0.5 million of cash collateral to satisfy its obligation under its financial and physical contracts relating to derivative instruments that are in a net liability position at March 31, 2012.  In addition, the Company could be required to provide additional credit assurances in future dealings with third parties, which could include letters of credit or cash collateral.
                     
6.
Stock-Based Compensation

The following table summarizes the Company's pre-tax compensation expense and related income tax benefit during the three months ended March 31, 2012 and 2011 related to the Company's performance units and restricted stock.
 
Three Months Ended
 
March 31,
(In millions)
2012
2011
Performance units
 
 
Total shareholder return
$
1.8

$
1.7

Earnings per share
0.7

2.2

Total performance units
2.5

3.9

Restricted stock
0.2

0.2

Total compensation expense
$
2.7

$
4.1

Income tax benefit
$
1.1

$
1.5


The Company has issued new shares to satisfy stock option exercises, restricted stock grants and payouts of earned performance units.  During the three months ended March 31, 2012, there were 388,587 shares of new common stock issued pursuant to the Company's stock incentive plans related to exercised stock options, restricted stock grants (net of forfeitures) and payouts of earned performance units. In November 2011 the Company purchased 120,000 shares of its common stock on the open market. During the three months ended March 31, 2012, 114,949 of these shares were used to payout Enogex's portion of earned performance units. During the three months ended March 31, 2012, there were 345 shares of restricted stock returned to the Company to satisfy tax liabilities. The Company received less than $0.1 million during the three months ended March 31, 2012 related to exercised stock options. The Company did not realize an income tax benefit for the tax deductions from the exercised stock options during the three months ended March 31, 2012 due to the Company being in a tax net operating loss position in 2012.


17

                                    

The following table summarizes the activity of the Company's stock-based compensation during the three months ended March 31, 2012.
 
Units/Shares
Fair Value
Grants
 
 
Performance units (Total shareholder return)
169,339

$51.82
Performance units (Earnings per share)
40,797

$47.63
Restricted stock
308

$52.37
Conversions
 
 
Performance units (Total shareholder return) (A)
291,294

N/A
Performance units (Earnings per share) (A)
97,100

N/A
(A) Performance units were converted based on a payout ratio of 200 percent of the target number of performance units granted in February 2009 and are included in the 388,587 and 114,949 shares of common stock issued during the three months ended March 31, 2012 as discussed above.

7.
Income Taxes

The Company files consolidated income tax returns in the U.S. Federal jurisdiction and various state jurisdictions.  With few exceptions, the Company is no longer subject to U.S. Federal tax examinations by tax authorities for years prior to 2007 or state and local tax examinations by tax authorities for years prior to 2002.  Income taxes are generally allocated to each company in the affiliated group based on its stand-alone taxable income or loss.  Federal investment tax credits previously claimed on electric utility property have been deferred and are being amortized to income over the life of the related property.  OG&E continues to amortize its Federal investment tax credits on a ratable basis throughout the year.  OG&E earns both Federal and Oklahoma state tax credits associated with the production from its wind farms.  In addition, OG&E and Enogex earn Oklahoma state tax credits associated with their investments in electric generating and natural gas processing facilities which further reduce the Company's effective tax rate.

8.
Common Equity
 
Automatic Dividend Reinvestment and Stock Purchase Plan
 
The Company issued 68,333 shares of common stock under its Automatic Dividend Reinvestment and Stock Purchase Plan during the three months ended March 31, 2012 and received proceeds of $3.6 million.  The Company may, from time to time, issue additional shares under its Automatic Dividend Reinvestment and Stock Purchase Plan to fund capital requirements or working capital needs.  At March 31, 2012, there were 2,300,710 shares of unissued common stock reserved for issuance under the Company's Automatic Dividend Reinvestment and Stock Purchase Plan.


18

                                    

Earnings Per Share
 
Basic earnings per share is calculated by dividing net income attributable to OGE Energy by the weighted average number of the Company's common shares outstanding during the period. In the calculation of diluted earnings per share, weighted average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. Potentially dilutive securities for the Company consist of performance units. Basic and diluted earnings per share for the Company were calculated as follows:
 
Three Months Ended
 
March 31,
(In millions)
2012
2011
Net Income Attributable to OGE Energy
$
37.1

$
24.8

Average Common Shares Outstanding
 
 
Basic average common shares outstanding
98.3

97.7

Effect of dilutive securities:
 
 
Contingently issuable shares (performance units)
0.5

1.4

Diluted average common shares outstanding
98.8

99.1

Basic Earnings Per Average Common Share
 
 
Attributable to OGE Energy Common Shareholders
$
0.38

$
0.25

Diluted Earnings Per Average Common Share
 
 
Attributable to OGE Energy Common Shareholders
$
0.38

$
0.25

Anti-dilutive shares excluded from earnings per share calculation


 
9.
Long-Term Debt
 
At March 31, 2012, the Company was in compliance with all of its debt agreements.
 
OG&E has tax-exempt pollution control bonds with optional redemption provisions that allow the holders to request repayment of the bonds at various dates prior to the maturity.  The bonds, which can be tendered at the option of the holder during the next 12 months, are as follows:
SERIES
DATE DUE
AMOUNT
 
 
(In millions)
0.22% - 0.33%
Garfield Industrial Authority, January 1, 2025
$
47.0

0.21% - 0.34%
Muskogee Industrial Authority, January 1, 2025
32.4

0.20% - 0.31%
Muskogee Industrial Authority, June 1, 2027
56.0

Total (redeemable during next 12 months)
$
135.4


All of these bonds are subject to an optional tender at the request of the holders, at 100 percent of the principal amount, together with accrued and unpaid interest to the date of purchase.  The bond holders, on any business day, can request repayment of the bond by delivering an irrevocable notice to the tender agent stating the principal amount of the bond, payment instructions for the purchase price and the business day the bond is to be purchased.  The repayment option may only be exercised by the holder of a bond for the principal amount.  When a tender notice has been received by the trustee, a third party remarketing agent for the bonds will attempt to remarket any bonds tendered for purchase.  This process occurs once per week.  Since the original issuance of these series of bonds in 1995 and 1997, the remarketing agent has successfully remarketed all tendered bonds.  If the remarketing agent is unable to remarket any such bonds, OG&E is obligated to repurchase such unremarketed bonds.  As OG&E has both the intent and ability to refinance the bonds on a long-term basis and such ability is supported by an ability to consummate the refinancing, the bonds are classified as long-term debt in the Company's Condensed Consolidated Financial Statements. OG&E believes that it has sufficient liquidity to meet these obligations.









19

                                    

10.
Short-Term Debt and Credit Facilities
 
The Company borrows on a short-term basis, as necessary, by the issuance of commercial paper and by borrowings under its revolving credit agreements.  The short-term debt balance was $489.3 million and $277.1 million at March 31, 2012 and December 31, 2011, respectively. The following table provides information regarding the Company's revolving credit agreements and available cash at March 31, 2012.
Revolving Credit Agreements and Available Cash 
 
Aggregate
Amount
Weighted-Average
 
 
Entity
Commitment 
Outstanding (A)
Interest Rate
 
Maturity
 
(In millions)
 
 
 
OGE Energy (B)
$
750.0

$
489.3

0.45
%
(D)
December 13, 2016
OG&E (C)
400.0

2.2

0.53
%
(D)
December 13, 2016
Enogex LLC (E)
400.0

150.0

1.62
%
(D)
December 13, 2016
 
1,550.0

641.5

0.72
%
 
 
Cash
1.6

N/A

N/A

 
N/A
Total
$
1,551.6

$
641.5

0.72
%
 
 
(A)
Includes direct borrowings under the revolving credit agreements, commercial paper borrowings and letters of credit at March 31, 2012.
(B)
This bank facility is available to back up OGE Energy's commercial paper borrowings and to provide revolving credit borrowings.  This bank facility can also be used as a letter of credit facility.  At March 31, 2012, there was $489.3 million in outstanding commercial paper borrowings.
(C)
This bank facility is available to back up OG&E's commercial paper borrowings and to provide revolving credit borrowings.  This bank facility can also be used as a letter of credit facility.  At March 31, 2012, there was $2.2 million supporting letters of credit.
(D)
Represents the weighted-average interest rate for the outstanding borrowings under the revolving credit agreements, commercial paper borrowings and letters of credit.
(E)
This bank facility is available to provide revolving credit borrowings for Enogex LLC.  As Enogex LLC's credit agreement matures on December 13, 2016, along with its intent in utilizing its credit agreement, borrowings thereunder are classified as long-term debt in the Company's Condensed Consolidated Balance Sheets.

The Company's ability to access the commercial paper market could be adversely impacted by a credit ratings downgrade or major market disruptions.  Pricing grids associated with the Company's credit facilities could cause annual fees and borrowing rates to increase if an adverse ratings impact occurs. The impact of any future downgrade could include an increase in the costs of the Company's short-term borrowings, but a reduction in the Company's credit ratings would not result in any defaults or accelerations.  Any future downgrade of the Company could also lead to higher long-term borrowing costs and, if below investment grade, would require the Company to post cash collateral or letters of credit.
 
OG&E must obtain regulatory approval from the FERC in order to borrow on a short-term basis.  OG&E has the necessary regulatory approvals to incur up to $800 million in short-term borrowings at any one time for a two-year period beginning January 1, 2011 and ending December 31, 2012.



















20

                                    

11.
Retirement Plans and Postretirement Benefit Plans

The details of net periodic benefit cost of the Company's Pension Plan, the Restoration of Retirement Income Plan and the postretirement benefit plans included in the Condensed Consolidated Financial Statements are as follows:

Net Periodic Benefit Cost
 
Pension Plan
Restoration of Retirement
Income Plan
 
Three Months Ended
Three Months Ended
 
March 31,
March 31,
(In millions)
2012
2011
2012
2011
Service cost
$
4.5

$
4.4

$
0.3

$
0.3

Interest cost
7.5

8.3

0.1

0.1

Expected return on plan assets
(11.5
)
(11.4
)


Amortization of net loss
5.9

4.8

0.1

0.1

Amortization of unrecognized prior service cost (A)
0.6

0.6

0.2

0.2

Net periodic benefit cost (B)
$
7.0

$
6.7

$
0.7

$
0.7

(A)
Unamortized prior service cost is amortized on a straight-line basis over the average remaining service period to the first eligibility age of participants who are expected to receive a benefit and are active at the date of the plan amendment.
(B)
In addition to the $7.7 million and $7.4 million of net periodic benefit cost recognized during the three months ended March 31, 2012 and 2011, respectively, OG&E recognized an increase in pension expense during the three months ended March 31, 2012 and 2011 of $2.9 million and $2.6 million, respectively, to maintain the allowable amount to be recovered for pension expense in the Oklahoma jurisdiction which are included in the Pension tracker regulatory liability (see Note 1). 

 
Postretirement
Benefit Plans
 
Three Months Ended
 
March 31,
(In millions)
2012
2011
Service cost
$
1.0

$
0.9

Interest cost
3.0

3.1

Expected return on plan assets
(0.8
)
(1.3
)
Amortization of transition obligation
0.7

0.7

Amortization of net loss
5.1

4.6

Amortization of unrecognized prior service cost (A)
(4.1
)
(4.1
)
Net periodic benefit cost (B)
$
4.9

$
3.9

(A)
Unamortized prior service cost is amortized on a straight-line basis over the average remaining service period to the first eligibility age of participants who are expected to receive a benefit and are active at the date of the plan amendment.
(B)
In addition to the $4.9 million of net periodic benefit cost recognized during the three months ended March 31, 2012, OG&E recognized an increase in postretirement medical expense of $0.4 million to maintain the allowable amount to be recovered for postretirement medical expense in the Oklahoma jurisdiction which are included in the Pension tracker regulatory liability (see Note 1).

Pension Plan Funding

The Company previously disclosed in its 2011 Form 10-K that it may contribute up to $35 million to its Pension Plan during 2012. In April 2012, the Company contributed $35 million to its Pension Plan. No additional contributions are expected in 2012.

12.
Report of Business Segments

The Company's business is divided into four segments for financial reporting purposes.  These segments are as follows: (i) electric utility, which is engaged in the generation, transmission, distribution and sale of electric energy, (ii) natural gas transportation and storage, (iii) natural gas gathering and processing and (iv) natural gas marketing.  Other Operations primarily includes the operations of the holding company.  Intersegment revenues are recorded at prices comparable to those of unaffiliated

21


customers and are affected by regulatory considerations.  In reviewing its segment operating results, the Company focuses on operating income as its measure of segment profit and loss, and, therefore, has presented this information below.  The following tables summarize the results of the Company's business segments during the three months ended March 31, 2012 and 2011.
Three Months Ended
March 31, 2012
 Electric Utility
Transportation and
Storage
Gathering and Processing
Marketing
Other Operations
Eliminations
Total
(In millions)
 
 
 
 
 
 
 
Operating revenues
$
426.7

$
79.1

$
304.5

$
130.0

$

$
(99.6
)
$
840.7

Cost of goods sold
195.5

43.5

217.9

127.2


(98.8
)
485.3

Gross margin on revenues
231.2

35.6

86.6

2.8


(0.8
)
355.4

Other operation and maintenance     
110.6

10.8

30.1

2.2

(5.3
)
(0.8
)
147.6

Depreciation and amortization
59.7

5.2

17.8

0.4

3.5


86.6

Impairment of assets


0.2




0.2

Gain on insurance proceeds


(7.5
)



(7.5
)
Taxes other than income
21.1

4.7

2.5

0.1

1.8


30.2

Operating income (loss)
$
39.8

$
14.9

$
43.5

$
0.1

$

$

$
98.3

 
 
 
 
 
 
 
 
Total assets
$
6,632.8

$
1,929.7

$
1,574.1

$
43.6

$
257.7

$
(1,363.4
)
$
9,074.5

Three Months Ended
March 31, 2011
 Electric Utility
Transportation and
Storage
Gathering and Processing
Marketing
Other Operations
Eliminations
Total
(In millions)
 
 
 
 
 
 
 
Operating revenues
$
422.1

$
100.2

$
266.7

$
198.1

$

$
(146.6
)
$
840.5

Cost of goods sold
219.4

64.0

196.3

199.3


(145.8
)
533.2

Gross margin on revenues
202.7

36.2

70.4

(1.2
)

(0.8
)
307.3

Other operation and maintenance     
105.8

9.1

26.8

2.1

(4.7
)
(0.8
)
138.3

Depreciation and amortization
51.8

5.4

13.5


3.3


74.0

Taxes other than income
19.1

4.3

1.9

0.2

1.6


27.1

Operating income (loss)
$
26.0

$
17.4

$
28.2

$
(3.5
)
$
(0.2
)
$

$
67.9

 
 
 
 
 
 
 
 
Total assets
$
5,826.2

$
1,345.6

$
1,028.8

$
73.4

$
128.8

$
(712.2
)
$
7,690.6


13.
Commitments and Contingencies
 
Except as set forth below and in Note 14, the circumstances set forth in Notes 16 and 17 to the Company's Consolidated Financial Statements included in the Company's 2011 Form 10-K appropriately represent, in all material respects, the current status of the Company's material commitments and contingent liabilities.

OG&E Railcar Lease Agreement
 
OG&E has a noncancellable operating lease with purchase options, covering 1,391 coal hopper railcars to transport coal from Wyoming to OG&E's coal-fired generation units.  Rental payments are charged to Fuel Expense and are recovered through OG&E's tariffs and fuel adjustment clauses. On December 15, 2010, OG&E renewed the lease agreement effective February 1, 2011.  At the end of the new lease term, which is February 1, 2016, OG&E has the option to either purchase the railcars at a stipulated fair market value or renew the lease.  If OG&E chooses not to purchase the railcars or renew the lease agreement and the actual fair value of the railcars is less than the stipulated fair market value, OG&E would be responsible for the difference in those values up to a maximum of $22.8 million.

On January 11, 2012, OG&E executed a five-year lease agreement for 135 railcars to replace railcars that have been taken out of service or destroyed. OG&E is also required to maintain all of the railcars it has under lease to transport coal from Wyoming and has entered into agreements with Progress Rail Services and WATCO, both of which are non-affiliated companies, to furnish this maintenance.


22


OG&E Wind Farm Land Lease Agreements

OG&E has wind farm land operating leases for its Centennial, OU Spirit and Crossroads wind farms expiring at various dates. Although the leases are cancellable, OG&E is required to make annual lease payments as long as the wind turbines are located on the land. OG&E does not expect to terminate the leases until the wind turbines reach the end of their economic life. Future minimum payments for these operating leases are as follows:
(In millions)
2012
2013
2014
2015
2016
2017 and Beyond
Total
OG&E wind farm land leases
$
2.0

$
2.0

$
2.1

$
2.1

$
2.1

$
53.9

$
64.2


Natural Gas Measurement Cases
 
Will Price, et al. v. El Paso Natural Gas Co., et al. (Price I).  On September 24, 1999, various subsidiaries of OGE Energy were served with a class action petition filed in the District Court of Stevens County, Kansas by Quinque Operating Company and other named plaintiffs alleging the mismeasurement of natural gas on non-Federal lands.  On April 10, 2003, the court entered an order denying class certification.  On May 12, 2003, the plaintiffs (now Will Price, Stixon Petroleum, Inc., Thomas F. Boles and the Cooper Clark Foundation, on behalf of themselves and other royalty interest owners) filed a motion seeking to file an amended class action petition, and the court granted the motion on July 28, 2003.  In its amended petition, OG&E and Enogex Inc. were omitted from the case but two of OGE Energy's other subsidiary entities remained as defendants.  The plaintiffs' amended petition seeks class certification and alleges that 60 defendants, including two of OGE Energy's subsidiary entities, have improperly measured the volume of natural gas.  The amended petition asserts theories of civil conspiracy, aiding and abetting, accounting and unjust enrichment.  In their briefing on class certification, the plaintiffs seek to also allege a claim for conversion.  The plaintiffs seek unspecified actual damages, attorneys' fees, costs and pre-judgment and post-judgment interest.  The plaintiffs also reserved the right to seek punitive damages.
 
On September 18, 2009, the court entered its order denying class certification.  On October 2, 2009, the plaintiffs filed for a rehearing of the court's denial of class certification.  On March 31, 2010, the court denied the plaintiffs' request for rehearing. On July 20, 2011, Enogex LLC and OER filed motions for summary judgment.  On January 25, 2012, the court denied portions of the motions for summary judgment related to the legal issue of the plaintiffs' claims regarding civil conspiracy. In an order dated January 23, 2012, the court granted the plaintiffs additional time to perform discovery prior to the consideration of the motions for summary judgment as they relate to the plaintiffs' other claims. On February 7, 2012, Enogex LLC and OER filed an application in the Kansas Court of Appeals seeking appeal of the trial court's denial of their motions for summary judgment. On February 23, 2012, the Kansas Court of Appeals denied this application. On March 23, 2012, Enogex LLC and OER filed an application with the Kansas Supreme Court seeking appeal of the Kansas Court of Appeals' decision.
 
OGE Energy intends to vigorously defend this action.  At this time, OGE Energy does not believe the outcome will have a material impact on its financial position.
 
Will Price, et al. v. El Paso Natural Gas Co., et al. (Price II).  On May 12, 2003, the plaintiffs (same as those in the amended petition in Price I above) filed a new class action petition in the District Court of Stevens County, Kansas naming the same defendants and asserting substantially identical legal and/or equitable theories as in the amended petition of the Price I case.  OG&E and Enogex Inc. were not named in this case, but two of OGE Energy's other subsidiary entities were named in this case.  The plaintiffs allege that the defendants mismeasured the British thermal unit content of natural gas obtained from or measured for the plaintiffs.  In their briefing on class certification, the plaintiffs seek to also allege a claim for conversion.  The plaintiffs seek unspecified actual damages, attorneys' fees, costs and pre-judgment and post-judgment interest.  The plaintiffs also reserved the right to seek punitive damages.
 
On September 18, 2009, the court entered its order denying class certification.  On October 2, 2009, the plaintiffs filed for a rehearing of the court's denial of class certification. On March 31, 2010, the court denied the plaintiffs' request for rehearing. On July 20, 2011, Enogex LLC and OER filed motions for summary judgment.  On January 25, 2012, the court denied portions of the motions for summary judgment related to the legal issue of the plaintiffs' claims regarding civil conspiracy. In an order dated January 23, 2012, the court granted the plaintiffs additional time to perform discovery prior to the consideration of the motions for summary judgment as they relate to the plaintiffs' other claims. On February 7, 2012, Enogex LLC and OER filed an application in the Kansas Court of Appeals seeking appeal of the trial court's denial of their motions for summary judgment. On February 23, 2012, the Kansas Court of Appeals denied this application. On March 23, 2012, Enogex LLC and OER filed an application with the Kansas Supreme Court seeking appeal of the Kansas Court of Appeals' decision.
 
OGE Energy intends to vigorously defend this action.  At this time, OGE Energy does not believe the outcome will have a material impact on its financial position.

23


Other
 
In the normal course of business, the Company is confronted with issues or events that may result in a contingent liability.  These generally relate to lawsuits, claims made by third parties, environmental actions or the action of various regulatory agencies.  When appropriate, management consults with legal counsel and other appropriate experts to assess the claim.  If, in management's opinion, the Company has 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 Company's Condensed Consolidated Financial Statements. Except as otherwise stated above, in Note 14 below, in Item 1 of Part II of this Form 10-Q, in Notes 16 and 17 of Notes to Consolidated Financial Statements and Item 3 of Part I of the Company's 2011 Form 10-K, management, after consultation with legal counsel, does not currently anticipate that liabilities arising out of these pending or threatened lawsuits, claims and contingencies will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 

14.
Rate Matters and Regulation
 
Except as set forth below, the circumstances set forth in Note 17 to the Company's Consolidated Financial Statements included in the Company's 2011 Form 10-K appropriately represent, in all material respects, the current status of any regulatory matters.

Completed Regulatory Matters

OG&E Contract and Wind Energy Purchase Agreement Filing

On December 1, 2011, OG&E filed an application with the OCC requesting approval of a 20-year agreement that is intended to provide wind power to help meet the current and future power generation needs of Oklahoma State University. The project calls for OG&E to contract with NextEra Energy to build a 60 MW wind farm near Blackwell, Oklahoma, to support the Oklahoma State University project in which NextEra Energy will build, own and operate the wind farm and OG&E will purchase the electric output. The wind farm is expected to be in service by the end of 2012. On February 22, 2012, OG&E, the Attorney General and the Public Utility Division of the OCC signed a settlement agreement whereby the stipulating parties requested that the OCC issue an order approving the agreement for electric service with Oklahoma State University. On March 12, 2012, OG&E received an order from the OCC approving the settlement agreement. Pursuant to the terms of the power purchase agreement between OG&E and NextEra Energy, OG&E will purchase the electric output of the wind farm and use that power to provide service to Oklahoma State University.

Southwest Power Pool Transmission/Substation Projects

In 2007, the Southwest Power Pool notified OG&E to construct 44 miles of a new 345 kilovolt transmission line originating at OG&E's existing Sooner 345 kilovolt substation and proceeding generally in a northerly direction to the Oklahoma/Kansas Stateline (referred to as the Sooner-Rose Hill project). At the Oklahoma/Kansas Stateline, the line connects to the companion line constructed in Kansas by Westar Energy. The transmission line was placed in service in April 2012. The total capital expenditures associated with this project were $45 million.

In January 2009, OG&E received notification from the Southwest Power Pool to begin construction on 50 miles of a new 345 kilovolt transmission line and substation upgrades at OG&E's Sunnyside substation, among other projects. In April 2009, Western Farmers Electric Cooperative assigned to OG&E the construction of 50 miles of line designated by the Southwest Power Pool to be built by Western Farmers Electric Cooperative.  The new line extends from OG&E's Sunnyside substation near Ardmore, Oklahoma, 123.5 miles to the Hugo substation owned by Western Farmers Electric Cooperative near Hugo, Oklahoma.  The transmission line was completed in April 2012. The total capital expenditures associated with this project were $157 million.

Pending Regulatory Matters

OG&E 2011 Oklahoma Rate Case Filing

As previously reported in the Company's 2011 Form 10-K, 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 11.0 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

24


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 decrease based on a return on equity of 9.5 percent and a common equity percentage of 48 percent. OG&E filed rebuttal testimony on November 29, 2011 on the revenue requirement testimony filed by the parties on November 9, 2011. On November 16, 2011, the parties filed cost-of-service and rate design testimony and OG&E filed rebuttal testimony in those areas on December 2, 2011. The hearing in this matter began on December 13, 2011 and discussions have continued throughout the first quarter of 2012. Currently, OG&E and the other parties to this matter are waiting on the recommendation from the administrative law judge. There is no statutory deadline for the administrative law judge to make the recommendation in this matter. After the administrative law judge makes the recommendation in this matter, OG&E expects to receive a final order from the OCC.

OG&E Fuel Adjustment Clause Review for Calendar Year 2010

The OCC routinely reviews the costs recovered from customers through OG&E’s fuel adjustment clause. On August 19, 2011, the OCC Staff filed an application to review OG&E’s fuel adjustment clause for calendar year 2010, including the prudence of OG&E’s electric generation, purchased power and fuel procurement costs. OG&E responded by filing direct testimony and the minimum filing review package on October 18, 2011. On April 6, 2012 witnesses for the OCC Staff, the Oklahoma Attorney General and the Oklahoma Industrial Energy Consumers association filed responsive testimony. The witness for the Oklahoma Industrial Energy Consumers recommended that the OCC disallow recovery of approximately $44 million of costs previously recovered through OG&E’s fuel adjustment clause. These recommendations were based on allegations that OG&E’s lower cost coal-fired generation was underutilized and that OG&E failed to aggressively pursue purchasing power at a cost lower than its marginal cost of generation. OG&E’s rebuttal testimony will be filed by May 8, 2012 and the hearing on the merits is scheduled to begin on June 21, 2012. The witnesses for the OCC Staff and the Oklahoma Attorney General recommended that OG&E should provide additional information to allow them to reach a conclusion on their prudence review. OG&E believes that the recommendations of the witness for the Oklahoma Industrial Energy Consumers are without merit.

Enogex 2012 Fuel Filing

On February 24, 2012, Enogex submitted its annual fuel filing to establish the fixed fuel percentages for its East Zone and West Zone for the upcoming fuel year (April 1, 2012 through March 31, 2013). The deadline for interventions and protests on the filing was March 27, 2012. Two parties intervened in the proceeding. A FERC order is pending.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Introduction
 
The Company 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 conducts these activities through four business segments:  (i) electric utility, (ii) natural gas transportation and storage, (iii) natural gas gathering and processing and (iv) natural gas marketing.
 
The electric utility segment generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas.  Its operations are conducted through OG&E and 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.  OG&E is the largest electric utility in Oklahoma and its franchised service territory includes the Fort Smith, Arkansas area.  OG&E sold its retail natural gas business in 1928 and is no longer engaged in the natural gas distribution business.

Enogex is a provider of integrated natural gas midstream services.  Enogex is engaged in the business of gathering, processing, transporting, storing and marketing natural gas.  Most of Enogex's natural gas gathering, processing, transportation and storage assets are strategically located in the Arkoma and Anadarko basins of Oklahoma and the Texas Panhandle.  Enogex's operations are organized into three business segments: (i) natural gas transportation and storage, (ii) natural gas gathering and processing and (iii) natural gas marketing.  At March 31, 2012, the Company indirectly owns an 81.3 percent membership interest in Enogex Holdings, which in turn owns all of the membership interests in Enogex LLC

Overview
 
Company Strategy
 
The Company'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. The Company's corporate strategy is to continue to maintain its existing business mix and diversified asset position of its regulated

25

                                    

electric utility business and unregulated natural gas midstream business while providing competitive energy products and services to customers primarily in the south central United States as well as seeking growth opportunities in both businesses. Additionally, the Company wants to achieve a premium valuation of its businesses relative to its peers, grow earnings per share with a stable earnings pattern, create a high performance culture and achieve desired outcomes with target stakeholders. The Company's financial objectives include a long-term annual earnings growth rate of five to seven percent on a weather-normalized basis, maintaining a strong credit rating as well as increasing the dividend to meet the Company's dividend payout objectives.  The Company's target payout ratio is to pay out dividends no more than 60 percent of its normalized earnings on an annual basis.  The target payout ratio has been determined after consideration of numerous factors, including the largely retail composition of the Company's shareholder base, the Company's financial position, the Company's growth targets, the composition of the Company's assets and investment opportunities.  The Company believes it can accomplish these financial objectives by, among other things, pursuing multiple avenues to build its business, maintaining a diversified asset position, continuing to develop a wide range of skills to succeed with changes in its industries, providing products and services to customers efficiently, managing risks effectively and maintaining strong regulatory and legislative relationships.

Summary of Operating Results
Three Months Ended March 31, 2012 as Compared to Three Months Ended March 31, 2011

Net income attributable to OGE Energy was $37.1 million, or $0.38 per diluted share, during the three months ended March 31, 2012 as compared to $24.8 million, or $0.25 per diluted share, during the same period in 2011. The increase in net income attributable to OGE Energy of $12.3 million, or 49.6 percent, during the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to:

an increase in net income at OG&E of $5.7 million, or 89.1 percent, or $0.07 per diluted share of the Company's common stock, primarily due to a higher gross margin primarily due to the recovery of investments partially offset by higher other operation and maintenance expense, higher depreciation and amortization expense and higher interest expense; and
an increase in net income at Enogex of $6.2 million, or 33.0 percent, or $0.06 per diluted share of the Company's common stock, primarily due to higher gross margin related to increased gathering volumes associated with ongoing expansion projects, the acquisition of certain gas gathering assets in November 2011 and increased inlet volumes and a gain on insurance proceeds partially offset by higher other operation and maintenance expense, higher depreciation and amortization expense and higher income tax expense.

Recent Developments and Regulatory Matters
 
OG&E Contract and Wind Energy Purchase Agreement Filing

On December 1, 2011, OG&E filed an application with the OCC requesting approval of a 20-year agreement that is intended to provide wind power to help meet the current and future power generation needs of Oklahoma State University. The project calls for OG&E to contract with NextEra Energy to build a 60 MW wind farm near Blackwell, Oklahoma, to support the Oklahoma State University project in which NextEra Energy will build, own and operate the wind farm and OG&E will purchase the electric output. The wind farm is expected to be in service by the end of 2012. On February 22, 2012, OG&E, the Attorney General and the Public Utility Division of the OCC signed a settlement agreement whereby the stipulating parties requested that the OCC issue an order approving the agreement for electric service with Oklahoma State University. On March 12, 2012, OG&E received an order from the OCC approving the settlement agreement. Pursuant to the terms of the power purchase agreement between OG&E and NextEra Energy, OG&E will purchase the electric output of the wind farm and use that power to provide service to Oklahoma State University.

OG&E Fuel Adjustment Clause Review for Calendar Year 2010
The OCC routinely reviews the costs recovered from customers through OG&E’s fuel adjustment clause. On August 19, 2011, the OCC Staff filed an application to review OG&E’s fuel adjustment clause for calendar year 2010, including the prudence of OG&E’s electric generation, purchased power and fuel procurement costs. OG&E responded by filing direct testimony and the minimum filing review package on October 18, 2011. On April 6, 2012 witnesses for the OCC Staff, the Oklahoma Attorney General and the Oklahoma Industrial Energy Consumers association filed responsive testimony. The witness for the Oklahoma Industrial Energy Consumers recommended that the OCC disallow recovery of approximately $44 million of costs previously recovered through OG&E’s fuel adjustment clause. These recommendations were based on allegations that OG&E’s lower cost coal-fired generation was underutilized and that OG&E failed to aggressively pursue purchasing power at a cost lower than its marginal cost of generation. OG&E’s rebuttal testimony will be filed by May 8, 2012 and the hearing on the merits is scheduled

26

                                    

to begin on June 21, 2012. The witnesses for the OCC Staff and the Oklahoma Attorney General recommended that OG&E should provide additional information to allow them to reach a conclusion on their prudence review. OG&E believes that the recommendations of the witness for the Oklahoma Industrial Energy Consumers are without merit.

Enogex Cox City Plant Fire

On December 8, 2010, a fire occurred at Enogex's Cox City natural gas processing plant destroying major components of one of the four processing trains, representing 120 MMcf/d of the total 180 MMcf/d of capacity, at that facility. The damaged train was replaced and the facility was returned to full service in September 2011. The total cost necessary to return the facility back to full service was $29.6 million. In the fourth quarter of 2011, Enogex received a partial insurance reimbursement of $7.4 million and recognized a gain of $3.0 million on insurance proceeds. In March 2012, Enogex reached a settlement agreement with its insurers in this matter. As a result of the settlement agreement, Enogex received additional reimbursements of $6.1 million during the three months ended March 31, 2012 and $1.5 million in April 2012. Enogex recognized a gain of $7.5 million on insurance proceeds during the three months ended March 31, 2012.

Enogex Western Oklahoma / Texas Panhandle Gathering and Processing System Expansions

Enogex expects to expand its cryogenic processing plant currently under construction in Wheeler County, Texas from a processing capacity of 120 MMcf/d to 200 MMcf/d with the installation of additional residue compression facilities. This processing capacity is expected to be in service during the third quarter of 2012. The new plant will be supported by the installation of 9,400 horsepower of field compression, as well as 6,000 horsepower of inlet compression to facilitate additional flexibility in the operation of the Enogex "super-header" gathering system. The total capital expenditures associated with this project are expected to be $160 million.

In support of significant long-term acreage dedications from its customers in the area, Enogex continues to expand its gathering infrastructure in four counties of western Oklahoma. These expansions include the installation of 39,700 horsepower of low pressure compression and 245 miles of gathering pipe across the area. This infrastructure is currently under construction and is expected to be completed during the third quarter of 2012. The total capital expenditures associated with these expansions projects are expected to be $215 million.

Enogex expects to install a 200 MMcf/d cryogenic processing plant in Custer County, Oklahoma. The new plant will be supported by 6,000 horsepower of inlet compression and 25 miles of transmission pipeline. This plant is expected to be in service by the end of 2013.

In support of additional long-term acreage dedications from its customers in six counties in central and southern Oklahoma, Enogex is further expanding its gathering infrastructure. These expansions are planned to occur in phases, with the initial low pressure horsepower and gathering pipelines to serve the area expected to be constructed throughout the remainder of 2012.  The total capital expenditures associated with the initial phase of these projects are expected to be $75 million.

2012 Outlook
 
The Company previously had indicated that it would provide 2012 consolidated earnings guidance following a final order in OG&E's Oklahoma general rate case, which final order it had anticipated receiving during March 2012. As indicated above, the rate order has not yet been issued. Accordingly, the guidance herein does not incorporate any impacts from the rate proceeding.

The Company's 2012 earnings guidance is between approximately $337 million and $357 million of net income, or $3.40 to $3.60 per average diluted share.

Key assumptions for 2012 include:

Consolidated OGE

Approximately 99.1 million average diluted shares outstanding;
An effective tax rate of approximately 27 percent; and
A projected loss at the holding company between $1 million and $2 million, or $0.01 to $0.02 per diluted share, primarily due to interest expense relating to long and short-term debt borrowings partially offset by tax credits.


27

                                    

OG&E

The Company projects OG&E to earn approximately $258 million to $268 million or $2.60 to $2.70 per average diluted share in 2012 and is based on the following assumptions:

Normal weather patterns are experienced for the remainder of the year;
Gross margin on revenues of approximately $1.22 billion to $1.23 billion based on sales growth of approximately one percent on a weather-adjusted basis;
Approximately $40 million of gross margin is primarily attributed to regionally allocated transmission projects; and
Approximately $28 million of gross margin associated with the Crossroads wind farm;
Operating expenses of approximately $760 million to $770 million with operation and maintenance expenses approximately 58 percent of the total;
Interest expense of approximately $126 million which assumes a $3 million allowance for borrowed funds used during construction reduction to interest expense;
Allowance for equity funds used during construction of approximately $10 million; and
An effective tax rate of approximately 24 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 earnings in the third quarter due to the seasonal nature of air conditioning demand.

As indicated above, due to the pending outcome of the Oklahoma general rate case, the above guidance does not incorporate any impacts from the proceeding. Every $5 million change in rates is expected to impact net income approximately $3 million or $0.03 per average diluted share on an annualized basis, with the impact to 2012 earnings dependent on the timing of the final rate order. For additional information regarding the 2011 Oklahoma Rate Case Filing, see Note 14 of Notes to Condensed Consolidated Financial Statements.

Enogex

The Company's 2012 earnings projection for Enogex is unchanged and is between approximately $80 million to $95 million, or $0.80 to $0.95 per average diluted share, net of noncontrolling interest and is based on the following assumptions:

Total Enogex anticipated gross margin of between $500 million and $515 million. The gross margin assumption includes:
Transportation, storage and marketing gross margin contribution of between $140 million and $155 million, of which 80 percent is attributable to the transportation business;
Gathering and processing gross margin contribution of between $355 million and $365 million, of which 62 percent is attributable to the processing business;
Key factors affecting the gathering and processing gross margin forecast are:
Assumed increase of six to 10 percent in gathered volumes over 2011;
Assumed increase of approximately 15 percent in processable* volumes over 2011;
At the midpoint of Enogex's gathering and processing assumption Enogex has assumed:
Processing contract mix of 42 percent fixed-fee, 25 percent percent-of-liquids, 17 percent percent-of-proceeds and 16 percent keep-whole;
Weighted average natural gas price of $2.70 per MMBtu in 2012;
Realized weighted average NGLs price of $1.04 per gallon in 2012; and
Average price per gallon of condensate of $2.12 in 2012;
Enogex has assumed operating expenses of $295 million to $305 million, with operation and maintenance expenses comprising 58 percent of the total;
Interest expense of $31 million to $33 million;
An effective tax rate of 38 percent; and
ArcLight group will own approximately 19 percent of Enogex Holdings by the end of 2012.

2013 Volume Projections for Enogex

Assumed increase of 10 to 15 percent in gathered volumes over 2012; and
Assumed increase of approximately 15 percent in processable* volumes over 2012.

* Processable volumes include condensate volumes which are captured in the gathering pipeline and therefore not included in plant inlet volumes.

28

                                    

EBITDA is a supplemental non-GAAP financial measure used by external users of the Company's financial statements such as investors, commercial banks and others; therefore, the Company has included the table below which provides a reconciliation of projected EBITDA to projected net income attributable to Enogex Holdings at the midpoint of Enogex Holdings' earnings assumptions for 2012, which does not include the effect of income taxes whereas OGE Energy's portion of Enogex Holdings' net income included in OGE Energy's earnings guidance does reflect the effect of income taxes. Enogex Holding's net income shown in the EBITDA table does not include the effect of income taxes because Enogex Holdings is a partnership and is not subject to income taxes. Each partner is responsible for paying their own income taxes. For a discussion of the reasons for the use of EBITDA, as well as its limitations as an analytical tool, see "Non-GAAP Financial Measure" below.
Reconciliation of projected EBITDA to projected net income attributable to Enogex Holdings
(In millions)
Twelve Months Ended December 31, 2012 (A)(B)
Net income attributable to Enogex Holdings
$
176

Add:
 
Interest expense, net
32

Depreciation an