SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File Number 1-12579
OGE Energy Corp.
(Exact name of registrant as specified in its charter)
Oklahoma
73-1481638
(State or other jurisdiction
of
(I.R.S. Employer
incorporation or
organization)
Identification No.)
321 North Harvey
P. O. Box 321
Oklahoma City, Oklahoma 73101-0321
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: 405-553-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which
so registered
each class is registered
Common Stock
New York Stock Exchange and Pacific Stock Exchange
Rights to Purchase Series A Preferred Stock
New York Stock Exchange and Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X
No
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
As of February 28, 2001, Common Shares outstanding
were 77,921,997. Based upon the closing price on the New York Stock Exchange on
February 28, 2001, the aggregate market value of the voting stock held by
nonaffiliates of the Company was: Common Stock $1,809,348,770.
The proxy statement for the 2001 annual meeting of
shareowners is incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
Item 1. Business............................................................................................. 1
The Company.......................................................................................... 1
Electric Operations.................................................................................. 2
General..................................................................................... 2
Regulation and Rates........................................................................ 4
Rate Structure, Load Growth and Related Matters.............................................. 11
Fuel Supply.................................................................................. 12
Enogex................................................................................................ 14
Finance and Construction.............................................................................. 17
Environmental Matters................................................................................. 18
Employees............................................................................................. 19
Item 2. Properties............................................................................................ 20
Item 3. Legal Proceedings..................................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................................................... 28
Item 6. Selected Financial Data............................................................................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................... 30
Item 8. Financial Statements and Supplementary Data........................................................... 43
Item 9. Changes in and Disagreements with Accountants
and Financial Disclosure..................................................................... 76
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................... 76
Item 11. Executive Compensation................................................................................ 76
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................................ 76
Item 13. Certain Relationships and Related Transactions........................................................ 76
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................................................... 76
i
PART I
Item 1. Business.
THE COMPANY
OGE Energy Corp. (the "Company") is a public utility holding company, which was incorporated in August 1995 in the State of Oklahoma.
The Company serves as the parent holding company to its two primary subsidiaries, Oklahoma Gas and Electric Company ("OG&E") and Enogex Inc. ("Enogex").
Despite the continuing growth at Enogex, the Company's financial results and condition are substantially dependent at this time on the financial results and conditions of OG&E. OG&E is a regulated public utility engaged in the generation, transmission and distribution of electricity to retail and wholesale customers. OG&E was incorporated in 1902 under the laws of the Oklahoma Territory and is the largest electric utility in the State of Oklahoma. OG&E sold its retail gas business in 1928 and now owns and operates an interconnected electric production, transmission and distribution system, which includes eight generating stations with a total capability of 5,781 megawatts.
Enogex owns and operates approximately 9,700 miles of natural gas transmission and gathering pipelines, has interests in 13 gas processing plants, markets electricity, natural gas and natural gas liquids and invests in the drilling for and production of crude oil and natural gas.
OG&E's regulated utility business has been and will continue to be affected by competitive changes to the utility industry. Significant changes already have occurred in the wholesale electric markets at the Federal level. In Oklahoma, legislation was passed in 1997 to provide for the orderly restructuring of the electric industry with the goal to provide retail customers with the ability to choose their electric suppliers by July 1, 2002. In April 1999, Arkansas became the 18th state to pass a law calling for restructuring of the electric utility industry at the retail level. The law initially targeted customer choice of electricity providers by January 1, 2002, but in February 2001, the law was amended to delay customer choice until October 1, 2003. It now appears that customer choice of electricity suppliers may also be delayed in Oklahoma beyond 2002. See "Electric Operations - Regulation and Rates - Recent Regulatory Matters" for further discussion of these developments.
The Company's executive offices are located at 321 North Harvey, P. O. Box 321, Oklahoma City, Oklahoma 73101-0321; telephone (405) 553-3000.
ELECTRIC OPERATIONS
GENERAL
OG&E furnishes retail electric service in 280 communities and their contiguous rural and suburban areas. During 2000, six other communities and two rural electric cooperatives in Oklahoma and western Arkansas purchased electricity from OG&E for resale. The service area, with an estimated population of 1.8 million, covers approximately 30,000 square miles in Oklahoma and western Arkansas; including Oklahoma City, the largest city in Oklahoma, and Ft. Smith, Arkansas, the second largest city in that state. Of the 286 communities served, 257 are located in Oklahoma and 29 in Arkansas. Approximately 91 percent of total electric operating revenues for the year ended December 31, 2000, were derived from sales in Oklahoma and the remainder from sales in Arkansas.
OG&E's system control area peak demand as reported by the system dispatcher for the year was approximately 5,754 megawatts, and occurred on August 29, 2000. OG&E's load responsibility peak demand was approximately 5,570 megawatts on August 29, 2000, resulting in a capacity margin of approximately 17.7 percent. As reflected in the table below and in the operating statistics on page 3, total kilowatt-hour sales increased 5.9 percent in 2000 as compared to a decrease of 2.2 percent in 1999 and a 4.2 percent increase in 1998. Kilowatt-hour sales to OG&E's customers ("system sales") increased 6.5 percent due to more favorable weather in the last six months of 2000. Sales to other utilities and power marketers ("off-system sales") decreased 31.5 percent, 48.6 percent and 39.5 percent in 2000, 1999 and 1998, respectively. In 1999, total kilowatt-hour sales decreased due to a decrease in system sales and off-system sales, both of which were higher in 1998 because of the record heat experienced in the summer of 1998.
Variations in kilowatt-hour sales for the three years are reflected in the following table:
SALES (Millions of Kwh)
Inc/ Inc/ Inc/
2000 (Dec) 1999 (Dec) 1998 (Dec)
- -----------------------------------------------------------------------------------------------------------------
System Sales 25,002 6.5% 23,468 (0.7%) 23,642 6.6%
Off-System Sales 256 (31.5%) 374 (48.6%) 728 (39.5%)
-------------- --------------- ---------------
Total Sales 25,258 5.9% 23,842 (2.2%) 24,370 4.2%
============== =============== ===============
OG&E is subject to competition in various degrees from government-owned electric systems, municipally owned electric systems, rural electric cooperatives and, in certain respects, from other private utilities, power marketers and cogenerators. See Item 3 "Legal Proceedings" for a further discussion of this matter. Oklahoma law forbids the granting of an exclusive franchise to a utility for providing electricity.
Besides competition from other suppliers or marketers of electricity, OG&E competes with suppliers of other forms of energy. The degree of competition between suppliers may vary depending on relative costs and supplies of other forms of energy. See "Electric Operations - Regulation and Rates - Recent Regulatory Matters" for a discussion of the potential impact on competition from federal and state legislation.
OKLAHOMA GAS AND ELECTRIC COMPANY
CERTAIN OPERATING STATISTICS
Year Ended December 31
2000 1999 1998
--------------- -------------- --------------
ELECTRIC ENERGY:
(Millions of Kwh)
Generation (exclusive of station use).............................. 23,327 21,788 22,565
Purchased.......................................................... 3,634 3,795 3,984
--------------- -------------- --------------
Total generated and purchased.................................. 26,961 25,583 26,549
Company use, free service and losses............................... (1,703) (1,741) (2,179)
--------------- -------------- --------------
Electric energy sold........................................... 25,258 23,842 24,370
--------------- -------------- --------------
ELECTRIC ENERGY SOLD:
(Millions of Kwh)
Residential........................................................ 7,974 7,509 7,959
Commercial and industrial.......................................... 12,729 11,985 11,912
Public street and highway lighting................................. 70 69 68
Other sales to public authorities.................................. 2,458 2,354 2,352
System sales for resale............................................ 1,771 1,551 1,351
--------------- -------------- --------------
Total system sales............................................. 25,002 23,468 23,642
Off-system sales................................................... 256 374 728
--------------- -------------- --------------
Total sales.................................................... 25,258 23,842 24,370
=============== ============== ==============
ELECTRIC OPERATING REVENUES:
(Thousands)
Electric Revenues:
Residential...................................................... $ 575,656 $ 515,299 $ 537,486
Commercial and industrial........................................ 643,576 557,884 554,589
Public street and highway lighting............................... 10,301 9,736 9,618
Other sales to public authorities................................ 124,217 108,159 110,522
System sales for resale.......................................... 58,117 42,918 38,763
--------------- -------------- --------------
Total system sales............................................. 1,411,867 1,233,996 1,250,978
Off-system sales................................................. 12,948 27,894 37,435
--------------- -------------- --------------
Total Electric Revenues........................................ 1,424,815 1,261,890 1,288,413
Miscellaneous.................................................... 28,770 24,954 23,665
--------------- -------------- --------------
Total Operating Revenues....................................... $ 1,453,585 $ 1,286,844 $ 1,312,078
=============== ============== ==============
NUMBER OF ELECTRIC CUSTOMERS:
(At end of period)
Residential........................................................ 603,826 599,702 598,378
Commercial and industrial.......................................... 86,659 86,837 86,251
Public street and highway lighting................................. 364 249 249
Other sales to public authorities.................................. 11,501 11,151 11,183
Sales for resale................................................... 52 56 39
--------------- -------------- --------------
Total.......................................................... 702,402 697,995 696,100
=============== ============== ==============
RESIDENTIAL ELECTRIC SERVICE:
Average annual use (Kwh)........................................... 13,264 12,546 13,342
Average annual revenue............................................. $ 957.54 $ 860.98 $ 900.94
Average price per Kwh (cents)...................................... 7.22 6.86 6.75
REGULATION AND RATES
OG&E's retail electric tariffs in Oklahoma are regulated by the Oklahoma Corporation Commission ("OCC"), and in Arkansas by the Arkansas Public Service Commission ("APSC"). The issuance of certain securities by OG&E is also regulated by the OCC and the APSC. OG&E's wholesale electric tariffs, short-term borrowing authorization and accounting practices are subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC"). The Secretary of the Department of Energy has jurisdiction over some of OG&E's facilities and operations.
As part of the corporate reorganization whereby the Company became the holding company parent of OG&E, OG&E obtained the approval of the OCC. The order of the OCC authorizing OG&E to reorganize into a holding company structure contains certain provisions which, among other things, ensure the OCC access to the books and records of the Company and its affiliates relating to transactions with OG&E; require the Company and its subsidiaries to employ accounting and other procedures and controls to protect against subsidization of non-utility activities by OG&E's customers; and prohibit the Company from pledging OG&E assets or income for affiliate transactions.
For the year ended December 31, 2000, approximately 88 percent of OG&E's electric revenue was subject to the jurisdiction of the OCC, seven percent to the APSC, and five percent to the FERC.
Recent Regulatory Matters
On January 12, 2000, the OCC Staff (the "Staff") filed three applications to address various aspects of OG&E's electric rates. The first application related to the completion on March 1, 2000, of the recovery of the amortization premium paid by OG&E when it acquired Enogex in 1986 and the resulting removal, pursuant to the Acquisition Premium Credit Rider ("APC Rider"), of $12.8 million ($10.7 million in the Oklahoma Jurisdiction) from the amount being recovered by OG&E from its customers through currently authorized electric rates. OG&E consented to this action and in March 2000, the OCC approved the APC Rider for $10.7 million annually.
The second application related to a review of the Generation Efficiency Performance Rider ("GEP Rider"), which, as part of the OCC's order issued in 1997 in connection with OG&E's last general rate review (the "1997 Order"), was scheduled for review in March 2000. OG&E collected approximately $9.9 million pursuant to the GEP Rider during 2000. The GEP Rider initially was designed so that when OG&E's average annual cost of fuel per kwh was less than 96.261 percent of the average non-nuclear fuel cost per kwh of certain other investor-owned utilities in the region, OG&E was allowed to collect, through the GEP Rider, one-third of the amount by which OG&E's average annual cost of fuel was below 96.261 percent of the average of the other specified utilities. If OG&E's fuel cost exceeded 103.739 percent of the stated average, OG&E was not allowed to recover one-third of the fuel costs above that average from Oklahoma customers. In April 2000 testimony, the Staff stated that they continued to support incentive programs that reward superior performance, but in their view the existing GEP Rider was not functioning as they had originally envisioned it.
In June 2000, the OCC approved the collection of $6.6 million through the GEP Rider for the time period July 1, 2000 through June 30, 2001 and approved the following four modifications to the GEP Rider: (i) changing OG&E's peer group to include utilities with a higher coal-to-gas generation mix; (ii) reducing the amount of fuel costs that can be recovered if OG&E's costs exceed the new peer group by changing the percentage above which OG&E will not be allowed to recover one-third of the fuel costs from Oklahoma customers from 103.739 percent to 101.0 percent; (iii) reducing OG&E's share of cost savings as compared to its new peer group from 33 percent to 30 percent; and (iv) limiting to $10.0 million the amount of any awards paid to OG&E or penalties charged to OG&E. The GEP Rider is to be revised effective July 1 of each year to reflect changes in the relative annual cost of fuel reported for the preceding calendar year.
The final application, relating to fuel cost recoveries, was used by the Staff to address the competitive bid process of OG&E's gas transportation needs. In the 1997 Order, the OCC approved a stipulation wherein OG&E agreed to initiate a competitive bidding process for gas transportation service to its gas-fired plants, with the competitive services commencing no later than April 30, 2000. The 1997 Order also set annual compensation for the transportation services provided by Enogex to OG&E at $41.3 million annually until March 1, 2000, at which time the rate would drop to $28.5 million (reflecting removal of the APC Rider, upon the completion of the recovery from customers of the amortization premium paid by OG&E when it acquired Enogex in 1986) and remain at that level until competitively-bid gas transportation began. Final firm bids were submitted by Enogex and other pipelines on April 15, 1999. In July 1999, OG&E filed an application with the OCC requesting approval of a performance-based rate plan for its Oklahoma retail customers from April 2000 until the introduction of customer choice for electric power in July 2002. As part of this application, OG&E stated that Enogex had submitted the only viable bid ($33.4 million per year) for gas transportation to OG&E's six gas-fired power plants that were the subject of the competitive bid. As part of its application to the OCC, OG&E offered to discount Enogex's bid from $33.4 million annually to $25.2 million annually. OG&E executed a gas transportation contract with Enogex under which Enogex continues to serve the needs of OG&E's power plants at a price to be paid by OG&E of $33.4 million annually and, if OG&E's proposal had been approved by the OCC, OG&E would have recovered a portion of such amount ($25.2 million) from its customers. OG&E negotiated with the Staff, the Office of the Oklahoma Attorney General and a coalition of industrial customers in an effort to settle all issues (including the competitive bid process) associated with its application for a performance-based rate plan. When these negotiations failed, OG&E withdrew its application, which withdrawal was approved by the OCC in December 1999.
In July 2000, OG&E entered into a stipulation (the "Stipulation") with the Staff, the Office of the Attorney General and a coalition of industrial customers regarding the competitive bid process of OG&E's gas transportation service. The Stipulation (which, with one exception, was signed by all parties to the proceeding) would permit OG&E to recover $25.2 million annually for gas transportation services to be provided by Enogex pursuant to the competitive bid process. The Stipulation was presented for approval to an Administrative Law Judge ("ALJ") in September 2000, and the ALJ recommended its approval. However, at a hearing on September 28, 2000, the OCC chose to delay the decision concerning the Stipulation and two of the three commissioners expressed concern over the competitive bid process. OG&E cannot predict what further action the OCC may take. OG&E believes that the competitive bid process was appropriate and is currently collecting $28.5 million on an annual basis through its base rates and APC Rider for gas transportation services from Enogex for the power plant requirements covered by the competitive bid.
On February 13, 1998, the APSC staff filed a motion for a show cause order to review OG&E's electric rates in the State of Arkansas. The Staff recommended a $3.1 million annual rate reduction (based on a test year ended December 31, 1996). The Staff and OG&E reached a settlement for a $2.3 million annual rate reduction, which was approved by the APSC in August 1999.
State Restructuring Initiatives
Oklahoma: As previously reported, Oklahoma enacted in April 1997 the Electric Restructuring Act of 1997 (the "Act") which is designed to provide for choice by retail customers of their electric supplier by July 1, 2002. In 1998 and 1999, various amendments to the Act were enacted. Additional implementing legislation needs to be adopted by the Oklahoma Legislature to address many specific issues associated with the Act and deregulation. If implemented as proposed, the Act will significantly affect OG&E's future operations. The following summary of the Act does not purport to be complete and is subject to the specific provisions of the Act, which is codified at Sections 190.2 et. seq. of Title 17 of the Oklahoma Statutes.
The Act consists of eight sections, with Section 1 designating the name of the Act. Section 2 describes the purposes of the Act, which is generally to restructure the electric industry to provide for more competition and, in particular, to provide for the orderly restructuring of the electric utility industry in the State of Oklahoma in order to allow direct access by retail consumers to the competitive market for the generation of electricity while maintaining the safety and reliability of the electric system in the state.
The primary goals of a restructured electric utility industry, as set forth in Section 2 of the Act, are as follows:
Section 3 of the Act sets forth various definitions and exempts in large part several electric cooperatives and municipalities from the Act unless they choose to be governed by it.
Sections 4, 5 and 6 of the Act are designed to implement the goals of the Act and provide for various studies and task forces to assess the issues and consequences associated with the proposed restructuring of the electric utility industry. In Section 4, the Joint Electric Utility Task Force (the "Joint Task Force"), which is described below, was directed to undertake a study of all relevant issues relating to restructuring the electric utility industry in Oklahoma including, but not limited to, the issues set forth in Section 4, and to develop a proposed electric utility framework for Oklahoma. The OCC is prohibited from promulgating orders relating to the restructuring without prior authorization of the Oklahoma Legislature. Also, in developing a framework for a restructured electric utility industry, the OCC is to adhere to fourteen principles set forth in Section 4, including the following:
Subject to the principles set forth in Section 4, the Joint Task Force was directed to prepare a four-part study. This study, which was completed in 1999, addressed: (i) technical issues (including reliability, safety, unbundling of generation, transmission and distribution services, transition issues and market power); (ii) financial issues (including rates, charges, access fees, transition costs and stranded costs); (iii) consumer issues (such as the obligation to serve, service territories, consumer choices, competition and consumer safeguards); and (iv) tax issues (including sales and use taxes, ad valorem taxes and franchise fees).
Section 5 of the Act directed the Joint Task Force to study and submit a report on the impact of the restructuring of the electric utility industry on state tax revenues and all other facets of the current utility tax structure on the state and all political subdivisions of the state. This study also was completed in 1999. The Oklahoma Tax Commission and the OCC are precluded from issuing any rules on such matters without the approval of the Oklahoma Legislature. Also, the Act requires the establishment, on or before July 1, 2002, of a uniform tax policy that allows all competitors to be taxed on a fair and equitable basis.
Section 6 created the Joint Task Force, which consisted of seven members from the Oklahoma Senate and seven members from the Oklahoma House of Representatives. The Joint Task Force was directed to undertake the studies set forth in Sections 4 and 5 of the Act. The Joint Task Force is permitted to make final recommendations to the Governor and Oklahoma Legislature. The Joint Task Force is also empowered to retain consultants to study the creation of an Independent System Operator, which would coordinate the physical supply of electricity throughout Oklahoma and maintain reliability, security and stability of the bulk power system. In addition, such study shall assess the benefits of establishing a power exchange that would operate as a power pool allowing power producers to compete on common ground in Oklahoma. In fulfilling its tasks, the Joint Task Force can appoint advisory councils made up of electric utilities, regulators, residential customers and other constituencies.
Section 7 provides generally that, with respect to electric distribution providers, no customer switching will be allowed from the effective date of the Act until July 1, 2002, except by mutual consent. It also provides that any municipality that fails to become subject to the Act will be prohibited from selling power outside its municipal limits, except from lines owned on the effective date of the Act. Furthermore, this section provides generally that out-of-state suppliers of electricity and their affiliates who make retail sales of electricity in Oklahoma, through the use of transmission and distribution facilities of in-state suppliers, must provide equal access to their transmission and distribution facilities outside of Oklahoma. Section 8 sets forth the effective date of the Act as April 25, 1997.
The Act was modified during the 1999 session of the Oklahoma Legislature to clarify certain ambiguities by defining key terms in the Act.
Additional implementing legislation needs to be adopted by the Oklahoma Legislature to address many specific issues associated with the Act and with deregulation. In May 2000, a bill addressing the specific issues of deregulation was passed in the Oklahoma State Senate and then was defeated in the Oklahoma House of Representatives. OG&E cannot predict what, if any, legislation will be adopted at the next legislative session. OG&E intends to participate actively in the legislative process and expects the scheduled start date for customer choice of July 1, 2002 to be postponed.
The OCC has adopted rules that are designed to make the gas utility business in Oklahoma more competitive. These rules do not impact the electric industry. Yet, if implemented, the rules are expected to offer increased opportunities to Enogex's pipeline and related businesses.
Arkansas: In April 1999, Arkansas became the 18th state to pass a law ("the Restructuring Law") calling for restructuring of the electric utility industry at the retail level. The Restructuring Law, like the Oklahoma law, would significantly affect OG&E's future operations. OG&E's electric service area includes parts of western Arkansas, including Fort Smith, the second-largest metropolitan market in the state. The Restructuring Law initially targeted customer choice of electricity providers by January 1, 2002. In February 2001, the law was amended to delay the start date of customer choice of electric providers in Arkansas until October 1, 2003, with the APSC having discretion to further delay implementation to October 1, 2005. The Restructuring Law also provides that utilities owning or controlling transmission assets must transfer control of such transmission assets to an independent system operator, independent transmission company or regional transmission group, if any such organization has been approved by the FERC. Other provisions of the Restructuring Law permit municipal electric systems to opt in or out, permit recovery of stranded costs and transition costs and require filing of unbundled rates for generation, transmission, distribution and customer service. OG&E filed preliminary business separation plans with the APSC on August 8, 2000. The APSC has established a timetable to establish rules implementing the Arkansas restructuring statutes.
Automatic Fuel Adjustment Clauses
Variances in the actual cost of fuel used in electric generation and certain purchased power costs, as compared to that component in cost-of-service for ratemaking, are charged to substantially all of OG&E's electric customers through automatic fuel adjustment clauses, which are subject to periodic review by the OCC, the APSC and the FERC. In March 2000, the OCC approved the APC Rider for $10.7 million annually. As previously discussed, the purpose of this rider is to credit the Oklahoma retail customers for the completion of the OCC authorized recovery of the premium paid by OG&E when it acquired Enogex in 1986. The APC Rider is applicable to each Oklahoma retail rate schedule to which OG&E's fuel cost adjustment clause applies.
National Energy Legislation
Federal law imposes numerous responsibilities and requirements on OG&E. The Public Utility Regulatory Policies Act of 1978 requires electric utilities, such as OG&E, to purchase electric power from, and sell electric power to, qualified cogeneration facilities and small power production facilities ("QFs"). Generally stated, electric utilities must purchase electric energy and production capacity made available by QFs at a rate reflecting the cost that the purchasing utility can avoid as a result of obtaining energy and production capacity from these sources; rather than generating an equivalent amount of energy itself or purchasing the energy or capacity from other suppliers. OG&E has entered into agreements with four such cogenerators. Electric utilities also must furnish electric energy to QFs on a non-discriminatory basis at a rate that is just and reasonable and in the public interest and must provide certain types of service which may be requested by QFs to supplement or back up those facilities' own generation.
The Energy Policy Act of 1992 ("Energy Act") among other things, authorized the FERC to order transmitting utilities to provide transmission services to any electric utility, Federal power marketing agency, or any other person generating electric energy for sale or resale, at transmission rates set by the FERC. The Energy Act also was designed to promote competition in the development of wholesale power generation in the electric industry.
Subsequently, FERC issued Order 888 and Order 889 to facilitate third-party utilization of the transmission grid as the vehicle for developing a more competitive wholesale bulk power market. Order 888 requires all transmission owners to (i) offer comparable open-access transmission service for wholesale transactions under a tariff of general applicability on file at FERC and (ii) take transmission service for their own wholesale sales under their open-access tariff. Order 889 requires electric utilities to functionally separate their transmission and reliability functions from their wholesale power marketing functions. Order 889 also required electric utilities to develop and maintain an Open Access Same-Time Information System ("OASIS") to ensure that transmission customers have access to transmission information, through electronic means, that will enable them to obtain open-access transmission service on a basis comparable to a transmitting utility's own use of its system.
In December 1999, FERC issued Order 2000 to advance the formation of Regional Transmission Organizations ("RTO"). The rule requires that each public utility that owns, operates or controls facilities for the transmission of electric energy in interstate commerce file by October 15, 2000, a proposal with respect to forming and participating in an RTO. The FERC also codified minimum characteristics and functions that a transmission entity must satisfy in order to be considered an RTO. OG&E is a member of the Southwest Power Pool ("SPP"), the regional reliability organization for Oklahoma, Arkansas, Kansas, Louisiana, Missouri and part of Texas. OG&E participated with the SPP in the development of regional transmission tariffs and executed an Agency Agreement with the SPP to facilitate interstate transmission operations within this region. In October 2000, the SPP filed its application with the FERC to become a RTO. OG&E intends to meet its obligation under Order 2000 and under the restructuring law in Arkansas by joining the RTO being formed by the SPP. The transfer of operational control of OG&E's transmission system to a FERC-approved RTO is not expected to significantly impact OG&E's financial results. Yet, it is expected to increase the markets in which OG&E can sell power at wholesale and, at the same time, to increase competition in such wholesale markets. As a low-cost producer of electricity with two of the most efficient power plants in the country, OG&E expects to remain a competitive supplier of electricity.
Another impact of complying with FERC's Order 888 is a requirement for utilities to offer a transmission tariff that includes network transmission service ("NTS") to transmission customers. NTS allows transmission service customers to fully integrate load and resources on an instantaneous basis, in a manner similar to how OG&E has historically integrated its load and resources. Under NTS, OG&E and participating customers share the total annual transmission cost for their combined joint-use systems, net of related transmission revenues, based upon each company's share of the total system load. Management expects minimal annual expenses as a result of Orders 888 and 889.
Regulatory Assets and Liabilities
As discussed previously, Oklahoma and Arkansas enacted legislation that will restructure the electric utility industry in those states, assuming that all the conditions in the legislation are met. This legislation would deregulate OG&E's electric generation assets and the continued use of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation", with respect to the related regulatory assets may no longer be appropriate. This may result in either full recovery of generation-related regulatory assets (net of related regulatory liabilities) or a non-cash, pre-tax write-off as an extraordinary charge of up to $29 million, depending on the transition mechanisms developed by the legislature for the recovery of all or a portion of these net regulatory assets.
The enacted Oklahoma and Arkansas legislation does not affect OG&E's electric transmission and distribution assets and OG&E believes that the continued use of SFAS No. 71 with respect to the related regulatory assets is appropriate. However, if utility regulators in Oklahoma and Arkansas were to adopt regulatory methodologies in the future that are not based on cost-of-service, the continued use of SFAS No. 71 with respect to the regulatory assets related to the electric transmission and distribution assets may no longer be appropriate.
Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, management believes that its regulatory assets, including those related to generation, are probable of future recovery.
Summary
The Energy Act, the actions of the FERC, the restructuring legislation in Oklahoma and Arkansas, and other factors are expected to significantly increase competition in the electric industry. OG&E has taken steps in the past and intends to take appropriate steps in the future to remain a competitive supplier of electricity. While OG&E is supportive of competition, it believes that all electric suppliers must be required to compete on a fair and equitable basis and OG&E is advocating this position vigorously.
RATE STRUCTURE, LOAD GROWTH AND
RELATED MATTERS
Two of OG&E's primary goals are: (i) to increase electric revenues by attracting and expanding job-producing businesses and industries; and (ii) to encourage the efficient use of electrical energy by all of OG&E's customers. In order to meet these goals, OG&E has reduced and restructured its rates to its customers. At the same time, OG&E had implemented numerous energy efficiency programs and tariff schedules. In 2000, these programs and schedules included: (i) the "Surprise Free Guarantee" program, which guarantees residential customers comfort and annual energy consumption for heating, cooling and water heating for new homes built to energy efficient standards; (ii) a load curtailment rate for industrial and commercial customers who can demonstrate a load curtailment of at least 500 kilowatts; and (iii) the time-of-use rate schedules for various commercial, industrial and residential customers designed to shift energy usage from peak demand periods during the hot summer afternoon to non-peak hours.
OG&E made its pilot Real Time Pricing ("RTP") program permanent in 1999. The program was first implemented in 1996 for qualifying industrial and commercial customers. This tariff gives customers additional options on total kilowatt-hour growth and the control of growth of peak demand. RTP is a tariff option, which prices electricity so that the current price varies hourly with short notice to reflect current expected costs. The RTP technique will allow a measure of competitive pricing, a broadening of customer choice, the balancing of electricity usage and capacity in the short-and long-term, and assist customers in controlling their costs.
OG&E's 2000 marketing efforts included geothermal heat pumps, electrotechnologies, electric food service promotion and a heat pump promotion in the residential, commercial and industrial markets. OG&E works closely with individual customers to provide the best information on how current technologies can be combined with OG&E's marketing programs to maximize the customer's benefit.
FUEL SUPPLY
During 2000, approximately 74 percent of the OG&E-generated energy was produced by coal-fired units and 26 percent by natural gas-fired units. A slight decline in the percentage of coal generation in future years is expected to result from increases in natural gas-fired generation required to meet growing energy needs while coal generation will remain fairly constant. Over the last five years, the average cost of fuel used, by type, per million Btu was as follows:
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Coal............................ $0.87 $0.85 $0.85 $0.84 $0.83
Natural Gas..................... $4.93 $3.14 $2.83 $3.60 $3.61
Weighted Avg.................... $1.96 $1.54 $1.48 $1.39 $1.45
A portion of the fuel cost is included in base rates and differs for each jurisdiction. The portion of these costs that is not included in base rates is recovered through automatic fuel adjustment clauses. See "Electric Operations - Regulation and Rates - Automatic Fuel Adjustment Clauses."
Coal-Fired Units: All OG&E coal units, with an aggregate capability of 2,531 megawatts, are designed to burn low sulfur western coal. OG&E purchases coal primarily under long-term contracts. During 2000, OG&E purchased 10.2 million tons of coal from the following Wyoming suppliers: Kennecott Energy Company, Thunder Basin Coal Company, Powder River Coal Company, and Triton Coal Company. The combination of all coal has a weighted average sulfur content of 0.3 percent and can be burned in these units under existing federal, state and local environmental standards (maximum of 1.2 pounds of sulfur dioxide per million Btu) without the addition of sulfur dioxide removal systems. Based upon the average sulfur content, OG&E units have an approximate emission rate of 0.63 pounds of sulfur dioxide per million Btu. In anticipation of the more strict provisions of Phase II of The Clean Air Act, which began in the year 2000, OG&E had contracts in place to allow for a supply of very low sulfur coal from suppliers in the Powder River Basin to meet the new sulfur dioxide standards.
OG&E has continued its efforts to maximize the utilization of its coal units by optimizing the boiler operations at both the Sooner and Muskogee generating plants. See "Environmental Matters" for a discussion of an environmental proposal that, if implemented as proposed, could inhibit OG&E's ability to use coal as its primary boiler fuel.
Gas-Fired Units: For calendar year 2001, OG&E utilized a Request for Bid (RFB) to acquire natural gas supplies through June 2002. Successful bids were accepted that are expected to supply approximately 38% of OG&E's annual gas requirements. OG&E will request bids for additional summer gas supplies. The additional gas requirements will be secured through monthly and day-to-day purchases as needed.
In 1993, OG&E began utilizing a natural gas storage facility, that allows OG&E to optimize economic dispatch of its units. This allows OG&E to attain a fuel mix that provides the lowest possible overall cost of fuel.
ENOGEX
The Company's wholly-owned non-utility subsidiary, Enogex Inc. is an Oklahoma intrastate natural gas pipeline, which also conducts operations in related businesses through subsidiary companies. These businesses include gas processing operations and natural gas liquids marketing ("Gas Processing"); exploration and production of oil and natural gas ("Exploration and Production"); marketing of natural gas, natural gas liquids, and electricity ("Marketing"); and the gas gathering and interstate gas transmission operations ("Gas Transportation").
For the year ended December 31, 2000, and before elimination of intercompany items between OG&E and Enogex, Enogex's consolidated revenues and net income were approximately $2.1 billion and $19.7 million, respectively.
Recent Actions: In July 2000, Enogex entered into a new contract with OG&E for new gas transportation service not covered by the $33.4 million contract executed in October 1999 that resulted from the competitive bidding process.
Enogex plans to diversify its revenue and income sources by increasing revenues and net income from transmission services provided to third parties, by increasing the revenues and net income from Enogex subsidiaries' natural gas gathering and processing, by continuing development and production operations around our systems, and by actively pursuing potential acquisitions of complementary businesses or assets.
The fees charged by Ozark Pipeline ("Ozark") and by NOARK Pipeline Systems, L.P. ("NOARK") second interstate pipeline, Arkansas Western Pipeline ("AWP") are subject to regulation by the FERC. AWP is an eight-mile pipeline segment crossing the border between eastern Arkansas and Missouri. Ozark filed a general rate case pursuant to Section 4 of the Natural Gas Act in April 2000, seeking to increase its base rates for transportation services. The rate case was resolved by settlement, which was approved by the FERC in December 2000 for rates effective November 2000. The newly approved maximum lawful rate for Ozark and NOARK is $0.2867 per mmbtu. As a condition of the settlement Ozark rolled the existing AWP rate into the newly approved Ozark rate.
Gas Transportation.One of Enogex's primary lines of business is the transportation of natural gas, which includes both interstate and intrastate transportation along with natural gas gathering. This business is conducted by Enogex and several of its subsidiaries in Oklahoma, Arkansas and Texas. Interruptible transportation service is offered to most interstate and intrastate pipelines and end-users connected to Enogex's systems. Enogex and its subsidiaries operate approximately 9,700 miles of pipeline that gather and transport gas from the Arkoma basin of eastern Oklahoma and Arkansas, the Anadarko basin of western Oklahoma and the Permian basin of West Texas.
In July 1999, Enogex acquired Transok Holding LLC ("Transok"). Transok was established in 1955 to transport boiler fuel to the gas-powered electric generating facilities of Public Service Company of Oklahoma ("PSO"). PSO, a subsidiary of Central and South West Corporation, is the second largest electric utility in Oklahoma, serving the Tulsa market. Transok was acquired by PSO in 1961 and maintained a sole-supplier relationship with PSO until 1998, when ONG began supplying gas to three of the PSO generating stations pursuant to a competitive bid process put in place by the OCC. Notwithstanding the loss of the sole-supplier status, PSO remains an important customer of Transok. Transok continues to provide gas transmission delivery services to all of PSO's gas-fueled electric generation units in Oklahoma under a firm intrastate transportation contract. The current contract, which expires January 1, 2003, provides for a monthly demand charge plus a variable transportation rate depending on the origins of the gas supply being transported. In addition, Transok provides straight fee transportation services to West Texas Utilities ("WTU"), an affiliate of PSO, for gas delivery service to certain WTU generating stations in the Texas Panhandle under a contract that expires on December 31, 2004. In 2000, Transok's revenues from the PSO and WTU contracts were $10.2 million and $2.5 million respectively.
The rates charged by Enogex and Transok for transporting natural gas on behalf of an interstate natural gas pipeline company or a local distribution company served by an interstate natural gas pipeline company are subject to the jurisdiction of FERC under Section 311 of the Natural Gas Policy Act. The statute entitles Enogex and Transok to charge a "fair and equitable" rate that is subject to review and approval by the FERC at least once every three years. This rate review may involve an administrative-type trial and an administrative appellate review. In addition, Enogex and Transok have agreed to open their systems to all interstate shippers that are interested in transporting natural gas through the systems. Enogex and Transok are required to conduct this transportation on a non-discriminatory basis, although this transportation is subordinate to that performed for OG&E and PSO. This decision does not increase appreciably the federal regulatory burden on Enogex and Transok, but does give Enogex and Transok the opportunity to utilize any unused capacity on an interruptible basis and thus increase its transportation revenues.
Gas Processing. With the acquisition of Transok, Enogex is now one of the largest gas processors in the state of Oklahoma. Enogex now owns 11 gas processing plants, with an inlet capacity of over one billion cubic feet per day ("bcfd"), and has ownership interest in two other gas processing plants, with an inlet capacity of 310 million cubic feet per day ("mmcfd"), on a net percentage of ownership basis. The Gas processing operations are conducted through Enogex Products Corporation ("Products") and a subsidiary of Transok. Products has been active since 1968 in the processing of natural gas and marketing of natural gas liquids. The NuStar Joint Venture ("NuStar"), in which Products owns an 80 percent interest, has been engaged in the processing of natural gas since 1951. Products' and NuStar's natural gas processing plant operations consist of the extraction and sale of natural gas liquids. The products extracted from Transok's natural gas stream include marketable ethane, propane, butanes and natural gasoline mix. The residue gas remaining after the liquid products have been extracted consists primarily of ethane and methane. All Transok processing plants are cryogenic expander processing plants capable of recovering or rejecting ethane.
A portion of the commercial grade propane processed at Products' Calumet facility and two Transok plants are sold on the local market. The other natural gas liquids produced by Products and Transok are delivered into pipeline facilities of Koch Hydrocarbon ("Koch") and transported to Conway, Kansas and Mont Belvieu, Texas, where they are sold under contract or on the spot market. Ethane, which is produced at all plants except Calumet, is sold under a contract with Equistar Chemicals LP, Dow Hydrocarbons and Resources Inc. and Koch. Natural gas liquids from the NuStar Joint Venture are sold to the Huntsman Chemicals plant (formerly Rexene Chemicals) in Midland, Texas.
In processing and marketing natural gas liquids, Enogex competes against virtually all other gas processors producing and selling natural gas liquids. Enogex believes it will be able to continue to compete favorably against such companies. With respect to factors affecting the natural gas liquids industry generally, as the price of natural gas liquids fall without a corresponding decrease in the price of natural gas, it may become uneconomical to extract certain natural gas liquids. As to factors affecting Enogex specifically, the volume of natural gas processed at their plants is dependent upon the volume of natural gas gathered by Enogex and other gatherers through their pipeline systems. Generally, if the volume of natural gas gathered increases, then the volume of liquids extracted by Enogex should also increase.
Marketing. Enogex's natural gas marketing is conducted through OGE Energy Resources ("Energy Resources") and Transok. Energy Resources serves both producers and consumers of natural gas by buying natural gas at pooling points both on and off the Enogex pipeline system and reselling to interstate pipelines, end-users or downstream purchasers both within and outside Oklahoma. The integration of the Transok and Enogex pipelines has increased gas transportation and provided Energy Resources with a better platform from which to market natural gas.
Energy Resources purchases and sells gas under long-term contracts, as well as in the "spot" market. In response to changes currently taking place in the gas industry, Energy Resources has been de-emphasizing its short-term markets, and an increasing proportion of its revenues are earned pursuant to long-term sales contracts. However, short-term or "spot" sales of natural gas will continue to play a critical role in overall strategy because they provide an important source of market intelligence, while serving a portfolio balancing function. Price risk on extended term gas purchase or sales contracts entered into by Resources is hedged on the NYMEX futures exchange as a matter of corporate policy. Energy Resources markets natural gas developed by Enogex Exploration Corporation ("Exploration") when volumes are sufficiently concentrated to justify Energy Resources marketing these volumes directly instead of through the property operator. Other services provided include energy forward price evaluations and centralized corporate commodity price risk assessment.
In its marketing business, Energy Resources encounters competition from other natural gas transporters and marketers and from other available alternative energy sources. The effect of competition from alternative energy sources is dependent upon the availability and cost of competing supply sources. Energy Resources competes with all major suppliers of natural gas in the geographic markets they serve. For natural gas, those geographic markets are primarily the areas served by pipelines with which Enogex, Transok or NOARK are interconnected. Although the price of the gas is an important factor to a buyer of natural gas from Energy Resources, the primary factor is the total cost (including transportation fees) that the buyer must pay. Natural gas transported for Energy Resources by Enogex, Transok or NOARK is billed at the same rates charged for comparable third-party transportation. Energy Resources acts as OG&E's natural gas purchasing arm for the natural gas fuel requirements of the OG&E power stations.
Energy Resources also conducts wholesale electric power purchase and reselling operations and has received market-based rate authority from the FERC. See "Electric Operations - Regulation and Rates." During 2000, Energy Resources had approximately 1.1 million Mwh of power sales. Since March 2000, virtually all of the Company's surplus power sales activity has been performed by Energy Resources.
Exploration and Production. The exploration and production activities are conducted through Exploration, which was formed in 1988 primarily to engage in the development and production of oil and natural gas. Exploration focused its early drilling activity in the Antrim Devonian shale trend in the state of Michigan but in recent years has concentrated on drilling opportunities in Oklahoma. As a part of this refocusing, Exploration sold its interests in Texas and Utah during 2000. As of December 31, 2000, Exploration had interests in over 350 active wells and estimated proved reserves of 71,733 MMcfe. The standardized measure of discounted future net cash flow (with related Section 29 tax credits) of Exploration's proved reserves was $182.5 million at December 31, 2000. In 1998, Energy Resources initiated a program of hedging the future gas selling price on a portion of Exploration's net production through commodity futures contracts to cushion against unfavorable monthly price swings.
FINANCE AND CONSTRUCTION
The Company generally meets its cash needs through a combination of internally generated funds, short-term borrowings and permanent financing. Cash flows from operations have enabled the Company to internally generate the required funds to satisfy construction expenditures.
Management expects that internally generated funds will be adequate over the next three years to meet the Company's anticipated construction expenditures. The primary capital requirements for 2001 through 2003 are estimated as follows:
(dollars in millions) 2001 2002 2003
- ----------------------------------------------------------------------------
Electric utility construction
expenditures including AFUDC............ $118.0 $118.0 $118.0
Non-utility construction expenditures
and pending acquisitions................ 46.0 46.0 46.0
Maturities of long-term debt.............. 7.0 115.0 14.3
- ----------------------------------------------------------------------------
Total................................. $171.0 $279.0 $178.3
============================================================================
The three-year estimate includes expenditures for construction of new facilities to meet anticipated demand for service, to replace or expand existing facilities in both its electric and non-utility businesses, and to some extent, for satisfying maturing debt. Approximately $2.5 million of the Company's construction expenditures budgeted for 2001 are to comply with environmental laws and regulations. OG&E's construction program was developed to support an anticipated peak demand growth of one to two percent annually and to maintain minimum capacity reserve margins as stipulated by the Southwest Power Pool. See "Electric Operations - Rate Structure, Load Growth and Related Matters."
OG&E intends to meet its customers' increased electricity needs during the foreseeable future primarily by maintaining the reliability and increasing the utilization of existing capacity, increasing demand-side management efforts and, if necessary, purchasing power from third parties. OG&E will continue to evaluate these strategies against the construction of additional peaking units or another base-load generating unit. These evaluations will consider, among other things, the amount of capital requirements and the relative cost of fuel supply, compared to other alternatives.
The Company will continue to use short-term borrowings to meet temporary cash requirements. The Company has the necessary approvals to incur up to $400 million in short-term borrowings at any one time. At December 31, 2000, the Company had in place a line of credit for up to $300 million, with $200 million to expire on January 15, 2001, and the remaining $100 million to expire on January 15, 2004. In January 2001, the Company's line of credit for $200 million was renewed, with an expiration date of January 15, 2002.
The Company's financial results continue to depend to a large extent upon the rates OG&E charges customers and the actions of the regulatory bodies that set those rates, the amount of energy used by OG&E's customers, the cost and availability of external financing and the cost of conforming to government regulations.
ENVIRONMENTAL MATTERS
The Company's management believes all of its operations are in substantial compliance with present federal, state and local environmental standards. It is estimated that the Company's total expenditures for capital, operating, maintenance and other costs to preserve and enhance environmental quality will be approximately $50.5 million during 2001, compared to approximately $47.1 million utilized in 2000. Approximately $2.5 million of the Company's construction expenditures budgeted for 2001 are to comply with environmental laws and regulations. The Company continues to evaluate its environmental management systems to ensure compliance with existing and proposed environmental legislation and regulations and to better position itself in a competitive market.
As required by Title IV of the Clean Air Act Amendments of 1990 ("CAAA"), OG&E has completed installation and certification of all required continuous emissions monitors ("CEMs") at its generating stations. OG&E submits emissions data quarterly to the Environmental Protection Agency ("EPA") as required by the CAAA. Phase II sulfur dioxide ("SO2") emission requirements affected OG&E beginning in the year 2000. OG&E met the SO2 limits without additional capital expenditures through the purchase of low sulfur coal. In 2000, OG&E's SO2 emissions were well below the allowable limits.
With respect to the nitrogen oxide ("NOx") regulations of Title IV of the CAAA, OG&E committed to meeting a 0.45 lbs/mmbtu NOx emission level in 1997 on all coal-fired boilers. As a result, OG&E was eligible to exercise its option to extend the effective date of the lower emission requirements from the year 2000 until 2008. OG&E's average NOx emissions from its coal-fired boilers for 2000 was 0.37 lbs/mmbtu.
OG&E has submitted all of its required Title V permit applications. As a result of the Title V Program, OG&E paid approximately $0.4 million in fees in 2000.
Other potential air regulations have emerged that could impact OG&E. On December 14, 2000, the EPA announced that it is appropriate and necessary to regulate mercury emissions from coal-fired utility boilers. If the EPA decides to regulate mercury emissions, limits on the amount of mercury emitted are expected to be finalized by December 2004 with OG&E's compliance required by 2008. Depending upon the final regulations implemented, this could result in significant capital and operating expenditures.
In 1997, the EPA finalized revisions to the ambient ozone and particulate standards. However, the standards were challenged in court and the ozone standard was subsequently remanded back to the EPA for further consideration. The EPA appealed the decision to the U.S. Supreme Court and the Supreme Court issued its decision on February 27, 2001. In its decision, the Supreme Court remanded the case to the District of Columbia Court of Appeals, in part, to allow additional challenges to the standards. If the proposed standard is eventually upheld, then it is likely that Tulsa County will fail to meet the new standard for ozone. The EPA has already indicated that in addition to Tulsa County, Muskogee County will also be considered non-attainment because of its impact on Tulsa. If this occurs NOx reductions at OG&E's Muskogee Generating Station could be required. In addition, the EPA projects that Muskogee, Kay, Tulsa and Comanche Counties in Oklahoma would fail to meet the standard for particulate matter. If reductions are required in Muskogee, Kay and Oklahoma Counties, significant capital expenditures could be required by OG&E.
The EPA also has issued regulations concerning regional haze. These regulations are intended to protect visibility in national parks and wilderness areas throughout the United States. In Oklahoma, the Wichita Mountains would be the only area covered under the regulation. Sulfates and nitrate aerosols (both emitted from coal-fired boilers) can lead to the degradation of visibility. Under these regulations, it is possible that controls on emission sources hundreds of miles away from the affected area may be required. The EPA has begun the process of determining what, if any, impact emission sources in Oklahoma have on national parks and wilderness areas. If an impact is determined, then significant capital expenditures could be required for both Sooner and Muskogee Generating Stations.
In December 1997, the United States was a signatory to the Kyoto Protocol for the reduction of greenhouse gases that contribute to global warming. The U.S. committed to a seven percent reduction from the 1990 levels. While it appears that the Senate will not ratify the Kyoto Protocol, momentum is gaining in the federal government for some type of reduction in the level of carbon dioxide emissions. If legislation is passed, it could have a tremendous impact on OG&E's operations by requiring OG&E to significantly reduce the use of coal as a fuel source.'
OG&E has and will continue to seek new pollution prevention opportunities and to evaluate the effectiveness of its waste reduction, reuse and recycling efforts. In 2000, OG&E obtained refunds of approximately $365,000 from its recycling efforts. 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 reuse of existing materials. Similar savings are anticipated in future years.
OG&E has received approvals to renew its Oklahoma Pollution Discharge Elimination System ("OPDES") permits for all facilities except one, which is awaiting final regulatory action. All of the renewed permits issued to date offer greater operational flexibility than those in the past. In addition, OG&E has made application for a new OPDES permit to cover gas turbine generating units that were constructed at one of its existing plants.
OG&E requested that the State agency responsible for the development of Water Quality Standards remove the agriculture beneficial use classification from one of its cooling water reservoirs. Without removal of this classification, OG&E could be subjected to costly treatment and/or facility reconfiguration requirements. Both the State and EPA have now approved this request.
OG&E remains a party to one action brought by the EPA concerning cleanup of a disposal site for hazardous and toxic waste. See Item 3 "Legal Proceedings."
The Company has and will continue to evaluate the impact of its operations on the environment. As a result, contamination on Company property may be discovered from time to time. One site has been identified as having been contaminated by historical operations. Remedial options based on the future use of this site are being pursued with appropriate regulatory agencies. The cost of these actions has not had and is not anticipated to have a material adverse impact on the Company's financial position or results of operations.
EMPLOYEES
The Company and its subsidiaries had 3,032 employees at December 31, 2000.
Item 2. Properties.
OG&E owns and operates an interconnected electric production, transmission and distribution system, located in Oklahoma and western Arkansas, which includes eight generating stations with an aggregate capability of 5,781 megawatts. The following table sets forth information with respect to electric generating facilities, all of which are located in Oklahoma:
Unit Station
Year Capability Capability
Station & Unit Fuel Installed (Megawatts) (Megawatts)
- -------------- ---- --------- ----------- -----------
Seminole 1 Gas 1971 517.0
2 Gas 1973 505.0
3 Gas 1975 496.0 1,518
Muskogee 3 Gas 1956 171.0
4 Coal 1977 503.0
5 Coal 1978 500.0
6 Coal 1984 516.0 1,690
Sooner 1 Coal 1979 500.0
2 Coal 1980 512.0 1,012
Horseshoe 6 Gas 1958 171.0
Lake 7 Gas 1963 234.0
8 Gas 1969 402.0
9 Gas 2000 45.0
10 Gas 2000 45.0 897
Mustang 1 Gas 1950 56.0
2 Gas 1951 53.0
3 Gas 1955 118.0
4 Gas 1959 258.0
5 Gas 1971 63.0 548
Conoco 1 Gas 1991 32.0
2 Gas 1991 31.0 63
Enid 1 Gas 1965 11.0
2 Gas 1965 8.0
3 Gas 1965 12.0
4 Gas 1965 12.0 43
Woodward 1 Gas 1963 10.0 10
-----------
Total Generating Capability (all stations) 5,781
===========
At December 31, 2000, OG&E's transmission system included: (i) 64 substations with a total capacity of approximately 18 million kVA and approximately 3,996 structure miles of lines in Oklahoma; and (ii) six substations with a total capacity of approximately 2.3 million kVA and approximately 241 structure miles of lines in Arkansas. OG&E's distribution system included: (i) 299 substations with a total capacity of approximately 4.4 million kVA, 22,326 structure miles of overhead lines, 1,739 miles of underground conduit and 7,076 miles of underground conductors in Oklahoma; and (ii) 31 substations with a total capacity of approximately 731,000 kVA, 1,861 structure miles of overhead lines, 198 miles of underground conduit and 411 miles of underground conductors in Arkansas.
Enogex and its subsidiaries own: (i) approximately 9,700 miles of intrastate transmission and gathering lines in the states of Oklahoma and Texas; (ii) 11 natural gas processing plants with a capacity to process over one bcfd, all located in Oklahoma; (iii) 75 percent interest in NOARK, which consists of 925 miles of interstate transmission and gathering pipelines, located in eastern Oklahoma and Arkansas; (iv) an 18 billion cubic feet ("bcf") gas storage field in Oklahoma with a withdrawal capacity of 450 mmcfd; (v) five bcf of gas storage in Oklahoma with a withdrawal capacity of 400 mmcfd; (vi) an 80 percent interest in NuStar, which includes a 66.67 percent interest in the 110 mmcfd capacity Benedum processing plant, a 100 percent interest in a smaller 30 mmcfd by-pass plant, over 200 miles of gathering pipelines and 52 miles of NGL pipeline, all located in the Permian Basin of West Texas; and (vii) 100 percent of the Belvan Corp., which consists of a natural gas processing plant with a capacity of process 15 mmcfd, a sulfur recovery plant, and an eight mile NGL pipeline, and 345 miles of gathering lines in West Texas.
During the three years ended December 31, 2000, the Company's gross property, plant and equipment additions approximated $1.4 billion and gross retirements approximated $163.2 million. These additions were provided by internally generated funds from operating cash flows, permanent financing and short-term borrowings. The additions during this three-year period amounted to approximately 38.5 percent of total property, plant and equipment at December 31, 2000.
Item 3. Legal Proceedings.
1. On January 11, 1993, OG&E received a Section 107 (a) Notice Letter from the EPA, Region VI, as authorized by the CERCLA, 42 USC Section 9607 (a), concerning the Double Eagle Refinery Superfund Site located at 1900 NE First Street in Oklahoma City, Oklahoma. The EPA has named OG&E and 45 others as PRPs. Each PRP could be held jointly and severally liable for remediation of this site.
On February 15, 1996, OG&E elected to participate in the de minimis settlement of EPA's Administrative Order on Consent. This would limit OG&E's financial obligation and also would eliminate its involvement in the design and implementation of the site remedy. A third party is currently contesting OG&E's participation as a de minimis party. Regardless of the outcome of this issue, OG&E believes that its ultimate liability for this site will not be material primarily due to the limited volume of waste sent by OG&E to the site.
2. As previously reported, on September 18, 1996, Trigen-Oklahoma City Energy Corporation ("Trigen") sued OG&E in the United States District Court, Western District of Oklahoma, Case No. CIV-96-1595-M. Trigen alleged six causes of action: (i) monopolization in violation of Section 2 of the Sherman Act; (ii) attempt to monopolize in violation of Section 2 of the Sherman Act; (iii) acts in restraint of trade in violation of Oklahoma law, 79 O.S. 1991, § 1; (iv) discriminatory sales in violation of 79 O.S. 1991, § 4; (v) tortious interference with contract; and (vi) tortious interference with a prospective economic advantage. On December 21, 1998, the jury awarded Trigen in excess of $30 million in actual and punitive damages. On February 19, 1999, the trial court entered judgment in favor of Trigen as follows: (i) $6.8 million for various antitrust violations, (ii) $4 million for tortious interference with an existing contract, (iii) $7 million for tortious interference with a prospective economic advantage and (iv) $10 million in punitive damages. The trial judge, in a companion order, acknowledged that the portions of the judgment could be duplicative, that the antitrust amounts could be tripled and that parties should address these issues in their post-trial motions. On January 25, 2000, a trial judge rejected OG&E's post-trial motions to reverse the jury verdict or to grant OG&E a new trial. The judge did, however, reduce the original $30 million judgment against OG&E to $20 million. On February 4, 2000, OG&E filed a notice of appeal. In addition, Trigen has filed a motion seeking attorneys' fees and costs in an amount over $3 million. Trigen will not be entitled to attorneys' fees or costs unless it prevails on appeal. Oral argument was heard by the Tenth Circuit on January 22, 2001. A decision is not expected for several months. While the outcome of the appeal is uncertain, legal counsel and management believe that it is not probable that Trigen will ultimately succeed in preserving the verdicts or judgment. Accordingly, the Company has not accrued any loss associated with the damages awarded. The Company believes that the ultimate resolution of this case will not have a material adverse effect on the Company's consolidated financial position or results of operations.
3. The City of Enid, Oklahoma ("Enid") through its City Council, notified OG&E of its intent to purchase OG&E's electric distribution facilities for Enid and to terminate OG&E's franchise to provide electricity within Enid as of June 26, 1998. On August 22, 1997, the City Council of Enid adopted Ordinance No. 97-30, which in essence granted OG&E a new 25-year franchise subject to approval of the electorate of Enid on November 18, 1997. In October 1997, eighteen residents of Enid filed a lawsuit against Enid, OG&E and others in the District Court of Garfield County, State of Oklahoma, Case No. CJ-97-829-01. Plaintiffs seek a declaration holding that (i) the Mayor of Enid and the City Council breached their fiduciary duty to the public and violated Article 10, Section 17 of the Oklahoma Constitution by allegedly "gifting" to OG&E the option to acquire OG&E's electric system when the City Council approved the new franchise by Ordinance No. 97-30; (ii) the subsequent approval of the new franchise by the electorate of the City of Enid at the November 18, 1997, franchise election cannot cure the alleged breach of fiduciary duty or the alleged constitutional violation; (iii) violations of the Oklahoma Open Meetings Act occurred and that such violations render the resolution approving Ordinance No. 97-30 invalid; (iv) OG&E's support of the Enid Citizens' Against the Government Takeover was improper; (v) OG&E has violated the favored nations clause of the existing franchise; and (vi) the City of Enid and OG&E have violated the competitive bidding requirements found at 11 O.S. 35-201, et seq. Plaintiffs seek money damages against the Defendants under 62 O.S. 372 and 373. Plaintiffs allege that the action of the City Council in approving the proposed franchise allowed the option to purchase OG&E's property to be transferred to OG&E for inadequate consideration. Plaintiffs demand judgment for treble the value of the property allegedly wrongfully transferred to OG&E. On October 28, 1997, another resident filed a similar lawsuit against OG&E, Enid and the Garfield County Election Board in the District Court of Garfield County, State of Oklahoma, Case No. CJ-97-852-01. However, Case No. CJ-97-852-01 was dismissed without prejudice in December 1997. On December 8, 1997, OG&E filed a Motion to Dismiss Case No. CJ-97-829-01 for failure to state claims upon which relief may be granted. This motion is currently pending. While the Company cannot predict the precise outcome of this proceeding, the Company believes at the present time that this lawsuit is without merit and intends to vigorously defend this case.
4. On February 19, 1998, Enogex was sued by Melvin Scoggin and Oak Tree Resources, LLC, in the District Court of Oklahoma County, State of Oklahoma, for alleged breach of contract, fraud, breach of fiduciary duty, misappropriation and unjust enrichment arising from communications that allegedly created agreements regarding oil and gas exploration activities. Plaintiffs' seek damages in excess of $25 million. Enogex filed an answer denying Plaintiffs' allegations and various motions for summary judgment. On October 20, 1999, and October 25, 1999, the trial judge granted Enogex's motions for summary judgment and entered judgment in favor of Enogex on all claims raised by the Plaintiffs. The Plaintiffs appealed the trial court decision and the Court of Appeals upheld the trial court's judgment on all counts. The time for Plaintiffs to appeal the decision to the Supreme Court of Oklahoma has not expired as of the date of this report. The Company continues to believe that this case is without merit.
5. United States of America ex rel., Jack J. Grynberg v. Enogex Inc., Enogex Services Corporation (now, Energy Resources) and OG&E. (United States District Court for the Western District of Oklahoma, Case No. CIV-97-1010-L.) United States of America ex rel., Jack J. Grynberg v. Transok Inc. et al. (United States District Court for the Eastern District of Louisiana, Case No. 97-2089; United States District Court for the Western District of Oklahoma, Case No. 97-1009M.) On June 15, 1999, the Company was served with Plaintiff's Complaint. Plaintiff's action is a qui tam action under the False Claims Act. Jack J. Grynberg, as individual Relator on behalf of the United States Government, Plaintiff, alleges: (i) each of the named Defendants have improperly and intentionally mismeasured gas (both volume and BTU content) purchased from federal and Indian lands which have resulted in the under-reporting and underpayment of gas royalties owed to the Federal Government; (ii) certain provisions generally found in gas purchase contracts are improper; (iii) transactions by affiliated companies are not arms-length; (iv) excess processing cost deduction; and (v) failure to account for production separated out as a result of gas processing. Grynberg seeks the following damages: (a) additional royalties which he claims should have been paid to the Federal Government, some percentage of which Grynberg, as Relator, may be entitled to recover; (b) treble damages; (c) civil penalties; (d) an order requiring Defendants to measure the way Grynberg contends is the better way to do so; (e) interest, costs and attorneys' fees. Plaintiff has filed over 70 other cases naming over 300 other defendants in various Federal Courts across the country containing nearly identical allegations.
In qui tam actions, the United States Government can intervene and take over such actions from the Relator. The Department of Justice, on behalf of the United States Government, has decided not to intervene in this action or any of the other Grynberg qui tam actions.
On November 16, 1999, the Multidistrict Litigation Panel ("MDL Panel") entered its order transferring and consolidating for pretrial purposes approximately 76 other similar actions filed in nine other Federal Courts. The consolidated cases are now before the United States District Court for the District of Wyoming.
On November 17, 1999, the Company filed a motion to dismiss, seeking: (i) a stay of discovery until after the dispositive motions are resolved; and (ii) dismissal of the complaint on various basis under the Federal Rules of Civil Procedure. A number of other defendants adopted the Company's pleadings or filed similar motions. On December 22, 1999, the Company joined a number of other defendants in filing Defendants' Statement of Points and Authorities regarding discovery issues. Grynberg's responses to all motions to dismiss were filed on January 14, 2000, and the Company's reply and those of other defendants were filed on February 14, 2000. A hearing on the motions to dismiss was held on March 17, 2000. The Court has not yet ruled on the motions to dismiss.
On April 10, 2000, the MDL Panel transferred another qui tam case (Quinque Operating Company, et al. v. Enogex Services Corporation, Enogex, Inc., Transok LLC, Transok, Inc., and Oklahoma Gas & Electric Company, et al.) ("Quinque") to Judge Downes in Wyoming and the MDL Panel consolidated it with this case.
On July 27, 2000, the Department of Justice ("DOJ") filed a Motion to Dismiss certain of Grynberg's claims on the basis Grynberg was not the first to file such qui tam allegations. The DOJ's Motion to Dismiss was heard on February 22, 2001.
On October 6, 2000, the MDL Panel transferred two additional qui tam cases (Harold E. Wright, et al. v. AGIP Petroleum, et al., E.D. Texas, C.A. No. 9:98-30 and M. Glenn Ousterhaudt, III, et al. v. Amoco Production, et al., E.D. Texas, C.A. No. 9:98-101) to Judge Downes in Wyoming, and the MDL consolidated them with this case and the Quinque case. The Company has not been named as a party in either the Wright or Ousterhaudt cases; therefore, no information regarding these two cases is being provided at this time.
While the Company cannot predict the precise outcome of this proceeding, the Company believes at the present time that this lawsuit is without merit and intends to vigorously defend this case.
6. On September 24, 1999, the Company was served with an Amended Class Action Petition filed in United States District Court, State of Kansas by Quinque Operating Company, on behalf of itself and others, alleging approximately 200 defendants, including OG&E, Enogex and two subsidiaries of Enogex, including Transok, have improperly and intentionally mismeasured gas (both volume and Btu content) purchased from all lands in the United States except from federal and Indian lands. Plaintiffs claim (i) underpayment by the Company and all other Defendants of gas royalties claimed to be owed to the Plaintiffs and the punitive class; (ii) breach of contract; (iii) negligence or intentional misrepresentation; (iv) civil conspiracy; (v) fraud; and (vi) breach of fiduciary duty. Plaintiffs seek the following damages: (a) actual damages in excess of $75,000; (b) punitive damages; (c) certification of the class; and (d) injunction to prevent mismeasurement in the future.
On October 5, 1999, the Company filed its Notice with the MDL Panel advising the MDL Panel of a possible tag-along action to the Grynberg qui tam actions discussed in Item 3, number 4 above. On March 30, 2000, the MDL Panel heard oral argument regarding the transfer of this action as a tag-along case; and on April 10, 2000, the MDL Panel transferred this case to Judge Downes in Wyoming and consolidated it with the Grynberg cases above.
On September 8, 2000, Plaintiffs filed a Motion for Expedited Hearing on Motion to Remand. On January 12, 2001, the Court issued its oral order granting Plaintiff's Motion to Remand. The Court is currently reviewing a Motion to Reconsider before sending the Order to the Stevens County Clerk, effectively remanding the case back to the Kansas State Court.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Executive Officers of the Registrant.
The following persons were Executive Officers of the Registrant as of March 15, 2001:
Name Age Title
- -------------------- --- --------------------------------
Steven E. Moore 54 Chairman of the Board, President
and Chief Executive Officer
Al M. Strecker 57 Executive Vice President and
Chief Operating Officer
Roger A. Farrell 48 President and Chief Executive
Officer - Enogex Inc.
James R. Hatfield 43 Senior Vice President and
Chief Financial Officer
Jack T. Coffman 57 Senior Vice President - Power
Supply - OG&E
Melvin D. Bowen, Jr. 59 Vice President - Power Delivery -
OG&E
Michael G. Davis 51 Vice President - Marketing and
Customer Care
Irma B. Elliott 62 Vice President and
Corporate Secretary
Steven R. Gerdes 44 Vice President - Shared
Services
David J. Kurtz 39 Vice President - Business
Development
Donald R. Rowlett 43 Vice President and Controller
Don L. Young 60 Controller Corporate Audits
Eric B. Weekes 49 Treasurer
No family relationship exists between any of the Executive Officers of the Registrant. Messrs. Moore, Strecker, Hatfield, Davis, Gerdes, Kurtz, Rowlett, Young, Weekes and Ms. Elliott are also officers of OG&E. Each Officer is to hold office until the Board of Directors meeting following the next Annual Meeting of Shareowners, currently scheduled for May 24, 2001.
The business experience of each of the Executive Officers of the Registrant for the past five years is as follows:
Name Business Experience
- -------------------- -------------------------------------------------
Steven E. Moore 1996-Present: Chairman of the Board,
President and Chief
Executive Officer
Al M. Strecker 1998-Present: Executive Vice President and
Chief Operating Officer
1996-1998: Senior Vice President
Roger A. Farrell 1998-Present: President and Chief Executive
Officer - Enogex Inc.
1997-1998: Executive Vice President -
Enogex Inc.
1996-1997: Vice President - Business
Development - Enogex Inc.
James R. Hatfield 2000-Present: Senior Vice President and
Chief Financial Officer
1999-2000: Senior Vice President,
Chief Financial Officer
and Treasurer
1997-1999: Vice President and Treasurer
1996-1997: Treasurer - OG&E
Jack T. Coffman 1999-Present: Senior Vice President -
Power Supply - OG&E
1996-1999: Vice President -
Power Supply - OG&E
Melvin D. Bowen, Jr. 1996-Present: Vice President -
Power Delivery - OG&E
Michael G. Davis 1998-Present: Vice President - Marketing
and Customer Care
1996-1998: Vice President -
Marketing and Customer
Services - OG&E
Irma B. Elliott 1996-Present: Vice President and
Corporate Secretary
Steven R. Gerdes 1998-Present: Vice President - Shared
Services
1997-1998: Director - Shared Services
1997: Manager - Enterprise Support
1996-1997: Manager - Purchasing and
Material Management - OG&E
David J. Kurtz 1999-Present: Vice President - Business
Development
1997-1999: Vice President - Business
Development - Enogex Inc.
1996-1997: Director - Gas Supply -
Enogex Inc.
Donald R. Rowlett 1999-Present: Vice President and Controller
1996-1999: Controller Corporate
Accounting
Don L. Young 1996-Present: Controller Corporate
Audits
Eric B. Weekes 2000-Present: Treasurer
1997-2000: Treasurer - Illinois Power
and Light
1996-1997: Senior Financial Manager -
Kraft Foods Inc.
PART II
Item 5. Market for Registrant’s Common Equity and
Related
Stockholder Matters.
The Company's Common Stock is listed for trading on the New York and Pacific Stock Exchanges under the ticker symbol "OGE." Quotes may be obtained in daily newspapers where the common stock is listed as "OGE Engy" in the New York Stock Exchange listing table. The following table gives information with respect to price ranges, as reported in The Wall Street Journal as New York Stock Exchange Composite Transactions, and dividends paid for the periods shown.
2000 1999
----------------------------------------------------------------------------------
Dividend Dividend
Paid High Low Paid High Low
----------------------------------------------------------------------------------
First Quarter $0.3325 $20.88 $16.50 $0.3325 $29.06 $22.56
Second Quarter 0.3325 21.25 18.31 0.3325 25.94 21.81
Third Quarter 0.3325 23.25 18.75 0.3325 24.56 21.69
Fourth Quarter 0.3325 24.75 18.94 0.3325 23.19 18.50
The number of record holders of Common Stock at December 31, 2000, was 36,326. The book value of the Company's Common Stock at December 31, 2000, was $13.66.
Item 6. Selected Financial Data.
HISTORICAL DATA
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(dollars in thousands except
for per share data)
Operating revenues.................. $ 3,298,727 $ 2,172,434 $ 1,617,737 $ 1,443,610 $ 1,387,435
Operating expenses.................. 2,948,906 1,834,269 1,278,280 1,175,160 1,107,989
------------ ------------ ------------ ------------ ------------
Operating income.................... 349,821 338,165 339,457 268,450 279,446
Other income and (deductions)....... 6,383 3,317 5,758 5,047 97
Interest charges.................... 132,664 100,279 70,699 66,495 67,984
------------ ------------ ------------ ------------ ------------
Net income.......................... 147,035 151,259 165,872 132,550 133,332
Preferred dividend
requirements...................... --- --- 733 2,285 2,302
Earnings available for
common............................ $ 147,035 $ 151,259 $ 165,139 $ 130,265 $ 131,030
============ ============ ============ ============ ============
Long-term debt...................... $ 1,648,523 $ 1,140,532 $ 935,583 $ 841,924 $ 829,281
Total assets........................ $ 4,319,630 $ 3,921,334 $ 2,983,929 $ 2,765,865 $ 2,762,355
Earnings per average common
share............................. $ 1.89 $ 1.94 $ 2.04 $ 1.61 $ 1.62
CAPITALIZATION RATIOS
Common equity....................... 39.23% 47.20% 52.72% 52.50% 52.26%
Cumulative preferred stock.......... --- --- --- 2.63% 2.68%
Long-term debt...................... 60.77% 52.80% 47.28% 44.87% 45.06%
INTEREST COVERAGES
Before federal income taxes
(including AFUDC)................. 2.66X 3.39X 4.84X 4.11X 4.07X
(excluding AFUDC)................. 2.64X 3.38X 4.82X 4.10X 4.06X
After federal income taxes
(including AFUDC)................. 2.09X 2.50X 3.31X 2.98X 2.94X
(excluding AFUDC)................. 2.07X 2.49X 3.30X 2.97X 2.93X
==========================================================================================================================
Item 7. Management's Discussion and analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis
OVERVIEW
Percent Change
From Prior Year
----------------
(thousands except per share amounts) 2000 1999 1998 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Operating revenues............................. $3,298,727 $2,172,434 $1,617,737 51.8 34.3
Earnings available for common stock............ $ 147,035 $ 151,259 $ 165,139 (2.8) (8.4)
Average shares outstanding..................... 77,864 77,916 80,772 (0.1) (3.5)
Earnings per average common share.............. $ 1.89 $ 1.94 $ 2.04 (2.6) (4.9)
Earnings per average common share -
assuming dilution............................ $ 1.89 $ 1.94 $ 2.04 (2.6) (4.9)
Dividends paid per share....................... $ 1.33 $ 1.33 $ 1.33 --- ---
===============================================================================================================
OGE Energy Corp. (the "Company") serves as the parent holding company to its two primary subsidiaries, Okl