<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
ONEOK Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
ONEOK INC.
100 WEST FIFTH STREET
TULSA, OKLAHOMA 74103
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
DECEMBER 12, 1996
November 7, 1996
To the Shareholders of ONEOK Inc.:
Notice is hereby given that the Annual Meeting of the Shareholders of ONEOK
Inc. will be held at ONEOK Plaza, 100 West Fifth Street, Tulsa, Oklahoma,
Thursday, December 12, 1996, at 10 a.m. for the following purposes:
1. To elect five directors (Class A) to serve until the Annual Meeting
of Shareholders to be held December 9, 1999, or until their successors are
duly elected and qualified.
2. To ratify and approve the appointment of KPMG Peat Marwick LLP as
independent auditor of the Corporation for the 1997 Fiscal Year.
3. To transact such other business as may properly come before the
meeting and at any and all adjournments thereof.
Only shareholders of record on the stock transfer books of the Corporation
at the close of business October 14, 1996, the record date fixed by the Board of
Directors, are entitled to notice of and to vote at the meeting and at any and
all adjournments thereof.
By Order of the Board of Directors,
N. E. DUCKWORTH, Secretary
- --------------------------------------------------------------------------------
To assure your representation at the meeting, please sign and mail the
enclosed proxy, which is being solicited on behalf of the Board of Directors of
ONEOK Inc. A return envelope that requires no postage, if mailed in the United
States, is enclosed for your convenience in returning your proxy. If you receive
more than one form of proxy, it is an indication that your shares are registered
in more than one account. All proxy forms received by you should be signed and
returned promptly to be sure that all your shares are voted.
If your shares are held in the name of a broker, trust, bank, or other
nominee and you plan to attend the meeting and vote your shares in person, you
should bring with you a proxy or letter from the broker, trustee, bank, or
nominee confirming your beneficial ownership of the shares.
<PAGE> 3
PROXY STATEMENT
ONEOK INC.
100 WEST FIFTH STREET
TULSA, OKLAHOMA 74103
NOVEMBER 7, 1996
ANNUAL MEETING OF SHAREHOLDERS
DECEMBER 12, 1996
PROXY AND SOLICITATION
The accompanying proxy is solicited by the Board of Directors of ONEOK Inc.
(the Corporation) for use at the Annual Meeting of Shareholders (Annual Meeting)
to be held at ONEOK Plaza, 100 West Fifth Street, Tulsa, Oklahoma, on Thursday,
December 12, 1996, at 10 a.m. and at any and all adjournments thereof.
Properly executed proxies received in time for the Annual Meeting will be
voted. If the enclosed proxy is executed and returned, it may be revoked by a
later-dated proxy or by written notice to the Secretary of the Corporation.
Shareholders attending the meeting may revoke their previously executed proxies
and vote in person.
The cost of soliciting proxies will be borne by the Corporation. In
addition to the use of the mails, proxies may be solicited personally or by
telephone by officers and regular employees of the Corporation. Morrow & Co.,
Inc., New York, New York, will assist in solicitation of proxies. The
Corporation will pay $8,500 to Morrow & Co., Inc., for proxy solicitation
services. The Corporation does not expect to pay any additional compensation for
the solicitation of proxies; however, the proxy solicitor, brokers and other
custodians, nominees, and fiduciaries will be reimbursed for expenses incurred
in forwarding proxy material to principals and obtaining their proxies.
ANNUAL REPORT
The Corporation's 1996 Annual Report to Shareholders, for the purposes of
this Proxy Statement, is included as an addendum to and with this Proxy
Statement. The Corporation's Summary Annual Report to Shareholders has been sent
to all shareholders of record on October 14, 1996 (Record Date), except for
accounts on which the shareholder has filed a written request to eliminate
receiving duplicate reports. In addition, the Corporation is providing brokers,
dealers, banks, voting trustees, and their nominees additional copies at the
Corporation's expense so that the Summary Annual Report may be forwarded to
beneficial owners as of the Record Date. The Summary Annual Report to
Shareholders is not part of this Proxy Statement and is not to be used as such.
STOCK OUTSTANDING AND VOTING RIGHTS
At Record Date the Corporation had issued and outstanding 180,000 shares of
Preferred Stock, Series A (4 3/4%), each share being entitled to two votes, and
27,270,633 shares of Common Stock, each share being entitled to one vote.
Under Delaware Law and the Corporation's By-laws, the holders of record of
a majority in voting interest of the shares of the stock of the Corporation
entitled to be voted at the Annual Meeting and present in person or by proxy
shall constitute a quorum for the Annual Meeting. In all matters other than the
election of directors, the affirmative vote of a majority in voting interest of
the shares entitled to vote at the Annual Meeting shall be the act of the
shareholders. Abstentions are treated as votes against a proposal, and broker
<PAGE> 4
non-votes have no effect on the vote. Directors shall be elected by a plurality
of the votes present in person or represented by proxy at the Annual Meeting and
entitled to vote on the election of directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following are known to the Corporation to be the beneficial owners of
more than five percent (5%) of any class of the Corporation's voting securities
at the Record Date.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OF BENEFICIAL PERCENT
TITLE OF CLASS OWNER OWNERSHIP OF CLASS
- ------------------ ------------------------------------- ------------------ --------
<S> <C> <C> <C>
Common Stock Bank of Oklahoma 3,022,202 Shares 11.08%
Trustee for Thrift Plan for Direct
Employees of ONEOK Inc. and
Subsidiaries
P.O. Box 2300
Tulsa, OK 74192
Preferred Stock
Series A
(4 3/4%) Sidney Paxton 23,948 Shares 13.30%
Box 76 Direct
Oklahoma City, OK 73101
Bank of Oklahoma 7,799 Shares 4.33%
Trustee for Thrift Plan for Direct
Employees of ONEOK Inc. and
Subsidiaries
P.O. Box 2300
Tulsa, OK 74192
</TABLE>
2
<PAGE> 5
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the shares of Common Stock beneficially
owned by directors and nominees for directors, the chief executive officer, the
four additional most highly compensated executive officers serving at the end of
the fiscal year, one additional individual who would have been included but for
retirement before the end of the fiscal year, and by all executive officers and
directors as a group as of August 31, 1996. Beneficial ownership of the stock is
as shown unless otherwise footnoted.
<TABLE>
<CAPTION>
SHARES OWNED
-----------------------
TITLE OF BENEFICIAL PERCENT
CLASS NAME OWNERSHIP OF CLASS
- ------------- ------------------------------------------------------ --------- --------
<S> <C> <C> <C>
Common Stock Edwyna G. Anderson.................................... 348 *
Director
Common Stock William M. Bell....................................... 1,256 *
Director
Common Stock Larry W. Brummett..................................... 32,057(1)(2) *
Chairman of the Board, President, and Chief Executive
Officer -- ONEOK Inc.
Common Stock Eugene N. Dubay 4,907(3) *
Vice President -- Business Development
Common Stock N. E. Duckworth....................................... 42,833(4) *
Vice President and Secretary
Common Stock Douglas R. Cummings................................... 1,400 *
Director
Common Stock William L. Ford....................................... 3,287(5) *
Director
Common Stock J. M. Graves.......................................... 2,376 *
Director
Common Stock Charles C. Ingram..................................... 99,176(6) *
Chairman of the Board Emeritus
ONEOK Inc.
Common Stock Stephen J. Jatras..................................... 3,300 *
Director
Common Stock David L. Kyle......................................... 27,198(7) *
President -- Oklahoma Natural Gas Company
Common Stock Bert H. Mackie........................................ 2,178 *
Director
Common Stock Jerry D. Neal......................................... 20,682(8) *
Vice President, Treasurer, and Chief Financial
Officer -- ONEOK Inc.
Common Stock Douglas Ann Newsom, Ph.D.............................. 699 *
Director
Common Stock Gary D. Parker........................................ 2,285 *
Director
Common Stock J. D. Scott........................................... 120,089(9) *
Director and Retired Chairman of the Board -- ONEOK
Inc.
Common Stock Bill M. Van Meter..................................... 27,865(10) *
President -- Energy Companies of ONEOK
Common Stock G. Rainey Williams, M.D............................... 2,800 *
Director
Common Stock Stanton L. Young...................................... 62,300 *
Director
Directors and Executive Officers as a Group............................ 457,036(11) 1.68%
</TABLE>
* Less than one percent of Class
3
<PAGE> 6
NOTES:
(1) Shares of Common Stock of the Corporation in the custody of the
Trustee under the Thrift Plan include 14,375 shares for the account of
Mr. Brummett; 17,681 shares of Common Stock are held by Mr. Brummett.
These total 32,057 shares.
(2) Mr. Brummett also owns 616 shares of Preferred Stock.
(3) Shares of Common Stock of the Corporation in the custody of the
Trustee under the Thrift Plan include 3,907 shares for the account of
Mr. Dubay. 1,000 shares of Common Stock are held by Mr. Dubay. These
total 4,907 shares.
(4) Shares of Common Stock of the Corporation in the custody of the
Trustee under the Thrift Plan include 38,175 shares for the account of
Mr. Duckworth. 4,658 shares of Common Stock are held by Mr. Duckworth.
These total 42,833 shares.
(5) Includes 989 shares owned by the 1979 Leslie A. Ford Trust, of which
William L. Ford is a trustee. Mr. Ford is not a beneficial owner of
these shares and disclaims ownership thereof.
(6) Includes 33,800 shares owned by Mrs. Charles C. Ingram. Mr. Ingram
disclaims ownership of these shares. In addition to the 99,176 shares,
Mr. Ingram is the donor of 876 shares of ONEOK Inc. Common Stock held
for the benefit of a relative in a trust over which he has retained no
control as to voting rights during the terms of this trust.
(7) Shares of Common Stock of the Corporation in the custody of the
Trustee under the Thrift Plan include 22,357 shares for the account of
Mr. Kyle. 4,841 shares are held by Mr. Kyle. These total 27,198
shares.
(8) Shares of Common Stock of the Corporation in the custody of the
Trustee under the Thrift Plan include 12,506 shares for the account of
Mr. Neal, 8,176 shares of Common Stock are held by Mr. Neal. These
total 20,682 shares.
(9) Shares of Common Stock in the Corporation in the custody of the
Trustee under the Thrift Plan include 68,734 for Mr. Scott, who
retired from the Corporation in 1994; 51,355 shares of Common Stock
are held by Mr. Scott. These amounts total 120,089 shares.
(10) Shares of Common Stock of the Corporation in the custody of the
Trustee under the Thrift Plan include 4,314 shares for the account of
Mr. Van Meter who retired from the Corporation in 1996; 23,551 shares
of Common Stock are held by Mr. Van Meter. These total 27,865 shares.
(11) Shares of Common Stock of the Corporation in the custody of the
Trustee under the Thrift Plan include 160,054 shares for directors and
executive officers as a group and are reported in the preceding
tabulation. Nonemployee directors do not participate in the Thrift
Plan, except Mr. Scott who, as a former employee, has elected to leave
his Thrift Plan holdings intact.
INFORMATION ON DIRECTORS
NOMINEES FOR DIRECTORS
CLASS A -- TERM ENDING 1999
EDWYNA G. ANDERSON Retired General Counsel, Duquense Light Company,
(age 66) Pittsburgh, Pennsylvania
Director since 1995 Mrs. Anderson served as general counsel of Duquense
Light Company from September 1988 until retirement in
October 1994. She also served as special counsel to
the president of Duquense Light Company until March
1995, when she retired from that position.
4
<PAGE> 7
WILLIAM L. FORD President, Shawnee Milling Company, Shawnee, Oklahoma
(age 54)
Director since 1981 Mr. Ford has served as president of Shawnee Milling
Company since 1979. He serves on the boards of
numerous civic and business organizations and
not-for-profit associations.
BERT H. MACKIE President, Security National Bank, Enid, Oklahoma
(age 54)
Director since 1989 Mr. Mackie, with Security National Bank since 1962,
is currently president and a director. Mr. Mackie
serves on the Board of Governors of the United States
Postal Service.
GARY D. PARKER President, Moffitt, Parker & Company, Inc., Muskogee,
(age 51) Oklahoma
Director since 1991
Mr. Parker, a certified public accountant,
is also the majority shareholder of Moffitt, Parker
& Company, Inc., and has been president of the firm
since 1982. He is a director of First National Bank
and Trust Company of Muskogee, Oklahoma.
STANTON L. YOUNG President, The Young Companies, Oklahoma City, Oklahoma
(age 69)
Director since 1972 Mr. Young is an individual investor with ownership of
oil and gas mineral and working interests, a shopping
center, and warehouses. He is also owner and
president of Journey House Travel Service, Inc., in
Oklahoma City.
CONTINUING DIRECTORS
CLASS B -- TERM ENDING 1997
LARRY W. BRUMMETT Chairman of the Board, President, and Chief Executive
(age 46) Officer, ONEOK Inc. Tulsa, Oklahoma
Director since 1994
Mr. Brummett has been employed by the Corporation for
more than 22 years. He was employed by ONEOK's
Oklahoma Natural Gas Company division as an engineer
trainee in June 1974 and, after receiving a number of
promotions within the division, was elected Vice
President of Tulsa District September 1, 1986, and
Executive Vice President in May 1990. He was elected
Executive Vice President of ONEOK Inc. January 21,
1993. He was elected President and Chief Executive
Officer February 17, 1994, and was elected to the
additional position of Chairman of the Board
effective June 1, 1994. Mr. Brummett is a director of
American Gas Association; Southern Gas Association;
Oklahoma State Chamber of Commerce; Metropolitan
Chamber of Commerce, Tulsa; and Bank of Oklahoma
Financial Corp./Bank of Oklahoma, N.A., in Tulsa. He
is also an officer or director of numerous civic and
business organizations and not-for-profit
associations.
DAVID L. KYLE President -- Oklahoma Natural Gas Company, Tulsa,
(age 44) Tulsa, Oklahoma
Director since 1995
Mr. Kyle was employed by Oklahoma Natural Gas Company,
a division of ONEOK Inc., in 1974 as an engineer
trainee. He served in a number of positions prior to
being elected Vice President of Gas Supply September
1, 1986, and Executive Vice President May 17, 1990.
He was elected President September 1, 1994. Mr. Kyle
is a director of Liberty Bancorp, Inc., Oklahoma
City, Oklahoma.
5
<PAGE> 8
DOUGLAS ANN Professor, Department of Journalism, Texas Christian
NEWSOM PH.D. University, Fort Worth, Texas
(age 63)
Director since 1982 In addition to her teaching position, Dr. Newsom is a
textbook author and public relations counselor.
J. D. SCOTT Retired Chairman of the Board, ONEOK Inc., Tulsa,
(age 65) Oklahoma D79 Mr. Scott served as President, Chief
Director since 19 Executive Officer, and Chairman of the Board of
ONEOK Inc. from January 1987 until he retired in
1994.
CONTINUING DIRECTORS
CLASS C -- TERM ENDING 1998
WILLIAM M. BELL Vice Chairman of the Board, Liberty Bank and Trust
(age 61) Company of Oklahoma City, N.A., Oklahoma City,
Director since 1981 Oklahoma
Mr. Bell is a director of Liberty Bank and Trust
Company of Oklahoma City, N.A.; and is chairman,
president, and chief executive officer of Liberty
Trust Company. He serves on the boards of numerous
civic and business organizations and not-for-profit
associations.
DOUGLAS R. CUMMINGS President and Owner, Cummings Oil Company, Oklahoma
(age 67) City, Oklahoma
Director since 1989
Mr. Cummings has been president of Cummings Oil
Company since 1972. He is an officer or director of
numerous civic and business organizations and
not-for-profit associations.
J. M. GRAVES President and Owner, Calumet Oil Company, Tulsa,
(age 70) Oklahoma
Director since 1989
Mr. Graves is also president and owner of Green
Country Supply, Inc., an oil field supply and
chemical company, and he is co-owner and an officer
of Cal Bohannan Drilling Company and Tri-Am Acid and
Fracture Service, Inc. He serves on the boards of
numerous civic and business organizations and
not-for-profit associations.
STEPHEN J. JATRAS Retired Chairman of the Board, Memorex Telex
(age 70) Corporation, Tulsa, Oklahoma
Director since 1985
Mr. Jatras retired from the position of chairman of
the board of Memorex Telex Corporation in 1991. He is
a director of Donald G. O'Brien, Inc., in Seabrook,
New Hampshire. He serves on the boards of numerous
civic and business organizations and not-for-profit
associations.
G. RAINEY WILLIAMS, M.D. Professor of Surgery, The University of Oklahoma,
(age 70) College of Medicine, Oklahoma City, Oklahoma
Director since 1974
Dr. Williams has held his current position since 1974.
He is a director of Boatmen's First National Bank of
Oklahoma in Oklahoma City.
ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS
Eleven regular meetings were held by the Board of Directors during the 1996
Fiscal Year. No Director attended fewer than seventy-five percent (75%) of the
meetings of the Board of Directors and committees on which such director served.
6
<PAGE> 9
Charles C. Ingram, chairman of the board emeritus, retired as a full-time
employee of the Corporation effective January 1, 1982, and as a director January
20, 1988. Mr. Ingram, as chairman of the board emeritus, is invited to attend
all board meetings.
DIRECTORS' COMPENSATION
The aggregate amount of directors' fees paid during the 1996 Fiscal Year
was $401,000. Officer-directors receive no additional compensation for service
on the Board of Directors or its committees. All other directors received an
annual retainer of $20,000; a fee of $900 for attending each board meeting and
each committee meeting; and reimbursement for expenses incurred in attending
board and/or committee meetings. Nonofficer directors who chair a committee
received an additional annual retainer of $2,000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on information submitted by the directors and officers, it has
been determined that all directors and all officers of the Corporation who are
required to so file have timely filed all forms required to be filed under
Section 16(a) of the Securities Exchange Act of 1934, as amended, with the
exception of E. N. Dubay who filed one late report containing one transaction.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has standing Executive, Audit, Nominating, and
Executive Compensation Committees.
EXECUTIVE COMMITTEE
Members of the Executive Committee are: Chairman Larry W. Brummett, Vice
Chairman David L. Kyle, William M. Bell, Douglas R. Cummings, J. M. Graves,
Stephen J. Jatras, J. D. Scott, and G. Rainey Williams.
The Committee did not meet during the 1996 Fiscal Year. The Executive
Committee may exercise all of the powers and authority of the Board of Directors
in the management of the business and affairs of the Corporation subject to
certain statutory limitations.
AUDIT COMMITTEE
Members of the Audit Committee are: Chairman Stephen J. Jatras, Vice
Chairman William L. Ford, Edwyna G. Anderson, William M. Bell, Bert H. Mackie,
Douglas Ann Newsom, Gary D. Parker, J. D. Scott, and Stanton L. Young. The
Committee, composed entirely of outside directors, held three meetings during
the last fiscal year. The Audit Committee reviews and makes recommendations to
the Board of Directors concerning employment of the independent auditors, the
proposed annual audit plan, the completed annual audit, and the Corporation's
conflict of interest program. The Committee also meets periodically with:
a. the Corporation's independent auditors to review the Corporation's
accounting policies, internal controls, and other accounting and auditing
matters;
b. the Corporation's manager of internal auditing to review the Corporation's
internal auditing program;
c. the Corporation's chief financial officer to review the Corporation's
accounting policy, the results of the annual audit, and the Corporation's
periodic financial statements; and
d. the Corporation's general counsel to review outstanding and potential
litigation, regulatory proceedings, and other significant legal matters.
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<PAGE> 10
NOMINATING COMMITTEE
Members of the Nominating Committee are: Chairman Bert H. Mackie, Edwyna G.
Anderson, Larry W. Brummett, J. M. Graves, Stephen J. Jatras, David L. Kyle,
Douglas Ann Newsom, and Stanton L. Young. The Committee met once during the last
fiscal year. The Nominating Committee recommends nominees to fill vacancies on
the Board of Directors, establishes procedures to identify potential nominees,
recommends criteria for membership on the Board of Directors, and recommends the
successor chief executive officer when a vacancy occurs. The Committee will
consider nominees recommended by shareholders for service on the Board of
Directors. Recommendations should be sent to the Corporate Secretary at the
address shown on the front of this Proxy Statement.
EXECUTIVE COMPENSATION COMMITTEE
Members of the Executive Compensation Committee are: Chairman William L.
Ford, Douglas R. Cummings, J. M. Graves, Gary D. Parker, and G. Rainey Williams.
The Committee, composed entirely of outside directors, held three meetings
during the last fiscal year. The Executive Compensation Committee oversees and
approves all elements of executive compensation, administers the Key Employee
Annual Incentive Plan and the Key Employee Stock Plan, and reports to the Board
all forms and amounts of executive compensation for information, approval, or
ratification, as necessary and appropriate.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------------
ANNUAL COMPENSATION AWARDS
--------------------------------------- ------------------------
OTHER SECURITIES PAYOUTS
ANNUAL RESTRICTED UNDERLYING ------- ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPENSA-
PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S) SARS PAYOUTS TION(1)
- ----------------------------- ---- -------- -------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry W. Brummett 1996 $375,333 $423,400 NONE NONE 17,600 NONE $ 8,993
Chairman of the Board, 1995 335,000 357,963 NONE NONE NONE NONE 9,000
President and CEO 1994 252,231 0 NONE NONE NONE NONE 12,889
Eugene N. Dubay 1996 $ 45,000 $ 25,080 NONE NONE NONE NONE $ -0-
Vice President -- 1995 -- -- NONE NONE NONE NONE --
Corporate Development(2) 1994 -- -- NONE NONE NONE NONE --
N. E. Duckworth 1996 $129,200 $ 61,000 NONE NONE 2,500 NONE $ 7,752
Vice President and 1995 -- -- NONE NONE NONE NONE --
Secretary(3) 1994 -- -- NONE NONE NONE NONE --
David L. Kyle 1996 $275,333 $278,600 NONE NONE 11,000 NONE $ 9,000
President -- Oklahoma 1995 240,000 164,175 NONE NONE NONE NONE 9,000
Natural Gas Company(4) 1994 -- -- NONE NONE NONE NONE --
Jerry D. Neal 1996 $162,200 $ 84,240 NONE NONE 2,500 NONE $ 8,993
Vice President, Treasurer 1995 161,133 122,313 NONE NONE NONE NONE 9,000
and CFO 1994 156,500 0 NONE NONE NONE NONE 9,376
Bill M. VanMeter 1996 $174,266 $ 20,425 NONE NONE NONE NONE $ 6,000
President -- Energy 1995 261,400 164,175 NONE NONE NONE NONE 9,000
Companies of ONEOK(5) 1994 258,866 0 NONE NONE NONE NONE 14,136
</TABLE>
(1) ONEOK Inc.'s contribution to the Thrift Plan for Employees of ONEOK Inc. and
Subsidiaries.
(2) Mr. Dubay was employed May 1, 1996.
(3) Mr. Duckworth became a corporate officer January 1, 1996. He was not one of
the highest-paid corporate officers in fiscal years 1994 and 1995.
(4) Mr. Kyle became president of Oklahoma Natural Gas Company September 1, 1994.
He was not one of the five highest-paid corporate officers in the 1994
fiscal year.
(5) Retired May 1, 1996.
8
<PAGE> 11
BOARD EXECUTIVE COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Executive Compensation Committee (the Committee) is responsible for
overseeing and approving the Corporation's executive compensation policies and
practices and approves all elements of compensation for corporate officers. In
carrying out its duties, the Committee has direct access to independent
compensation consultants and outside survey data. The Committee, which consists
of five outside directors, reports regularly to the Board of Directors on its
activities and obtains approval and ratification by the Board for components of
executive compensation when necessary and appropriate.
COMPENSATION PHILOSOPHY AND PRACTICES
The Corporation's executive compensation program is based on the belief
that the interests of executives should be closely aligned with those of the
shareholders. To support this philosophy, the following principles provide a
framework for the compensation program:
- - offer compensation opportunities that attract the best talent to the
Corporation; motivate individuals to perform at their highest levels; reward
outstanding achievement; and retain the leadership and skills necessary for
building long-term shareholder value;
- - maintain a significant portion of executives' total compensation at risk, tied
to both the annual and long-term financial performance of the Corporation, as
well as to the creation of shareholder value;
- - encourage executives to manage from the perspective of owners with an equity
stake in the Corporation.
The Corporation established the Key Employee Annual Incentive Plan
(Incentive Plan) on August 17, 1995, which became effective September 1, 1995.
The purpose of the Plan is to provide for compensation that focuses attention on
achievement of the Corporation and the goals of the operating units. The
Incentive Plan targets base pay levels at approximately 90 percent of the
average salaries paid for similar positions by the Corporation's peer
competitors as identified through published surveys, company documents, and
other sources. The Incentive Plan is designed to allow the Corporation's
executive officers the opportunity to earn compensation that is above average
when compared to the Corporation's peer competitors if the Corporation achieves
premium results compared to those competitors and the targeted objectives. The
Committee administers the Incentive Plan in accordance with its stated purposes.
Participation in the Incentive Plan is provided to executives and key employees
of the Corporation and subsidiaries selected by the Committee and upon
recommendations of the chief executive officer.
The executive compensation practices are recommended by independent
consultants using industry salary surveys that include the American Gas
Association Executive Compensation Survey, the KPMG Oil and Gas Industry
Compensation Survey, the Mercer Oil and Gas Industry Compensation Survey, the
Towers & Perrin Natural Gas Pipeline Survey, and the Watson Wyatt Worldwide
Compensation Survey. These surveys include corporations that are representative
of the firms with which the Corporation competes for executive talent and have
jobs similar to those at the Corporation in magnitude, complexity, and scope of
responsibility. Consequently, this is a broader and more diverse set of
companies than those included in the Standard & Poor's Natural Gas Distribution
Index, which is used in the Performance Graph on page 12.
COMPONENTS OF EXECUTIVE COMPENSATION
The compensation for executive officers consists of the following
components. An executive's annual compensation includes the core package
component of base salary and benefits, a bonus award component based on
achievement of certain corporate and unit performance goals, and a variable
component which is entirely at risk. The variable component is tied to the
equity based criteria that parallel the interests of the Corporation's
shareholders. Base salaries and bonus awards are established by the Committee
based on the executive's job responsibilities, level of experience, individual
performance and contribution to the business, and information obtained from
compensation surveys. Criteria on which individual performance was evaluated in
1996 were: achievement of corporate and unit goals, including return on assets,
revenue growth and other selected goals, and other performance, including
problem analysis; planning; organizational ability; directing;
9
<PAGE> 12
decision making; human, capital, and material resource utilization; time
management; initiation of and response to change; communications and team
relations; and personal actions.
The Stock Performance Plan, a five (5) year plan, was approved by the
shareholders and became effective September 1, 1991, and was terminated January
18, 1996, upon shareholder approval of the Key Employee Stock Plan, discussed
below. No Target Grants, Grants, or other compensation were established or paid
under the Stock Performance Plan for the 1996 Fiscal Year.
The Key Employee Stock Plan (the Stock Plan), as approved by the
shareholders, became effective August 17, 1995. The Stock Plan will remain in
effect until stock incentives, as defined, have been granted with respect to all
shares of Common Stock of the Corporation authorized to be issued and
transferred under the Stock Plan, or its earlier termination. The purpose of the
Stock Plan is to provide incentives to enable the Corporation to attract,
retain, and reward key employees and give such employees an interest parallel to
the interests of the Corporation's shareholders. The Committee administers the
Stock Plan and is authorized to make all decisions and interpretations required
to administer and execute the Stock Plan in accordance with its stated purposes.
Participation in the Stock Plan is limited to key employees of the Corporation
and subsidiaries, determined by the Committee to be those employees in positions
to contribute significantly to the growth and profitability of, or to perform
services of major importance to the Corporation or its subsidiaries. The Stock
Plan authorizes the Committee to grant Stock Incentives to participating key
employees, which may be in the form selected by the Committee, including
Incentive Stock Options, Non-Statutory Stock Options, Restricted Stock Awards,
and Performance Awards, as defined in the Stock Plan. Stock Incentives granted
under the Stock Plan are subject to the provisions of the Stock Plan providing
for the time and manner of payments and other terms and conditions as the
Committee determines. Stock Options granted by the Committee to selected key
employees may be subject to particular requirements contained in the Internal
Revenue Code, such as the purchase price and term of the option. The maximum
number of shares of Common Stock reserved for issuance under the Stock Plan is
1,000,000 shares, subject to adjustment in the event of recapitalization,
merger, consolidation, or similar events. On November 16, 1995, Non-Statutory
Stock Options were granted to 57 key employees by the Committee for 107,400
shares of Common Stock. Those options are exercisable only after November 16,
1996, and before November 16, 2005. The Committee granted, on October 10, 1996,
Non-Statutory stock options totaling 100,700 shares to 63 key employees,
exercisable only after October 11, 1997, and before October 10, 2006. At
present, 791,900 shares of Common Stock are available for Stock Incentives under
the Stock Plan.
COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
In considering the annual compensation for Mr. Brummett, who, in addition
to his duties as Chief Executive Officer, is Chairman of the Board and
President, the Committee relied on the aforementioned surveys to provide basic
information regarding peer positions. The C. A. Turner Utility Report on
financial and stock performance and comparisons of operating statistics from
American Gas Association member companies are also utilized. The industry
statistics have large comparative universes of natural gas distribution and
integrated natural gas companies. The companies in the Standard & Poor's Natural
Gas Distributors' Index, which is part of the Performance Graph below, are
included in the C. A. Turner Utility Report. The Committee also considered the
results of a formal Board of Directors' evaluation of Mr. Brummett's performance
during the fiscal year. The categories in which his performance was evaluated
include: leadership, strategic planning, human resources, and communication.
Each of the categories contains as many as five areas of specific performance
evaluation. The Committee recommended and the Board of Directors approved a base
compensation amount of $388,000, which was in the lower range of the surveys
utilized in the studies. Under the Key Employee Stock Plan Mr. Brummett was
granted an option to purchase 17,600 shares of the Corporation's common stock at
a purchase price of $23.69 per share, exercisable only after November 16, 1996.
Mr. Brummett received, under the Key Employee Annual Incentive Plan, $423,400,
which amounted to a total of 52.18 percent of his compensation that related to
the Corporation's performance during the year. Because he was paid at his
previously approved salary four months in the 1996 Fiscal Year, the actual
salary he received in fiscal 1996 was $375,333, and the at-risk portion of his
total compensation relating to the Corporation's performance amounted to 53.01
percent.
10
<PAGE> 13
FEDERAL INCOME TAX LIABILITY
The Corporation has not yet adopted a policy in respect to Internal Revenue
Code Section 162(m) regarding a $1 million annual limitation of a Federal income
tax deduction by the Corporation for compensation paid to any executive officer.
This limitation did not apply to the Corporation during fiscal year 1996;
however, the Internal Revenue Code requirement is being evaluated and the tax
regulations are being closely monitored.
CONCLUSION
The Board believes that the caliber and motivation of the Corporation's
leadership are fundamentally important to achieving the Corporation's objectives
established by the strategic plan and providing a sound investment for the
shareholders. The Committee is responsible to the Board, and by extension to the
shareholders, for ensuring that executives are compensated in a way that is
compatible with the Corporation's business strategies, thereby aligning their
interests with those of long-term investors. We believe the current methodology
governing executive compensation standards will prove beneficial to the
Corporation, its shareholders, its customers, and the communities served.
William L. Ford, Chairman Gary D. Parker
Douglas R. Cummings G. Rainey Williams
J. M. Graves
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG ONEOK INC., S&P 500 INDEX AND
S&P NATURAL GAS DISTRIBUTORS INDEX
[GRAPH]
12 Months Ended August 31
- --------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------
ONEOK Inc. 100.00 130.02 173.29 153.81 198.11 260.21
- --------------------------------------------------------------------------------
S&P 500 Index 100.00 107.92 124.34 131.14 159.27 189.10
- --------------------------------------------------------------------------------
S&P Natural Gas Distributors 100.00 106.53 141.07 126.43 143.27 194.01
- --------------------------------------------------------------------------------
The information provided under the foregoing sections entitled "Board Executive
Compensation Committee Report on Executive Compensation" and "Performance Graph"
shall not be deemed soliciting material or to be filed with the Securities and
Exchange Commission or subject to Regulations 14A or 14C, other than as provided
in Item 402 of Regulation S-K, or to the liabilities of Section 18 of the
Securities Exchange Act of 1934, and unless specific reference is made to such
sections in a filing, the information shall not be incorporated by reference
into any such filing under the Securities Act of 1933 or the Securities Exchange
Act
11
<PAGE> 14
of 1934. Additionally, the stock performance as shown on the Performance Graph
shall not be interpreted as a prediction of future stock performance.
STOCK OPTIONS
The following tables provide information concerning options to purchase
Common Stock of the Corporation granted for the last fiscal year and for fiscal
year 1997. None of the Stock Option Grants have been exercised.
TABLE I
STOCK OPTIONS GRANTED OCTOBER 10, 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL
OPTIONS RATES OF STOCK
STOCK GRANTED TO MARKET PRICE APPRECIATION
OPTION EMPLOYEES PRICE ON FOR OPTION TERM(1)
SHARES IN EXERCISE DATE OF EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE GRANT DATE 5% 10%
- ---------------------------- ------- ----------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Larry W. Brummett........... 10,000 9.93% 26.875 26.875 10-10-06 $169,015 $428,318
Eugene N. Dubay............. 2,500 2.48% 26.875 26.875 10-10-06 42,254 107,080
N. E. Duckworth............. 2,500 2.48% 26.875 26.875 10-10-06 42,254 107,080
David L. Kyle............... 8,000 7.94% 26.875 26.875 10-10-06 135,212 342,655
Jerry D. Neal............... 2,500 2.48% 26.875 26.875 10-10-06 42,254 107,080
</TABLE>
(1) Potential realizable value is the amount that would be realized upon
exercise by the named executive officer of the options immediately prior to
the expiration of their respective terms, assuming the specified compound
annual rates of appreciation on Common Stock over the respective terms of
the options. These amounts represent assumed rates of appreciation only.
Actual gains, if any, on stock option exercises depend on the future
performance of the Common Stock and overall market conditions. There can be
no assurances that the potential values reflected in this table will be
achieved.
TABLE II
AGGREGATED STOCK OPTIONS EXERCISED IN
FISCAL YEAR 1996 AND YEAR-END STOCK OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE YEAR END(#) FISCAL YEAR-END($)(1)
ON EXERCISE REALIZED ----------------------------- -----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry W. Brummett............ 0 0 17,600 -0- $ 479,600 -0-
Eugene N. Dubay.............. 0 0 -0- -0- -0- -0-
N. E. Duckworth.............. 0 0 2,500 -0- 68,125 -0-
David L. Kyle................ 0 0 11,000 -0- 299,750 -0-
Jerry D. Neal................ 0 0 2,500 -0- 68,125 -0-
</TABLE>
(1) Based on per share price for Company Common Stock of $27.25 per share. The
price reflects the average of the high and low trading price on the New
York Stock Exchange on August 30, 1996.
12
<PAGE> 15
PENSION PLANS
PENSION PLAN TABLE
ESTIMATED ANNUAL BENEFITS
UNDER FINAL-AVERAGE EARNINGS(1)(2)(3)(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000........................... $ 44,807 $ 54,274 $63,7411 $ 73,207 $ 82,674
$150,000........................... 54,182 65,680 77,178 89,676 100,174
$175,000........................... 63,557 77,086 90,616 104,145 117,674
$200,000........................... 72,932 88,492 104,053 119,614 135,174
$225,000........................... 82,307 99,899 117,491 135,082 152,674
$250,000........................... 91,682 111,305 130,928 150,551 170,174
$300,000........................... 110,432 134,117 157,803 181,489 205,174
$400,000........................... 147,932 179,742 211,553 243,364 275,174
$450,000........................... 166,682 202,555 238,428 274,301 310,174
$500,000........................... 185,432 225,367 265,303 305,239 345,174
</TABLE>
(1) For purposes of the above table, the annual Social Security Covered
Compensation benefit ($27,576) was used in the excess benefit calculation.
(2) Under the Internal Revenue Code, the annual compensation of each employee to
be taken into account under the Retirement Plan cannot exceed $150,000,
adjusted for increases in the cost of living, for plan years beginning after
December 31, 1993.
(3) Amounts are estimates only and would be subject to adjustment based on rules
and regulations applicable to the method of distribution and survivor
benefit options selected by the retiree. Retirement benefits would be
actuarially reduced for retirement prior to age 65.
(4) The compensation covered by the Retirement Plan benefit formula is the basic
salary paid to an employee within the employee's final average earnings. The
final average earnings means the employee's highest earnings during any
sixty consecutive months during the entire period of employment. For any
employee named or shown in the Summary Compensation Table who retires with
vested benefits under the Plan, the compensation shown as "salary" in the
Summary Compensation Table could be considered covered compensation in
determining benefits, except that the Plan benefit formula takes into
account only a fixed percentage of final average earnings which is uniformly
applied to all employees. The amount of covered compensation that may be
considered in calculating retirement benefits is also subject to limitations
in the Internal Revenue Code applicable to the Plan.
The RETIREMENT PLAN FOR EMPLOYEES OF ONEOK INC. AND SUBSIDIARIES
(RETIREMENT PLAN) is a tax-qualified, defined-benefit pension plan under the
Internal Revenue Code and the Employee Retirement Income Security Act of 1974.
In Plan years prior to 1989, benefits became vested and nonforfeitable after
completion of ten years of continuous employment; and in Plan years after 1988,
benefits become vested and nonforfeitable after completion of five years of
continuous employment. A vested participant receives the retirement benefit upon
attaining retirement age under the Retirement Plan notwithstanding an earlier
separation from service. Benefits (joint and survivor for married participants
unless they otherwise elect) are calculated at retirement date based on credited
service, limited to a maximum of 35 years, and final average earnings; and
monthly benefits are distributed by an insurance company. At August 31, 1996,
the executive officers named in the Summary Compensation Table had the following
credited service under the Plan, respectively: Larry W. Brummett, 21 years and 2
months; Eugene N. Dubay, 4 months; N. E. Duckworth, 35 years; David L. Kyle, 21
years and 2 months; and Jerry D. Neal, 33 years and 9 months. At retirement,
Bill M. Van Meter had 10 years and 8 months of credited service.
The maximum annual benefits for employees in higher salary classifications
retiring at age 65 with the specified years of service are as shown in the
Pension Plan Table above. There are a number of options
13
<PAGE> 16
available to a retiring employee such as the method of distribution and survivor
benefit options, which, when selected by the retiree, could result in reduced
monthly pension payments. Retirement benefits also would be actuarially reduced
for retirement prior to age 65.
The SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP) covers elected officers
of the Corporation, appointed officers of the Corporation, and certain other
highly compensated employees in the management of the Corporation who are
selected for participation by the Executive Compensation Committee and approved
by the Board of Directors and who are also eligible to receive limited benefits
from the Retirement Plan. An administrative committee interprets and administers
the SERP. The benefit payable to an employee under the SERP is equal to the
benefit which would be payable to the employee under the Retirement Plan if the
limitations prescribed by Sections 401(a)(17) and 415 of the Internal Revenue
Code of 1986, as amended, were not applicable, less the benefit payable under
the Retirement Plan with such limitations. Benefits under the SERP are paid
coincidentally with the payment of benefits under the Retirement Plan or as the
administrative committee may determine. These benefits are unfunded and are
payable from the general assets of the Corporation. The Board of Directors may
amend or terminate the SERP at any time; however, benefits accrued prior to
termination of the SERP will not be affected.
TERMINATION OF EMPLOYMENT AND
CHANGE OF CONTROL ARRANGEMENTS
On January 19, 1984, a Severance Pay Policy (Policy) was adopted, which
includes the officers of the Corporation; and termination agreements
(Termination Agreements) were authorized, which have been entered into with the
officers of the Corporation. Under the Policy, if within two years of any change
of control, employment is terminated, including voluntary termination following
a material adverse change in compensation, responsibility, and/or working
conditions, the officer would receive severance pay equal to eight weeks' pay
for each full year of service. Under the Termination Agreements, if within three
years of a change of control, an officer is terminated, including voluntary
termination under certain conditions, the officer would receive a lump-sum
termination payment equal to three times annual salary and bonus, if any, and
normal retirement and other employee benefits for three years. Change of control
occurs when a person or group acquires beneficial ownership of twenty percent
(20%) or more of the voting power of the Corporation; or if after a
transaction -- including a cash tender or exchange offer, merger or other
business combination, sale of assets, contested election, or any combination
thereof -- the directors, prior to such transaction, cease to constitute a
majority of the Board of Directors of the Corporation or its successor. Assuming
a change of control and termination of their employment on August 31, 1996, the
Executive Officers named in the Summary Compensation Table, All Current
Executive Officers as a Group, and All Other Current Officers as a Group would
have been entitled to receive the following payments under the Policy and their
Termination Agreements, respectively: Larry W. Brummett, $1,270,391 and
$1,217,896; Eugene N. Dubay, $-0- and $489,528; N. E. Duckworth, $854,729 and
$464,469; David L. Kyle, $931,921 and $917,986; and Jerry D. Neal, $848,453 and
$573,643. All Current Executive Officers as a Group, $3,905,494 and $3,663,433;
and All Other Current Officers as a Group, $5,884,391 and $6,520,846.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
As of December 12, 1996, the Board of Directors will consist of 14 members.
The Board is divided into three Classes (A, B, and C) consisting of 5, 4, and 5
members respectively. Each Class is elected for a term of three years, with the
term of one class expiring at each annual meeting of shareholders. At the Annual
Meeting to be held on December 12, 1996, five directors (Class A) are to be
elected to three-year terms expiring at the Annual Meeting of shareholders to be
held December 9, 1999, or until their successors are duly elected and qualified.
The nominees for director are: Edwyna G. Anderson, William L. Ford, Bert H.
Mackie, Gary D. Parker and Stanton L. Young. All are presently serving as
directors of the Corporation.
14
<PAGE> 17
Should any of the nominees for the office of director become unable to
accept nomination or election, it is intended that the persons named in the
accompanying form of proxy will vote for the election of such other person for
such office as the Board of Directors may recommend in the place of such
nominee.
PROPOSAL NO. 2
RATIFICATION AND APPROVAL OF APPOINTMENT OF AUDITOR
The Board of Directors, based on the recommendation of the Audit Committee,
appointed the firm of KPMG Peat Marwick LLP independent auditor to examine the
books of account and other records of the Corporation and its consolidated
subsidiaries for the 1997 Fiscal Year. The Board of Directors is asking the
shareholders to ratify and approve this action. KPMG Peat Marwick LLP has been
the Corporation's independent auditor since 1951, and the audit engagement
partner is normally rotated every five years. Representatives of the auditing
firm will be present at the meeting and will be afforded the opportunity, if
they so desire, to make a statement or respond to appropriate questions that may
come before the meeting.
Although such ratification is not required by law, the Board of Directors
believes that shareholders should be given the opportunity to express their
views on the subject. The Board has asked for such ratification since 1983.
While not binding on the Board of Directors, the failure of the shareholders to
ratify the appointment of KPMG Peat Marwick LLP as the Corporation's independent
auditor would be considered by the Board in determining whether or not to
continue with the services of KPMG Peat Marwick LLP.
SHAREHOLDER PROPOSALS
Any shareholder proposal to be presented at the Annual Meeting to be held
December 11, 1997, must be received by the Corporation on or before July 14,
1997, for inclusion in the Corporation's Proxy Statement and form of proxy
relating to that meeting.
OTHER MATTERS
The management of the Corporation knows of no other matters that are likely
to be brought before the meeting.
All shareholders who desire a copy of the Corporation's 1996 Annual Report
on Form 10-K filed with the Securities and Exchange Commission may obtain a copy
(excluding exhibits) without charge by addressing a request to the Chief
Financial Officer, ONEOK Inc., Post Office Box 871, Tulsa, Oklahoma 74102-0871.
Tulsa, Oklahoma
November 7, 1996
15
<PAGE> 18
APPENDIX
<PAGE> 19
DESCRIPTION OF BUSINESS CONDUCTED BY ONEOK INC. AND SUBSIDIARIES
ONEOK Inc. and its subsidiaries (collectively, the "Company") is a
diversified energy company primarily engaged in the production, gathering,
storage, transportation, distribution and marketing of natural gas, the
development and production of oil and gas, and the extraction and marketing of
natural gas liquids.
Oklahoma Natural Gas Company, a division of ONEOK Inc., and three
subsidiaries, ONG Transmission Company, ONG Gas Gathering Company and ONG Sayre
Storage Company, comprise a fully integrated intrastate natural gas gathering,
storage, distribution and transmission business. They are consolidated for
ratemaking purposes and regulated by the Oklahoma Corporation Commission.
Natural gas is sold to wholesale and retail customers located primarily in the
state of Oklahoma. Pipeline capacity is leased to industrial customers for their
use in transporting natural gas to their facilities. ONG Transmission Company
transports gas for others under Section 311 of the Natural Gas Policy Act of
1978. Oklahoma Natural Gas Company serves approximately seventy-five percent of
Oklahoma with a population estimated at over two million people.
ONEOK Gas Marketing Company purchases and markets natural gas, primarily in
the mid-continent area of the United States, as an interstate aggregator. ONEOK
Products Company owns interests in gas processing plants which extract natural
gas liquids which are then separated into component products (ether, butane,
propane and isobutane) and sold. These products are used for petrochemical
feedstock, for residential heating and cooking in rural areas and blended into
motor fuels. ONEOK Resources Company is in the oil and gas development and
production business, primarily in Oklahoma.
The Company, through two subsidiaries, ONEOK Parking Company and ONEOK
Leasing Company, owns a parking garage and leases an office building used for
its headquarters in downtown Tulsa, Oklahoma, with excess office space leased to
others.
1
<PAGE> 20
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of ONEOK Inc. is responsible for all information included in
the Annual Report, whether audited or unaudited. The financial statements have
been prepared in accordance with generally accepted accounting principles,
applied in a consistent manner, and necessarily include some amounts that are
based on the best estimates and judgments of management.
Management maintains a system of internal accounting policies, procedures,
and controls designed to provide reasonable assurance that assets are
safeguarded against loss or unauthorized use and that the financial records are
reliable for preparing financial statements. ONEOK Inc. maintains an internal
auditing staff responsible for evaluating the adequacy and application of
financial and operating controls and for testing compliance with management's
policies and procedures.
The accompanying consolidated financial statements of ONEOK Inc. and
subsidiaries as of August 31, 1996 and 1995, and for each of the years in the
three-year period ended August 31, 1996, have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. Their audits include reviews of
the system of internal controls to the extent considered necessary to determine
the audit procedures required to support their opinion on the consolidated
financial statements. The Independent Auditors' Report appears herein.
The Board of Directors performs its oversight role for reviewing the
accounting and auditing procedures and financial reporting of ONEOK Inc. through
its Audit Committee. Both KPMG Peat Marwick LLP and our internal auditors have
free access to the Committee, without the presence of management, to discuss
accounting, auditing, and financial reporting matters.
2
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
ONEOK Inc.:
We have audited the accompanying consolidated balance sheets of ONEOK Inc.
and subsidiaries as of August 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended August 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ONEOK Inc.
and subsidiaries as of August 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, effective
March 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
KPMG Peat Marwick LLP
Tulsa, Oklahoma
October 10, 1996
3
<PAGE> 22
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------------
1996 1995 1994
---------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating Revenues
Regulated................................................ $ 538,169 $594,923 $616,090
Nonregulated:
Marketing............................................. 598,300 266,426 78,576
Processing............................................ 58,395 64,874 64,735
Production............................................ 25,479 24,042 23,024
Other 4,002 3,930 1,642
---------- -------- --------
Total Nonregulated............................... 686,176 359,272 167,977
---------- -------- --------
Total Operating Revenues......................... 1,224,345 954,195 784,067
---------- -------- --------
Operating Expenses
Cost of gas.............................................. 807,694 574,513 426,634
Operations and maintenance............................... 201,259 200,443 190,118
Depreciation, depletion, and amortization................ 72,868 53,480 56,243
General taxes............................................ 21,489 20,246 19,043
Income taxes............................................. 33,037 25,342 21,095
---------- -------- --------
Total Operating Expenses......................... 1,136,347 874,024 713,133
---------- -------- --------
Operating Income................................. 87,998 80,171 70,934
---------- -------- --------
Interest
Interest on long-term debt............................... 31,748 32,401 32,988
Other interest........................................... 3,184 4,878 1,846
Amortization of debt expense............................. 530 512 525
Allowance for funds used during construction............. (300) (424) (606)
---------- -------- --------
Net Interest..................................... 35,162 37,367 34,753
---------- -------- --------
Net Income................................................. 52,836 42,804 36,181
Preferred Stock Dividends.................................. 428 428 428
---------- -------- --------
Income Available for Common Stock................ $ 52,408 $ 42,376 $ 35,753
========== ======== ========
Earnings Per Share of Common Stock......................... $ 1.93 $ 1.58 $ 1.34
========== ======== ========
Average Shares of Common Stock Outstanding (Thousands)..... 27,136 26,862 26,674
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 23
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
1996 1995
---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Property
Distribution system.......................................................... $ 802,910 $ 680,446
Transmission system.......................................................... 258,870 338,596
Gas storage.................................................................. 4,195 4,235
Gas gathering................................................................ 34,196 45,433
Oil and gas production....................................................... 143,996 120,223
Gas processing............................................................... 75,512 70,363
Other........................................................................ 16,973 16,447
---------- ----------
Total Property........................................................ 1,336,652 1,275,743
Accumulated depreciation, depletion, and amortization................. 541,618 509,833
---------- ----------
Net Property.......................................................... 795,034 765,910
---------- ----------
Current Assets
Cash and cash equivalents.................................................... 598 12,499
Accounts and notes receivable................................................ 119,338 81,768
Materials and supplies....................................................... 5,136 5,803
Gas in storage............................................................... 86,420 76,320
Advance payments for gas..................................................... 5,764 6,214
Deferred income taxes........................................................ -- 3,440
Purchased gas cost adjustment................................................ 11,677 --
Other current assets......................................................... 4,213 10,042
---------- ----------
Total Current Assets.................................................. 233,146 196,086
---------- ----------
Deferred Charges and Other Assets
Investments.................................................................. 2,279 17,077
Regulatory assets, net....................................................... 155,253 166,923
Other........................................................................ 34,179 35,200
---------- ----------
Total Deferred Charges and Other Assets............................... 191,711 219,200
---------- ----------
Total Assets.......................................................... $1,219,891 $1,181,196
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Common Shareholders' Equity
Common Stock without par value: authorized 60,000,000 share; issued and
outstanding 27,260,646 and 27,020,004 shares in 1996 and 1995.............. $ 207,084 $ 201,404
Retained earnings............................................................ 207,611 187,225
---------- ----------
Total Common Shareholders' Equity..................................... 414,695 388,629
Preferred stock: $50 par and involuntary liquidation value; $53 voluntary
liquidation value; Series A and B, 4 3/4% (cumulative); authorized 340,000
shares; issued 180,000 shares of Series A in 1996 and 1995................... 9,000 9,000
---------- ----------
Total Shareholders' Equity............................................ 423,695 397,629
---------- ----------
Long-Term Debt................................................................. 336,821 350,821
Current Liabilities
Long-term debt............................................................... 15,050 13,050
Notes payable................................................................ 50,223 55,275
Accounts payable............................................................. 96,872 58,174
Accrued taxes................................................................ 10,820 15,448
Accrued interest............................................................. 7,732 7,922
Purchased gas cost adjustment................................................ -- 2,706
Customers' deposits.......................................................... 6,316 6,759
Deferred income taxes........................................................ 3,427 --
Other........................................................................ 12,190 13,239
---------- ----------
Total Current Liabilities............................................. 202,630 172,573
---------- ----------
Deferred Credits and Other Liabilities
Deferred income taxes........................................................ 180,620 189,330
Customers' advances for construction
and other deferred credits................................................. 76,125 70,843
---------- ----------
Total Deferred Credits and Other Liabilities.......................... 256,745 260,173
---------- ----------
Commitments and Contingencies.................................................. -- --
---------- ----------
Total Liabilities and Shareholders' Equity............................ $1,219,891 $1,181,196
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 24
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating Activities
Net Income............................................... $ 52,836 $ 42,804 $ 36,181
Depreciation, depletion, and amortization................ 72,868 53,480 56,243
Net losses of equity investees........................... 173 811 1,455
Deferred income taxes.................................... (2,038) (15,270) 10,021
Other.................................................... (5,675) 613 (528)
Changes in assets and liabilities:
(Increase) decrease in accounts and notes
receivable.......................................... (37,570) (32,726) 2,466
(Increase) decrease in inventories.................... (9,433) 12,331 (1,547)
(Increase) decrease in other assets................... 8,027 5,816 (1,812)
(Increase) decrease in regulatory assets.............. 1,431 (2,981) (24,866)
Increase (decrease) in accounts payable and
accrued liabilities................................. 33,532 22,400 2,733
Changes in purchased gas cost adjustment.............. (14,383) 14,515 (20,658)
(Increase) decrease in deferred credits and other
liabilities......................................... 5,282 7,766 20,586
-------- -------- -------
Cash provided by operating activities............ 105,050 109,559 80,274
-------- -------- -------
Investing Activities
(Increase) decrease in other investments................. -- 5,226 (2,324)
Proceeds from sale of investment......................... -- 10,901 --
Capital expenditures, net................................ (89,582) (80,982) (73,999)
Proceeds from sale of property........................... 17,597 1,556 7,966
-------- -------- -------
Cash used in investing activities................ (71,985) (63,299) (68,357)
-------- -------- -------
Financing Activities
Payments of long-term debt............................... (12,000) (12,971) (15,000)
Net issuance (payments) of notes payable................. (5,052) 5,170 28,000
Dividends paid........................................... (27,914) (30,505) (30,039)
-------- -------- -------
Cash used in financing activities................ (44,966) (38,306) (17,039)
-------- -------- -------
Change in Cash and Cash Equivalents........................ (11,901) 7,954 (5,122)
Cash and Cash Equivalents at the Beginning of Year......... 12,499 4,545 9,667
-------- -------- --------
Cash and Cash Equivalents at End of Year................... $ 598 $ 12,499 $ 4,545
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 25
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHAREHOLDERS' EQUITY
----------------------------------
COMMON RETAINED PREFERRED
STOCK EARNINGS TOTAL STOCK
-------- -------- -------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance at September 1, 1993..................... $194,365 $168,784 $363,149 $ 9,000
Net income..................................... -- 36,181 36,181 --
Issuance of common stock....................... 1,203 -- 1,203 --
Preferred stock dividends --
$2.375 per share............................ -- (428) (428) --
Common stock dividends --
$1.11 per share............................. -- (29,611) (29,611) --
-------- -------- -------- ------
Balance at August 31, 1994....................... $195,568 $174,926 $370,494 $ 9,000
======== ======== ======== ======
Balance at September 1, 1994..................... $195,568 $174,926 $370,494 $ 9,000
Net income..................................... -- 42,804 42,804 --
Issuance of common stock....................... 5,836 -- 5,836 --
Preferred stock dividends --
$2.375 per share............................ -- (428) (428) --
Common stock dividends --
$1.12 per share............................. -- (30,077) (30,077) --
-------- -------- -------- ------
Balance at August 31, 1995....................... $201,404 $187,225 $388,629 $ 9,000
======== ======== ======== ======
Balance at September 1, 1995..................... $201,404 $187,225 $388,629 $ 9,000
Net income..................................... -- 52,836 52,836 --
Issuance of common stock....................... 5,680 -- 5,680 --
Preferred stock dividends --
$2.375 per share............................ -- (428) (428) --
Common stock dividends --
$1.18 per share............................. -- (32,022) (32,022) --
-------- -------- -------- -------
Balance at August 31, 1996....................... $207,084 $207,611 $414,695 $ 9,000
======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 26
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- ONEOK Inc. and subsidiaries (collectively, the
Company) is a diversified energy company engaged in the production, processing,
storage, transportation, distribution and marketing of environmentally clean
fuels and products. The Company's business units are characterized as operating
within either a rate regulated environment (Regulated Operations) or a
nonregulated environment (Nonregulated Operations). The regulated business units
provide natural gas distribution and transmission for about 75 percent of
Oklahoma and during 1996 generated approximately 80 percent of operating income
before income taxes. The nonregulated business has segments involved in various
aspects of natural gas marketing, processing and production. The Company's other
segment, whose results of operations are not material, operate and lease the
Company's headquarters building and parking facility.
CONSOLIDATION -- The consolidated financial statements include the accounts
of ONEOK Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REGULATION -- The regulated operations of the Company are primarily subject
to the rate regulation and accounting requirements of the Oklahoma Corporation
Commission (OCC). Certain other regulated activities of the Company are subject
to regulation by the Federal Energy Regulatory Commission (FERC) and the
Railroad Commission of Texas. Allocation of costs and revenues to accounting
periods for ratemaking and regulatory purposes may differ from bases generally
applied by nonregulated companies. Such allocations to meet regulatory
accounting requirements are considered to be generally accepted accounting
principles for regulated utilities provided that there is a demonstrable ability
to recover any deferred costs in future rates.
REVENUE RECOGNITION -- The Company recognizes revenue when services are
rendered or product is delivered. Major industrial and commercial gas
distribution customers are invoiced as of the end of each month. Certain gas
distribution customers, primarily residential and some commercial, are invoiced
on a cycle basis throughout each month, and the Company accrues unbilled
revenues at the end of each month. Beginning in 1996, the Company's rate tariff
for residential and commercial customers contains a temperature normalization
clause that provides for billing adjustments from actual volumes to normalized
volumes during the winter heating season. Revenues from marketing, processing
and production are recognized on the sales method. Credit is granted to these
customers under customary terms.
REGULATED PROPERTY -- Regulated distribution, transmission, and storage
property is stated at cost. Such cost includes personnel costs, general and
administrative costs, and an allowance for funds used during construction. The
allowance for funds used during construction represents the capitalization of
estimated average cost of borrowed funds (8.50 percent, 8.24 percent, and 8.21
percent, in 1996, 1995, and 1994, respectively) used during the construction of
major projects and is recorded as a credit to earnings.
Depreciation is calculated using the straight-line method based upon rates
prescribed for ratemaking purposes. The average depreciation rate approximated
3.6 percent in 1996, 3.7 percent in 1995, and 3.8 percent in 1994.
Maintenance and repairs are charged directly to expense. Generally, the
cost of property retired or sold, plus removal costs, less salvage, is charged
to accumulated depreciation. Gains and losses from sales or transfers of
operating units or systems are recognized in income.
PRODUCTION PROPERTY -- The Company uses the successful-efforts method to
account for costs incurred in the acquisition and exploration of oil and natural
gas reserves. Costs to acquire mineral interests in proved reserves, and to
drill and equip development wells are capitalized. Geological and geophysical
costs and costs to drill exploratory wells which do not find proved reserves are
expensed. Unproved oil and gas properties which are individually significant are
periodically assessed for impairment of value, and a loss is recognized at
8
<PAGE> 27
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the time of impairment by providing an impairment allowance. The remaining
unproved oil and gas properties are aggregated, and an overall impairment
allowance is provided based on the Company's experience.
Depreciation and depletion are calculated using the unit-of-production
method based upon periodic estimates of oil and gas reserves. Undeveloped
properties are amortized based upon remaining lease terms and exploratory and
developmental drilling experience.
OTHER PROPERTY -- Gas processing plants and all other properties are stated
at cost. Gas processing plants are depreciated using various rates based on
estimated lives of available gas reserves. All other property and equipment is
depreciated using the straight-line method over its estimated useful life.
INVENTORIES -- Materials and supplies are priced at average cost.
Noncurrent gas in storage is classified as property and is priced at cost.
Current gas in storage is valued using the last-in, first-out method. The
estimated replacement cost of current gas in storage was $81.5 million at August
31, 1996, and $72.4 million at August 31, 1995.
INCOME TAXES -- Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is deferred and amortized for
the OCC regulated operations and, for nonregulated operations, is recognized in
income in the period that includes the enactment date. The Company continues to
amortize previously deferred investment tax credits on gas distribution and
transmission properties over the period prescribed by the OCC for ratemaking
purposes.
COMMODITY PRICE RISK MANAGEMENT -- To minimize the risk from market
fluctuations in the price of natural gas and oil, the Company enters into
futures transactions, swaps and options in order to hedge existing physical gas
purchase or sale commitments. Gains and losses resulting from changes in market
value of the various derivative instruments utilized as hedges are recognized in
income when the underlying physical transaction is closed.
IMPAIRMENTS -- Effective March 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recognized for long-lived assets when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the assets carrying amount. The impairment loss is measured by comparing
the fair value of the asset to its carrying amount. Fair values are based on
discounted future cash flows or information provided by sales and purchases of
similar assets. Under SFAS No. 121, the Company now evaluates impairment of
production assets on a field by field basis rather than using a total company
basis for its proved properties. As a result, the Company recognized a pre-tax
impairment loss of $8.6 million in 1996, such loss is included in depreciation,
depletion and amortization expense.
USE OF ESTIMATES -- Management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
EARNINGS PER COMMON SHARE -- The computation of earnings per common share
is based on the weighted average number of shares of common stock outstanding.
Unexercised stock options do not have a material dilutive effect on the reported
amount of earnings per common share.
COMMON STOCK OPTIONS AND AWARDS -- The Company follows the intrinsic value
method of accounting for common stock options and awards issued to employees.
9
<PAGE> 28
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS -- Items classified as cash equivalents for the
purpose of the Consolidated Statements of Cash Flows include highly liquid
temporary investments, with original maturities of three months or less, in
"money market" or "pooled" investment accounts backed by government securities,
bank certificates of deposit, or bank lines of credit.
RECLASSIFICATION -- Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform with the 1996
presentation.
(B) REGULATORY ASSETS
The following table is a summary of regulatory assets, net of amortization:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1996 1995
-------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Recoupable take-or-pay settlements............................. $100,155 $104,746
Pension costs.................................................. 33,426 37,607
Postretirement costs other than pensions....................... 9,386 10,603
Postemployment benefit costs................................... 2,975 2,975
Income tax rate changes........................................ 8,354 8,887
Unamortized gas storage costs.................................. 957 2,105
-------- --------
Regulatory assets, net......................................... $155,253 $166,923
======== ========
</TABLE>
The Company incurred approximately $3.1 million of recoupable costs
attributable to resolutions of take-or-pay and pricing issues during 1995. No
additional costs were incurred in 1996. The OCC has authorized recovery of the
take-or-pay settlement costs through a combination of a surcharge to customers
and revenues derived from certain transportation customers.
The pension and postretirement benefit costs previously deferred are
currently being recovered through revenue and are being amortized to expense
over a 10 to 18 year period. As discussed in note G, the OCC also approved
recovery of pension and postretirement benefit costs through rates. The Company
anticipates that postemployment benefit costs will be recovered in future rate
filings. Amortization expense related to regulatory assets was approximately
$11.7 million, $8.2 million, and $3.1 million in 1996, 1995, and 1994,
respectively. An additional $2.1 million was recovered through gas purchase
expense during 1995.
(C) LINES OF CREDIT AND SHORT-TERM NOTES PAYABLE
At August 31, 1996, the Company had a short-term unsecured credit agreement
with several banks pursuant to which the banks have agreed to make loans to the
Company from time to time in an aggregate amount not to exceed $125 million at
any one time for general corporate purposes. The short-term credit agreement
provides a back-up line of credit for short-term debt from other sources in
addition to providing short-term funds. The facility fee requirement for this
line of credit is .075 percent applied annually to the total line of credit.
Borrowings under the agreement bear interest at offshore IBOR rates plus .200
percent per annum. No compensating balance requirements existed at August 31,
1996. A master note with Bank of America provides an additional $30 million of
borrowing capability.
Short-term notes payable totaling $50.2 million at August 31, 1996, and
$55.3 million at August 31, 1995, were outstanding. The notes carried average
interest rates of 5.61 percent and 6.16 percent, respectively.
10
<PAGE> 29
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(D) LONG-TERM DEBT
All long-term notes payable at August 31, 1996, are unsecured. The
aggregate current maturities of long-term debt for each of the five years ending
August 31, 2001, are $15.1 million; $15.1 million; $13.1 million; $16.1 million;
and $14.7 million, respectively, including $1.1 million each year callable at
the option of the holder.
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1996 1995
-------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Long-Term Notes Payable
5.00% due 1996........................................................ $ -- $ 12,000
5.57% due 1997........................................................ 14,000 14,000
5.90% due 1998........................................................ 10,000 10,000
6.20% due 1999........................................................ 8,000 8,000
6.43% due 2000........................................................ 5,000 5,000
8.32% due 2007........................................................ 40,000 40,000
8.44% due 2004........................................................ 40,000 40,000
8.70% due 2021........................................................ 34,871 34,871
9.70% due 2019........................................................ 125,000 125,000
9.75% due 2020........................................................ 75,000 75,000
-------- --------
Total......................................................... $351,871 363,871
-------- --------
Current maturities of long-term debt.................................... 15,050 13,050
-------- --------
Long-term notes payable................................................. $336,821 $350,821
======== ========
</TABLE>
(E) CAPITAL STOCK
The holders of Series A preferred stock have full voting rights (two votes
per share) and may redeem those shares in whole or in part at any time at the
option of the Company. Holders are entitled to $53 per share, plus all dividends
accrued or in arrears thereon, upon voluntary redemption or liquidation and $50
per share upon involuntary liquidation. No dividends were in arrears at August
31, 1996.
The Company has authorized three million shares of preference stock, none
of which was outstanding at August 31, 1996, and approximately 28 million shares
of unrestricted common stock available for issue. The Board has reserved two
million shares of the Company's common stock for the Direct Stock Purchase and
Dividend Reinvestment Plan of which 192,228 shares were issued in 1996; and has
reserved approximately three million shares for the Thrift Plan for Employees of
ONEOK Inc. and Subsidiaries.
In 1996, the Company approved the Key Employee Stock Plan which provides
for compensation of certain officers and key employees with common stock or cash
through various types of awards, including stock options, stock bonus,
performance units and restricted stock. To date, 100,000 fixed options have been
granted at an exercise price of $23.69; no options are exercisable by the
employee until November 1996. No other awards have been granted. The Stock
Performance Plan expired in 1996. During 1995, $1.9 million was expensed and
48,414 shares of common stock were issued in conjunction with this predecessor
plan. No amounts were expensed in 1994. The Board has reserved 1,000,000 shares
of common stock for this plan.
Also in 1996, the Company approved the Employee Stock Purchase Plan which
is a non-compensatory plan that allows substantially all employees to purchase
common stock at a 15 percent discount. The Board has reserved 350,000 shares of
common stock for this plan.
Under the most restrictive covenants of the Company's loan agreements,
$192.4 million (87.5 percent) of retained earnings at August 31, 1996, was
available to pay dividends.
11
<PAGE> 30
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(F) INCOME TAXES
The provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current income taxes
Federal............................................. $29,926 $ 34,837 $ 9,874
State............................................... 5,150 5,775 1,201
------- ------- -------
Total current income taxes.................. $35,076 $ 40,612 $11,075
======= ======= =======
Deferred income taxes
Federal............................................. $(1,766) $(13,007) $ 8,555
State............................................... (272) (2,263) 1,466
------- -------- -------
Total deferred income taxes................. $(2,038) $(15,270) $10,021
======= ======== =======
</TABLE>
Following is a reconciliation of the provision for income taxes.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Pretax income.......................................... $85,874 $68,146 $57,277
Federal statutory income tax rate...................... 35.00% 35.00% 35.00%
------- ------- -------
Provision for federal income taxes..................... 30,056 23,851 20,047
Amortization of distribution property investment tax
credits.............................................. (727) (739) (739)
State income taxes, net of credits and federal tax
benefit.............................................. 3,548 2,372 1,549
Other, net............................................. 160 (142) 238
------- ------- -------
Actual income tax expense.................... $33,037 $25,342 $21,095
======= ======= =======
</TABLE>
At August 31, 1996, the Company had $2.1 million in deferred investment tax
credits recorded in other deferred credits which will be amortized over the next
three years.
12
<PAGE> 31
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities are shown in the
accompanying table.
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1996 1995
-------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred Tax Assets
Investment write-down................................................ $ 1,373 $ 1,373
Accrued liabilities not deductible until paid........................ 7,016 5,099
Net operating loss carryforwards..................................... 754 800
Regulatory assets.................................................... 2,601 5,518
Other................................................................ 2,052 1,789
-------- --------
Total deferred tax assets.................................... 13,796 14,579
Valuation allowance for net operating loss carryforwards expected to
expire prior to utilization.......................................... 754 800
-------- --------
Net deferred tax assets...................................... 13,042 13,779
Deferred Tax Liabilities
Excess of tax over book depreciation and depletion................... 133,207 131,485
Investment in joint ventures......................................... -- 5,394
Regulatory assets.................................................... 60,753 59,294
Other................................................................ 3,129 3,496
-------- --------
Gross deferred tax liabilities............................... 197,089 199,669
-------- --------
Net Deferred Tax Liabilities................................. $184,047 $185,890
======== ========
</TABLE>
The Company had remaining net operating loss carry-forwards for state
income tax purposes of approximately $13.3 million at August 31, 1996, which
expire, unless previously utilized, at various dates through the year 2009.
(G) EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN -- The Company has a defined benefit retirement plan
covering substantially all employees. Company officers and certain key employees
are also eligible to participate in a supplemental retirement plan.
Net pension costs, as determined by an independent actuary, included the
following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost......................................... $ 5,957 $ 6,078 $ 6,518
Interest cost........................................ 23,525 22,659 20,599
Actual return on assets.............................. (72,138) (27,438) (12,404)
Net amortization and deferral........................ 50,337 6,920 (6,761)
-------- -------- --------
Net pension cost........................... $ 7,681 $ 8,219 $ 7,952
======== ======== ========
</TABLE>
13
<PAGE> 32
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company generally funds pension costs at a level at least equal to the
minimum amount required under the Employee Retirement Income Security Act of
1974. The accompanying table sets forth the funded status of the Company's
plans, as determined by the independent actuary.
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
1996 1995
--------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of vested benefit obligation.................. $(268,296) $(254,138)
Accumulated benefit obligation........................................ (281,363) (266,227)
Projected benefit obligation.......................................... (314,866) (311,526)
Plan assets at fair value, principally equity securities and an IPG
fund................................................................ 328,459 269,180
--------- ---------
Plan assets more (less) than projected benefit obligation... 13,593 (42,346)
Unrecognized net loss................................................. (863) 59,172
Unrecognized prior service cost....................................... 149 672
Unrecognized net asset................................................ (3,739) (4,206)
--------- ---------
Prepaid pension cost........................................ $ 9,140 $ 13,292
========= =========
</TABLE>
The projected benefit obligation was determined using an annual discount
rate of 7.75 percent for 1996 and 1995; a long-term rate of return on plan
assets of 8 percent and 9 percent for 1996 and 1995, respectively; and an
average assumed long-term annual rate of salary increases of 4 percent and 5
percent for 1996 and 1995, respectively.
OTHER POSTRETIREMENT BENEFIT PLANS -- The Company sponsors a defined
benefit health care plan that provides postretirement medical benefits and life
and accidental death and dismemberment benefits to substantially all employees
who reach normal retirement age while working for the Company. The plan is
contributory, with retiree contributions adjusted periodically, and contains
other cost-sharing features such as deductibles and coinsurance. The Company
began funding the plan in September 1996.
The Company elected to delay recognition of the accumulated postretirement
benefit obligation (APBO) of approximately $72.2 million and amortize it over 20
years as a component of net periodic postretirement benefit cost.
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1996 1995
------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Service cost...................................................... $ 1,704 $ 1,820
Interest cost..................................................... 5,668 5,282
Net amortization and deferral..................................... 3,608 3,608
------- -------
Net periodic postretirement benefit cost................ $10,980 $10,710
======= =======
</TABLE>
For measurement purposes, an 8.85 percent annual rate of increase in the
per capita cost of covered medical benefits (i.e., medical cost trend rate) was
assumed for 1996, the rate was assumed to decrease gradually to 5.0 percent by
the year 2003 and remain at that level thereafter. The medical cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed medical cost trend rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation as of
August 31, 1996, by $10.9 million and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year ended
August 31, 1996, by $1.4 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75 percent at August 31, 1996.
14
<PAGE> 33
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet.
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation
Retirees.............................................................. $(49,500) $(48,164)
Fully eligible active plan participants............................... (3,246) (4,176)
Other active plan participants........................................ (21,708) (22,868)
-------- --------
Accumulated postretirement benefit obligation................. (74,454) (75,208)
Unrecognized transition obligation...................................... 61,341 64,949
Unrecognized net gain................................................... (9,071) (6,050)
-------- --------
Accrued postretirement benefit cost........................... $(22,184) $(16,309)
======== ========
</TABLE>
EMPLOYEE THRIFT PLAN -- The Company has a Thrift Plan covering all
employees. Employee contributions are discretionary. Subject to certain limits,
employee contributions are matched by the Company. The annual cost of the plan
was $3.7 million in 1996; $3.4 million in 1995; and $3.7 million in 1994.
POSTEMPLOYMENT BENEFITS -- The Company pays postemployment benefits to
former or inactive employees after employment but before normal retirement.
REGULATORY TREATMENT -- The OCC has approved the recovery of pension costs
and other postretirement benefit costs through rates. The costs recovered
through rates are based on current funding requirements and the net periodic
postretirement benefit cost for pension and postretirement costs, respectively.
Differences, if any, between the expense and the amount ordered through rates
are charged to earnings.
(H) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FINANCIAL INSTRUMENTS -- The following table presents the carrying amounts
and fair values of certain of the Company's financial instruments. Fair value is
defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The estimated fair value of long term debt
and notes payable have been determined using quoted market prices of same or
similar issues, discounted cash flows and/or rates currently available to the
Company for debt with similar terms and remaining maturities. The fair value of
natural gas and oil swaps, options and futures contracts generally reflect the
estimated amounts that the Company would pay or receive to terminate the
contracts at the reporting date, thereby taking into account the unrealized
gains and losses on open contracts. There is no readily available market for
15
<PAGE> 34
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
natural gas swaps. The items presented without a carrying value are off-balance
sheet financial instruments. All of the Company's financial instruments are held
for purposes other than trading.
<TABLE>
<CAPTION>
BOOK APPROXIMATE
VALUE FAIR VALUE
-------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
AUGUST 31, 1996
Cash and cash equivalents.......................................... $ 598 $ 598
Accounts and notes receivable...................................... $119,338 $ 119,338
Natural gas swaps.................................................. -- $ 2,924
Natural gas options................................................ -- $ 78
Long-term debt and notes payable................................... $351,871 $ 377,383
AUGUST 31, 1995
Cash and cash equivalents.......................................... $ 12,499 $ 12,499
Accounts and notes receivable...................................... $ 81,768 $ 81,768
Long-term debt and notes payable................................... $363,871 $ 393,000
</TABLE>
RISK MANAGEMENT -- The Company's gas marketing, processing and production
operations subject the Company's earnings to variability based on fluctuations
in both the market price and transportation costs of natural gas and oil. The
Company's exposure arises from fixed price purchase or sale agreements which
extend for periods of up to 48 months. In order to mitigate the financial risks
associated with such activities the Company routinely enters into natural gas
and oil futures contracts, swaps and options, collectively referred to herein as
derivatives. Net open positions in terms of price, volume and specified delivery
point do occur.
The futures contracts are purchased and sold on the New York Mercantile
Exchange (NYMEX ) and require the Company to buy or sell natural gas at a fixed
price. Swap agreements generally require one party to make payments based on the
difference between a fixed price or fixed differential from the NYMEX price
while the other party pays a price based on a published index. Swaps and options
allow the Company to commit to purchase gas at one location and sell it at
another location without assuming unacceptable risk with respect to changes in
the price of the gas or the cost of the intervening transportation. Natural gas
options held to hedge price risk provide the right, but not the requirement, to
buy or sell natural gas at a fixed price. The Company utilizes options to manage
margins and to limit overall price risk exposure. None of these derivatives are
held for speculative purposes and, in general, the Company's risk management
policy requires that positions taken with derivatives be offset by positions in
physical transactions or other derivatives.
The total notional value of futures purchased and sold is $99.6 million and
$101 million, respectively, at August 31, 1996. The term "notional amount"
refers to the current contract unit price times the contract volume for the
relevant derivative. In general, such amounts are not indicative of the cash
requirements associated with these derivatives. The notional amount is intended
to be indicative of the Company's level of activity in such derivatives,
although the amounts at risk are significantly smaller because, in general,
changes in market value of these derivatives are offset by changes in the value
associated with the underlying physical transaction or other derivatives.
<TABLE>
<CAPTION>
AUGUST 31, 1996
--------------------------------------
ESTIMATED FAIR
VOLUME VOLUME MARKET VALUE
PURCHASED SOLD GAIN (LOSS)(A)
--------- ------- --------------
(VOLUMES IN MCF, THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Options.................................................... -- 1,335 $ 78
Swaps...................................................... 178,632 178,432 $2,924
Futures.................................................... 54,680 53,460 $1,935
</TABLE>
16
<PAGE> 35
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) Represents the estimated amount which would have been recognized upon
termination of the relevant derivatives as of the date indicated. The amount
which is ultimately charged or credited to earnings is affected by subsequent
changes in the market value of these derivatives.
There were no material amounts of options, swaps or contracts outstanding
at August 31, 1995 and 1994.
NYMEX-traded futures and option contracts are guaranteed by NYMEX and have
nominal credit risk. All other derivative transactions expose the Company to
off-balance sheet risk in the event of non-performance by the counterparts. In
order to minimize this risk, the Company analyzes each counterparts financial
condition prior to entering into an agreement, establishes credit limits and
monitors the appropriateness of these limits on an on-going basis. Swap
agreements are generally settled at the expiration of the contract term and may
be subject to margin requirements with the counterparty. NYMEX traded futures
and options contracts require daily cash settlement in margin accounts with
brokers.
(I) SEGMENT INFORMATION
The Company conducts its business through five reporting segments: (1)
Oklahoma Natural Gas, which includes gathering, transmission, storage, and
distribution of natural gas, transportation of gas for others, and leasing
pipeline capacity; (2) Marketing, which purchases and markets natural gas; (3)
Processing, which includes extracting and selling natural gas liquids; (4)
Production, which includes exploiting, producing, and selling natural gas and
oil; and (5) Other, which includes operating and leasing the Company's
headquarters building and a related parking facility, and the Company's former
contract drilling business, which was sold effective May 1, 1994.
Following is information relative to the Company's operations in different
segments.
<TABLE>
<CAPTION>
OKLAHOMA
NATURAL
GAS MARKETING PROCESSING PRODUCTION OTHER TOTAL
-------- --------- ---------- ---------- ----- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated
customers.................... $ 538.2 $ 598.3 $ 58.4 $ 25.5 $ 4.0 $1,224.4
Intersegment sales.............. 2.2 15.5 12.7 7.9 26.0 64.3
------- ------- ------ ------ ----- --------
Total revenues.......... $ 540.4 $ 613.8 $ 71.1 $ 33.4 $30.0 $1,288.7
------- ------- ------ ------ ----- --------
Operating income (loss) before
interest and income taxes....... $ 97.3 $ 12.9 $ 9.0 $ 2.8 $(1.0) $ 121.0
Identifiable assets............... $1,019.4 $ 71.2 $ 26.7 $ 73.2 $29.4 $1,219.9
Depreciation, depletion, and
amortization.................... $ 50.8 $ 0.5 $ 2.0 $ 19.2 $ 0.4 $ 72.9
Capital expenditures.............. $ 42.9 $ 0.4 $ 5.2 $ 46.7 $ 0.2 $ 95.4
======= ======= ====== ====== ===== ========
1995
Sales to unaffiliated
customers.................... $ 594.9 $ 266.4 $ 64.9 $ 24.1 $ 3.9 $ 954.2
Intersegment sales.............. 1.8 62.9 0.0 0.8 12.4 77.9
------- ------- ------ ------ ----- --------
Total revenues.......... $ 596.7 $ 329.3 $ 64.9 $ 24.9 $16.3 $1,032.1
------- ------- ------ ------ ----- --------
Operating income (loss) before
income taxes.................... $ 91.6 $ 4.8 $ 6.3 $ 3.6 $(0.8) $ 105.5
Identifiable assets............... $1,023.0 $ 41.4 $ 25.2 $ 60.0 $31.6 $1,181.2
Depreciation, depletion, and
amortization.................... $ 41.3 $ 0.1 $ 1.8 $ 10.0 $ 0.3 $ 53.5
Capital expenditures.............. $ 55.8 $ 0.9 $ 1.2 $ 25.0 $ 0.1 $ 83.0
======= ======= ====== ====== ===== ========
</TABLE>
17
<PAGE> 36
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OKLAHOMA
NATURAL
GAS MARKETING PROCESSING PRODUCTION OTHER TOTAL
-------- --------- ---------- ---------- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
1994
Sales to unaffiliated
customers.................... $ 616.1 $ 78.6 $ 64.8 $ 23.0 $ 1.6 $ 784.1
Intersegment sales.............. 1.7 91.6 0.6 1.5 10.9 106.3
------- ------- ------ ------ ----- --------
Total revenues.......... $ 617.8 $ 170.2 $ 65.4 $ 24.5 $12.5 $ 890.4
------- ------- ------ ------ ----- --------
Operating income (loss) before
income taxes.................... $ 87.8 $ 3.8 $ 3.4 $ 0.7 $(3.7) $ 92.0
Identifiable assets............... $1,011.0 $ 7.5 $ 28.8 $ 42.8 $58.0 $1,148.1
Depreciation, depletion, and
amortization.................... $ 41.3 $ 0.0 $ 1.9 $ 12.2 $ 0.9 $ 56.3
Capital expenditures.............. $ 62.2 $ 0.0 $ 2.7 $ 8.3 $ 0.7 $ 73.9
======= ======= ====== ====== ===== ========
</TABLE>
(J) COMMITMENTS AND CONTINGENCIES
LEASES -- The initial lease term on the Company's headquarters building,
ONEOK Plaza, is for 25 years, expiring in 2009, with six five-year renewal
options. At the end of the initial term or any renewal period, the Company can
purchase the property at its fair market value. Rent for the lease accrues
annually at $6.8 million a year until 2009. Rent payments were $5.8 million for
1996, 1995, and 1994. Estimated future minimum rental payments for the lease are
$5.8 million for each of the years ended August 31, 1997 through 1999, $7.6
million for the year ended August 31, 2000, $9.3 million for each of the years
ended August 31, 2001 through 2009.
The Company has the right to sublet excess office space in ONEOK Plaza. The
Company received $2.5 million, $2.4 million, and $2.1 million in rental revenue
during 1996, 1995, and 1994, respectively, for various subleases. Estimated
minimum future rental payments to be received under existing contracts for
subleases are: $2.5 million in 1997; $2.0 million in 1998; $1.4 million in 1999;
$1.1 million in 2000, $1.1 million in 2001; and a total of $3.5 million
thereafter.
OTHER -- The Company is involved in claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a materially adverse effect on the
Company's financial condition, results of operation, or cash flows.
18
<PAGE> 37
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(K) OIL AND GAS PRODUCING ACTIVITIES
The following is historical revenue and cost information relating to the
Company's production operations:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Capitalized costs at end of year:
Unproved properties.............................. $ 11,330 $ 5,030 $ 6,363
Proved properties................................ 129,035 111,459 94,507
-------- -------- --------
Total Capitalized Costs.................. 140,365 116,489 100,870
Accumulated depreciation, depletion, and
amortization........................... 74,129 65,376 61,052
-------- -------- --------
Net Capitalized Costs.................... $ 66,236 $ 51,113 $ 39,818
======== ======== ========
Costs incurred during the year:
Property acquisition costs (unproved)............ $ 231 $ 926 $ 1,021
Exploration costs................................ $ 601 $ 1,228 $ 2,731
Development costs................................ $ 2,811 $ 4,839 $ 4,729
Purchase of minerals in place.................... $ 43,064 $ 15,099 $ 101
</TABLE>
The accompanying schedule presents the results of operation for the
Company's oil and gas production activities. The results exclude general office
overhead and interest expense attributable to oil and gas production.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net revenues from production:
Sales to unaffiliated customers.................. $25,478 $24,042 $23,023
Gas sold to affiliates........................... 7,856 830 1,457
------- ------- -------
Net revenues from production............. 33,334 24,872 24,480
------- ------- -------
Production costs................................... 5,494 4,565 4,912
Exploration expenses............................... 574 680 1,419
Depreciation, depletion, and amortization.......... 18,552 9,447 12,048
Income tax expense................................. 3,311 3,868 2,222
------- ------- -------
Total expenses........................... 27,931 18,560 20,601
------- ------- -------
Results of operations from producing
activities............................. $ 5,403 $ 6,312 $ 3,879
======= ======= =======
</TABLE>
19
<PAGE> 38
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(L) OIL AND GAS RESERVES (UNAUDITED)
Following are estimates of the Company's proved oil and gas reserves, net
of royalty interests and changes therein, for the 1996, 1995, and 1994 fiscal
years.
<TABLE>
<CAPTION>
OIL GAS
(MBBLS) (MMCF)
------- ------
<S> <C> <C>
PROVED RESERVES
September 1, 1993......................................................... 2,832 38,790
Revisions of prior estimates............................................ (201) (756)
Extensions, discoveries, and other additions............................ 224 2,264
Purchases of minerals in place.......................................... 1 115
Production.............................................................. (572) (8,043)
------ ------
August 31, 1994........................................................... 2,284 32,370
Revisions of prior estimates............................................ 579 83
Extensions, discoveries, and other additions............................ 241 4,002
Purchases of minerals in place.......................................... 637 11,931
Sales of minerals in place.............................................. (28) (386)
Production.............................................................. (466) (8,774)
------ ------
September 1, 1995......................................................... 3,247 39,226
Revisions of prior estimates............................................ (274) (1,258)
Extensions, discoveries, and other additions............................ 41 5,089
Purchases of minerals in place.......................................... 928 42,347
Sales of minerals in place.............................................. (1,712) (1,930)
Production.............................................................. (435) (9,406)
------ ------
August 31, 1996........................................................... 1,795 74,068
====== ======
Proved developed reserves:
August 31, 1993......................................................... 2,352 34,792
August 31, 1994......................................................... 1,943 29,193
August 31, 1995......................................................... 3,068 36,946
August 31, 1996......................................................... 1,427 60,497
</TABLE>
The Company emphasizes that the volumes of reserves shown above are
estimates, which, by their nature, are subject to later revision. The estimates
are made by the Company's petroleum engineers and geologists utilizing all
available geological and reservoir data as well as production performance data.
These estimates are reviewed annually and revised, either upward or downward, as
warranted by additional performance data.
(M) DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
Estimates of the standard measure of discounted future cash flows from
proved reserves of oil and natural gas shown in the accompanying table are based
on prices at the end of the year. Gas prices are escalated only for fixed and
determinable amounts under provisions of applicable regulations in some
contracts. These estimated future cash flows are reduced by estimated future
development and production costs based on year-end cost levels, assuming
continuation of existing economic conditions, and by estimated future income tax
expense. This tax expense is calculated by applying the current year-end
statutory tax rates to pretax net cash
20
<PAGE> 39
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows (net of tax depreciation, depletion, and lease amortization allowances)
applicable to oil and gas production.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Future cash inflows............................................ $173,166 $111,370 $98,270
Future production and development costs........................ 53,491 29,684 26,103
Future income tax expense...................................... 21,245 16,375 16,278
-------- -------- -------
Future net cash flows.......................................... 98,430 65,311 55,889
10 percent annual discount for estimated timing of cash
flows..................................................... 31,114 17,484 15,660
-------- -------- -------
Standardized measure of discounted future net cash flows
relating to oil and gas reserves............................. $ 67,316 $ 47,827 $40,229
======== ======== =======
</TABLE>
The changes in standardized measure of discounted future net cash flows
relating to proved oil and gas reserves are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Beginning of year........................................... $ 47,827 $ 40,229 $ 48,628
Changes resulting from:
Sales of oil and gas produced, net of production costs.... (19,687) (16,234) (19,238)
Net changes in price, development, and production costs... 4,054 (4,874) (3,839)
Extensions, discoveries, additions, and improved recovery,
less related costs..................................... 6,056 6,377 5,112
Purchases of minerals in place............................ 42,999 14,707 126
Sales of minerals in place................................ (20,962) (871) --
Revisions of previous quantity estimates.................. (114) 5,520 (2,379)
Accretion of discount..................................... 3,885 5,107 6,360
Net change in income taxes.................................. (2,538) (274) 3,260
Other, net.................................................. 5,796 (1,860) 2,199
-------- -------- --------
End of year....................................... $ 67,316 $ 47,827 $ 40,229
======== ======== ========
</TABLE>
21
<PAGE> 40
ONEOK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(N) QUARTERLY FINANCIAL DATA (UNAUDITED)
Total operating revenues are consistently greater from November through May
due to the large volume of natural gas sold to customers for heating. A summary
of the unaudited quarterly results of operations for 1996 and 1995 follows:
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
Operating revenues
Regulated...................................... $104,858 $227,539 $131,396 $ 74,376
Nonregulated................................... $133,602 $237,201 $158,286 $157,087
Operating income................................. $ 22,815 $ 71,508 $ 27,835 $ (1,123)
Income taxes..................................... $ 5,276 $ 23,840 $ 7,746 $ (3,825)
Net income....................................... $ 8,423 $ 38,543 $ 11,707 $ (5,837)
Earnings per share of common stock............... $ 0.31 $ 1.42 $ 0.42 $ (0.22)
Dividends per share of common share.............. $ 0.29 $ 0.29 $ 0.30 $ 0.30
Average shares of common stock outstanding
(thousands).................................... 27,023 27,100 27,186 27,232
1995
Operating revenues
Regulated...................................... $126,025 $244,687 $144,551 $ 79,660
Nonregulated................................... $ 39,755 $ 41,813 $157,726 $119,978
Operating income................................. $ 21,907 $ 55,937 $ 23,253 $ 4,416
Income taxes..................................... $ 4,835 $ 17,811 $ 4,810 $ (2,114)
Net income....................................... $ 7,788 $ 28,287 $ 9,040 $ (2,311)
Earnings per share of common stock............... $ 0.29 $ 1.05 $ 0.33 $ (0.09)
Dividends per share of common share.............. $ 0.28 $ 0.28 $ 0.28 $ 0.28
Average shares of common stock outstanding
(thousands).................................... 26,690 26,712 27,020 27,020
</TABLE>
(O) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash Paid During the Year
Interest (including amount capitalized)...................... $35,122 $37,642 $34,694
Income taxes................................................. $40,642 $34,513 $14,948
Noncash Transactions:
Gas received as payment in kind.............................. $ 2,395 $86,033 $74,584
Issuance of common stock related to:
Stock Performance Plan.................................... $ 1,144 -- $ 1,203
Acquisition of gas marketing partnership.................. -- $ 5,836 --
Dividend reinvestment plan................................... $ 4,536 -- --
Distribution of net assets from partnership.................. $14,625 -- --
</TABLE>
22
<PAGE> 41
SELECTED FINANCIAL DATA
Following are selected financial data for the Company for each of the last
five fiscal years. Dollar amounts are in millions of dollars, except per share
amounts.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues......................... $1,224.3 $ 954.2 $ 784.1 $ 789.1 $ 677.1
Operating income before interest and income
taxes.................................... $ 121.0 $ 105.5 $ 92.0 $ 96.5 $ 83.9
Net income................................. $ 52.8 $ 42.8 $ 36.2 $ 38.4 $ 32.6
Total assets............................... $1,219.9 $1,181.2 $1,148.1 $1,115.1 $1,069.9
Long-term debt............................. $ 351.9 $ 363.9 $ 376.9 $ 391.9 $ 397.9
Earnings per common share.................. $ 1.93 $ 1.58 $ 1.34 $ 1.43 $ 1.21
Dividends per common share................. $ 1.18 $ 1.12 $ 1.11 $ 1.06 $ .96
Percent of payout.......................... 61.1% 70.9% 82.8% 74.1% 79.3%
Common equity per share.................... $ 15.21 $ 14.38 $ 13.88 $ 13.63 $ 13.28
Return on common equity.................... 12.64% 10.90% 9.65% 10.46% 9.09%
Ratio of earnings to fixed charges......... 3.44 2.56 2.39 2.33 2.21
</TABLE>
23
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATING ENVIRONMENT AND OUTLOOK
Each of the Company's business units has taken steps over the past two
years to strengthen its competitive edge and position it to be a leader in the
industry. The highlights for these units include:
- REGULATED OPERATIONS -- Changes initiated by Oklahoma Natural Gas in 1995
allowed rates to be restructured for large industrial customers,
positioning the Company to more effectively compete for additional
customers. In addition, the OCC approved a request for a temperature
adjustment clause that normalizes the effect of weather during the
heating season, the first such program approved in Oklahoma.
- NONREGULATED OPERATIONS -- ONEOK Gas Marketing experienced significant
growth in the last year becoming a billion cubic foot per day marketing
operation. The processing segment owns seven percent of the state's
processing capacity. Gathering systems around six plants were expanded to
bring them to operating capacity during the current year. The production
segment has significantly reduced its exploration activities; rather it
concentrates on exploitation activities and reserve ownership in
Oklahoma. Currently, 89 percent of the Company's reserves are located in
Oklahoma, up from 53 percent one year ago.
In the opinion of management, a significant indicator of future changes to
be encountered by the Company came in the form of a notice of inquiry (NOI)
regarding the restructuring of Oklahoma's gas utility industry issued by the OCC
in the spring of 1996. The Company supports restructuring and unbundling the
transmission, gathering, storage, customer service and gas supply functions.
Unbundling should enhance customer choices, service and value and potentially
should decrease unit costs, increase throughput, allow broader use of the
Company's assets, and strengthen economic development.
The Company plans to launch two new ventures to enhance its marketing
group. ONEOK Producer Services will bring gas marketing and other services to
the small gas producer to fill a niche market. In addition, the Company has
filed an application with FERC to market electricity.
CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Financial Results
Operating revenues -- regulated.......................... $ 538,169 $594,923 $616,090
Operating revenue -- nonregulated........................ $ 686,176 $359,272 $167,977
---------- -------- --------
Total operating revenue.......................... $1,224,345 $954,195 $784,067
Operating costs............................................ $1,030,442 $795,202 $635,795
Depreciation, depletion and amortization................... $ 72,868 $ 53,480 $ 56,243
---------- -------- --------
Operating income................................. $ 121,035 $105,513 $ 92,029
========== ======== ========
</TABLE>
24
<PAGE> 43
EARNINGS PER SHARE
[GRAPH]
RESULTS OF OPERATIONS
The continued strong performance of the Company's regulated business, the
rapid growth of the gas marketing segment and organizational changes implemented
to maximize the value of its nonregulated businesses contributed to a 23.4
percent increase in net income. Higher earnings attributable to the regulated
business are the result of reduced costs and increased margins. Growth of the
gas marketing operations is attributable to weather related demand and
effectively combining gas supply and commodity derivative knowledge in order to
match buyers and sellers. Use of derivative instruments, such as futures
contracts and swaps, allows ONEOK Gas Marketing to accept physical supply and
sale contracts which use differing price indices and hedge the price risk to the
Company.
The Company views its segments as operating within either a rate regulated
environment (Regulated Operations) or a nonregulated (Nonregulated Operations).
The nonregulated environment is further viewed as having three primary,
vertically integrated segments: marketing, processing and production. In order
to align this view with its financial reporting, the Company, beginning this
year, is presenting the combined results of each operating environment.
Nonregulated segment data is reported by process rather than entity.
REGULATED OPERATIONS
Oklahoma Natural Gas is a fully integrated intrastate natural gas
distribution and transmission business, which purchases, stores, transports, and
distributes natural gas for sale to wholesale and retail customers primarily in
the State of Oklahoma, and leases pipeline capacity to customers for their use
in transporting natural gas to their facilities. ONG Transmission Company
transports gas for others under Section 311(a) of the Natural Gas Policy Act of
1978 (NGPA). Oklahoma Natural Gas Company, ONG Transmission
25
<PAGE> 44
Company, ONG Sayre Storage Company, and ONG Gas Gathering Company are
consolidated for ratemaking purposes by the Oklahoma Corporation Commission.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
FINANCIAL RESULTS
Gas Sales............................................. $ 487,294 $ 502,427 $ 524,961
Cost of gas........................................... 247,299 316,867 353,516
---------- ---------- ----------
Gross margins on gas sales.................... 239,995 185,560 171,445
Pipeline capacity lease margins......................... 41,684 86,697 85,050
Other revenues.......................................... 11,394 7,551 7,759
---------- ---------- ----------
Net revenues.................................. 293,073 279,808 264,254
Operating expenses...................................... 144,927 146,986 135,139
Depreciation, depletion and amortization................ 50,805 41,252 41,265
---------- ---------- ----------
Operating income.............................. $ 97,341 $ 91,570 $ 87,850
========== ========== ==========
VOLUMES (MMCF)
Gas sales
Residential........................................... 58,681 52,804 58,587
Commercial............................................ 29,918 25,288 27,342
Industrial............................................ 15,145 39,095 51,276
Pipeline capacity lease................................. 158,527 134,130 120,619
---------- ---------- ----------
Total......................................... 262,271 251,317 257,824
========== ========== ==========
GROSS MARGIN PER MCF
Residential........................................... $ 2.92 $ 2.57 $ 2.13
Commercial............................................ $ 1.86 $ 1.88 $ 1.75
Industrial............................................ $ 0.84 $ 0.73 $ 1.79
Pipeline capacity leases.............................. $ 0.20 $ 0.47 $ 0.45
========== ========== ==========
Number of customers..................................... 729,467 724,201 715,142
Customers per employee.................................. 404 377 362
Capital expenditures (thousands)........................ $ 42,900 $ 55,800 $ 62,200
Identifiable assets (thousands)......................... $1,019,400 $1,023,000 $1,011,000
</TABLE>
OPERATIONAL HIGHLIGHTS -- In the last two rate cases, sweeping changes were
proposed to the way business had previously been conducted in order to be more
competitive and to stabilize and improve earnings capacity. The rate structure
that was approved shifted a significant amount of margin to core residential and
commercial customers, and offset that shift by gas cost reductions.
The Company dominates the core energy service markets with over a 90
percent market share for water heating, cooking and home heating. Annual cost
comparisons with electricity for these same services indicate that gas costs
were at least 50 percent less, the largest difference being in home heating at
70 percent less. On a gas to gas comparison, Oklahoma Natural Gas Company rates
were lower than the regional and national averages for residential, firm
industrial and interruptible industrial services.
In 1996, significant changes occurred in the way the Company conducts its
business. Highlights of those changes are:
- Implemented a performance-based compensation system for all employees.
- Shifted the source of the net revenues from the industrial customer to
the core residential and commercial customers. In 1996, 80 percent of net
revenues was derived from gas sales and PCL revenues from the core
customers, as compared to 63 percent in 1995 and 1994. Despite this shift
in net revenues, the core customers experienced a net decrease in their
cost of gas due to changes in gas purchasing and pricing practices.
26
<PAGE> 45
- Strengthened cost controls throughout the organization. Total employees
dropped by approximately six percent while increasing the number of
customers by approximately two percent. This was accomplished through
attrition and without compromising customer safety.
REGULATORY INITIATIVES -- The OCC's NOI on restructuring Oklahoma's gas
utility industry has set into motion the process of unbundling products and
services. The Company believes and has stated in its response to the NOI that it
envisions a restructured rate environment in which competition replaces the
traditional regulated, full merchant utility function. The Company supports the
unbundling of at least the transmission, gathering, storage, customer service
and gas supply functions; however, because of the inefficient and costly
duplication of certain functions, such as local distribution service, regulation
will continue to be necessary in certain areas. Unbundling of the appropriate
services could be accomplished within three to five years after final OCC
approval.
Customer choice is the driving force behind the restructuring efforts and
will ultimately provide a wide array of services from which to choose. The
Company has already unbundled the gas supply function for many industrial and
large commercial customers through the PCL program and envisions the separation
of the gas supply function, referred to in the industry as "open access", as the
first step in unbundling for small commercial and residential customers. The
Company intends to file for OCC permission for a pilot open access project
during the coming year and anticipates that open access can be accomplished
within two years after the OCC adopts the final rules.
RATE CASE ACTIVITIES -- November 1994 Rate Order -- Ratified a $23.7
million rate increase of which $18.2 million had been approved on an interim
basis in February of 1992. The rate order also established a monthly connection
fee that will reduce the impact of seasonality of weather on earnings.
June 1995 Rate Order -- Reduced the cost of service to the large industrial
customers and shifted the reduction to the core customers through a tariff
rider. Changes to gas purchasing and pricing practices offset the impact of the
tariff rider and provide a net savings to the customer. A temperature
normalization clause was adopted to further reduce the impact of seasonality on
earnings. As part of the settlement, the Company agreed not to file for a
general rate increase for two years.
CAPITAL EXPENDITURES -- The Company's capital expenditure program includes
expenditures for extending service to new areas, increasing system capabilities
and general replacements and betterments. The 1996 capital expenditure program
included $10 million for new business development and $2 million to improve peak
storage deliverability. It is the Company's practice to maintain and
periodically upgrade facilities to assure safe, reliable and efficient
operations.
OPERATING RESULTS -- Higher gross margins on gas sales result primarily
from rate increases granted under the two rate cases completed in fiscal 1995
and higher usage billed during the winter heating season which lasts from
November through April. Actual degree days in the 1996 heating season
approximated normal (3,632 degree days) and accordingly the Temperature
Adjustment Clause (TAC) had little impact on gas margins. Fluctuations in gas
margins in 1995 and 1994 (prior to the implementation of the TAC) are directly
attributable to weather as evidenced by total degree days of 3,358 and 3,874
during the respective winter heating seasons. Degree days is an industry measure
of temperature variations from an established normal temperature of 65 degrees;
a higher number of degree days reflects colder weather on the average. Despite
an increase in the spot market price of gas during 1996 from 1995, the Company
achieved a reduction in the cost of gas through changes in its gas purchasing
and pricing practices approved in the June 1995 rate case. Fluctuation in the
costs of gas from 1995 to 1994 reflects volume and spot market fluctuations. The
significant decrease in PCL margins reflects the rate restructuring completed in
1995 which lowered rates to our large industrial customers in order to compete
more effectively.
Operating expenses remained relatively unchanged in 1996 as compared to
1995 despite an $8.7 million increase in post-retirement benefit expense. Prior
to the June 1995 rate case, such cost was deferred pending regulatory approval.
Offsetting this increase in expense were reductions in labor costs, property
damage claims and other operations and maintenance expenses. The increase in
operating expenses in 1995 as compared to 1994 reflects increases in
compensation relating to lump-sum incentive costs resulting from the attainment
of
27
<PAGE> 46
corporate performance objectives and the recognition of net periodic pension
costs previously deferred pending regulatory approval in the November 1994 rate
case.
NONREGULATED OPERATIONS
The Company's nonregulated operations are involved in the production,
processing and marketing of natural gas, oil and natural gas liquids. As a
result of acquisitions and dispositions during the third quarter of 1996, the
Company's producing properties are concentrated principally in Oklahoma where it
also owns nonoperated interests in 15 gas liquids extraction plants. The gas
marketing subsidiary directs its activities to end users in the mid-continent
region of the United States. The Company also operates its headquarters office
building and a parking garage.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
FINANCIAL RESULTS
Gas sales................................................. $612,595 $328,890 $168,848
Cost of gas............................................... 596,491 320,572 165,692
-------- -------- --------
Gross margins on gas sales........................ 16,104 8,318 3,156
Gas and oil production.................................... 25,181 20,799 23,664
Gas processing............................................ 73,337 67,217 63,591
Other..................................................... 16,560 11,800 11,822
-------- -------- --------
Net revenues...................................... 131,182 108,134 102,233
Operating costs........................................... 85,425 81,963 83,076
Depreciation, depletion and amortization.................. 22,063 12,228 14,978
-------- -------- --------
Operating income.................................. $ 23,694 $ 13,943 $ 4,179
======== ======== ========
OPERATING INFORMATION
Natural gas volumes (MMcf)
Natural gas production.................................... 9,406 8,775 8,043
Residue gas............................................... 6,883 7,560 7,180
Marketing................................................. 315,616 221,561 83,541
-------- -------- --------
331,905 237,896 98,764
-------- -------- --------
LESS INTERSEGMENT SALES
Natural gas production.................................... 3,978 1,640 --
Residue gas............................................... 6,880 5,095 --
Marketing................................................. 7,822 41,262 10,445
-------- -------- --------
18,680 47,997 10,445
-------- -------- --------
Net natural gas volumes........................... 313,225 189,899 88,319
======== ======== ========
</TABLE>
MARKETING
OPERATIONAL HIGHLIGHTS -- The Company's marketing operation purchases and
markets natural gas, primarily in the mid-continent area of the United States.
Several operational changes instituted throughout the current year included
increased use of gas storage facilities, hedging and transportation arbitraging.
This allows the Company to capitalize on day-to-day pricing volatility by
managing positions and moving large volumes of gas in short periods of time.
Beginning in 1997, the Company expects to introduce ONEOK Producer
Services, an entity which will specialize in servicing small producers. Services
will include well connection identification and facilitation, production
balancing to nominated volumes and handling certain administrative accounting
functions.
28
<PAGE> 47
The Company has filed an application with FERC to market electricity.
Management anticipates that permits will be granted during the first quarter of
1997. It is not anticipated that such activities will be a major contributor to
earnings in 1997.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
MARKETING SEGMENT
Natural gas sales......................................... $612,595 $328,890 $168,848
Cost of gas............................................... 596,491 320,572 165,692
-------- -------- --------
Gross margin on gas sales......................... 16,104 8,318 3,156
Operating costs, net...................................... 2,697 3,458 (607)
Depreciation, depletion, and amortization................. 484 80 --
-------- -------- --------
Operating income.................................. $ 12,923 $ 4,780 $ 3,763
======== ======== ========
OPERATING INFORMATION
Natural gas volumes (MMcf)................................ 315,616 221,561 83,541
Capital expenditures (thousands).......................... $ 370 $ 921 --
Identifiable assets (thousands)........................... $ 71,200 $ 41,400 $ 7,500
</TABLE>
PRICE RISK MANAGEMENT -- In order to mitigate the financial risks arising
from fluctuations in both the market price and transportation costs of natural
gas, the Company routinely enters into natural gas futures contracts, swaps and
options as a method of protecting its margins on the underlying physical
transactions. However, net open positions in terms of price, volume and
specified delivery point do occur. For further discussion, see OTHER, Price Risk
Management at page 25.
OPERATING RESULTS -- The increase in profitability of the marketing
business reflects the impact of the additional volume and price volatility
resulting from weather related demand. As important, the Company focuses on
serving a niche market of daily production trading. Such demand is precipitated
by customers who have volatile consumption throughout a month or acquire a
portion of their operating needs on the spot market as a method of hedging price
changes. This sector of the market is potentially more profitable due to spot
market volatility. In any one month, approximately 80 to 90 percent of the
Company's volume results from such trading. In January 1995, the Company
acquired the remaining 50 percent interest in a gas marketing entity. The
results of operations attributable to this investment are included in operating
costs prior to that date.
PROCESSING
OPERATIONAL HIGHLIGHTS -- The Company's processing operation has
nonoperating interests in 15 gas processing plants whose operations include the
extraction and separation of natural gas liquids (NGLs) into distinct products
(e.g., ethane, butane, propane and isobutane). Under certain market conditions
it may become unprofitable to separate and sell certain products, a process
referred to as rejection. Other factors contributing to the volatility in
earnings are fluctuations in the price of natural gas which is consumed as "fuel
and shrinkage" in the extraction process, fluctuation in the discreet market
prices of NGLs, competition or processing plant capacity utilization.
29
<PAGE> 48
Processing plant enhancement completed during 1996 included an expansion of
the gathering systems behind certain plants, development of producer alliances
and bringing most gas processing plants to capacity. The Company's joint
interest partner completed construction of a gathering system servicing three
processing plants. Management is pursuing producer alliances which will provide
economical supplies and the dedication of additional production to the plants.
Currently, 12 of the Company's processing plants are on-line and running at or
near capacity.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
PROCESSING SEGMENT
Natural gas liquids and residue sales......................... $70,859 $64,726 $63,105
Other......................................................... 261 148 2,298
------- ------- -------
Operating revenues.................................... 71,120 64,874 65,403
Operating costs............................................... 60,077 56,755 60,091
Depreciation, depletion, and amortization..................... 2,063 1,790 1,899
------- ------- -------
Operating income...................................... $ 8,980 $ 6,329 $ 3,413
======= ======= =======
OPERATING INFORMATION
Residue gas (MMcf)............................................ 6,883 7,560 7,180
Natural gas liquids (MGallons)................................ 195,979 205,464 194,378
Average NGL's price (Gallons)................................. 0.297 0.261 0.251
Fuel and shrink price (MMbtu)................................. $ 1.82 $ 1.64 $ 1.86
Capital expenditures (thousands).............................. $ 5,183 $ 1,226 $ 2,729
Identifiable assets (thousands)............................... $26,700 $25,200 $28,800
</TABLE>
CAPITAL EXPENDITURES -- The Company's portion of the gathering field
addition was approximately $3.2 million. The remaining $2 million in capital
expenditures during 1996 related to capital required to sustain operations.
Prior years' expenditures generally related to capital required to sustain
operations.
OPERATING RESULTS -- Gas processing revenue rose, reflecting improving
market conditions for NGLs. NGL sales volumes were lower, due to rejection.
PRODUCTION
OPERATIONAL HIGHLIGHTS -- The Company's strategy is to concentrate
ownership of hydrocarbon reserves in Oklahoma in order to add value not only to
its existing production operations but also to the related processing,
marketing, transmission, and storage businesses. Accordingly, the Company
intends to focus on exploitation activities rather than exploratory drilling.
30
<PAGE> 49
The volatility of energy prices has a significant impact on the
profitability of this segment. In an effort to manage price risk as much as
possible, the production segment expanded its hedging program in late 1996. As
of August 31, 1996, approximately 76 percent of anticipated gas production in
1997 has been hedged primarily with swap agreements.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
PRODUCTION SEGMENT
Natural gas sales............................................. $17,466 $13,236 $16,036
Oil sales..................................................... 7,716 7,563 7,628
Liquids and residue gas....................................... 2,477 2,491 486
Other......................................................... 5,675 1,582 330
------- ------- -------
Operating revenues.................................... 33,334 24,872 24,480
Operating costs............................................... 11,341 11,257 11,573
Depreciation, depletion, and amortization..................... 19,161 10,038 12,172
------- ------- -------
Operating income...................................... $ 2,832 $ 3,577 $ 735
======= ======= =======
OPERATING INFORMATION
Proved Reserves
Gas (MMcf).................................................... 74,068 39,226 32,370
Oil (MBbls)................................................... 1,795 3,247 2,284
------- ------- -------
Production
Gas (MMcf).................................................... 9,406 8,775 8,043
Oil (MBbls)................................................... 435 466 572
------- ------- -------
Average Price
Gas (Mcf)..................................................... $ 1.85 $ 1.51 $ 1.95
Oil (BBls).................................................... $ 17.73 $ 16.22 $ 14.18
------- ------- -------
Capital Expenditures (thousands)................................ $46,733 $25,000 $ 8,327
Identifiable Assets (thousands)................................. $73,200 $60,000 $42,800
------- ------- -------
</TABLE>
CAPITAL EXPENDITURES -- During 1996, the Company purchased substantially
all of the Oklahoma oil and natural gas properties of SCANA Petroleum Resources,
Inc. The $43.1 million purchase included over 500 producing properties of which
90 percent are natural gas. Also in 1996, the Company sold all of its oil and
gas properties in Alabama and Mississippi for approximately $18.9 million. The
Company acquired working interests in oil and gas reserves located in Louisiana
for approximately $18.3 million in 1995.
Capital expenditures related to a limited drilling program were
approximately $3.4 million, $5.9 million and $8.3 million in 1996, 1995 and
1994, respectively.
OPERATING RESULTS -- Net production revenues rose reflecting increased
production capabilities over the last two years and an increase in natural gas
prices during 1996 to 1994 levels. Other production revenue includes the gain on
sale of the Alabama and Mississippi properties in the third quarter of 1996.
Effective March 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recognized for long-lived assets when indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the assets carrying
amount. The impairment loss is measured by comparing the fair value of the asset
to its carrying amount. Fair values are based on discounted future cash flows or
information provided by sales and purchases of similar assets. Under SFAS No.
121, the Company now evaluates impairment of production assets on a field by
field basis rather than using a total company basis for its proved properties.
As a result, the Company recognized a pre-tax impairment loss of $8.6 million in
1996.
31
<PAGE> 50
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ANALYSIS
Cash provided by operating activities remains strong and continues as the
primary source for meeting cash requirements. However, due to seasonal
fluctuations and additional capital requirements, the Company accesses funds
through a short-term credit agreement and, if necessary, through long-term
borrowings. The Company believes that internally generated funds and existing
credit agreements will be sufficient to meet its debt service, dividend payment
and capital expenditure requirements. However, certain events, such as
significant acquisitions, may require additional long-term debt or equity
financing. The following discussion of cash flows should be read in conjunction
with the Company's Consolidated Statement of Cash Flows and the supplemental
cash flow information included in note O of Notes to Consolidated Financial
Statements.
OPERATING CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------
1996 1995 1994
-------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash provided by operating activities............... $105,050 $109,559 $80,274
</TABLE>
Income before deferred taxes and depreciation, depletion and amortization
increased by approximately $43 million in 1996 reflecting the overall increase
in net income, changes in the components of current and deferred taxes and the
recovery through rates of deferred costs settled in the 1995 rate proceedings.
This increase from earnings was partially offset by fluctuations in the level of
gas in storage and the timing of the recovery of gas costs. In late 1996, the
Company received permission from the OCC to change its method of recovering
purchased gas costs which had accumulated during the winter heating season
resulting from the base cost of gas set during the June 1995 rate proceeding. In
addition, the OCC will allow periodic changes in the base gas cost in order to
reduce the impact on cash flow of future fluctuations in the weighted average
cost of gas.
Income before deferred taxes and depreciation, depletion and amortization
was $21 million lower in 1995 as compared to 1994 despite higher earnings in
1995, reflecting changes in the components of current and deferred taxes. This
was offset by significant reductions in both gas in storage and the level of
recovery of purchased gas costs.
INVESTING CASH FLOW
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash used in investing activities..................... $71,985 $63,299 $68,357
</TABLE>
32
<PAGE> 51
CAPITAL EXPENDITURES -- Total capital expenditures increased in both 1996
and 1995; however, as discussed in the "Results from Operations," this is
attributable to the acquisition of production assets for approximately $43
million and $18 million in each of those years respectively. Capital
expenditures for 1997, excluding potential acquisitions, are estimated to be $63
million.
ASSET SALES -- Approximately $18 million and $8 million of proceeds were
received in 1996 and 1994, resulting from the sale of production and drilling
assets in 1996 and 1994, respectively. The sale of a pipeline investment for its
approximate book value generated approximately $10.2 million in proceeds in
1995.
FINANCING CASH FLOW
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash used in financing activities..................... $44,966 $38,306 $17,039
</TABLE>
SHORT-TERM DEBT -- The Company uses short-term debt to help meet its need
for operating funds, which fluctuates with seasonal demands for gas purchases,
the levels of gas in storage and the Unrecovered Purchased Gas Cost (UPGC). A
short-term unsecured credit agreement with several banks provides aggregate
borrowings of up to $125 million for general corporate purposes. A master note
with Bank of America provides an additional $30 million of borrowing capability.
The maximum amount of short-term debt authorized by the Board of Directors is
$150 million. Fluctuation in the amount of cash used in financing activities in
each of the years presented is primarily a factor of short-term borrowings.
LONG-TERM DEBT -- As of August 31, 1996, the Company could have issued
approximately $292.5 million of additional long-term debt under the most
restrictive provisions contained in its various borrowing agreements. With the
current mix and relative sizes of the Company's businesses, Company goals are to
achieve an equity to capital ratio of approximately 50 percent and to preserve
or improve its current debt ratings. At August 31, 1996, the equity component
was 51 percent as compared to 49 percent a year ago. Debt ratings are A3 by
Moody's Investor Service and A- by Standard and Poor's Corporation. No long-term
debt is currently callable, and only the 8.7 percent, 9.7 percent and 9.75
percent series have call options commencing in October 1996, and December 1999
and 2000, respectively. No long-term debt was issued in the last three years.
STOCK AND DIVIDENDS -- The Company had approximately 28 million shares of
common stock, 160,000 shares of preferred stock and 3 million shares of
preference stock available for issue at August 31, 1996, 1995 and 1994. Common
stock dividends were $1.18, $1.12 and $1.11 per share in 1996, 1995 and 1994,
respectively. Preferred stock dividends were $2.375 in each of the three years.
Through the Company's Stock Purchase and Dividend Reinvestment Program, $2.04
million of dividends were reinvested into common stock during 1996.
33
<PAGE> 52
LIQUIDITY -- The regulated businesses continue to face competitive pressure
to serve the substantial market represented by its large industrial customers.
The loss of a substantial portion of its industrial load, without recoupment of
the revenues from that loss, would have a materially adverse effect on the
Company's financial condition. The Company has successfully competed for such
load in large part with such innovative methods as its PCL and SISP programs.
These programs were all designed to provide competitive alternatives for
Oklahoma industry. Rate restructuring achieved in the June 1995 rate order
further reduces the Company's risk in serving its large industrial customers.
OTHER
PRICE RISK MANAGEMENT -- Commodity futures contract options and swaps are
periodically used in the production, gas processing, and marketing operations to
hedge the impact of natural gas price fluctuations. Natural gas futures require
the Company to buy or sell natural gas at a fixed price. Under swap agreements,
the Company receives or makes payments based on the differential between a
specified price and the actual price of natural gas. Swaps and options allow the
Company to commit to purchase gas at one location and sell it at another
location without assuming unacceptable risk with respect to changes in price or
the cost of the intervening transportation. Natural gas options held to hedge
price risk provide the right, but not the requirement, to buy or sell natural
gas at a fixed price. The Company utilizes options to manage margins and to
limit overall price risk exposure. The Company's production operation
periodically uses commodity futures contracts and swaps to hedge the impact of
oil and natural gas price fluctuations. The Company's gas processing operation
uses futures to hedge the price of gas used in the natural gas liquid extraction
process. The gas marketing operation uses futures, options and swaps to lock in
margins on preexisting purchase or sale commitments for physical quantities of
natural gas. The Company adheres to policies and procedures which limit its
exposure to market risk from open positions and monitors daily its exposure to
market risk. Gains and losses on commodity futures contracts and swaps are
recognized in income when the underlying physical transactions are closed. At
August 31, 1996, the net deferred gain on these contracts was approximately $4.9
million.
NEW ACCOUNTING PRONOUNCEMENTS -- In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation,
which will become effective for years beginning after December 15, 1995. This
Statement will require that financial statements include certain disclosures
about stock-based employee compensation and allows, but does not require, a fair
value-based method of accounting for such compensation. The Company will not
adopt the fair value-based method of accounting, however, it will make the
required disclosures in future stockholder reports.
34
<PAGE> 53
MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
(A) MARKET INFORMATION
The Company's common stock is listed on the New York Stock Exchange under
the trading symbol OKE. The corporate name ONEOK is used in newspaper stock
listings. The high and low market prices of the Company's common stock for each
fiscal quarter during the last two fiscal years were as follows:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1996
First quarter..................................................... $24 13/16 $22
Second quarter.................................................... $23 7/8 $20
Third quarter..................................................... $27 1/2 $21 1/8
Fourth quarter.................................................... $28 7/8 24 3/8
1995
First quarter..................................................... $18 $15 7/8
Second quarter.................................................... $18 3/8 $16 7/8
Third quarter..................................................... $19 5/8 $17 1/4
Fourth quarter.................................................... $23 7/8 $18 3/4
</TABLE>
(B) HOLDERS
There were 13,267 holders of the Company's common stock at August 31, 1996.
(C) DIVIDENDS
Quarterly dividends declared on the Company's common stock during the last
two fiscal years were as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
First quarter........................................................ $ .29 $ .28
Second quarter....................................................... .29 .28
Third quarter........................................................ .30 .28
Fourth quarter....................................................... .30 .28
----- -----
Total...................................................... $1.18 $1.12
===== =====
</TABLE>
Debt agreements pursuant to which the Company's outstanding long-term and
short-term debt has been issued limit dividends and other distributions on the
Company's common stock. Under the most restrictive of these provisions,
$27,412,000 of retained earnings is so restricted. On August 31, 1996,
$192,437,000 was available for dividends on the Company's common stock.
35
<PAGE> 54
- --------------------------------------------------------------------------------
COMMON
ONEOK INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR ANNUAL
MEETING OF SHAREHOLDERS DECEMBER 12, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Larry W. Brummett and David L. Kyle, or
either of them, with the power of substitution in each, proxies to vote all
stock of the undersigned in ONEOK Inc. at the Annual Meeting of Shareholders to
be held December 12, 1996, and at any and all adjournments thereof, upon the
matter of the elections of directors, the proposals referred to in Items 2 and 3
of this Proxy, and any other business that may properly come before the meeting.
Shares will be voted as specified. IF NO SPECIFICATION IS MADE, SHARES WILL
BE VOTED TO ELECT THE DIRECTORS AS PROPOSED AND FOR THE PROPOSALS REFERRED TO IN
ITEMS 2 AND 3 OF THIS PROXY. The proxies or substitutes may vote accordingly in
their discretion upon any other business that may properly come before this
Annual Meeting or any adjournment thereof. MANAGEMENT RECOMMENDS A VOTE FOR
ITEMS 1, 2 AND 3.
1. Election of five Directors in Class A.Nominees: Edwyna G. Anderson,
William L. Ford, Bert H. Mackie, Gary D. Parker, Stanton L. Young
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY to
vote for all nominees
listed above
(TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT
NOMINEE'S NAME ON THE LINE PROVIDED BELOW)
- --------------------------------------------------------------------------------
2. To ratify and approve the appointment of KPMG Peat Marwick LLP as independent
auditor of the Corporation for the 1997 fiscal year.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(PLEASE SIGN ON REVERSE SIDE)
- --------------------------------------------------------------------------------
<PAGE> 55
- --------------------------------------------------------------------------------
3. To transact such other business as may properly come before the meeting and
at any and all adjournments thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
DATED:
------------------------
------------------------------
(Signature)
------------------------------
(Signature)
NOTE: Please sign this proxy
exactly as your name appears
hereon, including the title
"Executor," "Trustee," etc. If
the name indicated is a joint
account, each joint owner
should sign. If the stock is
held by a corporation, this
proxy should be executed by a
proper officer thereof.
PLEASE DATE AND SIGN THIS PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE
- --------------------------------------------------------------------------------
<PAGE> 56
- --------------------------------------------------------------------------------
PREFERRED
ONEOK INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR ANNUAL
MEETING OF SHAREHOLDERS DECEMBER 12, 1996
The undersigned hereby appoints Larry W. Brummett and David L. Kyle, or
either of them, with the power of substitution in each, proxies to vote all
stock of the undersigned in ONEOK Inc. at the Annual Meeting of Shareholders to
be held December 12, 1996, and at any and all adjournments thereof, upon the
matter of the elections of directors, the proposals referred to in Items 2 and 3
of this Proxy, and any other business that may properly come before the meeting.
Shares will be voted as specified. IF NO SPECIFICATION IS MADE, SHARES WILL
BE VOTED TO ELECT THE DIRECTORS AS PROPOSED AND FOR THE PROPOSALS REFERRED TO IN
ITEMS 2 AND 3 OF THIS PROXY. The proxies or substitutes may vote accordingly in
their discretion upon any other business that may property come before this
Annual Meeting or any adjournment thereof. Management recommends a vote FOR
Items 1, 2 and 3.
1. Election of five Directors in Class A. Nominees: Edwyna G. Anderson,
William L. Ford, Bert H. Mackie, Gary D. Parker, Stanton L. Young
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY to
vote for all nominees
listed above
(TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT
NOMINEE'S NAME ON THE LINE PROVIDED BELOW)
- --------------------------------------------------------------------------------
2. To ratify and approve the appointment of KPMG Peat Marwick LLP as independent
auditor of the Corporation for the 1997 fiscal year.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(PLEASE SIGN ON REVERSE SIDE)
- --------------------------------------------------------------------------------
<PAGE> 57
- --------------------------------------------------------------------------------
3. To transact such other business as may properly come before the meeting and
at any and all adjournments thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
DATED:
------------------------
------------------------------
(Signature)
------------------------------
(Signature)
NOTE: Please sign this proxy
exactly as your name appears
hereon, including the title
"Executor," "Trustee," etc. If
the name indicated is a joint
account, each joint owner
should sign. If the stock is
held by a corporation, this
proxy should be executed by a
proper officer thereof.
PLEASE DATE AND SIGN THIS PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE
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