<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 for the quarterly period ended February 28, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 for the transition period from to
--------------
------------------
Commission file number 001-13643
ONEOK, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1520922
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
100 WEST FIFTH STREET, TULSA, OK 74103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 588-7000
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
--- ---
On February 28, 1999, the Company had 31,636,119 shares of common stock
outstanding.
<PAGE> 2
ONEOK, INC.
QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE NO.
Consolidated Condensed Statements of Income -
Three Months and Six Months Ended
February 28, 1999 and 1998 3
Consolidated Condensed Balance Sheets -
February 28, 1999 and August 31, 1998 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended February 28, 1999 and 1998 5
Notes to Consolidated Condensed Financial Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 20
PART II - OTHER INFORMATION 21 - 22
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of Dollars, except per share amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated $396,814 $470,314 $583,716 $588,951
Nonregulated 195,850 251,740 388,877 447,263
- -------------------------------------------------------------------------------------------------------------
Total Operating Revenues 592,664 722,054 972,593 1,036,214
- -------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 363,288 474,704 603,124 683,977
Operations and maintenance 62,271 78,873 126,860 132,635
Depreciation, depletion, and amortization 31,797 27,265 62,935 44,459
General taxes 10,171 9,963 19,545 15,408
- -------------------------------------------------------------------------------------------------------------
Total Operating Expenses 467,527 590,805 812,464 876,479
- -------------------------------------------------------------------------------------------------------------
Income before Interest and Income Taxes 125,137 131,249 160,129 159,735
Income taxes 44,596 46,611 53,983 54,049
Interest 12,009 10,802 23,364 19,330
- -------------------------------------------------------------------------------------------------------------
NET INCOME 68,532 73,836 82,782 86,356
Preferred Stock Dividends 9,324 8,976 18,648 8,976
- -------------------------------------------------------------------------------------------------------------
Income Available for Common Stock $59,208 $64,860 $64,134 $77,380
=============================================================================================================
Earnings Per Share of Common Stock - Basic $1.87 $2.06 $2.03 $2.59
=============================================================================================================
Earnings Per Share of Common Stock - Diluted $1.33 $1.43 $1.60 $2.17
=============================================================================================================
Dividends Per Share of Common Stock $0.31 $0.30 $0.62 $0.60
=============================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FEBRUARY 28, August 31,
(Thousands of Dollars) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Property $2,680,361 $2,601,930
Accumulated depreciation, depletion, & amortization 945,461 915,769
- ---------------------------------------------------------------------------------------------------------
Total property 1,734,900 1,686,161
- ---------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 18,357 86
Accounts and notes receivable 332,214 177,649
Inventories 84,016 138,380
Other current assets 22,907 21,958
- ---------------------------------------------------------------------------------------------------------
Total current assets 457,494 338,073
- ---------------------------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets, net 250,318 229,543
Goodwill 78,106 77,422
Other 175,968 91,288
- ---------------------------------------------------------------------------------------------------------
Total deferred charges and other assets 504,392 398,253
- ---------------------------------------------------------------------------------------------------------
Total assets $2,696,786 $2,422,487
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
COMMON SHAREHOLDERS' EQUITY:
Common stock with $0.01 par value: authorized 100,000,000 shares;
issued and outstanding 31,036,119 shares at February 28, 1999 and
31,576,287 shares at August 31, 1998 $317 $316
Premium on capital stock 331,820 329,425
Retained earnings 315,360 270,808
- ---------------------------------------------------------------------------------------------------------
Total common shareholders' equity 647,497 600,549
Preferred Stock: $0.01 par value, authorized 100,000,000 shares:
Convertible Preferred Stock: Series A authorized 20,000,000 shares;
issued and outstanding 19,946,448 shares at February 28, 1999 and
August 31, 1998 199 199
Convertible Preferred Stock: Series B authorized 30,000,000 shares;
issued and outstanding 125,826 shares at February 28, 1999 and
83,826 at August 31, 1998 1 1
Premium on Preferred Stock 568,869 568,122
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,216,566 1,168,871
- ---------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 529,720 312,355
CURRENT LIABILITIES:
Long-term debt 19,817 16,909
Notes payable 160,000 212,000
Accounts payable 178,170 136,601
Accrued taxes 38,084 16,829
Accrued interest 8,624 7,814
Other 56,735 70,660
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 461,430 460,813
- ---------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 310,136 313,955
Other deferred credits 178,934 166,493
- ---------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 489,070 480,448
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $2,696,786 $2,422,487
=========================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
February 28,
(Thousands of Dollars) 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $82,782 $86,356
Depreciation, depletion, and amortization 62,935 47,052
Deferred income taxes (6,050) (4,650)
Changes in assets and liabilities (90,627) 58,890
- ----------------------------------------------------------------------------------------
Cash provided by operating activities 49,040 187,648
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Changes in other assets (59,230) (3,055)
Capital expenditures, net of salvage (104,725) (33,459)
- ----------------------------------------------------------------------------------------
Cash used in investing activities (163,955) (36,514)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of notes payable, net (52,000) (54,083)
Issuance (payment) of debt 220,273 (3,858)
Issuance of stock 3,143 6,007
Dividends paid (38,230) (26,876)
- ----------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 133,186 (78,810)
- ----------------------------------------------------------------------------------------
Change in cash and cash equivalents 18,271 72,324
Cash and cash equivalents at beginning of period 86 14,377
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $18,357 $86,701
========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM REPORTING. The interim consolidated condensed financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. Due to the seasonal nature of the
business, the results of operations for the six months ended February 28, 1999,
are not necessarily indicative of the results that may be expected for the year
ending August 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended August 31, 1998.
RECLASSIFICATION. Certain amounts for 1998 have been reclassified to conform
with the 1999 presentation.
B. SIGNIFICANT EVENTS
On December 14, 1998, ONEOK, Inc. (the Company) announced a definitive merger
agreement with Southwest Gas Corporation (Southwest). The agreement provides for
the Company to pay $28.50 per share for Southwest common stock outstanding,
valuing Southwest at approximately $1.8 billion, including assumed debt. In
February 1999, Southwest announced that they had received an unsolicited offer
of $32 per share of common stock from the Southern Union Company. The Company
has confirmed its offer of $28.50 per share of common stock and on March 5,
1999, announced that the applications had been filed with the regulatory
authorities in Arizona, Nevada and California requesting approval to merge with
Southwest.
During the second quarter, the Company consummated the strategic alliance with
Magnum Hunter Resources, Inc. (Magnum) adding $10 million in producing
properties and becoming a 31 percent equity owner in Magnum. The Company also
closed on two other acquisitions with a purchase price of $53 million adding
reserves located in Oklahoma. These acquisitions began contributing to income
before interest and income taxes during the second quarter.
In February 1999, the Company announced additional acquisitions. The Company and
Koch Midstream Enterprises (Koch) jointly announced a letter of intent for the
Company to acquire all the Oklahoma midstream natural gas gathering and
processing assets of Koch for $285 million in cash. The transaction is subject
to certain conditions, including approval by the Board of Directors of Koch. The
Company's Board of Directors approved the acquisition on March 18, 1999. The
Company also announced a strategic alliance with Costilla Energy, Inc.
(Costilla) to acquire $35 million in oil and gas properties and acquire a $65
million equity interest in Costilla. The transaction is contingent upon
Costilla's success in closing the acquisition of certain properties owned by
Pioneer Natural Resources Company.
On November 26, 1997, the Company acquired substantially all of the natural gas
assets of Western Resources, Inc. (Western). The following table of unaudited
pro forma information presents a summary of consolidated results of operations
of the Company as if the acquisition had occurred at the beginning of fiscal
year 1998. The results do not necessarily reflect the results which would have
been obtained if the acquisition had actually occurred on the date indicated or
the results which may be expected in the future.
6
<PAGE> 7
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Six Months Ended
February 28,
1999 1998
(Thousands of dollars, except per share amounts) (ACTUAL) (Pro Forma)
- -------------------------------------------------------------------------------
<S> <C> <C>
Total operating revenues $972,593 $1,224,384
Income before interest and income taxes $160,129 $157,991
Net income $82,782 $89,680
Preferred stock dividends $18,648 $17,952
Income available for common stock $64,134 $71,728
Earnings per share of common stock - basic $2.03 $2.82
Earnings per share of common stock - diluted $1.60 $1.74
- -------------------------------------------------------------------------------
</TABLE>
Oklahoma Natural Gas (ONG) is proceeding in a rate review before the Oklahoma
Corporation Commission (OCC) with a test year ended November 30, 1998. On March
11, 1999, the OCC issued a ruling which called for a hearing to make a
determination as to whether ONG's rates should be modified on an interim basis
until a full rate review can be completed. On March 22, 1999, the OCC Staff
filed a Proposed Issue Resolution which addressed unbundling of services and
deregulation of long haul transportation, storage, and gathering assets in
Oklahoma. The proposal included a procedural schedule on both the unbundling and
deregulation issues as well as the interim rates for the distribution
operations. The procedural schedule recommends a hearing on deregulation of
upstream services during the first week of August, 1999, following the
acceptance of bids for upstream services by the Company.
C. REGULATORY ASSETS
The table is a summary of regulatory assets, net of amortization, at February
28, 1999, and August 31, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
FEB. 28, Aug. 31,
(Thousands of dollars) 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Recoupable take-or-pay $88,448 $90,708
Pension costs 22,972 25,061
Postretirement costs other than pension 61,367 59,963
Other 6,315 8,917
Transition costs 23,137 18,447
Reacquired debt costs 22,799 -
Income tax rate change 25,280 26,447
- -------------------------------------------------------------------
Regulatory Assets, Net $250,318 $229,543
===================================================================
</TABLE>
D. SUPPLEMENTAL CASH FLOW INFORMATION
The table is supplemental information relative to the Company's cash flows for
the six months ended February 28, 1999 and 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28,
(Thousands of dollars) 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $22,554 $16,890
Income taxes $41,589 $34,682
Noncash transactions:
Gas received as payment in kind $139 $149
Acquisition of assets and liabilities
Plant, property and equipment - $638,940
Current assets - $232,520
Regulatory assets and goodwill $126,224
Deferred debits - ($5,379)
Current liabilities - ($23,494)
Debt assumed - ($161,198)
Deferred credits - ($54,774)
Deferred income taxes - ($91,336)
Stock - ($658,701)
------- ---------
Cash Paid - $2,802
================================================================
</TABLE>
7
<PAGE> 8
E. EARNINGS PER SHARE INFORMATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED FEBRUARY 28, 1999 SIX MONTHS ENDED FEBRUARY 28, 1999
PER SHARE PER SHARE
(In Thousands) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common stockholders $59,208 31,594 $1.87 $64,134 31,564 $2.03
===== =====
EFFECT OF DILUTIVE SECURITIES
Options 0 21 31
Convertible preferred stock 9,324 20,072 18,648 20,072
----- ------ ------ ------
DILUTED EPS
Net Income + assumed conversions $68,532 51,687 $1.33 $82,782 51,667 $1.60
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended February 28, 1998 Six Months Ended February 28, 1998
Per Share Per Share
(In Thousands) Income Shares Amount Income Shares Amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common stockholders $64,860 31,466 $2.06 $77,380 29,859 $2.59
===== =====
EFFECT OF DILUTIVE SECURITIES
Options 164 35
Convertible preferred stock 8,976 19,946 8,976 9,973
----- ------ ----- -----
DILUTED EPS
Net Income + assumed conversions $73,836 51,576 $1.43 $86,356 39,867 $2.17
======================================================================================================================
</TABLE>
F. ENVIRONMENTAL
In connection with the Western transaction, the Company acquired 12 manufactured
gas sites located in Kansas which may contain potentially harmful materials that
are classified as hazardous material. Hazardous materials 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 future work at these sites. The terms of the consent agreement allow
the Company to investigate these sites and set remediation priorities based upon
the results of the investigations and risk analysis. The prioritized sites will
be investigated over a ten year period. At February 28, 1999, the costs of the
investigations and risk analysis have been minimal. Limited information is
available about the sites and no testing has been performed. Management's best
estimate of the cost of remediation ranges from $100 thousand to $10 million per
site based on a limited comparison of costs incurred to remediate comparable
sites. These estimates do not give effect to potential insurance recoveries,
recoveries through rates or from third parties. The KCC has permitted others to
recover their remediation costs through rates. It should be noted that
additional information and testing could result in costs significantly below or
in excess of the amounts estimated above. To the extent that such remediation
costs are not recovered, the costs could be material to the Company's results of
operations and cash flows depending on the degree of remediation required and
number of years over which the remediation must be completed.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains statements concerning ONEOK, Inc. (the Company)
expectations or predictions of the future that are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are intended to be covered by the safe harbor provision of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking
statements are based on management's beliefs and assumptions based on
information currently available. It is important to note that actual results of
Company earnings could differ materially from those projected in such
forward-looking statements. Factors that may impact forward-looking statements
include, but are not limited to, the following:
o the effects of weather and other natural phenomena;
o increased competition from other energy suppliers as well as
alternative forms of energy;
o the capital intensive nature of the Company's business;
o economic climate and growth in the geographic areas in which the
Company does business;
o the uncertainty of gas and oil reserve estimates;
o the timing and extent of changes in commodity prices for natural gas,
electricity, and crude oil;
o the nature and projected profitability of potential projects and other
investments available to the Company;
o conditions of capital markets and equity markets;
o Year 2000 issues;
o the effects of changes in governmental policies and regulatory actions,
including income taxes, environmental compliance and authorized rates;
and
o the pending merger with Southwest.
Accordingly, while the Company believes these forward-looking statements to be
reasonable, there can be no assurance that they will approximate actual
experience or that the expectations derived from them will be realized. When
used in Company documents, the words "anticipate", "expect", "projection",
"goal", or similar words are intended to identify forward-looking statements.
The Company does not have any intention or obligation to update forward-looking
statements after they distribute this 10-Q even if new information, future
events or other circumstances have made them incorrect or misleading.
A. RESULTS OF OPERATIONS
ONEOK, Inc. provides natural gas and related products and services to its
customers through regulated and nonregulated segments. The regulated business
unit provides natural gas distribution and transmission services to
approximately three-fourths of Oklahoma and two-thirds of Kansas. The Company is
the eighth largest natural gas distribution company in the United States in
terms of number of customers. The nonregulated business unit is primarily
involved in the marketing, gathering and processing, and production of natural
gas and natural gas liquids.
9
<PAGE> 10
CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
(Thousands of dollars) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Operating revenues - regulated $396,814 $470,314 $583,716 $588,951
Operating revenues - nonregulated 195,850 251,740 388,877 447,263
- ---------------------------------------------------------------------------------------------------------------
Total operating revenues 592,664 722,054 972,593 1,036,214
Operating costs 435,730 563,540 749,529 832,020
Depreciation, depletion and amortization 31,797 27,265 62,935 44,459
- ---------------------------------------------------------------------------------------------------------------
Income before interest and income taxes $125,137 $131,249 $160,129 $159,735
- ------------------------------------------------=============================--==============================--
</TABLE>
Operating results continue to be strong despite warmer weather and lower gas
prices compared to one year ago. A gain on the sale of assets of $14.6 million
is included in income before interest and income taxes for the second quarter of
fiscal 1998. Excluding that gain, income before interest and income taxes was
$116.6 million for the second quarter of fiscal 1998 compared to $125.1 million
for the same period in fiscal 1999. A gain of $6 million on the sale of assets
was recorded in the first quarter of fiscal 1999. Excluding both gains,
operating income increased $9 million for the six months over the same period
one year ago. Lower gas prices industry-wide resulted in decreased revenues and
decreased gas costs.
CHANGES IN EPS
FISCAL YEAR TO DATE FEBRUARY 28, 1999 COMPARED 1998
[GRAPH]
Income available for common stockholders decreased due to the preferred stock
dividends of $9 million in the first quarter of fiscal 1999. For the same period
one year ago, there were no preferred stock dividends. The preferred stock upon
which the dividends were accrued is the convertible preferred stock, series A
and B, which has been issued to Western in connection with the strategic
alliance. The preferred dividends significantly affect earnings from the
acquisition in the first and fourth quarters of the year due to the weather
related fluctuations of the gas operations acquired. During those quarters, the
dividend requirement exceeds income before interest and income taxes. Interest
expense increased over one year ago due to debt assumed in the strategic
alliance with Western and debt incurred to finance other acquisitions.
Additional information follows in the discussion of the segment operations for
the regulated and nonregulated segments.
YEAR 2000. The Year 2000 (Y2K) issue arose because most computer systems,
including application software (IT applications) and computer technology
embedded in plant and equipment (Embedded Technology) were constructed using a
two digit date field that assumed the first two digits are always "19". On
January 1, 2000, these systems may incorrectly recognize the date as January 1,
1900. Some IT applications and Embedded Technology may incorrectly process
critical financial and operating information or stop processing altogether.
Management, under direction of the Board of Directors, has implemented a program
to proactively address the Y2K challenge. Beginning in 1996, the Company
inventoried existing programs and systems and began the conversion process that
will make the Company Y2K compatible. The Company installed
10
<PAGE> 11
a new IBM Year 2000 compatible mainframe computer in August 1997. The Company's
mainframe software is approximately 92 percent Y2K compatible with all other IT
applications 90 percent compatible.
Approximately 95 percent of Embedded Technology critical to the Company's
ability to continue to transport and distribute gas to customers without
significant interruption is Y2K compatible. Remediated programs are tested prior
to being deemed compatible. The target completion date for all such remediation
is the end of April 1999. The Company is on schedule to meet that goal.
The Company is assessing operational risks related to suppliers and vendors with
whom it conducts business. Based on this assessment, the Company is in the
process of contacting suppliers and vendors with whom the Company conducts
business, concerning their state of readiness and plans to complete Y2K
compatibility of their systems. The Company tests such third-party compliance to
the extent deemed reasonable and necessary to determine compliance.
The primary business risk associated with Y2K is the Company's ability to
continue to transport and distribute gas to its customers without significant
interruption. In the event the Company and/or its suppliers and vendors are
unable to remediate the Y2K problem prior to January 1, 2000, operations of the
Company could be significantly impacted. In order to mitigate this risk, the
Company is developing contingency plans to continue operations through manual
intervention and other procedures. Such procedures may include back-up power
supply for critical pipeline and storage operations and, if necessary,
curtailment of deliveries to customers. The Company's significant gas storage
capacity can be used to supplement system supply in the event gas suppliers
cannot make necessary deliveries. These contingency plans will augment and
supplement the Company's existing emergency plans. The Company expects its
operational Y2K contingency plans to be completed by the end of July 1999.
The Company is currently on schedule to meet its Y2K compatibly goals and should
be able to do so provided the Company is able to retain, or replace if required,
such key personnel as are necessary for conversion and testing of its remaining
programs and applications, and its key vendors and suppliers are Y2K compliant.
The vice president - Information Technology, who has headed the Y2K project, is
scheduled to retire effective June 1, 1999. However, he has agreed to remain
active on retainer as a contractor until January 31, 2000. His scheduled
retirement should not adversely affect the Company's Y2K project.
There can be no assurance that the Company's systems, or the systems of other
companies on which the Company relies, will be converted in a timely manner or
that any such failure to convert would not have a material adverse effect on the
Company operations, liquidity and financial conditions.
The Company's direct cost to date is approximately $1.3 million for Y2K
conversion. This does not include the cost of programs and equipment that are
being replaced in the ordinary course of business that are Y2K compatible. The
Company estimates it will spend an additional $700,000 in direct costs.
REGULATED OPERATIONS
The regulated business unit provides natural gas distribution, transportation,
gas supply, and storage services in Oklahoma and Kansas. The Company's
operations in Oklahoma are conducted through Oklahoma Natural Gas Company
Division, ONEOK Gas Transportation Company Division and three wholly-owned
subsidiaries, ONEOK Gas Transportation, L.L.C., ONG Transmission Company, and
ONEOK Sayre Storage Company, which together form an integrated intrastate
natural gas distribution and transmission business which serves residential,
commercial, and industrial customers in about 75 percent of the state of
Oklahoma. These companies will be collectively referred to herein as Oklahoma
Natural Gas (ONG).
11
<PAGE> 12
The Company is now in its second year of operation of the gas assets acquired
through the strategic alliance with Western Resources, Inc. (Western). This
alliance allowed the Company to extend its regulated operations into the state
of Kansas. The Company's operations in Kansas are conducted through Kansas Gas
Service Company Division (Kansas Gas Service) and Mid Continent Market Center
(MCMC), a wholly-owned transportation company. These companies will be
collectively referred to as KGS. KGS's regulated gas operations are primarily
engaged in distribution and intrastate gas transportation, as well as gas
wheeling, parking, balancing and storage services. Kansas Gas Service serves
residential, commercial, and industrial customers in about 67 percent of Kansas.
Kansas Gas Service also conducts regulated gas distribution operations in
northeastern Oklahoma. ONG is subject to regulatory oversight by the Oklahoma
Corporation Commission (OCC). KGS is subject to regulatory oversight by the
Kansas Corporation Commission (KCC) and the OCC.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
(Thousands of dollars) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Gas sales $371,928 $442,526 $536,498 $548,891
Cost of gas 212,692 284,777 301,816 342,212
- ---------------------------------------------------------------------------------------------------------------
Gross margins on gas sales 159,236 157,749 234,682 206,679
PCL, ECT and transportation margins 20,246 22,264 36,876 30,456
Other revenues 7,256 8,093 14,468 12,994
- ---------------------------------------------------------------------------------------------------------------
Net revenues 186,738 188,106 286,026 250,129
Operating expenses 56,929 61,526 116,775 93,638
Depreciation, depletion and amortization 23,103 21,990 44,916 35,285
- ---------------------------------------------------------------------------------------------------------------
Income before interest and income taxes $106,706 $104,590 $124,335 $121,206
===============================================================================================================
</TABLE>
Gross margins on gas sales increased slightly for the three months over the same
period one year ago. Lower gas prices industry-wide resulted in decreased gas
sales revenues and decreased gas costs. For the six months, gross margins on gas
sales were higher primarily due to the inclusion of KGS's operations during the
first quarter of this fiscal year. Operating expenses and depreciation,
depletion and amortization were higher for the six months compared to one year
ago also due to inclusion of KGS's operations for the entire six month period.
However, unseasonably warm weather reduced the expected increase in gross
margins on gas sales. Operating expenses for the three month period were lower
due to continuing efforts to control costs. On a pro forma basis, assuming the
Western acquisition had occurred at the beginning of fiscal 1998, net revenues
and operating expenses would have been $292 million and $125 million,
respectively, for the six months ended February 28, 1998.
Oklahoma Natural Gas (ONG) is proceeding in a rate review before the Oklahoma
Corporation Commission (OCC) with a test year ended November 30, 1998. On March
11, 1999, the OCC issued a ruling which called for a hearing to make a
determination as to whether ONG's rates should be modified on an interim basis
until a full rate review can be completed. On March 22, 1999, the OCC Staff
filed a Proposed Issue Resolution which addressed unbundling of services and
deregulation of long haul transportation, storage, and gathering assets in
Oklahoma. The proposal included a procedural schedule on both the unbundling and
deregulation issues as well as the interim rates for the distribution
operations. The procedural schedule recommends a hearing on deregulation of
upstream services during the first week of August, 1999, following the
acceptance of bids for upstream services by the Company. On March 9, 1999, the
OCC Staff filed a recommendation for an interim $8.2 million rate reduction
which included $1 million in savings from the strategic alliance with Western. A
hearing on the interim rate reduction is expected in early summer 1999.
Certain costs to be recovered through the rate making process have been recorded
as regulatory assets in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS 71). If the Company were required to discontinue the application of SFAS
71 due to unbundling and deregulation of upstream services or otherwise not be
able to recover certain regulatory assets through rates, the regulatory assets
would be charged to expense. Based on the present status of unbundling and
deregulation of upstream services, the Company is unable to determine the
financial impact of this process.
12
<PAGE> 13
GAS SALES, PCL & ECT VOLUMES (MMcf)
THREE MONTHS ENDED FEBRUARY 28,
[GRAPH]
GAS SALES, PCL & ECT VOLUMES (MMcf)
SIX MONTHS ENDED FEBRUARY 28,
[GRAPH]
expects that any regulatory assets not recovered through rates would be
immaterial and have little impact on the Company's financial position.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Margin per Mcf
OKLAHOMA
Residential $2.23 $2.22 $2.54 $2.53
Commercial $2.31 $2.29 $2.37 $2.29
Industrial $1.32 $1.19 $1.28 $1.13
Pipeline capacity leases $0.25 $0.25 $0.24 $0.21
KANSAS
Residential $1.96 $1.94 $2.24 $1.94
Commercial $1.56 $1.62 $1.70 $1.62
Industrial $1.89 $1.89 $1.92 $1.89
End-use customer transportation $0.59 $0.66 $0.52 $0.66
================================================================================================
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VOLUMES (MMCF)
Gas sales
Residential 57,015 58,226 72,212 67,912
Commercial 21,689 22,872 27,812 27,588
Industrial 2,291 2,934 3,355 4,636
Wholesale - As Available 5,253 2,318 16,275 2,318
PCL and ECT 48,069 57,936 94,589 98,772
- -------------------------------------------------------------------------------------------------
Total 134,317 144,286 214,243 201,226
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INFORMATION
Capital expenditures (thousands) $28,927 $23,802 $56,796 $44,779
O&M per customer $33 $37 $68 $57
Number of customers 1,431,051 1,419,295
Customers per employee 531 502
Identifiable assets (thousands) $2,212,162 $2,018,902
==================================================================================================
</TABLE>
NONREGULATED OPERATIONS
The Company's nonregulated operations are involved in the marketing, gathering
and processing, and production of natural gas and natural gas liquids. The gas
marketing subsidiary conducts its activities in 17 states. The Company's
interest in gas liquids extraction plants and its producing properties are
concentrated principally in Oklahoma and New Mexico. The Company also operates
its headquarters office building and a parking garage.
The Company adheres to a prudent risk management strategy of hedging fixed price
or location differential transactions using natural gas contracts or other
derivative agreements to offset potential price risk exposure.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
(Thousands of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
COMBINED NONREGULATED OPERATIONS
Gas sales $205,693 $219,666 $374,088 $386,996
Cost of gas 191,699 212,271 355,679 377,926
- -------------------------------------------------------------------------------------------------
Gross margins on gas sales 13,994 7,395 18,409 9,070
Gas and oil production 15,952 11,783 29,118 20,105
Gas processing, net 3,754 4,768 7,448 14,094
Other 4,408 18,187 18,464 23,276
- -------------------------------------------------------------------------------------------------
Net revenues 38,108 42,133 73,439 66,545
Operating expenses 10,720 10,199 20,218 18,842
Depreciation, depletion and amortization 8,957 5,275 17,427 9,174
- -------------------------------------------------------------------------------------------------
Income before interest and income taxes $18,431 $26,659 $35,794 $38,529
=================================================================================================
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
(MMcf) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMBINED NONREGULATED
NATURAL GAS OPERATIONS
Natural gas volumes
Marketing 96,651 94,061 183,207 151,537
Natural gas production 6,990 4,107 12,704 7,280
Residue gas 1,350 1,684 2,683 3,163
- -------------------------------------------------------------------------------------------------
Total natural gas volumes 104,991 99,852 198,594 161,980
- -------------------------------------------------------------------------------------------------
Less intersegment sales
Marketing 13,526 8,956 15,913 11,842
Natural gas production 1,827 1,342 3,652 2,469
Residue gas 1,350 1,684 2,683 3,163
- -------------------------------------------------------------------------------------------------
Total intersegment sales 16,703 11,982 22,248 17,474
- -------------------------------------------------------------------------------------------------
Net natural gas volumes 88,288 87,870 176,346 144,506
=================================================================================================
</TABLE>
MARKETING
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
(Thousands of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Natural gas sales $205,693 $219,666 $374,088 $386,996
Cost of gas 191,696 212,271 355,676 377,926
- -------------------------------------------------------------------------------------------------
Gross margins on gas sales 13,997 7,395 18,412 9,070
Other 497 373 2,523 2,813
- -------------------------------------------------------------------------------------------------
Operating revenues 14,494 7,768 20,935 11,883
Operating costs, net 2,254 1,961 4,025 2,908
Depreciation, depletion and amortization 158 182 203 311
- -------------------------------------------------------------------------------------------------
Income before interest and income taxes $12,082 $5,625 $16,707 $8,664
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INFORMATION
Natural gas volumes (MMcf) 96,651 94,061 183,207 151,537
Capital expenditures (thousands) $24 $112 $624 $112
Identifiable assets (thousands) $173,743 $165,824
- -------------------------------------------------------------------------------------------------
</TABLE>
The Company's marketing operation purchases and markets natural gas at both the
retail and wholesale level. The Company continues to develop its niche into new
market areas by arbitraging storage in the day trading market rather than
focusing on the baseload market. Gas volumes increased in 1999 primarily from
the Company's expansion into the Permian/Waha region of the United States. Gas
sales revenues are down due to gas prices being significantly lower (an
industry-wide trend) than one year ago as a result of warmer weather.
The Company has been granted a rate schedule by the Federal Energy Regulatory
Commission (FERC) to trade electricity at market-based wholesale rates and has
begun trading. However, the activity has been minimal and has had little impact
to date.
15
<PAGE> 16
GATHERING AND PROCESSING
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
(Thousands of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Gas processing, net $3,673 $4,493 $7,229 $13,314
Other 685 14,668 7,555 14,692
- -------------------------------------------------------------------------------------------------
Operating revenues 4,358 19,161 14,784 28,006
Operating costs, net 1,979 2,027 3,866 3,710
Depreciation, depletion and amortization 414 593 930 1,159
- -------------------------------------------------------------------------------------------------
Income before interest and income taxes $1,965 $16,541 $9,988 $23,137
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INFORMATION
Residue gas (MMcf) 1,350 1,684 2,683 3,163
Natural gas liquids (MGal) 30,703 63,018 60,251 136,023
Average NGL's price (MGal) $0.213 $0.299 $0.220 $0.322
Capital expenditures (thousands) $1,517 $734 $5,137 $1,751
Identifiable assets (thousands) $65,735 $46,633
- -------------------------------------------------------------------------------------------------
</TABLE>
The Company's sale of its 50 percent interest in the Tonkawa gas processing
plants in the second quarter of fiscal 1998 resulted in the reduction in natural
gas liquids volumes for the three and six months compared to the same periods
one year ago. Revenue from natural gas liquids sales also decreased due to the
average price per gallon decreasing from 29.9 cents and 32.2 cents for the three
and six month periods in 1998 to 21.3 cents and 22.0 cents for the same periods
in 1999. Certain nonstrategic assets sold effective September 1, 1998, included
a gas processing plant and one-half of the Company's interest in a gas gathering
system. Other revenue for fiscal 1999 includes the gain of $6 million on the
sale of these assets. Other revenue for the three months ended February 29,
1998, includes a gain on the sale of assets of $14.6 million during the second
quarter of fiscal 1998.
In February 1999, the Company and Koch Midstream Enterprises (Koch) jointly
announced a letter of intent for the Company to acquire all the Oklahoma
midstream natural gas gathering and processing assets of Koch for $285 million
in cash. The assets include a 100 percent interest in eight natural gas
processing plants sold in the second quarter of fiscal 1998 and approximately
3,250 miles of gathering pipeline connected to 1,460 gas wells located in
Oklahoma. Total capacity of the gas processing plants is 515 million cubic feet
per day. The Company did not previously own any portion of the gathering system
and the related contracts behind the processing plants and only owned a 50
percent interest in the plants themselves. The addition of the gathering systems
and the Company's recent purchase of significant production along the gathering
system makes these assets financially attractive to the Company.
16
<PAGE> 17
PRODUCTION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
(Thousands of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Natural gas sales $14,685 $10,467 $26,497 $17,464
Oil sales 1,267 1,316 2,621 2,641
Liquids and residue 81 275 219 780
Other 1,261 537 1,379 915
- -------------------------------------------------------------------------------------------------
Operating revenues 17,294 12,595 30,716 21,800
Operating costs, net 4,682 3,600 8,449 7,060
Depreciation, depletion and amortization 8,114 4,406 15,751 7,516
- -------------------------------------------------------------------------------------------------
Income before interest and income taxes $4,498 $4,589 $6,516 $7,224
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INFORMATION
Proved reserves
Gas (MMcf) - - 227,127 100,380
Oil (MBbls) - - 3,639 2,101
- -------------------------------------------------------------------------------------------------
Production
Gas (MMcf) 6,990 4,107 12,704 7,280
Oil (MBbls) 119 75 224 144
- -------------------------------------------------------------------------------------------------
Average price
Gas (Mcf) $2.10 $2.55 $2.09 $2.40
Oil (Bbls) $10.65 $18.05 $11.70 $18.48
- -------------------------------------------------------------------------------------------------
Capital expenditures (thousands) $70,494 $22,849 $74,114 $26,482
Identifiable assets (thousands) $257,294 $109,056
- -------------------------------------------------------------------------------------------------
</TABLE>
Gas volumes sold increased over the same periods one year ago while gas prices
decreased. Decreases in gas prices have been an industry-wide trend. Production
from properties acquired during fiscal 1998 and 1999 were the primary reason for
the increases in volumes. Accordingly, operating costs and depreciation,
depletion, and amortization also increased over the same periods one year ago
due to the Company operating and owning an interest in an increased number of
wells.
During the second quarter, the Company consummated the strategic alliance with
Magnum Hunter Resources, Inc. (Magnum) adding $10 million in producing
properties and becoming a 31 percent equity owner in Magnum. The Company also
closed on two other acquisitions with a purchase price of $53 million adding
reserves located in Oklahoma. These acquisitions began contributing to income
before interest and income taxes during the second quarter.
The Company has announced a strategic alliance with Costilla Energy, Inc. to
acquire $35 million in properties and acquire a $65 million equity interest in
Costilla.
17
<PAGE> 18
FINANCIAL FLEXIBILITY AND LIQUIDITY
The Company's capitalization structure is 63 percent equity and 37 percent debt
(including short-term debt) at February 28, 1999, compared to 71 percent equity
and 29 percent debt at February 28, 1998.
During the first quarter of fiscal 1999, the Company filed a shelf registration
for $400 million in new long-term debt securities. In September 1998, the
Company issued $200 million in debt securities registered under this shelf
registration for general corporate purposes including repayment of some
short-term debt. In November, 1998, the Company made tender offers on $125
million of 9.70 percent long-term debt and $75 million of 9.75 percent long-term
debt with the purpose of reducing overall interest expense. In December 1998,
all but $22 million of this debt was repurchased and replaced with short-term
debt at a lower interest rate. In February 1999, the Company issued the
remaining $200 million in debt securities registered under the shelf
registration using the proceeds primarily to repay short-term debt incurred from
the tender offer.
Cash provided by operating activities remains strong and continues as the
primary source for meeting day-to-day cash requirements. However, due to
seasonal fluctuations and additional capital requirements, the Company will
continue to periodically access funds through short-term credit agreements, and
if necessary, through long-term borrowings.
OPERATING CASH FLOWS
Operating cash flows for the six months ended February 28, 1999, as compared to
the same period one year ago are lower due to changes in accounts receivables
and payables, interest and income taxes.
INVESTING CASH FLOWS
Capital expenditures for the six months ended February 28, 1999 and 1998 are as
follows:
CAPITAL EXPENDITURES
SIX MONTHS ENDED FEBRUARY 28,
[GRAPH]
<TABLE>
<CAPTION>
- ------------------------------------------------------------
SIX MONTHS ENDED
FEBRUARY 28,
(Millions of dollars) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Regulated $56.8 $44.8
Processing 5.1 1.8
Production 74.1 26.4
Other 3.4 0.3
--- ---
Nonregulated $82.6 $28.5
============================================================
</TABLE>
FINANCING CASH FLOW
At February 28, 1999, $550 million of long-term debt was outstanding. As of that
date, the Company could have issued $840 million of additional long-term debt
under the most restrictive provisions contained in its various borrowing
agreements.
The Company believes that internally generated funds and access to financial
markets will be sufficient to meet its normal debt service, dividend
requirements, and capital expenditures.
18
<PAGE> 19
LIQUIDITY
The regulated segment continues to face competitive pressure to serve the
substantial market represented by its large volume customers. The loss of a
substantial portion of that load, without recoupment of the revenues from that
loss, could have a materially adverse effect on the Company's financial
condition. However, since 1995, rates in Oklahoma have been structured to reduce
the Company's risk in serving its large volume customers.
Oklahoma Natural Gas Company (ONG) is currently in a rate review before the
Oklahoma Corporation Commission (OCC), and a hearing has been scheduled to make
a determination as to whether ONG's rates should be modified on an interim basis
until the full review can be completed. A key issue to be addressed during the
review is the unbundling of services and the deregulation of long haul
transportation, storage and gathering assets in Oklahoma. Should the Company be
unable to recover costs of these assets, it could have an adverse effect on the
Company's financial condition. The OCC Staff has filed a recommendations for an
interim rate reduction of $8.2 million with a hearing expected by early summer.
On March 18, 1999, the Company authorized a stock buyback plan for up to 15
percent of its capital stock. The program authorizes the Company to make
purchases of its common stock on the open market with the timing and terms of
purchases and the number of shares purchased to be determined by management
based on market conditions and other factors. The purchased shares will be held
in treasury and will be available for general corporate purposes, resale at a
future date, or retirement. Any purchases will be financed with short-term debt
or made from available funds.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT - The Company, substantially through its nonregulated segments,
is exposed to market risk in the normal course of its business operations to the
impact of market fluctuations in the price of natural gas and oil. Market risk
refers to the risk of loss in cash flows and future earnings arising from
adverse changes in commodity energy prices. The Company's primary exposure
arises from fixed price purchase or sale agreements which extend for periods of
up to 48 months, gas in storage inventories utilitized by the gas marketing
operation, and anticipated sales of oil and gas production. To a lesser extent,
the Company is exposed to risk of changing prices or the cost of intervening
transportation resulting from purchasing gas at one location and selling it at
another (hereinafter referred to as basis risk). To minimize the risk from
market fluctuations in the price of natural gas and oil, the Company uses
commodity derivative instruments such as future contracts, swaps and options to
hedge existing or anticipated purchase and sale agreements, existing physical
gas in storage, and basis risk. None of these derivatives are held for
speculative purposes. The Company adheres to policies and procedures which limit
its exposure to market risk from open positions and monitors its exposure to
market risk. The results of the Company's derivative hedging activities continue
to meet its stated objective.
All of the Company's long-term debt is fixed-rate and, therefore, does not
expose the Company to the risk of earnings or cash flow loss due to changes in
market interest rates.
Kansas Gas Service uses derivative instruments to hedge the cost of some
anticipated gas purchases during the winter heating months to protect its
customers from upward volatility in the market price of natural gas. The gain or
loss resulting from such derivatives is combined with the physical cost of gas
and recovered from the customer through the gas purchase clause in rates. The
Company has no market risk associated with such activities and, accordingly,
these derivatives have been omitted from the value-at-risk disclosures below.
VALUE-AT-RISK DISCLOSURE OF MARKET RISK - The estimation of potential losses
that could arise from changes in market conditions is typically accomplished
through the use of statistical models that seek to predict risk of loss based on
historical price and volatility patterns. The value-at-risk (VAR) measurement
used by the Company is based on J.P. Morgan's RiskMetrics(TM) model, which
measures recent volatility and correlation in the price of natural gas and oil,
pulls through current price levels and net deltas, and applies estimates made by
management regarding the time required to liquidate positions and the degree of
confidence placed in the accuracy of the volatility and correlation estimates.
The Company's VAR calculation presents a comprehensive market risk disclosure by
combining its commodity derivative portfolio used to hedge price and basis risk
together with the current portfolio of
19
<PAGE> 20
firm physical purchase and sale contracts and nonregulated gas-in-storage
inventory. At February 28, 1999, the Company's estimated potential one-day
favorable or unfavorable impact on future earnings, as measured by the VAR,
using a 95 percent confidence level, diversified correlation and assuming three
days to liquidate positions is immaterial.
The Company's calculated VAR exposure represents an estimate of potential losses
that would be recognized for its portfolio of derivative financial instruments
and firm physical contracts and nonregulated gas-in-storage assuming
hypothetical movements in future market rates and are not necessarily indicative
of actual results that may occur. It does not represent the maximum possible
loss nor any expected loss that may occur, because actual future gains and
losses will differ from those estimated, based on actual fluctuations in the
market rates, operating exposures, and the timing thereof, and changes in the
Company's portfolio of derivative financial instruments and firm physical
contracts.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
APPLICATION OF MICHAEL EDWARD MCADAMS AND JOHN POWELL WALKER FOR RELIEF FROM
IMPROPER AND EXCESSIVE GAS COSTS, Cause PUD No. 980000188, Oklahoma Corporation
Commission. On February 12, 1999, the Company filed a Motion to Determine Scope
of Hearing. On February 18, 1999 oral arguments on the Motion were heard and the
matter taken under advisement.
APPLICATION OF ERNEST G. JOHNSON, DIRECTOR OF THE PUBLIC UTILITY DIVISION,
OKLAHOMA CORPORATION COMMISSION, TO CONDUCT A FINANCIAL REVIEW OF THE BOOKS AND
RECORDS OF OKLAHOMA NATURAL GAS COMPANY, Cause PUD No. 980000570, Oklahoma
Corporation Commission. The proceeding has been consolidated with Cause PUD No.
980000683.
APPLICATION OF ERNEST G. JOHNSON, DIRECTOR OF THE PUBLIC UTILITY DIVISION, OF
THE OKLAHOMA CORPORATION COMMISSION, TO REVIEW THE RATES, CHARGES, SERVICES, AND
SERVICE TERMS OF OKLAHOMA NATURAL GAS COMPANY, A DIVISION OF ONEOK, AND ALL
AFFILIATED COMPANIES AND ANY AFFILIATE OR NONAFFILIATE TRANSACTION RELEVANT TO
SUCH INQUIRY, Cause PUD No. 980000683, Oklahoma Corporation Commission
(Commission). This proceeding has been consolidated with Cause PUD No.
980000570. Intervention has been granted to Enogex, Inc., Transok, L.L.C., the
Oklahoma Industrial Energy Consumers ("OIEC") and Williams Natural Gas Pipeline
Company. The Attorney General has entered an appearance. On February 4, 1999
Oklahoma Natural Gas Company ("ONG") filed a Request for Affirmative Relief,
proposing a two-phase proceeding. Phase I to separate the distribution and
distribution-related assets of ONG from the gathering, transportation, and
storage assets and operations of ONEOK Gas Transportation, L.L.C. ("OGT"), and
to deregulate the OGT assets and operations effective November 1, 1999. In Phase
II, ONG proposed to consolidate the Oklahoma assets and operations of Kansas Gas
Service Company ("KGS") with ONG's, and that the Commission conduct a rate
review and issue an order by October 1, 1999. ONG also proposed several tariff
changes, including the creation of a tracking mechanism for costs related to
upstream services to be provided by others, creation of distribution-related
transportation rates, indexing rates to investment of capital, a flat rate for
distribution service and discontinuation of the Temperature Adjustment Clause,
and a tariff rider to accommodate ONG's assumption of ownership of service
lines. ONG also requested that it be allowed to recover transition costs and to
seek recovery of stranded costs, if any. The Attorney General and Transok filed
motions to dismiss ONG's request for affirmative relief and the OIEC and Enogex
filed objections, each arguing that it constituted a collateral attack on the
prior unbundling order, which is pending on appeal. The Commission Staff filed a
motion to strike ONG's proposal for capital indexing, service lines, and
stranded and transition cost recovery. Oral argument before the ALJs was held
March 1, 1999, at which time the ALJs took the matter under advisement. On
February 19, 1999, the Commission Staff filed a Motion to Establish Interim
Rates requesting that an evidentiary hearing be held the first week in April. On
March 11, 1999, the Commission granted the Motion and scheduled the evidentiary
hearing. ONG has filed with the Commission a motion to reconsider its March 11
Order granting the Commission Staff's Motion to Establish Interim Rates, which
was denied. The evidentiary hearing dates were established by the ALJ for June
22-24, 1999.
UNITED STATES OF AMERICA, EX REL. JACK GRYNBERG V. ALASKA PIPELINE CO., ET AL.,
(INCLUDING ONEOK, INC.), No. 95-725, in the United States District Court for the
District of Columbia. Grynberg did not file a petition for rehearing with the
Circuit Court or a petition for certiorari with the United States Supreme Court
within the prescribed time limit. The dismissal of the case is therefore final.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND 8-KA.
(b) REPORTS
October 21, 1998 - Announced the election of Douglas T. Lake, executive
vice president and chief strategic officer of Western Resources, Inc.,
Topeka, Kansas, to fill the remaining term of Steven L.
Kitchen on the Company's board of directors.
December 16, 1998 - Announced a letter of intent creating a strategic
alliance with Magnum Hunter Resources, Inc.
January 25, 1999 - Filed pro forma financial information relating to
the merger of the Company and Southwest Gas Corporation.
January 25, 1999 - Announced the retirement of Jerry D. Neal, vice
president , chief financial officer, and treasurer, effective March 31,
1999. Mr. Neal will be replaced by James C. Kneale, president and chief
operating officer of Oklahoma Natural Gas Company. Mr. Kneale will be
replaced by Edmund J. Farrell, vice president of ONEOK Gas Marketing
Company.
January 26, 1999 - Amended pro forma financial information in 8-K filed
on January 25, 1999.
February 8, 1999 - Announced the consummation of an underwritten public
offering of $100,000,000 aggregate principal amount of the Company's
six percent Debentures due February 1, 2009.
February 16, 1999 - Filed prospectus and preliminary prospectus
supplement relating to Senior Insured Quarterly Notes due February 1,
2019.
February 23, 1999 - Announced that the Company had been advised by
Southwest Gas Corporation that it received an unsolicited offer of $32
per share of common stock from the Southern Union Company.
February 24, 1999 - Announced a strategic alliance with Costilla
Energy, Inc.
February 24, 1999 - Announced that the Company had joined Carl E.
Gungoll Exploration, Inc., in completing an acquisition of natural gas
and oil reserves.
February 26, 1999 - Announced a letter of intent with Koch Midstream
Enterprises to acquire natural gas gathering and processing assets.
March 5, 1999 - Announced applications had been made with the state
regulatory authorities in Arizona, Nevada, and California requesting
approval to merge with Southwest Gas Corporation.
March 19, 1999 - Announced CEO Larry Brummett hospitalized following
surgery.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 14th day of April
1999.
ONEOK, Inc.
Registrant
By: Jim Kneale
-------------------------------------
Jim Kneale
Vice President, Chief Financial
Officer, and Treasurer
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS FOR THE 1998 FISCAL YEAR'S SECOND QUARTER
ENDED FEBRUARY 28, 1999, AND THE CONSOLIDATED BALANCE SHEET AT AUGUST 31, 1998,
FOR ONEOK INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 18,357
<SECURITIES> 0
<RECEIVABLES> 332,214
<ALLOWANCES> 0
<INVENTORY> 84,016
<CURRENT-ASSETS> 457,494
<PP&E> 2,680,361
<DEPRECIATION> 945,461
<TOTAL-ASSETS> 2,696,786
<CURRENT-LIABILITIES> 461,430
<BONDS> 0
0
569,069
<COMMON> 647,497
<OTHER-SE> 1,216,566
<TOTAL-LIABILITY-AND-EQUITY> 2,696,786
<SALES> 0
<TOTAL-REVENUES> 972,593
<CGS> 0
<TOTAL-COSTS> 603,124
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<INTEREST-EXPENSE> 23,364
<INCOME-PRETAX> 136,765
<INCOME-TAX> 53,983
<INCOME-CONTINUING> 82,782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,782
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 1.60
</TABLE>