OKLAHOMA GAS & ELECTRIC CO - FORM 10-Q

Attached files

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EX-32.01 - EXHIBIT 32.01 - OKLAHOMA GAS & ELECTRIC CO	q32016oge10-qxex3201.htm
EX-31.01 - EXHIBIT 31.01 - OKLAHOMA GAS & ELECTRIC CO	q32016oge10-qxex3101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission File Number: 1-1097

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

OKLAHOMA GAS AND ELECTRIC COMPANY

(Exact name of registrant as specified in its charter)



Oklahoma		73-0382390
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

321 North Harvey

P.O. Box 321

Oklahoma City, Oklahoma 73101-0321

(Address of principal executive offices)

(Zip Code)

405-553-3000

(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer o
Non-accelerated filer þ (Do not check if a smaller reporting company)	Smaller reporting company o

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

At September 30, 2016, 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, 2016

TABLE OF CONTENTS



	Page
GLOSSARY OF TERMS	ii
FORWARD-LOOKING STATEMENTS	1

Part I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Statements of Income and Comprehensive Income	2
Condensed Statements of Cash Flows	3
Condensed Balance Sheets	4
Condensed Statements of Changes in Stockholder's Equity	6
Notes to Condensed Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures About Market Risk	35

Item 4. Controls and Procedures	35

Part II - OTHER INFORMATION
Item 1. Legal Proceedings	37

Item 1A. Risk Factors	37

Item 6. Exhibits	37

Signature	38

GLOSSARY OF TERMS

The following is a glossary of frequently used abbreviations that are found throughout this Form 10-Q.



Abbreviation	Definition
2015 Form 10-K	Annual Report on Form 10-K for the year ended December 31, 2015
ALJ	Administrative Law Judge
APSC	Arkansas Public Service Commission
ASU	Financial Accounting Standards Board Accounting Standards Update
AVEC	Arkansas Valley Electric Cooperative Corporation
CO₂	Carbon dioxide
CSAPR	Cross-State Air Pollution Rule
Dry Scrubbers	Dry flue gas desulfurization units with spray dryer absorber
ECP	Environmental Compliance Plan
Enable	Enable Midstream Partners, LP, a midstream partnership formed between OGE Energy and CenterPoint Energy, Inc.
EPA	U.S. Environmental Protection Agency
FASB	Financial Accounting Standards Board
Federal Clean Water Act	Federal Water Pollution Control Act of 1972, as amended
FERC	Federal Energy Regulatory Commission
FIP	Federal implementation plan
GAAP	Accounting principles generally accepted in the United States
IRP	Integrated Resource Plan
kV	Kilovolt
MATS	Mercury and Air Toxics Standards
Mustang Modernization Plan	OG&E's plan to replace the soon-to-be retired Mustang steam turbines in late 2017 with 400 MWs of new, efficient combustion turbines at the Mustang site in 2018 and 2019
MW	Megawatt
NAAQS	National Ambient Air Quality Standards
NO_X	Nitrogen oxide
OCC	Oklahoma Corporation Commission
ODEQ	Oklahoma Department of Environmental Quality
OG&E	Oklahoma Gas and Electric Company, wholly-owned subsidiary of OGE Energy
OGE Energy	OGE Energy Corp., parent company of OG&E
Pension Plan	Qualified defined benefit retirement plan
Ppb	Parts per billion
PUD	Public Utility Division of the Oklahoma Corporation Commission
Restoration of Retirement Income Plan	Supplemental retirement plan to the Pension Plan
SIP	State implementation plan
SO₂	Sulfur dioxide
SPP	Southwest Power Pool
System sales	Sales to OG&E's customers

FORWARD-LOOKING STATEMENTS

Except for the historical statements contained herein, the matters discussed in this Form 10-Q, including those matters discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate", "believe", "estimate", "expect", "intend", "objective", "plan", "possible", "potential", "project" and similar expressions. Actual results may vary materially from those expressed in forward-looking statements. In addition to the specific risk factors discussed in "Item 1A. Risk Factors" in OG&E's 2015 Form 10-K and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" herein, factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:


•	general economic conditions, including the availability of credit, access to existing lines of credit, access to the commercial paper markets, actions of rating agencies and their impact on capital expenditures;


•	the ability of OG&E and OGE Energy to access the capital markets and obtain financing on favorable terms as well as inflation rates and monetary fluctuations;


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


•	business conditions in the energy industry;


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


•	unusual weather;


•	availability and prices of raw materials for current and future construction projects;


•	the effect of retroactive repricing 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 and regulations that may impact OG&E's operations;


•	changes in accounting standards, rules or guidelines;


•	the discontinuance of accounting principles for certain types of rate-regulated activities;


•	the cost of protecting assets against, or damage due to, terrorism or cyber-attacks and other catastrophic events;


•	advances in technology;


•	creditworthiness of suppliers, customers and other contractual parties; and


•	other risk factors listed in the reports filed by OG&E with the Securities and Exchange Commission including those listed in "Item 1A. Risk Factors" and in Exhibit 99.01 to OG&E's 2015 Form 10-K.

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2016			2015			2016			2015
OPERATING REVENUES	$	743.9		$	719.8		$	1,728.4		$	1,749.8
COST OF SALES	269.8			259.8			645.4			682.3
OPERATING EXPENSES
Other operation and maintenance	115.2			107.4			356.3			337.3
Depreciation and amortization	80.8			75.9			235.9			224.0
Taxes other than income	20.9			21.0			63.6			65.7
Total operating expenses	216.9			204.3			655.8			627.0
OPERATING INCOME	257.2			255.7			427.2			440.5
OTHER INCOME (EXPENSE)
Allowance for equity funds used during construction	3.9			2.2			9.2			5.4
Other income	2.9			4.8			11.3			9.8
Other expense	(0.8		)	(0.4		)	(2.2		)	(1.3		)
Net other income	6.0			6.6			18.3			13.9
INTEREST EXPENSE
Interest on long-term debt	35.4			36.7			106.3			110.1
Allowance for borrowed funds used during construction	(2.0		)	(1.1		)	(4.7		)	(2.7		)
Interest on short-term debt and other interest charges	0.9			0.8			3.2			3.1
Interest expense	34.3			36.4			104.8			110.5
INCOME BEFORE TAXES	228.9			225.9			340.7			343.9
INCOME TAX EXPENSE	69.0			63.0			102.4			94.9
NET INCOME	159.9			162.9			238.3			249.0
Other comprehensive income (loss), net of tax	—			—			—			—
COMPREHENSIVE INCOME	$	159.9		$	162.9		$	238.3		$	249.0

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
(In millions)	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	238.3		$	249.0
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation and amortization	235.9			224.0
Deferred income taxes and investment tax credits	92.6			124.5
Allowance for equity funds used during construction	(9.2		)	(5.4		)
Stock-based compensation expense	1.7			1.9
Regulatory assets	(10.5		)	12.7
Regulatory liabilities	(9.8		)	(13.9		)
Other assets	13.5			10.7
Other liabilities	(16.6		)	(2.1		)
Change in certain current assets and liabilities
Accounts receivable, net	(49.1		)	(33.8		)
Accrued unbilled revenues	(17.5		)	(22.4		)
Fuel, materials and supplies inventories	30.9			(25.6		)
Fuel clause under recoveries	(0.5		)	66.7
Other current assets	(12.3		)	(6.5		)
Accounts payable	(72.0		)	(51.1		)
Accounts payable - affiliates	(0.8		)	0.9
Income taxes payable - parent	9.2			(32.6		)
Fuel clause over recoveries	(59.9		)	34.5
Other current liabilities	21.9			20.1
Net Cash Provided from Operating Activities	385.8			551.6
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (less allowance for equity funds used during construction)	(466.7		)	(371.0		)
Proceeds from sale of assets	0.3			2.2
Net Cash Used in Investing Activities	(466.4		)	(368.8		)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in advances with parent	280.7			(92.7		)
Payment of long-term debt	(110.1		)	(0.1		)
Dividends paid on common stock	(90.0		)	(90.0		)
Net Cash Provided from (Used in) Financing Activities	80.6			(182.8		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	—			—
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	—			—
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	—

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED BALANCE SHEETS

(Unaudited)



(In millions)	September 30, 2016		December 31, 2015
ASSETS
CURRENT ASSETS
Accounts receivable, less reserve of $2.0 and $1.4, respectively	$	222.2	$	173.1
Accrued unbilled revenues	71.0		53.5
Advances to parent	8.6		333.6
Fuel inventories	87.6		113.8
Materials and supplies, at average cost	74.1		78.8
Fuel clause under recoveries	0.5		—
Other	63.9		51.6
Total current assets	527.9		804.4
OTHER PROPERTY AND INVESTMENTS	5.2		5.6
PROPERTY, PLANT AND EQUIPMENT
In service	10,482.1		10,179.3
Construction work in progress	365.8		278.5
Total property, plant and equipment	10,847.9		10,457.8
Less accumulated depreciation	3,328.9		3,161.7
Net property, plant and equipment	7,519.0		7,296.1
DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets	404.8		402.2
Other	54.6		17.2
Total deferred charges and other assets	459.4		419.4
TOTAL ASSETS	$	8,511.5	$	8,525.5

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED BALANCE SHEETS (Continued)

(Unaudited)



(In millions)	September 30, 2016		December 31, 2015
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable - affiliates	$	1.4	$	2.2
Accounts payable - other	121.4		236.0
Customer deposits	77.4		77.0
Accrued taxes	58.2		45.7
Accrued interest	32.8		42.8
Accrued compensation	23.9		23.8
Long-term debt due within one year	124.9		110.0
Fuel clause over recoveries	1.4		61.3
Other	62.5		43.6
Total current liabilities	503.9		642.4
LONG-TERM DEBT	2,405.4		2,529.3
DEFERRED CREDITS AND OTHER LIABILITIES
Accrued benefit obligations	176.1		179.9
Deferred income taxes	1,728.8		1,637.8
Regulatory liabilities	292.0		273.6
Other	134.6		106.8
Total deferred credits and other liabilities	2,331.5		2,198.1
Total liabilities	5,240.8		5,369.8
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDER'S EQUITY
Common stockholder's equity	1,023.5		1,021.8
Retained earnings	2,247.2		2,133.9
Total stockholder's equity	3,270.7		3,155.7
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	8,511.5	$	8,525.5

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

OKLAHOMA GAS AND ELECTRIC COMPANY

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

(Unaudited)



(In millions)	Common Stock		Premium on Common Stock		Retained Earnings			Total
Balance at December 31, 2015	$	100.9	$	920.9	$	2,133.9		$	3,155.7
Net income	—		—		238.3			238.3
Dividends declared on common stock	—		—		(125.0		)	(125.0		)
Stock-based compensation	—		1.7		—			1.7
Balance at September 30, 2016	$	100.9	$	922.6	$	2,247.2		$	3,270.7

Balance at December 31, 2014	$	100.9	$	918.3	$	1,985.0		$	3,004.2
Net income	—		—		249.0			249.0
Dividends declared on common stock	—		—		(90.0		)	(90.0		)
Stock-based compensation	—		1.9		—			1.9
Balance at September 30, 2015	$	100.9	$	920.2	$	2,144.0		$	3,165.1

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

OKLAHOMA GAS AND ELECTRIC COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)


1.	Summary of Significant Accounting Policies

Organization

OG&E generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas. Its operations are subject to regulation by the OCC, the APSC and the FERC. OG&E was incorporated in 1902 under the laws of the Oklahoma Territory. OG&E is the largest electric utility in Oklahoma and its franchised service territory includes 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, an energy and energy services provider offering physical delivery and related services for both electricity and natural gas primarily in the south central United States.

Basis of Presentation

The Condensed Financial Statements included herein have been prepared by OG&E, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, OG&E believes that the disclosures are adequate to prevent the information presented from being misleading.

In the opinion of management, all adjustments necessary to fairly present the financial position of OG&E at September 30, 2016 and December 31, 2015, the results of its operations for the three and nine months ended September 30, 2016 and 2015 and its cash flows for the nine months ended September 30, 2016 and 2015, have been included and are of a normal recurring nature except as otherwise disclosed.

Due to seasonal fluctuations and other factors, OG&E's operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 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 2015 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.

The following table is a summary of OG&E's regulatory assets and liabilities at:



(In millions)	September 30, 2016		December 31, 2015
Regulatory Assets
Current
Oklahoma demand program rider under recovery (A)	$	48.9	$	36.6
SPP cost tracker rider under recovery (A)	2.4		4.5
Fuel clause under recoveries	0.5		—
Other (A)	7.6		5.4
Total Current Regulatory Assets	$	59.4	$	46.5
Non-Current
Benefit obligations regulatory asset	$	235.0	$	242.2
Income taxes recoverable from customers, net	60.0		56.7
Smart Grid	43.4		43.6
Deferred storm expenses	35.9		27.6
Unamortized loss on reacquired debt	13.7		14.8
Other	16.8		17.3
Total Non-Current Regulatory Assets	$	404.8	$	402.2
Regulatory Liabilities
Current
Fuel clause over recoveries	$	1.4	$	61.3
Other (B)	3.8		7.5
Total Current Regulatory Liabilities	$	5.2	$	68.8
Non-Current
Accrued removal obligations, net	$	260.1	$	254.9
Pension tracker	30.9		17.7
Other (C)	1.0		1.0
Total Non-Current Regulatory Liabilities	$	292.0	$	273.6


(A)	Included in Other Current Assets on the Condensed Balance Sheets.


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


(C)	Prior year amount of $1.0 million reclassified from Deferred Other Liabilities to Non-Current Regulatory Liabilities.

Management continuously monitors the future recoverability of regulatory assets. When in management's judgment future recovery becomes impaired, the amount of the regulatory asset is adjusted, as appropriate. If OG&E were required to discontinue the application of accounting principles for certain types of rate-regulated activities for some or all of its operations, it could result in writing off the related regulatory assets, which could have significant financial effects.

Asset Retirement Obligations

The following table summarizes changes to OG&E's asset retirement obligations during the nine months ended September 30, 2016 and 2015.



	Nine Months Ended September 30,
(In millions)	2016			2015
Balance at January 1	$	63.3		$	58.6
Accretion expense	2.1			1.9
Liabilities settled	(0.2		)	(0.4		)
Revisions in estimated cash flows	—			1.6
Balance at September 30	$	65.2		$	61.7

Reclassifications

Certain prior-year amounts have been reclassified to conform to the current year presentation.

The December 31, 2015 Condensed Balance Sheet has been adjusted for the reclassification of $16.3 million of debt issuance costs from Total Deferred Charges and Other Assets to Long-Term Debt to be consistent with the 2016 presentation due to the adoption of ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs," in 2016.


2.	Accounting Pronouncements

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". The new guidance was intended to be effective for fiscal years beginning after December 15, 2016. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. Reporting entities may choose to adopt the standard as of the original effective date. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. OG&E has yet to select a transition method or determine the impact on its Condensed Financial Statements, however, the impact is not expected to be material.

Consolidation. In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810)". The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The new standard modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities along with eliminating the presumption that a general partner should consolidate a limited partnership. The new standard is effective for fiscal years beginning after December 15, 2015. The adoption of this new standard did not result in the consolidation of any non-consolidated entities.

Leases. In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The main difference between current lease accounting and Topic 842 is the recognition of right-to-use assets and lease liabilities by lessees for those leases classified as operating leases under current accounting guidance. Lessees, such as OG&E, will need to recognize a right-of-use asset and a lease liability for virtually all of their leases, other than leases that meet the definition of a short-term lease. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the Topic 842 retains a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense, while finance leases will result in a front-loaded expense pattern, similar to current capital leases. Classification of operating and finance leases will be based on criteria that are largely similar to those applied in current lease guidance, but without the explicit thresholds. The new guidance is effective for fiscal years beginning after December 2018. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. OG&E has started evaluating its current lease contracts. OG&E has not determined the amount of impact on its Condensed Financial Statements, but it anticipates an increase in the recognition of right-of-use assets and lease liabilities.

Investments. In March 2016, the FASB issued ASU 2016-07, "Investments-Equity Method and Joint Ventures; Simplifying the Transition to the Equity Method of Accounting (Topic 323)." The amendments in ASU 2016-07 eliminate the requirement to retroactively adopt the equity method of accounting for a qualifying equity method investment. ASU 2016-07 requires equity method investors to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments in this ASU are effective for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. OG&E does not believe this ASU will have any effect on its Condensed Financial Statements.

Employee Share Based Payment Accounting. In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share Based Payment Accounting," which amends ASC Topic 718, Compensation - Stock Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share based payments are accounted for and presented in the financial statements. The new guidance among other requirements will require all of the tax effects related to share based payments at settlement (or expiration) to be recorded through the income statement. Currently, tax benefits in excess of compensation cost (“windfalls”) are recorded in equity, and tax deficiencies (“shortfalls”) are recorded in equity to the extent of previous windfalls, and then to the income statement. This change is required to be applied prospectively to all excess tax benefits and tax deficiencies resulting from settlements after the date of adoption of the ASU 2016-09. Under the new guidance, the windfall tax benefit will be recorded when it arises, subject to normal valuation allowance considerations. This change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings. All tax related cash flows resulting from share based payments are to be reported as operating activities on the statement of cash flows, a change

from the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. Either prospective or retrospective transition of this provision is permitted. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption will be permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. OG&E has not determined the impact on its Condensed Financial Statements, however, the impact is not expected to be material.

Financial Instruments-Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments.” The amendment in this update 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 matter. ASU 2016-13 also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The standard is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted for interim and annual periods beginning after December 15, 2018. OG&E does not believe this ASU will have any effect on its Condensed Financial Statements.


3.	Related Party Transactions

OGE Energy charged operating costs to OG&E of $30.1 million and $29.6 million during the three months ended September 30, 2016 and 2015, respectively, and $97.0 million and $91.3 million for the nine months ended September 30, 2016 and 2015, respectively. OGE Energy charges operating costs to OG&E based on several factors. 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.

OG&E entered into a contract with Enable to provide gas transportation services effective May 1, 2014. This transportation agreement 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, 2016 and 2015.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2016		2015		2016		2015
Operating Revenues:
Electricity to power electric compression assets	$	3.7	$	4.4	$	9.0	$	11.1
Cost of Sales:
Natural gas transportation services	$	8.8	$	8.8	$	26.3	$	26.3
Natural gas purchases/(sales)	4.4		2.5		11.3		7.1

During the nine months ended September 30, 2016 and 2015, OG&E declared dividends to OGE Energy of $125.0 million and $90.0 million.


4.	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 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 no financial instruments measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015.

The following table summarizes the fair value and carrying amount of OG&E's financial instruments at September 30, 2016 and December 31, 2015.



	September 30, 2016				December 31, 2015
(In millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-Term Debt
Senior Notes	$	2,385.0	$	2,818.2	$	2,493.9	$	2,754.6
OG&E Industrial Authority Bonds	135.4		135.4		135.4		135.4
Tinker Debt	9.9		10.0		10.0		9.2

The fair value of OG&E's long-term debt is based on quoted market prices and estimates of current rates available for similar issues with similar maturities and is classified as Level 2 in the fair value hierarchy with the exception of the Tinker Debt which fair value is based on calculating the net present value of the monthly payments discounted by OG&E's current borrowing rate and is classified as Level 3 in the fair value hierarchy.


5.	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, 2016 and 2015 related to performance units and restricted stock for OG&E employees.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2016			2015			2016		2015
Performance units
Total shareholder return	$	0.5		$	0.6		$	1.5	$	1.9
Earnings per share	(0.4		)	(0.2		)	—		0.2
Total performance units	0.1			0.4			1.5		2.1
Restricted stock	—			—			—		0.1
Total compensation expense	$	0.1		$	0.4		$	1.5	$	2.2
Income tax benefit	$	—		$	0.2		$	0.5	$	0.9

During the three and nine months ended September 30, 2016, OG&E issued an immaterial number of shares to satisfy restricted stock grants.


6.	Income Taxes

OG&E is a member of an affiliated group that files consolidated income tax returns in the U.S. Federal jurisdiction and various state jurisdictions. With few exceptions, OG&E is no longer subject to U.S. Federal tax examinations by tax authorities for years prior to 2013 or state and local tax examinations by tax authorities for years prior to 2012. Income taxes are generally allocated to each company in the affiliated group based on its stand-alone taxable income or loss. Federal investment tax credits previously claimed on electric utility property have been deferred and are being amortized to income over the life of the related property. OG&E earns both Federal and Oklahoma state tax credits associated with production from its wind farms and earns Oklahoma state tax credits associated with its investments in electric generating facilities which further reduce OG&E's effective tax rate.


7.	Long-Term Debt

At September 30, 2016, 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 as follows:



SERIES			DATE DUE	AMOUNT
				(In millions)
0.05%	-	0.84%	Garfield Industrial Authority, January 1, 2025	$	47.0
0.07%	-	0.80%	Muskogee Industrial Authority, January 1, 2025	32.4
0.05%	-	0.82%	Muskogee Industrial Authority, June 1, 2027	56.0
Total (redeemable during next 12 months)				$	135.4

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


8.	Short-Term Debt and Credit Facility

At September 30, 2016, there was $8.6 million in advances to OGE Energy compared to $333.6 million in advances to OGE Energy at December 31, 2015. OG&E has an intercompany borrowing agreement with OGE Energy whereby OG&E has access to up to $400.0 million of OGE Energy's revolving credit amount. This agreement has a termination date of December 13, 2018. At September 30, 2016, there were no intercompany borrowings under this agreement. OG&E has a $400.0 million unsecured five-year revolving credit facility which is available to back up OG&E's commercial paper borrowings and to provide revolving credit borrowings. This bank facility can also be used as a letter of credit facility. At September 30, 2016, there were $1.7 million supporting letters of credit at a weighted-average interest rate of 0.95 percent. There were no outstanding borrowings under this revolving credit agreement and no outstanding commercial paper borrowings at September 30, 2016.

As of September 30, 2016, the commitment of $8.7 million of OG&E's credit facility was not extended and unless the non-extending lender is replaced in accordance with the terms of the credit facility, the commitment will expire December 13, 2017.

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, 2015 and ending December 31, 2016. 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.


9.	Retirement Plans and Postretirement Benefit Plans

The details of net periodic benefit cost, before consideration of capitalized amounts, of OG&E's portion of OGE Energy's Pension Plan, the Restoration of Retirement Income Plan and the postretirement benefit plans included in the Condensed Financial Statements are as follows:

Net Periodic Benefit Cost



	Pension Plan												Restoration of Retirement Income Plan
	Three Months Ended						Nine Months Ended						Three Months Ended				Nine Months Ended
	September 30,						September 30,						September 30,				September 30,
(In millions)	2016 (B)			2015 (B)			2016 (C)			2015 (C)			2016 (B)		2015 (B)		2016 (C)		2015 (C)
Service cost	$	2.6		$	2.7		$	7.7		$	7.7		$	—	$	0.1	$	—	$	0.1
Interest cost	4.8			5.1			14.4			14.9			0.1		0.1		0.1		0.1
Expected return on plan assets	(8.2		)	(8.9		)	(24.8		)	(27.4		)	—		—		—		—
Amortization of net loss	3.1			2.9			9.3			10.3			—		—		0.1		0.1
Amortization of unrecognized prior service cost (A)	—			0.1			—			0.4			—		—		—		—
Settlement	—			10.0			—			10.0			—		—		0.4		—
Net periodic benefit cost	$	2.3		$	11.9		$	6.6		$	15.9		$	0.1	$	0.2	$	0.6	$	0.3


(A)	Unamortized prior service cost is amortized on a straight-line basis over the average remaining service period to the first eligibility age of participants who are expected to receive a benefit and are active at the date of the plan amendment.


(B)	In addition to the $2.4 million and $12.1 million of net periodic benefit cost recognized during the three months ended September 30, 2016 and 2015, respectively, OG&E recognized the following:


•	an increase in pension expense during the three months ended September 30, 2016 of $2.4 million and a deferral of $4.7 million for the three months ended September 30, 2015, to maintain the allowable amount to be recovered for pension expense in the Oklahoma jurisdiction which are included in the Pension tracker regulatory liability (see Note 1); and


•	during the three months ended September 30, 2016 there were no costs relating to the deferral of pension expense compared to $1.4 million for the three months ended September 30, 2015 related to the Arkansas jurisdictional portion of the pension settlement charge of $10.0 million during the three months ended September 30, 2015.


(C)	In addition to the $7.2 million and $16.2 million of net periodic benefit cost recognized during the nine months ended September 30, 2016 and 2015, respectively, OG&E recognized the following:


•	an increase in pension expense during the nine months ended September 30, 2016 and 2015 of $6.7 million and $0.6 million, respectively, to maintain the allowable amount to be recovered for pension expense in the Oklahoma jurisdiction which are included in the Pension tracker regulatory liability (see Note 1); and


•	costs relating to the deferral of pension expense during the nine months ended September 30, 2016 and 2015 of $0.1 million and $1.4 million, respectively, related to the Arkansas jurisdictional portion of the pension settlement charge of $0.4 million and $10.0 million, respectively.



	Postretirement Benefit Plans
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2016 (B)			2015 (B)			2016 (C)			2015 (C)
Service cost	$	0.1		$	0.3		$	0.4		$	0.8
Interest cost	1.8			1.9			5.5			5.9
Expected return on plan assets	(0.6		)	(0.5		)	(1.6		)	(1.6		)
Amortization of net loss	0.6			3.0			1.9			8.9
Amortization of unrecognized prior service cost (A)	(1.5		)	(3.4		)	(4.6		)	(10.2		)
Net periodic benefit cost	$	0.4		$	1.3		$	1.6		$	3.8


(A)	Unamortized prior service cost is amortized on a straight-line basis over the average remaining service period to the first eligibility age of participants who are expected to receive a benefit and are active at the date of the plan amendment.

(B)

In addition to the $0.4 million and $1.3 million of net periodic benefit cost recognized during the three months ended September 30, 2016 and 2015, respectively, OG&E recognized an increase in postretirement medical expense during the three months ended September 30, 2016 and 2015 of $1.9 million and $1.4 million, respectively, to maintain the allowable amount to be recovered for postretirement medical expense in the Oklahoma jurisdiction which are included in the Pension tracker regulatory liability (see Note 1).

(C)

In addition to the $1.6 million and $3.8 million of net periodic benefit cost recognized during the nine months ended September 30, 2016 and 2015, respectively, OG&E recognized an increase in postretirement medical expense during the nine months ended September 30, 2016 and 2015 of $5.9 million and $4.3 million, respectively, to maintain the allowable amount to be recovered for postretirement medical expense in the Oklahoma jurisdiction which are included in the Pension tracker regulatory liability (see Note 1).



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2016		2015		2016		2015
Capitalized portion of net periodic pension benefit cost	$	0.8	$	0.6	$	2.2	$	1.9
Capitalized portion of net periodic postretirement benefit cost	0.2		0.4		0.6		1.2

Pension Plan Funding

In July 2016, OGE Energy contributed $20.0 million to its Pension Plan, none of which was attributed to OG&E. No additional contributions are expected in 2016.


10.	Commitments and Contingencies

Except as set forth below, in Note 11 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 12 and 13 to OG&E's Financial Statements included in OG&E's 2015 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, future construction activities to avoid or mitigate harm to threatened or endangered species and requiring the installation and operation of emissions 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. OG&E believes that 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. Historically, OG&E's total expenditures for environmental control facilities and for remediation have not been significant in relation to its financial position or results of operations. OG&E believes, however, that it is likely that the trend in environmental legislation and regulations will continue towards more restrictive standards. Compliance with these standards is expected to increase the cost of conducting business. Management continues to evaluate its compliance with existing and proposed environmental legislation and regulations and implement appropriate environmental programs in a competitive market.

OG&E is managing several significant uncertainties about the scope and timing for the acquisition, installation and operation of additional pollution control equipment and compliance costs for a variety of the EPA rules that are being challenged in court. OG&E is unable to predict the financial impact of these matters with certainty at this time.

Federal Clean Air Act New Source Review Litigation

In July 2008, OG&E received a request for information from the EPA regarding Federal Clean Air Act compliance at OG&E's Muskogee and Sooner generating plants.

On July 8, 2013, the U.S. Department of Justice, on behalf of the EPA, filed a complaint against OG&E in United States District Court for the Western District of Oklahoma alleging that OG&E did not follow the Federal Clean Air Act procedures for projecting emission increases attributable to eight projects that occurred between 2003 and 2006. This complaint sought to have OG&E submit a new assessment of whether the projects were likely to result in a significant emissions increase. The Sierra Club intervened in this proceeding. On August 30, 2013, the government filed a Motion for Summary Judgment and on September 6, 2013, OG&E filed a Motion to Dismiss the case. On January 15, 2015, the Court dismissed the complaints filed by the EPA and the Sierra Club. The Court held that it lacked subject matter jurisdiction over plaintiffs’ claims because plaintiffs failed to present an actual “case or controversy” as required by Article III of the Constitution. The court also ruled in the alternative that, even if plaintiffs had presented a case or controversy, it would have nonetheless “decline[d] to exercise jurisdiction.” The EPA and the Sierra Club did not file an appeal of the Court's ruling.

On August 12, 2013, the Sierra Club filed a separate complaint against OG&E in the United States District Court for the Eastern District of Oklahoma alleging that OG&E projects at Muskogee Unit 6 in 2008 were made without obtaining a prevention of significant deterioration permit and that the plant had exceeded emissions limits for opacity and particulate matter. The Sierra Club sought a permanent injunction preventing OG&E from operating the Muskogee generating plant. On March 4, 2014, the District Court dismissed the prevention of significant deterioration permit claim based on the statute of limitations, but allowed the opacity and particulate matter claims to proceed. To obtain the right to appeal this decision, the Sierra Club subsequently withdrew a Notice of Intent to Sue for additional Clean Air Act violations and asked the District Court to dismiss its remaining claims with prejudice. On August 27, 2014, the District Court granted the Sierra Club's request. The Sierra Club appealed the District Court's dismissal of its prevention of significant deterioration claim to the United States Court of Appeals for the Tenth Circuit. On March 8, 2016, the Tenth Circuit affirmed the trial court's decision dismissing the Sierra Club's case. On March 21, 2016, the Sierra Club filed a request for rehearing en banc with the Tenth Circuit. On April 13, 2016, the Tenth Circuit denied the request for rehearing. The Sierra Club did not seek review of the case by the United States Supreme Court. OG&E considers this case now closed.

Air Quality Control System

On September 10, 2014, OG&E executed a contract for the design, engineering and fabrication of two circulating dry scrubber systems to be installed at Sooner Units 1 and 2. OG&E entered into an agreement on February 9, 2015, to install the dry scrubber systems. The dry scrubbers are scheduled to be completed by 2019. More detail regarding the dry scrubber project can be found under “Pending Regulatory Matters” in Note 11.

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.


11.	Rate Matters and Regulation

Except as set forth below, the circumstances set forth in Note 13 to OG&E's Financial Statements included in OG&E's 2015 Form 10-K appropriately represent, in all material respects, the current status of OG&E's regulatory matters.

Completed Regulatory Matters

FERC Order No. 1000, Final Rule on Transmission Planning and Cost Allocation

On July 21, 2011, the FERC issued Order No. 1000, which revised the FERC's existing regulations governing the process for planning enhancements and expansions of the electric transmission grid along with the corresponding process for allocating the costs of such expansions. Order No. 1000 requires individual regions to determine whether a previously-approved project is subject to reevaluation and is therefore governed by the new rule.

Order No. 1000 directs public utility transmission providers to remove from the FERC-jurisdictional tariff and agreement provisions that establish any Federal "right of first refusal" for the incumbent transmission owner (such as OG&E) regarding transmission facilities selected in a regional transmission planning process, subject to certain limitations. However, Order No. 1000 is not intended to affect the right of an incumbent transmission owner (such as OG&E) to build, own and recover costs for upgrades to its own transmission facilities or to alter an incumbent transmission owner's use and control of existing rights of way. Order No. 1000 also clarifies that incumbent transmission owners may rely on regional transmission facilities to meet their reliability needs or service obligations. The SPP's pre-Order No. 1000 tariff included a "right of first refusal" for incumbent transmission owners and this provision has played a role in OG&E being selected by the SPP to build previous transmission projects in Oklahoma. On May 29, 2013, the Governor of Oklahoma signed House Bill 1932 into law which establishes a "right of first refusal" for Oklahoma incumbent transmission owners, including OG&E, to build new transmission projects with voltages under 300kV that interconnect to those incumbent owners' existing facilities.

The SPP has submitted compliance filings implementing Order No. 1000's requirements. In response, the FERC issued an order on the SPP filings that required the SPP to remove certain "right of first refusal" language from the SPP Tariff and the SPP Membership Agreement. On December 15, 2014, OG&E filed an appeal in the Court challenging the FERC's order requiring the removal of the "right of first refusal" language from the SPP Membership Agreement.

On July 1, 2016, the Court upheld the FERC's decision requiring removal of the rights of first refusal for incumbent transmission providers from the SPP Membership Agreement. The Court determined that the FERC had reasonably found the rights of first refusal in the SPP Membership Agreement to be anticompetitive.

OG&E does not believe the Court’s ruling will have any impact on existing transmission projects for which OG&E has already received a notice to construct from the SPP. OG&E intends to actively participate in the SPP planning process for competitive transmission projects that we believe apply to transmission voltage levels projects greater than 300kV.

Fuel Adjustment Clause Review for Calendar Year 2014

On July 28, 2015, the OCC staff filed an application to review OG&E's fuel adjustment clause for calendar year 2014, including the prudence of OG&E's electric generation, purchased power and fuel procurement costs. On May 26, 2016, the OCC issued a final order, finding that for the calendar year 2014 OG&E's electric generation, purchased power and fuel procurement processes and costs were prudent.

Oklahoma Demand Program Rider Review - SmartHours Program

In July 2012, OG&E filed an application with the OCC to recover certain costs associated with Demand Programs through the Demand Program Rider, including the lost revenues associated with the SmartHours program. The SmartHours program is designed to incentivize participating customers to reduce on-peak usage or shift usage to off-peak hours during the months of May through October, by offering lower rates to those customers in the off-peak hours of those months. Lost revenues are created by the difference in the standard rates and the lower incentivized rates. Non-SmartHours program customers benefit from the reduction of on-peak usage by SmartHours customers by the reduction of more costly on-peak generation and the delay in adding new on-peak generation.

In December 2012, the OCC issued an order approving the recovery of costs associated with the Demand Programs, including the lost revenues associated with the SmartHours program, subject to the PUD Staff's review.

In March 2014, the PUD Staff began their review of the Demand Program costs, including the lost revenues associated with the SmartHours program. In November 2014, OG&E believed that it had reached an agreement with the PUD Staff on the methodology to be used to calculate lost revenues associated with the SmartHours program and the amount of lost revenue for 2013, which totaled $10.1 million. The agreement also included utilizing the same methodology for calculating lost revenues for 2014 and beyond. In January 2015, OG&E implemented rates that began recovering the 2013 lost revenues (approximately $10.0 million annually).

In April 2015, the PUD Staff filed an application, seeking an order from the OCC, for determining the proper methodology for calculating lost revenues pursuant to OG&E’s Demand Program Rider, primarily affecting the SmartHours program lost revenues. In the application, the PUD Staff recommended the OCC approve the PUD Staff's methodology for calculating lost revenues associated with the SmartHours program, which differed from the methodology that OG&E believes it agreed upon and which would result in recovery of significantly less lost revenue for 2013, 2014 and 2015 than OG&E had recorded.

On March 28, 2016, the ALJ issued her recommendation on the PUD Staff's application. She found, among other things, that OG&E and the PUD Staff had not reached an agreement on all aspects of the calculation of lost revenues, that OG&E’s methodology for calculating lost revenues was not consistent with the provisions of OG&E’s tariff, and that the PUD Staff’s methodology for calculating lost revenues was proper. The ALJ recommended that the OCC order OG&E to adjust its calculation of SmartHours lost revenue for 2013 through 2015 consistent with the PUD Staff’s methodology, but that such adjustment should only be applied on a prospective basis following the issuance of an order by the OCC.

On August 9, 2016, OG&E entered into a settlement agreement with the PUD Staff to resolve the recoverable amount of lost revenues associated with the SmartHours program. The settlement provides for recovery of $10.1 million per year for 2013, 2014 and 2015, for a total of $30.3 million. OG&E had recorded $36.6 million of lost revenues for 2013, 2014 and 2015. On August 16, 2016, the OCC issued an order adopting the settlement agreement. Accordingly, OG&E reduced lost revenues and the Oklahoma Demand Program Rider regulatory asset by $6.3 million.

Mustang Modernization Plan-Arkansas

On April 13, 2016, OG&E filed an application at the APSC seeking authority to construct combustion turbines at its existing Mustang generating facility. Arkansas law requires a public utility to seek approval from the APSC to construct a power-generating facility located outside the boundaries of the state of Arkansas. The application did not seek any cost recovery for the capital expenditures in the application, as cost recovery will be determined in future proceedings. In July 2016, OG&E filed a motion to dismiss the APSC Mustang proceeding and in August, the APSC approved the dismissal. OG&E intends to seek cost recovery of the Mustang combustion turbines at a later date after the Mustang facility is placed in service.

Pending Regulatory Matters

Set forth below is a list of various proceedings pending before state or federal regulatory agencies. 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.

Environmental Compliance Plan

On August 6, 2014, OG&E filed an application with the OCC for approval of its plan to comply with the EPA’s MATS and Regional Haze Rule FIP while serving the best long-term interests of customers in light of future environmental uncertainties. The application sought approval of the ECP and for a recovery mechanism for the associated costs. The ECP includes installing dry scrubbers at Sooner Units 1 and 2 and the conversion of Muskogee Units 4 and 5 to natural gas. The application also asked the OCC to predetermine the prudence of its Mustang Modernization Plan, which calls for replacing OG&E's soon-to-be retired Mustang steam turbines in late 2017 with 400 MWs of new, efficient combustion turbines at the Mustang site in 2018 and 2019 and approval for a recovery mechanism for the associated costs. The OCC hearing on OG&E's application before an ALJ began on March 3, 2015, approximately seven months after OG&E filed its application, and concluded on April 8, 2015. Multiple parties advocating a variety of positions intervened in the proceeding.

On June 8, 2015, the ALJ issued his report on OG&E's application. While the ALJ in his report agreed that the installation of dry scrubbers at Sooner Units 1 and 2 and the conversion of Muskogee Units 4 and 5 to natural gas pursuant to OG&E’s ECP is the best approach, the ALJ's report included several recommendations. OG&E filed exceptions to the ALJ's report and on July 21, 2015, Commissioner Bob Anthony issued his deliberation statement that was consistent with many parts of the ALJ's report, including the ALJ’s support of OG&E’s ECP, the ALJ’s recommendation to pre-approve certain estimated costs of the environmental recovery plan, and the ALJ’s recommendation to defer all other cost recovery issues until the next general rate case.

On December 2, 2015, OG&E received an order from the OCC denying its plan to comply with the environmental mandates of the Federal Clean Air Act, Regional Haze Rule and MATS. The OCC also denied OG&E's request for pre-approval of its Mustang Modernization Plan, revised depreciation rates for both the retirement of the Mustang units and the replacement combustion turbines and pre-approval of early retirement and replacement of generating units at its Mustang site, including cost recovery through a rider.

On December 11, 2015, OG&E filed a motion requesting modification of the OCC order for the purposes of approving only the ECP. OG&E did not seek modification to any other provisions of the OCC order, including cost recovery. OG&E also agreed that it would not implement a rider for recovery of the costs of the ECP until and unless authorized by the OCC in a subsequent proceeding. On December 23, 2015, the OCC rejected, by a two to one vote, a proposal by Commissioner Dana Murphy to grant OG&E's December 11, 2015 motion.

On February 12, 2016, OG&E filed an application requesting the OCC to issue an order approving its decision to install dry scrubbers at the Sooner facility on or before May 2, 2016. OG&E's application did not seek approval of the costs of the dry scrubber project. Instead, the reasonableness of the costs would be considered after the project is completed and OG&E seeks recovery in its rates. On April 28, 2016, the OCC approved the dry scrubber project and OG&E is proceeding with the project. Two parties to the proceeding have appealed the OCC's decision to the Oklahoma Supreme Court. After the OCC provides a certified record to the Oklahoma Supreme Court, the parties will file briefs by the end of 2016 or the first quarter of 2017.

OG&E anticipates the total cost of dry scrubbers will be $547.5 million. As of September 30, 2016, OG&E had invested $138.6 million of construction work in progress on the dry scrubbers. OG&E anticipates the combustion turbines for the Mustang Modernization Plan will be $424.9 million. As of September 30, 2016, OG&E has invested $133.6 million on the Mustang Modernization Plan.

Integrated Resource Plans

In August 2015, OG&E initiated the process to update its IRP pursuant to the OCC rules. After engaging interested stakeholders in August and September, OG&E finalized the 2015 IRP and submitted it to the OCC on October 1, 2015. The 2015 IRP updated certain assumptions contained in the IRP submitted in 2014, but did not make any material changes to the ECP and other parts of the action plan contained in the IRP submitted in 2014.

Oklahoma Rate Case Filing

As previously reported in OG&E's 2015 Form 10-K, on December 18, 2015, OG&E filed a general rate case with the OCC requesting a rate increase of $92.5 million and a 10.25 percent return on equity based on a common equity percentage of 53 percent. The rate case was based on a June 30, 2015 test year and included recovery of $1.6 billion of electric infrastructure additions since its last general rate case in Oklahoma, the impact of the expiration of OG&E's wholesale contracts, increased operating costs such as vegetation management and increased recovery of depreciation and plant dismantlement of approximately $8.0 million. Each 0.25 percent change in the requested return on equity affects the requested rate increase by approximately $9.0 million.

In late March 2016, the PUD Staff and other intervenors filed testimony in the case. The PUD Staff recommended a $6.1 million annual rate increase based on a return on equity of 9.25 percent and a common equity percentage of 53 percent. Included in the PUD Staff's recommendation is a reduction of $33.0 million to OG&E’s requested increase for depreciation and plant dismantlement.

The staff of the Oklahoma Attorney General made a recommendation to reduce rates $10.8 million based on a return on equity of 9.25 percent and a common equity percentage of 50 percent, as well as a recommendation to reduce rates $13.7 million based on a return on equity of 8.90 percent and a common equity percentage of 53 percent. Included in the Attorney General's recommendation is a reduction of $20.9 million to OG&E’s requested increase for depreciation and plant dismantlement.

The Oklahoma Industrial Electric Consumers recommended a $47.9 million annual rate decrease based on a return on equity of 9.00 percent and a common equity percentage of 53 percent. Included in the Oklahoma Industrial Electric Consumers' recommendation is a reduction of $52.5 million to OG&E’s requested increase for depreciation and plant dismantlement.

The hearings in this matter began on May 3, 2016. While there is no statutory deadline for the ALJ to make a recommendation or for the commission to issue a final order, OG&E is allowed to implement increased rates subject to refund 180 days after the filing of its application on December 18, 2015. On July 1, 2016, OG&E implemented an annual interim rate

increase of $69.5 million while simultaneously reducing fuel costs billed to customers. The interim rates are subject to refund of any amount recovered in excess of the rates ultimately approved by the OCC in the rate case.

As of September 30, 2016, OG&E has recorded $23.6 million of revenues from the interim rate increase and has reserved $21.0 million of that revenue.

Arkansas Rate Case Filing

On August 25, 2016, OG&E filed a general rate case with the APSC. The rate filing requested a $16.5 million rate increase based on a 10.25 percent return on equity. The rate increase was based on a June 30, 2016 test year and included a recovery of over $3.0 billion of electric infrastructure additions since the last Arkansas general rate case in 2011. The increase also reflects increases in operation and maintenance expenses, including vegetation management, and increased recovery of depreciation and dismantlement costs. OG&E has a hearing scheduled for the rate case in the second quarter of 2017.

Fuel Adjustment Clause Review for Calendar Year 2015

On September 8, 2016, the OCC staff filed an application to review OG&E’s fuel adjustment clause for calendar year 2015, including the prudence of OG&E’s electric generation, purchased power and fuel procurement costs. OG&E has verbally agreed to a March 9, 2017 hearing date.

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

Introduction

Overview

OG&E Mission and Focus

OGE Energy's mission, through OG&E and its 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.

Summary of Operating Results

Three Months Ended September 30, 2016 as Compared to Three Months Ended September 30, 2015

OG&E reported net income of $159.9 million and $162.9 million during the three months ended September 30, 2016 and 2015, respectively, a decrease of $3.0 million, or 1.8 percent, primarily due to an increase in other operation and maintenance expense, higher income tax expense, additional depreciation and amortization expense due to higher storm amortization and additional assets placed into service, and lower other income partially offset by an increase in gross margin and an increase in allowance for equity funds used during construction.

Nine Months Ended September 30, 2016 as Compared to Nine Months Ended September 30, 2015

OG&E reported net income of $238.3 million and $249.0 million during the nine months ended September 30, 2016 and 2015, respectively, a decrease of $10.7 million, or 4.3 percent, primarily due to an increase in other operation and maintenance expense, higher depreciation and amortization expense due to additional assets being placed into service and an increase in income tax expense. These decreases were partially offset by an increase in gross margin, lower interest expense, higher other income and lower taxes other than income.

2016 Outlook

OG&E projects to earn approximately $288.0 million to $300.0 million in 2016. The guidance assumes, among other things, normal weather for remainder of the year and a final order before the end of 2016 from the OCC in OG&E's general rate case granting OG&E adequate rate relief. See OG&E's 2015 Form 10-K for other key factors and assumptions underlying its 2016 earnings guidance.

Non-GAAP Financial Measures

Gross margin is defined by OG&E as operating revenues less 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.

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, 2016 as compared to the same period in 2015 and OG&E's financial position at September 30, 2016. Due to seasonal fluctuations and other factors, OG&E's operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or for any future period. The following information should be read in conjunction with the Condensed Financial Statements and Notes thereto. Known trends and contingencies of a material nature are discussed to the extent considered relevant.



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Dollars in millions)	2016			2015		2016			2015
Operating revenues	$	743.9		$	719.8	$	1,728.4		$	1,749.8
Cost of sales	269.8			259.8		645.4			682.3
Other operation and maintenance	115.2			107.4		356.3			337.3
Depreciation and amortization	80.8			75.9		235.9			224.0
Taxes other than income	20.9			21.0		63.6			65.7
Operating income	257.2			255.7		427.2			440.5
Allowance for equity funds used during construction	3.9			2.2		9.2			5.4
Other income	2.9			4.8		11.3			9.8
Other expense	0.8			0.4		2.2			1.3
Interest expense	34.3			36.4		104.8			110.5
Income tax expense	69.0			63.0		102.4			94.9
Net income	$	159.9		$	162.9	$	238.3		$	249.0
Operating revenues by classification
Residential	$	351.9		$	318.1	$	750.0		$	726.7
Commercial	188.4			176.5		434.2			423.0
Industrial	60.4			59.2		147.4			150.2
Oilfield	47.3			49.1		118.4			128.2
Public authorities and street light	66.8			63.4		154.4			154.1
Sales for resale	—			0.9		0.2			21.7
System sales revenues	714.8			667.2		1,604.6			1,603.9
Provision for rate refund	(21.0		)	—		(21.0		)	—
Integrated market	13.2			13.5		33.0			34.8
Other	36.9			39.1		111.8			111.1
Total operating revenues	$	743.9		$	719.8	$	1,728.4		$	1,749.8
Reconciliation of gross margin to revenue:
Operating revenues	$	743.9		$	719.8	$	1,728.4		$	1,749.8
Cost of sales	269.8			259.8		645.4			682.3
Gross margin	$	474.1		$	460.0	$	1,083.0		$	1,067.5
MWH sales by classification (In millions)
Residential	3.2			3.1		7.3			7.4
Commercial	2.1			2.1		5.7			5.7
Industrial	1.0			1.0		2.8			2.8
Oilfield	0.8			0.8		2.4			2.5
Public authorities and street light	0.9			0.9		2.4			2.4
Sales for resale	—			—		—			0.5
System sales	8.0			7.9		20.6			21.3
Integrated market	0.7			0.4		1.5			1.1
Total sales	8.7			8.3		22.1			22.4
Number of customers	832,234			821,596		832,234			821,596
Weighted-average cost of energy per kilowatt-hour - cents
Natural gas	2.688			2.668		2.366			2.666
Coal	2.222			2.209		2.251			2.170
Total fuel	2.337			2.300		2.175			2.245
Total fuel and purchased power	2.984			2.973		2.796			2.925
Degree days (A)
Heating - Actual	3			—		1,714			1,984
Heating - Normal	19			19		2,020			2,020
Cooling - Actual	1,450			1,372		2,082			1,993
Cooling - Normal	1,380			1,380		2,018			2,018


(A)	Degree days are calculated as follows: The high and low degrees of a particular day are added together and then averaged. If the calculated average is above 65 degrees, then the difference between the calculated average and 65 is expressed as cooling

degree days, with each degree of difference equaling one cooling degree day. If the calculated average is below 65 degrees, then the difference between the calculated average and 65 is expressed as heating degree days, with each degree of difference equaling one heating degree day. The daily calculations are then totaled for the particular reporting period.

Three Months Ended September 30, 2016 as Compared to Three Months Ended September 30, 2015

OG&E's net income decreased $3.0 million, or 1.8 percent, during the three months ended September 30, 2016 as compared to the same period in 2015 primarily due to higher other operation and maintenance expense, higher income tax expense, higher depreciation and amortization expense and lower other income partially offset by higher gross margin, lower interest expense and lower taxes other than income.

Operating revenues were $743.9 million during the three months ended September 30, 2016 as compared to $719.8 million during the same period in 2015, an increase of $24.1 million, or 3.3 percent. Cost of sales were $269.8 million during the three months ended September 30, 2016 as compared to $259.8 million during the same period in 2015, an increase of $10.0 million, or 3.8 percent. Gross margin was $474.1 million during the three months ended September 30, 2016 as compared to $460.0 million during the same period in 2015, an increase of $14.1 million, or 3.1 percent. The below factors contributed to the change in gross margin:



(In millions)	Change
Interim rate increase - Oklahoma (A)	$	23.6
Reserve for rate refund (A)	(21.0		)
Price variance (B)	10.8
Non-residential demand and related revenues	1.1
New customer growth	0.8
Quantity variance (primarily weather)	0.7
Other	0.1
Expiration of AVEC contract (C)	(0.6		)
Wholesale transmission revenue	(1.4		)
Change in gross margin	$	14.1


(A)	As discussed in Note 13, on July 1, 2016, OG&E implemented an annual interim rate increase of $69.5 million. Interim rates are subject to refund of any amount recovered in excess of the rates ultimately approved by the OCC in the general rate case.


(B)	Increased primarily due to the pricing impact of weather related sales.


(C)	On June 30, 2015, the wholesale power contract with AVEC expired.

Cost of sales for OG&E consists of fuel used in electric generation, purchased power and transmission related charges. Fuel expense was $164.5 million during the three months ended September 30, 2016 as compared to $148.7 million during the same period in 2015, an increase of $15.8 million, or 10.6 percent, primarily due to an increase in generation. Purchased power costs were $92.7 million during the three months ended September 30, 2016 as compared to $100.3 million during the same period in 2015, a decrease of $7.6 million, or 7.6 percent, primarily due to a decrease of $5.7 million in purchases from the SPP and a decrease of $1.6 million in cogeneration purchases. Transmission expense is charged to OG&E by the SPP for the utilization of transmission systems owned by other SPP members and is recovered from retail customers through the SPP Cost Tracker in Oklahoma and through the Transmission Cost Recovery Rider in Arkansas. Transmission related charges were $12.6 million during the three months ended September 30, 2016 as compared to $10.8 million during the same period in 2015, an increase of $1.8 million, or 16.7 percent, primarily due to higher SPP charges for the base plan projects of other utilities.

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, the APSC and the FERC. The OCC, the APSC and the FERC have authority to review the appropriateness of gas transportation charges or other fees OG&E pays to its affiliate, Enable.

Operating Expenses

Other operation and maintenance expense was $115.2 million during the three months ended September 30, 2016 as compared to $107.4 million during the same period in 2015, an increase of $7.8 million, or 7.3 percent. The below factors contributed to the change in other operation and maintenance expense:



(In millions)	Change
Salaries and wages (A)	$	3.5
Contract professional services (B)	3.4
Marketing (related to demand side management)	2.2
Maintenance at power plants (C)	1.7
Corporate allocations and overheads	0.4
Injuries and damages	(1.1		)
Capitalized labor (D)	(2.3		)
Change in other operation and maintenance expense	$	7.8


(A)	Increased primarily due to increased overtime and an increase in incentive compensation.


(B)	Increased primarily due to increased engineering services.


(C)	Increased primarily due to increased work performed at the power plants.


(D)	Decreased primarily due to capitalized labor related to storms.

Depreciation and amortization expense was $80.8 million during the three months ended September 30, 2016 as compared to $75.9 million during the same period in 2015, an increase of $4.9 million, or 6.5 percent, primarily due to higher storm amortization and additional assets being placed in service.

Additional Information

Allowance for Equity Funds Used During Construction. Allowance for Equity Funds Used During Construction was $3.9 million during the three months ended September 30, 2016 as compared to $2.2 million during the same period in 2015, an increase of $1.7 million or 77.3 percent, primarily due to higher construction work in progress balances resulting from increased spending for environmental projects.

Other Income. Other income was $2.9 million during the three months ended September 30, 2016 as compared to $4.8 million during the same period in 2015, a decrease of $1.9 million, or 39.6 percent, primarily due to lower guaranteed flat bill margins and lower non-utility income from contract work partially offset by an increase in the tax gross up related to higher allowance for funds used during construction.

Income Tax Expense. Income tax expense was $69.0 million during the three months ended September 30, 2016 as compared to $63.0 million during the same period in 2015, an increase of $6.0 million, or 9.5 percent, primarily due to higher pre-tax income and a reduction in wind related tax credits generated.

Nine Months Ended September 30, 2016 as Compared to Nine Months Ended September 30, 2015

OG&E's net income decreased $10.7 million, or 4.3 percent, during the nine months ended September 30, 2016 as compared to the same period in 2015 primarily due to higher other operation and maintenance expense, higher depreciation and amortization expense and higher income tax expense partially offset by higher gross margin, lower interest expense, higher other income and lower taxes other than income.

Operating revenues were $1,728.4 million during the nine months ended September 30, 2016 as compared to $1,749.8 million during the same period in 2015, a decrease of $21.4 million, or 1.2 percent. Cost of sales were $645.4 million during the nine months ended September 30, 2016 as compared to $682.3 million during the same period in 2015, a decrease of $36.9 million, or 5.4 percent. Gross margin was $1,083.0 million during the nine months ended September 30, 2016 as compared to $1,067.5 million during the same period in 2015, an increase of $15.5 million, or 1.5 percent. The below factors contributed to the change in gross margin:



(In millions)	Change
Interim rate increase - Oklahoma (A)	$	23.6
Reserve rate for refund (A)	(21.0		)
Price variance (B)	21.2
Wholesale transmission revenue (C)	4.7
New customer growth	1.9
Non-residential demand and related revenues	(0.6		)
Quantity variance (primarily weather)	(1.5		)
Other	(3.1		)
Expiration of AVEC contract (D)	(9.7		)
Change in gross margin	$	15.5


(A)	As discussed in Note 13, on July 1, 2016, OG&E implemented an annual interim rate increase of $69.5 million. Interim rates are subject to refund of any amount recovered in excess of the rates ultimately approved by the OCC in the general rate case.


(B)	Increased primarily due to the reversal of a reserve for gas transportation charges in addition to the pricing impact of weather related sales.


(C)	Increased primarily due to a true up for the base plan projects in the SPP formula rate for 2014 and 2015 as well as a true up for Network Integration Transmission Services in the SPP formula rate for 2015.


(D)	On June 30, 2015, the wholesale power contract with AVEC expired.

Cost of sales for OG&E consists of fuel used in electric generation, purchased power and transmission related charges. Fuel expense was $330.1 million during the nine months ended September 30, 2016 as compared to $368.4 million during the same period in 2015, a decrease of $38.3 million, or 10.4 percent, primarily due to a decrease in generation due to lower sales. Purchased power costs were $276.8 million during the nine months ended September 30, 2016 as compared to $280.9 million during the same period in 2015, a decrease of $4.1 million, or 1.5 percent, primarily due to a decrease of $8.5 million in purchases from the SPP partially offset by an increase of $2.4 million in wind purchases, an increase of $1.4 million in cogeneration purchases and an increase of $0.5 million from transmission and curtailment expenses. Transmission expense is charged to OG&E by the SPP for the utilization of transmission systems owned by other SPP members and is recovered from retail customers through the SPP Cost Tracker in Oklahoma and through the Transmission Cost Recovery Rider in Arkansas. Transmission related charges were $38.5 million during the nine months ended September 30, 2016 as compared to $33.0 million during the same period in 2015, an increase of $5.5 million, or 16.7 percent, primarily due to higher SPP charges for the base plan projects of other utilities.

Operating Expenses

Other operation and maintenance expense was $356.3 million during the nine months ended September 30, 2016 as compared to $337.3 million during the same period in 2015, an increase of $19.0 million, or 5.6 percent. The below factors contributed to the change in other operation and maintenance expense:



(In millions)	Change
Salaries and wages (A)	$	6.2
Contract professional services (B)	4.7
Maintenance at power plants (C)	4.6
Corporate allocations and overheads (D)	4.5
Vegetation management (E)	3.6
Marketing (related to demand side management)	2.8
Employee benefits	(1.1		)
Injuries and damages	(1.1		)
Software expense	(1.5		)
Capitalized labor (F)	(3.8		)
Change in other operation and maintenance expense	$	18.9


(A)	Increased primarily due to annual salary increases and an increase in incentive compensation.


(B)	Increased primarily due to increased engineering services.


(C)	Increased primarily due to increased work performed at the power plants.


(D)	Increased primarily due to additional information technology and facility direct support.


(E)	Increased primarily due to timing of vegetation management.


(F)	Decreased primarily due to capitalized labor related to storms.

Depreciation and amortization expense was $235.9 million during the nine months ended September 30, 2016 as compared to $224.0 million during the same period in 2015, an increase of $11.9 million, or 5.3 percent, primarily due to additional assets being placed in service.

Additional Information

Allowance for Equity Funds Used During Construction. Allowance for Equity Funds Used During Construction was $9.2 million during the nine months ended September 30, 2016 as compared to $5.4 million during the same period in 2015, an increase of $3.8 million, or 70.4 percent, primarily due to higher construction work in progress balances resulting from increased spending for environmental projects.

Other Income. Other income was $11.3 million during the nine months ended September 30, 2016 as compared to $9.8 million during the same period in 2015, an increase of $1.5 million, or 15.3 percent, primarily due to an increase in the tax gross up related to higher allowance for funds used during construction partially offset by lower non-utility income from contract work.

Allowance for Borrowed Funds Used During Construction. Allowance for Borrowed Funds Used During Construction was $4.7 million during the nine months ended September 30, 2016 as compared to $2.7 million during the same period in 2015, an increase of $2.0 million, or 74.1 percent, primarily due to higher construction work in progress balances resulting from increased spending for environmental projects.

Income Tax Expense. Income tax expense was $102.4 million during the nine months ended September 30, 2016 as compared to $94.9 million during the same period in 2015, an increase of $7.5 million, or 7.9 percent, primarily due to a reduction in wind related tax credits generated partially offset by lower pretax income.

Off-Balance Sheet Arrangement

There have been no significant changes in OG&E's off-balance sheet arrangement from that discussed in OG&E's 2015 Form 10-K.

Liquidity and Capital Resources

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.

Accounts Receivable and Accrued Unbilled Revenues. The balance of Accounts Receivable and Accrued Unbilled Revenues was $293.2 million and $226.6 million at September 30, 2016 and December 31, 2015, respectively, an increase of $66.6 million, or 29.4 percent, primarily due to an increase in billings to OG&E's retail customers reflecting higher usage due to warmer weather in September 2016 as compared to December 2015.

Advances to Parent. The balance in Advances to Parent was $8.6 million and $333.6 million at September 30, 2016 and December 31, 2015, respectively, a decrease of $325.0 million, or 97.4 percent. The change in Advances to Parent is primarily due to additional capital expenditures during the nine months ended September 30, 2016, payment of long-term debt in January 2016 and customer refunds of over-recovered fuel.

Fuel Inventories. The balance of Fuel Inventories was $87.6 million and $113.8 million at September 30, 2016 and December 31, 2015, respectively, a decrease of $26.2 million, or 23.0 percent, primarily due to lower coal inventory balances from higher coal generation.

Other Current Assets. The balance of Other Current Assets was $63.9 million and $51.6 million at September 30, 2016 and December 31, 2015, respectively, an increase of $12.3 million, or 23.8 percent, primarily due to reduced revenue collections from customers and increased revenue requirements that are not included in current rates.

Accounts Payable. The balance of Accounts Payable was $122.8 million and $238.2 million at September 30, 2016 and December 31, 2015, respectively, a decrease of $115.4 million, or 48.4 percent, primarily due to the timing of vendor payments and a decrease in accruals.

Accrued Taxes. The balance of Accrued Taxes was 58.2 million and 45.7 million at September 30, 2016 and December 31, 2015, respectively, an increase of $12.5 million, or 27.4 percent, primarily resulting from ad valorem tax accruals of approximately $57.6 million offset by payments of approximately $45.5 million.

Accrued Interest. The balance of Accrued Interest was $32.8 million and $42.8 million at September 30, 2016 and December 31, 2015, respectively, a decrease of $10.0 million, or 23.4 percent, primarily due to long-term debt that matured in January 2016 and the timing of interest payments on long-term debt in 2016.

Long-Term Debt Due Within One Year. The balance in Long-term Debt Due Within One Year was $124.9 million and $110.0 million at September 30, 2016 and December 31, 2015, respectively, an increase of $14.9 million, or 13.5 percent, primarily due to long-term debt that matured in January 2016 and the reclassification of long-term debt that will mature July 2017.

Fuel Clause Over Recoveries. The balance of Fuel Clause Over Recoveries was $1.4 million and $61.3 million at September 30, 2016 and December 31, 2015, respectively, a decrease of $59.9 million, or 97.7 percent, primarily due to lower amounts billed to OG&E retail customers as compared to the actual cost of fuel and purchased power.

Other Current Liabilities. The balance of Other Current Liabilities was $62.5 million and $43.6 million at September 30, 2016 and December 31, 2015, respectively, an increase of $18.9 million, or 43.3 percent, primarily due to revenue that has been collected from customers but is reserved until OG&E receives a rate case order from the OCC.

Cash Flows



	Nine Months Ended
	September 30,						2016 vs. 2015
(In millions)	2016			2015			$ Change			% Change
Net cash provided from operating activities	$	385.8		$	551.6		$	(165.8	)	(30.1	)%
Net cash used in investing activities	(466.4		)	(368.8		)	(97.6		)	26.5	%
Net cash provided from (used in) financing activities	80.6			(182.8		)	263.4			*

* Change is greater than 100 percent variance.

Operating Activities

The decrease of $165.8 million, or 30.1 percent, in net cash provided from operating activities during the nine months ended September 30, 2016 as compared to the same period in 2015 was primarily due to higher fuel refunds during the nine months ended September 30, 2016 as compared to higher fuel recoveries in 2015.

Investing Activities

The increase of $97.6 million, or 26.5 percent, in net cash used in investing activities during the nine months ended September 30, 2016 as compared to the same period in 2015 was primarily due to an increase in capital expenditures related to environmental projects.

Financing Activities

The increase of $263.4 million in net cash provided from financing activities during the nine months ended September 30, 2016 as compared to the same period in 2015 was primarily due to changes in cash advances with parent partially offset by the payment of long-term debt in January 2016.

Future Capital Requirements and Financing Activities

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

Capital Expenditures

OG&E's estimates of capital expenditures for the years 2016 through 2020 are shown in the following table. These capital expenditures represent the base maintenance capital expenditures (i.e., capital expenditures to maintain and operate OG&E's business) plus capital expenditures for known and committed projects.



(In millions)	2016		2017		2018		2019		2020
Base Transmission	$	50	$	35	$	30	$	30	$	30
Base Distribution	185		195		175		175		175
Base Generation	45		40		75		75		75
Other	40		35		25		25		25
Total Base Transmission, Distribution, Generation and Other	320		305		305		305		305
Known and Committed Projects:
Transmission Projects:
Other Regionally Allocated Projects (A)	45		55		20		20		20
Large SPP Integrated Transmission Projects (B) (C)	20		150		20		—		—
Total Transmission Projects	65		205		40		20		20
Other Projects:
Environmental - low NO_X burners (D)	20		10		—		—		—
Environmental - dry scrubbers (D)	125		145		85		25		—
Combustion turbines - Mustang	150		160		30		—		—
Environmental - natural gas conversion (D)	—		20		25		25		—
Allowance of funds used during construction and ad valorem taxes	20		55		40		5		—
Total Other Projects	315		390		180		55		—
Total Known and Committed Projects	380		595		220		75		20
Total	$	700	$	900	$	525	$	380	$	325


(A)	Typically 100kV to 299kV projects. Approximately 30 percent of revenue requirement allocated to SPP members other than OG&E.


(B)	Typically 300kV and above projects. Approximately 85 percent of revenue requirement allocated to SPP members other than OG&E.



(C)	Project Type	Project Description	Estimated Cost (In millions)	Projected In-Service Date
	Integrated Transmission Project	30 miles of transmission line from OG&E's Gracemont substation to an AEP companion transmission line to its Elk City substation. Approximately $5.0 million of the estimated cost has been spent prior to 2016.	$45	Late 2017
	Integrated Transmission Project	126 miles of transmission line from OG&E's Woodward District Extra High Voltage substation to OG&E's Cimarron substation; construction of the Mathewson substation on this transmission line. Approximately $55.0 million of the estimated cost associated with the Mathewson to Cimarron line and substations will go into service in 2016; $35.0 million has been spent prior to 2016.	$185	Mid 2018


(D)	Represent capital costs associated with OG&E’s ECP to comply with the EPA’s MATS and Regional Haze Rule. More detailed discussion regarding the Regional Haze Rule and OG&E’s ECP can be found in Note 11 and under “Environmental Laws and Regulations” within “Management's Discussion and Analysis of Financial Condition and Results of Operations” under Part I, Item 2 of this Form 10-Q.

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

Pension Plan Funding

In July 2016, OGE Energy contributed $20.0 million to its Pension Plan, none of which was attributed to OG&E. No additional contributions are expected in 2016.

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.

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 (proceeds from OGE Energy's other offerings) will be adequate over the next three years to meet anticipated cash needs and to fund future growth opportunities. OG&E utilizes short-term borrowings (through a combination of bank borrowings, commercial paper and borrowings from OGE Energy) to satisfy temporary working capital needs and as an interim source of financing capital expenditures until permanent financing is arranged.

Short-Term Debt and Credit Facility

At September 30, 2016 there was $8.6 million in advances to OGE Energy compared to $333.6 million in advances to OGE Energy at December 31, 2015. OG&E has an intercompany borrowing agreement with OGE Energy whereby OG&E has access to up to $400.0 million of OGE Energy's revolving credit amount. This agreement has a termination date of December 13, 2018. At September 30, 2016, there were no intercompany borrowings under this agreement. OG&E has a $400.0 million revolving credit facility which is available to back up OG&E's commercial paper borrowings and to provide revolving credit borrowings. This bank facility can also be used as a letter of credit facility. At September 30, 2016, there were $1.7 million supporting letters of credit at a weighted-average interest rate of 0.95 percent. There were no outstanding borrowings under this revolving credit agreement and no outstanding commercial paper borrowings at September 30, 2016. At September 30, 2016, OG&E had $398.3 million of net available liquidity under its revolving credit agreement. 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, 2015 and ending December 31, 2016. 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 8 for a discussion of OG&E's short-term debt activity.

Critical Accounting Policies and Estimates

The Condensed Financial Statements and Notes to Condensed Financial Statements contain information that is pertinent to Management's Discussion and Analysis. In preparing the Condensed Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the Condensed Financial Statements and the reported amounts of revenues and expenses during the reporting period. Changes to these assumptions and estimates could have a material effect on OG&E's Condensed Financial Statements. However, OG&E believes it has taken reasonable positions where assumptions and estimates are used in order to minimize the negative financial impact to OG&E that could result if actual results vary from the assumptions and estimates.

In management's opinion, the areas of OG&E where the most significant judgment is exercised includes the determination of Pension Plan assumptions, income taxes, contingency reserves, asset retirement obligations and depreciable lives of property, plant and equipment, the determination of regulatory assets and liabilities and unbilled revenues. The selection, application and disclosure of OG&E's critical accounting estimates have been discussed with OGE Energy's Audit Committee and are discussed in detail in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in OG&E's 2015 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 10 and 11 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, future construction activities to avoid or mitigate harm to threatened or endangered species and requiring the installation and operation of emissions 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. OG&E believes that its operations are in substantial compliance with current Federal, state and local environmental standards. These environmental laws and regulations are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in OG&E's 2015 Form 10-K. Except as set forth below, there have been no material changes to such items.

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 will likely 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.

Regional Haze Control Measures

The EPA's 2005 Regional Haze Rule is intended to protect visibility in certain national parks and wilderness areas throughout the United States that may be impacted by air pollutant emissions.

On February 18, 2010, Oklahoma submitted its SIP to the EPA, which set forth the state's plan for compliance with Regional Haze Rule. On December 28, 2011, the EPA issued a final Regional Haze Rule for Oklahoma in which it rejected the SO₂ portion of the previously submitted Oklahoma SIP and issued a FIP in its place. OG&E and the State of Oklahoma's subsequent appeal of the FIP with the Tenth Circuit of Appeals and the U.S. Supreme Court ended on May 27, 2014 when the Supreme Court denied Petition for Certiorari, upholding the EPA's FIP for SO₂. The FIP compliance date is now January 4, 2019.

On December 9, 2015, the EPA released a final rule partially disapproving the revisions to the 2010 Oklahoma SIP for Regional Haze Rule and promulgated FIPs in their place for Oklahoma and Texas. The EPA disapproved portions of the Oklahoma SIP related to the establishment of reasonable progress goals for the Class I area located within the state and promulgated revised reasonable progress goals based on the FIP implementation in Texas. As a result, no further requirements are required in Oklahoma to meet the 2018 reasonable progress goals for Oklahoma.

21, 2015, Commissioner Bob Anthony issued his deliberation statement that was consistent with many parts of the ALJ's report, including the ALJ’s support of OG&E’s ECP, the ALJ’s recommendation to pre-approve certain estimated costs of the environmental recovery plan, and the ALJ’s recommendation to defer all other cost recovery issues until the next general rate case.

As of September 30, 2016, OG&E had incurred $138.6 million of construction work in progress on the dry scrubbers.

Cross-State Air Pollution Rule

In August 2011, the EPA finalized its CSAPR that required 27 states in the eastern half of the United States to reduce power plant emissions that contribute to ozone and particulate matter pollution in other states. In December 2011, the EPA published a supplemental CSAPR, which would make six additional states, including Oklahoma, subject to the CSAPR for NO_X emissions during the ozone-season from May 1 through September 30. Under the rule, OG&E would have been required to reduce ozone-season NO_X emissions from its electrical generating units within the state beginning in 2012. In response to legal challenges of the final rule on December 30, 2011, the U.S. Court of Appeals issued a stay of the rule, which includes the supplemental rule, pending a decision on the merits. By order dated August 21, 2012, the Court of Appeals vacated the CSAPR and ordered the EPA to promulgate a replacement rule. On April 29, 2014, the U.S. Supreme Court reversed the decision by the Court of Appeals. On October 23, 2014, the Court of Appeals for the District of Columbia Circuit granted the EPA's request that the court lift the stay of the CSAPR. The EPA subsequently clarified that compliance with the CSAPR would begin in 2015 using the amount of allowances originally scheduled to be available in 2012. As of December 31, 2015, OG&E has installed five low NO_X burner systems on two Muskogee units, two Sooner units and one Seminole unit and is in compliance with the final rule. In the meantime, the petitions for review of the supplemental rule remain pending before the D.C. Circuit Court of Appeals for consideration of issues that are not addressed by the Supreme Court's decision.

On September 7, 2016, the EPA finalized an update to the 2011 CSAPR which had been previously remanded back to the EPA by the D.C. Circuit Court of Appeals. The new rule, which was proposed on December 3, 2015, applies to ozone season, NOx only, in 22 eastern states including Oklahoma, utilizes a cap and trade program for NO_xemissions and will take effect on May 1, 2017. The final rule reduces the 2016 CSAPR emissions cap from all seven of OG&E’s coal and gas facilities by 47 percent combined. OG&E does not anticipate additional capital expenditures beyond what has been disclosed to comply with this new rule, and does not expect the reduced emissions cap will have a material impact on OG&E's financial position, results of operations or cash flows.

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, which became effective April 16, 2012. The final rule uses a numerical standard to establish limits for particulate matter (as a surrogate for toxic metals), hydrogen chloride and mercury emissions from coal-fired boilers. Compliance was required within three years of the rule's effective date. Based on OG&E's request for a one-year extension, the deadline for compliance was extended to April 16, 2016. To comply with this rule, OG&E utilized activated carbon injections at each of its five coal-fired units during 2015.

The final MATS rule was appealed by several parties, but OG&E was not a party to the appeals. After withstanding judicial scrutiny at the District of Columbia Circuit Court of Appeals, the MATS rule was challenged at the U.S. Supreme Court. On June 29, 2015, the U.S. Supreme Court found that the EPA should have considered the compliance costs imposed on utilities at the first stage of the EPA’s regulatory analysis. The U.S. Supreme Court did not vacate the rule, but reversed the D.C. Circuit's decision and remanded to the D.C. Circuit for further proceedings. OG&E believes that it is in compliance with the existing MATS rule.

Federal Clean Air Act New Source Review Litigation

In July 2008, OG&E received a request for information from the EPA regarding Federal Clean Air Act compliance at OG&E's Muskogee and Sooner generating plants.

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, 2016, no areas of Oklahoma had been designated as non-attainment for pollutants that are likely to affect OG&E's operations. Several processes are under way to designate areas in Oklahoma as attaining or not attaining revised NAAQS. OG&E is monitoring those 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.

In August of 2013, the Sierra Club and the Natural Resources Defense Council filed a complaint under the citizen suit provision of the Clean Air Act based on the EPA's failure to promulgate and publish designations for the 2010 revised primary SO₂ NAAQS. On March 2, 2015, the U.S. District Court for the Northern District of California issued an order granting the EPA and the Sierra Club's joint motion to approve and enter a consent decree that set forth mandatory deadlines for the EPA to issue designations for all areas of the country that remained undesignated. On September 18, 2015 the ODEQ reported to the EPA that no areas in Oklahoma should be designated as non-attainment for the 2010 SO₂standard. In a letter dated February 11, 2016, EPA Region 6 notified Oklahoma of their intent to designate part of Muskogee County in which OG&E’s Muskogee Power Plant is located, as non-attainment for the 2010 SO₂ NAAQS. This new designation was required to be finalized according to the EPA-Sierra Club consent decree by July 2, 2016. On June 17, 2016 and again on August 30, 2016, the EPA and the Sierra Club entered into a joint agreement to extend the July 2, 2016 deadline for certain areas including the Muskogee area. The date for a final EPA

decision on the proposed designation for the Muskogee area is pending. The EPA published final decisions on all other areas not subject to the extension on July 2, 2016. In this decision, Noble County, in which the Sooner plant is located, was deemed to be in attainment with the 2010 standard. On August 21, 2015, the EPA finalized a data requirements rule for implementing the 2010 SO₂ standard requiring air agencies to characterize air quality around sources that emit 2,000 tons per year or more of SO₂ via air quality modeling or ambient air monitoring. On June 28, 2016, the ODEQ filed their emissions monitoring plan with the EPA in compliance with the rule, stating that ambient monitoring will be used as the method for characterizing air quality for sources which release 2,000 tons of SO₂ per year or more. At this time, OG&E cannot determine with any certainty whether this determination will cause a material impact to OG&E's financial results.

On September 30, 2015 the EPA finalized a new ambient standard for ozone at 70 Ppb which is more stringent than the current standard of 75 Ppb, set in 2008. In September 2016, Governor Mary Fallin submitted to the EPA the recommendation of "attainment/unclassifiable" for all 77 counties in Oklahoma. This recommendation is subject to approval by the EPA.

OG&E is monitoring those 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.

Clean Power Plan

On October 23, 2015, the EPA published the final Clean Power Plan that established standards of performance for CO₂emissions from existing fossil-fuel-fired power plants along with state-specific CO₂reduction standards expressed as both rate-based (lbs/MWh) and mass-based (tons/yr) goals. The 2030 rate-based reduction requirement for all existing generating units in Oklahoma has decreased from a proposed 43 percent reduction to 32 percent in the final rule. The mass-based approach for existing units calls for a 24 percent reduction by 2030 in Oklahoma. The Clean Power Plan required that states submit to the EPA plans for achieving the state-specific CO₂reduction goals by September 6, 2016 or submit an extension request for up to two years. The compliance period was to begin in 2022, and emission reductions were to be phased in by 2030. The EPA also proposed a federal compliance plan to implement the Clean Power Plan in the event that an approvable state plan was not submitted to the EPA by the required deadline.

A number of states have filed lawsuits against the Clean Power Plan. On February 9, 2016, the U.S. Supreme Court issued orders staying implementation of the Clean Power Plan pending resolution of challenges to the rule. OG&E is unable to determine what impact the lawsuits will ultimately have on the Clean Power Plan or what impact the stay in implementation will have; however, if the Clean Power Plan survives judicial review and is implemented as written, it could result in significant additional compliance costs that would affect our future consolidated financial position, results of operations and cash flows if such costs are not recovered through regulated rates. Significant uncertainties would remain with regards to potential implementation in Oklahoma (and the federal plan that would be imposed by the EPA for states that do not submit approvable plans), including whether states would elect an emissions standards approach versus a state measures approach, whether and what type of emissions trading would be allowed, and available cost mitigation options. Due to the pending litigation and the uncertainties in the state approaches, the ultimate timing and impact of these standards on our operations cannot be determined with certainty at this time.

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. In December 2015, as part of the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change, the United States committed to reduce economy wide emissions by 26 percent to 28 percent below 2005 emission levels. This multinational agreement became open for signing on April 22, 2016 and will require countries to review and "represent a progression" every five years beginning in 2020. The agreement could result in future additional emissions reductions in the United States, 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 commitments under the December 2015 Paris Agreement will be implemented through the Clean Air Act, other than existing statutes and new legislation.

Several states 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.

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.

In 2009, the EPA adopted a comprehensive national system for reporting emissions of CO₂ and other greenhouse gases produced by major sources in the United States. The reporting requirements apply to large direct emitters of greenhouse gases with emissions equal to or greater than a threshold of 25,000 metric tons per year, which includes certain OG&E facilities. OG&E also reports quarterly its CO₂emissions from generating units subject to the Federal Acid Rain Program. OG&E has submitted the reports required by the applicable reporting rules.

Nonetheless, OG&E’s current business strategy will result in a reduced carbon emissions rate compared to current levels. As discussed in “Pending Regulatory Matters”, OG&E has filed an application with the OCC for approval of its plan to comply with the EPA’s MATS and Regional Haze Rule FIP by converting two coal-fired generating units at 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 also seeks to utilize renewable energy sources that do not emit greenhouse gases. OG&E's service territory borders one of the nation's best wind resource areas. OG&E has leveraged its geographic position to develop renewable energy resources and completed transmission investments to deliver the renewable energy. The SPP has begun to authorize the construction of transmission lines capable of bringing renewable energy out of the wind resource area 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.

EPA Startup, Shutdown, and Malfunction Policy

On May 22, 2015, the EPA issued a final rule to address the outdated 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 to assure consistency with the Clean Air Act and other recent court decisions. The Oklahoma Department of Environmental Quality is in the process of developing a SIP to comply with this rule, which is to be submitted to the EPA before November 2016. Although the extent of impact is not known, this rule will impact certain OG&E units.

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.

In 2014, OG&E enrolled in the Western Association of Fish and Wildlife Agencies range-wide conservation plan which consists of industry-specific conservation practices that apply to projects and activities in the impacted area. The range-wide conservation plan was approved by the U.S. Fish and Wildlife Service and incorporated as part of the agency’s final decision on March 27, 2014 to list the lesser prairie chicken as a threatened species. On September 1, 2015, the U.S. District Court Western District of Texas vacated federal protections for the lesser prairie chicken based on the U.S. Fish and Wildlife Service's failure to thoroughly consider the active conservation efforts in making the listing decision. On July 19, 2016, the U.S. Fish and Wildlife Service issued a final rule to amend its regulations to remove the lesser prairie chicken from the list of threatened species under the Endangered Species Act. On September 8, 2016, WildEarth Guardians, Defenders of Wildlife and the Center for Biological Diversity filed a petition with the U.S. Fish and Wildlife Services to list the lesser prairie chicken as "endangered" under the Endangered Species Act. OG&E will continue to monitor the progress of the petition.

Air Quality Control System

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.

On December 19, 2014, 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 final rule regulates coal ash as a solid waste rather than a hazardous waste, which would have made the management of coal ash more costly. The final rule is currently being appealed at the D.C. Circuit Court of Appeals. OG&E is in compliance with this rule at this time.

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. In 2015, OG&E obtained refunds of $2.3 million from the recycling of scrap metal, salvaged transformers and used transformer oil. This figure does not include the additional savings 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.

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. OG&E submitted compliance plans to the state in April 2015. 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.

On September 30, 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 occurs between 2018 and 2023. 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.

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 generate 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 a further discussion regarding contingencies relating to environmental laws and regulations, see Note 10.

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).

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Reference is made to Item 3 of Part I of OG&E's 2015 Form 10-K for a description of certain legal proceedings presently pending. Except as described above under Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Laws and Regulations," 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.

There have been no significant changes in OG&E's risk factors from those discussed in OG&E's 2015 Form 10-K, which are incorporated herein by reference.

Item 6. Exhibits.



Exhibit No.	Description
31.01	Certifications Pursuant to Rule 13a-14(a)/15d-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Schema Document.
101.PRE	XBRL Taxonomy Presentation Linkbase Document.
101.LAB	XBRL Taxonomy Label Linkbase Document.
101.CAL	XBRL Taxonomy Calculation Linkbase Document.
101.DEF	XBRL Definition Linkbase Document.

SIGNATURE

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



	OKLAHOMA GAS AND ELECTRIC COMPANY
	(Registrant)

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

November 3, 2016

OKLAHOMA GAS & ELECTRIC CO - FORM 10-Q - November 3, 2016

Attached files

OKLAHOMA GAS & ELECTRIC CO Reports