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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003.

OR

For the transition period from              to             .

Commission file number 001-13643

ONEOK, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (918) 588-7000

Securities registered pursuant to Section 12(b) of the Act:

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 Registration 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.  ¨

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨.

Aggregate market value of registrant’s common stock held by non-affiliates based on the closing trade price on June 30, 2003, was $1,470.7 million.

On March 1, 2004, the Company had 102,363,387 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

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ONEOK, Inc.

2003 ANNUAL REPORT ON FORM 10-K

As used in this Annual Report on Form 10-K, the terms “we”, “our” or “us” mean ONEOK, Inc., an Oklahoma corporation, and its predecessors and subsidiaries, unless the context indicates otherwise.

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PART I.

General

ONEOK, Inc., an Oklahoma corporation, was organized on May 16, 1997. On November 26, 1997, we acquired the natural gas business of Westar Energy, Inc. (Westar), formerly Western Resources, Inc., and merged with ONEOK Inc., a Delaware corporation organized in 1933. We are the successor to a company founded in 1906 as Oklahoma Natural Gas Company.

ONEOK is a diversified energy company. We purchase, gather, process, transport, store, and distribute natural gas. We drill for and produce oil and natural gas; extract, sell and market natural gas liquids; and are engaged in the natural gas, crude oil, natural gas liquids and electricity marketing and trading business. We are the largest natural gas distributor in Kansas and Oklahoma and the third largest gas distributor in Texas, providing service as a regulated public utility to wholesale and retail customers. Our largest markets are Oklahoma City and Tulsa, Oklahoma; Wichita, Topeka and Johnson County (which includes Overland Park), Kansas; and Austin and El Paso, Texas. Our energy marketing and trading operations provide service to customers in many states.

Definitions

Following are definitions of abbreviations used in this Form 10-K:

Strategy

Our business strategy is focused on the maximization of shareholder value by vertically integrating our natural gas business operations from the wellhead to the burner tip. We expect to continue evaluating and assessing acquisition opportunities to further complement our existing asset base. We also, from time to time, sell assets when deemed less strategic or as other conditions warrant.

Acquisitions and Divestitures

Acquisition of Gulf Coast Fractionators - On February 25, 2004, we announced an agreement with ConocoPhillips to purchase a 22.5 percent general partnership interest in Gulf Coast Fractionators (GCF), which owns a natural gas liquids fractionation facility, located in Mont Belvieu, Texas for $23 million, subject to adjustments. The pending acquisition is subject to the customary closing conditions, the consent of the partners, and agreement by the partners that we will replace ConocoPhillips as operator of the facility. By existing agreement, the GFC partners have a preferential right to purchase the ConocoPhillips interest at the same terms as agreed to by us. This preferential right expires March 31, 2004. This facility has a fractionation capacity of 110 MBbls/d of mixed NGLs. As the operator, we will operate the facility and control approximately 24.8 MBbls/d of fractionation capacity. The acquisition is expected to close in April 2004 and is estimated to add $1.8 million to operating income in 2004.

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Sale of Transmission and Gathering Pipelines and Compression - On March 1, 2004, we completed a transaction to sell certain natural gas transmission and gathering pipelines and compression for approximately $13 million.

Acquisition of Properties of Wagner & Brown, Ltd. - On December 22, 2003, we purchased approximately $240 million of Texas gas and oil properties and related flow lines from a partnership owned by Wagner & Brown, Ltd. of Midland, Texas. The results of operations for these assets have been included in our consolidated financial statements since that date. The acquisition included approximately 318 wells, 271 of which we operate, and 177.2 Bcfe of estimated proved gas and oil reserves as of the September 1, 2003 effective date, with additional probable and possible gas reserve potential. Net production from these properties is approximately 26,000 Mcfe per day.

Acquisition of NGL Storage and Pipeline - In December 2003, we acquired NGL storage and pipeline facilities located in Conway, Kansas for approximately $13.7 million from ChevronTexaco. In the prior two years we had leased and operated these facilities.

Sale of Transmission Assets - In October 2003, we completed a transaction to sell certain Texas transmission assets for a sales price of approximately $3.1 million. A charge against accumulated depreciation of approximately $7.8 million was recorded in accordance with Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation” (Statement 71) and the regulatory accounting requirements of the Federal Energy Regulatory Commission (FERC) and Texas Railroad Commission (TRC).

Acquisition of Fort Bliss Gas Distribution System - In August 2003, we acquired the gas distribution system at the United States Army’s Fort Bliss in El Paso, Texas for $2.4 million. The gas distribution system at Fort Bliss has approximately 2,500 customers.

Acquisition of Pipeline System - In August 2003, we acquired a pipeline system that extends through the Rio Grande Valley region in Texas for $3.6 million. The Texas Gas Service Company (TGS) pipeline system serves the city gate points for the TGS Rio Grande Valley service area, providing service to approximately 10 transport customers, two power plants and offers access to production wells that supply the area.

Sale of Production Assets - In January 2003, we closed the sale of approximately 70 percent of the natural gas and oil producing properties of our Production segment for a cash sales price of $294 million, including adjustments. The properties sold were in Oklahoma, Kansas and Texas. The effective date of the sale was November 30, 2002. The sale included approximately 1,900 wells, 482 of which we operated. We recorded a pretax gain of approximately $61.2 million in 2003 related to this sale. The statistical and financial information related to the properties sold is reflected as a discontinued component in this Annual Report on Form 10-K. All periods presented have been restated to reflect the discontinued component.

Acquisition of Properties from Southern Union Company - On January 3, 2003, we purchased the Texas gas distribution business and other Texas assets from Southern Union Company (Southern Union). The results of operations for these assets have been included in our consolidated financial statements since that date. We paid approximately $436.6 million for these assets, including $16.6 million in working capital adjustments. The primary assets acquired were gas distribution operations that currently serve approximately 544,000 customers in cities located throughout Texas, including the major cities of El Paso and Austin, as well as the cities of Port Arthur, Galveston, Brownsville and others. Over 90 percent of the customers are residential. The other assets acquired include a 125-mile natural gas transmission system, as well as other energy related domestic assets involved in gas marketing, retail sales of propane and distribution of propane. The purchase also included natural gas distribution investments in Mexico. The gas distribution assets are operated under TGS.

Sale of Midstream Natural Gas Assets - On December 13, 2002, we closed the sale of a portion of our midstream natural gas assets for a cash sales price of approximately $92 million to an affiliate of Mustang Fuel Corporation, a private, independent oil and gas company. The assets that were sold are located in north central Oklahoma and include three natural gas processing plants and related gathering systems and our interest in a fourth natural gas processing plant.

Sale of Sayre Storage Company Property Rights - In December 2002, we sold our property rights in Sayre Storage Company (Sayre), a natural gas storage field, and entered into a long-term agreement with the purchaser whereby we retain storage capacity consistent with our original ownership position.

Sale of Investment in Magnum Hunter Resources - In the second quarter of 2002, we sold our remaining shares of Magnum Hunter Resources (MHR) common stock for a pretax gain of approximately $7.6 million, which is included in the Other segment’s other income for the year ended December 31, 2002. We retained approximately 1.5 million common stock purchase warrants.

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Sale of Investment in K. Stewart Petroleum Corporation - In June 2001, we sold our 40 percent interest in K. Stewart Petroleum Corporation (K. Stewart), a privately held exploration company, for a sales price of $7.7 million.

Environmental Matters

We are subject to multiple environmental laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid wastes and hazardous material and substance management. These laws and regulations generally require us to obtain and comply with a wide variety of environmental registrations, licenses, permits, inspections and other approvals. Failure to comply with these laws, regulations, permits and licenses may expose us to fines, penalties and/or interruptions in our operations that could be material to our results of operations. If an accidental leak or spill of hazardous materials occurs from our lines or facilities, in the process of transporting natural gas, or at any facilities that we own, operate or otherwise use, we could be held jointly and severally liable for all resulting liabilities, including investigation and clean up costs, which could materially affect our results of operations and cash flows. In addition, emission controls required under the Federal Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities. We cannot assure you that existing environmental regulations will not be revised or that new regulations will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our business, financial condition and results of operations.

We own or retain legal responsibility for the environmental conditions at 12 former manufactured gas sites in Kansas. These sites contain potentially harmful materials that are subject to control or remediation under various environmental laws and regulations. A consent agreement with the Kansas Department of Health and Environment (KDHE) presently governs all work at these sites. The terms of the consent agreement allow us to investigate these sites and set remediation activities based upon the results of the investigations and risk analysis. We have commenced active remediation on three sites with regulatory closure achieved at two of these locations, and have begun assessment at the remaining sites. The site situations are not common and we have no previous experience with similar remediation efforts. We have not completed a comprehensive study of the remaining nine sites and therefore cannot accurately estimate individual or aggregate costs to satisfy our remedial obligations.

Our preliminary review of similar cleanup efforts at former manufactured gas sites reveals that costs can range from $100,000 to $10 million per site. These estimates do not give effect to potential insurance recoveries, recoveries through rates or from unaffiliated parties, to which we may be entitled. At this time, we have not recorded any amounts for potential insurance recoveries or recoveries from unaffiliated parties, and we are not recovering any environmental amounts in rates. Total costs to remediate the two sites, which have achieved regulatory closure, totaled approximately $800,000. Total remedial costs for each of the remaining sites are expected to exceed $400,000 per site, but there is no assurance that costs to investigate and remediate the remaining sites will not be significantly higher. As more information related to the site investigations and remediation activities becomes available, and to the extent such amounts are expected to exceed our current estimates, additional expenses could be recorded. Such amounts could be material to our results of operations and cash flows depending on the remediation done and number of years over which the remediation is completed.

Our expenditures for environmental evaluation and remediation have not been significant in relation to the results of operations and there have been no material effects upon earnings or our competitive position during 2003 related to compliance with environmental regulations.

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Employees

We employed 4,342 people at December 31, 2003. The acquisition of our Texas assets added approximately 735 employees to our workforce in 2003. Kansas Gas Service Company (KGS) employed 827 people who were subject to collective bargaining contracts at December 31, 2003. We had no other union employees at December 31, 2003. The following table sets forth our contracts with unions at December 31, 2003.

SEC Filings

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC). You can read and copy any materials we file with the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information about the operations of the SEC Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains information we file electronically with the SEC, which you can access over the Internet at www.sec.gov. Our common stock is listed on the New York Stock Exchange (NYSE: OKE), and you can obtain information about us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

Website Information

You can access financial and other information at our website at www.oneok.com. We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and reports of holdings of our securities filed by our officers and directors under Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of our Code of Business Conduct, Corporate Governance Guidelines, Director Independence Guidelines and Board of Director committee charters including the charters of our audit, executive, executive compensation and corporate governance committees are also available on our website and we will make available, free of charge, copies of these documents upon request.

DESCRIPTION OF BUSINESS SEGMENTS

We report operations in the following reportable business segments:

Production

Segment Description - Our Production segment produces natural gas and oil in Oklahoma through ONEOK Energy Resources Company and in Texas through ONEOK Texas Energy Resources, LP.

General - We focus on development activities rather than exploratory drilling and seek to serve as operator on wells where we have significant ownership interest. In our role as operator, we control operating decisions that impact production volumes and lifting costs. We strive to reduce finding costs and to minimize production costs. We continue to review opportunities to acquire new properties, develop existing properties and divest of properties when the market offers premium value.

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Operating income from the Production segment is 3.6 percent, 2.8 percent, and 7.2 percent of our consolidated operating income from continuing operations for fiscal years 2003, 2002, and 2001, respectively. The Production segment has no single external customer from which it receives ten percent or more of consolidated revenues.

Acquisitions and Divestitures - The following acquisitions and divestitures are described beginning on page 3:

Producing Reserves - The Production segment primarily focuses on natural gas production activities. We own interests in 839 gas wells and 69 oil wells located in Oklahoma and Texas. A number of these wells produce from multiple zones. Production from our retained gas and oil wells decreased in 2003 compared to 2002 as a result of the natural decline in production on existing wells and limited new drilling. The lower gas production on retained wells was offset by the partial month of production on the properties acquired in December 2003. During 2003, we participated in drilling 20 wells, which included 19 producing gas wells and one dry hole.

Market Conditions and Business Seasonality - Natural gas prices during 2003 were stronger throughout the year than historical prices. This resulted in increased industry-wide drilling activity, which required us to participate in a number of developmental drilling projects during the year with other operators in order to maintain our reserve value. Until we identified and closed on the acquisition of the oil and gas properties in Texas, we limited our capital projects to only those required to maintain our leasehold position in Oklahoma. Once we fully incorporate the Texas properties into our operations, we will resume our pursuit of acquisition opportunities as a low-risk method of adding reserves.

Our goal is to continue to build on and maintain our existing reserve base through developmental drilling, and further supported by acquisition. We operate or have large interests in our retained wells. We are in a competitive position within our operating regions due to low finding costs and high quality production at locations near transportation points and markets. During 2003, the segment’s gas and oil production was sold at market prices to a number of affiliated and unaffiliated markets.

Similar to our other business segments, the Production segment can be subject to seasonal factors. The Production segment’s revenues are impacted by prices, which have been historically higher in the winter heating months, when demand is higher. Much of the seasonality has been offset through the utilization of hedging. As a result, prices received are not necessarily comparable to historical patterns. Oil prices in the United States are also impacted by international production and export policies.

Risk Management - We utilized derivative instruments in 2003 to hedge anticipated sales of natural gas and oil production. In 2003, hedges on gas production resulted in an average net wellhead price of $4.50 per MMBtu for 78 percent of our 2003 production. Hedges on oil production resulted in an average price of $27.25 per Bbl for 79 percent of our 2003 oil production.

At December 31, 2003, the Production segment had hedged 89 percent of its anticipated gas production and 89 percent of its anticipated oil production for 2004 at a weighted average wellhead price of $5.28 per MMBtu for gas and a net New York Mercantile Exchange (NYMEX) price of $30.35 per Bbl for oil. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Note D of Notes to Consolidated Financial Statements in this Form 10-K.

Gathering and Processing

Segment Description - Our Gathering and Processing segment gathers, processes and markets natural gas and fractionates, stores and markets NGLs primarily through its two main subsidiaries, ONEOK Field Services Company (OFS) and ONEOK NGL Marketing L.P. (NGL Marketing). These activities are conducted primarily in Oklahoma, Kansas and Texas.

General - We have a processing capacity of approximately 2.0 Bcf/d, of which approximately 0.2 Bcf/d is currently idle. We own approximately 13,800 miles of gathering pipelines that supply our gas processing plants.

Operating income from the Gathering and Processing segment is 14.1 percent, 8.9 percent, and 17.0 percent of our consolidated operating income from continuing operations in 2003, 2002, and 2001, respectively. The Gathering and Processing segment has no single external customer from which it receives ten percent or more of consolidated revenues.

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The gas processing operation primarily includes the extraction of mixed NGLs from natural gas and the fractionation (separation) of mixed NGLs into component products (ethane, propane, iso butane, normal butane and natural gasoline). The NGL component products are used by and sold to a diverse customer base of end users for petrochemical feedstock, residential uses, and blending into motor fuels. The gathering operation connects unaffiliated and affiliated producing wells to the processing plants. It consists of the gathering of natural gas through pipeline systems, including compression, treatment and dehydration services.

We generally process gas under three types of contracts. Under our “percent of proceeds” (POP) contracts, the producer is paid a percentage of the market value of the natural gas and NGLs that are processed. Our “keep whole” contracts allow us to replace the Btu’s extracted as NGLs with equivalent Btu’s of natural gas, which keeps the producer whole on Btu’s and allows us to retain and sell the NGLs. Under “fee” contracts, we are paid a fee for gas processing.

During 2003, we processed an average of 1,209 MMMBtu/d of natural gas and produced an average of 59 MBbls/d of NGLs. NGL Marketing markets our NGL production and also purchases NGLs from third parties for resale. During 2003, we sold approximately 114 MBbls/d of NGLs to a diverse base of customers.

Acquisitions and Divestitures - The following acquisitions and divestitures are described beginning on page 3:

Market Conditions and Business Seasonality - During the year, both crude oil and natural gas prices were volatile with NYMEX crude oil prices ranging from $26.96 to $36.79 per Bbl and NYMEX natural gas prices ranging from $4.43 to $9.13 per MMBtu.

Despite significant consolidation in the recent past, the U.S. midstream industry remains relatively fragmented and we face competition from a variety of companies including major integrated oil companies; major pipeline companies and their affiliated marketing companies; and national and local gas gatherers, processors and marketers. Competition exists for obtaining gas supplies for gathering and processing operations, obtaining supplies of raw product for fractionation, and the transportation and storage of natural gas and NGLs. The factors that affect competition typically are the fees charged under the contract, the pressures maintained on the gathering systems, the location of our gathering systems relative to competition, the efficiency and reliability of the operations, and the delivery capabilities that exist at each plant location.

We have responded to these industry conditions by primarily acquiring assets that are strategically located near our existing assets, reducing costs, selling assets in non-core operating areas and renegotiating unprofitable contracts. The principal goal of the contract renegotiation effort is to mitigate earnings and cash flow variability.

Some of our products, such as natural gas and propane used for heating, are subject to seasonality resulting in more demand during the months of November through March. As a result, prices of these products are typically higher during that time period. Other products, such as ethane, are tied to the petrochemical industry, while iso butane and natural gasoline are used by the refining industry as blending stocks. As a result, the prices of these products are affected by the economic conditions and demand associated with these various industries.

Government Regulation - The FERC has traditionally maintained that a processing plant is not a facility for transportation or sale for resale of natural gas in interstate commerce and therefore is not subject to jurisdiction under the Natural Gas Act (NGA). Although the FERC has made no specific declaration as to the jurisdictional status of our gas processing operations or facilities, our gas processing plants are primarily involved in removing natural gas liquids and therefore, we believe, are exempt from FERC jurisdiction. The NGA also exempts natural gas gathering facilities from the jurisdiction of the FERC. Interstate transmission facilities remain subject to FERC jurisdiction. The FERC has historically distinguished between these two types of facilities on a fact-specific basis. We believe our gathering facilities and operations meet the criteria used by the FERC to determine a non-jurisdictional gathering facility status. We can transport residue gas from our plants to interstate pipelines in accordance with Section 311(a) of the Natural Gas Policy Act (NGPA).

The states of Oklahoma, Kansas and Texas also have statutes regulating, in various degrees, the gathering of gas in those states. In each state, regulation is applied on a case-by-case basis if a complaint is filed against the gatherer with the appropriate state regulatory agency.

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Risk Management - Derivative instruments can be used to minimize volatility in NGL and natural gas prices. Accordingly, we will occasionally use derivative instruments to hedge the purchase and sale of natural gas used for or produced by our operations. We also occasionally use derivative instruments to secure a certain price for NGL products. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Note D of Notes to the Consolidated Financial Statements in this Form 10-K.

Transportation and Storage

Segment Description - Our Transportation and Storage segment provides natural gas transportation, storage, and nonprocessable gas gathering services. These operations are primarily conducted through Mid Continent Market Center, Inc. (MCMC), ONEOK Gas Transportation, L.L.C. (OGT), ONEOK WesTex Transmission, L.P. (WesTex), ONEOK Gas Storage, L.L.C. (OGS), ONEOK Texas Gas Storage L.P. (OTGS) and ONEOK Gas Gathering, L.L.C. (OGG). The TRC regulates both OTGS and WesTex. OGS operates under market-based rate authority granted by the FERC. MCMC’s operations continue to be regulated by the Kansas Corporation Commission (KCC). In October 2001, OGG was created by merging the gathering assets of OGT with ONEOK Producer Services, L.L.C.

General - We own approximately 5,800 miles of intrastate pipeline and storage companies with a working storage capacity of approximately 59.6 Bcf, of which 8.0 Bcf is temporarily idle.

In Oklahoma, we operate OGT, OGG and OGS. These companies have approximately 2,900 miles of pipeline and five storage facilities with a combined working storage capacity of 44.6 Bcf. In December 2002, certain Oklahoma storage property rights were sold and a long-term agreement was entered into with the purchaser, whereby we retained 3 Bcf of working capacity for our own use consistent with our historical usage. Our Distribution segment is the Transportation and Storage segment’s major customer for intrastate natural gas pipeline transportation in Oklahoma and Kansas. Capacity in the storage facilities is leased to both ONEOK Energy Marketing and Trading Company (OEMT) and third parties under terms determined by contract or the market.

OGG operates our gathering pipelines located in Oklahoma that are connected to our transmission pipelines, including gathering systems previously owned by OGT and ONEOK Producer Services, L.L.C.

The Oklahoma transmission system transported 236.7 Bcf in 2003, 257.2 Bcf in 2002, and 253.9 Bcf in 2001. OGT provides access to the major natural gas producing areas in Oklahoma. The system intersects 11 intrastate and interstate pipelines at 27 interconnect points and connects 21 processing plants and approximately 130 producing fields, allowing gas to be moved throughout the state.

In Kansas, we operate MCMC. In July 2002, we completed a transaction to transfer certain Kansas transmission assets from MCMC to our affiliated distribution company in Kansas. All historical financial and statistical information has been adjusted to reflect this transfer. After the transfer MCMC operates 200 miles of pipeline and three gas storage facilities with approximately 5.6 Bcf of working storage capacity. MCMC has access to the major natural gas producing area in south central Kansas. The system intersects four different intrastate and interstate pipelines at six interconnect points and is connected to two processing plants and associated producing fields.

In Texas, we operate WesTex and OTGS. These companies have approximately 2,680 miles of pipeline and three storage facilities. Total working storage capacity is approximately 9.3 Bcf. The Texas transmission system transported 192.2 Bcf in 2003, 227.3 Bcf in 2002 and 206.4 Bcf in 2001. WesTex is connected to the major natural gas producing areas in the Texas Panhandle and the Permian Basin. The system intersects with a total of 11 different interstate and intrastate pipelines at 32 interconnect points, 11 natural gas processing plants and two producing fields. This system provides for gas to be moved to the Waha Hub for transportation east to the Houston Ship Channel market and west to the California market. This pipeline allows us to provide service to the city of El Paso, Texas. The Loop storage facility remains operational with both injection and withdrawal capabilities. However, due to certain unresolved contractual issues, this facility is being used minimally resulting in reduced in use storage capacity in Texas of approximately 5 Bcf.

The majority of the Transportation and Storage segment’s revenues are derived from services provided to affiliates. Operating income from the Transportation and Storage segment is 11.4 percent, 14.4 percent, and 20.8 percent of our consolidated operating income from continuing operations in 2003, 2002, and 2001, respectively. The Transportation and Storage segment has no single external customer from which it receives ten percent or more of consolidated revenues.

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Divestitures - The following divestitures are described beginning on page 3:

Market Conditions and Seasonality - The Transportation and Storage segment primarily serves local distribution companies (LDCs), large industrial companies and marketing companies that serve both LDCs and large industrial customers. We compete directly with other intrastate and interstate pipelines, and storage facilities within Oklahoma, Kansas and Texas. Competition for transportation services continues to increase as the FERC and state regulatory bodies introduce more competition in the natural gas markets. Factors that affect competition are location, price and quality of services provided. We believe that the working capacity of our transportation and storage assets enables us to compete effectively.

This industry is significantly affected by the economy, price volatility and weather. Transportation quantities fluctuate due to rainfall that impacts irrigation demand, hot temperatures that affect power generation demand and cold temperatures that affect heating demand. Historically, customers have purchased and stored gas in the summer months when prices were lower and withdrawn gas during the heating season; however, increased price volatility in the natural gas market can mitigate the seasonality effect by influencing decisions relating to injection and withdrawal of natural gas in storage.

Government Regulations - Our transportation assets in Oklahoma, Kansas and Texas are regulated by the Oklahoma Corporation Commission (OCC), KCC and TRC, respectively. We have flexibility in establishing transportation rates with customers. However, there is a maximum rate that we can charge our customers in Oklahoma and Kansas and if a rate cannot be agreed upon in Texas then the rate is established by the TRC.

In January 2001, the Yaggy storage facility’s operating parameters were changed as mandated by the KDHE following natural gas explosions and eruptions of natural gas geysers in or near Hutchinson, Kansas. This removed injection capabilities related to 3 Bcf of our Kansas storage capacity. We are currently considering the steps necessary to return the field to service in accordance with regulations recently issued by the KDHE.

Customers - The Transportation and Storage segment serves affiliated companies in the Distribution and Marketing and Trading segments, as well as a number of commercial, industrial, power generation and fertilizer transporters. Each of our Transportation and Storage companies provides flexible service alternatives to meet the consumers’ needs.

Distribution

Segment Description - Our Distribution segment provides natural gas distribution in Kansas, Oklahoma and Texas. Operations in Kansas are conducted through our KGS division, which serves residential, commercial, industrial, transportation and wholesale customers. Operations in Oklahoma are conducted through our Oklahoma Natural Gas (ONG) division, which serves residential, commercial, industrial, wholesale and transportation customers, including customers that lease gas pipeline capacity. Operations in Texas are conducted through our TGS division, which serves residential, commercial, industrial, public authority and transportation customers. TGS is subject to regulatory oversight by the various municipalities that it serves, which have primary jurisdiction in their respective areas. Rates in areas adjacent to the various municipalities and appellate matters from municipalities are subject to regulatory oversight by the TRC. This segment also includes an interstate gas transportation company, OkTex Pipeline Company (OkTex), which is regulated by the FERC.

General - At December 31, 2003, ONG delivered natural gas to approximately 804,000 customers in 327 communities in Oklahoma. ONG’s largest markets are the Oklahoma City and Tulsa metropolitan areas. ONG also sells natural gas to other local gas distributors serving 40 Oklahoma communities.

At December 31, 2003, KGS supplied natural gas to approximately 642,000 customers in 336 communities in Kansas. It also makes wholesale delivery to 27 customers. KGS’ largest markets served include Kansas City, Wichita, Topeka, and Johnson County, which includes Overland Park.

On July 28, 2003, KGS and the International Brotherhood of Electrical Workers labor union entered into a three-year bargaining agreement expiring June 30, 2006. Approximately 351 of our KGS employees are members of this labor union, comprising approximately 30 percent of our KGS workforce. The parties agreed to a two percent wage increase effective July 1, 2004 and an additional two percent wage increase effective July 1, 2005. On September 12, 2003, KGS completed negotiations with the remaining three Kansas labor unions to replace collective bargaining agreements that expired on July 31, 2003. Approximately 476 of our KGS employees are members of those three labor unions, comprising approximately 41 percent of our KGS workforce. The parties agreed to extend the existing agreements for one year with a two percent wage

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increase effective retroactively to August 1, 2003. Currently, we have no ongoing labor negotiations and there are no other unions representing our employees.

At December 31, 2003, TGS delivered natural gas to approximately 544,000 customers in 181 communities in Texas. TGS’ largest markets served include Austin and El Paso.

Operating income from the Distribution segment is 26.4 percent, 25.6 percent, and 24.0 percent of the consolidated operating income from continuing operations for fiscal years 2003, 2002, and 2001, respectively. The Distribution segment has no single external customer from which it receives ten percent or more of consolidated revenues.

Acquisitions - The following acquisitions are described beginning on page 3:

Gas Supply - Gas supplies available to ONG for purchase and resale include supplies of gas under both short and long-term contracts with gas marketers, independent producers and other suppliers. Oklahoma is the third largest gas producing state in the nation and through the Transportation and Storage segment’s transmission system as well as transmission systems belonging to unaffiliated companies, ONG has direct access to all of the major gas producing areas in Oklahoma and the mid-continent region. Our gas storage, transportation and gathering assets were unbundled from the utility and operate as separate entities. A majority of ONG’s gas supply and transportation contracts were competitively bid and awarded for service beginning in the 2000/2001 heating season for a five-year term. As a result of the process, the majority of ONG’s gas supply and gas transportation needs will continue to be met by two affiliates, OEMT for supply and OGT for upstream transportation service.

ONG competitively bid reserved storage capacity of 0.9 Bcf with Southern Star Central Gas Pipeline, Inc. (Central) during 2003. Effective April 1, 2003, ONG added two additional storage contracts with affiliates. The first affiliate contract is for 4.1 Bcf of reserved storage capacity and is the result of the settlement with the OCC in May 2002. The second affiliate contract is for 1.4 Bcf of reserved storage capacity and is the result of OGS being the successful bidder in a competitive bid process. The three contracts combined give ONG a reserved storage capacity of approximately 6.4 Bcf.

KGS had 12.4 Bcf of reserved storage capacity with Central, 0.4 Bcf of reserved storage capacity with Panhandle Eastern Pipeline Company (Panhandle) and 2.4 Bcf of reserved storage capacity with MCMC throughout 2003. Effective April 22, 2003, KGS added an additional storage contract with Central for 2.5 Bcf of reserved storage capacity. The four contracts combined give KGS a reserved storage capacity of approximately 17.7 Bcf.

KGS has a long-term gas purchase contract with Amoco Production Company (Amoco) for the purpose of meeting the requirements of the customers served over the Central system. We anticipate that this contract will supply between 45 percent and 55 percent of KGS’ demand served by the Central pipeline system. Amoco is one of various suppliers over the Central pipeline system. Management believes that if this contract were cancelled the gas supplied by Amoco could be replaced with gas from other suppliers. Gas available under the contract that exceeds the needs of our residential and commercial customer base is also available for sale to other parties, known as “as available” gas sales.

The remainder of KGS’ gas supply is purchased from a combination of direct wellhead production, natural gas processing plants, natural gas marketers and production companies.

KGS has transportation agreements for delivery of gas that have remaining terms with some extending to 2017 with the following nonaffiliated pipeline transmission companies: Central, Enbridge Pipelines - KPC, Inc. (KPC), Kinder Morgan Interstate Gas Transmission, L.L.C., Wyoming Interstate Gas Company, Panhandle, Northern Natural Gas Company and Natural Gas Pipeline Company of America. Additionally, approximately five percent of KGS’ transportation service is provided by MCMC, which is an affiliated company.

In 2002, KGS signed an agreement with Colorado Interstate Gas Company (CIG) for capacity on the proposed Cheyenne Plains pipeline. This pipeline will provide KGS access to the Rocky Mountain gas supply basin, which currently has excess supply. This will facilitate KGS’ ability to maintain a reliable gas source for our current customers through a proposed interconnection with Central and the KGS transmission system. The proposed Cheyenne Plains pipeline will originate at the Cheyenne Hub in northeast Colorado and terminate with deliveries to several pipelines in Kansas. The proposed completion date of this pipeline is 2005. CIG must obtain several regulatory approvals before the pipeline can be completed.

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In May 2002, the KCC approved an order allowing the transfer of certain MCMC transmission pipeline assets from our Transportation and Storage segment to KGS. The operation of these assets is regulated by the KCC. The transportation system provides access to the major natural gas producing areas in Kansas intersecting with eight intrastate and interstate pipelines at 13 interconnect points, three processing plants, and approximately three producing fields effectively allowing gas to be moved throughout the state. With the transfer of these assets, KGS has firm transportation service. KGS uses these transmission pipeline assets to serve its customers and provide transportation service on and off-system. The order was effective July 1, 2002. All historical financial and statistical information has been adjusted to reflect this transfer.

The majority of TGS’ 2003 gas requirements for its operations were delivered under short and long-term transportation contracts through five major pipeline companies. TGS purchases significant volumes of gas under short and long-term arrangements with suppliers. The amounts of such short-term purchases are contingent upon price. TGS has firm supply commitments for all areas that are supplied with gas purchased under short-term arrangements. TGS also holds rights to 5.2 Bcf of storage capacity to assist in meeting peak demands in El Paso and Austin service areas.

TGS is committed under various agreements to purchase certain quantities of gas in the future. These commitments may extend over a period of several years depending upon when the required minimum quantity is purchased. TGS has purchased gas tariffs in effect for all its utility service areas that provide for purchased gas cost recovery under defined methodologies.

There is an adequate supply of natural gas available to our utility systems, and we do not anticipate problems with securing additional gas supply as needed for our customers. However, if supply shortages occur, ONG’s rate schedule “Order of Curtailment” and KGS’ rate order “Priority of Service” provide for first reducing or totally discontinuing gas service to large industrial users and graduating down to requesting residential and commercial customers to reduce their gas requirements to an amount essential for public health and safety. In Texas, gas sales and/or transportation contracts with interruption provisions, whereby large volume users purchase gas with the understanding that they may be forced to shut down or switch to alternate sources of energy at times when the gas is needed for higher priority customers, have been utilized for load management by TGS and the gas industry as a whole. In addition, during times of special supply problems, curtailments of deliveries to customers with firm contracts may be made in accordance with guidelines established by appropriate federal and state regulatory agencies.

Residential and Commercial Customers - KGS, ONG and TGS distribute natural gas as public utilities to approximately 71 percent of Kansas’ distribution market, 86 percent of Oklahoma’s distribution market and 14 percent of Texas’ distribution market. Natural gas sold to residential and commercial customers, which is used primarily for heating and cooking, accounts for approximately 58 and 16 percent of gas sales, respectively, in Kansas, 66 and 27 percent of gas sales, respectively, in Oklahoma, and 62 and 23 percent of gas sales, respectively, in Texas.

A franchise, although nonexclusive, is a right to use the municipal streets, alleys, and other public ways for utility facilities for a defined period of time for a fee. ONG, KGS and TGS hold franchises in 40, 280 and 83 municipalities, respectively. In management’s opinion, our franchises contain no unduly burdensome restrictions and are sufficient for the transaction of business in the manner in which it is now conducted.

Industrial Customers - Under ONG’s transportation tariffs, certain customers, for a fee, can have their gas, whether purchased from ONG or another supplier, transported to their facilities utilizing lines owned by ONG or its affiliates. KGS transports gas for large industrial customers through its End-Use Customer Transportation (ECT) program. TGS transports gas for industrial customers that qualify under tariffs in each of the TGS service areas. Qualifying industrial and commercial customers are able to purchase gas on the spot market and have it transported by ONG, KGS and TGS.

Because of increased competition for the transportation of gas to commercial and industrial customers, some of these customers may be lost to affiliated or unaffiliated transporters. If the Transportation and Storage segment gained some of this business, it would result in a shift of some revenues from the Distribution segment to the Transportation and Storage segment.

Market Conditions and Business Seasonality - The natural gas industry is expected to remain highly competitive resulting from initiatives being pursued by the industry and regulatory agencies that allow industrial and commercial customers increased options for energy supplies. We believe that we must maintain a competitive advantage in order to retain our customers and, accordingly, continue to focus on reducing costs.

The Distribution segment is subject to competition from electric utilities offering electricity as a rival energy source and competing for the space heating, water heating, and industrial process markets. Alternative fuels such as propane and fuel oil also present competition. The principal means to compete against alternative fuels is lower prices, and natural gas continues to maintain its price advantage in the residential, commercial, and both small and large industrial markets. In residential

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markets, the average cost of gas is less for ONG, KGS and TGS customers than the cost of an equivalent amount of electricity.

The Distribution segment is subject to competition from other pipelines for its existing industrial load. ONG, KGS and TGS compete for service to the large industrial and commercial customers and competition continues to lower rates. A portion of ONG’s transportation services and KGS’ ECT services are at negotiated rates that are generally below the approved transportation tariff rates, and increased competition potentially could lower these rates. In TGS’ service areas, transportation service is negotiated due to the ability of competitive pipelines within the proximity to by-pass TGS service, and file a separate, confidential tariff at the TRC. Industrial and transportation sales volumes tend to remain relatively constant throughout the year.

Gas sales to residential and commercial customers are seasonal, as a substantial portion of gas is used principally for heating. Accordingly, the volume of gas sales is consistently higher during the heating season (November through March) than in other months of the year. ONG’s and KGS’ tariff rates include a temperature normalization adjustment clause during the heating season, which mitigates the effect of fluctuations in weather. KGS’ WeatherProof Bill program was designed to mitigate the effect of weather fluctuations in Kansas for customers electing to use this program. Due to a notification that KGS’ contractor would not be able to provide sufficient support for the WeatherProof Bill program, this program ended effective December 1, 2003. Additionally, with prior KCC approval, KGS has a gas hedging program in place to reduce volatility in the gas price paid by consumers. The costs of this program are borne by the KGS customers. Approximately 78 percent of TGS’ revenues are protected from abnormal weather due to a flat fee rate and a weather normalization adjustment clause. TGS’ weather normalization adjustment clause is in 17 Texas towns and cities, including Austin, Galveston and Mineral Wells, to stabilize earnings and neutralize the impact of unusual weather on customers. A flat monthly fee is included in the authorized rate design for El Paso and Port Arthur to protect customers from abnormal weather. From time to time, TGS uses derivative instruments to mitigate the volatility of the cost of gas to protect its customers in the city of El Paso.

Government Regulation - Rates charged for gas services are established by the OCC for ONG and by the KCC for KGS. TGS is subject to regulatory oversight by the various municipalities that is serves, which have primary jurisdiction in their respective areas. Rates in areas adjacent to the various municipalities and appellate matters are subject to regulatory oversight by the TRC. Gas purchase costs are included in the Purchased Gas Adjustment (PGA) clause rate that is billed to customers. Our distribution companies do not make a profit on the cost of gas. Other changes in costs must be recovered through periodic rate adjustments approved by the OCC, KCC, TRC and various municipalities in Texas.

There were several regulatory initiatives in 2003. The highlights of these initiatives are as follows:

We believe we will be able to recognize all revenues authorized by the OCC in this limited issue filing. We believe our next rate increase will exceed $10.7 million. We will continue to monitor the regulatory environment to determine any changes in our estimated future rate increase and if a refund liability is determined to exist we will record a reserve for the obligation.

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We have settled all known claims arising out of long-term gas supply contracts containing “take-or-pay” provisions that purport to require us to pay for volumes of natural gas contracted for but not taken. The OCC has authorized recovery of the accumulated settlement costs over a 20-year period, expiring in 2014, or approximately $6.7 million annually through a combination of a surcharge from customers, revenue from transportation under Section 311(a) of the NGPA and other intrastate transportation revenues. There are no significant potential claims or cases pending against us under “take-or-pay” contracts.

OkTex transports gas in interstate commerce under Section 311(a) of the NGPA and is treated as a separate entity by the FERC. Accordingly, OkTex is subject to the regulatory jurisdiction of the FERC under the NGPA with respect to rates, accounts and records, the addition of facilities, the extension of services in certain cases, the abandonment of services and facilities, the curtailment of gas deliveries and other matters. OkTex has the capacity to move up to 1,100 MMcf/d.

Marketing and Trading

Segment Description - Our Marketing and Trading segment conducts its business through OEMT and its subsidiaries. OEMT is actively engaged in value creation through marketing and trading of natural gas to both wholesale and retail customers throughout the United States using leased gas storage and firm transportation capacity from related parties and others. We have executed an integrated wholesale energy business strategy based on expanding our existing marketing, trading and arbitrage opportunities in the natural gas and power markets. The combination of owning or controlling strategic assets and having a reliable marketing franchise allows us to capture volatility in the energy markets.

Through the strength of our wholesale marketing, trading and risk management capabilities, we provide commodity-diverse products and services designed to meet each of our customers’ needs. As a result of our core competencies, our retail operations have become a full-service provider in the states of our corporate-owned utilities and have successfully expanded throughout the United States.

OEMT was the successful bidder to supply gas to ONG, an affiliated company, for its gas sales requirements for five years beginning in November 2000. In response, we entered into firm supply arrangements with major producers and large independents that average in length from two to five years.

In the first quarter of 2002, our Power segment was combined into our Marketing and Trading segment, eliminating the Power segment. This reflects our strategy of trading around the capacity of our electric generating plant. All segment data has been restated to reflect this change.

General - Our Marketing and Trading segment purchases, stores, markets, and trades natural gas in the retail sector in its core distribution area and the wholesale sector throughout most of the United States. We have also diversified our marketing and trading portfolio to include power, crude oil and natural gas liquids. We have a strong mid-continent region storage and transport position, with transportation capacity of 1.3 Bcf/d. With total cyclical storage capacity of 75 Bcf, withdrawal capability of 2.3 Bcf/d and injection capability of 1.5 Bcf/d spread across 19 different facilities, we have direct access to most regions of the country and flexibility to capture volatility in the energy markets. Because of seasonal demands on natural gas for heating, volatility tends to be greater in the winter months. We recently extended our marketing and trading operations into leasing storage and pipeline capacity in Canada. We continue to enhance our strategy of focusing on higher margin business, which includes providing reliable service during peak demand periods, through the use of storage and transportation capacity.

Operating income from our Marketing and Trading segment is 44.2 percent, 48.9 percent, and 29.3 percent of our consolidated operating income from continuing operations for fiscal years 2003, 2002, and 2001, respectively. A $37.4 million charge related to Enron’s bankruptcy proceedings is included in 2001 and a $14.0 million gain related to the sale of Enron claims is included in 2002. The Marketing and Trading segment has no single external customer from which it receives ten percent or more of consolidated revenues.

We completed construction on a peak electric power generating plant in mid-2001. The 300-megawatt plant is located in Oklahoma adjacent to one of our natural gas storage facilities and is configured to supply electric power during peak demand periods. This plant allows us to capture the “spark spread premium,” which is the value added by converting natural gas to electricity, during peak demand periods. Because of seasonal demands for electricity for summer cooling, the demands on our power plant are greater in the summer months. In October 2003, we signed a tolling arrangement with a third party for

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their power plant in Big Springs, Texas, which is connected to our gas transmission system. The agreement, which expires in December 2005, allows us to sell the steam and power generated in the Electric Reliability Council of Texas (ERCOT). This agreement increased our owned or contracted power capacity from 300 to 512 megawatts.

Market Conditions and Business Seasonality - In response to a very competitive marketing and trading environment resulting from continued deregulation of the retail natural gas markets and the restructuring of the U.S. retail and wholesale electricity markets, our strategy is to concentrate our efforts on capitalizing on short-term pricing volatility through marketing, trading and arbitrage opportunities provided by leasing or ownership of storage, generation and transportation assets. We focus on building and strengthening supplier and customer relationships to execute our strategy. We have also benefited from overall market conditions generated from large energy merchant and trading operations becoming under capitalized and having lower credit quality.

The Marketing and Trading segment’s net revenues are subject to fluctuations during the year primarily due to the impact certain seasonal factors have on sales volumes and the price of natural gas, electricity, and crude oil. Natural gas sales volumes are typically higher in the winter heating months than in the summer months, reflecting increased demand due to greater heating requirements and, typically, higher natural gas prices that occur during the winter heating months.

Risk Management - In order to mitigate the risks associated with energy trading activities, we manage our portfolio of contracts and its assets in order to maximize value, minimize the associated risks and provide overall liquidity. In doing so, we use price risk management instruments, including swaps, options, futures and physical commodity-based contracts to manage exposures to market price movements. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk and Note D of Notes to Consolidated Financial Statements in this Form 10-K for further discussion.

Other