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Oklahoma Gas And Electric

Filed: 4 Nov 20, 7:00pm


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

FORM 10-Q

(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR

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

Commission File Number: 1-1097
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)
(Registrant's telephone number, including area code): 405-553-3000

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A

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.   Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer  
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At September 30, 2020, 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 SEPTEMBER 30, 2020

TABLE OF CONTENTS


i


GLOSSARY OF TERMS
 
The following is a glossary of frequently used abbreviations that are found throughout this Form 10-Q.
AbbreviationDefinition
2019 Form 10-KAnnual Report on Form 10-K for the year ended December 31, 2019
APSCArkansas Public Service Commission
ASUAccounting Standards Update from the Financial Accounting Standards Board
CO2
Carbon dioxide
COVID-19Novel Coronavirus disease
Dry ScrubberDry flue gas desulfurization unit with spray dryer absorber
EnableEnable Midstream Partners, LP, a midstream partnership formed between OGE Energy and CenterPoint Energy, Inc.
EPAU.S. Environmental Protection Agency
Federal Clean Air ActFederal Clean Air Act of 1970, as amended
Federal Clean Water ActFederal Water Pollution Control Act of 1972, as amended
FERCFederal Energy Regulatory Commission
FIPFederal Implementation Plan
GAAPAccounting principles generally accepted in the U.S.
MATSMercury and Air Toxics Standards
MWMegawatt
MWhMegawatt-hour
NAAQSNational Ambient Air Quality Standards
NOX
Nitrogen oxide
OCCOklahoma Corporation Commission
ODEQOklahoma Department of Environmental Quality
OG&EOklahoma Gas and Electric Company, wholly owned subsidiary of OGE Energy
OGE EnergyOGE Energy Corp., parent company of OG&E
Pension PlanQualified defined benefit retirement plan
Regional Haze RuleThe EPA's Regional Haze Rule
Restoration of Retirement Income PlanSupplemental retirement plan to the Pension Plan
SIPState Implementation Plan
SO2
Sulfur dioxide
SPPSouthwest Power Pool
System salesSales to OG&E's customers
U.S.United States of America
 
ii


FORWARD-LOOKING STATEMENTS

Except for the historical statements contained herein, the matters discussed within this Form 10-Q, including those matters discussed within "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 within "Item 1A. Risk Factors" in OG&E's 2019 Form 10-K and within "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1A. Risk Factors" of "Part II - Other Information" 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 as well as inflation rates and monetary fluctuations;
the ability to obtain timely and sufficient rate relief to allow for recovery of items such as capital expenditures, fuel costs, operating costs, transmission costs and deferred expenditures;
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;
the impact on demand for our services resulting from cost-competitive advances in technology, such as distributed electricity generation and customer energy efficiency programs;
technological developments, changing markets and other factors that result in competitive disadvantages and create the potential for impairment of existing assets;
factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages, unusual maintenance or repairs; unanticipated changes to fossil fuel, natural gas or coal supply costs or availability due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline system constraints;
availability and prices of raw materials for current and future construction projects;
the effect of retroactive pricing of transactions in the SPP markets or adjustments in market pricing mechanisms by the SPP;
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, safety laws or other regulations that may impact the cost of operations or restrict or change the way OG&E operates its facilities;
changes in accounting standards, rules or guidelines;
the discontinuance of accounting principles for certain types of rate-regulated activities;
the cost of protecting assets against, or damage due to, terrorism or cyberattacks and other catastrophic events;
creditworthiness of suppliers, customers and other contractual parties;
social attitudes regarding the utility industry;
identification of suitable investment opportunities to enhance shareholder returns and achieve long-term financial objectives through business acquisitions and divestitures;
increased pension and healthcare costs;
the impact of extraordinary external events, such as the current pandemic health event resulting from COVID-19, and their collateral consequences, including extended disruption of economic activity in our markets;
costs and other effects of legal and administrative proceedings, settlements, investigations, claims and matters, including, but not limited to, those described in this Form 10-Q; and
other risk factors listed in the reports filed by OG&E with the Securities and Exchange Commission, including those listed within "Item 1A. Risk Factors" in OG&E's 2019 Form 10-K and "Item 1A. Risk Factors" of "Part II - Other Information" herein.

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.

1


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(In millions)2020201920202019
OPERATING REVENUES
Revenues from contracts with customers$687.8 $739.2 $1,600.2 $1,717.7 
Other revenues14.3 16.2 36.7 41.4 
Operating revenues702.1 755.4 1,636.9 1,759.1 
COST OF SALES209.1 234.0 481.5 625.3 
OPERATING EXPENSES  
Other operation and maintenance110.1 130.0 348.8 370.3 
Depreciation and amortization100.5 94.1 292.2 260.8 
Taxes other than income23.9 22.3 72.8 66.8 
Operating expenses234.5 246.4 713.8 697.9 
OPERATING INCOME258.5 275.0 441.6 435.9 
OTHER INCOME (EXPENSE)  
Allowance for equity funds used during construction1.1 1.0 3.7 3.7 
Other net periodic benefit expense(1.3)(0.7)(2.8)(0.3)
Other income1.1 2.0 3.7 4.5 
Other expense(0.3)(2.4)(1.7)(3.9)
Net other income0.6 (0.1)2.9 4.0 
INTEREST EXPENSE  
Interest on long-term debt38.7 37.5 114.1 101.9 
Allowance for borrowed funds used during construction(0.5)(0.6)(1.5)(2.2)
Interest on short-term debt and other interest charges1.3 1.1 3.1 4.0 
Interest expense39.5 38.0 115.7 103.7 
INCOME BEFORE TAXES219.6 236.9 328.8 336.2 
INCOME TAX EXPENSE20.1 9.7 30.5 14.9 
NET INCOME$199.5 $227.2 $298.3 $321.3 
Other comprehensive income, net of tax0 0 
COMPREHENSIVE INCOME$199.5 $227.2 $298.3 $321.3 















The accompanying Notes to Condensed Financial Statements are an integral part hereof.
2


OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(In millions)20202019
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income$298.3 $321.3 
Adjustments to reconcile net income to net cash provided from operating activities:  
Depreciation and amortization292.2 260.8 
Deferred income taxes and investment tax credits, net23.9 8.7 
Allowance for equity funds used during construction(3.7)(3.7)
Stock-based compensation expense2.2 3.7 
Regulatory assets(8.5)(48.1)
Regulatory liabilities(48.6)(32.1)
Other assets(3.2)2.8 
Other liabilities(27.6)1.1 
Change in certain current assets and liabilities:  
Accounts receivable and accrued unbilled revenues, net(62.4)(78.6)
Fuel, materials and supplies inventories(2.0)8.0 
Fuel recoveries74.3 (44.8)
Other current assets(5.8)8.9 
Accounts payable(59.6)(54.1)
Income taxes payable - parent9.6 2.6 
Other current liabilities(0.7)(13.1)
Net cash provided from operating activities478.4 343.4 
CASH FLOWS FROM INVESTING ACTIVITIES  
Capital expenditures (less allowance for equity funds used during construction)(419.7)(476.5)
Net cash used in investing activities(419.7)(476.5)
CASH FLOWS FROM FINANCING ACTIVITIES  
Dividends paid on common stock(75.0)
Proceeds from long-term debt297.1 296.4 
Payment of long-term debt(0.1)(250.0)
Changes in advances with parent(248.7)99.9 
Net cash provided from (used in) financing activities(26.7)146.3 
NET CHANGE IN CASH AND CASH EQUIVALENTS32.0 13.2 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD0 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$32.0 $13.2 



















The accompanying Notes to Condensed Financial Statements are an integral part hereof.
3


OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
September 30,December 31,
(In millions)20202019
ASSETS  
CURRENT ASSETS  
Cash and cash equivalents$32.0 $
Accounts receivable, less reserve of $2.6 and $1.5, respectively209.0 153.8 
Accrued unbilled revenues71.9 64.7 
Advances to parent293.9 304.8 
Fuel inventories36.5 46.3 
Materials and supplies, at average cost107.0 90.6 
Fuel clause under recoveries0 39.5 
Other25.4 19.6 
Total current assets775.7 719.3 
OTHER PROPERTY AND INVESTMENTS4.4 4.7 
PROPERTY, PLANT AND EQUIPMENT  
In service13,109.1 12,765.0 
Construction work in progress128.9 141.6 
Total property, plant and equipment13,238.0 12,906.6 
Less: accumulated depreciation4,010.1 3,868.1 
Net property, plant and equipment9,227.9 9,038.5 
DEFERRED CHARGES AND OTHER ASSETS  
Regulatory assets301.6 306.0 
Other13.7 8.1 
Total deferred charges and other assets315.3 314.1 
TOTAL ASSETS$10,323.3 $10,076.6 



























The accompanying Notes to Condensed Financial Statements are an integral part hereof.
4


OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSED BALANCE SHEETS (Continued)
(Unaudited)
September 30,December 31,
(In millions)20202019
LIABILITIES AND STOCKHOLDER'S EQUITY  
CURRENT LIABILITIES  
Accounts payable$112.4 $175.0 
Customer deposits82.4 83.0 
Accrued taxes70.7 41.9 
Accrued interest40.4 37.9 
Accrued compensation24.4 29.5 
Fuel clause over recoveries39.6 4.8 
Other38.8 65.1 
Total current liabilities408.7 437.2 
LONG-TERM DEBT3,493.9 3,195.2 
DEFERRED CREDITS AND OTHER LIABILITIES  
Accrued benefit obligations115.0 133.3 
Deferred income taxes996.2 951.4 
Deferred investment tax credits10.2 7.1 
Regulatory liabilities1,199.4 1,223.5 
Other166.1 170.6 
Total deferred credits and other liabilities2,486.9 2,485.9 
Total liabilities6,389.5 6,118.3 
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDER'S EQUITY  
Common stockholder's equity1,038.8 1,036.6 
Retained earnings2,895.0 2,921.7 
Total stockholder's equity3,933.8 3,958.3 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$10,323.3 $10,076.6 

























The accompanying Notes to Condensed Financial Statements are an integral part hereof.
5


OKLAHOMA GAS AND ELECTRIC COMPANY
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Unaudited)
(In millions)Shares OutstandingCommon StockPremium on Common StockRetained EarningsTotal
Balance at December 31, 201940.4 $100.9 $935.7 $2,921.7 $3,958.3 
Net income0 0 0 19.9 19.9 
Stock-based compensation0 0 0.9 0 0.9 
Balance at March 31, 202040.4 $100.9 $936.6 $2,941.6 $3,979.1 
Net income0 0 0 78.9 78.9 
Dividends declared on common stock0 0 0 (75.0)(75.0)
Stock-based compensation0 0 0.7 0 0.7 
Balance at June 30, 202040.4 $100.9 $937.3 $2,945.5 $3,983.7 
Net income0 $0 $0 $199.5 $199.5 
Dividends declared on common stock0 0 0 (250.0)(250.0)
Stock-based compensation0 0 0.6 0 0.6 
Balance at September 30, 202040.4 $100.9 $937.9 $2,895.0 $3,933.8 
Balance at December 31, 201840.4 $100.9 $930.9 $2,571.5 $3,603.3 
Net income19.6 19.6 
Stock-based compensation1.0 1.0 
Balance at March 31, 201940.4 $100.9 $931.9 $2,591.1 $3,623.9 
Net income74.5 74.5 
Stock-based compensation1.0 1.0 
Balance at June 30, 201940.4 $100.9 $932.9 $2,665.6 $3,699.4 
Net income227.2 227.2 
Stock-based compensation1.6 1.6 
Balance at September 30, 201940.4 $100.9 $934.5 $2,892.8 $3,928.2 






















The accompanying Notes to Condensed Financial Statements are an integral part hereof.
6


OKLAHOMA GAS AND ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1.Summary of Significant Accounting Policies

OG&E's significant accounting policies are detailed in "Note 1. Summary of Significant Accounting Policies" in OG&E's 2019 Form 10-K. Changes to OG&E's accounting policies as a result of adopting ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Information" are incorporated within "Allowance for Uncollectible Accounts Receivables" below and discussed in Note 2.

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 Fort Smith, Arkansas and the surrounding communities. 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, a holding company with investments in energy and energy services providers offering physical delivery and related services for both electricity and natural gas primarily in the south-central U.S.

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 September 30, 2020 and December 31, 2019, the results of its operations for the three and nine months ended September 30, 2020 and 2019 and its cash flows for the nine months ended September 30, 2020 and 2019 have been included and are of a normal, recurring nature except as otherwise disclosed. Management also has evaluated the impact of events occurring after September 30, 2020 up to the date of issuance of these Condensed Financial Statements, and these statements contain all necessary adjustments and disclosures resulting from that evaluation.

Due to seasonal fluctuations and other factors, OG&E's operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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 2019 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 incurred 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 incurred costs and obligations as regulatory assets or liabilities if, based on regulatory orders or other available evidence, it is probable that the costs or obligations will be included in amounts allowable for recovery or refund in future rates.

7


The following table is a summary of OG&E's regulatory assets and liabilities.
September 30,December 31,
(In millions)20202019
REGULATORY ASSETS  
Current:  
SPP cost tracker under recovery (A)$4.6 $
Generation Capacity Replacement rider under recovery (A)1.2 3.7 
Fuel clause under recoveries0 39.5 
Other (A)9.7 5.5 
Total current regulatory assets$15.5 $48.7 
Non-current:  
Benefit obligations regulatory asset$150.2 $167.2 
Deferred storm expenses70.2 65.5 
Sooner Dry Scrubbers19.9 20.6 
Smart Grid13.1 18.4 
Unamortized loss on reacquired debt9.9 10.6 
Arkansas deferred pension expenses8.4 8.0 
Pension tracker8.1 2.3 
COVID-19 deferred expenses4.9 
Other16.9 13.4 
Total non-current regulatory assets$301.6 $306.0 
REGULATORY LIABILITIES  
Current:  
Fuel clause over recoveries$39.6 $4.8 
Oklahoma demand program rider over recovery (B)5.8 2.0 
Reserve for tax refund and interim surcharge (B)1.3 12.7 
SPP cost tracker over recovery (B)0 2.6 
Other (B)4.9 6.9 
Total current regulatory liabilities$51.6 $29.0 
Non-current:  
Income taxes refundable to customers, net$875.5 $899.2 
Accrued removal obligations, net318.9 318.5 
Other5.0 5.8 
Total non-current regulatory liabilities$1,199.4 $1,223.5 
(A)Included in Other Current Assets in the Condensed Balance Sheets.
(B)Included in Other Current Liabilities in the Condensed Balance Sheets.

In response to the COVID-19 pandemic, the OCC and APSC issued orders allowing OG&E to defer certain expenses related to its COVID-19 response. For additional information about these orders, see Note 12 and "Item 2. Management's Discussion and Analysis - Recent Developments."

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 or liabilities, which could have significant financial effects.

Allowance for Uncollectible Accounts Receivable

Customer balances are generally written off if not collected within six months after the final billing date. The allowance for uncollectible accounts receivable for OG&E is generally calculated by multiplying the last six months of electric revenue by the provision rate, which is based on a 12-month historical average of actual balances written off and is adjusted for current conditions and supportable forecasts as necessary. To the extent the historical collection rates, when incorporating forecasted conditions, are not representative of future collections, there could be an effect on the amount of uncollectible expense recognized, such as in response to COVID-19 impacts. Also, a portion of the uncollectible provision related to fuel within the Oklahoma jurisdiction is being recovered through the fuel adjustment clause. The allowance for uncollectible
8


accounts receivable is a reduction to Accounts Receivable in the Condensed Balance Sheets and is included in the Other Operation and Maintenance in the Condensed Statements of Income.

New business customers are required to provide a security deposit in the form of cash, bond or irrevocable letter of credit that is refunded when the account is closed. New residential customers whose outside credit scores indicate an elevated risk are required to provide a security deposit that may be refunded based on customer protection rules defined by the OCC and the APSC. The payment behavior of all existing customers is continuously monitored, and, if the payment behavior indicates sufficient risk within the meaning of the applicable utility regulation, customers will be required to provide a security deposit.

OG&E considered COVID-19 pandemic impacts when calculating its reserve on accounts receivable as of September 30, 2020, as further discussed in "Item 2. Management's Discussion and Analysis - Recent Developments."

2.Accounting Pronouncements

Recently Adopted Accounting Standards

The following table provides an overview of recently adopted accounting pronouncements and their impacts on OG&E.
ASU Number and NameDescriptionDate of AdoptionFinancial Statements and Disclosures Impact
ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Information"This standard requires entities to measure all expected credit losses of financial assets held at a reporting date based on historical experience, current conditions and reasonable and supportable forecasts in order to record credit losses in a more timely manner.January 1, 2020Utilizing a modified-retrospective approach, OG&E determined its only financial instrument requiring measurement under ASU 2016-13 is trade receivables. OG&E considers both future economic conditions and historical data to measure the reserve for trade receivables under this standard and determined no adjustments to its reserve were necessary upon adoption.
ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)"The standard aligns requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.January 1, 2020The new standard did not have a material effect on OG&E's financial statements upon adoption. Prospectively, OG&E records applicable capitalized implementation costs in Other Current Assets and related amortization expense in Other Operation and Maintenance.
ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework"The standard removes, adds or modifies disclosure requirements that impact all levels of the fair value hierarchy, as well as investments measured using the net asset value practical expedient.January 1, 2020OG&E applied the guidance on a retrospective or prospective basis, depending on the requirement, and did not experience a significant impact on its financial statement disclosures.
ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)"The standard removes, adds or clarifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.January 1, 2020OG&E applied the guidance on a retrospective basis and did not experience a significant impact on its financial statement disclosures.
ASU 2020-04, "Reference Rate Reform (Topic 848)"This standard provides optional expedients and exceptions, if certain criteria are met, for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.January 1, 2020The guidance did not have a material impact upon adoption, nor does OG&E expect a material impact in the future, on its financial statements.

9


3.Revenue Recognition

The following table disaggregates OG&E's revenues from contracts with customers by customer classification. OG&E's operating revenues disaggregated by customer classification can be found in "Results of Operations" within "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Three Months EndedNine Months Ended
September 30,September 30,
(In millions)2020201920202019
Residential$294.9 $318.9 $664.6 $692.4 
Commercial156.7 172.9 361.0 383.7 
Industrial59.3 66.8 145.5 172.0 
Oilfield50.6 58.6 127.2 156.9 
Public authorities and street light57.8 65.7 133.1 150.2 
   System sales revenues619.3 682.9 1,431.4 1,555.2 
Provision for rate refund4.8 (2.3)3.2 (2.9)
Integrated market18.0 12.8 33.7 29.8 
Transmission35.0 36.7 109.0 112.6 
Other10.7 9.1 22.9 23.0 
Revenues from contracts with customers$687.8 $739.2 $1,600.2 $1,717.7 

4.Related Party Transactions
 
OGE Energy charges operating costs to OG&E based on several factors, and operating costs directly related to OG&E are assigned as such. Operating costs incurred for the benefit of OG&E are allocated either as overhead based primarily on labor costs or using the "Distrigas" method, which is a three-factor formula that uses an equal weighting of payroll, net operating revenues and gross property, plant and equipment.

OGE Energy charged operating costs to OG&E of $32.7 million and $37.0 million during the three months ended September 30, 2020 and 2019, respectively, and $107.5 million and $109.9 million during the nine months ended September 30, 2020 and 2019, respectively.

Enable provides gas transportation services to OG&E pursuant to an agreement that grants Enable the responsibility of delivering natural gas to OG&E's generating facilities and performing an imbalance service. With this imbalance service, in accordance with the cash-out provision of the contract, OG&E purchases gas from Enable when Enable's deliveries exceed OG&E's pipeline receipts. Enable purchases gas from OG&E when OG&E's pipeline receipts exceed Enable's deliveries. The following table summarizes related party transactions between OG&E and Enable during the three and nine months ended September 30, 2020 and 2019.
Three Months EndedNine Months Ended
September 30,September 30,
(In millions)2020201920202019
Operating revenues:
Electricity to power electric compression assets$4.5 $4.5 $11.7 $12.1 
Cost of sales:
Natural gas transportation services$9.3 $9.4 $23.4 $33.5 
Natural gas purchases (sales)$3.2 $(1.1)$2.2 $(5.4)

5.Fair Value Measurements

The classification of OG&E's fair value measurements requires judgment regarding the degree to which market data is 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
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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.  

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 had 0 financial instruments measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019. The following table summarizes the carrying amount and fair value of OG&E's financial instruments at September 30, 2020 and December 31, 2019.
 September 30,December 31,
20202019
(In millions)Carrying Amount Fair
Value
Carrying Amount  Fair
Value
Classification
Long-term Debt (including Long-term Debt due within one year):
Senior Notes$3,349.0 $4,116.5 $3,050.3 $3,500.4 Level 2
Industrial Authority Bonds$135.4 $135.4 $135.4 $135.4 Level 2
Tinker Debt$9.5 $10.6 $9.5 $10.0 Level 3

6.Stock-Based Compensation

The following table summarizes OG&E's pre-tax compensation expense and related income tax benefit during the three and nine months ended September 30, 2020 and 2019 related to OGE Energy's performance units and restricted stock units for OG&E employees.
Three Months Ended September 30,Nine Months Ended September 30,
(In millions)2020201920202019
Performance units:  
Total shareholder return$0.5 $0.8 $1.8 $2.3 
Earnings per share0 0.8 0.1 1.1 
Total performance units0.5 1.6 1.9 3.4 
Restricted stock units0.1 0.1 0.3 0.3 
Total compensation expense$0.6 $1.7 $2.2 $3.7 
Income tax benefit$0.2 $0.4 $0.6 $0.9 

During the three and nine months ended September 30, 2020, OGE Energy purchased 150,000 and 405,000 shares of its common stock, respectively, and 89,225 of these shares were used during March 2020 to satisfy payouts of earned performance units to OG&E employees pursuant to OGE Energy's Stock Incentive Plan. OGE Energy intends to use the remaining shares to satisfy payouts of earned performance units and restricted stock unit grants pursuant to its Stock Incentive Plan. The shares were purchased at an average cost of $38.04 and $33.14 per share on the open market during March 2020 and August 2020, respectively.


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7.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 or state and local examinations by tax authorities for years prior to 2016. 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 will be amortized to income over the life of the related property. Additionally, OG&E earns federal tax credits associated with production from its wind facilities. Oklahoma production and investment state tax credits are also earned on investments in electric and solar generating facilities which further reduce OG&E's effective tax rate.

8.Long-Term Debt

At September 30, 2020, OG&E was in compliance with all of its debt agreements.

Industrial Authority Bonds

OG&E has tax-exempt pollution control bonds with optional redemption provisions that allow the holders to request repayment of the bonds on any business day. The bonds, which can be tendered at the option of the holder during the next 12 months, are included in the following table.
SeriesDate DueAmount
  (In millions)
0.30%-5.35%Garfield Industrial Authority, January 1, 2025$47.0 
0.33%-4.31%Muskogee Industrial Authority, January 1, 202532.4 
0.30%-5.35%Muskogee Industrial Authority, June 1, 202756.0 
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 Balance Sheets. OG&E believes that it has sufficient liquidity to meet these obligations.

Issuance of Long-Term Debt

In April 2020, OG&E issued $300.0 million of 3.25 percent senior notes due April 1, 2030. The proceeds from the issuance were added to OG&E's general funds to be used for general corporate purposes, including to fund ongoing capital expenditures and working capital.

9.Short-Term Debt and Credit Facility

OG&E has a $450.0 million revolving credit facility that matures on March 8, 2023. This facility is available to back up OG&E's commercial paper borrowings, to provide revolving credit borrowings and can also be used as a letter of credit facility. At September 30, 2020, there were $0.3 million supporting letters of credit outstanding at a weighted-average interest rate of 1.15 percent. There were 0 outstanding commercial paper borrowings at September 30, 2020.

At September 30, 2020, there were $293.9 million in advances to OGE Energy compared to $304.8 million at December 31, 2019. OG&E has an intercompany borrowing agreement with OGE Energy whereby OG&E has access to up to $350.0 million of OGE Energy's revolving credit amount. This agreement has a termination date of March 8, 2023. At September 30, 2020, there were 0 intercompany borrowings under this agreement.

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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 rating 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 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 $800.0 million in short-term borrowings at any one time for a two-year period beginning January 1, 2019 and ending December 31, 2020. OG&E has requested renewal of this authority for an additional two-year period and expects to receive approval prior to the expiration of its current authority.
 
10.Retirement Plans and Postretirement Benefit Plans

In accordance with ASC Topic 715, "Compensation - Retirement Benefits," a one-time settlement charge is required to be recorded by an organization when lump sum payments or other settlements that relieve the organization from the responsibility for the pension benefit obligation during the plan year exceed the service cost and interest cost components of the organization's net periodic pension cost. During the nine months ended September 30, 2020, OG&E experienced an increase in both the number of employees electing to retire and the amount of lump sum payments paid to such employees upon retirement, which resulted in OG&E recording pension settlement charges of $10.8 million. The pension settlement charge did not require a cash outlay by OG&E and did not increase OG&E's total pension expense over time, as the charge was an acceleration of costs that otherwise would be recognized as pension expense in future periods.
 
Net Periodic Benefit Cost

The following table presents the net periodic benefit cost components, before consideration of capitalized amounts, of OG&E's portion of OGE Energy's Pension Plan, Restoration of Retirement Income Plan and postretirement benefit plans that are included in the Condensed Financial Statements. Service cost is presented within Other Operation and Maintenance, and the remaining net periodic benefit cost components as listed in the table below are presented within Other Net Periodic Benefit Expense in OG&E's Condensed Statements of Income. OG&E recovers specific amounts of pension and postretirement medical costs in rates approved in its Oklahoma rate reviews. In accordance with approved orders, OG&E defers the difference between actual pension and postretirement medical expenses and the amount approved in its last Oklahoma rate review as a regulatory asset or regulatory liability. These amounts have been recorded in the Pension tracker in the regulatory assets and liabilities table in Note 1 and within Other Net Periodic Benefit Expense in OG&E's Condensed Statements of Income.

 Pension PlanRestoration of Retirement
Income Plan
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(In millions)20202019202020192020201920202019
Service cost$2.3 $2.3 $6.8 $6.7 $0 $$0.1 $0.1 
Interest cost3.2 3.5 10.0 11.7 0 0.1 0.1 
Expected return on plan assets(7.0)(7.2)(20.9)(20.7)0 0 
Amortization of net loss3.0 3.3 9.0 9.7 0.1 0.1 0.3 0.3 
Settlement cost10.3 1.7 10.3 12.9 0.5 0.3 0.5 0.3 
Total net periodic benefit cost11.8 3.6 15.2 20.3 0.6 0.4 1.0 0.8 
Plus: Amount allocated from OGE Energy1.5 0.9 2.5 3.5 0.2 0.2 0.8 0.4 
Net periodic benefit cost$13.3 $4.5 $17.7 $23.8 $0.8 $0.6 $1.8 $1.2 

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In addition to the net periodic benefit cost amounts recognized, as presented in the table above, for the Pension and Restoration of Retirement Income Plans for the three and nine months ended September 30, 2020 and 2019, OG&E recognized the following:
Three Months EndedNine Months Ended
September 30,September 30,
(In millions)2020201920202019
Increase (decrease) of pension expense to maintain allowed recoverable amount in Oklahoma jurisdiction (A)(B)$2.4 $1.5 $5.7 $(0.2)
Deferral of pension expense related to pension settlement charges:
Oklahoma jurisdiction (A)(B)$10.8 $2.3 $11.1 $14.0 
Arkansas jurisdiction (A)(B)$1.0 $0.2 $1.0 $1.3 
(A)Included in the pension regulatory asset or liability in each jurisdiction, as indicated in the regulatory assets and liabilities table in Note 1.
(B)Includes a portion of OGE Energy's pension expense.

Postretirement Benefit Plans
Three Months EndedNine Months Ended
September 30,September 30,
(In millions)2020201920202019
Service cost$0 $$0.1 $0.1 
Interest cost0.8 1.1 2.4 3.2 
Expected return on plan assets(0.4)(0.4)(1.2)(1.3)
Amortization of net loss0.5 0.6 1.6 1.7 
Amortization of unrecognized prior service cost (A)(1.5)(1.6)(4.6)(4.6)
Total net periodic benefit cost(0.6)(0.3)(1.7)(0.9)
Plus: Amount allocated from OGE Energy(0.2)(0.2)(0.6)(0.5)
Net periodic benefit cost$(0.8)$(0.5)$(2.3)$(1.4)
(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.

In addition to the net periodic benefit income amounts recognized, as presented in the table above, for the postretirement benefit plans for the three and nine months ended September 30, 2020 and 2019, OG&E recognized the following:
Three Months EndedNine Months Ended
September 30,September 30,
(In millions)2020201920202019
Increase of postretirement expense to maintain allowed recoverable amount in Oklahoma jurisdiction (A)(B)$0.4 $0.1 $1.2 $0.9 
(A)Included in the Pension tracker, as presented in the regulatory assets and liabilities table in Note 1.
(B)Includes a portion of OGE Energy's pension expense.

Three Months EndedNine Months Ended
September 30,September 30,
(In millions)2020201920202019
Capitalized portion of net periodic pension benefit cost$0.8 $0.7 $2.3 $2.2 
Capitalized portion of net periodic postretirement benefit cost$0 $$0.1 $0.1 

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Pension Plan Funding

In August 2020, OGE Energy contributed $20.0 million to its Pension Plan, of which $5.0 million was attributed to OG&E. No additional contributions are expected in 2020.

11.Commitments and Contingencies

Except as set forth below, in Note 12 and under "Environmental Laws and Regulations" in Item 2 of Part I and in Item 1 of Part II of this Form 10-Q, the circumstances set forth in Notes 14 and 15 to OG&E's Financial Statements included in OG&E's 2019 Form 10-K appropriately represent, in all material respects, the current status of OG&E's material commitments and contingent liabilities.

Environmental Laws and Regulations
The activities of OG&E are subject to numerous stringent and complex federal, state and local laws and regulations governing environmental protection. These laws and regulations can change, restrict or otherwise impact OG&E's business activities in many ways, including the handling or disposal of waste material, planning for future construction activities to avoid or mitigate harm to threatened or endangered species and requiring the installation and operation of emissions or pollution control equipment. Failure to comply with these laws and regulations could result in the assessment of administrative, civil and criminal penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations. Management believes that all of its operations are in substantial compliance with current federal, state and local environmental standards.

Environmental regulation can increase the cost of planning, design, initial installation and operation of OG&E's facilities. Management continues to evaluate its compliance with existing and proposed environmental legislation and regulations and implement appropriate environmental programs in a competitive market.

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 or claims made by third parties, including governmental agencies. When appropriate, management consults with legal counsel and other 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. At the present time, based on currently available information, OG&E believes that any reasonably possible losses in excess of accrued amounts arising out of pending or threatened lawsuits or claims would not be quantitatively material to its financial statements and would not have a material adverse effect on OG&E's financial position, results of operations or cash flows.

12.Rate Matters and Regulation

Except as set forth below, the circumstances set forth in Note 15 to the Financial Statements included in OG&E's 2019 Form 10-K appropriately represent, in all material respects, the current status of OG&E's regulatory matters.

Completed Regulatory Matters

APSC Proceedings

Arkansas 2019 Formula Rate Plan Filing

OG&E filed its second evaluation report under its Formula Rate Plan in October 2019. On February 28, 2020, the APSC approved a settlement agreement among OG&E, the General Staff of the APSC and the Office of the Arkansas Attorney General providing for a $5.2 million revenue increase, with rates effective April 1, 2020. The settling parties agreed that the Series I grid modernization projects are prudent in both action and cost and that the Series II grid modernization projects are prudent in action only and the determination of prudence of costs will be reserved until the actual historical costs are reviewed. The settling parties also agreed that OG&E will no longer use projections for the remaining initial term or extension of its current Formula Rate Plan and that all costs will be included for recovery for the first time in the historical year.




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Order Regarding COVID-19

On April 10, 2020, the APSC issued Order No. 1 related to COVID-19 and the provision of safe, adequate and reliable utility service at just and reasonable rates. Among other things, the APSC ordered the suspension of customer disconnects for non-payment during the pendency of the Arkansas Governor's emergency declaration or until the directive is rescinded by the APSC, neither of which have occurred yet, although the APSC has requested comments as to whether the moratorium should be lifted. The order encourages companies to provide reasonable payment arrangements once the suspension is lifted. The APSC also authorized utilities to establish regulatory assets to record costs resulting from the suspension of disconnections. These regulatory assets will be reviewed in future proceedings for reasonableness. The APSC ordered the General Staff of the APSC to consult with utilities to create a quarterly report to be used to report the costs incurred and saved that have been booked to the regulatory asset. OG&E is monitoring the regulatory activity regarding COVID-19 at the APSC and will consider the request for additional regulatory action by the APSC as needed.

On May 1, 2020, OG&E filed a Request for Additional Actions and Tariff Deviation seeking relief from the Arkansas General Service Rules and OG&E's Terms and Conditions under the tariff, in order to allow for: more flexible deferred payment agreements for all customer classes, suspension of increased deposits due to non-payment and suspension of the removal of customers from certain billing and extended due date plans for late payments. In addition, OG&E requested that incremental expenses, such as additional personal protective equipment, increased sanitation efforts at facilities, implementing health-screening processes and securing temporary facilities for potential sequestration of critical operation personnel, be tracked in a regulatory asset. OG&E noted that all possible cost categories are not known currently and reserved the right to file subsequent requests as needed.

On May 27, 2020, the APSC issued an order approving OG&E's request to deviate from the specified terms in the Arkansas General Service Rules and OG&E's Terms and Conditions to allow deferred payment arrangements to be offered to all customer classes and have more flexible payment arrangements. OG&E is authorized to record the expenses requested in its regulatory asset to defer and seek future recovery. The APSC found that because each utility has different cost recovery mechanisms and the magnitude of the utilities' expenses are unknown at this time, the APSC finds that it is premature to decide the exact recovery mechanism for any utility for COVID-19 related costs.

Environmental Compliance Plan Rider

In May 2019, OG&E filed an environmental compliance plan rider in Arkansas to recover its investment for the environmentally mandated costs associated with the Sooner Dry Scrubbers project and the conversion of Muskogee Units 4 and 5 to natural gas. The filing initiated an interim surcharge, subject to refund, that began with the first billing cycle of June 2019. OG&E had been reserving the amounts collected through the interim surcharge, pending APSC approval of OG&E's filing. A hearing on the merits was held in December 2019. Parties submitted additional briefs to the APSC in March 2020, which were requested due to certain intervenors questioning whether a company can utilize an environmental compliance plan rider while also being regulated under a formula rate plan. The APSC Staff concurred with OG&E that the rider may run concurrently with a formula rate plan, and the Arkansas Attorney General and other intervenors were in opposition. On July 31, 2020, OG&E's request to recover its investment for these environmentally mandated costs through the interim surcharge was not approved, as the APSC indicated OG&E could otherwise recover this investment, such as through the Formula Rate Plan Rider. As of September 30, 2020, OG&E has returned $5.3 million to customers that had been reserved for refund and has included those costs for recovery in its 2020 Formula Rate Plan filing.

OCC Proceedings

OCC Public Utility Division Motion Regarding COVID-19

On April 28, 2020, the Director of the Public Utility Division filed an application requesting an order from the OCC authorizing action in response to COVID-19. The application requested that the OCC authorize the State's utilities to record as a regulatory asset increased bad debt expenses, costs associated with expanded payment plans, waived fees and incremental expenses that are directly related to the suspension of or delay in disconnection of service beginning March 15, 2020, which coincides with the issuance of the Oklahoma Governor's emergency declaration. The application also requested that the OCC allow utilities to defer additional expenses associated with ensuring the continuity of utility service, such as additional personal protective equipment, increased sanitation efforts at facilities, implementing heath-screening processes and securing temporary facilities for potential sequestration of critical operation personnel. The application asked the OCC to consider in future proceedings whether each utility's request for recovery of these regulatory assets is reasonable and necessary and to consider issues such as the incremental bad debt experienced over normal periods, the appropriate period of recovery for any approved amount of regulatory asset, any amount of carrying costs and other related matters.

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On May 7, 2020, the OCC ordered that each utility is authorized to record as a regulatory asset any increased bad debt expense, cost associated with expanded payment plans, waived fees and incremental expenses that are directly related to the suspension of or delay in disconnection of service beginning March 15, 2020 until September 2020, unless otherwise ordered by the OCC. The OCC will consider in future proceedings whether each utility's request for recovery of these regulatory assets is reasonable and necessary. The OCC will also consider issues such as the incremental bad debt experienced over normal periods, appropriate period of recovery for any approved amount of regulatory assets, any amounts of carrying costs thereon and other related matters. The OCC also authorized utilities to defer expenses associated with ensuring continuity of service and protecting utility personnel, customers and the general public.

Pending Regulatory Matters

Various proceedings pending before state or federal regulatory agencies are described below. Unless stated otherwise, OG&E cannot predict when the regulatory agency will act or what action the regulatory agency will take. OG&E's financial results are dependent in part on timely and adequate decisions by the regulatory agencies that set OG&E's rates.

FERC Proceedings

Order for Sponsored Transmission Upgrades within SPP

Under the SPP Open Access Transmission Tariff, costs of participant-funded, or "sponsored," transmission upgrades may be recovered from other SPP customers whose transmission service depends on capacity enabled by the upgrade. The SPP Open Access Transmission Tariff required the SPP to charge for these upgrades beginning in 2008, but the SPP had not been charging its customers for these upgrades due to information system limitations. However, the SPP had informed participants in the market that these charges would be forthcoming. In July 2016, the FERC granted the SPP's request to recover the charges not billed since 2008. The SPP subsequently billed OG&E for these charges and credited OG&E related to transmission upgrades that OG&E had sponsored, which resulted in OG&E being a net receiver of sponsored upgrade credits. The majority of these net credits were refunded to customers through OG&E's various rate riders that include SPP activity with the remaining amounts retained by OG&E.

Several companies that were net payers of Z2 charges sought rehearing of the FERC's July 2016 order; however, in November 2017, the FERC denied the rehearing requests. In January 2018, one of the impacted companies appealed the FERC's decision to the U.S. Court of Appeals for the District of Columbia Circuit. In July 2018, that court granted a motion requested by the FERC that the case be remanded back to the FERC for further examination and proceedings. In February 2019, the FERC reversed its July 2016 order and November 2017 rehearing denial, ruled that the SPP violated its tariff to charge for the 2008 - 2015 period in 2016, held that the SPP tariff provision that prohibited those charges could not be waived and ordered the SPP to develop a plan to refund the payments but not to implement the refunds until further ordered to do so. In response, in April 2019, OG&E filed a request for rehearing with the FERC, and in May 2019, OG&E filed a FERC 206 complaint against the SPP, alleging that the SPP's forced unwinding of the revenue credit payments to OG&E would violate the provisions of the Sponsored Upgrade Agreement and of the applicable tariff. OG&E's filing requested that the FERC rule that the SPP is not entitled to seek refunds or in any other way seek to unwind the revenue credit payments it had paid to OG&E pursuant to the Sponsored Upgrade Agreement. The SPP's response to OG&E's filing agreed that OG&E should be entitled to keep its Z2 payments and argued that the SPP should not be held responsible for those payments if refunds are ordered. Further, the SPP has requested the FERC to negotiate a global settlement with all impacted parties, including other project sponsors who, like OG&E, have also filed complaints at FERC contending that the payments they have received cannot properly be unwound.

On February 20, 2020, the FERC denied OG&E's request for rehearing of its February 2019 order, denying the waiver and ruling that the SPP must seek refunds from project sponsors for Z2 payments for the 2008 through 2015 period and pay them back to transmission owners. The FERC also denied the SPP's request for a stay and for institution of settlement procedures. The FERC stated it would not institute settlement procedures unless parties on both sides of the matter requested them. The FERC did not rule on OG&E's complaint or the complaints of other project sponsors, or consider the SPP's refund plan. The FERC thus has not set any date for payment of refunds. On March 2, 2020, OG&E petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review of the FERC's order denying the waiver and requiring refunds. The appeal will likely be decided by the second quarter of 2021.

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OG&E cannot predict the outcome of this proceeding based on currently available information, and as of September 30, 2020 and at present time, OG&E has not reserved an amount for a potential refund. If the reversal of the July 2016 FERC order remains intact, OG&E estimates it would be required to refund $13.0 million, which is net of amounts paid to other utilities for upgrades and would be subject to interest at the FERC-approved rate. If refunds were required, recovery of these upgrade credits would shift to future periods. Of the $13.0 million, OG&E would be impacted by $5.0 million in expense that initially benefited OG&E in 2016, and OG&E customers would incur a net impact of $8.0 million in expense through rider mechanisms or the FERC formula rate.

On January 31, 2020, the FERC acted on an SPP proposal to eliminate Attachment Z2 revenue crediting and replace it with a different rate mechanism that would provide project sponsors, such as OG&E, the same level of recovery, and rejected the proposal to the extent it would limit recovery to the amount of the upgrade sponsor's directly assigned upgrade costs with interest. The SPP resubmitted a proposal on April 29, 2020 without this limited recovery, and with the alternative rate mechanism, and the FERC approved it on June 30, 2020, effective July 1, 2020. No party sought rehearing of the order, and it is now final. This order would only prospectively impact OG&E and its recovery of any future upgrade costs that it may incur as a project sponsor. All of the existing projects that are eligible to receive revenue credits under Attachment Z2, which includes the $13.0 million at issue in OG&E's appeal as discussed above, will continue to do so.

APSC Proceedings

Arkansas 2020 Formula Rate Plan Filing

On October 1, 2020, OG&E filed its third evaluation report under its Formula Rate Plan. If approved, new rates will be effective April 1, 2021.

Net Metering Order

On June 1, 2020, the APSC revised its net-metering rules. The revised rules retained 1:1 full credit for net excess generation of residential customers and commercial customers up to 1 MW without demand charges. For larger commercial customers, 1 MW to 20 MW, the APSC found that some cost shifting to non-net-metering customers may occur. While the rules retain 1:1 full credit for net excess generation, they allow for a grid charge. The grid charge is initially set at zero; however, a utility may request approval to revise the grid charge based on evidence that an unreasonable cost shift to non-net-metering customers is occurring. OG&E does not currently have a significant number of net-metering customers in Arkansas. OG&E is reviewing its existing net-metering tariffs considering the new rules and will request the APSC approve any changes that are believed to be necessary.

Disconnection Procedures Related to COVID-19

On September 17, 2020, the APSC issued Order No. 9 inviting comments from all jurisdictional utilities and any other interested stakeholders on specific questions related to whether a moratorium on service terminations should be lifted and if so, how the resumption of disconnections should occur. The APSC also ordered utilities to submit a detailed "Transitional Plan" outlining how utilities propose to reinstate routine service disconnection activities and collection of past due amounts once the moratorium is lifted. OG&E submitted its proposed Transitional Plan on October 14, 2020. The APSC General Staff is directed to file reports addressing the adequacy of Investor Owned Utilities' Transitional Plans by November 5, 2020.

Arkansas Solar

On July 29, 2020, OG&E submitted its application for a Certificate of Public Convenience and Necessity to construct and operate a five megawatt solar generation facility near Branch, Arkansas. On September 30, 2020, the parties reached a unanimous settlement agreement relating to the filing. The terms of the settlement, which is subject to approval by the APSC, are as follows: (i) parties agree that OG&E has complied with Arkansas law and rules of practice and procedure and recommend granting a Certificate of Public Convenience and Necessity for the construction, ownership and operation of the project and associated tariffs; (ii) OG&E agrees that it would not seek cost recovery until its next general rate review or Formula Rate Plan filing; (iii) OG&E agrees to keep detailed records of final cost, for review at such time that cost recovery is sought, including all cost variance estimates, whereby a determination of prudency of cost may be made; and (iv) OG&E agrees to reserve 50 percent of the total expected energy produced for residential customers for the first 90 days of the program's initial subscription period. OG&E is awaiting a final order from the APSC, which is expected by the end of November 2020.




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OCC Proceedings

Oklahoma Grid Enhancement Plan

On February 24, 2020, OG&E filed an application with the OCC for approval of a mechanism that allows for interim recovery of the costs associated with its grid enhancement plan. The plan includes approximately $800.0 million of strategic, data-driven investments, over five years, covering grid resiliency, grid automation, communication systems and technology platforms and applications. On May 19, 2020, the OCC temporarily suspended the procedural schedule in light of various conditions related to the COVID-19 pandemic and the uncertainty surrounding the method and date in which the hearing on the merits may occur. On July 9, 2020, a prehearing conference was held before the Administrative Law Judge to establish a procedural schedule and lift the stay ordered on May 19, 2020. On July 23, 2020, the OCC issued an order approving the amended procedural schedule and thereby lifting the stay.

On October 5, 2020, OG&E filed a Joint Stipulation and Settlement Agreement that included the following key terms: (i) cost recovery through a rider mechanism will be limited to projects placed in service in 2020 and 2021, capped at a revenue requirement of $7.0 million annually and only include communication, automation and technology systems projects; (ii) no operation and maintenance expense will be included in the rider mechanism; (iii) the rider mechanism will terminate by the issuance of a final order in OG&E's next general rate review or October 31, 2022, whichever occurs first; (iv) the rider mechanism rate of return will be capped at OG&E's current cost of capital; and (v) all cost recovery is subject to true-up and refund in OG&E's next general rate review. On October 8, 2020, a hearing on the agreement was held. The Administrative Law Judge recommended approval of the Joint Stipulation and Settlement Agreement and directed OG&E to prepare a draft order, on which the OCC is scheduled to deliberate on November 5, 2020.

Any capital investment falling outside the criteria of the rider mechanism will be included in OG&E's next general rate review for recovery.

2019 Oklahoma Fuel Prudency

On June 16, 2020, the Public Utility Division Staff filed their application initiating the review of the 2019 fuel adjustment clause and prudence review and on October 7, 2020, filed their recommendation for a finding of prudency for calendar year 2019. A hearing on the merits is scheduled for December 3, 2020.

Oklahoma Retail Electric Supplier Certified Territory Act Causes

Several rural electric cooperative electricity suppliers have filed complaints with the OCC alleging that OG&E has violated the Oklahoma Retail Electric Supplier Certified Territory Act. OG&E believes it is lawfully serving customers specifically exempted from this act and has presented evidence and testimony to the OCC supporting its position. There have been five complaint cases initiated at the OCC, and the OCC has issued decisions on each of them. The OCC ruled in favor of the electric cooperatives in three of those cases and ruled in favor of OG&E in two of those cases. All five of those cases have been appealed to the Oklahoma Supreme Court, where they have been made companion cases but will be individually briefed and have individual final decisions.

If the Oklahoma Supreme Court ultimately were to find that some or all of the customers being served are not exempted from the Oklahoma Retail Electric Supplier Certified Territory Act, OG&E would have to evaluate the recoverability of some plant investments made to serve these customers. The total amount of OG&E's plant investments made to serve the customers in all five cases is approximately $28.0 million, of which $11.7 million applies to the three cases where the OCC ruled in favor of the electric cooperatives. In addition to the evaluation of the recoverability of the investments, OG&E may also be required to reimburse certified territory suppliers for an amount of lost revenue. The amount of such lost revenue would depend on how the OCC calculates the revenue requirement but could range from approximately $13.0 million to $20.0 million for all five cases, of which $1.1 million to $1.8 million would apply to the three cases where the OCC ruled in favor of the electric cooperatives.




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

Introduction
 
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 Fort Smith, Arkansas and the surrounding communities. 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, a holding company with investments in energy and energy services providers offering physical delivery and related services for both electricity and natural gas primarily in the south-central U.S.

Overview

OG&E Mission and Focus

OGE Energy's mission, through OG&E and OGE Energy's equity interest in Enable, is to fulfill its critical role in the nation's electric utility and natural gas midstream pipeline infrastructure and meet individual customer's needs for energy and related services, focusing on safety, efficiency, reliability, customer service and risk management.

Recent Developments

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the U.S. and world. In an effort to contain COVID-19 or slow its spread, the U.S. federal, state and local governments enacted various measures, including orders to close or place restrictions on businesses not deemed "essential," enact "shelter in place" restrictions on residents and practice social distancing when engaging in essential activities. The COVID-19 outbreak has adversely impacted global markets and activity, including the energy industry, and it is impossible to predict the ultimate impact of the COVID-19 pandemic, as the situation continues to evolve. In Oklahoma City, OG&E's largest service territory, the mayor's "shelter in place" order required residents to stay home except for certain "essential" activities and closed down restaurant dining rooms, personal care services and other businesses that posed a high risk for spreading COVID-19. The order was effective from March 16, 2020 to April 30, 2020. Beginning May 1, 2020, Oklahoma City began its phased "re-opening," and there are currently no city-wide or state-wide "shelter in place" restrictions.

OG&E's current and potential future responses to the COVID-19 impacts on its employees, customers and shareholders are further discussed below.

OG&E's top priority is to protect its employees and their families, as well as its customers. OG&E is taking all precautionary measures as directed by health authorities and local and national governments. OG&E continues to monitor the outbreak of COVID-19 and whether any occupancy reductions or closures are necessary to help ensure the health and safety of its employees and customers. In order to promote the safety of OG&E's employees and the continuity of utility service, OG&E implemented health-screening processes and increased sanitation efforts at its facilities and secured additional personal protective equipment, among other additional measures taken. The OCC and the APSC both issued accounting orders allowing OG&E to defer these incremental costs incurred for recovery.
As a precautionary measure in order to increase OGE Energy's cash position and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic, OGE Energy entered into a one-year $75.0 million term loan agreement in April 2020. The full $75.0 million was repaid in September 2020. Further, OG&E issued $300.0 million in senior notes in April 2020.
In March 2020, President Trump signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act, or the "CARES Act," which is aimed at addressing the economic disruption resulting from the COVID-19 pandemic and providing certain tax relief to businesses in the U.S. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of the employer portion of FICA payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. OG&E concluded that the financial impact of the provisions it adopted is immaterial.
OG&E voluntarily suspended all disconnects for nonpayment, effective March 16, 2020, and on June 25, 2020 announced that it would reinstate disconnects for nonpayment in Oklahoma, effective July 6, 2020. OG&E also
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announced that it will provide broad payment options to customers who repay their past due balances, including a six-month installment plan and the Average Monthly Billing plan which would spread past due balances over a 12-month period. The Arkansas disconnection moratorium is still in place. OG&E adjusted its reserve on accounts receivable as of September 30, 2020 in light of the current expected credit loss model (ASU 2016-13) and the COVID-19 pandemic. The adjustment, which was $1.0 million, incorporated concerns of continued slower customer payment due to unemployment. OG&E deferred this credit reserve amount to a regulatory asset, as both the OCC and the APSC issued accounting orders allowing OG&E to seek recovery of incremental bad debt resulting from COVID-19. OG&E will continue to monitor the reserve as it gains better clarity on the impacts of COVID-19 on its customers and business.
OG&E is also monitoring customer usage to determine any impact on load forecasts, in terms of both energy and demand usage. While other customer classes have experienced declines due to COVID-19, residential MWh sales have increased by 3.3 percent on a weather-adjusted basis for the nine months ended September 30, 2020 compared to the same period in 2019, likely due to more customers spending a higher percentage of time at home as a result of the pandemic. However, weather-adjusted commercial MWh sales, as well as industrial MWh sales, have improved since the second quarter, likely aided by the expiration of Oklahoma City's "shelter in place" restrictions in May 2020. Oilfield MWh sales have also improved since the second quarter. Due to different customer characteristics, the contribution to margin varies by customer class and applicable tariffs. The below table presents a one percent annual gross margin sensitivity by class, based on the gross margin guidance OG&E provided in its 2019 Form 10-K. OG&E believes providing this analysis based on annual gross margin is relevant due to its seasonality of earnings. This analysis only incorporates retail gross margin and excludes transmission and other gross margin sensitivities.

Customer Class
1% Annual Margin Sensitivity
(In millions)
Residential$6.5 
Commercial$3.6 
Industrial$1.3 
Oilfield$1.1 
Public authorities$1.2 

October 2020 Ice Storm

On October 26, 2020, a major ice storm moved into OG&E's territory where three separate waves of sleet, freezing rain and high winds caused significant damage to the system resulting in approximately 422,000 outages. OG&E's restoration personnel, including contractors and mutual assistance crews, are working to restore power. Operation and maintenance expense incurred during the ice-storm restoration will be deferred to a regulatory asset and subsequently submitted for recovery in rates.

Regulatory Matters

Further discussion can be found in Note 12 within "Item 1. Financial Statements."

Arkansas 2019 Formula Rate Plan Filing

OG&E filed its second evaluation report under its Formula Rate Plan in October 2019. On February 28, 2020, the APSC approved a settlement agreement among OG&E, the General Staff of the APSC and the Office of the Arkansas Attorney General providing for a $5.2 million revenue increase, with rates effective April 1, 2020. The settling parties agreed that the Series I grid modernization projects are prudent in both action and cost and that the Series II grid modernization projects are prudent in action only and the determination of prudence of costs will be reserved until the actual historical costs are reviewed. The settling parties also agreed that OG&E will no longer use projections for the remaining initial term or extension of its current Formula Rate Plan and that all costs will be included for recovery for the first time in the historical year.

APSC Order Regarding COVID-19

On May 27, 2020, the APSC issued an order approving OG&E's request to deviate from the specified terms in the Arkansas General Service Rules and OG&E's Terms and Conditions to allow deferred payment arrangements to be offered to all customer classes and have more flexible payment arrangements. OG&E is also authorized to defer to a regulatory asset
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certain incremental expenses, such as additional personal protective equipment, increased sanitation efforts at facilities, implementing health-screening processes and securing temporary facilities for potential sequestration of critical operation personnel, and seek future recovery. The APSC found that it is premature to decide at this time the exact recovery mechanism for any utility for COVID-19 related costs.

OCC Public Utility Division Motion Regarding COVID-19

On May 7, 2020, the OCC ordered that the State's utilities, including OG&E, are authorized to record as a regulatory asset any increased bad debt expense, cost associated with expanded payment plans, waived fees and incremental expenses that are directly related to the suspension of or delay in disconnection of service beginning March 15, 2020 until September 2020, unless otherwise ordered by the OCC. The OCC will consider in future proceedings whether each utility's request for recovery of these regulatory assets is reasonable and necessary. The OCC will also consider issues such as the incremental bad debt experienced over normal periods, appropriate period of recovery for any approved amount of regulatory assets, any amounts of carrying costs thereon and other related matters. The OCC also authorized utilities to defer expenses associated with ensuring continuity of service and protecting utility personnel, customers and the general public.

APSC Environmental Compliance Plan Rider

In May 2019, OG&E filed an environmental compliance plan rider in Arkansas to recover its investment for the environmentally mandated costs associated with the Sooner Dry Scrubbers project and the conversion of Muskogee Units 4 and 5 to natural gas. The filing initiated an interim surcharge, subject to refund, that began with the first billing cycle of June 2019. On July 31, 2020, OG&E's request to recover its investment for these environmentally mandated costs through the interim surcharge was not approved, as the APSC indicated OG&E could otherwise recover this investment, such as through the Formula Rate Plan Rider. As of September 30, 2020, OG&E has returned $5.3 million to customers that had been reserved for refund and has included those costs for recovery in its 2020 Formula Rate Plan filing.

Summary of Operating Results

Three Months Ended September 30, 2020 as compared to the Three Months Ended September 30, 2019

OG&E reported net income of $199.5 million and $227.2 million during three months ended September 30, 2020 and 2019, respectively, a decrease of $27.7 million, or 12.2 percent, primarily due to lower gross margin driven by milder weather and lower sales partially impacted by COVID-19, higher depreciation and amortization expense due to additional assets being placed into service and higher income tax expense, partially offset by lower other operation and maintenance expense.

Nine Months Ended September 30, 2020 as compared to the Nine Months Ended September 30, 2019

OG&E reported net income of $298.3 million and $321.3 million during the nine months ended September 30, 2020 and 2019, respectively, a decrease of $23.0 million, or 7.2 percent, primarily due to higher depreciation and amortization expense due to additional assets being placed into service, gross margin reductions from milder weather and COVID-19 impacts, higher income tax expense and higher interest expense driven by increased long-term debt outstanding. These decreases to net income were partially offset by increases to gross margin driven by recovery of additional assets placed into service through the expiration of the cogeneration credit rider and lower other operation and maintenance expense.

2020 Outlook
OG&E projects to earn approximately $336 million to $340 million, a decrease from the previously issued guidance of approximately $346 million to $357 million of net income, in 2020. The updated projections for 2020 are based on the following:

normal weather patterns are experienced for the remainder of the year;
gross margin on revenues of approximately $1.482 billion to $1.484 billion;
operating expenses of approximately $956 million to $958 million with operation and maintenance expenses comprising approximately 49 percent of the total;
net interest expense of approximately $155 million which assumes a $2 million allowance for borrowed funds used during construction reduction to interest expense;
net other income of approximately $1 million including approximately $4.9 million of allowance for equity funds used during construction; and
an effective tax rate of approximately 9.4 percent.
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Non-GAAP Financial Measures

Gross margin is defined by OG&E as operating revenues less cost of sales. Cost of sales, as reflected on the income statement, includes fuel, purchased power and certain transmission expenses. Gross margin is a non-GAAP financial measure because it excludes depreciation and amortization and other operation and maintenance expenses. Expenses for fuel and purchased power are recovered through fuel adjustment clauses, and as a result, changes in these expenses are offset in operating revenues with no impact on net income. OG&E believes gross margin provides a more meaningful basis for evaluating its operations across periods than operating revenues because gross margin excludes the revenue effect of fluctuations in these expenses. Gross margin is used internally to measure performance against budget and in reports for management and the Board of Directors. OG&E's definition of gross margin may be different from similar terms used by other companies. Further, gross margin is not intended to replace operating revenues as determined in accordance with GAAP as an indicator of operating performance. For a reconciliation of gross margin to revenue, which is the most directly comparable financial measure calculated and presented in accordance with GAAP, for the three and nine months ended September 30, 2020 and 2019, see "Results of Operations" below.

Detailed below is a reconciliation of gross margin to revenue included in the 2020 Outlook.
(In millions)Twelve Months Ended December 31, 2020
(A)
Operating revenues$2,108 
Cost of sales625 
Gross margin$1,483 
(A)Based on the midpoint of OG&E earnings guidance for 2020.

Results of Operations

The following discussion and analysis presents factors that affected OG&E's results of operations for the three and nine months ended September 30, 2020 as compared to the same periods in 2019 and OG&E's financial position at September 30, 2020. Due to seasonal fluctuations and other factors, OG&E's operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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. 

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Three Months EndedNine Months Ended
September 30,September 30,
(Dollars in millions)2020201920202019
Operating revenues$702.1 $755.4 $1,636.9 $1,759.1 
Cost of sales209.1 234.0 481.5 625.3 
Other operation and maintenance110.1 130.0 348.8 370.3 
Depreciation and amortization100.5 94.1 292.2 260.8 
Taxes other than income23.9 22.3 72.8 66.8 
Operating income258.5 275.0 441.6 435.9 
Allowance for equity funds used during construction1.1 1.0 3.7 3.7 
Other net periodic benefit expense(1.3)(0.7)(2.8)(0.3)
Other income1.1 2.0 3.7 4.5 
Other expense0.3 2.4 1.7 3.9 
Interest expense39.5 38.0 115.7 103.7 
Income tax expense20.1 9.7 30.5 14.9 
Net income$199.5 $227.2 $298.3 $321.3 
Operating revenues by classification:
Residential$302.7 $328.0 $683.4 $710.0 
Commercial160.3 176.6 370.5 396.7 
Industrial60.5 68.1 148.8 176.0 
Oilfield51.1 59.4 129.2 159.5 
Public authorities and street light59.0 67.0 136.2 154.3 
Sales for resale —  0.1 
System sales revenues633.6 699.1 1,468.1 1,596.6 
Provision for rate refund4.8 (2.3)3.2 (2.9)
Integrated market18.0 12.8 33.7 29.8 
Transmission35.0 36.7 109.0 112.6 
Other10.7 9.1 22.9 23.0 
Total operating revenues$702.1 $755.4 $1,636.9 $1,759.1 
Reconciliation of gross margin to revenue:
Operating revenues$702.1 $755.4 $1,636.9 $1,759.1 
Cost of sales209.1 234.0 481.5 625.3 
Gross margin$493.0 $521.4 $1,155.4 $1,133.8 
MWh sales by classification (In millions)
Residential3.0 3.2 7.4 7.6 
Commercial1.9 2.1 4.9 5.1 
Industrial1.1 1.2 3.1 3.4 
Oilfield1.1 1.2 3.2 3.5 
Public authorities and street light0.9 1.0 2.2 2.4 
System sales8.0 8.7 20.8 22.0 
Integrated market0.7 0.3 1.5 0.9 
Total sales8.7 9.0 22.3 22.9 
Number of customers865,259 855,904 865,259 855,904 
Weighted-average cost of energy per kilowatt-hour (In cents)
Natural gas2.137 1.943 1.935 2.234 
Coal1.772 2.025 1.838 2.005 
Total fuel1.931 1.857 1.787 2.002 
Total fuel and purchased power2.302 2.528 2.058 2.616 
Degree days (A)
Heating - Actual29 — 1,980 2,277 
Heating - Normal19 19 2,023 2,023 
Cooling - Actual1,163 1,477 1,745 1,958 
Cooling - Normal1,382 1,382 2,021 2,021 
(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.
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OG&E's net income decreased $27.7 million, or 12.2 percent, and $23.0 million, or 7.2 percent, during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. Primary drivers for these decreases in net income are further discussed below.
Gross margin decreased $28.4 million, or 5.4 percent, and increased $21.6 million, or 1.9 percent, during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The below factors contributed to the changes in gross margin.
$ Change
(In millions)Three Months EndedNine Months Ended
Quantity impacts (primarily weather) (A)$(34.4)$(30.4)
Industrial and oilfield sales(3.8)(8.5)
Non-residential demand and related revenues(3.8)(6.3)
Other(0.1)(2.0)
Price variance (B)9.8 59.7 
New customer growth3.9 9.1 
Change in gross margin (C)$(28.4)$21.6 
(A)Decreased primarily due to a 21.3 percent and 10.9 percent decrease in cooling degree days for the three and nine months ended September 30, 2020, respectively, as well as a 13.0 percent decrease in heating degree days for the nine months ended September 30, 2020.
(B)Increased for the nine months ended September 30, 2020 primarily due to recovery of additional assets placed into service through the expiration of the cogeneration credit rider in the second half of 2019.
(C)Gross margin for both the three and nine months ended September 30, 2020 was impacted by COVID-19, particularly as seen in the negative impacts within industrial and oilfield sales and non-residential demand and related revenues.

Cost of sales for OG&E consists of fuel used in electric generation, purchased power and transmission related charges. The actual cost of fuel used in electric generation and certain purchased power costs are passed through to OG&E's customers through fuel adjustment clauses. The fuel adjustment clauses are subject to periodic review by the OCC and the APSC. OG&E's cost of sales decreased $24.9 million, or 10.6 percent, and $143.8 million, or 23.0 percent, during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The below factors contributed to the changes in cost of sales.
$ Change% Change
(In millions)Three Months EndedNine Months EndedThree Months EndedNine Months Ended
Fuel expense (A)$18.5 $(15.0)16.7 %(5.6)%
Purchased power costs:
Purchases from SPP (B)(38.6)(116.5)(46.7)%(49.0)%
Cogeneration (C)(2.9)(14.6)(100.0)%(100.0)%
Wind (D)(2.7)1.4 (19.9)%3.5 %
Other(0.3)(0.3)(5.2)%(3.5)%
Transmission expense1.1 1.2 6.6 %2.3 %
Change in cost of sales$(24.9)$(143.8)
(A)Increased primarily due to higher fuel usage related to the generating assets utilized and decreased primarily due to lower fuel costs related to the generating assets utilized during the three and nine months ended September 30, 2020, respectively.
(B)Decreased primarily due to lower market prices as a result of decreased fuel costs for generators along with decreased MWhs purchased of 27.5 percent and 12.1 percent for the three and nine months ended September 30, 2020, respectively.
(C)Decreased primarily due to the expiration of cogeneration contracts in 2019.
(D)Decreased primarily due to a decrease of 19.1 percent in MWs purchased and increased primarily due to an increase of 4.7 percent in MWs purchased during the three and nine months ended September 30, 2020, respectively.

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Other operation and maintenance expense decreased $19.9 million, or 15.3 percent, and $21.5 million, or 5.8 percent, during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The below factors contributed to the changes in other operation and maintenance expense.
$ Change% Change
(In millions)Three Months EndedNine Months EndedThree Months EndedNine Months Ended
Contract technical and construction services$(6.9)$(13.1)(50.8)%(33.2)%
Capitalized labor(4.5)(6.5)(16.8)%(8.1)%
Other(4.2)(5.3)(5.9)%(2.6)%
Payroll and benefits(2.7)0.9 (4.4)%0.5 %
Materials and supplies(1.0)(4.3)(15.0)%(21.5)%
New expenses related to River Valley power plant (A)(0.6)6.8 (10.5)%(97.8)%
Change in other operation and maintenance expense (B)$(19.9)$(21.5)

(A)Additional other operation and maintenance expenses related to the purchase of the River Valley plant are primarily recovered through a rider mechanism, as approved by the OCC in 2019.
(B) OG&E has been focused on reducing other operation and maintenance activities in light of COVID-19. Further, certain incremental expenses incurred by OG&E related to its COVID-19 response have been deferred and are included in the regulatory assets and liabilities table in Note 1 within "Item 1. Financial Statements."

Depreciation and amortization expense increased $6.4 million, or 6.8 percent, and $31.4 million, or 12.0 percent, during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019, primarily due to additional assets being placed into service. The increase during the nine months ended September 30, 2020 was also impacted by depreciation expense for the Sooner Dry Scrubbers no longer being deferred to a regulatory asset.

Taxes other than income increased $1.6 million, or 7.2 percent, and $6.0 million, or 9.0 percent, during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019, primarily due to increased ad valorem taxes.

Interest on long-term debt increased $12.2 million, or 12.0 percent, during the nine months ended September 30, 2020, as compared to the same period in 2019, primarily due to increased long-term debt outstanding and interest expense for the Sooner Dry Scrubbers no longer being deferred to a regulatory asset.

Income tax expense increased $10.4 million and $15.6 million during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019, primarily due to reduced tax credit generation and amortization of net unfunded deferred taxes, partially offset by reduced taxes on lower pretax income.

Off-Balance Sheet Arrangements

There have been no significant changes in OG&E's off-balance sheet arrangements from those discussed in OG&E's 2019 Form 10-K.


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Liquidity and Capital Resources

Cash Flows
Nine Months Ended
September 30,2020 vs. 2019
(Dollars in millions)20202019$ Change% Change
Net cash provided from operating activities (A)$478.4 $343.4 $135.0 39.3 %
Net cash used in investing activities (B)$(419.7)$(476.5)$56.8 (11.9)%
Net cash provided from (used in) financing activities (C)$(26.7)$146.3 $(173.0)*
* Change is greater than 100 percent variance.
(A)Increased primarily due to a decrease in payments for purchased power.
(B)Decreased primarily due to environmental projects that were completed and placed into service as well as fewer plant outages in 2020, partially offset by increased reliability projects.
(C)Increased primarily due to changes in cash advances with parent and an increase in dividends paid, partially offset by the payment of long-term debt in January 2019.

Working Capital

Working capital is defined as the difference in current assets and current liabilities. OG&E's working capital requirements are driven generally by changes in accounts receivable, accounts payable, commodity prices, credit extended to and the timing of collections from customers, the level and timing of spending for maintenance and expansion activity, inventory levels and fuel recoveries. The following discussion addresses changes in working capital balances at September 30, 2020 compared to December 31, 2019.

Cash and Cash Equivalents increased $32.0 million, primarily due to normal business operations. OG&E expects to use the cash over time for general corporate purposes.

Accounts Receivable and Accrued Unbilled Revenues increased $62.4 million, or 28.6 percent, primarily due to an increase in billings to OG&E's retail customers reflecting higher seasonal usage in September 2020 as compared to December 2019, as well as increased customer balances due to the disconnection moratorium related to COVID-19, as discussed in "Recent Developments - COVID-19 Pandemic."

Advances to Parent decreased $10.9 million, or 3.6 percent, primarily due to a decrease in daily operational expenses, capital expenditures and dividends declared but not paid, partially offset by cash from customers and proceeds from long-term debt in April 2020.

Fuel Inventories decreased $9.8 million, or 21.2 percent, primarily due to decreased coal inventory.

Materials and Supplies increased $16.4 million, or 18.1 percent, primarily due to increased materials and supplies inventory acquired for upcoming projects.

Fuel Clause Under Recoveries decreased $39.5 million, primarily due to increased collections from customers and lower fuel costs.

Other Current Assets increased $5.8 million, or 29.6 percent, primarily due to an increase in under-recovered riders and SPP transmission formula rate, partially offset by decreased prepaid insurance.

Accounts Payable decreased $62.6 million, or 35.8 percent, primarily due to the timing of vendor payments and lower fuel costs.

Accrued Taxes increased $28.8 million, or 68.7 percent, primarily due to the timing of ad valorem payments and deferment of the employer portion of FICA payroll taxes as allowed by the CARES Act.

Accrued Compensation decreased $5.1 million, or 17.3 percent, primarily due to lower accruals for incentive compensation due to 2019 payouts that occurred in the first quarter of 2020.

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Fuel Clause Over Recoveries increased $34.8 million, primarily due to increased collections from customers and lower fuel costs.

Other Current Liabilities decreased $26.3 million, or 40.4 percent, primarily due to changes in amounts owed to customers which includes an $18.9 million reduction in SPP reserves related to the transmission formula rate.

Future Capital Requirements
 
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, 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, which represent base maintenance capital expenditures plus capital expenditures for known and committed projects, for the years 2020 through 2024 are discussed in detail within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in OG&E's 2019 Form 10-K. Additional capital expenditures beyond those identified in OG&E's 2019 Form 10-K, including additional incremental growth opportunities in electric transmission assets, will be evaluated based upon their impact upon achieving OG&E's financial objectives. OG&E remains on track for its approximately $575.0 million in capital investment planned for 2020 as disclosed in OG&E's 2019 Form 10-K. However, the progression of, and global response to, the COVID-19 outbreak increases the risk of delays in construction activities and equipment deliveries related to OG&E's capital projects, including potential delays in obtaining permits from government agencies, resulting in potential deferral of capital expenditures in future periods.

Financing Activities and 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 OGE Energy's 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. As indicated above, as a precautionary measure in order to increase OG&E's cash position and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic, OGE Energy entered into a one-year $75.0 million term loan agreement in April 2020, which was repaid in September 2020. Further, OG&E issued $300.0 million in senior notes in April 2020. The disruption in the capital markets and the commercial paper markets caused by the COVID-19 outbreak could make additional financing more challenging, and there can be no assurance that OG&E will be able to obtain such financing on commercially reasonable terms or at all.

Short-Term Debt and Credit Facility

OG&E has a $450.0 million revolving credit facility that matures on March 8, 2023. This facility is available to back up OG&E's commercial paper borrowings, to provide revolving credit borrowings and can also be used as a letter of credit facility. At September 30, 2020, there were $293.9 million in advances to OGE Energy compared to $304.8 million at December 31, 2019. OG&E has an intercompany borrowing agreement with OGE Energy whereby OG&E has access to up to $350.0 million of OGE Energy's revolving credit amount. This agreement has a termination date of March 8, 2023. The following table highlights OG&E's short-term debt activity as of September 30, 2020.
(Dollars in millions)September 30, 2020
Balance of outstanding supporting letters of credit$0.3 
Weighted-average interest rate of outstanding supporting letters of credit1.15 %
Balance of outstanding commercial paper borrowings$— 
Net available liquidity under revolving credit agreements$449.7 
Balance of outstanding intercompany borrowings with OGE Energy$— 

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OG&E has the necessary regulatory approvals to incur up to $800.0 million in short-term borrowings at any one time for a two-year period beginning January 1, 2019 and ending December 31, 2020. OG&E has requested renewal of this authority for an additional two-year period and expects to receive approval prior to the expiration of its current authority. See Note 9 within "Item 1. Financial Statements" for further discussion of OG&E's short-term debt activity.

Issuance of Long-Term Debt

In April 2020, OG&E issued $300.0 million of 3.25 percent senior notes due April 1, 2030. The proceeds from the issuance were added to OG&E's general funds to be used for general corporate purposes, including to fund ongoing capital expenditures and working capital.

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 rating 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 OGE Energy or OG&E could also lead to higher long-term borrowing costs and, if below investment grade, would require OG&E to post 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.

On April 3, 2020, S&P's Global Ratings affirmed its issuer credit and commercial paper ratings, as listed in OGE Energy's 2019 Form 10-K, for both OGE Energy and OG&E. S&P's Global Ratings also affirmed both companies' stable outlooks. S&P's Global Ratings' affirmation follows the announcement that Enable will increase the level of cash it retains, which effectively reduces dividend distributions for OGE Energy by as much as half. However, S&P's Global Ratings indicated it does not expect OGE Energy's credit quality to weaken materially, given the cushion in its current financial measures. Further, S&P's Global Ratings indicated they continue to view OG&E as insulated from OGE Energy, reflecting the combination of OG&E's stronger stand-alone credit profile and sufficient separateness between OG&E and OGE Energy.

On June 24, 2020, Moody's Investors Service issued an opinion to update its credit analysis for OGE Energy and OG&E, in light of COVID-19 developments. Moody's Investors Service indicated it expects OGE Energy and its subsidiaries, including OG&E, to be resilient to recessionary pressures related to COVID-19 because of OGE Energy's and OG&E's primary rate regulated, essential service business model and cost recovery framework. Nevertheless, Moody's Investors Service indicated it is watching for electric usage declines, utility bill payment delinquency and the regulatory response to counter these effects on earnings and cash flow. Further, Moody's Investor Service indicated that the effects of the pandemic could result in financial metrics that are weaker than expected but see these issues as temporary and not reflective of the core operations or long-term financial or credit profile of OGE Energy and OG&E. Moody's Investor Service indicated that it views OG&E's regulatory relationships in Oklahoma as generally supportive and is a key credit driver for both OGE Energy and OG&E. Additionally, while Enable's quarterly distribution reduction is credit negative, Moody's Investor Service indicated OGE Energy's financial metrics are expected to remain solid.

On July 27, 2020, S&P's Global Ratings issued their annual update for OG&E, indicating their issuer credit rating, commercial paper rating and outlook for OG&E are unchanged from those affirmed on April 3, 2020. In the update, S&P's Global Ratings indicated they believe OG&E is less vulnerable to volumetric decline caused by COVID-19 due to OG&E's limited commercial and industrial exposure, and any potential reduction in commercial and industrial load growth is expected to be mitigated by OG&E's large residential customer base. Further, S&P's Global Ratings indicated it expects OG&E to manage its regulatory risk effectively through its numerous constructive regulatory mechanisms.

On October 16, 2020, Fitch Ratings affirmed its long-term and short-term issuer credit ratings for both OGE Energy and OG&E. The outlooks for both OGE Energy and OG&E are stable. Fitch Ratings indicated that OGE Energy's ratings and outlook primarily reflect the stable cash flows and earnings from OG&E, which help mitigate the operating risks and dividend distribution reduction from OGE Energy's investment in Enable. Fitch Ratings also indicated that OG&E's overall supportive regulatory framework is a key ratings driver. Further, Fitch Ratings indicated that it expects the financial impact from COVID-19 to be manageable and that there are no major operational issues at this time. Fitch Ratings indicated that this expectation is supported by Oklahoma re-opening in May and regulatory recovery mechanisms approved by the OCC and the APSC for incremental bad debt expense and other incremental costs incurred during OGE Energy's response to COVID-19.
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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 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 include the determination of Pension Plan assumptions, income taxes, contingency reserves, asset retirement obligations, depreciable lives of property, plant and equipment, 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 within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in OG&E's 2019 Form 10-K.

Commitments and Contingencies
 
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 or claims made by third parties, including governmental agencies. When appropriate, management consults with legal counsel and other 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. At the present time, based on available information, OG&E believes that any reasonably possible losses in excess of accrued amounts arising out of pending or threatened lawsuits or claims would not be quantitatively material to its financial statements and would not have a material adverse effect on OG&E's financial position, results of operations or cash flows. See Notes 11 and 12 within "Item 1. Financial Statements" for a discussion of OG&E's commitments and contingencies.

Environmental Laws and Regulations
 
The activities of OG&E are subject to numerous, stringent and complex federal, state and local laws and regulations governing environmental protection. These laws and regulations can change, restrict or otherwise impact OG&E's business activities in many ways, including the handling or disposal of waste material, planning for future construction activities to avoid or mitigate harm to threatened or endangered species and requiring the installation and operation of emissions or pollution control equipment. Failure to comply with these laws and regulations could result in the assessment of administrative, civil and criminal penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations. Management believes that all of its operations are in substantial compliance with current federal, state and local environmental standards. These environmental laws and regulations are also discussed in detail within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in OG&E's 2019 Form 10-K.

Environmental regulation can increase the cost of planning, design, initial installation and operation of OG&E's facilities. Management continues to evaluate its compliance with existing and proposed environmental legislation and regulations and implement appropriate environmental programs in a competitive market.
 
Air
 
Federal Clean Air Act Overview

OG&E's operations are subject to the Federal Clean Air Act as amended and comparable state laws and regulations. These laws and regulations regulate emissions of air pollutants from various industrial sources, including electric generating units and also impose various monitoring and reporting requirements. Such laws and regulations may require that OG&E obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of existing air emissions, obtain and strictly comply with air permits containing various emissions and operational limitations or install emission control equipment. OG&E likely will be required to incur certain capital expenditures in the future for air pollution control equipment and technology in connection with obtaining and maintaining operating permits and approvals for air emissions.
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Cross-State Air Pollution Rule

On September 7, 2016, the EPA finalized an update to the 2011 Cross-State Air Pollution Rule. The new rule applies to ozone-season NOX emissions from power plants in 22 eastern states (including Oklahoma). The rule utilizes a cap and trade program for NOX emissions and went into effect on May 1, 2017 in Oklahoma. The 2016 rule reduces the 2011 Cross-State Air Pollution Rule emissions cap for all of OG&E's coal and gas facilities (except the River Valley and Frontier facilities which were not owned by OG&E until 2019) by 47 percent combined. OG&E and numerous other parties filed petitions for judicial and administrative review of the 2016 rule. On September 13, 2019, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion that partially remanded the Cross-State Air Pollution Rule update and also deferred a decision on our challenges to the rule pending an EPA review and decision on a separate administrative petition that we filed. Subsequently, all of OG&E's judicial challenges were voluntarily dismissed, but the administrative petitions for reconsideration remain pending at the EPA. On October 30, 2020, the EPA published a proposed rule to revise the 2016 update rule and address the 2019 remand. OG&E is currently reviewing the proposal, which does not propose any additional reductions in the emissions budget for Oklahoma based on a preliminary determination that the state does not cause or contribute to nonattainment of the ambient air quality standards in the relevant downwind areas.

OG&E continues to monitor these processes and their possible impact on its operations but, at this time, cannot determine with any certainty whether they will cause a material impact to OG&E's financial results. OG&E is in compliance with the 2016 rule requirements which remain in effect. OG&E does not anticipate, at this time, additional capital expenditures for compliance with the 2016 rule.

Hazardous Air Pollutants Emission Standards

On February 16, 2012, the EPA published the final MATS rule regulating the emissions of certain hazardous air pollutants from electric generating units. OG&E complied with the MATS rule by the April 16, 2016 deadline that applied to OG&E's coal units. On May 22, 2020, the EPA published a final rule which reconsidered certain elements of the 2012 rule in response to litigation in the D.C. Circuit Court. In the final rule, the EPA concluded that it is not "appropriate and necessary" to regulate MATS-related emissions from coal-fired units. Nonetheless, the EPA retained the emissions limits that were established in the 2012 rule, which remains in effect today. Petitions for judicial review of the final May 2020 rule have been filed at the D.C. Circuit Court.

National Ambient Air Quality Standards

The EPA is required to set NAAQS for certain pollutants considered to be harmful to public health or the environment. The Clean Air Act requires the EPA to review each NAAQS every five years. As a result of these reviews, the EPA periodically has taken action to adopt more stringent NAAQS for those pollutants. If any areas of Oklahoma were to be designated as not attaining the NAAQS for a particular pollutant, OG&E could be required to install additional emission controls on its facilities to help the state achieve attainment with the NAAQS. As of September 30, 2020, no areas of Oklahoma had been designated as non-attainment for pollutants that are likely to affect OG&E's operations.

The EPA proposed to designate part of Muskogee County, in which OG&E's Muskogee Power Plant is located, as non-attainment for the 2010 SO2 NAAQS on March 1, 2016, even though nearby monitors indicated compliance with the NAAQS. The proposed designation was based on modeling that did not reflect the conversion of two of the coal units at Muskogee to natural gas. The State of Oklahoma's monitoring preliminarily indicates that ambient SO2 emissions in the area are well within the NAAQS. After evaluation by Oklahoma and the EPA of the designation proposed in 2016, on August 13, 2020, the EPA notified Oklahoma that it intends to designate Muskogee County as attainment/unclassifiable. The EPA has indicated that it anticipates finalizing a designation at the end of 2020. At this time, OG&E cannot determine with any certainty whether the proposed designation of Muskogee County will cause a material impact to OG&E's financial results.

OG&E continues to monitor these processes and their possible impact on its operations but, at this time, cannot determine with any certainty whether they will cause a material impact to OG&E's financial results.

Climate Change and Greenhouse Gas Emissions

There is continuing discussion and evaluation of possible global climate change in certain regulatory and legislative arenas. The focus is generally on emissions of greenhouse gases, including CO2, sulfur hexafluoride and methane, and whether these emissions are contributing to the warming of the earth's atmosphere. On November 4, 2019, President Trump announced that the U.S. has officially notified the United Nations that the U.S. will withdraw from the "Paris Agreement" on climate
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change after having announced in 2017 that the U.S. would begin negotiations to re-enter the agreement with different terms. A new agreement may result in future additional emissions reductions in the U.S.; however, it is not possible to determine what the international legal standards for greenhouse gas emissions will be in the future and the extent to which these commitments will be implemented through the Clean Air Act or any other existing statutes and new legislation.

If legislation or regulations are passed at the federal or state levels in the future requiring mandatory reductions of CO2 and other greenhouse gases on OG&E's facilities, this could result in significant additional compliance costs that would affect OG&E's future financial position, results of operations and cash flows if such costs are not recovered through regulated rates. Several states outside the area where OG&E operates have passed laws, adopted regulations or undertaken regulatory initiatives to reduce the emission of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs.
OG&E's current business strategy has resulted in reduced carbon dioxide emissions by over 40 percent compared to 2005 levels, and during the same period, emissions of ozone-forming NOx have been reduced by approximately 75 percent and emissions of SO2 have been reduced by approximately 90 percent. OG&E expects to further reduce carbon dioxide emissions to 50 percent of 2005 levels by 2030. To comply with the EPA's MATS rule and Regional Haze Rule FIP, OG&E converted two coal-fired generating units at the Muskogee Station to natural gas, among other measures. OG&E's deployment of Smart Grid technology helps to reduce the peak load demand. OG&E is also deploying more renewable energy sources that do not emit greenhouse gases. OG&E's service territory borders one of the nation's best wind resource areas, and OG&E has leveraged its geographic position to develop renewable energy resources and completed transmission investments to deliver the renewable energy. The SPP has authorized the construction of transmission lines capable of bringing renewable energy out of the wind resource areas in western Oklahoma, the Texas Panhandle and western Kansas to load centers by planning for more transmission to be built in the area. In addition to increasing overall system reliability, these new transmission resources should provide greater access to additional wind resources that are currently constrained due to existing transmission delivery limitations.

On July 8, 2019, the EPA published the Affordable Clean Energy rule. Numerous parties, not including OG&E, have filed petitions for judicial review of the Affordable Clean Energy rule in the U.S. Court of Appeals for the District of Columbia Circuit. Oral argument was held on October 8, 2020. The Affordable Clean Energy rule requires states, including Oklahoma, to develop emission limitations for carbon dioxide for each existing coal-fired utility boiler within the state, including all of OG&E's coal units, and submit a compliance and implementation plan to the EPA by July 2022. The EPA will approve or disapprove the proposed state plan within 18 months of submittal and develop a federal implementation plan if the proposed state plan is disapproved. At this time, OG&E cannot determine with any certainty whether the implementation plan will cause a material impact to its financial results.

EPA Startup, Shutdown and Malfunction Policy

On May 22, 2015, the EPA issued a final rule to address the provisions in the SIPs of 36 states (including Oklahoma) regarding the treatment of emissions that occur during startup, shutdown and malfunction operations. The final rule clarifies the EPA's Startup, Shutdown and Malfunction Policy. Although judicial challenges to the rule are ongoing, the ODEQ submitted a SIP revision for the EPA's approval on November 7, 2016 to comply with this rule. This rule has resulted in permit modifications for certain OG&E units and applications remain pending for other units. OG&E does not anticipate capital expenditures, or a material impact to its financial position, results of operations or cash flows, as a result of adoption of this rule.

Regional Haze Regulation - Second Planning Period

In January 2017, the EPA finalized a rule that would revise certain provisions of the Regional Haze Rule. Notably, the EPA extended the due date for the second Regional Haze implementation period by three years to 2021 and made changes to the provisions for impacts to national parks and other protected wilderness areas. Petitions for Reconsideration to the EPA were filed by industry groups. While not acting on the petitions, the EPA announced on January 17, 2018 that it intends to commence a notice-and-comment rulemaking revisiting certain aspects of the rule. During 2019, the EPA released technical resources to assist states in developing SIPs, including a significant non-binding guidance document and updated atmospheric modeling which will allow states to better account for international emissions affecting regional haze in the U.S. On July 1, 2020, the ODEQ notified OG&E that the Horseshoe Lake generating units are to be included in the state's evaluation of visibility impairment impacts to the Wichita Mountains. OG&E conducted an analysis of all potential control measures for NOx on these units and submitted it to the ODEQ on September 15, 2020. The ODEQ will identify any cost-effective control measures in a Regional Haze SIP, to be submitted to the EPA for approval by July 31, 2021. It is unknown at this time what the outcome, or any potential material impacts, will be from the evaluations by OG&E, the ODEQ and the EPA.

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Endangered Species

Certain federal laws, including the Bald and Golden Eagle Protection Act, the Migratory Bird Treaty Act and the Endangered Species Act, provide special protection to certain designated species. These laws and any state equivalents provide for significant civil and criminal penalties for unpermitted activities that result in harm to or harassment of certain protected animals and plants, including damage to their habitats. If such species are located in an area in which OG&E conducts operations, or if additional species in those areas become subject to protection, OG&E's operations and development projects, particularly transmission, wind or pipeline projects, could be restricted or delayed, or OG&E could be required to implement expensive mitigation measures.

Vegetation Management

On July 10, 2020, the U.S. Department of Agriculture – Forest Service published a final rule which updates procedures for creating operating plans and agreements for powerline facility maintenance and vegetation management within and abutting the linear boundary of a special use authorization for a powerline facility within Forest Service lands. This rule codifies the memorandum of understanding between utilities such as OG&E and the Forest Service regarding vegetation management best practices. All companies will be required to have an approved operating plan or agreement with the Forest Service. OG&E will be required to submit a draft operating plan to the Forest Service by August 10, 2023 for ongoing maintenance and vegetation management activities located within the Ozark National Forest in Arkansas.

Waste

OG&E's operations generate wastes that are subject to the Federal Resource Conservation and Recovery Act of 1976 as well as comparable state laws which impose detailed requirements for the handling, storage, treatment and disposal of waste.

In 2015, the EPA finalized a rule under the Federal Resource Conservation and Recovery Act for the handling and disposal of coal combustion residuals or coal ash. The rule regulates coal ash as a solid waste rather than a hazardous waste, which would have made the management of coal ash more costly. In August 2019, the EPA proposed revisions to the 2015 coal ash rule in response to the D.C. Circuit Court of Appeals issuing a decision regarding the ongoing Coal Combustion Residuals litigation. The proposed changes do not appear to be material to OG&E at this time. OG&E completed the clean closure of one regulated inactive coal ash impoundment in August 2019.

On June 28, 2018, the EPA approved the State of Oklahoma's application for a state coal ash permitting program that will operate in lieu of the federal coal ash program promulgated under the Federal Resource Conservation and Recovery Act. On September 26, 2018, a citizen suit was filed against the EPA in the U.S. District Court in the District of Columbia concerning the final approval, which was decided upon in the EPA's favor on April 15, 2020 and has subsequently been appealed.

OG&E currently recycles and provides approximately 89 percent of its ash to the concrete and cement industries for use as a component within their products. Using fly ash in this way enables aggregate manufacturers to minimize their impact on the environment by avoiding the need to extract and process other natural resources.

OG&E has sought and will continue to seek pollution prevention opportunities and to evaluate the effectiveness of its waste reduction, reuse and recycling efforts. OG&E obtains refunds from the recycling of scrap metal, salvaged transformers and used transformer oil. Additional savings are expected to be gained through the reduction and/or avoidance of disposal costs and the reduction in material purchases due to the reuse of existing materials. Similar savings are anticipated in future years.

Water

OG&E's operations are subject to the Federal Clean Water Act and comparable state laws and regulations. These laws and regulations impose detailed requirements and strict controls regarding the discharge of pollutants into state and federal waters.
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The EPA issued a final rule on May 19, 2014 to implement Section 316(b) of the Federal Clean Water Act, which requires that power plant cooling water intake structure location, design, construction and capacity reflect the best available technology for minimizing their adverse environmental impact via the impingement and entrainment of aquatic organisms. The ODEQ issued final permits on December 22, 2017 and August 22, 2018 for Muskogee Power Plant and Seminole Power Plant, respectively, in compliance with the final 316(b) rule, and OG&E did not incur any material costs associated with the rule's implementation at either location. OG&E expects to be able to provide a reasonable estimate of any material costs associated with the rule's implementation at other facilities following the future issuance of permits from the State of Oklahoma.

In 2015, the EPA issued a final rule addressing the effluent limitation guidelines for power plants under the Federal Clean Water Act. The final rule establishes technology- and performance-based standards that may apply to discharges of six waste streams including bottom ash transport water. Compliance with this rule will occur by 2023; however, on April 12, 2017, the EPA granted a Petition for Reconsideration of the 2015 Rule. On October 13, 2020, the EPA published a final rule to revise the technology-based effluent limitations for flue gas desulfurization waste water and bottom ash transport water. In light of the final rule, OG&E is evaluating what, if any, compliance actions are needed but is not able to quantify with any certainty what costs may be incurred. OG&E expects to be able to provide a reasonable estimate of any material costs associated with the rule's implementation following issuance of the permits from the State of Oklahoma.

On April 21, 2020, the EPA and U.S. Army Corps of Engineers published in the Federal Register "The Navigable Waters Protection Rule: Definition of Waters of the United States." This final rule replaces the repealed definition of waters of the U.S. from 2015. The effective date of this final rule will be June 22, 2020. OG&E does not expect any material impacts as a result of this rule.

Since the purchase of the Redbud facility in 2008, OG&E's average use of treated municipal effluent for all of the needed cooling water at Redbud and McClain is approximately 2.6 billion gallons per year. This use of treated municipal effluent offsets the need for fresh water as cooling water, making fresh water available for other beneficial uses like drinking water, irrigation and recreation.

Site Remediation
 
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state laws impose liability, without regard to the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances into the environment. Because OG&E utilizes various products and generates wastes that are considered hazardous substances for purposes of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, OG&E could be subject to liability for the costs of cleaning up and restoring sites where those substances have been released to the environment. At this time, it is not anticipated that any associated liability will cause a significant impact to OG&E.

For further discussion regarding contingencies relating to environmental laws and regulations, see Note 11 within "Item 1. Financial Statements."
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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 has 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).

While remote work arrangements were temporarily implemented in response to the COVID-19 pandemic, OG&E believes there have been no material changes to the processes and procedures that impact financial reporting. OG&E continues to monitor potential internal control impacts of COVID-19 and plan accordingly to ensure the effectiveness of OG&E's internal controls over financial reporting and disclosures.
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Reference is made to Item 3 of Part I of OG&E's 2019 Form 10-K for a description of certain legal proceedings presently pending. Except as described under "Environmental Laws and Regulations" within "Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," there are no new significant cases to report against OG&E and there have been no material changes in the previously reported proceedings.

Item 1A. Risk Factors.
 
Except as detailed below, there have been no significant changes in OG&E's risk factors from those discussed in OG&E's 2019 Form 10-K, which are incorporated herein by reference.

We face risks related to health epidemics and other outbreaks.

The outbreak of COVID-19 is a continually evolving situation around the globe that has adversely impacted economic activity and conditions worldwide. In particular, efforts to control the spread of COVID-19 have led to shutdowns of various facilities as well as disrupted supply chains around the world. Efforts to control the spread of COVID-19 have also resulted in remote work arrangements, increased unemployment, customer slow payment or non-payment and decreased commercial and industrial load. We expect these particular COVID-19 impacts will likely continue in the near future. We are continuing to monitor developments involving our workforce, customers and suppliers and cannot predict whether COVID-19 will have a material impact on our results of operations, financial condition and prospects. A slowdown of the United States' economic growth, demand for commodities and/or material changes in governmental policy has resulted to a certain extent and could continue to result in lower economic growth and lower demand for electricity in our key markets as well as the ability of various customers, contractors, suppliers and other business partners to fulfill their obligations, which could have a material adverse effect on our results of operations, financial condition and prospects. Further, the negative impacts on the economy could also adversely impact the market value of the assets that fund our pension plans, which could necessitate accelerated funding of the plans to meet minimum federal government requirements.

In addition, we cannot predict the ongoing impact that COVID-19 will have on our customers, suppliers, vendors and other business partners and each of their financial conditions; however, any material effect on these parties could adversely impact us. The impact of COVID-19 may also exacerbate other risks discussed in "Item 1A. Risk Factors" in OG&E's 2019 Form 10-K, any of which could have a material effect on us. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

Item 6. Exhibits.
Exhibit No. Description
31.01
32.01
101.INSInline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
101.SCHInline XBRL Taxonomy Schema Document.
101.PREInline XBRL Taxonomy Presentation Linkbase Document.
101.LABInline XBRL Taxonomy Label Linkbase Document.
101.CALInline XBRL Taxonomy Calculation Linkbase Document.
101.DEFInline XBRL Definition Linkbase Document.
104Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101).

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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/ Sarah R. Stafford
 Sarah R. Stafford
 Controller and Chief Accounting Officer
(On behalf of the Registrant and in her capacity as Chief Accounting Officer)

November 4, 2020

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