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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 (FEE REQUIRED)
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1997 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 27, 1998, Common Shares outstanding were 40,385,917.
Based upon the closing price on the New York Stock Exchange on February 27,
1998, the aggregate market value of the voting stock held by nonaffiliates of
the Company was: Common Stock $2,172,426,750.
The proxy statement for the 1998 annual meeting of shareowners is
incorporated by reference into Part III of this Report.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
Item 1. Business.......................................................... 1
The Company....................................................... 1
Electric Operations............................................... 2
General.................................................. 2
Regulation and Rates..................................... 5
Rate Structure, Load Growth and Related Matters.......... 12
Fuel Supply.............................................. 13
Enogex............................................................ 15
Origen............................................................ 18
Finance and Construction.......................................... 19
Environmental Matters............................................. 21
Employees......................................................... 22
Item 2. Properties........................................................ 23
Item 3. Legal Proceedings................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders............... 27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 32
Item 6. Selected Financial Data........................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 34
Item 8. Financial Statements and Supplementary Data....................... 47
Item 9. Changes in and Disagreements with Accountants
and Financial Disclosure................................. 75
PART III
Item 10. Directors and Executive Officers of the Registrant................ 75
Item 11. Executive Compensation............................................ 75
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................... 75
Item 13. Certain Relationships and Related Transactions.................... 75
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................... 75
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
became the parent company of Oklahoma Gas and Electric Company ("OG&E") and its
former subsidiary, Enogex Inc. on December 31, 1996 pursuant to a mandatory
share exchange whereby each share of outstanding common stock of OG&E was
exchanged on a share-for-share basis for common stock of the Company.
Immediately following this exchange, OG&E transferred its shares of Enogex stock
to the Company and Enogex Inc. became a direct subsidiary of the Company.
The Company now serves as the parent company to OG&E, Enogex Inc.,
Origen Inc. (a newly formed company), and any other companies that may be formed
within the organization in the future. The holding company structure is intended
to provide greater flexibility to take advantage of opportunities in an
increasingly competitive business environment and to clearly separate the
Company's electric utility business from its non-utility businesses. At December
31, 1997, the Company was not engaged in any business independent of that
conducted through its subsidiaries OG&E, Enogex Inc. and Enogex Inc.'s
subsidiaries ("Enogex"), and Origen Inc. and Origen Inc.'s subsidiaries
("Origen").
The Company's principal subsidiary is OG&E and, accordingly, 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 active generating stations with a total capability of 5,647,300
kilowatts.
Enogex owns and operates approximately 3,500 miles of natural gas
transmission and gathering pipelines, has interests in five gas processing
plants, markets electricity, natural gas and natural gas products 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 generation suppliers by July 1, 2002. This
legislation, if implemented as proposed, would significantly impact OG&E. The
Arkansas Public Service Commission ("APSC") recently initiated proceedings to
consider the implementation of a competitive retail market in Arkansas. 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.
1
ELECTRIC OPERATIONS
GENERAL
OG&E furnishes retail electric service in 277 communities and their
contiguous rural and suburban areas. During 1997, five 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 1.7 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 282 communities served,
254 are located in Oklahoma and 28 in Arkansas. Approximately 91 percent of
total electric operating revenues for the year ended December 31, 1997, 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 5,287 megawatts, and occurred on July
28, 1997. OG&E's load responsibility peak demand was approximately 4,982
megawatts on July 28, 1997, resulting in a capacity margin of approximately 18.4
percent. OG&E is a member, along with neighboring utilities and other electric
suppliers, in the Southwest Power Pool ("SPP"), which requires that OG&E
maintain a capacity reserve margin of 13 percent. As reflected in the table
below and in the operating statistics on page 4, total kilowatt-hour sales
increased 1.6 percent in 1997 as compared to an increase of 1.5 percent in 1996
and a 7.0 percent increase in 1995. In 1997, kilowatt-hour sales to OG&E
customers ("system sales") increased slightly due to continued customer growth.
Sales to other utilities ("off-system sales") decreased in 1997. Off-system
sales are at much lower prices per kilowatt-hour and have less impact on
operating revenues and income than system sales. In 1996 and 1995, total
kilowatt-hour sales increased due to continued customer growth.
Variations in kilowatt-hour sales for the three years are reflected in
the following table:
SALES (Millions of Kwh)
Inc/ Inc/ Inc/
1997 (Dec) 1996 (Dec) 1995 (Dec)
- --------------------------------------------------------------------------------
System Sales 22,183 3.0% 21,541 3.4% 20,828 0.9%
Off-System Sales 1,202 (18.5%) 1,475 (20.4%) 1,852 232.6%
------ ------ ------
Total Sales 23,385 1.6% 23,016 1.5% 22,680 7.0%
====== ====== ======
In 1997, OG&E's Sooner Generating Station (consisting of two coal-fired
units with an aggregate capability of 1,015 Mw) and OG&E's three coal-fired
units at its Muskogee Generating Station (with an aggregate capability of 1,515
Mw) were again recognized by an industry survey as being in the top ten lowest
cost producers of electricity for 1996 among the 850 electric generating
stations surveyed.
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. 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
2
relative costs and supplies of other forms of energy. See "Electric Operations -
Regulation and Rates - Recent Regulatory Matters" for a discussion of potential
impact of competition of federal and state legislation.
3
OKLAHOMA GAS AND ELECTRIC COMPANY
CERTAIN OPERATING STATISTICS
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------- --------------- ---------------
ELECTRIC ENERGY:
(Millions of Kwh)
Generation (exclusive of station use)................... 21,620 21,253 20,639
Purchased............................................... 3,528 3,564 3,578
-------------- --------------- ---------------
Total generated and purchased..................... 25,148 24,817 24,217
Company use, free service and losses.................... (1,763) (1,801) (1,537)
-------------- --------------- ---------------
Electric energy sold.............................. 23,385 23,016 22,680
-------------- --------------- ---------------
ELECTRIC ENERGY SOLD:
(Millions of Kwh)
Residential............................................. 7,179 7,143 6,848
Commercial and industrial............................... 11,586 11,161 10,963
Public street and highway lighting...................... 68 67 66
Other sales to public authorities....................... 2,202 2,096 2,087
Sales for resale........................................ 2,350 2,549 2,716
-------------- --------------- ---------------
Total............................................. 23,385 23,016 22,680
============== =============== ===============
ELECTRIC OPERATING REVENUES:
(Thousands)
Electric Revenues:
Residential......................................... $ 474,419 $ 479,574 $ 471,313
Commercial and industrial........................... 526,673 530,213 512,212
Public street and highway lighting.................. 9,456 9,367 9,115
Other sales to public authorities................... 98,818 98,209 95,660
Sales for resale.................................... 57,695 60,141 63,340
Provision for rate refund........................... --- (1,221) (2,437)
Miscellaneous....................................... 24,630 24,054 19,084
-------------- --------------- ---------------
Total Electric Revenues........................... $ 1,191,691 $ 1,200,337 $ 1,168,287
============== =============== ===============
NUMBER OF ELECTRIC CUSTOMERS:
(At end of period)
Residential............................................. 593,699 588,778 583,741
Commercial and industrial............................... 85,315 84,032 82,577
Public street and highway lighting...................... 249 249 249
Other sales to public authorities....................... 10,897 10,688 10,340
Sales for resale........................................ 40 41 43
-------------- --------------- ---------------
Total............................................. 690,200 683,788 676,950
============== =============== ===============
RESIDENTIAL ELECTRIC SERVICE:
Average annual use (Kwh)................................ 12,133 12,178 11,786
Average annual revenue.................................. $ 801.74 $ 817.62 $ 811.10
Average price per Kwh (cents)........................... 6.61 6.71 6.88
4
REGULATION AND RATES
OG&E's retail electric tariffs in Oklahoma are regulated by the
Oklahoma Corporation Commission ("OCC"), and in Arkansas by the 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, 1997, 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: In January 1998, OG&E filed an application
--------------------------
with the OCC seeking approval to revise an existing cogeneration contract with
Mid-Continent Power Company ("MCPC"), a cogeneration plant near Pryor, Oklahoma.
Under Public Utility Regulatory Policies Act of 1978 ("PURPA"), OG&E was
obligated to enter into the original contract, which was approved by the OCC in
1987, and which required OG&E to purchase peaking capacity from the plant for 10
years beginning in 1998 -- whether the capacity was needed or not. In December
1997, the Company agreed to purchase the stock of Oklahoma Loan Acquisition
Corporation, the company that owns the MCPC plant. As part of the transaction,
the duration of the existing cogeneration contract with OG&E would be reduced
from 10 years ending December 31, 2007, to four and one-half years ending June
30, 2002. If the transaction is approved by the necessary regulatory agencies
and is consummated, OG&E estimates that it will provide aggregate savings for
its Oklahoma customers of approximately $46 million as compared to the existing
cogeneration contract. On March 13, 1998, the OCC issued its order granting the
relief requested by OG&E. Additional regulatory approvals of the FERC and the
APSC, among others, are needed to complete the transaction.
On February 11, 1997, the OCC issued an order that, among other things,
effectively lowered OG&E's rates to its Oklahoma retail customers by $50 million
annually (based on a test year ended December 31, 1995). Of the $50 million rate
reduction, approximately $45 million became effective on March 5, 1997, and the
remaining $5 million became effective March 1, 1998. The February 11, 1997 order
also directed OG&E to transition to competitive bidding of its gas
transportation requirements currently met by Enogex no later than April 30, 2000
and set annual compensation for the transportation services provided by Enogex
to OG&E at $41.3 million until competitively-bid gas transportation begins. In
1997, approximately $41.7 million or 12.9 percent of Enogex's revenues were
attributable to transporting gas for OG&E. Other pipelines seeking to compete
with Enogex for OG&E's business will likely have to pay a fee to Enogex for
transporting gas on Enogex's system or incur capital expenditures to develop the
necessary infrastructure to connect with OG&E's gas-fired generating stations.
See Note 10 of Notes to Consolidated Financial Statements.
5
The Order also contained a Generation Efficiency Performance Rider
("GEP Rider"), which is designed so that when OG&E's average annual cost of fuel
per kwh is less than 96.261 percent of the average non-nuclear fuel cost per kwh
of certain other investor-owned utilities, OG&E is allowed to collect, through
the GEP Rider, one-third of the amount by which OG&E's average annual cost of
fuel comes in below 96.261 percent of the average of the other specified
utilities. If OG&E's fuel cost exceeds 103.739 percent of the stated average,
the Company will not be allowed to recover one-third of the fuel costs above
that average from Oklahoma customers.
The fuel cost information used to calculate the GEP Rider is based on
fuel cost data submitted by each of the utilities in their Form No. 1 Annual
Report filed with the FERC. The GEP Rider is revised effective July 1 of each
year to reflect any changes in the relative annual cost of fuel reported for the
preceding calendar year. For 1997, the GEP Rider increased revenues by
approximately $18.0 million, or approximately $0.28 per share. The current GEP
Rider is estimated to positively impact revenue by $27 million, or approximately
$0.41 per share during the 12 months ending June 1998.
As previously reported, Oklahoma enacted in April 1997 the Electric
Restructuring Act of 1997 (the "Act"). 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:
l. To reduce the cost of electricity for as many consumers as
possible, helping industry to be more competitive, to create
more jobs in Oklahoma and help lower the cost of government by
reducing the amount and type of regulation now paid for by
taxpayers;
2. To encourage the development of a competitive electricity
industry through the unbundling of prices and services and
separation of generation services from transmission and
distribution services;
3. To enable retail electric energy suppliers to engage in fair
and equitable competition through open, equal and comparable
access to transmission and distribution systems and to avoid
wasteful duplication of facilities;
4. To ensure that direct access by retail consumers to the
competitive market for generation be implemented in Oklahoma
by July 1, 2002; and
5. To ensure that proper standards of safety, reliability and
service are maintained in a restructured electric service
industry.
6
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 OCC is 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 under the direction of the
Joint Electric Utility Task Force (which task force is described below).
However, 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:
1. Appropriate rules shall be promulgated, ensuring that reliable
and safe electric service is maintained.
2. Consumers shall be allowed to choose among retail electric
energy suppliers to help ensure competitive and innovative
markets. A process should be established whereby all retail
consumers are permitted to choose their retail electric energy
suppliers by July 1, 2002.
3. When consumer choice is introduced, rates shall be unbundled
to provide clear price information on the components of
generation, transmission and distribution and any other
ancillary charges. Charges for public benefit programs
currently authorized by statute or the OCC, or both, shall be
unbundled and appear in line item format on electric bills for
all classes of consumers.
4. An entity providing distribution services shall be relieved of
its traditional obligation to provide electric supply but
shall have a continuing obligation to provide distribution
service for all consumers in its service territory.
5. The benefits associated with implementing an independent
system planning committee composed of owners of electric
distribution systems to develop and maintain planning and
reliability criteria for distribution facilities shall be
evaluated.
6. A defined period for the transition to a restructured electric
utility industry shall be established. The transition period
shall reflect a suitable time frame for full compliance with
the requirements of a restructured utility industry.
7. Electric rates for all consumer classes shall not rise above
current levels throughout the transition period. If possible,
electric rates for all consumers shall be lowered when
feasible as markets become more efficient in a restructured
industry.
8. The OCC shall consider the establishment of a distribution
access fee to be assessed to all consumers in Oklahoma
connected to electric distribution systems regulated by the
OCC. This fee shall be charged to cover social costs, capital
costs, operating costs, and other appropriate costs associated
with the operation
7
of electric distribution systems and the provision of electric
services to the retail consumer.
9. Electric utilities have traditionally had an obligation to
provide service to consumers within their established service
territories and have entered into contracts, long-term
investments and federally mandated cogeneration contracts to
meet the needs of consumers. These investments and contracts
have resulted in costs which may not be recoverable in a
competitive restructured market and thus may be "stranded."
Procedures shall be established for identifying and
quantifying stranded investments and for allocating costs; and
mechanisms shall be proposed for recovery of an appropriate
amount of prudently incurred, unmitigable and verifiable
stranded costs and investments. As part of this process, each
entity shall be required to propose a recovery plan which
establishes its unmitigable and verifiable stranded costs and
investments and a limited recovery period designed to recover
such costs expeditiously, provided that the recovery period
and the amount of qualified transition costs shall yield a
transition charge which shall not cause the total price for
electric power, including transmission and distribution
services, for any consumer to exceed the cost per
kilowatt-hour paid on the effective date of this Act during
the transition period. The transition charge shall be applied
to all consumers including direct access consumers, and shall
not disadvantage one class of consumer or supplier over
another, nor impede competition and shall be allocated over a
period of not less than three (3) years nor more than seven
(7) years.
10. It is the intent that all transition costs shall be recovered
by virtue of the savings generated by the increased efficiency
in markets brought about by restructuring of the electric
utility industry. All classes of consumers shall share in the
transition costs.
Subject to the principles set forth in Section 4, the OCC is directed
to prepare a four-part study to be delivered to the Joint Electric Utility Task
Force (the "Joint Task Force"). The first part of the study, which was due
February 1, 1998, was to address independent operation issues. The second part,
which is due December 31, 1998, is to address technical issues, such as
reliability, safety, unbundling of generation, transmission and distribution
services, transition issues and market power. The third part of the study is due
December 31, 1999, and is to address financial issues, including rates, charges,
access fees, transition costs and stranded costs. The final part of the study is
due August 31, 2000 and is to cover consumer issues, such as the obligation to
serve, service territories, consumer choices, competition and consumer
safeguards.
Section 5 of the Act directs the Oklahoma Tax Commission to study and
submit a report to the Joint Task Force by December 31, 1998 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. The Oklahoma Tax Commission is precluded from issuing
any rules on such matters without the approval of the Oklahoma Legislature or
the Joint Task Force. Also, in the event a uniform tax policy that allows all
competitors to be taxed on a fair and equitable basis is not established on or
before July 1, 2002, then the effective date for implementing customer choice of
retail electric suppliers shall be extended until a uniform tax policy is
established.
8
Section 6 creates the Joint Task Force, which shall consist of seven
members from the Oklahoma Senate and seven members from the Oklahoma House of
Representatives. The Joint Task Force is to direct and oversee the studies of
the OCC and Oklahoma Tax Commission 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. Section 8 sets forth the effective date of the Act as
April 25, 1997.
A new bill was introduced in the State Senate in the 1998 legislative
session and was passed by a State Senate committee in February 1998. This bill,
if adopted, would modify the Act by (i) directing the Joint Task Force, instead
of the OCC, to conduct the required studies and (ii) accelerating the deadlines
for completion of such studies to October 1, 1999.
OG&E intends to actively participate in the restructuring of the
electric utility industry in Oklahoma and to remain a competitive supplier of
electricity. However, due to the early stages of the process, OG&E cannot
predict the impact that the restructuring will have on its operations in the
future. OG&E continues to be generally supportive of the restructuring efforts
in Oklahoma. However, the Company and OG&E believe that federal legislation
mandating retail competition in all states is appropriate to ensure that OG&E's
ability to compete for retail customers of other suppliers is commensurate with
the ability of such suppliers to compete for OG&E's jurisdictional customers in
Oklahoma.
In December 1997, the APSC established four generic proceedings to
consider the implementation of a competitive retail electric market in the State
of Arkansas. Among the topics to be considered are competitive retail
generation, market structure, market power, taxation, recovery and mitigation of
stranded costs, service and reliability, low income assistance, independent
system operators and transition issues. The Company intends to participate
actively in these proceedings.
On February 25, 1994, the OCC issued an order that, among other things,
effectively lowered OG&E's rates to its Oklahoma retail customers by
approximately $17 million annually and required OG&E to refund approximately
$41.3 million. Of the $41.3 million refund, $39.1 million was associated with
revenues prior to January 1, 1994, while the remaining $2.2 million related to
1994. The entire $41.3 million refund related to the OCC's disallowance of a
portion of the fees paid by OG&E to Enogex for prior transportation and related
gas gathering services.
In 1994, OG&E underwent a significant restructuring effort and redesign
of its operations to more favorably position itself for the competitive electric
utility environment. As part of this process, OG&E implemented a Voluntary Early
Retirement Package ("VERP") and a severance package that reduced its workforce
by approximately 900 employees. The Company incurred $63.4 million of
9
restructuring costs in 1994. Pending an OCC order, OG&E deferred the costs
associated with the VERP and severance package in the third quarter of 1994.
Between August 1 and December 31, 1994, the amount deferred was reduced by
approximately $14.5 million. In response to an application filed by OG&E on
August 9, 1994, the OCC issued an order on October 26, 1994, that permitted OG&E
to amortize the December 31, 1994, regulatory asset of $48.9 million over 26
months and reduced OG&E's electric rates during such period by approximately $15
million annually, effective January 1995. In 1997, 1996 and 1995, the labor
savings substantially offset the amortization of the regulatory asset and the
annual rate reduction of $15 million.
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 is
recommending a $3.1 million annual rate reduction (based on a test year ended
December 31, 1996) and that OG&E file a cost of service study with the APSC.
While OG&E does not agree that any refund is appropriate, it is in the process
of evaluating and responding to the staff's position.
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 the Company's electric customers through automatic fuel adjustment
clauses, which are subject to periodic review by the OCC, the APSC and the FERC.
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. See "Finance and Construction." 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 ("EPAct") has resulted in some
significant changes in the operations of the electric utility industry and the
federal policies governing the generation, transmission and sale of electric
power. The EPAct, 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 EPAct also is designed to
promote competition in the development of wholesale power generation in the
electric industry. It exempts a new class of independent power producers from
regulation under the Public Utility Holding Company Act of 1935.
In April 1996, FERC issued two final rules, Orders 888 and 889, which
have had a significant impact on wholesale markets. These orders where
subsequently amended in orders issued in March and November 1997. These orders
have been appealed by many entities, including representatives of the states,
the electric utility industry and consumers. Order 888 set forth rules on
non-discriminatory open access transmission service to promote wholesale
competition. Order 888, which was effective on July 9, 1996, requires utilities
and other transmission users to abide by comparable terms, conditions and
pricing in transmitting power. Order 889, which had its effective date extended
to January 3, 1997, requires public utilities to implement Standards of Conduct
and an Open Access Same Time Information System
10
("OASIS," formerly known as "Real-Time Information Networks"). These rules
require transmission personnel to provide the same information about the
transmission system to all transmission customers using the OASIS.
OG&E is complying with these rules from the FERC. To implement the
requirements of Order 888, as amended, OG&E has filed an Open Access
Transmission Tariff ("OATT"), OG&E's original OATT, which was accepted for
filing by FERC on June 11, 1997, had an effective date of July 9, 1996. OG&E
filed an updated OATT on July 30, 1997 to comply with FERC's changes to Order
888. That filing remains pending before FERC. Among other things, the OATT
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, net of related transmission revenues,
based upon each company's share of the total system load.
On December 27, 1996, OG&E submitted, in accordance with Order 889,
"Standards of Conduct" governing interactions between its transmission-function
employees and its wholesale merchant-function employees. On March 12, 1998, the
FERC issued an order requiring OG&E and many other utilities to submit revised
Standards of Conduct. In accordance with the FERC's directive, revised Standards
will be submitted in April 1998. Generally speaking, the FERC has required only
that OG&E provide a more detailed version of the Standards it has already
submitted, or that the Standards reflect changes required by amendments to Order
889 that occurred after OG&E originally submitted its Standards. Management
expects minimal annual expense increases, as a result of Orders 888 and 889.
Orders 888 and 889 are cornerstones of the FERC's efforts to encourage
competition in the wholesale electric power market. As part of its own efforts
to better its competitive position in the wholesale market, OG&E on November 3,
1997 sought from the FERC authority to sell capacity and energy at
"market-based," negotiated rates. OG&E was granted market-based rate authority
on December 18, 1997, subject to certain restrictions on interactions with its
affiliates. For example, OG&E is prohibited from selling power to its affiliates
under its market-based rate schedule without separate approval from the FERC.
Such restrictions on affiliate interactions, which are intended to prevent
affiliate abuse, are the norm for traditional utilities with market-based rate
authority.
Enogex's newly formed subsidiary, OGE Energy Resources, Inc. ("OERI")
is a power marketer that received market-based rate authority in 1997. OERI is
an indirect wholly-owned subsidiary of OG&E's parent, OGE Energy Corp. and, as a
result, is an affiliate of OG&E. Like OG&E, OERI is subject to certain
restrictions on its dealings with OG&E, such as the prohibition on sales to OG&E
without separate approval from the FERC. OERI is authorized to "broker" power
purchases and sales for OG&E, again subject to certain restrictions. These
restrictions, which are intended to prevent affiliate abuse are the norm for
power marketers with traditional utility affiliates.
As discussed previously, Oklahoma enacted legislation that will
restructure the electric utility industry in Oklahoma by July 2002, 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 $32 million,
depending on the transition mechanisms developed by the legislature for the
recovery of all or a portion of these net regulatory assets.
11
The enacted Oklahoma legislation does not affect OG&E's electric
transmission and distribution assets and the Company 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.
The EPAct, the actions of the FERC, the restructuring proposal in
Oklahoma, the Arkansas proceedings and other factors are expected to
significantly increase competition in the electric industry. The Company has
taken steps in the past and intends to take appropriate steps in the future to
remain a competitive supplier of electricity. Past actions include the redesign
and restructuring effort in 1994, continuing actions to reduce fuel costs,
improvements in customer service and efforts to improve OG&E's electric
transmission and distribution network to reduce outages, all of which enhance
OG&E's ability to deliver electricity competitively. While the Company is
supportive of competition, it believes that all electric suppliers must be
required to compete on a fair and equitable basis and the Company intends to
advocate 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 electrical energy use 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 has implemented numerous energy efficiency
programs and tariff schedules. In 1997, these programs and schedules included:
(i) elimination of the Low Use Residential Service rate (because it did not
effectively reach those customers it was intended to serve); (ii) an increased
level of OG&E funding to the LIHEAP assistance program (the LIHEAP program helps
low income residential customers meet their winter heating needs with lower
electrical heating energy costs); (iii) 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; (iv) the elimination of the PEAKS program (a program that helped
reduce the summer residential air conditioning peak) because continuation of
this program was not cost effective as compared to other alternatives; (v) a
load curtailment rate for industrial and commercial customers who can
demonstrate a load curtailment of at least 500 kilowatts (the minimum load of
the curtailment rate was raised in the February 11, 1997, OCC order); and (vi)
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 implemented a Real Time Pricing ("RTP") pilot program, for
industrial and commercial customers that can meet the requirements of the
tariff. This tariff gives customers additional options on total kilowatt hour
growth and the control of growth of peak demand. Real Time Pricing is a tariff
option
12
which prices electricity so that 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 the helping of
customers in control of their costs.
OG&E's 1997 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.
Other recent efforts to improve OG&E's services included the
implementation of a new customer service telephone system, capable of handling
approximately ten times more calls simultaneously than the prior system and
implementation of a Company-wide enterprise software system that, besides being
Year 2000 compliant, enables OG&E and the Company's other subsidiaries to obtain
extensive business information on nearly a real-time basis. Also, OG&E is in the
process of implementing a new outage management system that should improve
OG&E's ability to restore service, and a new mapping system that, when
completed, will provide OG&E up-to-date information on its transmission and
distribution assets.
Electric and magnetic fields ("EMFs") surround all electric tools and
appliances, internal home wiring and external power lines such as those owned by
OG&E. During the last several years considerable attention has focused on
possible health effects from EMFs. While some studies indicate a possible weak
correlation, other similar studies indicate no correlation between EMFs and
health effects. The nation's electric utilities, including OG&E, have
participated with the Electric Power Research Institute ("EPRI") in the
sponsorship of more than $75 million in research to determine the possible
health effects of EMFs. In addition, the Edison Electric Institute ("EEI") is
helping fund $65 million for EMF studies over a five-year period, that began in
1994. One-half of this amount is expected to be funded by the federal
government, and two-thirds of the non-federal funding is expected to be provided
by the electric utility industry. Through its participation with the EPRI and
EEI, OG&E will continue its support of the research with regard to the possible
health effects of EMFs. OG&E is dedicated to delivering electric service in a
safe, reliable, environmentally acceptable and economical manner.
FUEL SUPPLY
During 1997, approximately 81 percent of the OG&E-generated energy was
produced by coal-fired units and 19 percent by natural gas-fired units. It is
estimated that the fuel mix for 1998 through 2002, based upon expected
generation for these years, will be as follows:
1998 1999 2000 2001 2002
- --------------------------------------------------------------------------------
Coal............................ 80% 80% 79% 79% 79%
Natural Gas..................... 20% 20% 21% 21% 21%
The slight decline from 80 percent to 79 percent in the percentage of
coal-fired generation relative to total generation is expected to result from
increases in natural gas-fired generation, not from a reduction in Kwh of
coal-fired generation.
13
The average cost of fuel used, by type, per million Btu for each of the
5 years was as follows:
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Coal............................ $0.84 $0.83 $0.83 $0.78 $1.16
Natural Gas..................... $3.60 $3.61 $3.19 $3.58 $3.64
Weighted Avg.................... $1.39 $1.45 $1.41 $1.58 $1.92
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
----------------
2,530 megawatts, are designed to burn low sulfur western coal. OG&E purchases
coal under a mix of long- and short-term contracts. During 1997, OG&E purchased
9.6 million tons of coal from the following Wyoming suppliers: Amax Coal West,
Inc., Caballo Rojo, Inc., Kennecott Energy Company, Thunder Basin Coal Company
and Powder River Coal Company. The combination of all coals 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
starting in the year 2000, OG&E has contracts in place that will allow for a
supply of very low sulfur coal from suppliers in the Powder River Basin to meet
the new sulfur dioxide standards.
During 1997, rail congestion on the Union Pacific Railroad caused a
coal shortage among many of the utilities in the Southwest Power Pool and the
state of Texas. As a result, OG&E depleted its coal stockpiles and was forced to
take some coal conservation measures in November and December. Since that time,
rail service has improved. During 1997 and 1996, OG&E used larger unit trains
with a maximum of 135 cars instead of a maximum of 112 cars in unit train
service to the Muskogee generating station. Increasing the unit train size
allows for an increase of delivered tons by approximately 21 percent. The
combination of high volume, aluminum design and increased train size to the
Muskogee generating station reduces the number of trips from Wyoming by
approximately 29 percent. OG&E continued its efforts to maximize the utilization
of its coal units by optimizing the boiler operations at both the Sooner and
Muskogee generating plants, resulting in a record capacity factor of
approximately 79 percent. 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 1998, OG&E expects to acquire less
----------------
than 2 percent of its gas needs from long-term gas purchase contracts. The
remainder of OG&E's gas needs during 1998 will be supplied by contracts with
at-market pricing or through day-to-day purchases on the spot market.
In 1993, OG&E began utilizing a natural gas storage facility which
helps lower fuel costs by allowing OG&E to optimize economic dispatch between
fuel types and take advantage of seasonal variations in natural gas prices. By
diverting gas into storage during low demand periods, OG&E is able to use as
much coal as possible to generate electricity and utilize the stored gas to meet
the additional demand for electricity.
14
ENOGEX
The Company's wholly-owned non-utility subsidiary, Enogex Inc., is the
38th largest pipeline in the nation in terms of miles of pipeline. At January 1,
1998, Enogex Inc. had three wholly-owned subsidiaries, Enogex Products
Corporation ("Products"), OGE Resources Inc., formerly known as Enogex Services
Corporation ("Resources") and Enogex Exploration Corporation ("Exploration").
The operations of Enogex and its subsidiaries are organized into four business
units focused in the areas of natural gas gathering and transportation ("Gas
Transportation"), gas processing ("Gas Processing"), marketing of natural gas,
liquids and electricity ("Marketing") and development and production of oil and
natural gas ("Development and Production").
The operations of the Gas Transportation unit are conducted exclusively
by Enogex Inc. The Gas Processing unit consists of Products, which owns
interests in and operates natural gas processing plants and some gas gathering
lines. The Gas Marketing unit consists of Resources, which through subsidiaries
is engaged in the marketing of natural gas, natural gas liquids and electricity.
The Development and Production unit consists of Exploration, which is engaged in
investing in the development and production of oil and natural gas and the
purchase of oil and gas reserves. Enogex Inc. disposed of its 80 percent
interest in Centoma Gas Systems, Inc., effective April 1, 1997, for an amount
approximate to its net book value through the sale of its stock to the minority
interest owner.
For the year ended December 31, 1997, and before elimination of
intercompany items between OG&E and Enogex, Enogex's consolidated revenues and
net income were approximately $322.0 million and $16.2 million, respectively.
Recent Actions. As stated previously, Enogex is the exclusive
---------------
transporter of natural gas to OG&E's electric power generating stations. The OCC
in its order on February 11, 1997 directed OG&E to transition to competitive
bidding of its gas transportation no later than April 30, 2000. The order also
set annual compensation for the transportation services provided by Enogex to
OG&E at $41.3 million until competitively-bid gas transportation begins. As a
result of the foregoing, Enogex expects that revenues generated from its
transportation services for OG&E (which in 1996 and 1997 represented 19 percent
and 12.9 percent, respectively, of Enogex's consolidated revenues) will remain
at $41.3 million per year through 1999 and may decline after 1999 since Enogex
may no longer be the exclusive provider of transportation services to OG&E after
1999.
As a result, the Company's plan has been and is for Enogex to diversify
its revenue and income sources by increasing revenues from transmission services
provided to third parties, by increasing the net income of Enogex subsidiaries'
natural gas processing and development and production operations, and by
actively evaluating potential acquisitions of complementary businesses or
assets.
In May 1997, Products acquired an 80 percent interest in the NuStar
Joint Venture from Nuevo Liquids Inc. for $26 million, subject to certain
post-closing adjustments. The joint venture assets include a 66.67 percent
interest in the Benedum gas processing plant with an inlet capacity of 110
million cubic feet per day; a 100 percent interest in a second bypass plant with
a capacity of 30 million cubic feet per day; 52 miles of natural gas liquid
pipeline and over 200 miles of related gas gathering facilities located in
Upton, Crockett, Reagan and neighboring counties in the Permian Basin in West
Texas.
15
In January 1998, Enogex, through a newly-formed subsidiary, Enogex
Arkansas Pipeline Corp. ("EAPC") agreed to acquire interests in two natural gas
pipelines, NOARK Pipeline System, L.P. ("NOARK") and Ozark Pipeline ("Ozark"),
for approximately $30 million and $55 million, respectively. The NOARK line is a
302 mile intra-state pipeline system that extends from near Fort Chaffee,
Arkansas to near Paragould, Arkansas. Current throughput capacity on the NOARK
line is approximately 130 million cubic feet per day. The Ozark line is a 437
mile interstate pipeline system that begins near McAlester, Oklahoma and
terminates near Searcy, Arkansas. Current throughput capacity on the Ozark line
is approximately 170 million cubic feet per day. The transactions are subject to
certain regulatory approvals, including that of the FERC.
Following regulatory approvals, EAPC will contribute Ozark to the NOARK
partnership and the two pipelines will be integrated into a single, interstate
transmission system at an estimated additional cost of $15 million and with an
estimated throughput of 330 million cubic feet per day. After the integration,
which is to be funded by EAPC, EAPC will own a 75 percent interest in the NOARK
partnership and Southwestern Energy Pipeline Co. will retain its 25 percent
interest in the partnership.
Gas Transportation. Enogex's primary business is natural gas
--------------------
transportation and it consists primarily of gathering and transporting natural
gas in Oklahoma for OG&E and on an interruptible basis, for other customers.
Enogex's system consists of approximately 3,500 miles of pipeline, which extends
from the Arkoma Basin in eastern Oklahoma to the Anadarko Basin in western
Oklahoma. Since 1960, Enogex has had a gas transmission contract with OG&E under
which Enogex transports OG&E's natural gas supply on a fee basis. Under the gas
transmission contract, OG&E agrees to tender to Enogex and Enogex agrees to
transport, on a firm, load-following basis, all of OG&E's natural gas
requirements for boiler fuel for its seven gas-fired electric generating
stations. In 1997, Enogex transported 151 Bcf of natural gas; of which
approximately 40 Bcf, or about 26 percent, was delivered to OG&E's electric
generating stations and storage facility, which resulted in approximately 63
percent of Enogex Inc.'s transportation revenues of $66.5 million for 1997.
Enogex's pipeline system also gathers and transports natural gas
destined for interstate markets through interconnections in Oklahoma with other
pipeline companies. Among others, these interconnections include Panhandle
Eastern Pipeline, Williams Natural Gas Pipeline, Natural Gas Pipeline Company of
America, Northern Natural Gas Company, NorAm Gas Transmission Company and Ozark
Gas Transmission Company.
The rates charged by Enogex 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 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 has agreed to open its system to all interstate
shippers that are interested in moving natural gas through the Enogex system.
Enogex is required to conduct this transportation on a non-discriminatory basis,
although this transportation is subordinate to that performed for OG&E. This
decision does not increase appreciably the federal regulatory burden on Enogex,
but does give Enogex the opportunity to utilize any unused capacity on an
interruptible basis and thus increase its transportation revenues.
The fees charged by Enogex for transporting natural gas for OG&E and
other intrastate shippers are not subject to FERC regulation. With respect to
state regulation, the fees charged by Enogex for any intrastate transportation
service have not been subject to direct state regulation by the OCC. Even though
16
the intrastate pipeline business of Enogex is not directly regulated, the OCC,
the APSC and the FERC have the authority to examine the appropriateness of any
transportation charge or other fees paid by OG&E to Enogex, which OG&E seeks to
recover from ratepayers. As stated above, OCC issued an order on February 11,
1997 directing OG&E to transition to competitive bidding of its gas
transportation no later than April 30, 2000 and set an annual compensation for
the transportation services provided by Enogex to OG&E at $41.3 million until
competitively-bid gas transportation begins.
Gas Processing. Products has been active since 1968 in the processing
---------------
of natural gas and marketing of natural gas liquids. The NuStar Joint Venture,
in which Products recently acquired 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 the gas stream include marketable ethane,
propane, butane and natural gasoline mix. The residue gas remaining after the
liquid products have been extracted consists primarily of ethane and methane. In
addition to the 66.67 percent interest in the Benedum gas processing plant owned
by NuStar Joint Venture, Products also owns the second largest natural gas
processing plant in Oklahoma, which is located near Calumet, Oklahoma and has
the capacity to process 250 million cubic feet of natural gas per day. Prior to
1997, Products shared ownership equally of the Calumet plant with a third party
and, in 1997, Products purchased all of the third party's interest in the plant.
Products also owns interests in three other natural gas processing plants in
Oklahoma, which have, in the aggregate, the capacity to process approximately 46
million cubic feet of natural gas per day.
Most of the commercial grade propane processed at Products' Oklahoma
facilities is sold on the local market. The other natural gas liquids, commonly
referred to as Group 140 are delivered to Conway, Kansas (which is one of the
nation's largest wholesale markets for gas liquids), where they are sold on the
spot market. Ethane, which is produced at all of Products' plants except
Calumet, is sold under a contract with Equistar Chemicals. This contract expired
in February 1998, but is renewable on an annual basis. Natural gas liquids are
marketed by Resources. Natural gas liquids from the NuStar Joint Venture are
sold to the Rexene Chemicals plant in Midland, Texas pursuant to a contract
expiring in February 1999.
In processing and marketing natural gas liquids, the Enogex companies
compete against virtually all other gas processors selling natural gas liquids.
The Enogex companies believe they 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 the Enogex
companies specifically, the volume of natural gas processed at their plants is
dependent upon the volume of natural gas transported through the pipeline system
located "behind the plants." If the volume of natural gas transported by such
pipeline increases "behind the plants," then the volume of liquids extracted by
Products should normally increase.
Marketing. Enogex's natural gas marketing is conducted through
---------
Resources and its subsidiaries. Resources serves both producers and consumers of
natural gas by buying natural gas at the wellhead or at gathering points both on
and off the Enogex pipeline system and reselling to interstate pipelines,
end-users or downstream purchasers both within and outside Oklahoma. Resources
has placed primary emphasis on the purchase and sale of volumes of gas moving on
the Enogex pipeline system in order to enhance utilization of pipeline capacity.
During 1997, Resources sold approximately 223 billion BTUs of natural gas per
day, of which about 81 percent moved on the Enogex pipeline system.
17
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, 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. Commencing in 1995, Resources began serving Products by purchasing and
marketing the natural gas liquids produced by Products. In addition, Resources
also markets natural gas developed by Exploration when volumes are sufficiently
concentrated to justify Resources marketing these volumes directly instead of
through the property operator. Other services to be provided include energy
forward price evaluations, centralized corporate risk management, and gas and
electric marketing to large end-users.
Enogex Inc. is committed to continue the activities of Resources in
order to increase the amount of natural gas transported through the pipeline and
the amount of natural gas processed by Products.
In its marketing and transportation services for third parties, Enogex
Inc. and Resources encounter 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. Resources competes with all major
suppliers of natural gas and natural gas liquids in the geographic markets they
serve. For natural gas, those geographic markets are primarily the areas served
by pipelines with which Enogex is interconnected. Although the price of the gas
is an important factor to a buyer of natural gas from Resources, the primary
factor is the total cost (including transportation fees) that the buyer must
pay. Natural gas transported for Resources by Enogex Inc. is billed at the same
rate Enogex Inc. charges for comparable third-party transportation.
The activities of Resources and its subsidiaries were recently expanded
in early 1998 to include the marketing of electricity. As stated previously,
OERI (a subsidiary of Resources) is a power marketer that received market-based
rate authority in 1997 from the FERC. See "Electric Operations - Regulation and
Rates".
Development and Production. Exploration was formed in 1988 primarily to
--------------------------
engage in the development and production of oil and natural gas. Exploration has
focused its drilling activity in the Antrim Devonian shale trend in the state of
Michigan and also has interests in Oklahoma, Utah, Texas, Indiana, Mississippi
and Louisiana. As of December 31, 1997, Exploration had interest in 510 active
wells. Exploration's estimated proved reserves were 89,408 Mmcfe. The
standardized measure of discounted future net cash flow with related Section 29
tax credits of Exploration's proved reserves was $60.1 million at December 31,
1997.
ORIGEN
The Company's newest wholly-owned non-regulated subsidiary, Origen is
currently involved in the development of energy related products and services.
At December 31, 1997, Origen's primary business unit was Geothermal Design and
Engineering, Inc. ("GD&E"). GD&E is engaged in the design and engineering of
geothermal heating and cooling systems.
18
GD&E was incorporated in April 1997 and immediately began developing
the geothermal market for HVAC/R. GD&E is a licensed consulting engineering firm
that specializes in design and project management of comprehensive geothermal
HVAC/R systems, loop field design and building controls automation. GD&E is
licensed in four states and has submitted applications to nine others. GD&E is a
nationally recognized geothermal design and engineering company with thousands
of tons of geothermal systems installed. Systems designed by GD&E carry a
system's performance guarantee. The performance guarantee states that GD&E will
warrant the system to perform within 5 percent of the design criteria in terms
of comfort, operating efficiencies (energy and demand) and maintenance
reliability. No other design-build company or engineering firm will offer this
guarantee to an owner. Developing the market has been the main goal for GD&E
during the first year. GD&E is working closely with several government agencies
and national associations such as the Dept. of Energy, Oklahoma State
University, International Ground Source Heat Pump Association, EPRI, Geothermal
Heat Pump Consortium and several others to promote the development of this
market. GD&E is also combining efforts with several utilities from across the
country to establish the geothermal market. GD&E was named a Certified Energy
Savings Performance Contractor for all civilian federal facilities. This award
came from the Department of Energy and was only given to a select few
outstanding candidates. The award enables GD&E to contract directly with federal
facilities for new or retrofitted HVAC/R systems.
Origen did not contribute to earnings in 1997, however, the first year
results were better than anticipated. The Company anticipates that Origen will
contribute to earnings in 1998.
FINANCE AND CONSTRUCTION
The Company generally meets its cash needs through internally generated
funds, short-term borrowings and permanent financing. Cash flows from operations
remained strong in 1997 and 1996, which enabled the Company to internally
generate the required funds to satisfy construction expenditures during these
years.
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 1998 through 2000 are
estimated as follows:
(dollars in millions) 1998 1999 2000
- --------------------------------------------------------------------------------
Electric utility construction
expenditures including AFUDC............ $108.0 $100.0 $100.0
Non-utility construction expenditures
and pending acquisitions................ 192.0 10.0 10.0
Maturities of long-term debt and
sinking fund requirement................ 25.0 12.5 167.0
- --------------------------------------------------------------------------------
Total................................. $325.0 $122.5 $277.0
================================================================================
19
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 to fund pending
acquisitions (including any related capital expenditures), and to some extent,
for satisfying maturing debt and sinking fund obligations. Approximately $.9
million of the Company's construction expenditures budgeted for 1998 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. OG&E's current resource strategy includes
the reactivation of existing plants and the addition of peaking resources. OG&E
does not anticipate the need for another base-load plant in the foreseeable
future.
The ability of the Company and its subsidiaries to sell additional
securities on satisfactory terms to meet its capital needs is dependent upon
numerous factors, including general market conditions for utility securities,
which will impact OG&E's ability to meet earnings tests for the issuance of
additional first mortgage bonds and preferred stock. Based on earnings for the
twelve months ended December 31, 1997, and assuming an annual interest rate of
7.6 percent, OG&E could issue more than $1.0 billion in principal amount of
additional first mortgage bonds under the earnings test contained in OG&E's
Trust Indenture (assuming adequate property additions were available). Under the
earnings test contained in OG&E's Restated Certificate of Incorporation and
assuming none of the foregoing first mortgage bonds are issued, more than $.9
billion of additional preferred stock at an assumed annual dividend rate of 6.8
percent could be issued as of December 31, 1997. As explained below, OG&E's
Trust Indenture is expected to be discharged and no longer in effect in April
1998.
The Company will continue to use short-term borrowings to meet
temporary cash requirements. OG&E has the necessary regulatory approvals to
incur up to $400 million in short-term borrowings at any one time. The maximum
amount of outstanding short-term borrowings during 1997 was $129.3 million.
In October 1995, OG&E changed its primary method of long-term debt
financing from issuing first mortgage bonds under its First Mortgage Bond Trust
Indenture to issuing Senior Notes under a new Indenture (the "Senior Note
Indenture"). Each series of Senior Notes issued under the Senior Note Indenture
was secured in essence by a series of first mortgage bonds (the "Back-up First
Mortgage Bonds"), subject to the condition that, upon retirement or redemption
of all first mortgage bonds issued prior to October 1995 (the "Prior First
Mortgage Bonds"), each series of Back-up First Mortgage Bonds would
automatically be canceled. In April 1998, all of the Prior First Mortgage Bonds
will have been redeemed or retired with the result that no first mortgage bonds
will remain outstanding. At that time, OG&E will cancel its First Mortgage Bond
Trust Indenture and cause the related first mortgage lien currently on
substantially all of its properties to be discharged and released. OG&E expects
to have more flexibility in future financings under its Senior Note Indenture
than existed under the First Mortgage Bond Trust Indenture.
In accordance with the requirements of the PURPA (see "Electric
Operations - Regulation and Rates - National Energy Legislation"), OG&E is
obligated to purchase 110 megawatts of capacity annually from Smith
Cogeneration, Inc. and 320 megawatts annually from Applied Energy Services,
Inc., another qualified cogeneration facility. In 1986, a contract was signed
with Sparks Regional Medical Center to purchase energy not needed by the
hospital from its nominal seven megawatt cogeneration
20
facility. In 1987, OG&E signed a contract to purchase up to 110 megawatts of
capacity from MCPC. This obligation to purchase capacity began in 1998, but OG&E
has no obligation to purchase energy. The Company is seeking to obtain ownership
of this cogeneration facility and, as part of the transaction, to amend the
existing power purchase agreement. See "Regulation and Rates".
The Company's financial results continue to depend to a large extent
upon the tariffs OG&E charges customers and the actions of the regulatory bodies
that set those tariffs, 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 $43.0 million during 1998, compared to
approximately $49.1 million utilized in 1997. Approximately $.9 million of the
Company's construction expenditures budgeted for 1998 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 will
affect OG&E beginning in the year 2000. Based on current information, OG&E
believes it can meet the SO2 limits without additional capital expenditures. In
1997 OG&E emitted 61,475 tons of SO2.
With respect to the nitrogen oxide ("NOx") regulations of Title IV of
the CAAA, OG&E committed to meeting a 0.45 lbs/mm Btu NOx emission level in
1997. 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 for 1997 was 0.38 lbs/mm Btu.
OG&E has submitted all of its required Title V permit applications. As
a result of the Title V Program, OG&E paid approximately $.3 million in fees in
1997.
Other potential air regulations have emerged that could impact OG&E.
The Ozone Transport Assessment Group ("OTAG") studied long range transport of
ozone and its precursors across a thirty-seven state area. The study was
completed in 1997 but as a result of the efforts of OG&E and others, Oklahoma
was exempted from any OTAG emission reduction requirements. If reductions had
been required in Oklahoma, OG&E could have been forced to reduce its NOx
emissions even further from the limits imposed by Title IV of the Act.
EPA has finalized revisions to the ambient ozone and particulate
standards. Based on historic data and EPA projections, Tulsa and Oklahoma
counties would fail to meet the proposed standard for ozone. In addition,
Muskogee, Kay, Tulsa and Comanche counties in Oklahoma would fail to meet the
21
standard for particulate matter. If reductions are required in Muskogee, Kay and
Oklahoma counties, significant capital expenditures could be required by OG&E.
In December 1997, the United States agreed to a global treaty for the
reduction of greenhouse gases that contribute to global warming. The U.S.
committed to a 7 percent reduction from the 1990 levels. If the Senate ratifies
the treaty, this reduction could have a significant impact on OG&E's use of coal
as a boiler fuel. Based on current load and fuel budget projections, a 7 percent
reduction of greenhouse gases would require OG&E to substantially increase gas
burning in the year 2008 and to significantly reduce its use of coal as a boiler
fuel. Since there are numerous issues which will affect how this reduction would
be implemented, if at all, the cost to the Company to comply with this reduction
cannot be established at this time, but is expected to be substantial.
The Company has and will continue to seek new pollution prevention
opportunities and to evaluate the effectiveness of its waste reduction, reuse
and recycling efforts. In 1997, the Company obtained refunds of approximately
$.5 million 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 made application for renewal of all of its National Pollutant
Discharge Elimination system permits. OG&E has received two of the permits in
final form and the others are pending regulatory action. It is anticipated,
because of regulation changes, that all of the permits when finally issued will
offer greater operational flexibility than those in the past.
OG&E has requested from the State agency responsible for the
development of Water Quality Standards removal of the agriculture beneficial use
classification from one of its cooling water reservoirs. Without removal of this
classification, the facility could be subjected to standards that will require
costly treatment and/or facility reconfiguration. It is anticipated that the
request for the removal of this classification will be successful.
OG&E remains a party to two separate actions brought by the EPA
concerning cleanup of disposal sites 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
will be discovered from time to time. One site identified as having been
contaminated by historical operations was addressed during 1997. 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 2,809 employees at December 31,
1997.
22
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 active generating stations with an aggregate active
capability of 5,647 megawatts. The following table sets forth information with
respect to present 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 549
2 Gas 1973 507
3 Gas 1975 500 1,556
Muskogee 3 Gas 1956 184
4 Coal 1977 500
5 Coal 1978 500
6 Coal 1984 515 1,699
Sooner 1 Coal 1979 505
2 Coal 1980 510 1,015
Horseshoe 6 Gas 1958 178
Lake 7 Gas 1963 238
8 Gas 1969 404 820
Mustang 1 Gas 1950 58 Inactive
2 Gas 1951 57 Inactive
3 Gas 1955 122
4 Gas 1959 260
5 Gas 1971 64 446
Conoco 1 Gas 1991 26
2 Gas 1991 26 52
Arbuckle 1 Gas 1953 74 Inactive
Enid 1 Gas 1965 12
2 Gas 1965 12
3 Gas 1965 12
4 Gas 1965 12 48
Woodward 1 Gas 1963 11 11
-----------
Total Active Generating Capability (all stations) 5,647
===========
23
At December 31, 1997, OG&E's transmission system included: (i) 65
substations with a total capacity of approximately 15.5 million kVA and
approximately 4,003 structure miles of lines in Oklahoma; and (ii) six
substations with a total capacity of approximately 1.9 million kVA and
approximately 241 structure miles of lines in Arkansas. OG&E's distribution
system included: (i) 301 substations with a total capacity of approximately 4.1
million kVA, 19,896 structure miles of overhead lines, 1,585 miles of
underground conduit and 6,502 miles of underground conductors in Oklahoma; and
(ii) 30 substations with a total capacity of approximately 617,500 kVA, 1,642
structure miles of overhead lines, 154 miles of underground conduit and 353
miles of underground conductors in Arkansas.
Substantially all of OG&E's electric facilities are subject to a direct
first mortgage lien under the Trust Indenture securing OG&E's first mortgage
bonds. The Trust Indenture and related lien are expected to be discharged in
April 1998.
Enogex owns: (i) approximately 3,500 miles of natural gas pipeline
extending from the Arkoma Basin in eastern Oklahoma to the Anadarko Basin in
western Oklahoma; (ii) a natural gas processing plant near Calumet, Oklahoma,
which has the capacity to process 250 Mmcf of natural gas per day; (iii) three
other natural gas processing plants in Oklahoma, which have, in the aggregate,
the capacity to process approximately 46 Mmcf of natural gas per day; and (iv)
an 80 percent interest in the NuStar Joint Venture, whose assets include a 66.67
percent interest in the Benedum gas processing plant with an inlet capacity of
110 million cubic feet per day; a 100 percent interest in a second bypass plant
with a capacity of 30 million cubic feet per day; 52 miles of natural gas liquid
pipeline and over 200 miles of related gas gathering facilities located in
Upton, Crockett, Reagan and neighboring counties in the Permian Basin in West
Texas.
During the three years ended December 31, 1997, the Company's gross
property, plant and equipment additions approximated $463 million and gross
retirements approximated $118 million. These additions were provided by
internally generated funds. The additions during this three-year period amounted
to approximately 11.1 percent of total property, plant and equipment at December
31, 1997.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
1. On July 8, 1994, an employee of OG&E filed a lawsuit in state court
against OG&E in connection with OG&E's VERP. The case was removed to the U.S.
District Court in Tulsa, Oklahoma. On August 23, 1994, the trial court granted
OG&E's Motion to Dismiss Plaintiff's Complaint in its entirety.
On September 12, 1994, Plaintiff, along with two other Plaintiffs,
filed an Amended Complaint alleging substantially the same allegations which
were in the original complaint. The action was filed as a class action, but no
motion to certify a class was ever filed. Plaintiffs want credit, for retirement
purposes, for years they worked prior to a pre-ERISA (1974) break in service.
They allege violations of ERISA, the Veterans Reemployment Act, Title VII, and
the Age Discrimination in Employment Act. State law claims, including one for
intentional infliction of emotional distress, are also alleged.
On October 10, 1994, Defendants filed a Motion to Dismiss Counts II,
IV, V, VI and VII of Plaintiffs' Amended Complaint. With regard to Counts I and
III, Defendants filed a Motion for Summary Judgment on January 18, 1996. On
September 8, 1997, the United States Magistrate Judge recommended the
Defendant's motion to dismiss or for summary judgment should be granted and that
the case be dismissed in its entirety and judgment entered for OG&E. The United
States District Judge accepted the
24
recommendation of the Magistrate and granted the motion to dismiss or summary
judgment. Plaintiffs have filed an appeal which is pending with the Tenth
Circuit Court of Appeals.
While the Company cannot predict the precise outcome of the proceeding,
the Company continues to believe that the lawsuit is without merit and will not
have a material adverse effect on its consolidated results of operations or
financial condition.
2. OG&E is also involved, along with numerous other Potentially
Responsible Party's ("PRP"), in an EPA administrative action involving the
facility in Holden, Missouri, of Martha C. Rose Chemicals, Inc. ("Rose").
Beginning in early 1983 through 1986, Rose was engaged in the business of
brokering of polychlorinated biphenyls ("PCBs") and PCB items, processing of PCB
capacitors and transformers for disposal, and decontamination of mineral oil
dielectric fluids containing PCBs. During this time period, various generators
of PCBs ("Generators"), including OG&E, shipped materials containing PCBs to the
facility. Contrary to its contractual obligation with OG&E and other Generators,
it appears that Rose failed to manage, handle and dispose of the PCBs and the
PCB items in accordance with the applicable law. Rose has been issued citations
by both the EPA and the Occupational Safety and Health Administration. Several
Generators, including OG&E, formed a Steering Committee to investigate and clean
up the Rose facility.
The Company's share of the total hazardous wastes at the Rose facility
was less than six percent. The remediation of this site was completed in 1995 by
the Steering Committee and is currently in the final stages of closure with the
EPA, which includes operation and maintenance activities as required in the
Administrative Order on Consent with the EPA. Due to additional funds resulting
from payments by third party companies who were not a part of the Steering
Committee, and also reduced remedy implementation costs, the Company received a
refund in December 1995 under the allocation formula. OG&E has reached a
settlement agreement with its insurance carrier, AEGIS Insurance Company, with
respect to costs incurred at this site. The Company considers this insurance
matter to be closed.
Management believes that OG&E's ultimate liability for any additional
cleanup costs of this site will not have a material adverse effect on OG&E's
financial position or its results of operations. Management's opinion is based
on the following: (i) the present status of the site; (ii) the cleanup costs
already paid by certain parties; (iii) the financial viability of the other
PRPs; (iv) the portion of the total waste disposed at this site attributable to
OG&E; and (v) the Company's settlement agreement with its insurer. Management
also believes that costs incurred in connection with this site, which are not
recovered from insurance carriers or other parties, may be allowable costs for
future ratemaking purposes.
3. 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
25
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.
4. 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, ss. 1; (iv)
discriminatory sales in violation of 79 O.S. 1991, ss. 4; (v) tortious
interference with contract; and (vi) tortious interference with a prospective
economic advantage. Trigen seeks actual damages of at least $7 million, trebled,
together with its costs, pre- and post-judgment interest and attorney fees, in
connection with each of the first four counts. It seeks actual damages of at
least $7 million, plus punitive damages together with its costs, pre-and
post-judgment interest and attorney fees, in connection with each of the
remaining counts. Trigen also seeks permanent injunctive relief against the
alleged Sherman Act violations and against OG&E's alleged practice of offering
cooling services to customers in Oklahoma City in the form of RTP-priced
electricity "bundled" together with financing, construction, and/or other
consulting services at guaranteed rates.
OG&E filed an answer and counterclaim on November 7, 1996 asserting
that Trigen made false claims, misrepresented facts, published false statements
and other defamatory conduct which damaged OG&E, and asserting violation of the
Oklahoma Deceptive Trade Practices Act. OG&E seeks punitive and actual damages.
While OG&E cannot predict the outcome of this proceeding, OG&E believes that it
will not have a material adverse effect on OG&E's consolidated financial
position or results of operations.
5. As previously reported, the State of Oklahoma, ex rel., Teresa
Harvey (Carroll); Margaret B. Fent and Jerry R. Fent v. Oklahoma Gas and
Electric Company, et al., District Court, Oklahoma County, Case No.
CJ-97-1242-63. On February 24, 1997, the taxpayers instituted litigation against
OG&E and Co-Defendants Oklahoma Corporation Commission, Oklahoma Tax Commission
and individual commissioners seeking judgment in the amount of $970,184.14 and
treble penalties of $2,910,552.42, plus interest and costs, for overcharges
refunded by OG&E to its ratepayers in compliance with an Order of the OCC which
Plaintiffs allege was illegal. Plaintiffs allege the refunds should have been
paid into the state Unclaimed Property Fund. In June 1997, OG&E's Motion for
Summary Judgment was granted. Plaintiffs have appealed. Management believes that
the lawsuit is without merit and will not have a material adverse effect on the
Company's consolidated financial position or its results of operations.
6. As reported, 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 (a) 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; (b) 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; (c) violations of the Oklahoma Open Meetings
Act occurred and that such violations render the resolution approving Ordinance
No. 97-30 invalid; (d) OG&E's support of the Enid Citizens' Against the
Government Takeover was improper; (e) OG&E has violated the favored nations
clause of the existing franchise; and (f) the City of Enid and OG&E have
violated the
26
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None
27
EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------
The following persons were Executive Officers of the Registrant as of
March 15, 1998:
Name Age Title
- --------------------- --- --------------------------------------
Steven E. Moore 51 Chairman of the Board, President
and Chief Executive Officer
Al M. Strecker 54 Senior Vice President
Michael G. Davis 48 Vice President
James R. Hatfield 40 Vice President and Treasurer
Irma B. Elliott 59 Vice President and
Corporate Secretary
Melvin D. Bowen, Jr. 56 Vice President - Power Delivery - OG&E
Jack T. Coffman 54 Vice President - Power Supply - OG&E
Donald R. Rowlett 40 Controller Corporate Accounting - OG&E
Don L. Young 57 Controller Corporate Audits - OG&E
No family relationship exists between any of the Executive Officers of
the Registrant. Each Officer is to hold office until the Board of Directors
meeting following the next Annual Meeting of Shareowners, currently scheduled
for May 21, 1998.
Messrs. Moore, Strecker, Davis, Hatfield and Ms. Elliott were named to
the position shown above following the corporate reorganization effective
December 31, 1996, pursuant to which the Registrant became the holding company
parent of OG&E. Such persons are also officers of OG&E.
28
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
1996-Present: Chairman of the Board,
President and Chief
Executive Officer - OG&E
1995-1996: President and Chief
Operating Officer - OG&E
1992-1995: Vice President - Law
and Public Affairs - OG&E
Al M. Strecker 1996-Present: Senior Vice President
1994-Present: Senior Vice President -
Finance and
Administration - OG&E
1992-1994: Vice President and
Treasurer - OG&E
Michael G. Davis 1996-Present: Vice President
1994-Present: Vice President -
Marketing and Customer
Services - OG&E
1992-1994: Director - Marketing
Division - OG&E
1992: Manager - Industrial
Services - OG&E
29
Name Business Experience
- -------------------- ---------------------------------------------------
James R. Hatfield 1997-Present: Vice President and Treasurer
1997-Present: Vice President and
Treasurer - OG&E
1994-1997: Treasurer - OG&E
1994: Vice President - Investor
Relations & Corporate
Secretary - Aquila Gas
Pipeline Corporation
(an intrastate gas
pipeline subsidiary of
UtiliCorp United Inc.)
1992-1993: Assistant Treasurer -
UtiliCorp United Inc.
(an electric and
natural gas utility
company)
Irma B. Elliott 1996-Present: Vice President and
Corporate Secretary
1996-Present: Vice President and
Corporate Secretary -
OG&E
1992-1996: Corporate Secretary - OG&E
Melvin D. Bowen, Jr. 1994-Present: Vice President -
Power Delivery - OG&E
1992-1994: Metro Region
Superintendent - OG&E
Jack T. Coffman 1994-Present: Vice President -
Power Supply - OG&E
1992-1994: Manager - Generation
Services - OG&E
30
Name Business Experience
- -------------------- ---------------------------------------------------
Donald R. Rowlett 1996-Present: Controller Corporate
Accounting - OG&E
1994-1996: Assistant Controller - OG&E
1992-1994: Senior Specialist -
Tax Accounting - OG&E
1992: Specialist - Tax Accounting -
OG&E
Don L. Young 1996-Present: Controller Corporate
Audits - OG&E
1992-1996: Controller - OG&E
31
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.
1997 1996
--------------------------------------------------------------
DIVIDEND Dividend
PAID HIGH LOW Paid High Low
--------------------------------------------------------------
First Quarter $0.66 1/2 $43 $40 1/2 $0.66 1/2 $43 5/8 $38 7/8
Second Quarter 0.66 1/2 45 7/8 40 5/8 0.66 1/2 40 1/8 36 7/8
Third Quarter 0.66 1/2 47 1/4 44 0.66 1/2 41 7/8 38 1/8
Fourth Quarter 0.66 1/2 54 3/4 46 5/16 0.66 1/2 41 7/8 38 1/8
The number of record holders of Common Stock at December 31, 1997, was
41,893. The book value of the Company's Common Stock at December 31, 1997, was
$24.39.
32
ITEM 6. SELECTED FINANCIAL DATA.
- -------------------------------
HISTORICAL DATA
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT
FOR PER SHARE DATA)
Operating revenues.............. $1,472,307 $1,387,435 $1,302,037 $1,355,168 $1,447,252
Operating expenses.............. 1,278,309 1,186,216 1,099,890 1,154,702 1,252,009
----------- ----------- ----------- ----------- -----------
Operating income................ 193,998 201,219 202,147 200,466 195,153
Other income and deductions..... 5,047 97 800 (2,167) (1,301)
Interest charges................ 66,495 67,984 77,691 74,514 79,575
----------- ----------- ----------- ----------- -----------
Net income...................... 132,550 133,332 125,256 123,785 114,277
Preferred dividend
requirements................... 2,285 2,302 2,316 2,317 2,317
Earnings available for
common......................... $ 130,265 $ 131,030 $ 122,940 $ 121,468 $ 111,960
=========== =========== =========== =========== ===========
Long-term debt.................. $ 841,924 $ 829,281 $ 843,862 $ 730,567 $ 838,660
Total assets.................... $2,765,865 $2,762,355 $2,754,871 $2,782,629 $2,731,424
Earnings per average common
share.......................... $ 3.23 $ 3.25 $ 3