OKLAHOMA GAS & ELECTRIC CO - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - OKLAHOMA GAS & ELECTRIC CO	Financial_Report.xls
EX-31.01 - EXHIBIT 31.01 - OKLAHOMA GAS & ELECTRIC CO	q12012ogande10-qxex3101.htm
EX-32.01 - EXHIBIT 32.01 - OKLAHOMA GAS & ELECTRIC CO	q12012ogande10-qxex3201.htm

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

£ 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: 1-1097

Oklahoma Gas and Electric Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H(2).

OKLAHOMA GAS AND ELECTRIC COMPANY

(Exact name of registrant as specified in its charter)



Oklahoma		73-0382390
(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 o	Accelerated filer o
Non-accelerated filer R (Do not check if a smaller reporting company)	Smaller reporting company o

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 40,378,745 shares of common stock, par value $2.50 per share, outstanding, all of which were held by OGE Energy Corp. There were no other shares of capital stock of the registrant outstanding at such date.

OKLAHOMA GAS AND ELECTRIC COMPANY

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS



	Page
GLOSSARY OF TERMS	ii
FORWARD-LOOKING STATEMENTS	1

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Statements of Income	2
Condensed Statements of Comprehensive Income	3
Condensed Statements of Cash Flows	4
Condensed Balance Sheets	5
Condensed Statements of Changes in Stockholder's Equity	7
Notes to Condensed Financial Statements	8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	27

Item 4. Controls and Procedures	27

Part II - OTHER INFORMATION
Item 1. Legal Proceedings	28

Item 1A. Risk Factors	28

Item 6. Exhibits	29

Signature	30

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
BART	Best Available Retrofit Technology
Crossroads	OG&E's Crossroads wind farm in Dewey County, Oklahoma
Dry Scrubbers	Dry flue gas desulfurization units with Spray Dryer Absorber
Enogex	Enogex Holdings LLC, collectively with its subsidiaries, a majority-owned subsidiary of OGE Energy
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
MW	Megawatt
MWH	Megawatt-hour
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, wholly-owned subsidiary of OGE Energy
OGE Energy	OGE Energy Corp., parent company of OG&E
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

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 OG&E'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 OG&E and OGE Energy to access the capital markets and obtain financing on favorable terms;


•	prices and availability of electricity, coal and natural gas;


•	business conditions in the energy industry;


•	competitive factors including the extent and timing of the entry of additional competition in the markets served by OG&E;


•	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 OG&E's markets;


•	environmental laws and regulations that may impact OG&E'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; and


•	other risk factors listed in the reports filed by OG&E with the Securities and Exchange Commission including those listed in "Item 1A. Risk Factors" and in Exhibit 99.01 to OG&E's 2011 Form 10-K.

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended
	March 31,
(In millions)	2012			2011
OPERATING REVENUES	$	426.7		$	422.1
COST OF GOODS SOLD (exclusive of depreciation and amortization shown below)	195.5			219.4
Gross margin on revenues	231.2			202.7
OPERATING EXPENSES
Other operation and maintenance	110.6			105.8
Depreciation and amortization	59.7			51.8
Taxes other than income	21.1			19.1
Total operating expenses	191.4			176.7
OPERATING INCOME	39.8			26.0
OTHER INCOME (EXPENSE)
Interest income	—			0.1
Allowance for equity funds used during construction	1.9			4.4
Other income	5.2			5.0
Other expense	(0.7		)	(0.6		)
Net other income	6.4			8.9
INTEREST EXPENSE
Interest on long-term debt	31.0			27.8
Allowance for borrowed funds used during construction	(1.1		)	(2.3		)
Interest on short-term debt and other interest charges	1.0			0.6
Interest expense	30.9			26.1
INCOME BEFORE TAXES	15.3			8.8
INCOME TAX EXPENSE	3.2			2.4
NET INCOME	$	12.1		$	6.4

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended
	March 31,
(In millions)	2012		2011
Net income	$	12.1	$	6.4
Other comprehensive income (loss), net of tax
Deferred commodity contracts hedging losses, net of tax of $0 and $0.1 million, respectively	—		0.2
Other comprehensive income (loss), net of tax	—		0.2
Comprehensive income	$	12.1	$	6.6

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended
	March 31,
(In millions)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	12.1		$	6.4
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation and amortization	59.7			51.8
Deferred income taxes and investment tax credits, net	3.2			2.4
Allowance for equity funds used during construction	(1.9		)	(4.4		)
Stock-based compensation expense	0.6			0.9
Regulatory assets	5.6			6.0
Regulatory liabilities	(3.4		)	2.8
Other assets	0.9			1.5
Other liabilities	1.1			(4.1		)
Change in certain current assets and liabilities
Accounts receivable, net	38.3			3.2
Accrued unbilled revenues	6.0			6.3
Fuel, materials and supplies inventories	(9.8		)	4.4
Gas imbalance assets	—			0.1
Fuel clause under recoveries	1.8			0.6
Other current assets	(5.0		)	5.8
Accounts payable	(27.5		)	(25.5		)
Accounts payable - affiliates	(0.3		)	(1.2		)
Gas imbalance liabilities	—			0.1
Fuel clause over recoveries	31.5			(4.5		)
Other current liabilities	(24.8		)	(18.2		)
Net Cash Provided from Operating Activities	88.1			34.4
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (less allowance for equity funds used during construction)	(190.1		)	(127.0		)
Reimbursement of capital expenditures	9.7			11.3
Proceeds from sale of assets	0.2			0.4
Net Cash Used in Investing Activities	(180.2		)	(115.3		)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in advances with parent	92.1			80.9
Net Cash Provided from Financing Activities	92.1			80.9
NET CHANGE IN CASH AND CASH EQUIVALENTS	—			—
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	—			—
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	—

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED BALANCE SHEETS



(In millions)	March 31, 2012 (Unaudited)		December 31, 2011
ASSETS
CURRENT ASSETS
Accounts receivable, less reserve of $2.5 and $3.7, respectively	$	144.1	$	182.4
Accrued unbilled revenues	53.3		59.3
Advances to parent	5.0		97.2
Fuel inventories	86.0		76.9
Materials and supplies, at average cost	81.8		81.1
Deferred income taxes	16.8		10.3
Fuel clause under recoveries	—		1.8
Other	33.0		28.0
Total current assets	420.0		537.0
OTHER PROPERTY AND INVESTMENTS, at cost	2.6		2.7
PROPERTY, PLANT AND EQUIPMENT
In service	7,965.8		7,808.8
Construction work in progress	350.3		334.4
Total property, plant and equipment	8,316.1		8,143.2
Less accumulated depreciation	2,629.4		2,592.3
Net property, plant and equipment	5,686.7		5,550.9
DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets	500.5		507.9
Other	23.0		22.4
Total deferred charges and other assets	523.5		530.3
TOTAL ASSETS	$	6,632.8	$	6,620.9

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED BALANCE SHEETS (Continued)



(In millions)	March 31, 2012 (Unaudited)			December 31, 2011
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable - affiliates	$	1.0		$	1.3
Accounts payable - other	141.9			193.4
Customer deposits	67.0			65.7
Accrued taxes	20.4			33.5
Accrued interest	30.0			43.2
Accrued compensation	22.1			26.6
Price risk management	2.5			2.2
Fuel clause over recoveries	39.2			7.7
Other	61.2			56.5
Total current liabilities	385.3			430.1
LONG-TERM DEBT	2,039.3			2,039.2
DEFERRED CREDITS AND OTHER LIABILITIES
Accrued benefit obligations	231.9			230.8
Deferred income taxes	1,155.6			1,146.0
Deferred investment tax credits	5.5			6.1
Regulatory liabilities	237.0			230.7
Price risk management	1.6			1.8
Other	69.9			42.2
Total deferred credits and other liabilities	1,701.5			1,657.6
Total liabilities	4,126.1			4,126.9
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDER'S EQUITY
Common stockholder's equity	1,012.0			1,011.4
Retained earnings	1,497.2			1,485.1
Accumulated other comprehensive loss, net of tax	(2.5		)	(2.5		)
Total stockholder's equity	2,506.7			2,494.0
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	6,632.8		$	6,620.9

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

(Unaudited)



(In millions)	Common Stock		Premium on Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2011	$	100.9	$	910.5	$	1,485.1	$	(2.5	)	$	2,494.0
Comprehensive income (loss)
Net income	—		—		12.1		—			12.1
Comprehensive income (loss)	—		—		12.1		—			12.1
Stock-based compensation	—		0.6		—		—			0.6
Balance at March 31, 2012	$	100.9	$	911.1	$	1,497.2	$	(2.5	)	$	2,506.7

Balance at December 31, 2010	$	100.9	$	857.5	$	1,221.8	$	(2.1	)	$	2,178.1
Comprehensive income (loss)
Net income	—		—		6.4		—			6.4
Other comprehensive income (loss), net of tax	—		—		—		0.2			0.2
Comprehensive income (loss)	—		—		6.4		0.2			6.6
Stock-based compensation	—		1.0		—		—			1.0
Balance at March 31, 2011	$	100.9	$	858.5	$	1,228.2	$	(1.9	)	$	2,185.7

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

OKLAHOMA GAS AND ELECTRIC COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)


1.	Summary of Significant Accounting Policies

Organization

OG&E generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. Its operations 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. OG&E is a wholly-owned subsidiary of OGE Energy which is an energy and energy services provider offering physical delivery and related services for both electricity and natural gas primarily in the south central United States.

Basis of Presentation

The Condensed Financial Statements included herein have been prepared by OG&E, 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, OG&E 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 financial position of OG&E 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, OG&E'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 Financial Statements and Notes thereto should be read in conjunction with the audited Financial Statements and Notes thereto included in OG&E'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.

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 Balance Sheets.


(B)	Included in Other Current Liabilities on the Condensed 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.

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 Loss

The balance of Accumulated Other Comprehensive Loss was $2.5 million at both March 31, 2012 and December 31, 2011 related to deferred commodity contracts hedging activity.

Related Party Transactions

OGE Energy charged operating costs to OG&E of $32.7 million and $31.0 million during the three months ended March 31, 2012 and 2011, respectively. OGE Energy charges operating costs to its subsidiaries based on several factors. Operating costs

directly related to specific subsidiaries are assigned to those subsidiaries. Where more than one subsidiary benefits from certain expenditures, the costs are shared between those subsidiaries receiving the benefits. Operating costs incurred for the benefit of all subsidiaries are allocated among the subsidiaries, either as overhead based primarily on labor costs or using the "Distrigas" method. The Distrigas method is a three-factor formula that uses an equal weighting of payroll, net operating revenues and gross property, plant and equipment. OGE Energy adopted the Distrigas method in January 1996 as a result of a recommendation by the OCC Staff. OGE Energy believes this method provides a reasonable basis for allocating common expenses.

During each of the three months ended March 31, 2012 and 2011, OG&E recorded an expense from its affiliate, Enogex, of $8.7 million for transporting gas to OG&E's natural gas-fired generating facilities. During each of the three months ended March 31, 2012 and 2011, OG&E recorded an expense from Enogex of $3.2 million for natural gas storage services. During the three months ended March 31, 2012 and 2011, OG&E also recorded natural gas purchases from Enogex, through its subsidiary, OER, of $3.6 million and $12.6 million, respectively. There are $1.3 million and $1.7 million of natural gas purchases recorded at March 31, 2012 and December 31, 2011, respectively, which are included in Accounts Payable – Affiliates in the Balance Sheets for these activities.

On July 1, 2009, OG&E, Enogex and OER entered into hedging transactions to offset natural gas long positions at Enogex with short natural gas exposures at OG&E resulting from the cost of generation associated with a wholesale power sales contract with the Oklahoma Municipal Power Authority. Enogex sold physical natural gas to OER, and OG&E entered into an offsetting natural gas swap with OER. These transactions are for 50,000 MMBtu per month from August 2009 to December 2013 (see Note 3).


2.	Fair Value Measurements

The classification of OG&E'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 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.

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 hedging transactions to offset natural gas long positions at Enogex with short natural gas exposures at OG&E resulting from the cost of generation associated with a wholesale power sales contract with the Oklahoma Municipal Power Authority.

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).

OG&E 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. Over-the-counter derivatives with NYMEX based prices are considered Level 2 due to the impact of counterparty credit risk.

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.

At March 31, 2012 and December 31, 2011, OG&E had no gross derivative assets measured at fair value on a recurring basis. At March 31, 2012 and December 31, 2011, OG&E had $4.1 million and $4.0 million, respectively, of gross derivative liabilities measured at fair value on a recurring basis which are considered level 2 in the fair value hierarchy.

The following table summarizes the fair value and carrying amount of OG&E's financial instruments, including derivative contracts related to OG&E'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 Liabilities
Energy Derivative Contracts	$	4.1	$	4.1	$	4.0	$	4.0
Long-Term Debt
OG&E Senior Notes	$	1,903.9	$	2,301.7	$	1,903.8	$	2,383.8
OG&E Industrial Authority Bonds	135.4		135.4		135.4		135.4

The carrying value of the financial instruments on the Condensed Balance Sheets not otherwise discussed above approximates fair value except for long-term debt which is valued at the carrying amount. The valuation of OG&E's energy derivative contracts was determined generally based on quoted market prices. The valuation of instruments also considers the credit risk of the counterparties. The fair value of OG&E's long-term debt is based on quoted market prices and estimates of current rates available for similar issues with similar maturities.


3.	Derivative Instruments and Hedging Activities

OG&E 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. OG&E is also exposed to credit risk in its business operations.

Commodity Price Risk

OG&E occasionally uses commodity price swap contracts to manage OG&E's commodity price risk exposures. Natural gas swaps are used to manage OG&E's natural gas exposure associated with a wholesale power sales contract.

Normal purchases and normal sales contracts are not recorded in PRM Assets or Liabilities in the Condensed 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) electric power contracts by OG&E and (ii) fuel procurement by OG&E.

OG&E recognizes its non-exchange traded derivative instruments as PRM Assets or Liabilities in the Condensed Balance Sheets at fair value with such amounts classified as current or long-term based on their anticipated settlement.

Interest Rate Risk

OG&E's exposure to changes in interest rates primarily relates to short-term variable-rate debt and commercial paper. OG&E manages its interest rate exposure by monitoring and limiting the effects of market changes in interest rates. OG&E 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

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

At March 31, 2012 and December 31, 2011, the only derivative instruments that were designated as cash flow hedges were the related party natural gas swaps with OER discussed above.

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. OG&E 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, OG&E had no derivative instruments that were designated as fair value hedges.

Derivatives Not Designated As Hedging Instruments

For derivative instruments not designated as hedging instruments, the gain or loss on the derivative is recognized currently in earnings.

At March 31, 2012 and December 31, 2011, OG&E had no material derivative instruments that were not designated as hedging instruments.

Credit-Risk Related Contingent Features in Derivative Instruments

At March 31, 2012, OG&E had no derivative instruments that contain credit-risk related contingent features.


4.	Stock-Based Compensation

The following table summarizes OG&E's pre-tax compensation expense and related income tax benefit during the three months ended March 31, 2012 and 2011 related to performance units and restricted stock for OG&E employees.



	Three Months Ended
	March 31,
(In millions)	2012		2011
Performance units
Total shareholder return	$	0.4	$	0.4
Earnings per share	0.2		0.5
Total compensation expense	$	0.6	$	0.9
Income tax benefit	$	0.3	$	0.4

OGE Energy 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 100,619 shares of new common stock issued to OG&E's employees pursuant to OGE Energy's stock incentive plans related to exercised stock options, restricted stock grants (net of forfeitures) and payouts of earned performance units. During the three months ended March 31, 2012, there were 207 shares of restricted stock returned to OG&E to satisfy tax liabilities.

The following table summarizes the activity of OG&E's stock-based compensation during the three months ended March 31, 2012.



	Units/Shares	Fair Value
Grants
Performance units (Total shareholder return)	40,561	$51.82
Performance units (Earnings per share)	13,519	$47.63
Restricted stock	308	$52.37
Conversions
Performance units (Total shareholder return) (A)	55,511	N/A
Performance units (Earnings per share) (A)	18,504	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 100,619 shares of common stock issued during the three months ended March 31, 2012 as discussed above.


5.	Income Taxes

OG&E is a member of an affiliated group that files consolidated income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. With few exceptions, OG&E 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 as well as earning Oklahoma state tax credits associated with its investments in electric generating facilities which further reduce OG&E's effective tax rate.


6.	Long-Term Debt

At March 31, 2012, OG&E 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 OG&E's Condensed Financial Statements. OG&E believes that it has sufficient liquidity to meet these obligations.


7.	Short-Term Debt and Credit Facility

to $400 million of OGE Energy's revolving credit amount. This agreement has a termination date of December 13, 2016. At March 31, 2012, there were no intercompany borrowings under this agreement. OG&E has a $400.0 million revolving credit facility which 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, OG&E had $2.2 million supporting letters of credit at a weighted-average interest rate of 0.53 percent. There were no outstanding borrowings under this revolving credit agreement and no outstanding commercial paper borrowings at March 31, 2012. At March 31, 2012, OG&E had less than $0.1 million in cash and cash equivalents.

OGE Energy's and OG&E'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 OGE Energy's and OG&E'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 OGE Energy's and OG&E's short-term borrowings, but a reduction in OGE Energy's and OG&E's credit ratings would not result in any defaults or accelerations. Any future downgrade of OG&E could also lead to higher long-term borrowing costs and, if below investment grade, would require OG&E 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.


8.	Retirement Plans and Postretirement Benefit Plans

The details of net periodic benefit cost of OG&E's portion of OGE Energy's Pension Plan, the Restoration of Retirement Income Plan and the postretirement benefit plans included in the Condensed 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	$	2.7		$	2.7		$	—	$	—
Interest cost	5.9			6.6			—		—
Expected return on plan assets	(9.5		)	(9.3		)	—		—
Amortization of net loss	4.8			3.9			—		—
Amortization of unrecognized prior service cost (A)	0.5			0.6			0.1		0.1
Net periodic benefit cost (B)	$	4.4		$	4.5		$	0.1	$	0.1


(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 $4.5 million and $4.6 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	$	0.7		$	0.6
Interest cost	2.4			2.5
Expected return on plan assets	(0.7		)	(1.2		)
Amortization of transition obligation	0.6			0.6
Amortization of net loss	4.3			3.9
Amortization of unrecognized prior service cost (A)	(3.4		)	(3.4		)
Net periodic benefit cost (B)	$	3.9		$	3.0


(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 $3.9 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

OGE Energy 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, OGE Energy contributed $35 million to its Pension Plan, of which $33 million was OG&E's portion. No additional contributions are expected in 2012.


9.	Commitments and Contingencies

Except as set forth below and in Note 10, the circumstances set forth in Notes 12 and 13 to OG&E's Financial Statements included in OG&E's 2011 Form 10-K appropriately represent, in all material respects, the current status of OG&E's material commitments and contingent liabilities.

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.

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
Wind farm land leases	$	2.0	$	2.0	$	2.1	$	2.1	$	2.1	$	53.9	$	64.2

Natural Gas Measurement Case

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.

Other

In the normal course of business, OG&E 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, OG&E 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 OG&E's Condensed Financial Statements. Except as otherwise stated above, in Note 10 below, in Item 1 of Part II of this Form 10-Q, in Notes 12 and 13 of Notes to Financial Statements and Item 3 of Part I of OG&E'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 OG&E's financial position, results of operations or cash flows.


10.	Rate Matters and Regulation

Except as set forth below, the circumstances set forth in Note 13 to OG&E's Financial Statements included in OG&E's 2011 Form 10-K appropriately represent, in all material respects, the current status of any regulatory matters.

Completed Regulatory Matters

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

2011 Oklahoma Rate Case Filing

As previously reported in OG&E'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 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.

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.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

Overview

OG&E Strategy

OGE Energy's mission is to fulfill its critical role in the nation's electric utility and natural gas midstream pipeline infrastructure and meet individual customers' needs for energy and related services in a safe, reliable and efficient manner. OGE Energy's corporate strategy is to continue to maintain its existing business mix and diversified asset position of its regulated 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.

Summary of Operating Results

Three Months Ended March 31, 2012 as Compared to Three Months Ended March 31, 2011

OG&E reported net income of $12.1 million and $6.4 million, respectively, during the three months ended March 31, 2012 and 2011, an increase of $5.7 million, or 89.1 percent, 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.

Recent Developments and Regulatory Matters

Contract and Wind Energy Purchase Agreement Filing

Fuel Adjustment Clause Review for Calendar Year 2010

2012 Outlook

OGE Energy 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.

OGE Energy projects OG&E to earn approximately $258 million to $268 million 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 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 10 of Notes to Condensed Financial Statements.

Results of Operations

The following discussion and analysis presents factors that affected OG&E's results of operations for the three months ended March 31, 2012 as compared to the same period in 2011 and OG&E's financial position at March 31, 2012. Due to seasonal fluctuations and other factors, the 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 following information should be read in conjunction with the Condensed Financial Statements and Notes thereto. Known trends and contingencies of a material nature are discussed to the extent considered relevant.



	Three Months Ended
	March 31,
(In millions)	2012		2011
Operating income	$	39.8	$	26.0
Net income	$	12.1	$	6.4

In reviewing its operating results, OG&E believes that it is appropriate to focus on operating income as reported in its Condensed Statements of Income as operating income indicates the ongoing profitability of OG&E excluding the cost of capital and income taxes.



	Three Months Ended
	March 31,
(Dollars in millions)	2012		2011
Operating revenues	$	426.7	$	422.1
Cost of goods sold	195.5		219.4
Gross margin on revenues	231.2		202.7
Other operation and maintenance	110.6		105.8
Depreciation and amortization	59.7		51.8
Taxes other than income	21.1		19.1
Operating income	39.8		26.0
Interest income	—		0.1
Allowance for equity funds used during construction	1.9		4.4
Other income	5.2		5.0
Other expense	0.7		0.6
Interest expense	30.9		26.1
Income tax expense	3.2		2.4
Net income	$	12.1	$	6.4
Operating revenues by classification
Residential	$	169.6	$	176.8
Commercial	99.9		98.2
Industrial	44.2		44.1
Oilfield	36.6		34.9
Public authorities and street light	39.4		38.3
Sales for resale	12.8		13.2
System sales revenues	402.5		405.5
Off-system sales revenues	8.9		9.4
Other	15.3		7.2
Total operating revenues	$	426.7	$	422.1
MWH sales by classification (In millions)
Residential	1.9		2.2
Commercial	1.5		1.5
Industrial	1.0		0.9
Oilfield	0.8		0.8
Public authorities and street light	0.7		0.7
Sales for resale	0.3		0.3
System sales	6.2		6.4
Off-system sales	0.4		0.3
Total sales	6.6		6.7
Number of customers	792,065		784,582
Weighted-average cost of energy per kilowatt-hour - cents
Natural gas	2.937		4.390
Coal	2.246		2.033
Total fuel	2.500		2.686
Total fuel and purchased power	2.735		3.048
Degree days (A)
Heating - Actual	1,382		1,904
Heating - Normal	1,798		1,963
Cooling - Actual	61		41
Cooling - Normal	13		8

(A)

Degree days are calculated as follows: The high and low degrees of a particular day are added together and then averaged. If the calculated average is above 65 degrees, then the difference between the calculated average and 65 is expressed as cooling degree days, with each degree of difference equaling one cooling degree day. If the calculated average is below 65 degrees, then the difference between the calculated average and 65 is expressed as heating degree days, with each degree of difference equaling one heating degree day. The daily calculations are then totaled for the particular reporting period.

Three Months Ended March 31, 2012 as Compared to Three Months Ended March 31, 2011.

OG&E's operating income increased $13.8 million, or 53.1 percent, during the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to a higher gross margin offset by other operation and maintenance expense and higher depreciation and amortization expense.

Gross Margin

Gross margin was $231.2 million during the three months ended March 31, 2012 as compared to $202.7 million during the same period in 2011, an increase of $28.5 million, or 14.1 percent. The gross margin increased primarily due to:


•	an increased price variance, which included revenues from the recovery of investments, including the Crossroads wind farm, the Windspeed transmission line, Smart Grid, the OU Spirit wind farm and system hardening and higher revenues from sales and customer mix, which increased the gross margin by $24.1 million;


•	higher transmission revenue primarily due to the inclusion of construction work in progress in transmission rates for specific FERC approved projects that previously accrued allowance for funds used during construction, which increased the gross margin by $9.0 million;


•	higher demand and related revenues by non-residential customers in OG&E's service territory, which increased the gross margin by $2.5 million;


•	new customer growth in OG&E's service territory, which increased the gross margin by $1.9 million;


•	revenues from the Arkansas rate increase, which increased the gross margin by $1.4 million; and


•	higher revenues related to the renewal of the Arkansas Valley Electric Cooperative contract (see Note 13 of Notes to Financial Statements in OG&E's 2011 Form 10-K), which increased the gross margin by $1.0 million.

These increases in the gross margin were partially offset by milder weather in OG&E's service territory during the three months ended March 31, 2012, which decreased the gross margin by $11.5 million.

Cost of goods sold for OG&E consists of fuel used in electric generation, purchased power and transmission related charges. Fuel expense was $143.1 million during the three months ended March 31, 2012 as compared to $171.1 million during the same period in 2011, a decrease of $28.0 million, or 16.4 percent, primarily due to lower natural gas prices. OG&E's electric generating capability is fairly evenly divided between coal and natural gas and provides for flexibility to use either fuel to the best economic advantage for OG&E and its customers. Purchased power costs were $49.0 million during the three months ended March 31, 2012 as compared to $46.4 million during the same period in 2011, an increase of $2.6 million, or 5.6 percent, primarily due to an increase in purchases in the energy imbalance service market and short-term power purchases partially offset by a decrease in cogeneration costs.

Variances in the actual cost of fuel used in electric generation and certain purchased power costs, as compared to the fuel component included in the cost-of-service for ratemaking, are passed through to OG&E's customers through fuel adjustment clauses. The fuel adjustment clauses are subject to periodic review by the OCC, the APSC and the FERC. The OCC, the APSC and the FERC have authority to review the appropriateness of gas transportation charges or other fees OG&E pays to Enogex.

Operating Expenses

Other operation and maintenance expenses were $110.6 million during the three months ended March 31, 2012 as compared to $105.8 million during the same period in 2011, an increase of $4.8 million, or 4.5 percent. The increase in other operation and maintenance expenses was primarily due to:


•	an increase of $3.1 million in salaries and wages expense primarily due to salary increases in 2012 and an increase in accrued vacation expense due to adopting a new vacation policy effective January 1, 2012;


•	an increase of $1.9 million allocated from the holding company partially due to higher contract technical and construction services and marketing and sales expense;


•	an increase of $1.4 million in contract professional services partially related to Smart Grid, which expenses are being recovered through a rider;


•	an increase of $1.2 million related to increased spending on vegetation management partially related to system hardening, which expenses are being recovered through a rider; and


•	an increase of $1.2 million in other marketing and sales expense related to demand-side management initiatives, which expenses are being recovered through a rider.

These increases in other operation and maintenance expenses were partially offset by a decrease of $3.8 million due to an increase in capitalized labor in 2012 as compared to 2011.

Depreciation and amortization expense was $59.7 million during the three months ended March 31, 2012 as compared to $51.8 million during the same period in 2011, an increase of $7.9 million, or 15.3 percent, primarily due to additional assets being placed in service, including Crossroads, which was fully in service in January 2012.

Taxes other than income was $21.1 million during the three months ended March 31, 2012 as compared to $19.1 million during the same period in 2011, an increase of $2.0 million, or 10.5 percent, primarily due to higher ad valorem taxes.

Additional Information

Allowance for Equity Funds Used During Construction. Allowance for equity funds used during construction was $1.9 million during the three months ended March 31, 2012 as compared to $4.4 million during the same period in 2011, a decrease of $2.5 million, or 56.8 percent, primarily due to higher levels of construction costs for Crossroads in 2011.

Interest Expense. Interest expense was $30.9 million during the three months ended March 31, 2012 as compared to $26.1 million during the same period in 2011, an increase of $4.8 million, or 18.4 percent, primarily due to a $3.2 million increase related to the issuance of long-term debt in May 2011 partially offset by a decrease of $1.2 million due to a higher allowance for borrowed funds used during construction primarily due to construction costs for Crossroads.

Income Tax Expense. Income tax expense was $3.2 million during the three months ended March 31, 2012 as compared to $2.4 million during the same period in 2011, an increase of $0.8 million, or 33.3 percent. The increase in income tax expense was primarily due higher pre-tax income during the three months ended March 31, 2012 as compared to the same period in 2011 partially offset by an increase in Federal renewable energy credits during the three months ended March 31, 2012 as compared to the same period in 2011.

Financial Condition

The balance of Accounts Receivable, Net was $144.1 million and $182.4 million at March 31, 2012 and December 31, 2011, respectively, a decrease of $38.3 million, or 21.0 percent, primarily due to a decrease in OG&E's billings to customers reflecting milder weather in March 2012 as compared to December 31, 2011.

The balance of Advances to Parent was $5.0 million and $97.2 million at March 31, 2012 and December 31, 2011, respectively, a decrease of $92.2 million, or 94.9 percent, primarily related to higher levels of capital expenditures in 2012 related to various transmission projects and Crossroads.

The balance of Accounts Payable was $141.9 million and $193.4 million at March 31, 2012 and December 31, 2011, respectively, a decrease of $51.5 million, or 26.6 percent, primarily due to payments made in the first quarter of 2012 for projects accrued at December 31, 2011.

The balance of Fuel Clause Over Recoveries was $39.2 million and $7.7 million at March 31, 2012 and December 31, 2011, respectively, an increase of $31.5 million, primarily due to the fact that the amount billed to retail customers was higher than OG&E's cost of fuel. OG&E's fuel recovery clauses are designed to smooth the impact of fuel price volatility on customers' bills. As a result, OG&E under recovers fuel costs in periods of rising fuel prices above the baseline charge for fuel and over recovers fuel costs when prices decline below the baseline charge for fuel. Provisions in the fuel clauses are intended to allow OG&E to amortize under and over recovery balances.

The balance of Other Deferred Liabilities was $69.9 million and $42.2 million at March 31, 2012 and December 31, 2011, respectively, an increase of $27.7 million, or 65.6 percent, primarily due to 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.

Off-Balance Sheet Arrangement

OG&E Railcar Lease Agreement

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.

Liquidity and Capital Resources

Cash Flows



	Three Months Ended
	March 31,
(In millions)	2012			2011
Net cash provided from operating activities	$	88.1		$	34.4
Net cash used in investing activities	(180.2		)	(115.3		)
Net cash provided from financing activities	92.1			80.9

Operating Activities

The increase of $53.7 million in net cash provided from operating activities during the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to higher fuel recoveries at OG&E in the first quarter of 2012 as compared to the same period in 2011 and an increase in cash received in 2012 from the recovery of investments including the Crossroads wind farm, the Windspeed transmission line, Smart Grid, the OU Spirit wind farm and system hardening.

Investing Activities

The increase of $64.9 million, or 56.3 percent, in net cash used in investing activities during the three months ended March 31, 2012 as compared to the same period in 2011 primarily related to higher levels of capital expenditures in 2012 related to various transmission projects and Crossroads.

Financing Activities

The increase of $11.2 million, or 13.8 percent, in net cash provided from financing activities during the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to an increase in advances from parent.

Future Capital Requirements and Financing Activities

OG&E's primary needs for capital are related to acquiring or constructing new facilities and replacing or expanding existing facilities. Other working capital requirements are expected to be primarily related to maturing debt, operating lease obligations, hedging activities, fuel clause under and over recoveries and other general corporate purposes. OG&E generally meets its cash needs through a combination of cash generated from operations, short-term borrowings (through a combination of bank borrowings, commercial paper and borrowings from OGE Energy) and permanent financings.

Capital Expenditures

OG&E's estimates of capital expenditures for the years 2012 through 2016 are shown in the following table. These capital expenditures represent the base maintenance capital expenditures (i.e., capital expenditures to maintain and operate OG&E's business) plus capital expenditures for known and committed projects.



(In millions)	2012		2013		2014		2015		2016
Base Transmission	$	70	$	50	$	50	$	50	$	50
Base Distribution	175		175		175		175		175
Base Generation	75		75		75		75		75
Other	20		15		15		15		15
Total Base Transmission, Distribution, Generation and Other	340		315		315		315		315
Known and Committed Projects:
Transmission Projects:
Sunnyside-Hugo (345 kilovolt)	25		—		—		—		—
Sooner-Rose Hill (345 kilovolt)	5		—		—		—		—
Balanced Portfolio 3E Projects	110		180		50		—		—
Southwest Power Pool Priority Projects	20		200		115		—		—
Total Transmission Projects	160		380		165		—		—
Other Projects:
Smart Grid Program (A)	90		30		30		15		15
Crossroads	35		—		—		—		—
System Hardening	15		—		—		—		—
Total Other Projects	140		30		30		15		15
Total Known and Committed Projects	300		410		195		15		15
Total (B)	$	640	$	725	$	510	$	330	$	330


(A)	These capital expenditures are net of the $130 million Smart Grid grant approved by the U.S. Department of Energy.


(B)	The capital expenditures above exclude any environmental expenditures associated with:

•

Pollution control equipment related to regional haze requirements due to the uncertainty regarding the approach and timing for such pollution control equipment. OG&E has committed to install low NOX burners at the affected generating units at an estimated cost of $120 million, but the timing of the installation of such burners is uncertain. The SO2 emissions standards in the EPA's Federal implementation plan could require the installation of Dry Scrubbers or fuel switching. OG&E estimates that installing such Dry Scrubbers could cost more than $1.0 billion. The Federal implementation plan is being challenged by OG&E and the state of Oklahoma. Neither the outcome of the challenge to the Federal implementation plan nor the timing of any required capital expenditures can be predicted with any certainty at this time, but such capital expenditures could be significant.


•	Compliance with Maximum Achievable Control Technology requirements due to the uncertainty regarding the approach and timing of such expenditures. OG&E is planning to utilize dry sorbent injection with activated carbon injection at up to five coal-fired units at an estimated cost of $310 million, but the timing of such expenditures is uncertain.

OG&E is currently evaluating options to comply with environmental requirements. For further information, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Laws and Regulations" below.

Additional capital expenditures beyond those identified in the table above, including additional incremental growth opportunities in electric transmission assets, will be evaluated based upon their impact upon achieving OG&E's financial objectives.

Pension Plan Funding

Security Ratings

Access to reasonably priced capital is dependent in part on credit and security ratings. Generally, lower ratings lead to higher financing costs. Pricing grids associated with OGE Energy's and OG&E'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 OGE Energy's and OG&E's short-term borrowings, but a reduction in OGE Energy's and OG&E's credit ratings would not result in any defaults or accelerations. Any future downgrade of OG&E could also lead to higher long-term borrowing costs and, if below investment grade, would require OG&E to post cash collateral or letters of credit.

A security rating is not a recommendation to buy, sell or hold securities. Such rating may be subject to revision or withdrawal at any time by the credit rating agency and each rating should be evaluated independently of any other rating.

Future Sources of Financing

Management expects that cash generated from operations, proceeds from the issuance of long and short-term debt and funds received from OGE Energy (from proceeds from the sales of its common stock to the public through OGE Energy's Automatic Dividend Reinvestment and Stock Purchase Plan or other offerings) will be adequate over the next three years to meet anticipated cash needs and to fund future growth opportunities. OG&E utilizes short-term borrowings (through a combination of bank borrowings, commercial paper and borrowings from OGE Energy) to satisfy temporary working capital needs and as an interim source of financing capital expenditures until permanent financing is arranged.

Short-Term Debt and Credit Facility

At March 31, 2012 and December 31, 2011, there were $5.0 million and $97.2 million, respectively, in net outstanding advances to OGE Energy. OG&E has an intercompany borrowing agreement with OGE Energy whereby OG&E has access to up to $400 million of OGE Energy's revolving credit amount. This agreement has a termination date of December 13, 2016. At March 31, 2012, there were no intercompany borrowings under this agreement. OG&E has a $400.0 million revolving credit facility which 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, OG&E had $2.2 million supporting letters of credit at a weighted-average interest rate of 0.53 percent. There were no outstanding borrowings under this revolving credit agreement and no outstanding commercial paper borrowings at March 31, 2012. At March 31, 2012, OG&E had $397.8 million of net available liquidity under its revolving credit agreement. 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. At March 31, 2012, OG&E had less than $0.1 million in cash and cash equivalents. See Note 7 of Notes to Condensed Financial Statements for a discussion of OG&E's short-term debt activity.

Critical Accounting Policies and Estimates

The Condensed Financial Statements and Notes to Condensed Financial Statements contain information that is pertinent to Management's Discussion and Analysis. In preparing the Condensed Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the Condensed Financial Statements and the reported amounts of revenues and expenses during the reporting period. Changes to these assumptions and estimates could have a material effect on OG&E's Condensed Financial Statements. However, OG&E believes it has taken reasonable, but conservative, positions where assumptions and estimates are used in order to minimize the negative financial impact to OG&E that could result if actual results vary from the assumptions and estimates. In management's opinion, the areas of OG&E where the most significant judgment is exercised includes the valuation of Pension Plan assumptions, impairment estimates of long-lived assets (including intangible assets), income taxes, contingency reserves, asset retirement obligations, fair value and cash flow hedges, the allowance for uncollectible accounts receivable, the valuation of regulatory assets and liabilities and unbilled revenues. The selection, application and disclosure of OG&E's critical accounting estimates have been discussed with OGE Energy's Audit Committee and are discussed in detail in Management's Discussion and Analysis of Financial Condition and Results of Operations in OG&E's 2011 Form 10-K.

Commitments and Contingencies

Except as disclosed otherwise in this Form 10-Q and OG&E'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 OG&E's financial position, results of operations or cash flows. See Notes 9 and 10 of Notes to Condensed Financial Statements in this Form 10-Q and Notes 12 and 13 of Notes to Financial Statements and Item 3 of Part I of OG&E's 2011 Form 10-K, for a discussion of OG&E's commitments and contingencies.

Environmental Laws and Regulations

The activities of OG&E are subject to stringent and complex Federal, state and local laws and regulations governing environmental protection including the discharge of materials into the environment. These laws and regulations can restrict or impact OG&E's business activities in many ways, such as restricting the way it can handle or dispose of its wastes, requiring remedial action to mitigate pollution conditions that may be caused by its operations or that are attributable to former operators, regulating future construction activities to mitigate harm to threatened or endangered species and requiring the installation and operation of pollution control equipment. Failure to comply with these laws and regulations may result in the assessment of

administrative, civil and criminal penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations. OG&E believes that its operations are in substantial compliance with current Federal, state and local environmental standards. These environmental laws and regulations are discussed in detail in Management's Discussion and Analysis of Financial Condition and Results of Operations in OG&E's 2011 Form 10-K. Except as set forth below, there have been no material changes to such items.

OG&E expects that environmental expenditures necessary to comply with the environmental laws and regulations discussed below will qualify as part of a pre-approval plan to handle state and Federally mandated environmental upgrades which will be recoverable in Oklahoma from OG&E's retail customers under House Bill 1910, which was enacted into law in May 2005.

Air

Regional Haze Control Measures

On June 15, 2005, the EPA issued final amendments to its 1999 regional haze rule. Regional haze is visibility impairment caused by the cumulative air pollutant emissions from numerous sources over a wide geographic area. These regulations are intended to protect visibility in certain national parks and wilderness areas throughout the United States. In Oklahoma, the Wichita Mountains are the only area covered under the regulation. However, Oklahoma's impact on parks in other states must also be evaluated.

As required by the Federal regional haze rule, the state of Oklahoma evaluated the installation of BART to reduce emissions that cause or contribute to regional haze from certain sources within the state that were built between 1962 and 1977. Certain of OG&E’s units at the Horseshoe Lake, Seminole, Muskogee and Sooner generating stations were evaluated for BART. On February 18, 2010, Oklahoma submitted its SIP to the EPA, which set forth the state's plan for compliance with the Federal regional haze rule. The SIP was subject to the EPA's review and approval.

The Oklahoma SIP included requirements for reducing emissions of NOX and SO2 from OG&E's seven BART-eligible units at the Seminole, Muskogee and Sooner generating stations. The SIP also included a waiver from BART requirements for all eligible units at the Horseshoe Lake generating station based on air modeling that showed no significant impact on visibility in nearby national parks and wilderness areas. The SIP concluded that BART for reducing NOX emissions at all of the subject units should be the installation of low NOX burners with overfire air (flue gas recirculation was also required on two of the units) and set forth associated NOX emission rates and limits. OG&E preliminarily estimates that the total capital cost of installing and operating these NOX controls on all covered units, based on recent industry experience and past projects, will be approximately $120 million, but the timing of the installation of such burners is uncertain. With respect to SO2 emissions, the SIP included an agreement between the Oklahoma Department of Environmental Quality and OG&E that established BART for SO2 control at four coal-fired units located at OG&E's Sooner and Muskogee generating stations as the continued use of low sulfur coal (along with associated emission rates and limits). The SIP specifically rejected the installation and operation of Dry Scrubbers as BART for SO2 control from these units because the state determined that Dry Scrubbers were not cost effective on these units.

On December 28, 2011, the EPA rejected portions of the Oklahoma SIP and issued a Federal implementation plan. While the EPA accepted Oklahoma's BART determination for NOX in the SIP, it rejected the SO2 BART determination with respect to the four coal-fired units at the Sooner and Muskogee generating stations. In its place, the EPA is requiring that OG&E meet an SO2 emission rate of 0.06 pounds per MMBtu within five years. OG&E could meet the proposed standard by either installing and operating Dry Scrubbers or fuel switching at the four affected units. OG&E estimates that installing Dry Scrubbers on these units would include capital costs to OG&E of more than $1.0 billion. OG&E and the state of Oklahoma filed an administrative stay request with the EPA on February 24, 2012. OG&E and other parties also filed a petition for review of this determination in the U.S. Court of Appeals for the Tenth Circuit on February 24, 2012. OG&E filed a stay request in the U.S. Court of Appeals for the Tenth Circuit on April 4, 2012. Neither the outcome of the appeal nor the timing of any required expenditures for pollution control equipment can be predicted with any certainty at this time.

Cross-State Air Pollution Rule

On July 7, 2011, the EPA finalized its Cross-State Air Pollution Rule to replace the former Clean Air Interstate Rule that was remanded by a Federal court as a result of legal challenges. The final rule requires 27 states to reduce power plant emissions that contribute to ozone and particulate matter pollution in other states. On December 27, 2011, the EPA published a supplemental rule which makes six additional states, including Oklahoma, subject to the Cross-State Air Pollution Rule for NOX emissions during the ozone-season from May 1 through September 30. Under the rule, OG&E is required to reduce ozone-season NOX emissions from its electrical generating units within the state beginning in 2012. The Cross-State Air Pollution Rule is currently being challenged in court by numerous states and power generators. On December 30, 2011, the U.S. Court of Appeals issued a

stay of the rule and requested proposals for accelerated briefing. On February 6, 2012, the EPA issued a notice indicating that the supplemental rule is also included in the stay discussed above. In April 2012, the U.S. Court of Appeals heard oral arguments on this rule and have taken these under advisement. OG&E cannot predict the outcome of such challenges and is evaluating what emission controls would be necessary to meet the standards, its ability to comply with the standards in the timeframe proposed by the EPA and the associated costs, which could be significant.

Hazardous Air Pollutants Emission Standards

On December 16, 2011, the EPA signed the Maximum Achievable Control Technology regulations governing emissions of certain hazardous air pollutants from electric generating units. The final rule includes numerical standards for particulate matter (as a surrogate for toxic metals), hydrogen chloride and mercury emissions from coal-fired boilers. In addition, the regulations include work practice standards for dioxins and furans. The effective date of the final rule was April 16, 2012 and compliance is required within three years after the effective date of the rule with a likely possibility of a one year extension. OG&E is planning to utilize dry sorbent injection with activated carbon injection at up to five coal-fired units at an estimated capital cost of $310 million, but the timing of such expenditures is uncertain. The final rule has been appealed by several parties. OG&E is not a party to these appeals. OG&E cannot predict the outcome of any such appeals and is evaluating the regulations and what emission controls would be necessary to meet the standards and the associated costs, which could be significant.

Notice of Violation

In July 2008, OG&E received a request for information from the EPA regarding Federal Clean Air Act compliance at OG&E's Muskogee and Sooner generating plants. In recent years, the EPA has issued similar requests to numerous other electric utilities seeking to determine whether various maintenance, repair and replacement projects should have required permits under the Federal Clean Air Act's new source review process. In January 2012, OG&E received a supplemental request for an update of the previously provided information and for some additional information not previously requested. On May 1, 2012, OG&E responded to the EPA's supplemental request for information. OG&E believes it has acted in full compliance with the Federal Clean Air Act and new source review process and is cooperating with the EPA. On April 26, 2011, the EPA issued a notice of violation alleging that 13 projects that occurred at OG&E's Muskogee and Sooner generating plants between 1993 and 2006 without the required new source review permits. The notice of violation also alleges that OG&E's visible emissions at its Muskogee and Sooner generating plants are not in accordance with applicable new source performance standards. OG&E has met with the EPA regarding the notice but cannot predict at this time what, if any, further actions may be necessary as a result of the notice. The EPA could seek to require OG&E to install additional pollution control equipment and pay fines and significant penalties as a result of the allegations in the notice of violation. Section 113 of the Federal Clean Air Act (along with the Federal Civil Penalties Inflation Adjustment Act of 1996) provides for civil penalties as much as $37,500 per day for each violation.

Climate Change and Greenhouse Gas Emissions

On June 3, 2010, the EPA issued a final rule that makes certain sources subject to permitting requirements for greenhouse gas emissions. This rule now requires sources that emit greater than 100,000 tons per year of greenhouse gases to obtain a permit for those emissions, even if they are not otherwise required to obtain a new or modified permit. Such sources may have to install best available control technology to control greenhouse gas emissions pursuant to this rule. Also, in December 2010, the EPA entered into an agreement to settle litigation brought by states and environmental groups whereby the EPA agreed to issue New Source Performance Standards for greenhouse gas emissions from certain new and modified electric generating units and emissions guidelines for existing units over the next two years. Pursuant to this settlement agreement, the EPA agreed to issue proposed rules during the fourth quarter of 2011 and final rules by mid-2012. On March 27, 2012, the EPA proposed a new source performance standards limit of 1,000 pounds of carbon dioxide per MWH. The proposed limit would apply only to new sources. The EPA did not propose standards for existing or modified sources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Under the reduced disclosure format permitted by General Instruction H(2)(c) of Form 10-Q, the information otherwise required by Item 3 as been omitted.

Item 4. Controls and Procedures.

OG&E maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by OG&E in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management,

including the chief executive officer and chief financial officer, allowing timely decisions regarding required disclosure. As of the end of the period covered by this report, based on an evaluation carried out under the supervision and with the participation of OG&E's management, including the chief executive officer and chief financial officer, of the effectiveness of OG&E's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934), the chief executive officer and chief financial officer have concluded that OG&E's disclosure controls and procedures are effective.

No change in OG&E's internal control over financial reporting has occurred during OG&E's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, OG&E's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Reference is made to Part I, Item 3 of OG&E's 2011 Form 10-K for a description of certain legal proceedings presently pending. Except as set forth below, there are no new significant cases to report against OG&E's and there have been no material changes in the previously reported proceedings.

1. 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.

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.

Item 1A. Risk Factors.

There have been no significant changes in OG&E's risk factors from those discussed in OG&E's 2011 Form 10-K, which are incorporated herein by reference.

Item 6. Exhibits.



Exhibit No.	Description
10.01	Form of Performance Unit Agreement under OGE Energy's 2008 Stock Incentive Plan. (Filed as Exhibit 10.01 to OGE Energy's Form 10-Q for the quarter ended March 31, 2012 (File No. 1-12579) and incorporated by reference herein).
31.01	Certifications Pursuant to Rule 13a-14(a)/15d-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Schema Document.
101.PRE	XBRL Taxonomy Presentation Linkbase Document.
101.LAB	XBRL Taxonomy Label Linkbase Document.
101.CAL	XBRL Taxonomy Calculation Linkbase Document.
101.DEF	XBRL Definition Linkbase Document.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	OKLAHOMA GAS AND ELECTRIC COMPANY
	(Registrant)

By:	/s/ Scott Forbes
	Scott Forbes
	Controller and Chief Accounting Officer
	(On behalf of the Registrant and in his capacity as Chief Accounting Officer)

May 3, 2012

OKLAHOMA GAS & ELECTRIC CO - FORM 10-Q - May 3, 2012

Attached files

OKLAHOMA GAS & ELECTRIC CO Reports