OGE Energy Corp. 2000 Annual Report

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In this era of change in the energy industry, we’re working to adapt, and to shape the future of our company for the benefit of our customers and investors. At the same time, we’re committed to our time-tested focus on the excellence of our core operations in electricity and natural gas. We have arrived at the point where they are truly coming together.
    Energy convergence, as the cover of this report suggests, presents us with new opportunities to position our company as much more than an electric utility. In fact, we’ve already begun.
    For the third year in a row, our businesses combined to produce record revenues. We also saw a 29 percent increase in the OGE stock price in 2000.
    Moving money to the bottom line, however, proved to be more difficult as expenses also grew and earnings dropped by five cents a share. The principal cause of the decline was the under-recovery of rising fuel costs associated with the operation of our natural gas pipeline system. But we’re correcting the problem and, in the year ahead, we plan to get our earnings growing again.

Double Platinum
In this new economy of instant information, accelerating change and often-volatile uncertainty, everyone is challenged to be flexible, yet well grounded at the same time. That’s one reason why we’re proud to have been named for the second straight year to the Forbes Magazine Platinum List of America’s 400 Best Big Companies.
    We were struck in particular by one paragraph from Forbes, describing what the Platinum companies have in common beyond their solid financial performance:

“…an innate ability to adapt to change; a hunger to innovate and go against the grain; resiliency in a down industry and amid doubts on Wall Street; and a relentless will to be miserly even in boom times...”

    We see this as an affirmation of our commitment to operational excellence in everything we do.

Still Focused on Deregulation
Arkansas and Oklahoma, the two states served by our OG&E electric utility, are among the 24 states that are moving toward deregulation. Delays, however, are on the horizon. Arkansas lawmakers have delayed deregulation until October 2003 and the Oklahoma Legislature may delay deregulation until January 2004 or later.
    These delays come on the heels of price spikes and blackouts in California, where “deregulation” has gotten much of the blame. We traveled to California for a first-hand look at the situation. Our conclusion is that circumstances and details of deregulation in California bear little, if any, resemblance to those found in our part of the country. The biggest difference is simple: supply and demand. California uses more power than it can generate. Oklahoma, by contrast, is attracting many new power plant projects that, when built, will enable the state to produce more power than it needs.
    We continue to believe that deregulation presents an important opportunity for our customers, for our company, and for our entire state.
    We’ve been working for years to prepare our businesses for customer choice; to be ready with solid plans to deliver value to customers and investors in a new era of competition. This preparation has focused our attention keenly on our business fundamentals and we believe the decisions we’re making today are good for our company in any event.
    While we want to move forward toward deregulation, we recognize that concern about California is likely to cause a delay. That will require patience, which we see as one of our attributes.

The New Face of OGE
As the new face of OGE Energy continues to take shape, we’ll be highlighting what we see as the uniqueness of our electricity and natural gas assets—pipelines and power lines virtually intertwined. We believe with these assets, and our good people, that we are in a great position—especially strong for a company our size.
    We also see our location as an asset for three key reasons. First, we are where the gas is—Oklahoma is the third-leading gas producing state, and the high-price environment is attracting new drilling which will increase that production. Second, our central location and abundant natural gas reserves are attracting development of new power plants—about 11,000 megawatts of new generation are under construction or on the drawing board. We are ideally positioned to compete for these new plants’ gas transportation business. Third, we’re in an excellent place to market electric power and natural gas, not only in our service area, but also to points across the mid-continent region. Energy marketing is a key component in today’s economy. It works around the clock, fueled by professionals working trading floors from coast to coast.
    It’s a fast-paced arena, but it can’t shake our focus from our four guiding principles: preparing for deregulation, achieving operational excellence, developing new skills, and pursuing disciplined growth.
    We know it’s the growth component that most interests investors. That’s why we’re particularly disappointed that we didn’t get better results in 2000 from Enogex. The under-recovery of pipeline system fuel cost us $25 million.
    Moving gas through a pipeline requires pumps and compressors that use some of the gas from the pipeline as fuel. Our gas transportation contracts enable us to recover that pipeline system fuel, but as we integrated the Transok pipeline—acquired in 1999—into our existing system, we discovered we were recovering less than we were both using and entitled to recover.
    With natural gas prices as high as we have ever seen, it was expensive. But we have filed for fuel rate adjustments with the Federal Energy Regulatory Commission to recoup as much as we can, and for full recovery moving forward. As a result, we expect our gas operations to contribute significantly stronger earnings in 2001.
    In Oklahoma, where our pipeline assets are concentrated, drilling rig counts nearly doubled in 2000, and we expect the increased exploration to result in more gathering and transportation opportunities. That should translate into significant new business for our pipeline system, the ninth largest in the United States.
    We’ve already negotiated major contracts to transport gas for two new power plants, and we’ve expanded our service to an existing plant that added new capacity. Moreover, we’re in an excellent position to compete aggressively for additional transportation to other gas-fired electric generation plants proposed in both Oklahoma and Arkansas.
    We’re also counting on OGE Energy Resources, our energy trading and marketing business, to continue its pattern of increasing volumes, growing margins and higher profits. This important part of our company got in on the ground floor of what, in just a few years, has evolved into today’s energy market. It’s earning high marks for customer satisfaction in an arena where relationships really matter.

Extreme Weather
Again in 2000, perhaps the most visible example of operational excellence at OGE Energy was our employees’ response to extreme weather events in Oklahoma and Arkansas. In July, we were hit with freakish 90-mph windstorms on consecutive days, knocking out power to 150,000 customers. The successful restoration didn’t feel like victory, though, as we mourned the loss of Boyd Caygle, a longtime OG&E line worker who was fatally injured.
    As our crews finished the repairs, a heat storm was brewing. It burned through August and September into October. As the demand for indoor cooling grew, our people and our equipment answered the call to produce and deliver power in record volumes. We were glad to have already added capacity at two of our power plants—on time and under budget—to handle summer peaks.
    Two months later it turned bitterly cold. To run their heaters, our customers also set a new wintertime record for peak electricity demand. Then, at Christmas, a two-day ice storm toppled trees and power lines across Oklahoma and Arkansas, including 10,000 square miles of OG&E service territory. More than 500,000 electric customers lost power, 142,000 of them ours. The people of OG&E mounted the largest restoration program in the history of our company. The days were long, dangerous and cold, but our people, and those who came to assist, did the job well and safely.
    Also in 2000, we congratulated our people at Enogex, winners of the Pinnacle Award, the Oklahoma Safety Council’s highest honor. These are just the latest examples of the operational excellence we encourage, and strive every day to achieve.

Embracing Change
We strongly believe that convergence and deregulation will create exciting new opportunities for our company. We are embracing change. We are doing our part to create change where we see benefit for our customers, our investors, and the communities where we live and work.
    At the same time, it appears the transition from governmental control to competitive markets in energy will take longer and be more difficult than originally thought.
    It’s now clear there won’t be a “national” power market anytime soon; the winners will be determined region by region. This favors us, playing into our vision that OGE Energy will be the converged, low-cost energy platform preferred by customers in our region.
    We believe that, by investing in OGE Energy, you have made a sound investment. Our business fundamentals are in great shape. Our financials and cash flow are strong. We have a strong mix of assets in an ideal geographic position, with an energy convergence strategy to capture value. We have a track record of solid performance, and we’re working to improve on that record. We appreciate your confidence. Our aim is to earn it every day.

Sincerely,

Steven E. Moore
Chairman, President and Chief Executive Officer

Steve Moore Chairman, President, and Chief Executive Officer

“ We believe in energy convergence and we’re
dedicated to making it work for our investors.”
Steve Moore
Chairman, President, and Chief Executive Officer

Board Thanks Swisher, Welcomes Williams
This year, with many thanks for his 22 years of service on our board of directors, we bid farewell to Bill Swisher, chairman of CMI Corp. in Oklahoma City. We wish our friend Bill the very best in his retirement and thank him for his exceptional service and dedication to our company.
We also welcome the newest member of our board, J.D. Williams. Founder of the Washington D.C.-based law firm Williams & Jensen P.C., Mr. Williams brings leadership experience, knowledge of the energy industry, and insight into our region. We look forward to working with him.

Chart: Projected U.S. Natural Gas Demand

OGE Energy's electric and natural gas assets give us a regional presence from west Texas to southeast Missouri. OG&E is Oklahoma's largest electric utility, serving 30,000 square miles in Oklahoma and western Arkansas. Enogex is the nation's ninth-largest natural gas pipeline, with 10,000 miles of pipe and 13 processing plants. Click on map for enlarged view.