OG&E generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. OG&E furnishes retail electric service in 267 communities and their contiguous rural and suburban areas. The service area covers 30,000 square miles in Oklahoma and western Arkansas including Oklahoma City, the largest city in Oklahoma, and Fort Smith, Arkansas, the second largest city in that state. Of the 267 communities that OG&E serves, 241 are located in Oklahoma, and 26 are in Arkansas. OG&E derived 92 percent of its total electric operating revenues in 2019 from sales in Oklahoma and the remainder from sales in Arkansas. OG&E does not currently serve wholesale customers in either state.
OG&E's profitability depends to a large extent on the ability to fully recover its costs from its customers in a timely manner, and there may be changes in the regulatory environment that impair its ability to recover costs from its customers.
OG&E's rates are subject to rate regulation by the states of Oklahoma and Arkansas, as well as by a federal agency, whose regulatory paradigms and goals may not be consistent.
Costs of compliance with environmental laws and regulations are significant, and the cost of compliance with future environmental laws and regulations may adversely affect our results of operations, financial position or liquidity.
We may not be able to recover the costs of our substantial investments in capital improvements and additions.
Increased competition resulting from restructuring efforts could have a significant financial impact on OG&E and consequently impact our revenue.
Events that are beyond our control have increased the level of public and regulatory scrutiny of our industry. Governmental and market reactions to these events may have negative impacts on our business, financial position, results of operations, cash flows and access to capital.
We are subject to substantial utility and energy regulation by governmental agencies. Compliance with current and future utility and energy regulatory requirements and procurement of necessary approvals, permits and certifications may result in significant costs to us.
Our results of operations may be impacted by disruptions beyond our control.
OG&E's electric generation, transmission and distribution assets are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and maintenance expenses, increased purchase power costs, accidents and third-party liability.
Changes in technology, regulatory policies and customer electricity consumption may cause our assets to be less competitive and impact our results of operations.
Economic conditions could negatively impact our business and our results of operations.
We are subject to cybersecurity risks and increased reliance on processes automated by technology.
Terrorist attacks, and the threat of terrorist attacks, have resulted in increased costs to our business. Continued hostilities or sustained military campaigns may adversely impact our financial position, results of operations and cash flows.
Weather conditions such as tornadoes, thunderstorms, ice storms, wind storms, flooding, earthquakes, prolonged droughts and the occurrence of wildfires, as well as seasonal temperature variations may adversely affect our financial position, results of operations and cash flows.
Market performance, increased retirements, changes in retirement plan regulations and increasing costs associated with our Pension Plan, health care plans and other employee-related benefits may adversely affect our financial position, results of operations or cash flows.
We face certain human resource risks associated with the availability of trained and qualified labor to meet our future staffing requirements.
We may be able to incur substantially more indebtedness, which may increase the risks created by our indebtedness.
Any reductions in our credit ratings or changes in benchmark interest rates could increase our financing costs and the cost of maintaining certain contractual relationships or limit our ability to obtain financing on favorable terms.
Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.
We are exposed to the credit risk of our key customers and counterparties, and any material nonpayment or nonperformance by our key customers and counterparties could adversely affect our financial position, results of operations and cash flows.
OG&E reported net income of $350.2 million and $328.0 million, respectively, in 2019 and 2018. The increase of $22.2 million, or 6.8 percent, was primarily due to higher gross margin driven primarily by the expiration of the cogeneration credit rider, lower income tax expense and lower interest expense. This increase was partially offset by higher depreciation and amortization expense due to additional assets being placed into service, lower allowance for funds used during construction due to certain environmental projects being completed and placed into service and higher other operation and maintenance expense.
A more detailed discussion regarding the financial performance of OG&E for the year ended December 31, 2019 as compared to December 31, 2018 can be found under "Results of Operations" below. A discussion of the financial performance for the year ended December 31, 2018 compared to December 31, 2017 can be found within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in OG&E's 2018 Form 10-K.
Further discussion can be found in Note 15 within "Item 8. Financial Statements and Supplementary Data."