<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended February 28,
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 February 28, 1997, the Company had 27,815,783 shares of common stock
outstanding.
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<PAGE> 2
ONEOK INC.
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Consolidated Condensed Statements of Income -
Three Months and Six Months Ended
February 28, 1997 and February 29, 1996 3
Consolidated Condensed Balance Sheets -
February 28, 1997, and August 31, 1996 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended February 28, 1997 and February 29, 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>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
FEBRUARY 28, February 29, FEBRUARY 28, February 29,
(Thousands of Dollars except per share amounts) 1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated $ 282,794 $ 227,539 $ 396,041 $ 332,397
Nonregulated 190,859 237,201 326,363 370,803
------------ ------------ ------------ ------------
Total Operating Revenues 473,653 464,740 722,404 703,200
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of gas 344,123 336,873 506,706 498,270
Operations and maintenance 33,531 34,954 68,944 68,564
Depreciation, depletion, and amortization 19,012 15,602 35,996 31,464
General taxes 5,930 5,804 11,023 10,579
Income taxes 23,818 23,840 31,481 29,117
------------ ------------ ------------ ------------
Total Operating Expenses 426,414 417,073 654,150 637,994
------------ ------------ ------------ ------------
Operating Income 47,239 47,667 68,254 65,206
Interest 8,998 9,124 17,838 18,240
------------ ------------ ------------ ------------
NET INCOME 38,241 38,543 50,416 46,966
Preferred Stock Dividends 107 107 214 214
------------ ------------ ------------ ------------
Income Available for Common Stock $ 38,134 $ 38,436 $ 50,202 $ 46,752
============ ============ ============ ============
Earnings Per Share of Common Stock $ 1.39 $ 1.42 $ 1.84 $ 1.73
============ ============ ============ ============
Dividends Per Share of Common Stock $ 0.30 $ 0.29 $ 0.60 $ 0.58
============ ============ ============ ============
Average Shares of Common Stock
Outstanding (Thousands) 27,378 27,100 27,326 27,062
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
FEBRUARY 28, August 31,
(Thousands of Dollars) 1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Property $ 1,386,538 $ 1,336,652
Accumulated depreciation, depletion, and amortization 561,558 541,618
------------ ------------
Net Property 824,980 795,034
------------ ------------
CURRENT ASSETS
Cash and cash equivalents 6,095 598
Accounts and notes receivable 232,948 119,338
Inventories 50,932 91,556
Other 27,575 21,654
------------ ------------
Total Current Assets 317,550 233,146
------------ ------------
DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets, net 149,723 155,253
Other 41,161 36,458
------------ ------------
Total Deferred Charges and Other Assets 190,884 191,711
------------ ------------
Total Assets $ 1,333,414 $ 1,219,891
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
COMMON SHAREHOLDER'S EQUITY
Common stock without par value: authorized 60,000,000
shares; issued and outstanding 27,815,783 shares at
February 28, 1997 and 27,260,646 shares at August 31, 1996 $ 222,178 $ 207,084
Retained earnings 241,402 207,611
------------ ------------
Total Common Shareholders' Equity 463,580 414,695
------------ ------------
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
February 28, 1997 and August 31, 1996 9,000 9,000
------------ ------------
Total Shareholders' Equity 472,580 423,695
------------ ------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 342,218 336,821
CURRENT LIABILITIES
Long-term debt 18,911 15,050
Notes payable 35,066 50,223
Accounts payable 146,481 96,872
Accrued taxes 20,521 10,820
Accrued interest 7,804 7,732
Other 29,052 21,933
------------ ------------
Total Current Liabilities 257,835 202,630
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 182,104 180,620
Customers' advances for construction and other deferred credits 78,677 76,125
------------ ------------
Total Deferred Credits and Other Liabilities 260,781 256,745
Commitments and Contingencies -- --
------------ ------------
Total Liabilities and Shareholders' Equity $ 1,333,414 $ 1,219,891
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 5
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
FEBRUARY 28, February 29,
(Thousands of Dollars except per share amounts) 1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 50,416 $ 46,966
Depreciation, depletion, and amortization 35,996 31,464
Net losses of equity investees 155 1,290
Deferred income taxes (1,086) 2,604
Changes in assets and liabilities (15,916) (50,127)
------------ ------------
Cash provided by operating activities 69,565 30,907
------------ ------------
INVESTING ACTIVITIES
Changes in other investments, net 798 (2,231)
Capital expenditures, net of salvage (38,304) (19,832)
------------ ------------
Cash used in investing activities (37,506) (22,063)
------------ ------------
FINANCING ACTIVITIES
Payment of notes payable, net (15,158) (5,000)
Payments of debt -- (41)
Issuance of common stock 3,327 1,144
Dividends paid (14,731) (14,036)
------------ ------------
Cash used in financing activities (26,562) (17,933)
------------ ------------
Change in cash and cash equivalents 5,497 (9,089)
Cash and cash equivalents at beginning of year 598 12,499
------------ ------------
Cash and cash equivalents at end of year $ 6,095 $ 3,410
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<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 six
month periods ended February 28, 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 standstill agreement prevents Western from increasing their
position in the Company for 15 years and restricts the conditions under
which Western can vote any common shares received upon conversion of its
preferred stock.
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 and
the Kansas Corporation Commission. The S-4 Registration Statement is
expected to be filed with the Securities and Exchange Commission by
mid-April. Transition teams representing the Company and Western continue
working toward a 3rd quarter 1997 closing of the transaction.
C. REGULATORY ASSETS
The following table is a summary of regulatory assets, net of amortization,
outstanding at February 28, 1997 and August 31, 1996.
<TABLE>
<CAPTION>
FEB. 28, AUG. 31,
(THOUSANDS OF DOLLARS) 1997 1996
-------- --------
<S> <C> <C>
Recoupable take-or-pay settlements $ 97,831 $100,155
Pension costs 31,335 33,426
Postretirement costs other than pensions 9,111 9,386
Postemployment benefits costs 2,975 2,975
Income tax rate changes 8,088 8,354
Unamortized gas storage costs 383 957
-------- --------
Regulatory Assets, Net $149,723 $155,253
======== ========
</TABLE>
<PAGE> 7
D. SUPPLEMENTAL CASH FLOW INFORMATION
The following table is supplemental information relative to the Company's
cash flows for the six months ended February 28, 1997 and February 29,
1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 17,254 $ 23,310
Income taxes $ 9,018 $ 8,132
Noncash transactions -
Gas received as payment in kind $ 320 $ 1,698
Common stock issued under dividend
Reinvestment program 1,894 $ 1,874
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
acquisitions were accounted for as a purchase.
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.
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 standstill agreement
prevents Western from increasing their position in the Company for 15 years 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 Oklahoma Corporation Commission and the
Kansas Corporation Commission. This transaction is anticipated to close by
September 1997 and will also require additional approvals from ONEOK
shareholders and the Securities and Exchange Commission and antitrust clearance
under the Hart-Scott-Rodino Act.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Operating revenues - regulated $282,794 $227,539 $396,041 $332,397
Operating revenues - nonregulated 190,859 237,201 326,363 370,803
-------- -------- -------- --------
Total operating revenues 473,653 464,740 722,404 703,200
Operating costs 383,584 377,630 586,673 577,413
Depreciation, depletion and amortization 19,012 15,602 35,996 31,464
-------- -------- -------- --------
Operating income before taxes $ 71,057 $ 71,508 $ 99,735 $ 94,323
======== ======== ======== ========
</TABLE>
EARNINGS PER SHARE
2ND QUARTER ENDED FEBRUARY
[GRAPH]
Graph indicates 2nd Quarter E.P.S. for Regulated and Nonregulated
companies. Regulated E.P.S. is $1.13 for 1997 and $1.21 for 1996.
Nonregulated E.P.S. is $0.27 for 1997 and $0.21 for 1996.
EARNINGS PER SHARE
SIX MONTHS ENDED FEBRUARY
[GRAPH]
Graph indicates 2nd Quarter Earnings Per Share for Regulated and
Nonregulated companies. Regulated E.P.S. is $1.33 for 1997 and $1.44 for
1996. Nonregulated E.P.S. is $0.51 for 1997 and $0.29 for 1996.
<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 SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Gas sales $266,654 $214,533 $368,715 $306,736
Cost of gas 178,798 119,466 229,012 161,520
-------- -------- -------- --------
Gross margins on gas sales 87,856 95,067 139,703 145,216
Pipeline capacity lease margins 11,574 12,434 21,180 21,672
Other revenues 5,057 1,356 6,893 5,141
-------- -------- -------- --------
Net revenues 104,487 108,857 167,776 172,029
Operating expenses 33,532 35,088 66,922 67,598
Depreciation, depletion and amortization 12,886 12,406 25,775 24,786
-------- -------- -------- --------
Operating income $ 58,069 $ 61,363 $ 75,079 $ 79,645
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
GROSS MARGIN PER Mcf
Residential $ 1.98 $ 1.95 $ 2.40 $ 2.41
Commercial $ 1.97 $ 1.97 $ 2.06 $ 2.08
Industrial $ 1.11 $ 1.02 $ 1.06 $ 0.83
Pipeline capacity lease $ 0.19 $ 0.21 $ 0.19 $ 0.19
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
VOLUMES (MMcf)
Gas sales
Residential 30,141 31,367 40,967 41,259
Commercial 14,580 14,865 19,999 19,609
Industrial 4,749 5,277 7,507 9,628
Pipeline capacity leases 45,417 41,854 86,144 79,008
-------- -------- -------- --------
Total 94,887 93,363 154,617 149,504
======== ======== ======== ========
Capital expenditures (thousands) $ 11,133 $ 10,132 $ 21,334 $ 21,172
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FEB. 28, FEB. 29,
1997 1996
---------- ----------
<S> <C> <C>
Number of customers 752,775 744,868
Customers per employee 426 402
Identifiable assets (thousands) $1,115,637 $1,114,007
========== ==========
</TABLE>
GAS SALES VOLUMES/MMcf
SIX MONTHS ENDED FEBRUARY
[GRAPH]
Graph shows gas sales volumes for 1997 and 1996 in MMcf. 1997 volumes: PCL
86,144 MMcf, Commercial 19,999 MMcf, Industrial 7,507 MMcf and Residential
40,967 MMcf. 1996 volumes were PCL 79,008 MMcf, Commercial 19,609 MMcf,
Industrial 9,628 MMcf and Residential 41,259 MMcf.
During the second quarter, the Company filed two related applications with the
Oklahoma Corporation Commission (OCC). The first was an application for
approval of a plan to deregulate the transmission, gathering and storage
functions of the regulated operations. If approved, these functions would be
separated into a nonregulated company which would continue to provide services
to the regulated operation on a competitive bid basis. Subsequent phases would
further unbundle services for large industrial and commercial customers
allowing them to separately contract for transmission and storage services. The
second application proposed unbundling the merchant function of the regulated
operations in order to provide its customers with a choice of gas supplier.
Initially, large industrial and
<PAGE> 9
commercial customers would have the opportunity to choose a qualified supplier.
Small industrial and commercial customers and residential customers would be
given that opportunity on May 1, 1998. These applications are in response to
increasing competition in the natural gas industry, as well as to the OCC's
recent decision to go forward with restructuring of the Oklahoma gas utility
industry.
Net revenues decreased from the same periods one year ago although volumes
delivered increased. Operating costs declined from the same periods one year
ago while the number of customers served increased. The reduction in operating
costs is primarily attributable to lower employee benefit costs. Other revenues
increased primarily due to revenues from storage of gas for an affiliate, ONEOK
Gas Marketing Company.
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 SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
COMBINED NONREGULATED OPERATIONS
Gas sales $171,471 $223,672 $280,136 $341,340
Cost of gas 165,854 216,771 271,091 331,958
-------- -------- -------- --------
Gross margins on gas sales 5,617 6,901 9,045 9,382
Gas and oil production 10,416 5,965 19,587 11,336
Gas processing (net) 10,862 4,992 18,842 10,067
Other (87) 3,262 3,831 5,926
-------- -------- -------- --------
Net revenues 26,808 21,120 51,305 36,711
Operating expenses 7,694 7,779 16,429 15,354
Depreciation, depletion and amortization 6,126 3,196 10,221 6,677
-------- -------- -------- --------
Operating income before taxes $ 12,988 $ 10,145 $ 24,655 $ 14,680
======== ======== ======== ========
</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 SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
COMBINED NONREGULATED
NATURAL GAS OPERATIONS
Natural gas volumes (MMcf)
Marketing 50,441 109,712 105,028 191,247
Natural gas production 3,788 1,970 7,365 4,121
Residue gas 1,446 1,766 2,995 3,575
-------- -------- -------- --------
55,675 113,448 115,388 198,943
-------- -------- -------- --------
Less intersegment sales
Marketing 2,868 3,589 3,837 5,267
Natural gas production 2,232 919 3,932 1,759
Residue gas 1,446 1,766 2,995 3,573
-------- -------- -------- --------
6,546 6,274 10,764 10,599
-------- -------- -------- --------
Net natural gas volumes 49,129 107,174 104,624 188,344
======== ======== ======== ========
</TABLE>
Total nonregulated operating income increased for the same period one year ago
primarily as a result of improvements in product prices and natural gas
production.
<PAGE> 10
MARKETING
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
MARKETING SEGMENT
Natural gas sales $171,471 $223,672 $280,136 $341,340
Cost of gas 165,854 216,771 271,091 331,958
-------- -------- -------- --------
Gross margins on gas sales 5,617 6,901 9,045 9,382
Other 34 899 488 1,170
-------- -------- -------- --------
Operating revenues 5,651 7,800 9,533 10,552
Operating costs, net 2,685 799 3,490 1,782
Depreciation, depletion and amortization 127 215 241 243
-------- -------- -------- --------
Operating income $ 2,839 $ 6,786 $ 5,802 $ 8,527
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING INFORMATION
Natural gas volumes (MMcf) 50,441 109,712 105,028 191,247
Capital expenditures (thousands) 195 $ 29 235 $ 116
Identifiable assets (thousands) -- -- $106,969 $ 79,631
======== ======== ======== ========
</TABLE>
MARKETING GROSS MARGINS / Mcf
2ND QUARTER ENDED FEBRUARY
[GRAPH]
Graph shows 2nd Quarter Marketing margins per Mcf. Margins for 1997 were
$0.11 per Mcf and $0.06 per Mcf for 1996.
MARKETING GROSS MARGINS / Mcf
SIX MONTHS ENDED FEBRUARY
[GRAPH]
Graph shows Six Months ended Marketing margins per Mcf. Margins for 1997
were $0.09 per Mcf and $0.05 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 decrease in gas marketing volumes
and gross margins for the quarter reflects the reduction in base load gas
trading as compared to the same period in the prior year. 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. The increase in operating costs is due to a nonrecurring expense.
<PAGE> 11
PROCESSING
Gas processing volumes and revenue rose over the same periods one year ago
reflecting improved market conditions for natural gas liquids (NGL). Product
prices and processing margins continued at the highest level in recent times.
Significant increases in fuel and shrink costs were minimized through hedging.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PROCESSING SEGMENT
Gas processing (net) $ 10,155 $ 4,338 $ 17,482 $ 8,769
Other 33 9 35 71
-------- -------- -------- --------
Operating revenues 10,188 4,347 17,517 8,840
Operating costs, net 2,138 2,117 3,989 3,855
Depreciation, depletion and amortization 574 467 1,095 935
-------- -------- -------- --------
Operating income $ 7,476 $ 1,763 $ 12,433 $ 4,050
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PROCESSING SEGMENT
Operating Information
Residue gas (MMcf) 1,446 1,766 2,995 3,575
Natural gas liquids (MBbls) 55,943 49,576 108,715 94,509
Average NGL's price (Bbls) $ 0.470 $ 0.280 $ 0.420 $ 0.280
Fuel & Shrink price (MMbtu) $ 2.370 $ 1.836 $ 2.104 $ 1.612
Capital expenditures (thousands) $ 9,171 $ 436 $ 9,487 $ 4,014
Identifiable assets (thousands) -- -- $ 36,081 $ 32,348
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRODUCTION SEGMENT
Natural gas sales $ 8,802 $ 3,619 $ 16,090 $ 6,713
Oil residue sales 1,614 2,346 3,497 4,622
Liquids and residue 707 654 1,361 1,299
Other 308 27 408 61
-------- -------- -------- --------
Operating revenues 11,431 6,646 21,356 12,695
Operating costs, net 3,070 2,414 5,654 4,627
Depreciation, depletion and amortization 5,335 2,425 8,705 5,321
-------- -------- -------- --------
Operating income $ 3,026 $ 1,807 $ 6,997 $ 2,747
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
(THOUSANDS OF DOLLARS) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRODUCTION SEGMENT
Proved Reserves
Gas (MMcf) -- -- 88,626 35,922
Oil (MBbls) -- -- 1,829 2,979
-------- -------- -------- --------
Production
Gas (MMcf) 3,788 1,970 7,365 4,121
Oil (MBbls) 81 134 171 272
-------- -------- -------- --------
Average price
Gas (Mcf) $ 2.32 $ 1.84 $ 2.18 $ 1.63
Oil (Bbls) $ 19.81 $ 17.52 $ 20.44 $ 17.00
-------- -------- -------- --------
Capital expenditures (thousands) $ 28,725 $ 841 $ 30,105 $ 1,460
Identifiable assets (thousands) -- -- $ 94,872 $ 55,892
======== ======== ======== ========
</TABLE>
PRODUCTION
Gas production volumes increased over the same periods one year ago reflecting
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.
Operating efficiencies also resulted in a decline of the operating cost per
equivalent Mcf.
The Company completed the acquisition of PSEC, Inc. an independent oil and gas
producing company in February 1997. The transaction included 180 wells with
proven reserves of 20 Bcf of natural gas and 167,000 barrels of oil
concentrated in three counties in Oklahoma. Also included in the acquisition
was PSPC, Ltd., which operates and holds a 42 percent interest in the Sycamore
Gas Gathering System. The $25 million acquisition was made with a combination
of cash, notes payable and ONEOK common stock, and is in keeping with the
Company's objective to acquire quality producing properties in its core areas.
<PAGE> 12
FINANCIAL FLEXIBILITY AND LIQUIDITY
Prior to closing its strategic alliance with Western Resources, the Company's
goals are to continue 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 February 28, 1997, the equity component was 54
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 41 percent of total capital at February 28,
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 six months ended February 28, 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 six months ended February 28, 1997 and February
29, 1996 are as follows.
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1997 1996
------ ------
<S> <C> <C>
Regulated $ 21.3 $ 21.2
------ ------
Processing 9.4 4.0
Production 30.1 1.5
Other 0.6 0.1
------ ------
Nonregulated $ 40.1 $ 5.6
====== ======
</TABLE>
CAPITAL EXPENDITURES
SIX MONTHS ENDED FEBRUARY
[GRAPH]
Graph shows Capital expenditures for Regulated and Nonregulated companies
for 1997 and 1996. Capital expenditures for regulated companies were $22.7
million in 1997 and $21.2 million in 1996. Nonregulated capital
expenditures were $37.6 million in 1997 and $5.6 million in 1996.
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
acquisitions were accounted for as a purchase.
FINANCING CASH FLOW
At February 28, 1997, $361 million of long-term debt was outstanding. As of
that date, the Company could have issued $315 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.
<PAGE> 13
LIQUIDITY
The regulated segment continues to face competitive pressure to serve the
substantial market represented by its large volume customers. The loss of a
substantial portion of that load, without recoupment of the revenues from that
loss, could have a materially adverse effect on the Company's financial
condition. However, 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 February 28, 1997, the
net deferred gain on these contracts was approximately $2.2 million.
<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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports
None
No financial statements were filed with the Form 8-K.
<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 31st day of
March, 1997.
ONEOK Inc.
Registrant
By: /s/ J. D. NEAL
------------------------------------
J. D. Neal
Vice President, Chief Financial
Officer, and Treasurer (Principal
Financial and Accounting Officer)
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- -----------
<S> <C> <C>
Ex 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 1997 FISCAL YEAR ENDED
FEBRUARY 28, 1997, AND THE CONSOLIDATED CONDENSED BALANCE SHEET AT FEBRUARY 28,
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> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 6,095
<SECURITIES> 0
<RECEIVABLES> 232,948
<ALLOWANCES> 0
<INVENTORY> 50,932
<CURRENT-ASSETS> 317,550
<PP&E> 1,386,538
<DEPRECIATION> 561,558
<TOTAL-ASSETS> 1,333,414
<CURRENT-LIABILITIES> 257,835
<BONDS> 0
0
9,000
<COMMON> 222,178
<OTHER-SE> 241,402
<TOTAL-LIABILITY-AND-EQUITY> 1,333,414
<SALES> 0
<TOTAL-REVENUES> 722,404
<CGS> 0
<TOTAL-COSTS> 622,669
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,838
<INCOME-PRETAX> 81,997
<INCOME-TAX> 31,481
<INCOME-CONTINUING> 50,416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,416
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
</TABLE>
