<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended May 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _________ to
__________
Commission file number 1-2572
ONEOK INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-0383100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 WEST FIFTH STREET, TULSA, OK 74103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 588-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On May 31, 1997, the Company had 27,997,925 shares of common stock outstanding.
<PAGE> 2
ONEOK INC.
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Consolidated Condensed Statements of Income -
Three Months and Nine Months Ended
May 31, 1997 and May 31, 1996 3
Consolidated Condensed Balance Sheets -
May 31, 1997, and August 31, 1996 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended May 31, 1997 and May 31, 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 12
PART II - OTHER INFORMATION 13 - 15
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
May 31, May 31,
(Thousands of Dollars except per share amounts) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated $128,970 $131,396 $525,011 $463,793
Nonregulated 102,657 158,286 429,020 529,089
- -------------------------------------------------------------------------------------------
Total Operating Revenues 231,627 289,682 954,031 992,882
- -------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 138,016 195,406 644,722 693,676
Operations and maintenance 38,008 36,075 106,952 104,640
Depreciation, depletion, and amortization 19,719 24,923 55,715 56,387
General taxes 5,960 5,442 16,983 16,021
Income taxes 8,174 7,746 39,655 36,862
- -------------------------------------------------------------------------------------------
Total Operating Expenses 209,877 269,592 864,027 907,586
- -------------------------------------------------------------------------------------------
Operating Income 21,750 20,090 90,004 85,296
Interest 7,981 8,383 25,819 26,623
- -------------------------------------------------------------------------------------------
NET INCOME 13,769 11,707 64,185 58,673
Preferred Stock Dividends 71 107 285 321
- -------------------------------------------------------------------------------------------
Income Available for Common Stock $ 13,698 $ 11,600 $ 63,900 $ 58,352
===========================================================================================
Earnings Per Share of Common Stock $0.49 $0.42 $2.32 $2.15
===========================================================================================
Dividends Per Share of Common Stock $0.30 $0.30 $0.90 $0.88
===========================================================================================
Average Shares of Common Stock
Outstanding (Thousands) 27,897 27,186 27,518 27,103
===========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MAY 31, August 31,
(Thousands of Dollars) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Property $1,400,223 $1,336,652
Accumulated depreciation, depletion, and amortization 572,229 541,618
- ----------------------------------------------------------------------------------------
Net Property 827,994 795,034
- ----------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 12,851 598
Accounts and notes receivable 110,310 119,338
Inventories 64,612 91,556
Other 15,892 21,654
- ----------------------------------------------------------------------------------------
Total Current Assets 203,665 233,146
- ----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets, net 146,949 155,253
Other 41,467 36,458
- ----------------------------------------------------------------------------------------
Total Deferred Charges and Other Assets 188,416 191,711
- ----------------------------------------------------------------------------------------
Total Assets $1,220,075 $1,219,891
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
COMMON SHAREHOLDER'S EQUITY
Common stock without par value: authorized 60,000,000
shares; issued and outstanding 27,997,925 shares at
May 31, 1997 and 27,260,646 shares at August 31, 1996 $ 227,263 $ 207,084
Retained earnings 246,144 207,611
- ----------------------------------------------------------------------------------------
Total Common Shareholders' Equity 473,407 414,695
- ----------------------------------------------------------------------------------------
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
and outstanding 180,000 shares of Series A at
August 31, 1996 -- 9,000
- ----------------------------------------------------------------------------------------
Total Shareholders' Equity 473,407 423,695
- ----------------------------------------------------------------------------------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 332,073 336,821
CURRRENT LIABILITIES
Long-term debt 15,050 15,050
Notes payable 5,069 50,223
Accounts payable 74,303 96,872
Accrued taxes 26,097 10,820
Accrued interest 12,791 7,732
Other 27,377 21,933
- ----------------------------------------------------------------------------------------
Total Current Liabilities 160,687 202,630
- ----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 178,740 180,620
Customers' advances for construction and other deferred credits 75,168 76,125
- ----------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 253,908 256,745
- ----------------------------------------------------------------------------------------
Commitments and Contingencies -- --
- ----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,220,075 $1,219,891
========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Nine Months Ended
May 31,
(Thousands of Dollars except per share amounts) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 64,185 $ 58,673
Depreciation, depletion, and amortization 55,715 56,387
Net losses of equity investees 257 1,271
Deferred income taxes (8,053) (909)
Changes in assets and liabilities 40,679 17,780
- -----------------------------------------------------------------------------
Cash provided by operating activities 152,783 133,202
- -----------------------------------------------------------------------------
INVESTING ACTIVITIES
Changes in other investments, net 1,560 (1,821)
Capital expenditures, net of salvage (58,583) (61,241)
- -----------------------------------------------------------------------------
Cash used in investing activities (57,023) (63,062)
- -----------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of notes payable, net (54,413) (12,044)
Payments of debt (4,748) (15,000)
Issuance of common stock 6,704 1,144
Dividends paid (21,510) (20,763)
Redemption of preferred stock (9,540) --
- -----------------------------------------------------------------------------
Cash used in financing activities (83,507) (46,663)
- -----------------------------------------------------------------------------
Change in cash and cash equivalents 12,253 23,477
Cash and cash equivalents at beginning of period 598 12,499
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,851 $ 35,976
=============================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM REPORTING. The interim consolidated condensed financial statements
reflect all adjustments which, in the opinion of management, are necessary
for a fair presentation of the results for the interim periods presented.
All such adjustments are of a normal recurring nature. Due to the seasonal
nature of the business, the results of operations for the three and nine
month periods ended May 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended August 31, 1997. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
August 31, 1996.
RECLASSIFICATION. Certain amounts in the 1996 consolidated condensed
financial statements have been reclassified to conform with the 1997
presentation.
B. SIGNIFICANT EVENTS
During the first quarter of this fiscal year, the Company and Western
Resources, Inc. (Western) announced a strategic alliance combining the
natural gas assets of both companies. The agreement provides for the
Company to own and operate the natural gas assets of Western located in
Kansas and northeast Oklahoma. In exchange for the assets, Western will
receive approximately three million shares of common stock and 19 million
shares of convertible preferred stock making Western the largest
shareholder of the Company. The preferred stock will be non-voting and
convertible into common shares only under certain circumstances.
Additionally, a shareholder agreement containing standstill provisions
would prevent Western from increasing their position in the Company and
restricts the conditions under which Western can vote any common shares
received upon conversion of its preferred stock. In preparation for the
strategic alliance, the Company redeemed all of its outstanding shares of
preferred stock during the third quarter of fiscal 1997.
Western's gas distribution system serves 660,000 customers. The assets
include 10,068 miles of pipeline, a Kansas gas processing plant with 15
million cubic feet per day capacity, a 42 percent interest in a New Mexico
plant with a 200 million cubic feet per day capacity, and a natural gas
marketing company with a retail marketing focus. Requests for approval of
the alliance have been filed with the Oklahoma Corporation Commission
(OCC) and the Kansas Corporation Commission (KCC). The OCC has issued a
procedural schedule calling for a July 14 hearing on the strategic
alliance, with a decision expected by the end of July. Transition teams
representing the Company and Western continue working toward a September
1997 closing of the transaction.
C. REGULATORY ASSETS
The following table is a summary of regulatory assets, net of
amortization, outstanding at May 31, 1997 and August 31, 1996.
<TABLE>
<CAPTION>
------------------------------------------------------------
MAY 31, AUG. 31,
(THOUSANDS OF DOLLARS) 1997 1996
------------------------------------------------------------
<S> <C> <C>
Recoupable take-or-pay settlements $ 96,660 $100,155
Pension costs 30,289 33,426
Postretirement costs other than pensions 8,974 9,386
Postemployment benefits costs 2,975 2,975
Income tax rate changes 7,955 8,354
Unamortized gas storage costs 96 957
------------------------------------------------------------
Regulatory Assets, Net $146,949 $155,253
============================================================
</TABLE>
6
<PAGE> 7
D. SUPPLEMENTAL CASH FLOW INFORMATION
The following table is supplemental information relative to the Company's
cash flows for the nine months ended May 31, 1997 and 1996.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
NINE MONTHS ENDED
MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $20,254 $22,077
Income taxes $24,794 $21,193
Noncash transactions -
Gas received as payment in kind $ 427 $ 2,132
Common stock issued under Dividend
Reinvestment program $ 3,602 $ 3,411
Distribution of net assets from partnership -- $14,625
====================================================================
</TABLE>
In connection with the acquisition of PSEC, Inc. and other oil and gas
properties, the Company issued common stock of $9.8 million, debt of $9.2
million and recognized a deferred tax liability of $3.5 million. The
acqusitions were accounted for in accordance with the purchase method.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
ONEOK Inc. provides natural gas and related products and services to its
customers through regulated and nonregulated segments. The regulated
business unit provides natural gas distribution and transmission services
for about 75 percent of Oklahoma. The nonregulated business unit is
primarily involved in the marketing, processing and production of natural
gas and natural gas liquids.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Operating revenues - regulated $128,970 $131,396 $525,011 $463,793
Operating revenues - nonregulated 102,657 158,286 429,020 529,089
- ------------------------------------------------------------------------------------
Total operating revenues 231,627 289,682 954,031 992,882
Operating costs 181,984 236,924 768,657 814,337
Depreciation, depletion and amortization 19,719 24,923 55,715 56,387
- ------------------------------------------------------------------------------------
Operating income before taxes $ 29,924 $ 27,835 $129,659 $122,158
====================================================================================
</TABLE>
CONSOLIDATED OPERATIONS
The Company continues to take steps to strengthen its competitive edge and
position itself to be a leader in the industry. Intensive efforts to acquire
additional gas distribution and transmission facilities to enhance its
operations have resulted in the first quarter announcement of a strategic
alliance to combine the natural gas assets of the Company and Western
Resources, Inc. (Western). Under this alliance, the Company will own and
operate the natural gas assets of Western located in Kansas and northeast
Oklahoma while Western will become the largest equity holder of ONEOK through a
combination of common and convertible preferred stock. A shareholder agreement
containing standstill provisions would prevent Western from increasing their
position in the Company and restricts the conditions under which Western can
vote any common shares received upon conversion of its preferred stock.
Requests for approval of the alliance have been filed with the OCC and the KCC.
This transaction is anticipated to close during the last half of 1997. It will
also require a no-action letter or order from the Securities and Exchange
Commission or its staff that as a result of the alliance the Company will not
be deemed a "subsidiary company" under the Public Utility Holding Company Act
of 1935. The waiting period under the Hart-Scott-Rodino Antitrust Improvement
Act of 1976 has expired.
[GRAPH]
Graph indicates 3rd Quarter E.P.S. for Regulated and Nonregulated companies.
Regulated E.P.S. is $.40 for 1997 and $.31 for 1996. Nonregulated E.P.S. is
$0.09 for 1997 and $0.11 for 1996.
[GRAPH]
Graph indicates FYTD Earnings Per Share for Regulated and Nonregulated
companies. Regulated E.P.S. is $1.73 for 1997 and $1.75 for 1996.
Nonregulated E.P.S. is $0.59 for 1997 and $0.40 for 1996.
7
<PAGE> 8
REGULATED OPERATIONS
ONEOK's regulated operations are conducted through Oklahoma Natural Gas Company
(ONG), an integrated intrastate natural gas distribution and transmission
business which serves residential, commercial and industrial customers in the
state of Oklahoma. ONG also leases space in its pipeline system under its
Pipeline Capacity Lease (PCL) program to large volume customers for their use
in transporting natural gas to their facilities. ONG is subject to regulatory
oversight by the Oklahoma Corporation Commission (OCC)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Gas sales $116,824 $117,709 $485,539 $424,444
Cost of gas 56,396 61,669 285,408 223,189
- --------------------------------------------------------------------------------------------
Gross margins on gas sales 60,428 56,040 200,131 201,255
Pipeline capacity lease margins 11,102 11,461 32,282 32,214
Other revenues 1,829 3,045 8,722 9,106
- --------------------------------------------------------------------------------------------
Net revenues 73,359 70,546 241,135 242,575
Operating expenses 36,148 35,674 103,070 103,272
Depreciation, depletion and amortization 12,892 13,282 38,667 38,068
- --------------------------------------------------------------------------------------------
Operating income $ 24,319 $ 21,590 $ 99,398 $101,235
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS MARGIN PER MCF
Residential $3.52 $3.08 $2.66 $2.57
Commercial $2.36 $2.07 $2.13 $2.07
Industrial $0.56 $0.86 $0.94 $0.83
Pipeline capacity lease $0.20 $0.21 $0.19 $0.20
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VOLUMES (MMCF)
Gas sales
Residential 12,364 13,438 53,330 54,697
Commercial 6,274 7,498 26,272 27,107
Industrial 2,342 3,178 9,849 12,806
Pipeline capacity leases 45,641 39,983 131,785 118,991
- ------------------------------------------------------------------------------------
Total 66,621 64,097 221,236 213,601
====================================================================================
Capital expenditures (thousands) $ 17,762 $ 10,611 $ 39,096 $ 31,783
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
MAY 31,
1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Number of customers 744,096 737,948
Customers per employee 421 401
Identifiable assets (thousands) $1,061,272 $1,028,673
======================================================================
</TABLE>
[GRAPH]
Graphs shows gas sales volume for 1997 and 1996 in MMcf. 1997 volumes: PCL
131,785 MMcf, Commercial 26,272 MMcf, Industrial 9,849 MMcf and Residential
53,330 MMcf. 1996 volumes were PCL 118,991 MMcf, Commercial 27,107 MMcf,
Industrial 12,806 Mmcf and Residential 54,697 MMcf.
Two related applications filed by the Company with the OCC during the second
quarter have been withdrawn. The first was an application for approval of a plan
to deregulate the transmission, gathering and storage functions of the regulated
operations and the second was an application for approval of a plan to unbundle
the merchant function of the regulated operations in order to provide its
customers with a choice of gas supplier. While the Company remains committed to
providing its customers with a choice of gas suppliers, it recognizes the
desirability of waiting until the rules are established by the OCC.
8
<PAGE> 9
Transportation of gas has begun to one of the natural gas fired electric
generating plants owned by Public Service Company of Oklahoma (PSO). The Company
will be providing transportation services to half of these plants for PSO by
early fiscal 1998 with an anticipated annual delivery of 10.5 Bcf. Firm gas
sales will be provided by the Company's nonregulated marketing operation.
Capital expenditures include $8 million through the third quarter of fiscal
1997 and are expected to total $11.5 million when the facilities are completed.
NONREGULATED OPERATIONS
ONEOK's nonregulated operations are involved in the marketing, processing and
production of natural gas, oil and natural gas liquids. The gas marketing
subsidiary directs its activities to the mid-continent region of the United
States. The Company's interests in gas liquids extraction plants and its
producing properties are concentrated principally in Oklahoma. The Company also
operates its headquarters office building and a parking garage.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
COMBINED NONREGULATED OPERATIONS
Gas sales $82,618 $133,714 $362,754 $475,054
Cost of gas 79,890 128,039 350,981 459,997
- ------------------------------------------------------------------------------------
Gross margins on gas sales 2,728 5,675 11,773 15,057
Gas and oil production 10,374 4,523 29,961 15,859
Gas processing (net) 5,296 5,717 24,138 15,784
Other 3,410 10,015 7,241 15,940
- ------------------------------------------------------------------------------------
Net revenues 21,808 25,930 73,113 62,640
Operating expenses 9,377 8,043 25,806 23,397
Depreciation, depletion and amortization 6,827 11,641 17,048 18,320
- ------------------------------------------------------------------------------------
Operating income before taxes $ 5,604 $ 6,246 $ 30,259 $ 20,923
====================================================================================
</TABLE>
The Company adheres to a prudent risk management strategy of hedging fixed
price or location differential transactions using natural gas futures contracts
or other derivative agreements to offset potential price risk exposure.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
1997 1996 1997 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMBINED NONREGULATED
NATURAL GAS OPERATIONS
Natural gas volumes (MMcf)
Marketing 46,958 61,549 146,846 252,795
Natural gas production 3,521 1,887 10,886 6,009
Residue gas 1,541 1,693 4,536 5,268
--------------------------------------------------------------------------
52,020 65,129 162,268 264,072
--------------------------------------------------------------------------
Less intersegment sales
Marketing 2,711 1,513 6,548 6,780
Natural gas production 2,046 1,031 5,978 2,790
Residue gas 1,541 1,693 4,536 5,266
--------------------------------------------------------------------------
6,298 4,237 17,062 14,836
--------------------------------------------------------------------------
Net natural gas volumes (MMcf) 45,722 60,892 145,206 249,236
==========================================================================
</TABLE>
9
<PAGE> 10
MARKETING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARKETING SEGMENT
Natural gas sales $ 82,586 $133,714 $362,723 $475,054
Cost of gas 79,859 128,039 350,951 459,997
- --------------------------------------------------------------------------------------------
Gross margins on gas sales 2,727 5,675 11,772 15,057
Other 16 39 504 1,209
- --------------------------------------------------------------------------------------------
Operating revenues 2,743 5,714 12,276 16,266
Operating costs, net 938 1,010 4,428 2,793
Depreciation, depletion and amortization 121 120 362 363
- --------------------------------------------------------------------------------------------
Operating income $ 1,684 $ 4,584 $ 7,486 $ 13,110
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INFORMATION
Natural gas volumes (MMcf) 46,958 61,549 151,986 252,796
Capital expenditures (thousands) $60 $3 $295 $119
Identifiable assets (thousands) $65,473 $74,546
=========================================================================================
</TABLE>
[GRAPH]
Graph shows Nine Months ended May, Marketing margins per Mcf. Margins for 1997
were $0.08 per Mcf and $0.06 per Mcf for 1996.
The Company's gas marketing operation concentrates its efforts on capitalizing
on day to day pricing volatility through the use of gas storage facilities,
hedging and transportation arbitraging. The decreases in gas marketing volumes
and gross margins for the current quarter reflect the reduction in base load
gas trading as compared to the same period in the prior year and a lower degree
of price dispersion. The increase in gross margin per Mcf for the fiscal year to
date compared to the same period one year ago reflects the Company's emphasis on
daily trading. The Company will continue to pursue an aggressive marketing
strategy using hedging and gas storage to allow the marketing operation to take
advantage of the volatility in gas prices.
10
<PAGE> 11
PROCESSING
Gas processing revenues and operating income were lower for the quarter ended
May 31, 1997 compared to the same quarter one year ago due to a drop in product
prices and storage of a significant volume of propane and other products. For
the nine months ended May 31, 1997, gas processing revenues and operating
income remained higher then the same period one year ago due to higher product
prices earlier in fiscal 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROCESSING SEGMENT
Gas processing (net) $ 4,813 $ 5,156 $ 22,295 $ 13,925
Other (119) 188 (84) 259
- ----------------------------------------------------------------------------------------------
Operating revenues 4,694 5,344 22,211 14,184
Operating costs, net 1,896 1,902 5,885 5,757
Depreciation, depletion and amortization 649 467 1,744 1,402
- ----------------------------------------------------------------------------------------------
Operating income $ 2,149 $ 2,975 $ 14,582 $ 7,025
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROCESSING SEGMENT
Operating Information
Residue gas (MMBtu) 1,541 1,693 4,536 5,268
Natural gas liquids sold (MGal) 47,745 49,252 156,460 143,761
Average NGL's price (Gal) $ 0.322 $ 0.320 $ 0.390 $ 0.290
Fuel & Shrink price (MMbtu) $ 1.99 $ 1.95 $ 2.07 $ 1.73
Capital expenditures (thousands) $ 495 $ 656 $ 9,982 $ 4,670
Identifiable assets (thousands) $ 37,074 $ 27,798
=====================================================================================
</TABLE>
PRODUCTION
Gas production volumes increased over the same periods one year ago continuing
to reflect the effects of gas reserves acquired in the latter part of fiscal
1996 and operational changes and efficiencies. The increase in the average
price of gas and oil is attributable to general market conditions and an
aggressive marketing campaign conducted through the Company's gas marketing
segment. Other revenues for the prior year reflect the sale of producing
properties in Alabama and Mississippi. Operating efficiencies also resulted in
a decline of the operating cost per equivalent Mcf of sales. The decrease in
depreciation, depletion and amortization reflects the Company's ongoing
evaluation of its producing properties in fiscal 1997 offset by a $8.6 million
impairment in fiscal 1996 in accordance with the adoption of Statement of
Financial Accounting Standard No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRODUCTION SEGMENT
Natural gas sales $ 8,759 $ 4,000 $ 24,849 $ 10,713
Oil residue sales 1,617 523 5,114 5,146
Liquids and residue 483 561 1,844 1,860
Other 65 7,376 473 7,437
- ---------------------------------------------------------------------------------------------
Operating revenues 10,924 12,460 32,280 25,156
Operating costs, net 2,998 2,699 8,652 7,326
Depreciation, depletion and amortization 5,967 10,964 14,672 16,285
- ---------------------------------------------------------------------------------------------
Operating income $ 1,959 $ (1,203) $ 8,956 $ 1,545
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRODUCTION SEGMENT
Proved Reserves
Gas (MMcf) -- -- 78,844 31,233
Oil (MBbls) -- -- 1,583 2,701
- --------------------------------------------------------------------------------
Production
Gas (MMcf) 3,521 1,887 10,886 6,009
Oil (MBbls) 80 22 252 294
- --------------------------------------------------------------------------------
Average price
Gas (Mcf) $ 2.49 $ 2.12 $ 2.28 $ 1.78
Oil (Bbls) $ 20.11 $ 23.67 $ 20.33 $ 17.50
- --------------------------------------------------------------------------------
Capital expenditures (thousands) $ 5,743 $14,433 $28,920 $42,893
Identifiable assets (thousands) $98,860 $77,945
================================================================================
</TABLE>
As a result of the second quarter acquisition of PSEC, Inc., and affiliates,
the Company became the operator and managing partner of Sycamore Gas Gathering
System (Sycamore). In field drilling of the Sycamore properties has begun to
enhance the proven reserves. The Company is also pursuing other opportunities
in gathering operations.
11
<PAGE> 12
FINANCIAL FLEXIBILITY AND LIQUIDITY
Prior to closing its strategic alliance with Western, the Company's goals are
to maintain an equity to capital ratio, including short-term debt, of
approximately 50 percent and to preserve or improve its current debt ratings.
At May 31, 1997, the equity component was 57 percent, which increased from 51
percent at August 31, 1996. Debt ratings are A3 by Moody's Investors Service
and A- by Standard & Poor's Corporation. The Company's long-term debt
represents 42 percent of total capital at May 31, 1997.
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 periodically
accesses funds through short-term credit agreements and, if necessary, through
long-term borrowings.
OPERATING CASH FLOWS
Operating cash flows for the nine months ended May 31, 1997, as compared to the
same period in 1996 are higher due to increased earnings and lower net invested
working capital.
INVESTING CASH FLOWS
Capital expenditures for the nine months ended May 31, 1997 and 1996 are as
follows.
<TABLE>
<CAPTION>
-----------------------------------
(MILLIONS OF DOLLARS) 1997 1996
-----------------------------------
<S> <C> <C>
Regulated $39.1 $31.8
-----------------------------------
Processing 10.0 4.7
Production 28.9 42.9
Other .9 .2
-----------------------------------
Nonregulated $39.8 $47.8
===================================
</TABLE>
[GRAPH]
Graph shows Capital expenditures for Regulated and Nonregulated companies for
the nine months ended 1997 and 1996. Capital expenditures for regulated
companies were $39.1 million in 1997 and $31.8 million in 1996. Nonregulated
capital expenditures were $39.8 million in 1997 and $47.8 million in 1996.
FINANCING CASH FLOW
At May 31, 1997, $347 million of long-term debt was outstanding. As of that
date, the Company could have issued $313 million of additional long-term debt
under the most restrictive provisions contained in its various borrowing
agreements.
The Company believes that internally generated funds and access to financial
markets will be sufficient to meet its debt service, dividend requirements, and
capital expenditures. However, if certain events occur, such as significant
acquisitions, additional debt or equity financing may be required.
12
<PAGE> 13
LIQUIDITY
The regulated segment continues to face competitive pressure in serving the
substantial market represented by its large volume customers. The loss of a
substantial portion of that load, without recoupment of the revenues from that
loss, could have a materially adverse effect on the Company's financial
condition. However, rate restructuring achieved in the June 1995 rate order
reduced the Company's risk in serving its large volume customers.
OTHER
PRICE RISK MANAGEMENT. Commodity futures contracts and swaps are periodically
used in the production, gas processing, and marketing operations to hedge the
impact of price fluctuations. Natural gas futures contracts require the Company
to buy or sell natural gas at a fixed price. Swap agreements are non-exchange
trades between parties whereby one party pays a fixed price and the other a
floating price. Swaps allow for the creation of customized transactions. 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 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 when the related physical
gas purchases or sales transactions are recognized. At May 31, 1997, the net
deferred gain on these contracts was approximately $3.8 million.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
OCTAGON RESOURCES, INC. V. OKLAHOMA NATURAL GAS COMPANY, No. CJ-96-2328-L, in
the District Court of Cleveland County, Oklahoma. The plaintiff brought this
action against the Company for the alleged breach of a gas purchase agreement
seeking to recover actual damages in excess of $10,000 and punitive damages in
excess of $10,000. The plaintiff has also asserted claims for fraud and deceit
and for declaratory relief to determine the rights and obligations of the
parties under the agreement. The Company has filed an answer denying the
claims of the plaintiff and has asserted a counterclaim seeking to recover
damages from the plaintiff for its repudiation of the gas purchase agreement.
The case is now in discovery. Settlement discussions are in progress.
UNITED STATES EX REL JACK J. GRYNBERG V. ALASKA PIPELINE COMPANY, ET AL.
(INCLUDING ONEOK INC.), No. 95-725-TFH, in the United States District Court for
the District of Columbia. The Company joined with 52 other defendants in filing
a motion to dismiss the claims of the Plaintiff on a number of grounds. The
motion was granted on March 27, 1997. The Plaintiff has not filed an appeal and
the time for appeal has expired.
FENT, ET UX V. OKLAHOMA NATURAL GAS COMPANY, A DIVISION OF ONEOK INC., ET AL.,
No. CJ-88-10148, District Court, Oklahoma County ("Fent I case"). Fent appealed
the decision of the District Court and the appeal was referred to the Court of
Appeals for decision. All briefs have been filed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports
On April 25, 1997 the Company filed a form 8-K concerning the death of
ONEOK Board member Dr. G. Rainey Williams.
No financial statements were filed with the Form 8-K.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 20th day of June,
1997.
ONEOK Inc.
Registrant
By: /s/ J. D. Neal
-----------------------------------------
J. D. Neal
Vice President, Chief Financial Officer,
and Treasurer (Principal Financial and
Accounting Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED MAY 31,
1997, AND THE CONSOLIDATED CONDENSED BALANCE SHEET AT MAY 31, 1997, FOR ONEOK
INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 12,851
<SECURITIES> 0
<RECEIVABLES> 110,310
<ALLOWANCES> 0
<INVENTORY> 64,612
<CURRENT-ASSETS> 203,665
<PP&E> 1,400,223
<DEPRECIATION> 572,229
<TOTAL-ASSETS> 1,220,075
<CURRENT-LIABILITIES> 160,687
<BONDS> 0
0
0
<COMMON> 227,263
<OTHER-SE> 264,144
<TOTAL-LIABILITY-AND-EQUITY> 1,220,075
<SALES> 0
<TOTAL-REVENUES> 954,031
<CGS> 0
<TOTAL-COSTS> 864,027
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,819
<INCOME-PRETAX> 103,840
<INCOME-TAX> 39,655
<INCOME-CONTINUING> 64,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,900
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
