| OGE ENERGY CORP Item 1A Risk Factors |
| In the discussion of risk factors set forth below, unless the context otherwise requires, the terms “OGE Energy”, “we”, “our” and “us” refer to OGE Energy Corp, “OG&E” refers to our subsidiary Oklahoma Gas and 16 ______________________________________________________________________ Electric Company and “Enogex” refers to our subsidiary Enogex Inc |
| and its subsidiaries |
| In addition to the other information in this 10-K and other documents filed by us and/or our subsidiaries with the SEC from time to time, the following factors should be carefully considered in evaluating OGE Energy and its subsidiaries |
| Such factors could affect actual results and cause results to differ materially from those expressed in any forward-looking statements made by or on behalf of us or our subsidiaries |
| Additional risks and uncertainties not currently known to us or that we currently view as immaterial may also impair our business operations |
| REGULATORY RISKS Our profitability depends to a large extent on the ability of OG&E to fully recover its costs from its customers and there may be changes in the regulatory environment that impair its ability to recover costs from its customers |
| We are subject to comprehensive regulation by several federal and state utility regulatory agencies, which significantly influences our operating environment and OG&E’s ability to fully recover its costs from utility customers |
| With rising fuel costs, recoverability of under recovered amounts from our customers is a significant risk |
| The utility commissions in the states where OG&E operates regulate many aspects of our utility operations including siting and construction of facilities, customer service and the rates that we can charge customers |
| The profitability of our utility operations is dependent on our ability to fully recover costs related to providing energy and utility services to our customers |
| On May 20, 2005, OG&E filed for an dlra89 million annual rate increase to recover investments in our electric system, including those related to our McClain Plant |
| Several parties made filings recommending a significantly lower increase and, in certain cases, rate decreases |
| On December 12, 2005, the OCC issued an order providing for a dlra42dtta3 million rate increase in OG&E’s electric rates which became effective in January 2006 |
| We cannot assure you that the OCC will grant us rate increases in the future or in the amounts we request, and it could instead lower our rates |
| In recent years, the regulatory environments in which we operate have received an increased amount of public attention |
| It is possible that there could be changes in the regulatory environment that would impair our ability to fully recover costs historically absorbed by our customers |
| State utility commissions generally possess broad powers to ensure that the needs of the utility customers are being met |
| We are unable to predict the impact on our operating results from the future regulatory activities of any of the agencies that regulate us |
| Changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations |
| OG&E’s rates are subject to regulation by the states of Oklahoma and Arkansas, as well as by a federal agency, whose regulatory paradigms and goals may not be consistent |
| OG&E is currently a vertically integrated electric utility and most of its revenue results from the sale of electricity to retail customers subject to bundled rates that are approved by the applicable state utility commission and the sale of electricity to wholesale customers subject to rates and other matters approved by the FERC OG&E operates in Oklahoma and western Arkansas and is subject to regulation by the OCC and the APSC, in addition to the FERC Exposure to inconsistent state and federal regulatory standards may limit our ability to operate profitably |
| Further alteration of the regulatory landscape in which we operate may harm our financial condition and results of operations |
| Costs of compliance with environmental laws and regulations are significant and the cost of compliance with future environmental laws and regulations may adversely affect our results of operations, financial position, or liquidity |
| We are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, wildlife mortality, natural resources and health and safety that could, among other things, restrict or limit the output of certain facilities or the use of certain fuels required for the production of electricity and/or require additional pollution control equipment and otherwise increase costs |
| There are significant capital, operating and other costs associated with compliance with these environmental statutes, rules and regulations and those costs may be even more significant in the future |
| OG&E’s results of operations could be affected by OG&E’s ability to renegotiate franchise agreements with municipalities and counties in Oklahoma |
| 17 ______________________________________________________________________ OG&E has several franchise agreements with municipalities and counties in Oklahoma and OG&E’s ability to renegotiate these agreements may affect our results of operations and financial position |
| The regional power market in which OG&E operates has changing transmission regulatory structures, which may affect the transmission assets and related revenues and expenses |
| OG&E currently owns and operates transmission facilities as part of a vertically integrated utility |
| OG&E is a member of the SPP regional transmission organization (“RTO”) and has transferred operational authority (but not ownership) of OG&E’s transmission facilities to the SPP RTO The SPP RTO is planning to develop and operate a regional market for trading in electric energy |
| Because it remains unclear how and when the SPP RTO will implement the market or what new market rules it will establish, we are unable to assess fully the impact that these developments may have on our business |
| OG&E’s revenues, expenses, assets and liabilities may be adversely affected by changes in the organization, operation and regulation by the FERC or the SPP RTO OG&E’s Settlement Agreement with the OCC relating to its 2002 rate case targets dlra75 million of savings over a three-year period from the acquisition of new generation |
| OG&E may not be able to achieve such targeted savings, in which case, OG&E will be required to credit any unrealized savings to its Oklahoma customers |
| As part of OG&E’s settlement agreement in November 2002, OG&E indicated that the acquisition of up to 400 MW’s of new generation through the purchase of a 77 percent in the McClain Plant should provide dlra75 million of savings to our customers over three years |
| OG&E also agreed that if it is unable to demonstrate such savings, it will credit its customers any unrealized savings below dlra75 million |
| We cannot assure you that OG&E will be able to realize the targeted dlra75 million of savings to its customers, in which case, OG&E will be required to credit unrealized savings to its Oklahoma customers |
| Increased competition resulting from restructuring efforts could have a significant financial impact on us and OG&E and consequently decrease our revenue |
| We have been and will continue to be affected by competitive changes to the utility and energy industries |
| Significant changes already have occurred and additional changes have been proposed to the wholesale electric market |
| Although retail restructuring efforts in Oklahoma and Arkansas have been postponed for the time being, if such efforts were renewed, retail competition and the unbundling of regulated energy service could have a significant financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins and/or increased costs of capital |
| Any such restructuring could have a significant impact on our consolidated financial position, results of operations and cash flows |
| We cannot predict when we will be subject to changes in legislation or regulation, nor can we predict the impact of these changes on our consolidated financial position, results of operations or cash flows |
| We believe that the prices for electricity and the quality and reliability of our service currently place us in a position to compete effectively in the energy market |
| Recent events that are beyond our control have increased the level of public and regulatory scrutiny of our industry |
| Governmental and market reactions to these events may have negative impacts on our business, financial condition and access to capital |
| As a result of the energy crisis in California during the summer of 2001, the volatility of natural gas prices in North America, the bankruptcy filing by Enron Corporation, accounting irregularities at public companies in general, and energy companies in particular, and investigations by governmental authorities into energy trading activities, companies in the regulated and unregulated utility business have been under an increased amount of public and regulatory scrutiny and suspicion |
| The accounting irregularities have caused regulators and legislators to review current accounting practices, financial disclosures and relationships between corporations and their independent auditors |
| The capital markets and rating agencies also have increased their level of scrutiny |
| We believe that we are complying with all applicable laws and accounting standards, but it is difficult or impossible to predict or control what effect these types of events may have on our business, financial condition or access to the capital markets |
| As a result of these events, Congress passed the Sarbanes-Oxley Act of 2002 |
| It is unclear what additional laws or regulations may develop, and we cannot predict the ultimate impact of any future changes in accounting regulations or practices in general with respect to public companies, the energy industry or our operations specifically |
| Any new accounting standards could affect the way we are required to record revenues, expenses, assets and liabilities |
| These changes in accounting standards could lead to negative impacts on reported earnings or increases in liabilities that could, in turn, affect our reported results of operations |
| 18 ______________________________________________________________________ We are subject to substantial utility and energy regulation by governmental agencies |
| Compliance with current and future utility and energy regulatory requirements and procurement of necessary approvals, permits and certifications may result in significant costs to us |
| We are subject to substantial regulation from federal, state and local regulatory agencies |
| We are required to comply with numerous laws and regulations and to obtain numerous permits, approvals and certificates from the governmental agencies that regulate various aspects of our businesses, including customer rates, service regulations, retail service territories, sales of securities, asset acquisitions and sales, accounting policies and practices and the operation of generating facilities |
| We believe the necessary permits, approvals and certificates have been obtained for our existing operations and that our business is conducted in accordance with applicable laws; however, we are unable to predict the impact on our operating results from future regulatory activities of these agencies |
| OPERATIONS RISKS Our results of operations may be impacted by disruptions beyond our control |
| We are exposed to risks related to performance of contractual obligations by our suppliers |
| We are dependent on coal for much of our electric generating capacity |
| We rely on suppliers to deliver coal in accordance with short and long-term contracts |
| We have certain coal supply contracts in place; however, there can be no assurance that the counterparties to these agreements will fulfill their obligations to supply coal to us |
| The suppliers under these agreements may experience financial or technical problems which inhibit their ability to fulfill their obligations to us |
| In addition, the suppliers under these agreements may not be required to supply coal to us under certain circumstances, such as in the event of a natural disaster |
| Coal delivery may be subject to short-term interruptions or reductions due to various factors, including transportation problems, weather and availability of equipment |
| Failure or delay by our suppliers of coal deliveries could disrupt our ability to deliver electricity and require us to incur additional expenses to meet the needs of our customers |
| In addition, as agreements with our suppliers expire, we may not be able to enter into new agreements for coal delivery on equivalent terms |
| Also, because our generation and transmission systems are part of an interconnected regional grid, we face the risk of possible loss of business due to a disruption or black-out caused by an event (severe storm, generator or transmission facility outage) on a neighboring system or the actions of a neighboring utility, similar to the August 14, 2003 black-out in portions of the eastern US and Canada |
| Any such disruption could result in a significant decrease in revenues and significant additional costs to repair assets, which could have a material adverse impact on our financial condition and results of operations |
| Weather conditions such as tornadoes, thunderstorms, ice storms, wind storms, as well as seasonal temperature variations may adversely affect our results of operations and financial position |
| Weather conditions directly influence the demand for electric power |
| In OG&E’s service area, demand for power peaks during the hot summer months, with market prices also typically peaking at that time |
| In addition, we have historically sold less power, and consequently received less revenue, when weather conditions are milder |
| Unusually mild weather in the future could reduce our revenues, net income, available cash and borrowing ability |
| Severe weather, such as tornadoes, thunderstorms, ice storms and wind storms, may cause outages and property damage which may require us to incur additional costs that are generally not insured and that may not be recoverable from customers |
| The effect of the failure of our facilities to operate as planned, as described above, would be particularly burdensome during a peak demand period |
| FINANCIAL AND MARKET RISKS Increasing costs associated with our defined benefit retirement plans, health care plans and other employee-related benefits may adversely affect our results of operations, financial position, or liquidity |
| We have defined benefit and postretirement plans that cover substantially all of our employees |
| Assumptions related to future costs, returns on investments, interest rates and other actuarial assumptions have a significant impact on our earnings and funding requirements |
| Based on our assumptions at December 31, 2005 and assuming continuation of the current federal interest rate relief beyond 2005, in order to maintain minimum funding levels for our pension plans, we expect to continue to make future contributions to maintain required funding levels |
| It is our practice to also make voluntary contributions to maintain more prudent funding levels than minimally required |
| These amounts are estimates and may change based on actual stock market performance, changes in interest rates and any changes in governmental regulations |
| 19 ______________________________________________________________________ In addition to the costs of our retirement plans, the costs of providing health care benefits to our employees and retirees have increased substantially in recent years |
| We believe that our employee benefit costs, including costs related to health care plans for our employees and former employees, will continue to rise |
| The increasing costs and funding requirements with our defined benefit retirement plan, health care plans and other employee benefits may adversely affect our results of operations, financial position, or liquidity |
| We are a holding company with our primary assets being investments in our subsidiaries |
| We are a holding company and thus our investments in our subsidiaries are our primary assets |
| Substantially all of our operations are conducted by our subsidiaries |
| Consequently, our operating cash flow and our ability to pay our dividends and service our indebtedness depends upon the operating cash flow of our subsidiaries and the payment of funds by them to us in the form of dividends |
| At December 31, 2005, we had outstanding indebtedness and other liabilities of approximately dlra3dtta5 billion |
| Our subsidiaries are separate legal entities that have no obligation to pay any amounts due on our indebtedness or to make any funds available for that purpose, whether by dividends or otherwise |
| In addition, each subsidiary’s ability to pay dividends to us depends on any statutory and contractual restrictions that may be applicable to such subsidiary, which may include requirements to maintain minimum levels of working capital and other assets |
| Claims of creditors, including general creditors, of our subsidiaries on the assets of these subsidiaries will have priority over our claims generally (except to the extent that we may be a creditor of the subsidiaries and our claims are recognized) and claims by our shareowners |
| In addition, as discussed above, OG&E is regulated by state utility commissions in Oklahoma and Arkansas which generally possess broad powers to ensure that the needs of the utility customers are being met |
| To the extent that the state commissions attempt to impose restrictions on the ability of OG&E to pay dividends to us, it could adversely affect our ability to continue to pay dividends |
| We and our subsidiaries may be able to incur substantially more indebtedness, which may increase the risks created by our indebtedness |
| The terms of the indentures governing our debt securities do not fully prohibit us or our subsidiaries from incurring additional indebtedness |
| If we or our subsidiaries are in compliance with the financial covenants set forth in our revolving credit agreements and the indentures governing our debt securities, we and our subsidiaries may be able to incur substantial additional indebtedness |
| If we or any of our subsidiaries incur additional indebtedness, the related risks that we and they now face may intensify |
| Certain provisions in our charter documents and rights plan have anti-takeover effects |
| Certain provisions of our certificate of incorporation and bylaws, as well as the Oklahoma corporations statute, may have the effect of delaying, deferring or preventing a change in control of OGE Energy |
| Such provisions, including those regulating the nomination of directors, limiting who may call special stockholders’ meetings and eliminating stockholder action by written consent, together with the possible issuance of preferred stock of OGE Energy without stockholder approval, may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of our common stock or to launch other takeover attempts that a stockholder might consider to be in such stockholder’s best interest |
| Additionally, our rights plan may also delay, defer or prevent a change of control of OGE Energy |
| Under the rights plan, each outstanding share of common stock has one half of a right attached that trades with the common stock |
| Absent prior action by our board of directors to redeem the rights or amend the rights plan, upon the consummation of certain acquisition transactions, the rights would entitle the holder thereof (other than the acquiror) to purchase shares of common stock at a discounted price in a manner designed to result in substantial dilution to the acquiror |
| These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, discourage third party bidders from bidding for us and could significantly impede the ability of the holders of our common stock to change our management |
| Any reductions in our credit ratings could increase our financing costs and the cost of maintaining certain contractual relationships |
| We cannot assure you that any of our current ratings or our subsidiaries’ will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant |
| Any future downgrade could increase the cost of short-term borrowings but would not result in any defaults or accelerations as a result of the rating changes |
| Any downgrade could lead to higher borrowing costs and, if below investment grade, could require us to issue guarantees on behalf of Enogex to support some of OERI’s marketing operations |
| 20 ______________________________________________________________________ We are subject to commodity price risk |
| We are exposed to commodity price risk in our generation, retail distribution, pipeline and energy trading operations |
| To minimize the risk of commodity prices, we may enter into physical or financial derivative instrument contracts to hedge purchase and sale commitments, fuel requirements and inventories of natural gas, distillate fuel oil, electricity, coal and emission allowances |
| However, financial derivative instrument contracts do not eliminate the risk |
| Specifically, such risks include commodity price changes, market supply shortages and interest rate changes |
| The impact of these variables could result in our inability to fulfill contractual obligations, significantly higher energy or fuel costs relative to corresponding sales contracts or increased interest expense |
| However, exposure to commodity price risk related to OG&E’s retail customers is partially mitigated by its fuel adjustment clause, although we cannot assure you that all increases in our commodity prices, including fuel costs, will be completely recovered, or that any such recovery will be timely |
| We are also exposed to volatility from our exposure to keep-whole processing arrangements |
| Keep-whole processing arrangements generally require a processor of natural gas to keep its shippers whole on a Btu basis by replacing the Btu of the liquids extracted from the well stream with natural gas at market prices |
| Therefore, if natural gas prices increase and liquids prices do not increase by a corresponding amount, processing margins are negatively affected |
| In order to minimize the negative impact on processing margins, ethane and propane are rejected based upon then current market conditions |
| Exposure to these keep-whole processing arrangements was reduced, but not eliminated, through contract renegotiations and changes in the SOC that provides for a default processing fee in the event the natural gas liquids revenue less the associated fuel and shrinkage costs is negative |
| In addition, the Company actively monitors current and future commodity prices for opportunities to hedge its processing margin |
| Enogex uses forward physical sales and financial instruments to capture these spreads |
| Despite these activities, we cannot assure that our exposure to keep-whole processing arrangements has been eliminated |
| We mark our energy trading portfolio to estimated fair market value on a daily basis (mark-to-market accounting), which causes earnings variability |
| Market prices are utilized in determining the value of electric energy, natural gas and related derivative commodity instruments |
| For longer-term positions, which are limited to a maximum of 18 months, and certain short-term positions for which market prices are not available, models based on forward price curves are utilized |
| These models incorporate estimates and assumptions as to a variety of factors such as pricing relationships between various energy commodities and geographic locations |
| Actual experience can vary significantly from these estimates and assumptions |
| We are exposed to credit risks in our generation, retail distribution, pipeline and energy trading operations |
| Credit risk includes the risk that counterparties that owe us money or energy will breach their obligations |
| If the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements |
| In that event, our financial results could be adversely affected, and we could incur losses |