<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---
ACT OF 1934
For the quarterly period ended September 30, 2000.
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 Identification No.)
incorporation of organization)
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 September 30, 2000, the Company had 29,195,884 shares of common stock
outstanding.
<PAGE>
ONEOK, Inc.
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
<S> <C>
Consolidated Condensed Statements of Income - 3
Three and Nine Months Ended September 30, 2000 and 1999
Consolidated Condensed Balance Sheets -
September 30, 2000 and December 31, 1999 4-5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7 - 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 27
Quantitative and Qualitative Disclosures about Market Risk 27 - 28
Part II. Other Information 29 - 31
</TABLE>
2
<PAGE>
Item 1. Financial Statements
ONEOK, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues $ 1,754,790 $480,257 $ 3,970,390 $ 1,417,751
Cost of gas 1,578,981 354,026 3,379,272 944,839
-----------------------------------------------------------------------------------------------------------------------
Net Revenues 175,809 126,231 591,118 472,912
-----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Operations and maintenance 75,421 64,014 210,198 184,507
Depreciation, depletion, and amortization 36,068 32,115 107,556 98,375
General taxes 15,239 10,540 39,594 30,791
-----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 126,728 106,669 357,348 313,673
-----------------------------------------------------------------------------------------------------------------------
Operating Income 49,081 19,562 233,770 159,239
-----------------------------------------------------------------------------------------------------------------------
Other income and (expenses) (1,629) 1,646 10,135 1,646
Interest expense 32,337 17,704 82,665 44,623
Income taxes 5,029 1,705 63,085 44,532
-----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in 10,086 1,799 98,155 71,730
accounting principle
Cumulative effect of a change in
accounting principle, net of tax (Note J) - - 2,115 -
-----------------------------------------------------------------------------------------------------------------------
Net Income 10,086 1,799 100,270 71,730
Preferred Stock Dividends 9,275 9,276 27,825 27,907
-----------------------------------------------------------------------------------------------------------------------
Income (Loss) Available for Common Stock $ 811 $ (7,477) $ 72,445 $ 43,823
=======================================================================================================================
Earnings Per Share of Common Stock (Note F)
Basic $ 0.03 $ (0.24) $ 2.48 $ 1.40
=======================================================================================================================
Diluted $ 0.03 $ (0.24) $ 2.04 $ 1.39
=======================================================================================================================
Average Shares of Common Stock (Thousands)
Basic 29,200 31,030 29,214 31,414
Diluted 29,204 31,030 49,163 51,461
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
ONEOK, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(Unaudited) 2000 1999
----------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 137 $ 72
Trade accounts and notes receivable 1,147,918 371,313
Inventories 322,983 134,871
Assets from price risk management activities (Note J) 785,936 -
Restricted deposits 100,981 40,928
Other current assets 47,887 46,537
----------------------------------------------------------------------------------------------------------------
Total Current Assets 2,405,842 593,721
----------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 4,066,654 3,143,693
Accumulated depreciation, depletion, and amortization 1,090,101 1,021,915
----------------------------------------------------------------------------------------------------------------
Net Property 2,976,553 2,121,778
----------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets
Regulatory assets, net (Note D) 255,489 247,486
Goodwill 92,496 80,743
Assets from price risk management activities (Note J) 399,666 -
Investments and other 216,905 195,847
----------------------------------------------------------------------------------------------------------------
Total Deferred Charges and Other Assets 964,556 524,076
----------------------------------------------------------------------------------------------------------------
Total Assets $ 6,346,951 $ 3,239,575
================================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
(Unaudited) 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Thousands of Dollars)
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 14,367 $ 21,767
Notes payable 481,105 462,242
Accounts payable 1,129,389 237,653
Accrued taxes 15,332 359
Accrued interest 14,358 16,628
Liabilities from price risk management activities (Note J) 828,062 -
Other 69,260 48,064
----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,551,873 786,713
----------------------------------------------------------------------------------------------------------------
Long-term Debt, excluding current maturities 1,348,955 775,074
Deferred Credits and Other Liabilities
Deferred income taxes 377,456 348,218
Liabilities from price risk management activities (Note J) 549,996 -
Lease obligation 121,862 -
Other deferred credits 209,105 178,046
----------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 1,258,419 526,264
----------------------------------------------------------------------------------------------------------------
Total Liabilities 5,159,247 2,088,051
----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note G)
Shareholders' Equity
Convertible Preferred Stock, $0.01 par value: Series A authorized 199 199
20,000,000 shares; issued and outstanding 19,946,448 shares
Common stock, $0.01 par value: authorized 100,000,000 shares; issued 316 316
31,599,305 shares and outstanding 29,195,884 and 29,554,623 shares
Paid in capital (Note I) 894,976 894,976
Unearned compensation (1,169) (1,825)
Retained earnings 362,557 317,964
Treasury stock at cost: 2,403,421 and 2,044,682 shares (69,175) (60,106)
----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,187,704 1,151,524
----------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,346,951 $ 3,239,575
================================================================================================================
</TABLE>
5
<PAGE>
ONEOK, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Unaudited) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Thousands of Dollars)
Operating Activities
Net income $ 100,270 $ 71,730
Depreciation, depletion, and amortization 107,556 98,375
Gain on sale of assets (27,050) -
Net income from equity investments (3,357) (1,170)
Deferred income taxes 28,633 15,889
Changes in assets and liabilities (117,595) (34,912)
------------------------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities 88,457 149,912
------------------------------------------------------------------------------------------------------------------
Investing Activities
Changes in other investments, net (6,121) (66,312)
Acquisitions (460,472) (296,287)
Capital expenditures, net of retirements (202,915) (159,894)
Proceeds from sale of property 60,659 -
------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (608,849) (522,493)
------------------------------------------------------------------------------------------------------------------
Financing Activities
Payment (borrowing) of notes payable, net 18,863 (22,200)
Issuance of debt 589,429 500,000
Payment of debt (22,948) (16,581)
Issuance of common stock - 1,381
Issuance of treasury stock 2,229 -
Acquisition of treasury stock (12,138) (23,029)
Dividends paid (54,978) (57,183)
------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 520,457 382,388
------------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents 65 9,807
Cash and Cash Equivalents at Beginning of Period 72 -
------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 137 $ 9,807
==================================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A. Change in Fiscal Year End.
In October 1999, the Board of Directors of ONEOK, Inc. and subsidiaries (the
Company) approved a change in the Company's fiscal year-end from August 31 to
December 31 beginning January 1, 2000. The consolidated condensed financial
statements for the third quarter and fiscal year to date under the new fiscal
year are presented in this Form 10-Q. A transition report was filed on Form 10-Q
for the period September 1, 1999, through December 31, 1999.
B. 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 nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for a twelve-
month period. 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, 1999.
Reclassifications. Certain amounts in the consolidated condensed financial
statements have been reclassified to conform to the current presentation.
C. Significant Events
On November 3, 2000, the Company announced the execution of long-term agreements
between ONEOK Gas Transportation, L.L.C., (OGT), a subsidiary of ONEOK, Inc.,
and Duke Energy North America (DENA) whereby OGT will provide natural gas
transportation service to DENA's natural gas fueled McClain Energy Facility.
The Company received a final order (the Order), on May 30, 2000, in the rate
case before the Oklahoma Corporation Commission (OCC). The Order provided a $20
million net revenue reduction in rates which will be offset by an annual
reduction in depreciation expense of $11.4 million. The Order also transferred
the Oklahoma assets and customers of Kansas Gas Service Company Division (KGS)
to Oklahoma Natural Gas Company Division (ONG), separated the distribution
assets of ONG and the transmission assets of ONEOK Gas Transportation, L.L.C.
(OGT), and related affiliates into two separate public utilities, adjusted rates
for the removal of the gathering and storage assets no longer collected in base
rates and provided for the recovery of gas purchase operations and maintenance
expenses and line losses through a rider rather than base rates. The Order also
provided for the deregulation of storage assets. Additionally, the Order
approved a contract between ONG and OGT and affiliates for transportation and
storage services.
On April 5, 2000, the Company acquired certain natural gas gathering and
processing assets located in Oklahoma, Kansas and West Texas from Kinder Morgan,
Inc. (KMI). The Company also acquired KMI's marketing and trading operations, as
well as some storage and transmission pipelines in the mid-continent region. The
Company paid approximately $109 million for these assets plus working capital of
approximately $53 million which is subject to adjustment. The Company also
assumed certain liabilities including those related to an operating lease for a
processing plant for which the Company established a liability for an uneconomic
lease obligation and some firm capacity lease obligations to third parties for
which the Company established a reserve for out-of-market terms of those
obligations. The assets and liabilities acquired have been recorded at
preliminary fair values. As additional information is obtained, there could be
significant adjustments to the purchase price allocation. The Company expects to
have its evaluation complete and record adjustments, if any, in the fourth
quarter of fiscal 2000. The acquisition was accounted for as a purchase. The
results of operations of this acquisition are included in the consolidated
condensed statement of income subsequent to the purchase date.
The table of unaudited pro forma information, set forth below, presents a
summary of consolidated results of operations of the Company as if the
acquisition of the businesses acquired from KMI had occurred at the beginning of
the periods presented. The results do not necessarily reflect the results which
would have been obtained if the acquisition had actually occurred on the dates
indicated or the results which may be expected in the future.
7
<PAGE>
Pro Forma
Nine Months Ended
September 30,
2000 1999
---------------------------
(Thousands of Dollars)
Operating revenues $ 4,919,678 $ 4,391,352
Net income $ 107,428 $ 79,872
Income available for common shareholders $ 79,603 $ 51,986
Earnings Per Share of Common Stock - Diluted $ 2.19 $ 1.56
==========================================================================
In March 2000, the Company completed the sale of its 42.4 percent interest in
Indian Basin Gas Processing Plant and gathering system for $55 million.
In March 2000, the Company completed the acquisition of assets located in
Oklahoma, Kansas, and the Texas panhandle from Dynegy, Inc. for $305 million in
cash which included a $3 million preliminary adjustment for working capital. The
working capital adjustment is expected to be finalized in November 2000. The
assets include gathering systems, gas processing facilities, and transmission
pipelines.
On January 20, 2000, the Board of Directors of the Company voted unanimously to
terminate the merger agreement with Southwest Gas Corporation (Southwest) in
accordance with the terms of the merger agreement. The Company charged $10.7
million of previously deferred transaction and ongoing litigation costs to Other
income and (expenses) for the nine months ended September 30, 2000.
D. Regulatory Assets
The following table is a summary of the Company's regulatory assets, net of
amortization.
September 30, December 31,
2000 1999
-------------------------------------------------------------------------
(Thousands of Dollars)
Recoupable take-or-pay $ 80,590 $ 84,343
Pension costs 16,351 19,487
Postretirement costs other than pension 64,180 62,207
Transition costs 22,350 22,746
Reacquired debt costs 23,424 24,068
Income taxes 31,644 23,337
Other 16,950 11,298
-------------------------------------------------------------------------
Regulatory assets, net $255,489 $247,486
=========================================================================
8
<PAGE>
E. Supplemental Cash Flow Information
The following table is supplemental information relative to the Company's cash
flows.
Nine Months Ended
September 30,
2000 1999
-----------------------------------------------------------------------
(Thousands of Dollars)
Cash paid during the year
Interest (including amounts capitalized) $ 86,124 $ 39,896
Income taxes $ 41,243 $ 37,966
Acquisitions
Property, plant, and equipment $ 782,970 $ 289,931
Current assets 74,012 -
Current liabilities (20,996) -
Goodwill 14,459 10,817
Lease obligation (139,000) -
Price risk management activities (239,660) -
Deferred credits (11,313) -
Deferred income taxes - (4,461)
-----------------------------------------------------------------------
Cash paid $ 460,472 $ 296,287
=======================================================================
F. Earnings per Share Information
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
Per Share Per Share
Income Shares Amount Income Shares Amount
------------------------------------------------------------------------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available for common stock $ 811 29,200 $ 0.03 $ (7,477) 31,030 $(0.24)
======= ======
Effect of Dilutive Securities
Options - 4 - -
Convertible preferred stock - - - -
------ ------ -------- ------
Diluted EPS
Income available for common stock
+ assumed conversion $ 811 29,204 $ 0.03 $ (7,477) 31,030 $(0.24)
======================================================================================================================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
Per Share Per Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------------
(Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available for common stock $ 72,445 29,214 $ 2.48 $ 43,823 31,414 $1.40
====== =====
Effect of Dilutive Securities
Options - 3 - 101
Convertible preferred stock 27,825 19,946 27,907 19,946
-------- ------- -------- - -------
Diluted EPS
Income available for common stock
+ assumed conversion $100,270 49,163 $ 2.04 $ 71,730 51,461 $1.39
==================================================================================================================
</TABLE>
There were 56,677 and 41,817 option shares excluded from the calculation of
Diluted Earnings per Share for the three months ended September 30, 2000 and
1999, respectively, due to being antidilutive for the periods. There were
19,946,448 shares of convertible preferred stock excluded from the calculation
of Diluted Earnings per Share due to being antidilutive for the three months
ended September 30, 2000 and 1999. For the nine months ended September 30, 2000
and 1999, there were 153,639 and 68,658 option shares excluded from the
calculation of Diluted Earnings per Share, respectively, due to being
antidilutive.
The following is a reconciliation of the basic and diluted EPS computations on
income before the cumulative effect of a change in accounting principle to net
income.
Nine Months Ended September 30,
Basic EPS Diluted EPS
2000 1999 2000 1999
---------------------------------
(Per share amounts)
Income available for common stock $2.41 $1.40 $2.00 $1.39
before cumulative effect of a
change in accounting principle
Cumulative effect of a change in 0.07 - 0.04 -
accounting principle, net of tax
--------------- ---------------
Income available for common stock $2.48 $1.40 $2.04 $1.39
======================================================================
G. Commitments and Contingencies
The Company and Southwest entered into a merger agreement, as amended, in which
the Company agreed to acquire Southwest for $30 per share of common stock in an
all cash transaction valued at $918 million. In January 2000, the Company
terminated the merger in accordance with the terms of the merger agreement.
The Company and certain of its officers as well as Southwest and certain of its
officers and others have been named as defendants in a lawsuit brought by
Southern Union Company (Southern Union). The complaint asks for $750 million
damages to be trebled for racketeering and unlawful violations, compensatory
damages of not less than $750 million and rescission of the Confidentiality and
Standstill Agreement.
Southwest has filed a complaint against the Company and Southern Union in the
United States District Court in Arizona. Southwest seeks actual, consequential,
incidental and punitive damages in an amount in excess of $75,000 and a
declaration that the Company has breached the merger agreement.
10
<PAGE>
On February 3, 2000, two substantially identical derivative actions were filed
in the District Court in Tulsa, Oklahoma by shareholders against the members of
the Board of Directors of the Company for alleged violation of their fiduciary
duties to the Company by causing or allowing the Company to engage in certain
fraudulent and improper schemes relating to the planned merger with Southwest.
In June 2000, these cases were consolidated into one case. Such conduct
allegedly caused the Company to be sued by both Southwest and Southern Union
which exposed the Company to millions of dollars in liabilities. The plaintiffs
seek an award of compensatory and punitive damages and costs, disbursements and
reasonable attorney fees. On September 19, 2000, the Company and its directors
and officers, named as defendants, filed Motions to Dismiss the actions for
failures of the plaintiffs to make a presuit demand on ONEOK's Board of
Directors.
In September, 2000, the cases pending in the United States District Court in
Tulsa, Oklahoma relating to Southwest Gas matters were transferred to the United
States District Court in Arizona. On October 17, 2000, in the Arizona Court, the
Southwest Gas case was transferred to the same Judge considering the Southern
Union case and the matter of consolidating the cases was referred to a Special
Master.
It is anticipated that Southern Union and Southwest will continue their
litigation against the Company. If any of the plaintiffs should be successful in
any of their claims against the Company and substantial damages are awarded, it
could have a material adverse effect on the Company's operations, cash flow and
financial position. The Company intends to vigorously defend against the claims
asserted by Southern Union and Southwest and all other matters relating to the
now terminated merger with Southwest.
The Company has responsibility for 12 manufactured gas sites located in Kansas
which may contain potentially harmful materials that are classified as hazardous
substances. Hazardous substances are subject to control or remediation under
various environmental laws and regulations. A consent agreement with the Kansas
Department of Health and Environment 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 September 30, 2000, the costs of the investigations
and risk analysis have been minimal. Limited information is available about the
sites. 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 Kansas
Corporation Commission (KCC) has permitted others to recover 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
remediation done and number of years over which the remediation is completed.
The Company is a party to other litigation matters and claims which are normal
in the course of its operations, and while the results of litigation and claims
cannot be predicted with certainty, management believes the final outcome of
such matters will not have a materially adverse effect on consolidated results
of operations, financial position, or liquidity.
H. Segments
The Company conducts its operations through six segments: (1) the Marketing
segment markets natural gas to wholesale and retail customers and markets
electricity to wholesale customers; (2) the Gathering and Processing segment
gathers and processes natural gas and natural gas liquids; (3) the
Transportation and Storage segment transports and stores natural gas for others
and buys and sells natural gas; (4) the Distribution segment distributes natural
gas to residential, commercial and industrial customers, leases pipeline
capacity to others and provides transportation services for end-use customers;
(5) the Production segment develops and produces natural gas and oil; and (6)
the Other segment primarily operates and leases the Company's headquarters
building and a related parking facility.
11
<PAGE>
Intersegment sales are recorded on the same basis as sales to unaffiliated
customers. All corporate overhead costs relating to a reportable segment have
been allocated for the purpose of calculating operating income. The Company's
equity method investments do not represent operating segments of the Company.
The Company has no single external customer from which it receives ten percent
or more of its revenues.
<TABLE>
<CAPTION>
Gathering
Three Months Ended and Transportation Other and
September 30, 2000 Marketing Processing and Storage Distribution Production Eliminations Total
------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $1,226,292 $ 306,352 $ 33,607 $ 169,279 $ 12,454 $ 6,806 $ 1,754,790
Intersegment sales 49,892 51,125 12,152 1,021 5,914 (120,104) -
------------------------------------------------------------------------------------------------------------------------------
Total Revenues $1,276,184 $ 357,477 $ 45,759 $ 170,300 $ 18,368 $ (113,298) $ 1,754,790
------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 15,937 $ 70,886 $ 39,966 $ 55,382 $ 18,368 $ (24,730) $ 175,809
Operating costs $ 4,558 $ 31,328 $ 19,714 $ 51,552 $ 6,443 $ (22,935) $ 90,660
Depreciation, depletion and
amortization $ 192 $ 6,839 $ 4,628 $ 16,087 $ 7,701 $ 621 $ 36,068
Operating income $ 11,187 $ 32,719 $ 15,624 $ (12,257) $ 4,224 $ (2,416) $ 49,081
Income from equity
investments $ - $ - $ 519 $ - $ 37 $ - $ 556
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Gathering
Three Months Ended and Transportation Other and
September 30, 1999 Marketing Processing and Storage Distribution Production Eliminations Total
------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars) Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to Unaffiliated customers $ 275,084 $ 49,848 $ 13,769 $ 130,924 $13,697 $ (3,065) $ 480,257
Intersegment sales 2,430 1,873 16,357 994 4,173 (25,827) -
-------------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 277,514 $ 51,721 $ 30,126 $ 131,918 $ 17,870 $ (28,892) $ 480,257
-------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 6,179 $ 15,005 $ 30,126 $ 62,676 $ 17,870 $ (5,625) $ 126,231
Operating costs $ 2,540 $ 6,280 $ 8,984 $ 55,647 $ 5,735 $ (4,632) $ 74,554
Depreciation, depletion and
amortization $ 160 $ 1,781 $ 3,748 $ 18,100 $ 7,753 $ 573 $ 32,115
Operating income $ 3,479 $ 6,944 $ 17,394 $ (11,071) $ 4,382 $ (1,566) $ 19,562
Income (loss) from equity
investments $ - $ - $ (115) $ - $ 23 $ - $ (92)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Gathering
Nine Months Ended and Transportation Other and
September 30, 2000 Marketing Processing and Storage Distribution Production Eliminations Totals
-----------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $2,537,207 $ 554,441 $ 81,507 $ 736,761 $ 45,318 $ 15,156 $ 3,970,390
Intersegment sales 195,870 94,442 40,873 2,848 11,357 (345,390) -
-----------------------------------------------------------------------------------------------------------------------------------
Total Revenues $2,733,077 $ 648,883 $ 122,380 $ 739,609 $ 56,675 $ (330,234) $ 3,970,390
-----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 61,657 $ 145,051 $ 108,900 $ 271,556 $ 56,675 $ (52,721) $ 591,118
Operating costs $ 11,258 $ 59,971 $ 48,321 $ 162,955 $ 17,968 $ (50,681) $ 249,792
Depreciation, depletion and
amortization $ 697 $ 15,530 $ 13,825 $ 51,460 $ 24,153 $ 1,891 $ 107,556
Operating income $ 49,702 $ 69,550 $ 46,754 $ 57,141 $ 14,554 $ (3,931) $ 233,770
Cumulative effect of a change
in accounting principle,
before tax $ 3,449 $ - $ - $ - $ - $ - $ 3,449
Income from equity
investments $ - $ - $ 3,291 $ - $ 66 $ - $ 3,357
Total assets $2,481,205 $1,394,540 $ 631,128 $ 1,716,326 $ 353,892 $ (230,140) $ 6,346,951
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gathering
Nine Months Ended and Transportation Other and
September 30, 1999 Marketing Processing and Storage Distribution Production Eliminations Totals
-----------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 614,792 $ 79,915 $ 28,371 $ 656,256 $ 40,180 $ (1,763) $ 1,417,751
Intersegment sales 45,469 7,192 55,679 5,610 16,889 (130,839) -
-----------------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 660,261 $ 87,107 $ 84,050 $ 661,866 $ 57,069 $ (132,602) $ 1,417,751
-----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 23,927 $ 29,843 $ 84,050 $ 293,121 $ 57,069 $ (15,098) $ 472,912
Operating costs $ 7,057 $ 11,002 $ 24,938 $ 171,157 $ 15,627 $ (14,483) $ 215,298
Depreciation, depletion and
amortization $ 461 $ 3,474 $ 10,582 $ 57,061 $ 25,835 $ 962 $ 98,375
Operating income $ 16,409 $ 15,367 $ 48,530 $ 64,903 $ 15,607 $ (1,577) $ 159,239
Income from equity
investments $ - $ - $ 1,110 $ - $ 60 $ - $ 1,170
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
I. Paid in Capital
Paid in Capital at September 30, 2000 and December 31, 1999, was $330.8 million
for common stock and $564.2 million for convertible preferred stock.
13
<PAGE>
J. Energy Trading and Risk Management
On January 1, 2000, the Company adopted the provisions of Emerging Issues Task
Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and
Risk Management Activities" (EITF 98-10) for certain energy trading contracts.
EITF 98-10 requires entities involved in energy trading activities to record
energy trading contracts using the mark-to-market method of accounting. Under
this methodology, the energy trading contracts with third parties are reflected
at fair market value, net of reserves, with the resulting unrealized gains and
losses recorded as assets and liabilities from price risk management activities
in the consolidated condensed balance sheet. These assets and liabilities are
affected by the actual timing of settlements related to these contracts and
current period changes resulting from newly originated transactions and the
impact of price movements. These changes are recognized in gross margin on a net
basis in the consolidated condensed statement of income in the period the change
occurs. The cumulative effect to January 1, 2000, of adopting EITF 98-10 was a
gain of $3.4 million, $2.1 million, net of tax, or $0.04 per diluted share of
common stock. In prior years, these contracts were accounted for under the
accrual method of accounting, therefore, gains and losses were recognized as the
contracts settled. Energy contracts held by other Company segments are generally
designated as and considered effective as hedges of non-trading activities and
are not considered energy trading contracts.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains statements concerning 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
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:
. the effects of weather and other natural phenomena on sales and prices;
. increased competition from other energy suppliers as well as alternative
forms of energy;
. the capital intensive nature of the Company's business;
. further deregulation, or "unbundling" of the natural gas business;
. competitive changes in the natural gas gathering, transportation and
storage business resulting from deregulation, or "unbundling," of the
natural gas business;
. the profitability of assets or businesses acquired by the Company;
. risks of hedging and marketing activities as a result of changes in energy
prices;
. economic climate and growth in the geographic areas in which the Company
does business;
. the uncertainty of gas and oil reserve estimates;
. the timing and extent of changes in commodity prices for natural gas,
natural gas liquids, electricity, and crude oil;
. the effects of changes in governmental policies and regulatory actions,
including income taxes, environmental compliance, and authorized rates;
. the results of litigation related to the Company's previously proposed
acquisition of Southwest Gas Corporation (Southwest) or to the termination
of the Company's merger agreement with Southwest; and
. the other factors listed in the reports the Company has filed and may file
with the Securities and Exchange Commission, which are incorporated by
reference.
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 Form 10-Q even if new information, future
events or other circumstances have made them incorrect or misleading.
A. Acquisitions and Sales
Kinder Morgan, Inc.
On April 5, 2000, the Company acquired certain natural gas gathering and
processing assets located in Oklahoma, Kansas and West Texas from Kinder Morgan,
Inc. (KMI). The Company also acquired KMI's marketing and trading operations, as
well as some storage and transmission pipelines in the mid-continent region. The
Company paid approximately $109 million for these assets plus working capital of
approximately $53 million which is subject to adjustment. The Company also
assumed certain liabilities including those related to an operating lease for a
processing plant for which the Company established a liability for uneconomic
lease obligation and some firm capacity lease obligations to third parties for
which the Company established a reserve for out-of-market terms of those
obligations. The assets and liabilities acquired have been recorded at
preliminary fair values. As additional information is obtained, there could be
significant adjustments to the purchase price allocation. The Company expects to
have its evaluation complete and record adjustments, if any, in the fourth
quarter of fiscal 2000. This acquisition includes more than 12,000 miles of
pipeline, six gas processing plants with capacity of 1.26 billion cubic feet per
day and 10.5 billion cubic feet of storage. Approximately 350 employees were
added to the ONEOK workforce as part of the acquisition.
15
<PAGE>
Indian Basin Gas Processing Plant
During the first quarter of 2000, the Company sold its 42.4 percent interest in
the Indian Basin Gas Processing Plant and gathering system for $55 million to El
Paso Field Services Company, a business unit of El Paso Energy Corporation. The
gain on this sale is included in Other income and (expenses).
Dynegy, Inc.
In March 2000, the Company acquired eight gas processing plants, interests in
two other gas processing plants and approximately 7,000 miles of gas gathering
and transmission pipeline systems in Oklahoma, Kansas and Texas from Dynegy,
Inc. (Dynegy). The Company paid approximately $305 million for these assets
which included a $3.0 million preliminary adjustment for working capital. The
working capital adjustment is expected to be finalized in November 2000. The
current throughput of the assets is approximately 240 million cubic feet per day
with an approximate capacity of 375 million cubic feet per day. Production of
natural gas liquids from the assets averages 25,000 barrels per day. In July
2000, the Company received approval of the acquisition from the KCC for transfer
of the portion of these assets located in Kansas. Approximately 75 employees
have been added to the ONEOK workforce as part of the acquisition. The majority
of these employees are in field operations in Western Oklahoma, the Texas
panhandle and Southern Kansas.
Southwest Gas Corporation
On January 18, 2000, the Company received a letter from Michael O. Maffie,
President and Chief Executive Officer of Southwest Gas Corporation (Southwest),
taking the position that the Company had breached the merger agreement entered
into between the Company and Southwest and demanding that the breach be cured.
On January 20, 2000, the Board of Directors of the Company voted unanimously to
terminate the merger agreement in accordance with the terms of the merger
agreement. On January 21, 2000, a letter was sent to Southwest denying that the
Company was in breach of the merger agreement and advising Southwest of the
Company's election to terminate the merger agreement.
On the same date, the Company filed a complaint in Federal District Court in
Tulsa, Oklahoma asking the court to declare that under the terms of the merger
agreement, the Company has properly terminated the merger agreement. On the same
date, the Company advised the Arizona Corporation Commission (ACC) of the
termination of the merger agreement and gave notice the Company withdrew the
Application asking for authorization to implement the merger agreement. On
January 25, 2000, Southwest filed an objection that the Company could not
unilaterally withdraw a joint application. On February 4, 2000, the Hearing
Officer granted the withdrawal and closed the docket.
On January 24, 2000, in reaction to the notice of termination of the merger
agreement, Southwest filed a complaint against the Company and Southern Union in
the United States District Court in Arizona. In the complaint, Southwest
alleges, among other things, that the Company failed to disclose to Southwest
that the Company had purportedly participated in improper lobbying efforts
allegedly involving a state regulatory official for the purpose of influencing
state utility regulators to oppose Southern Union's attempt to acquire Southwest
and inducing Southwest to enter into the merger agreement with the Company
instead of accepting Southern Union's acquisition proposal. The complaint also
alleges that the Company failed to use commercially reasonable efforts to obtain
all necessary governmental authorization for the planned merger with Southwest
by failing to remedy alleged improper conduct and by failing to make truthful
disclosure of such purportedly improper lobbying and relationships to the ACC.
The complaint further alleges that, because of the Company's alleged breach of
the merger agreement, the Company was contractually unable to terminate the
merger agreement and that the Company's notice of termination of the agreement
was therefore wrongful. The complaint uses these allegations as a basis for
causes of action for fraud in the inducement, fraud, breach of contract, breach
of implied covenant of good faith and fair dealing, and declaratory relief.
Southwest seeks actual, consequential, incidental and punitive damages in an
amount in excess of $75,000 and a declaration that the Company has breached the
merger
16
<PAGE>
agreement.
On February 3, 2000, two substantially identical derivative actions were filed
in the District Court in Tulsa, Oklahoma by shareholders against the members of
the Board of Directors of the Company for alleged violation of their fiduciary
duties to the Company by causing or allowing the Company to engage in certain
fraudulent and improper schemes relating to the planned merger with Southwest.
In June 2000, these cases were consolidated into one case. Such conduct
allegedly caused the Company to be sued by both Southwest and Southern Union
which exposed the Company to millions of dollars in liabilities. The plaintiffs
seek an award of compensatory and punitive damages and costs, disbursements and
reasonable attorney fees. On September 19, 2000, the Company and its directors
and officers, named as defendants, filed Motions to Dismiss the actions for
failures of the plaintiffs to make a presuit demand on ONEOK's Board of
Directors.
The Company and certain of its officers as well as Southwest and certain of its
officers and others have been named as defendants in a lawsuit brought by
Southern Union Company (Southern Union). The complaint asks for $750 million
damages to be trebled for racketeering and unlawful violations, compensatory
damages of not less than $750 million and rescission of the Confidentiality and
Standstill Agreement.
In September 2000, the cases pending in the United States District Court in
Tulsa, Oklahoma relating to Southwest Gas Corporation matters were transferred
to the United States District Court for Arizona. On October 17, 2000, in the
Arizona Court, the Southwest Gas case was transferred to the Judge considering
the Southern Union case and the matter of consolidating the cases was referred
to a Special Master.
It is anticipated that Southern Union and Southwest will continue their
litigation against the Company. If any of the plaintiffs should be successful in
any of their claims against the Company and substantial damages are awarded, it
could have a material adverse effect on the Company's operations, cash flow and
financial position. The Company intends to vigorously defend against the claims
asserted by Southern Union and Southwest and all other matters relating to the
now terminated merger with Southwest. The Company charged $10.7 million of
previously deferred transaction and ongoing litigation costs to Other income and
(expenses) for the nine months ended September 30, 2000.
B. Results of Operations
Consolidated Operations
The Company is a diversified energy company whose objective has been to maximize
value for shareholders by vertically integrating its business operations from
the wellhead to the burner tip. This strategy has focused on acquiring assets
that provide synergistic trading and marketing opportunities all along the
natural gas energy chain. Products and services are provided to its customers
through the following segments:
. Marketing
. Gathering and Processing
. Transportation and Storage
. Distribution
. Production
. Other
17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial Results
Operating revenues $ 1,754,790 $ 480,257 $ 3,970,390 $ 1,417,751
Cost of gas 1,578,981 354,026 3,379,272 944,839
-----------------------------------------------------------------------------------------------------------------------------
Net revenue 175,809 126,231 591,118 472,912
Operating costs 90,660 74,554 249,792 215,298
Depreciation, depletion, and amortization 36,068 32,115 107,556 98,375
-----------------------------------------------------------------------------------------------------------------------------
Operating income $ 49,081 $ 19,562 $ 233,770 $ 159,239
=============================================================================================================================
Other income and (expenses) $ (1,629) $ 1,646 $ 10,135 $ 1,646
=============================================================================================================================
Cumulative effect of a change in accounting principle $ - $ - $ 3,449 $ -
Income tax - - 1,334 -
-----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of a change in accounting principle, net of tax $ - $ - $ 2,115 $ -
=============================================================================================================================
</TABLE>
Operating revenue and cost of gas for the three and nine months ended September
30, 2000, as compared to the corresponding previous periods, have increased
primarily due to the acquisition of certain assets from KMI and Dynegy in early
2000 and increased natural gas prices. The increase in net revenue for the three
and nine months ended September 30, 2000 compared to the corresponding previous
periods, is due to the margin on marking energy contracts to market and
increased margins in the Marketing segment resulting from increased sales due to
the acquisition of KMI's marketing and trading operation, higher margins for the
Gathering and Processing segment on new business acquired in the KMI and Dynegy
acquisitions, and the increase in retained fuel and demand fees in the
Transportation and Storage segment.
Operating income for the nine months ended September 30, 2000, compared to the
previous period, was favorably impacted as a result of the KMI and Dynegy
acquisitions and successful cost containment efforts.
The $26.7 million gain on the sale of the Company's interest in the Indian Basin
Gas Processing Plant is included in Other income and (expenses) for the nine
month period ended September 30, 2000. Other income and (expenses) for the nine
months ended September 30, 2000 also includes a contribution to the ONEOK
Foundation of $5.0 million and the write-off of $10.7 million of previously
deferred transaction and ongoing litigation costs associated with the terminated
acquisition of Southwest.
Interest expense increased for the three and nine months ended September 30,
2000, as compared to the previous corresponding periods, primarily due to
increased debt. Total debt, including notes payable, increased approximately
$700.0 million from September 30, 1999 to September 30, 2000. The increase in
debt is primarily due to financing acquisitions and increased gas costs.
Marketing
The Marketing segment purchases, stores and markets natural gas to both the
wholesale and retail sectors in 25 states. The acquisition of KMI's marketing
and trading operation, in April 2000, expanded firm transport capacity and
storage capacity in the mid-continent region. The transport capacity of 1 Bcf
per day, allows for trade from the California border, throughout the Rockies, to
the Chicago city gate. With total storage capacity of 63 Bcf, withdrawal
capability of 2 Bcf per day and injection of 1.1 Bcf per day, the Company has
direct access to all regions of the country with great flexibility in capturing
volatility in the energy markets.
18
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial Results
Gas sales $ 1,275,568 $ 276,694 $ 2,731,483 $ 659,178
Cost of gas 1,260,247 271,335 2,671,420 636,334
------------------------------------------------------------------------------------------------------------------------------
Gross margin on gas sales 15,321 5,359 60,063 22,844
Other revenues 616 820 1,594 1,083
------------------------------------------------------------------------------------------------------------------------------
Net revenues 15,937 6,179 61,657 23,927
Operating costs 4,558 2,540 11,258 7,057
Depreciation, depletion, and amortization 192 160 697 461
------------------------------------------------------------------------------------------------------------------------------
Operating income $ 11,187 $ 3,479 $ 49,702 $ 16,409
==============================================================================================================================
Cumulative effect of a change in accounting principle, before tax $ - $ - $ 3,449 $ -
==============================================================================================================================
</TABLE>
The increase in gas sales and cost of gas for the three and nine months ended
September 30, 2000, as compared with the corresponding previous periods, is
primarily due to the acquisition of KMI's marketing and trading operation,
increased optionality on storage and increased storage demand fees. The increase
in margin for the three and nine months ended September 30, 2000, includes
margin resulting from marking energy contracts to market. In prior years, energy
contracts were accounted for under the accrual method of accounting, therefore,
gains and losses were recognized as the contacts settled. Gross margin per Mcf
remained flat for the three months ended September 30, 2000, as compared to the
year ago period, due to a higher percentage of sales being baseload rather than
demand and the large amount of storage injections during the quarter. Gross
margins on gas sales are expected to improve in the fourth quarter and continue
through the first quarter of fiscal 2001, due to lower baseload sales as a
percentage of total sales and storage withdrawals, as compared to the quarter
ended September 30, 2000.
Operating costs for the three and nine months ended September 30, 2000, as
compared to the corresponding previous period, increased primarily as a result
of increased personnel resulting from the acquisition of KMI's marketing and
trading operation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Information
Natural gas volumes (MMcf) 285,783 107,873 721,198 306,519
Gross Margin (Mcf) $ 0.05 $ 0.05 $ 0.08 $ 0.07
Capital expenditures (Thousands) $ 11,925 $ 7,599 $ 31,598 $ 8,493
Total assets (Thousands) - - $ 2,481,205 $ 274,219
------------------------------------------------------------------------------------------------
</TABLE>
The increase in volumes sold for the three and nine months ended September 30,
2000, as compared to the prior year, is primarily due to the acquisition of
KMI's marketing and trading operation. Total assets as compared to the prior
year have increased primarily due to the price risk management assets, an
increase in accounts receivable and an increase in construction work in progress
relating to the construction of an electric generating plant.
Capital expenditures of $11.9 million and $31.6 million for the three and nine
month periods ended September 30, 2000, relate to the construction of the
gas-fired electric generating plant. Construction of the plant began in the
fourth quarter of fiscal 1999. The plant is expected to be in service in June,
2001. The Company signed a definitive agreement with a third party for a 15-year
term providing for the purchase of approximately 25 percent of the plant's
generating capacity.
19
<PAGE>
Trading of electricity, at market-based wholesale rates, began in early 1999 but
has had minimal impact on operations to date.
Gathering and Processing
The gathering and processing segment operates 20 gas processing plants which
have a total capacity of 2 Bcf per day. The segment also has an ownership
interest in 4 gas processing plants which increases their capacity to 2.1 Bcf
per day. A total of over 17,000 miles of gathering pipelines support the gas
processing plants. The gathering and processing segment has experienced
tremendous growth with the recent acquisition of assets from Dynegy and KMI.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial Results
Natural gas liquids and condensate sales $ 191,674 $ 30,819 $ 336,758 $ 54,291
Gas sales 145,076 15,801 261,774 24,574
Cost of sales 286,591 36,716 503,832 57,264
-----------------------------------------------------------------------------------------------
Gross margin 50,159 9,904 94,700 21,601
Gathering revenues 15,790 5,005 32,670 8,141
Other revenues 4,937 96 17,681 101
-----------------------------------------------------------------------------------------------
Net revenues 70,886 15,005 145,051 29,843
Operating costs 31,328 6,280 59,971 11,002
Depreciation, depletion, and amortization 6,839 1,781 15,530 3,474
-----------------------------------------------------------------------------------------------
Operating income $ 32,719 $ 6,944 $ 69,550 $ 15,367
===============================================================================================
Other income and expenses, net $ 5 $ - $ 26,590 $ -
===============================================================================================
</TABLE>
Revenues and cost of sales increased for the three and nine month periods ended
September 30, 2000, compared to the corresponding year ago periods, as a result
of acquisitions of gathering and processing assets in March and April 2000 and
the Koch Midstream Enterprises, Inc. (Koch) acquisition in June of 1999 and
favorable increases in prices.
The contract mix at September 30, 2000, for the gas processing facilities was
42.7% percent of proceeds, 34.8% keep whole and 22.5% fee based. This compares
to 26.0% percent of proceeds and 74.0% keep whole at September 30, 1999,
respectively. The change in contract mix from keep whole to percent of proceeds
has favorably impacted margins due to increasing commodity prices. The change to
percent of proceeds reduces the Company's exposure to the risk of narrowing
pricing spreads between natural gas and natural gas liquids. The Company's
strategy is to continue to strategically align the contract mix to capitalize on
price changes in the market.
During the first three quarters of 2000, the processing margin related to
approximately one-third of gas volumes processed was hedged. These hedges
partially reduced the increase in gross margins for the three and nine months
ended September 30, 2000, compared to the prior periods. These hedges expired
during the third quarter and the Company is currently evaluating the Gathering
and Processing segment's hedging strategy.
Operating costs and depreciation increased primarily as a result of the
acquisitions. The increase in operating expenses is primarily due to increased
personnel costs and plant operating costs resulting from acquisitions. The
operating results from the new acquisitions more than offset the impact on
operations associated with the sale of the Indian Basin plant in March 2000.
Other income and expenses, net includes the gain on the sale of the Indian Basin
plant.
20
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gas Processing Plants Operating Information
Average NGL price realized ($/Gal) $ 0.458 $ 0.307 $ 0.407 $ 0.283
Average gas price ($/Mcf) $ 4.01 $ 2.26 $ 3.22 $ 2.18
Capital expenditures (Thousands) $ 8,576 $ 5,825 $ 18,872 $ 11,948
Total assets (Thousands) - - $ 1, 394,540 $ 348,864
Total gas gathered (Mcf/D) 1,374,549 513,497 1,107,522 391,387
Total gas processed (Mcf/D) 1,300,758 394,106 1,021,011 305,501
Natural gas liquids sales (MGal) 254,125 98,392 606,318 182,283
Gas sales (MMcf) 36,178 7,004 81,352 11,263
Natural Gas Liquids by Component (%)
Ethane 36 49 40 49
Propane 33 27 31 26
Iso butane 5 5 5 4
Normal butane 12 8 11 9
Natural gasoline 14 11 13 12
</TABLE>
NGL and natural gas prices have remained strong during the first nine months of
and are expected to continue to be strong for the remainder of the year.
Transportation and Storage
The transportation and storage segment represents the Company's intrastate
transmission pipelines and natural gas storage facilities. The Company has five
storage facilities in Oklahoma, two in Kansas and three in Texas with a combined
working capacity of approximately 58 Bcf. The Company's intrastate transmission
pipelines operate in Oklahoma, Kansas and Texas and are regulated by the
Oklahoma Corporation Commission (OCC), Kansas Corporation Commission (KCC), and
Texas Railroad Commission (TRC), respectively.
The acquisition of transmission pipelines and storage fields from KMI was
completed in April 2000. This acquisition increased transportation throughput by
an average of 890,000 Mmbtu's per day, miles of transmission pipeline from 4,325
miles to 9,150 miles, and Company-owned storage capacity from 48 Bcf to 58 Bcf.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial Results
Gas sales $ 5,955 $ - $ 18,250 $ -
Cost of gas 5,793 - 13,480 -
-----------------------------------------------------------------------------------------
Gross margin on gas sales 162 - 4,770 -
-----------------------------------------------------------------------------------------
Transportation revenues 16,701 18,380 52,816 54,515
Storage revenues 11,559 8,240 24,281 21,722
Other revenues 11,544 3,506 27,033 7,813
-----------------------------------------------------------------------------------------
Net revenues 39,966 30,126 108,900 84,050
Operating costs 19,714 8,984 48,321 24,938
Depreciation, depletion, and amortization 4,628 3,748 13,825 10,582
-----------------------------------------------------------------------------------------
Operating income $15,624 $17,394 $ 46,754 $48,530
=========================================================================================
</TABLE>
21
<PAGE>
The acquisition of the Texas assets from KMI contributed to the Transportation
and Storage segment generating gross margin on gas sales due to merchant gas
sales by ONEOK WesTex Transmission, Inc. Reduced tariff rates paid by an
affiliate more than offset the increase in transportation volumes resulting from
acquisitions. Storage revenues increased for the three and nine months ended
September 30, 2000, due primarily to the increased storage capacity resulting
from recent acquisitions. Other revenues increased during the three and nine
month periods ended September 30, 2000, as compared to the year ago periods, due
to increased retained fuel.
Operating costs and depreciation, depletion and amortization increased for the
three and nine months ended September 30, 2000, as compared to the corresponding
year ago periods, due to the acquisitions. The increase in operating expenses is
primarily due to increased plant operating and personnel costs resulting from
acquisitions.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Information
Volumes transported (MMcf) 160,977 73,187 396,484 262,722
Capital expenditures (Thousands) $ 10,912 $ 16,179 $ 25,319 $ 34,963
Total assets (Thousands) - - $ 631,128 $ 371,418
-----------------------------------------------------------------------------------------------
</TABLE>
On November 3, 2000, the Company announced the execution of long-term agreements
between ONEOK Gas Transportation, L.L.C., (OGT), a subsidiary of ONEOK, Inc.,
and Duke Energy North America (DENA) whereby OGT will provide firm natural gas
transportation service up to 85,000 Mcf per day to DENA's natural gas fueled
McClain Energy Facility.
The Company received a final order from the OCC (the Order) in the second
quarter of 2000 that separated the distribution assets of ONG and the
transmission assets of OGT and related affiliates into two separate public
utilities. The Order also adjusted ONG's rates for the removal of the gathering,
transmission and storage assets, and established a competitive bid process for
ONG's upstream service. Through the competitive bid process, OGT retained
approximately 96 percent of ONG's upstream transportation requirements.
Distribution
The Distribution segment provides natural gas distribution services in Oklahoma
and Kansas. The Company's operations in Oklahoma are primarily conducted through
ONG which serves residential, commercial, and industrial customers and leases
pipeline capacity. The Company's operations in Kansas are conducted through KGS
which serves residential, commercial, and industrial customers. The Distribution
segment serves about 80 percent of Oklahoma and about 67 percent of Kansas. ONG
is subject to regulatory oversight by the OCC. KGS is subject to regulatory
oversight by the KCC.
The Order received in May 2000, provided for a $20 million net revenue reduction
in rates which will be offset by an annual reduction in depreciation expense of
$11.4 million. Pursuant to the Order, the Oklahoma assets and customers of KGS
were transferred to ONG. The Order also adjusted rates for the removal of the
gathering and storage assets no longer included in base rates and provided for
the recovery of gas purchase, operations and maintenance expenses and line
losses through a rider rather than base rates.
22
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial Results
Gas sales $ 154,130 $115,520 $684,236 $605,068
Cost of gas 114,918 69,242 468,053 368,745
----------------------------------------------------------------------------------------------
Gross margin on gas sales 39,212 46,278 216,183 236,323
PCL and ECT revenues 12,382 12,776 42,953 42,830
Other revenues 3,788 3,622 12,420 13,968
----------------------------------------------------------------------------------------------
Net revenues 55,382 62,676 271,556 293,121
Operating costs 51,552 55,647 162,955 171,157
Depreciation, depletion, and amortization 16,087 18,100 51,460 57,061
----------------------------------------------------------------------------------------------
Operating (loss) income $ (12,257) $ (11,071) $57,141 $64,903
==============================================================================================
</TABLE>
Gross margin decreased for the three and nine months ended September 30, 2000,
as compared to the previous periods, due to the rate reductions resulting from
unbundling, in Oklahoma, and the reduction in tariff rates in Kansas that are
offset by a cost of gas rider. The reduction in tariff rates in Kansas is due to
the recovery of certain costs through a cost of gas rider rather than through
tariff rates. The impact of this change reduces gross margin and operating costs
by a like amount. This change is the result of a regulatory order that became
effective during the third quarter. This increase in cost of gas, more than
offset the decreased transportation costs paid to an affiliate resulting in
lower gross margin for the three and nine months ended September 30, 2000 as
compared to the year ago periods. Warmer weather, mainly in Kansas during the
first quarter of 2000, also had a negative impact on margins for the nine months
ended September 30, 2000.
Operating costs for the three months and nine months ended September 30, 2000,
compared to the year ago periods, decreased due in part to the change in how
certain costs are being recovered, discussed above, and continued cost
containment efforts. The decrease in depreciation, depletion and amortization
for the three and nine months ended September 30, 2000, as compared to the
corresponding previous periods, is due to the rate order granted in May 2000
which reduced depreciation expense by $11.4 million annually for Oklahoma assets
and the transfer of certain transportation assets from the Distribution segment
to the Transportation and Storage segment. Under the Order, the average
depreciable life of certain assets was extended.
In October 2000, the KCC approved a pilot weather normalization program and a
two-year rate moratorium for KGS customers. The normalized rate rider will
become effective December 1, 2000 and is expected to further stabilize the
revenue stream of the segment. ONG has had normalized rates since 1995.
23
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Margin per Mcf
Oklahoma
Residential $ 6.50 $ 7.98 $ 2.99 $ 2.99
Commercial $ 2.74 $ 4.05 $ 2.33 $ 2.47
Industrial $ 1.44 $ 1.13 $ 1.26 $ 1.18
Pipeline capacity leases $ 0.25 $ 0.26 $ 0.26 $ 0.26
Kansas
Residential $ 5.71 $ 4.79 $ 2.53 $ 2.39
Commercial $ 2.96 $ 2.78 $ 1.93 $ 1.83
Industrial $ 1.96 $ 2.36 $ 1.86 $ 2.11
End-use customer transportation $ 0.46 $ 0.45 $ 0.55 $ 0.50
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Information
Average number of customers 1,409,349 1,406,841 1,437,737 1,418,924
Capital expenditures (Thousands) $ 26,481 $ 27,005 $ 78,150 $ 128,808
Total assets (Thousands) - - $1,716,326 $1,718,000
Customers per employee 555 527 554 530
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Volumes (MMcf)
Gas sales
Residential 6,937 7,033 72,568 76,829
Commercial 3,915 3,455 28,209 30,615
Industrial 1,003 1,003 4,015 4,276
-----------------------------------------------------------------------------------
Total volumes sold 11,855 11,491 104,792 111,720
PCL and ECT 47,752 47,757 147,527 151,195
-----------------------------------------------------------------------------------
Total volumes delivered 59,607 59,248 252,319 262,915
===================================================================================
</TABLE>
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".
As services continue to unbundle, certain of these assets may no longer meet the
criteria of a regulatory asset, and accordingly, a write-off of regulatory
assets and stranded costs may be required. The Company's most recent Orders did
not change the recoverability of regulatory assets. The Order allows the Company
to recover transition costs due to unbundling and allows an initial annual
recovery of $1.8 million which will be updated annually. Accordingly, the
Company does not anticipate that write-off of costs, if any, will be material.
24
<PAGE>
Production
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Financial Results
Natural gas sales $15,279 $14,451 $46,944 $47,539
Oil sales $ 1,548 1,866 5,722 5,021
Other revenues 1,541 1,553 4,009 4,509
------------------------------------------------------------------------------------------
Net revenues 18,368 17,870 56,675 57,069
Operating costs 6,443 5,735 17,968 15,627
Depreciation, depletion, and amortization 7,701 7,753 24,153 25,835
------------------------------------------------------------------------------------------
Operating income $ 4,224 $ 4,382 $14,554 $15,607
==========================================================================================
Other income and expenses, net $ 61 $ 1,646 $ 421 $ 1,646
==========================================================================================
</TABLE>
Oil and gas prices have been strong during fiscal 2000; however, the Company
hedged the majority of its production through December 2000. Net revenues for
the three month period ended September 30, 2000, as compared to the year ago
period, have been favorably impacted primarily due to the increase in natural
gas prices, net of hedging activities, and the slight increase in gas
production. Net revenues for the nine months ended September 30, 2000, as
compared to the year ago period, have decreased primarily due to the decrease in
production which is being offset by an increase in prices, net of hedging
activities.
Operating costs for the three and nine month periods ended September 30, 2000,
compared to the corresponding previous periods, increased primarily as a result
of increased production taxes resulting from higher oil and gas prices which are
calculated on wellhead price rather than realized price.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Information
Proved reserves
Gas (MMcf) - - 258,310 254,229
Oil (MBbls) - - 4,151 4,187
Production
Gas (MMcf) 6,705 6,485 20,573 21,956
Oil (MBbls) 88 100 314 346
Average realized price
Gas (MMcf) $ 2.28 $ 2.23 $ 2.28 $ 2.16
Oil (MBbls) $17.59 $18.70 $ 18.20 $ 14.52
Capital expenditures (Thousands) $7,258 $5,463 $ 25,180 $ 21,657
Total assets (Thousands) - - $353,892 $357,092
------------------------------------------------------------------------------------------
</TABLE>
The Production segment added 28.2 Bcfe of reserves and produced 22.5 Bcfe for
the nine months ended September 30, 2000. The reserve additions are 11.3 Bcfe
proved developed, 3.9 Bcfe proved behind pipe, 8.2 Bcfe proved undeveloped and
4.8 Bcfe of upward proven reserve additions and a minor acquisition for the nine
months ended September 30, 2000. Capital expenditures reflected above include
current drilling or completion projects with reserves yet to be assigned.
Average realized price, above, reflects the impact of hedging activities.
25
<PAGE>
C. Financial Flexibility and Liquidity
The Company's capitalization structure is 39 percent equity and 61 percent debt
(including short-term debt) at September 30, 2000, compared to 48 percent equity
and 52 percent debt at December 31, 1999. Cash provided by operating activities
continues as the primary source for meeting day-to-day cash requirements.
However, due to seasonal fluctuations, acquisitions, and additional capital
requirements, the Company accesses funds through commercial paper, and
short-term credit agreements and, if necessary, through long-term borrowing.
Operating cash flows for the nine months ended September 30, 2000, as compared
to the same period one year ago, were $88.5 million compared to $149.9 million.
Cash flow from operating activities was negatively impacted in the current year
as a result of increased receivables and gas in storage. Competition continues
to increase in all segments of the Company's business. The loss of major
customers without recoupment of those revenues is an event that could have a
material adverse effect on the Company's financial condition. However,
strategies such as aggressive negotiations with potential new customers, weather
normalization in Kansas and Oklahoma, and increased use of storage in the day
trading market are expected to reduce other risks to the Company. Additionally,
rates in the Distribution segment are structured to reduce the Company's risk in
serving its large customers.
Cash paid for capital expenditures and acquisitions was $225.7 million and
$460.5 million for the nine months ended September 30, 2000, respectively.
Capital expenditures include $31.6 million for construction of an electric
generating plant. For the same period one year ago, cash paid for capital
expenditures and acquisitions was $211.8 million and $296.3 million,
respectively.
At September 30, 2000, $1.4 billion of long-term debt was outstanding. As of
that date, the Company could have issued $1.1 billion of additional long-term
debt under the most restrictive provisions contained in its various borrowing
agreements. The increase in debt has lead to a significant increase in interest
costs.
The Company issued $240 million of two-year floating rate notes in April 2000.
The interest rate for these notes will reset quarterly at a 0.65 percent spread
over the three month London InterBank Offered Rate (LIBOR). The proceeds from
the notes were used to fund acquisitions. In March 2000, the Company issued $350
million of five year, 7.75 percent, fixed rate notes to refinance short term
debt and finance acquisitions.
In June 2000, the Company entered into an $800 million 364-day Revolving Credit
Facility with Bank of America, N.A. and other financial institutions with a
maturity date of June 30, 2001. This credit facility is primarily used as a
commercial paper backup facility and replaces the previously existing $600
million Revolving Credit Facility dated July 2, 1999, with a maturity date of
June 30, 2000 and the $200 million Revolving Credit Facility entered into in
March 2000 that was terminated on June 1, 2000. At September 30, 2000, $481
million of commercial paper was outstanding.
The Company believes that internally generated funds and access to financial
markets will be sufficient to meet its normal debt services, dividend
requirements, and capital expenditures.
D. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement 133), was issued by the Financial
Accounting Standards Board (FASB) in June, 1998. Statement 133 standardizes the
accounting for derivatives instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the balance sheet at fair value. The accounting
for changes in the fair value of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and, if so,
on the reason for holding it. If certain conditions are met, entities may elect
to designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedge exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
26
<PAGE>
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately.
Statement 133 was amended by Statement of Financial Accounting Standards No. 137
in June 1999 that delayed implementation until fiscal years beginning after June
15, 2000. Statement 133 was amended again by Statement of Financial Accounting
Standards No. 138 in June 2000 that amends the accounting and reporting
standards of Statement 133 for certain derivative instruments and certain
hedging activities. Statement 138 also amends Statement 133 for decisions made
by the FASB relating to the Derivatives Implementation Group process. The
Company is currently evaluating the impact of adopting Statement 133. However,
the transition effect at January 1, 2001, cannot be estimated at this time
because it is subject to the following variables as of that date: (1) actual
derivatives and related hedged positions, (2) market values of derivatives and
hedged positions, and (3) further interpretation of Statement 133 by the FASB.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management - The Company, substantially through its nonutility segments, is
exposed to market risk in the normal course of its business operations through
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 that extend for periods of
up to 48 months, gas in storage inventories utilized by the gas marketing
operation, and anticipated sales of oil and gas production and natural gas
liquids. 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 futures contracts,
swaps and options to hedge existing or anticipated purchase and sale agreements,
existing physical gas in storage, and basis risk. The Company adheres to
policies and procedures that 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.
To minimize the impact of weather on operations, the Company uses weather
derivative swaps to manage the risk of fluctuations in heating degree days (HDD)
during the heating season. Under the weather derivative swap agreements, the
Company receives a fixed payment per degree day below the contracted normal HDD
and pays a fixed amount per degree day above the contracted normal HDD. The
swaps contain a contract cap that limits the amount either party is required to
pay. At September 30, 2000, the Company has weather derivative swaps relating to
weather exposure for the months of October and a portion of November.
KGS uses derivative instruments to hedge the cost of some anticipated gas
purchases during the winter heating months to protect their 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.
Interest Rate Risk - The Company is subject to the risk of fluctuating interest
rates in the normal course of business. The Company manages interest rate risk
through the use of fixed rate debt, floating rate debt and interest rate swaps.
As of September 30, 2000 and December 31, 1999, a hypothetical 10 percent change
in interest costs would result in an annual $4.1 and $2.1 million change in
interest costs related to short-term and floating rate debt including the
interest rate swaps, respectively, based on principal balances outstanding at
these dates.
27
<PAGE>
Value-at-Risk Disclosure of Market Risk - The Company measures market risk in
its price risk management portfolios using value at risk. The quantification of
market risk, using value at risk, provides a consistent measure of risk across
energy markets and products with different risk factors in order to set overall
risk tolerance and risk targets. The use of this methodology requires a number
of key assumptions. The Company relies on value at risk to determine the
potential reduction in the price risk management portfolio value arising from
changes in market conditions.
At September 30, 2000, 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 and diversified correlation assuming one day 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 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.
28
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
ONEOK, Inc. v. Southern Union Company, No. 99-CV-0345-H(M), in the United States
District Court for the Northern District of Oklahoma, transferred, No. CV 00-
1812-PHX-ROS, in the United States District Court for the District of Arizona,
on appeal of preliminary injunction, No. 99-5103, in the United States Court of
Appeals for the Tenth Circuit. At a status conference on August 31, 2000, the
Court heard argument on and granted Southern Union's pending Motion to transfer
the action to the federal district court in Arizona.
Southern Union Company v. Southwest Gas Corporation, et al., (including ONEOK,
Inc.) No. CIV 99-1294-PHX-ROS, United States District Court for the District of
Arizona. The court granted Southern Union's motion for leave to file a Second
Amended Complaint on August 3, 2000. On August 24, 2000, ONEOK and all other
defendants filed Motions to dismiss the claims asserted by Southern Union in its
Second Amended Complaint. On August 28, 2000, the Court entered an order denying
the motions to dismiss for lack of personal jurisdiction filed on behalf of Gene
Dubay and John Gaberino, but granted the motion filed on behalf of Jim Kneale.
The Court also entered an order denying the defendants' motions to dismiss the
federal and state RICO claims on the grounds that they were precluded by the
Private Securities Litigation Reform Act. The case is in discovery. Motions to
dismiss the Second Amended Complaint are pending.
ONEOK, Inc. v. Southwest Gas Corporation, No. 00-CV-063-H(E), in the United
States District Court for the Northern District of Oklahoma, transferred, No.
CIV-00-1775-PHX-RCB, in the United States District Court for the District of
Arizona. At a status conference, in the Northern District of Oklahoma, on August
31, 2000, the Court heard argument on and granted thereafter Southwest's pending
Motion to transfer this action to the federal district court in Arizona.
Southwest Gas Corporation v. ONEOK, Inc. and Southern Union Company, No.,
CIV-00-0119-PHX-ROS, in the United States District Court for the District of
Arizona. On August 7, 2000, Southern Union filed a motion to transfer and
consolidate this action with the action brought by Southern Union against ONEOK,
Southwest, and the other individual defendants now pending before Judge Silver
(Case No. CIV-99-1294-PHX-ROS, above). On October 17, 2000, the court granted
the motion to transfer and referred the motion to consolidate to a Special
Master.
In re: ONEOK, Inc. Derivative litigation f/k/a Gaetan Lavalla, Derivatively on
Behalf of Nominal Defendant ONEOK, Inc. v. Larry W. Brummett, et al., District
Court of Tulsa County, No. CJ-2000-598 and Hayward Lane, Derivatively on Behalf
of Nominal Defendant ONEOK, Inc. v. Larry W. Brummett, et al., District Court of
Tulsa County, No. CJ-2000-593. On September 19, 2000, ONEOK and its directors
and officers named as defendants filed Motions to Dismiss the action for failure
of the plaintiffs to make a pre-suit demand on ONEOK's Board of Directors. In
addition, Motions to Dismiss the Plaintiffs' Consolidated Petition for failure
to state a claim were filed.
Switzer, et al., v. Chevron U.S.A., Inc., Dynegy Midstream Services, Ltd., and
Dynegy Midstream, L.L.C., Case No. CIV-00-478-R, in the United States District
Court for the Western District of Oklahoma. Certain royalty owners are seeking
recovery of compensatory and punitive damages relating to an alleged failure to
properly compute and pay royalties and are seeking certification of a nationwide
class. A subsidiary of the Company that was acquired by ONEOK from Dynegy, Inc.
on March 22, 2000 is one of several defendants in this action. The acquired
affiliate operated, among other things, a natural gas processing plant near
Leedey, Oklahoma. Plaintiffs filed their Third Amended Complaint on August 25,
2000, but have not yet alleged specific dollar amounts of damages.
For additional information regarding the Company's legal proceedings, see the
Company's Form 10-K for the period ended August 31, 1999, the Company's Form
10-Q for the period ended November 30, 1999, the Company's Form 10-Q for the
transition period ended December 31, 1999 and the Company's Form 10-Q for the
periods ended March 31, 2000 and June 30, 2000.
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits Incorporated by Reference -
Certificate of Incorporation of the Company, filed May 16, 1997
(Incorporated by reference from Exhibit 3.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-4 filed August 6, 1997).
Certificate of Merger of the Company filed November 26, 1997
(Incorporated by reference from Exhibit (1)(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1998).
Amended Certificate of Incorporation of ONEOK, Inc., filed January 16,
1998 (Incorporated by reference from Exhibit (1)(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1998).
Certificate of Designation for Convertible Preferred Stock of WAI, Inc.
(now ONEOK, Inc.) Filed November 26, 1997 (Incorporated by reference
from Exhibit 3.3 to Amendment No. 3 to Registration Statement on Form
S-4 filed August 31, 1997).
Certificate of Designation for Series C Participating Preferred Stock of
ONEOK, Inc. filed November 26, 1998 (Incorporated by reference from
Exhibit No. 1 to Form 8-A filed November 26, 1997).
Certificate of Merger of the Company filed April 3, 1998.
Certificate of Merger of the Company filed April 28, 2000.
By-laws of ONEOK, Inc., as amended (Incorporated by reference from
Exhibit (3)(d) to the Company's Annual Report on Form 10-K for the year
ended August 31, 1999.
Registration Rights Agreement dated March 1, 2000 among the Company and
the Initial Purchasers described therein, incorporated by reference from
Registration Statement on Form S-4 filed March 13, 2000.
(B) Reports on Form 8-K
August 29, 2000 - Filed an amended complaint against Southwest Gas
Corporation (Southwest) alleging that Southwest failed to disclose
certain material information to ONEOK during a critical period of time
during which ONEOK increased its price for Southwest.
August 29, 2000 - Announced that David Kyle will succeed Larry Brummett
as the Company's chairman and chief executive officer. Mr. Brummett
passed away after his two-year battle with cancer.
November 7, 2000 - Announced the execution of a long-term agreement
whereby ONEOK Gas Transportation L.L.C., a subsidiary of ONEOK, Inc.,
will provide firm transportation service to Duke Energy North America's
McClain Energy Facility.
30
<PAGE>
Signatures
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 this 13th day of
November 2000.
ONEOK, Inc.
Registrant
By: /s/ Jim Kneale
-------------------------------
Jim Kneale
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
31
