UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934 for the quarterly period ended .
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OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934 for the transition period from September 1, 1999 to
December 31, 1999.
Commission file number 001-13643
ONEOK, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1520922
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
100 West Fifth Street, Tulsa, OK 74103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 588-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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On December 31, 1999, the Company had 29,554,623 shares of common stock
outstanding.
ONEOK, Inc.
QUARTERLY REPORT ON FORM 10-Q
Part I. Financial Information Page No.
Consolidated Condensed Statements of Income - 3
Four Months Ended December 31, 1999 and 1998
Consolidated Condensed Balance Sheets - 4
December 31, 1999 and August 31, 1999
Consolidated Condensed Statements of Cash Flows - 5
Four Months Ended December 31, 1999 and 1998
Notes to Consolidated Condensed Financial Statements 6 - 10
Management's Discussion and Analysis of 11 - 29
Financial Condition and Results of Operations
Part II. Other Information 30 - 33
2
Part I - FINANCIAL INFORMATION
ONEOK, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited) Four Months Ended
December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars,
except per share amounts)
Operating Revenues $ 808,874 $ 580,701
Cost of gas 523,533 368,783
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Net Revenues 285,341 211,918
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Operating Expenses
Operations and maintenance 141,395 89,559
Depreciation, depletion, and amortization 43,227 41,736
General taxes 14,755 12,485
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Total Operating Expenses 199,377 143,780
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Operating Income 85,964 68,138
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Other income - 4,993
Interest 27,883 15,567
Income taxes 22,737 22,736
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Net Income 35,344 34,828
Preferred Stock Dividends 12,367 12,432
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Income Available for Common Stock $ 22,977 $ 22,396
====================================================================================================================================
Earnings Per Share of Common Stock - Basic $ 0.76 $ 0.71
====================================================================================================================================
Earnings Per Share of Common Stock - Diluted $ 0.70 $ 0.67
====================================================================================================================================
Average Shares of Common Stock - Basic (Thousands) 30,425 31,535
Average Shares of Common Stock - Diluted (Thousands) 50,384 51,648
See accompanying notes to consolidated condensed financial statements.
3
ONEOK, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited) December 31, August 31,
1999 1999
- -----------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Assets
Current Assets
Cash and cash equivalents $ 72 $ 4,402
Trade accounts and notes receivable 371,313 228,336
Inventories 134,871 118,951
Other current assets 87,465 87,578
- -----------------------------------------------------------------------------------------------------
Total Current Assets 593,721 439,267
- -----------------------------------------------------------------------------------------------------
Property, Plant and Equipment 3,143,693 3,057,626
Accumulated depreciation, depletion, and amortization 1,021,915 988,797
- -----------------------------------------------------------------------------------------------------
Net Property 2,121,778 2,068,829
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Deferred Charges and Other Assets
Regulatory assets, net (Note D) 247,486 246,658
Goodwill 80,743 81,560
Investments and other 195,847 188,631
- -----------------------------------------------------------------------------------------------------
Total Deferred Charges and Other Assets 524,076 516,849
- -----------------------------------------------------------------------------------------------------
Total Assets $ 3,239,575 $ 3,024,945
=====================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 21,767 $ 22,817
Notes payable 462,242 263,747
Accounts payable 237,653 183,759
Accrued taxes 359 11,186
Accrued interest 16,628 7,042
Other 48,064 55,031
- -----------------------------------------------------------------------------------------------------
Total Current Liabilities 786,713 543,582
- -----------------------------------------------------------------------------------------------------
Long-term Debt, excluding current maturities 775,074 810,087
Deferred Credits and Other Liabilities
Deferred income taxes 348,218 323,624
Other deferred credits 178,046 173,193
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Total Deferred Credits and Other Liabilities 526,264 496,817
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Total Liabilities 2,088,051 1,850,486
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Commitments and Contingencies (Notes C and G)
Shareholders' Equity
Convertible Preferred Stock, $0.01 par value: Series A authorized 199 199
20,000,000 shares; issued and outstanding 19,946,448 shares
Common stock, $0.01 par value: authorized 100,000,000 shares; issued 316 316
31,599,305 shares, outstanding 29,554,623 and 30,884,225 shares
Paid in capital (Note I) 894,976 894,978
Unearned compensation (1,825) -
Retained earnings 317,964 301,536
Treasury stock at cost: 2,044,682 and 715,080 shares (60,106) (22,570)
- -----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,151,524 1,174,459
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 3,239,575 $ 3,024,945
=====================================================================================================
See accompanying notes to consolidated condensed financial statements.
4
ONEOK, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Four Months Ended
December 31,
(Unaudited) 1999 1998
- ---------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities
Net income $ 35,344 $ 34,828
Depreciation, depletion, and amortization 43,227 41,736
Gain on sale of assets - (4,993)
Net income from other investments (2,396) (634)
Deferred income taxes 28,317 (4,874)
Changes in assets and liabilities (111,524) (85,001)
- ---------------------------------------------------------------------------------
Cash Used in Operating Activities (7,032) (18,938)
- ---------------------------------------------------------------------------------
Investing Activities
Changes in other investments, net 994 1,813
Capital expenditures, net of retirements (92,165) (64,767)
Proceeds from sale of property - 13,500
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Cash Used in Investing Activities (91,171) (49,454)
- ---------------------------------------------------------------------------------
Financing Activities
Issuance (payment) of notes payable, net 198,495 98,000
Issuance of debt - 199,634
Payment of debt (36,952) (201,221)
Acquisition of treasury stock (39,610) -
Dividends paid (28,060) (28,107)
- ---------------------------------------------------------------------------------
Cash Provided by Financing Activities 93,873 68,306
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Change in Cash and Cash Equivalents (4,330) (86)
Cash and Cash Equivalents at Beginning of Period 4,402 86
- ---------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 72 $ -
=================================================================================
See accompanying notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A. Change in Fiscal Year End.
In October, 1999, the Company's Board of Directors approved a change in the
Company's fiscal year-end from August 31 to December 31 beginning January 1,
2000. The consolidated condensed financial statements included in this Form 10-Q
represent the period from September 1, 1999 through December 31, 1999, the
Company's transition period (the "Transition Period") preceding the beginning of
the new fiscal year.
B. Summary of Significant Accounting Policies
Interim Reporting. The interim consolidated condensed financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. Due to the seasonal nature of the
business, the results of operations for the Transition Period are not
necessarily indicative of the results that may be expected for a twelve-month
period. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the year ended
August 31, 1999.
C. Significant Events
On January 20, 2000, the Board of Directors of the Company voted unanimously to
terminate the merger agreement with Southwest Gas Corporation (Southwest) in
accordance with the terms of the merger agreement. Costs in the amount of $4.7
million related to the transaction have been deferred on the Company's Balance
Sheet for December 31, 1999. These costs and other costs incurred since December
31, 1999 will be charged to expense during the first quarter of fiscal 2000. The
pro forma effect of these costs being charged to expense during the Transition
Period would be to reduce Diluted Earnings Per Share to $0.64 for the Transition
Period from $0.70.
On February 1, 2000, the Company announced the purchase of assets located in
Oklahoma, Kansas, and the Texas Panhandle from Dynegy, Inc. for a cash purchase
price of $307.7 million. The assets include gathering systems, gas processing
facilities, and transmission pipelines. Closing of the transaction is expected
by the end of the first quarter of 2000.
On February 8, 2000, the Company announced the purchase of gathering and
processing assets located in Oklahoma, Kansas and West Texas from Kinder Morgan,
Inc. (KMI). The marketing and trading business of KMI as well as certain storage
and transmission pipelines in the mid-continent region will also be purchased.
The Company will pay approximately $114.0 million plus an amount equal to net
working capital at closing.
A July, 1999 order from the Oklahoma Corporation Commission (OCC) removed the
Company's Oklahoma gathering and storage assets from utility regulation
effective November 1, 1999. These assets are now included in the Transportation
and Storage segment where they are being utilized in the competitive
marketplace. An August, 1999 order from the OCC distinguished between upstream
(transportation) and downstream (distribution) assets and cleared the way for
future unbundling activities including competitive bidding for transportation
services in Oklahoma. The Distribution segment issued bids for these services in
Oklahoma during the Transition Period with contracts to be awarded in the spring
of 2000.
6
D. Regulatory Assets
The table is a summary of regulatory assets, net of amortization, at December
31, 1999, and August 31, 1999.
December 31, August 31,
1999 1999
- ---------------------------------------------------------------------------
(Thousands of Dollars)
Recoupable take-or-pay $ 84,343 $ 85,996
Pension costs 19,487 20,881
Postretirement costs other than pension 62,207 61,830
Transition costs 22,746 22,903
Reacquired debt costs 24,068 22,413
Income taxes 23,337 24,114
Other 11,298 8,521
- ---------------------------------------------------------------------------
Regulatory assets, net $ 247,486 $ 246,658
===========================================================================
E. Supplemental Cash Flow Information
The table is supplemental information relative to the Company's cash flows for
the four months ended December 31, 1999 and 1998.
1999 1998
- -------------------------------------------------------------------
(Thousands of Dollars)
Cash paid during the year
Interest (including amounts capitalized) $ 16,605 $ 13,039
Income taxes $ - $ 21,500
Noncash transactions
Treasury stock transferred to
compensation plans $ 2,071 $ -
- -------------------------------------------------------------------
F. Earnings per Share Information
The following is a reconciliation of the basic and diluted EPS computations.
Four Months Ended December 31, 1999
Per Share
Income Shares Amount
- -----------------------------------------------------------------------------------
(Thousands, except per share amounts)
Basic EPS
Income available to common stockholders $ 22,977 30,425 $ 0.76
=======
Effect of Dilutive Securities
Options - 13
Convertible preferred stock 12,367 19,946
----------- ---------
Diluted EPS
Income available to common stockholders
+ assumed conversions $ 35,344 50,384 $ 0.70
===================================================================================
7
Four Months Ended December 31, 1998
Per Share
Income Shares Amount
- -----------------------------------------------------------------------------------
(Thousands, except per share amounts)
Basic EPS
Income available to common stockholders $ 22,396 31,535 $ 0.71
=======
Effect of Dilutive Securities
Options - 42
Convertible preferred stock 12,432 20,071
----------- -------
Diluted EPS
Income available to common stockholders
+ assumed conversions $ 34,828 51,648 $ 0.67
===================================================================================
G. Commitments and Contingencies
During the year ended August 31, 1999, the Company and Southwest entered into a
merger agreement, as amended, in which the Company agreed to acquire Southwest
for $30 per share of common stock in an all cash transaction valued at $918
million. On January 20, 2000, the Company terminated the merger agreement in
accordance with the terms of the merger agreement.
The Company and certain of its officers as well as Southwest have been named as
defendants in a lawsuit brought by Southern Union Company (Southern Union). The
complaint asks for $750 million and damages to be trebled for racketeering and
unlawful violations, compensatory damages of not less than $750 million and
rescission of the Confidentiality and Standstill Agreement.
Southwest has filed a complaint against the Company and Southern Union in the
United States District Court in Arizona. Southwest seeks actual, consequential,
incidental and punitive damages in an amount in excess of $75,000 and a
declaration that the Company has breached the merger agreement.
It is anticipated that Southern Union and Southwest will continue their
litigation against the Company. If any of the plaintiffs should be successful in
any of their claims against the Company and substantial damages are awarded, it
could have a material adverse effect on the Company's operations, cash flow and
financial position. The Company intends to vigorously defend against the claims
asserted by Southern Union and Southwest and all other matters relating to the
now terminated merger with Southwest.
On February 3, 2000, two substantially identical derivative actions were filed
in the District Court in Tulsa, Oklahoma by shareholders against the members of
the Board of Directors of the Company for alleged violation of their fiduciary
duties to the Company by causing or allowing the Company to engage in certain
fraudulent and improper schemes relating to the planned merger with Southwest.
Such conduct allegedly caused the Company to be sued by both Southwest and
Southern Union which exposed the Company to millions of dollars in liabilities.
The plaintiffs seek an award of compensatory and punitive damages and costs,
disbursements and reasonable attorney fees. The Company intends to vigorously
defend against these allegations.
The Company has responsibility for 12 manufactured gas sites located in Kansas
which may contain potentially harmful materials that are classified as hazardous
material. Hazardous materials are subject to control or remediation under
various environmental laws and regulations. A consent agreement with the Kansas
Department of Health and Environment presently governs all future work at these
sites. The terms of the consent agreement allow the Company to investigate these
sites and set remediation priorities based upon the results of the
investigations and risk analysis. The prioritized sites will be investigated
over a ten year period. At December 31, 1999, the costs of the investigations
and risk analysis have been minimal. Limited information is available about the
sites. Management's best estimate of the cost of remediation ranges from $100
thousand to
8
$10 million per site based on a limited comparison of costs incurred to
remediate comparable sites. These estimates do not give effect to potential
insurance recoveries, recoveries through rates or from third parties. The Kansas
Corporation Commission (KCC) has permitted others to recover remediation costs
through rates. It should be noted that additional information and testing could
result in costs significantly below or in excess of the amounts estimated above.
To the extent that such remediation costs are not recovered, the costs could be
material to the Company's results of operations and cash flows depending on the
remediation done and number of years over which the remediation is completed.
The Company is a party to other litigation matters and claims which are normal
in the course of its operations, and while the results of litigation and claims
cannot be predicted with certainty, management believes the final outcome of
such matters will not have a materially adverse effect on consolidated results
of operations, financial position, or liquidity.
H. Segments
In fiscal 1999, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement required the Company to
define and report the Company's business segments based on how management
currently evaluates its business. Management has segmented its business based on
differences in products and services and management responsibility.
The Company conducts its operations through six segments: (1) the Distribution
segment distributes natural gas to residential, commercial and industrial
customers, leases pipeline capacity to others and provides transportation
services for end-use customers; (2) the Transportation and Storage segment
transports and stores natural gas for others; (3) the Marketing segment markets
natural gas to wholesale and retail customers and markets electricity to
wholesale customers; (4) the Gathering and Processing segment gathers and
processes natural gas and natural gas liquids; (5) the Production segment
develops and produces natural gas and oil; and (6) the Other segment primarily
operates and leases the Company's headquarters building and a related parking
facility.
Intersegment oil and gas sales are recorded on the same basis as sales to
unaffiliated customers. All corporate overhead costs relating to a reportable
segment have been allocated for the purpose of calculating operating income. The
Company's equity method investments do not represent operating segments of the
Company. The Company has no single external customer from which it receives ten
percent or more of its revenues.
Gathering
Four Months Ended Transportation and Eliminations
December 31, 1999 Distribution and Storage Marketing Processing Production and Other Total
- --------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Sales to unaffiliated
customers $ 337,890 $ 14,357 $ 365,224 $ 63,869 $ 20,014 $ 7,520 $ 808,874
Intersegment sales 1,334 25,868 17,825 15,032 4,779 (64,838) -
- --------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 339,224 $ 40,225 $ 383,049 $ 78,901 $ 24,793 $ (57,318) $ 808,874
- --------------------------------------------------------------------------------------------------------------------------
Net Revenues $ 133,662 $ 40,225 $ 11,493 $ 78,901 $ 24,793 $ (3,733) $ 285,341
Operating Costs $ 73,247 $ 14,844 $ 3,344 $ 68,076 $ 7,245 $ (10,606) $ 156,150
Depreciation, depletion and
amortization $ 24,815 $ 5,124 $ 242 $ 2,513 $ 9,715 $ 818 $ 43,227
Operating Income $ 35,600 $ 20,257 $ 7,907 $ 8,312 $ 7,833 $ 6,055 $ 85,964
Income from Equity
Investments $ - $ 1,074 $ - $ - $ 1,322 $ - $ 2,396
Total Assets $ 1,776,273 $ 437,561 $ 306,705 $ 368,904 $ 352,912 $ (2,780) $ 3,239,575
Capital Expenditures $ 38,994 $ 5,938 $ 13,454 $ 26,863 $ 7,206 $ 1,534 $ 93,989
- --------------------------------------------------------------------------------------------------------------------------
9
Gathering
Four Months Ended Transportation and Eliminations
December 31, 1998 Distribution and Storage Marketing Processing Production and Other Total
- -------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Sales to unaffiliated $ 307,424 $ 9,387 $ 237,927 $ 10,165 $ 10,694 $ 5,104 $ 580,701
customers
Intersegment sales 3,029 26,610 8,319 4,341 6,968 (49,267) -
- -------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 310,453 $ 35,997 $ 246,246 $ 14,506 $ 17,662 $ (44,163) $ 580,701
- -------------------------------------------------------------------------------------------------------------------------
Net Revenues $ 133,450 $ 35,997 $ 12,436 $ 14,506 $ 17,662 $ (2,133) $ 211,918
Operating Costs $ 76,796 $ 13,010 $ 2,730 $ 10,650 $ 5,227 $ (6,369) $ 102,044
Depreciation, depletion and $ 24,603 $ 4,554 $ 103 $ 681 $ 10,292 $ 1,503 $ 41,736
amortization
Operating Income $ 32,051 $ 18,433 $ 9,603 $ 3,175 $ 2,143 $ 2,733 $ 68,138
Income from Equity
Investments $ - $ 620 $ - $ - $ 14 $ - $ 634
Total Assets $ 1,804,631 $ 507,573 $ 141,733 $ 45,709 $ 275,840 $ (218,348) $ 2,557,138
Capital Expenditures $ 24,636 $ 13,163 $ 605 $ 3,724 $ 39,533 $ 2,575 $ 84,236
- -------------------------------------------------------------------------------------------------------------------------
I. Paid in Capital
Paid in Capital at December 31, 1999, is $330.8 million and $564.2 million for
common stock and convertible preferred stock, respectively.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains statements concerning Company expectations or
predictions of the future that are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are intended to be covered by the safe harbor provision of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking
statements are based on management's beliefs and assumptions based on
information currently available. It is important to note that actual results
could differ materially from those projected in such forward-looking statements.
Factors that may impact forward-looking statements include, but are not limited
to, the following:
. the effects of weather and other natural phenomena;
. increased competition from other energy suppliers as well as alternative
forms of energy;
. the capital intensive nature of the Company's business;
. economic climate and growth in the geographic areas in which the Company
does business;
. the uncertainty of gas and oil reserve estimates;
. the timing and extent of changes in commodity prices for natural gas,
natural gas liquids, electricity, and crude oil;
. the nature and projected profitability of potential projects and other
investments available to the Company;
. conditions of capital markets and equity markets;
. the effects of changes in governmental policies and regulatory actions,
including income taxes, environmental compliance, authorized rates, and
deregulation or "unbundling" of natural gas;
. the results of litigation related to the terminated previously proposed
acquisition of Southwest and the termination of the Company's merger
agreement with Southwest; and
. the impact of the acquisitions of properties.
Accordingly, while the Company believes these forward-looking statements to be
reasonable, there can be no assurance that they will approximate actual
experience or that the expectations derived from them will be realized. When
used in Company documents, the words "anticipate," "expect," "projection,"
"goal" or similar words are intended to identify forward-looking statements. The
Company does not have any intention or obligation to update forward-looking
statements after they distribute this Form 10-Q even if new information, future
events or other circumstances have made them incorrect or misleading.
A. Acquisitions and Mergers
On December 14, 1998, the Company entered into a merger agreement with Southwest
subject to shareholder and regulatory approvals. The Company agreed to pay
$28.50 per share of common stock in cash. On February 1, 1999, Southern Union
made an unsolicited offer to purchase the Southwest shares for $32.00 in cash.
Southern Union then signed a Confidentiality and Standstill Agreement with
Southwest and completed its due diligence investigation. On April 25, 1999, the
Board of Directors of Southwest rejected Southern Union's proposal as not being
a superior proposal. Thereafter, the Company increased its offer to $30.00 per
share and the merger agreement was amended. Southern Union then increased its
offer to $33.50 per share which was also rejected by the Board of Directors of
Southwest. Southern Union intervened in a shareholders lawsuit in California
state court in an effort to block the holding of a meeting of the Southwest
shareholders to consider the merger with the Company. Southwest brought an
action in Nevada federal court to enforce the terms of the Confidentiality and
Standstill Agreement. Southern Union also intervened in the regulatory
proceedings in California and Nevada.
After Southern Union made statements in the public press that it intended to
solicit proxies in opposition to the Company/Southwest merger in breach of the
Confidentiality and Standstill Agreement, the Company (as third party
beneficiary) filed an action in Oklahoma federal court. The court entered a
temporary restraining order against Southern Union. It was later converted to a
preliminary injunction requiring Southern Union to abide by terms of the
Confidentiality and Standstill Agreement. The issuance of the injunction is on
appeal and efforts of Southern Union to have it lifted have been unsuccessful.
11
On July 19, 1999, Southern Union filed an action in the federal district court
of Arizona in its further effort to block regulatory approval of the merger.
Named as defendants in the case are the Company, Southwest, certain officers of
the companies (including the Company's Eugene N. Dubay and John A. Gaberino,
Jr.), a member of the Arizona Corporation Commission (ACC) and a former employee
of the ACC's staff. Southern Union alleges a scheme of "fraud and racketeering"
by the companies and the individual defendants to block Southwest shareholders
from voting on the Southern Union proposal and ensuring that only the merger
with the Company would be considered. It also alleges a "secret campaign of
deception, corruption and misrepresentation" by the defendants to influence the
vote of the ACC on the merger and to "mislead" the Board of Directors of
Southwest. Southern Union further alleged that it was "fraudulently induced" to
enter into the Confidentiality and Standstill Agreement. The complaint asks for
$750 million and damages to be trebled for racketeering and unlawful violations,
compensatory damages of not less than $750 million and rescission of the
Confidentiality and Standstill Agreement. On October 12, 1999, Southern Union
filed an amended complaint asserting essentially the same claims as in the
earlier complaint and named additional individual defendants (including the
Company's Larry W. Brummett and James C. Kneale). Southern Union withdrew its
initial false allegation that the Company had funneled money through an Arizona
law firm to a former member of the ACC staff in order to improperly influence
the Arizona regulatory proceedings, Southern Union is now claiming that the
Company intended to enter into an arrangement with a large national investment
banking firm to funnel money to the same individual who was formerly on the
ACC's staff.
On August 5, 1999, both the California state court and the Arizona federal court
denied Southern Union's motions for temporary restraining orders.
As of January 1, 2000, the merger has been approved by the Public Utility
Commission of Nevada. In California, a settlement document had been filed with a
30-day comment period. On January 4, 2000, the staff of the ACC advised the ACC
that approval of the proposed merger was premature due to unresolved issues
raised in the litigation, citing the Company's "appearance of impropriety" and
raising concerns about the Company's integrity and truthfulness. Accordingly,
the staff recommended that any decision on the merger be deferred until these
issues and allegations could be resolved so as to allow the ACC to make an
informed decision on whether the proposed merger was in the public interest.
On January 18, 2000, the Company received a letter from Michael O. Maffie,
President and Chief Executive Officer of Southwest, taking the position that the
Company had breached the merger agreement and demanding that the breach be
cured.
On January 20, 2000, the Board of Directors of the Company voted unanimously to
terminate the merger agreement in accordance with the terms of the merger
agreement. On January 21, 2000, a letter was sent to Southwest denying that the
Company was in breach of the merger agreement and advising Southwest of the
Company's election to terminate the merger agreement.
On the same date, the Company filed a complaint in Federal District Court in
Tulsa, Oklahoma asking the court to declare that under the terms of the merger
agreement, the Company has properly terminated the merger agreement. On the same
date, the Company advised the ACC of the termination of the merger agreement and
gave notice the Company withdrew the Application asking for authorization to
implement the merger agreement. On January 25, 2000, Southwest filed an
objection that the Company could not unilaterally withdraw a joint application.
On February 4, 2000, the Hearing Officer granted the withdrawal and closed the
docket.
On January 24, 2000, in reaction to the notice of termination of the merger
agreement, Southwest filed a complaint against the Company and Southern Union in
the United States District Court in Arizona. In the complaint, Southwest
alleges, among other things, that the Company failed to disclose to Southwest
that the Company had purportedly participated in improper lobbying efforts
allegedly involving a state regulatory official for the purpose of influencing
state utility regulators to oppose Southern Union's attempt to acquire Southwest
and inducing Southwest to enter into the merger agreement with the Company
instead of accepting Southern
12
Union's acquisition proposal. The complaint also alleges that the Company failed
to use commercially reasonable efforts to obtain all necessary governmental
authorization for the planned merger with Southwest by failing to remedy alleged
improper conduct and by failing to make truthful disclosure of such purportedly
improper lobbying and relationships to the ACC. The complaint further alleges
that, because of the Company's alleged breach of the merger agreement, the
Company was contractually unable to terminate the merger agreement and that the
Company's notice of termination of that agreement was therefore wrongful. The
compliant uses these allegations as a basis for causes of action for fraud in
the inducement, fraud, breach of contract, breach of implied covenant of good
faith and fair dealing, and declaratory relief. Southwest seeks actual,
consequential, incidental and punitive damages in an amount in excess of $75,000
and a declaration that the Company has breached the merger agreement.
On February 3, 2000, two substantially identical derivative actions were filed
in the District Court in Tulsa, Oklahoma by shareholders against the members of
the Board of Directors of the Company for alleged violation of their fiduciary
duties to the Company by causing or allowing the Company to engage in certain
fraudulent and improper schemes relating to the planned merger with Southwest.
Such conduct allegedly caused the Company to be sued by both Southwest and
Southern Union which exposed the Company to millions of dollars in liabilities.
The plaintiffs seek an award of compensatory and punitive damages and costs,
disbursements and reasonable attorney fees.
It is anticipated that Southern Union and Southwest will continue their
litigation against the Company. If any of the plaintiffs should be successful in
any of their claims against the Company and substantial damages are awarded, it
could have a material adverse effect on the Company's operations, cash flow and
financial position. The Company intends to vigorously defend against the claims
asserted by Southern Union and Southwest and all other matters relating to the
now terminated merger with Southwest.
B. Results of Operations
Consolidated Operations
The Company provides natural gas and related products and services to its
customers through the following segments:
. Distribution
. Transportation and Storage
. Marketing
. Gathering and Processing
. Production
. Other
The Company is the ninth largest natural gas distribution company in the United
States in terms of number of customers. Nonregulated operations involve
transmission, storage, marketing, gathering and processing, and production of
natural gas and natural gas liquids and marketing of electricity.
Operating results continue to be strong despite warmer than normal weather.
While the four month periods ended December 31, 1999 and 1998 were both warmer
than normal, the Company is using derivative instruments for the 1999/2000
heating season to reduce the effect of weather variances. During the Transition
Period, these derivative instruments resulted in revenue of $5.7 million which
offset much of the margin variances caused by weather. This revenue was recorded
in the Other segment.
Although some higher interest rate debt was refinanced at a lower interest rate
during fiscal 1999, increased borrowing, primarily due to acquisitions in fiscal
1999, resulted in increased interest expense. Gains on sales of assets of $5.0
million were included in Other Income during the four month period ended
December 31, 1998.
13
Four Months Ended
December 31,
- ----------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Operating revenues $ 808,874 $ 580,701
Cost of gas 523,533 368,783
- ----------------------------------------------------------------------
Net Revenue 285,341 211,918
Operating costs 156,150 102,044
Depreciation, depletion, and amortization 43,227 41,736
- ----------------------------------------------------------------------
Operating income $ 85,964 $ 68,138
======================================================================
Other income $ - $ 4,993
======================================================================
Year 2000 - The Year 2000 (Y2K) issue arose because most computer systems,
including application software and computer technology embedded in plant and
equipment were constructed using a two digit date field that assumed the first
two digits are always "19". It was believed that on January 1, 2000, those
systems might incorrectly recognize the date as January 1, 1900, and incorrectly
process critical information or stop processing altogether.
The Company made the necessary conversions to make the Company Y2K compatible
spending $2.2 million in this effort. No material projects were delayed during
this time. While there can be no assurance that there will be no future problems
related to Y2K, it appears that these efforts were successful. There has been no
negative impact on any of the Company's systems or operations, and there are no
remaining contingencies to be completed. The Company received assurances from
all significant third party vendors that they are Y2K compliant, and there have
been no problems to indicate otherwise.
Distribution
The Distribution segment provides natural gas distribution services in Oklahoma
and Kansas. The Company's operations in Oklahoma are primarily conducted through
Oklahoma Natural Gas Company Division (ONG) which serves residential,
commercial, and industrial customers and leases pipeline capacity. The Company's
operations in Kansas are conducted through Kansas Gas Service Company Division
(KGS) which serves residential, commercial, and industrial customers. KGS also
conducts regulated gas distribution operations in northeastern Oklahoma. The
Distribution segment serves about 80 percent of Oklahoma and about 67 percent of
Kansas. ONG is subject to regulatory oversight by the OCC. KGS is subject to
regulatory oversight by the KCC and the OCC.
14
Four Months Ended
December 31,
- ----------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 316,901 $ 286,317
Cost of gas 205,562 177,003
- ----------------------------------------------------------------------
Gross margin on gas sales 111,339 109,314
PCL and ECT revenues 18,230 19,582
Other revenues 4,093 4,554
- ----------------------------------------------------------------------
Net revenues 133,662 133,450
Operating costs 73,247 76,796
Depreciation, depletion, and amortization 24,815 24,603
- ----------------------------------------------------------------------
Operating Income $ 35,600 $ 32,051
======================================================================
Four Months Ended
December 31,
1999 1998
- ---------------------------------------------------------
Gross Margin per Mcf
Oklahoma
Residential $ 2.88 $ 2.96
Commercial $ 2.48 $ 2.51
Industrial $ 1.16 $ 1.27
Pipeline capacity leases $ 0.25 $ 0.23
Kansas
Residential $ 2.76 $ 2.85
Commercial $ 2.07 $ 1.86
Industrial $ 1.97 $ 2.70
End-use customer transportation $ 0.60 $ 0.48
- ---------------------------------------------------------
Four Months Ended
December 31,
1999 1998
- -----------------------------------------------------------------
Operating Information
Number of customers 1,435,647 1,421,280
Capital expenditures (Thousands) $ 38,994 $ 24,636
Total assets (Thousands) $ 1,776,273 $ 1,804,631
Customers per employee 546 527
- -----------------------------------------------------------------
Four Months Ended
December 31,
1999 1998
- --------------------------------------------------
Volumes (MMcf)
Gas sales
Residential 31,908 31,244
Commercial 11,415 12,005
Industrial 1,795 1,684
- --------------------------------------------------
Total volumes sold 45,118 44,933
PCL and ECT 61,696 76,974
- --------------------------------------------------
Total volumes delivered 106,814 121,907
==================================================
Gross margins on gas sales increased primarily due to reduced transportation
costs paid to an affiliate and an increase in volumes sold during the Transition
Period compared to the same period one year ago. A reduction in revenues due to
the gathering and storage assets being removed from rate base, as discussed
below, offset part of that increase. Pipeline Capacity Lease (PCL) and End-use
Customer Transportation (ECT) revenues and volumes decreased primarily due to
the loss of three customers and the effect of warm weather including the
15
temporary shut-down of two power plants served by the Distribution segment. The
volume decrease was partially offset by an increase in rates.
Operating costs decreased due to reductions in labor expense, employee benefits,
and other operating efficiencies. The Distribution segment continues its
strategy of increased operational efficiency while maintaining quality customer
service.
Two rate cases were combined in Oklahoma, eliminating an interim rate case
scheduled for the summer of 1999 and providing for a one-time interim rate
reduction of $5 million which began September 1, 1999 for residential customers
in Oklahoma. The amount of the rate reduction in the Transition Period was $1.6
million. A July, 1999 order from the OCC removed the Oklahoma gathering and
storage assets from utility regulation effective November 1, 1999. These assets
are now included in the Transportation and Storage segment where they are being
utilized in the competitive marketplace.
The removal of the gathering and storage assets from rate base will result in a
net reduction of revenues of $29.0 million on an annualized basis, based on the
allocation of costs from the 1994 rate case. The Transportation and Storage and
Marketing segments, as discussed below, are aggressively seeking new business
opportunities and have replaced a substantial portion of these revenues.
Additionally, a charge collected through the PGA for ONG's current working gas
in storage is replacing a portion of the revenues. These revenue adjustments are
subject to review in the current consolidated rate case with hearings scheduled
for March, 2000.
The Company filed its rate case proposal on September 20, 1999 supporting a
revenue increase of $33.6 million. The OCC staff and the Attorney General filed
testimonies on January 24, 2000, in response to the Company's rate case proposal
recommending rate reductions of $69.5 million and $53.0 million, respectively.
The Company will file rebuttal testimony on February 29, 2000.
In August, 1999, the OCC approved a plan to distinguish between upstream and
downstream activities in Oklahoma. The Distribution segment began taking bids
during the Transition Period for transportation services in Oklahoma with
contracts to be awarded in the spring of 2000 for service beginning November 1,
2000. As contracts with PCL customers expire, these contracts may be renewed
with the Distribution segment, the Transportation and Storage segment of the
Company or nonaffiliated service providers. Consequently, this could result in
reduced revenues in the Distribution segment.
Certain costs to be recovered through the rate making process have been recorded
as regulatory assets in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS 71). As the Company continues to unbundle its services, certain of these
assets may no longer meet the criteria for following SFAS 71, and accordingly, a
write-off of regulatory assets and stranded costs may be required. The Company
does not anticipate these costs to be significant.
Transportation and Storage
The Company's gathering and storage assets and services in Oklahoma were removed
from utility regulation effective November 1, 1999. Gathering and storage
assets, including current gas in storage, of $325.0 million were removed from
rate base. With unbundling and deregulation of gathering and storage service,
the Company is positioned to compete for business at market-based rates. The
Company's strategy to increase its storage utilization through greater injection
and withdrawal capabilities has resulted in increased storage revenues for the
Transition Period compared to the same period one year ago as well as increased
compressor fuel expense. A decrease in transportation for an affiliate and
warmer weather resulted in decreased transportation volumes and revenues for the
Transition Period compared to the same period one year ago. The increase in
other revenues is due to increased revenues from retained fuel.
16
Four Months Ended
December 31,
1999 1998
- ----------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Transportation revenues $ 20,435 $ 24,485
Storage revenues 13,218 9,099
Other revenues 6,572 2,413
- ----------------------------------------------------------------------
Net revenues 40,225 35,997
Operating costs 14,844 13,010
Depreciation, depletion, and amortization 5,124 4,554
- ----------------------------------------------------------------------
Operating income $ 20,257 $ 18,433
======================================================================
Four Months Ended
December 31,
1999 1998
- ----------------------------------------------------------
Operating Information
Volumes transported (MMcf) 115,970 104,054
Injection Horsepower 35,300 31,000
Capital expenditures (Thousands) $ 5,938 $ 13,163
Total assets (Thousands) $ 437,561 $ 507,573
- ----------------------------------------------------------
Marketing
The Company's marketing operation purchases, stores and markets natural gas at
both the retail and wholesale level, primarily in the producing areas of the
United States. The Company continues to develop its niche into new market areas
by arbitraging storage in the day trading market rather than focusing on the
baseload market. Gas volumes increased in the Transition Period over the same
period one year ago primarily from the Company's expansion into the Permian/Waha
region of the United States. The Company now leases from others, including
affiliates, more than 50 Bcf of storage capacity which gives direct access to
the west coast and Texas intrastate markets.
Four Months Ended
December 31,
1999 1998
- ----------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 382,650 $ 243,776
Cost of gas 371,556 233,810
- ----------------------------------------------------------------------
Gross margin on gas sales 11,094 9,966
Other revenues 399 2,470
- ----------------------------------------------------------------------
Net revenues 11,493 12,436
Operating costs 3,344 2,730
Depreciation, depletion, and amortization 242 103
- ----------------------------------------------------------------------
Operating income $ 7,907 $ 9,603
======================================================================
Four Months Ended
December 31,
1999 1998
- ----------------------------------------------------------
Operating Information
Natural gas volumes (MMcf) 138,070 116,309
Capital expenditures (Thousands) $ 13,454 $ 605
Total assets (Thousands) $ 306,705 $ 141,733
- ----------------------------------------------------------
The increase in gross margins is attributable to increased throughput, and a
more extensive use of storage. The use of storage has allowed the Company to
concentrate on the day-to-day market and take advantage of volatility in that
market. Emphasis on base load market has been reduced. Increased sales volumes
are primarily due to the expanded niche business into Texas and the west coast.
The decrease in other revenues is due to the recovery
17
of prior period costs in the four months ended December 31, 1998. The increase
in operating costs is related to leasing storage and start-up costs for ONEOK
Power Marketing Company.
Trading of electricity at market-based wholesale rates has begun but has had
minimal impact on operations to date. The increase in capital expenditures for
the Transition Period is related to the 300-megawatt gas-fired electric
generating plant to be constructed in Logan County, Oklahoma. The plant is
expected to be in service in June, 2001.
Gathering and Processing
Revenues increased in the Transition Period over the same period one year ago
due to the acquisition of the midstream natural gas gathering and processing
assets from Koch Midstream Enterprises (Koch) in April, 1999. Operating costs
and depreciation also increased due to the additional assets and the cost of
operating those assets. Gathering, compression, and dehydration revenues result
from operation of the Fuel and Shrink plants acquired from Koch. Total gas
gathered and total gas processed for the Transition Period increased 354.5 MMcf
per day and 281.4 MMcf per day, respectively, compared to the same period one
year ago. Average NGL price per gallon increased as prices continued to
experience an upward correction from the abnormally low prices prevalent
throughout much of 1998 and early 1999. Other income in the four months ended
December 31, 1998 consisted of the gains on sales of assets.
Four Months Ended
December 31,
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Natural gas liquids and condensate sales $ 43,290 $ 8,951
Gas sales 28,824 4,157
Gathering, compression and dehydration revenues 6,664 -
Other revenues 123 1,398
- -----------------------------------------------------------------------------
Total revenues 78,901 14,506
Cost of sales 59,488 8,388
- -----------------------------------------------------------------------------
Gross margin 19,413 6,118
Operating costs 8,588 2,262
Depreciation, depletion, and amortization 2,513 681
- -----------------------------------------------------------------------------
Operating income $ 8,312 $ 3,175
=============================================================================
Other income $ - $ 4,993
=============================================================================
18
Four Months Ended
December 31,
1999 1998
- --------------------------------------------------------------
Operating Information
Average NGL's price ($/Gal) $ 0.371 $ 0.226
Average gas price ($/Mcf) $ 2.71 $ 1.80
Capital expenditures (Thousands) $ 26,863 $ 3,724
Total assets (Thousands) $ 368,904 $ 45,709
Total gas gathered (Mcf/D) 481,183 126,655
Total gas processed (Mcf/D) 396,512 115,141
Natural gas liquids sales (MGal) 126,309 38,934
Gas sales (MMMbtu) 10,643 2,303
Natural Gas Liquids by Component (%)
Ethane 47 48
Propane 27 25
Iso butane 5 4
Normal butane 9 9
Natural gasoline 12 14
Contracts %
Percent of Proceeds 64 65
Fuel and Shrink 36 35
- --------------------------------------------------------------
On February 1, 2000, the Company announced the purchase of assets from Dynegy,
Inc. for $307.7 million in cash. These assets include eight gas processing
plants, interest in two other gas processing plants, and approximately 7,000
miles of gas gathering and transmission pipeline systems in Oklahoma, Kansas,
and the Texas Panhandle. Current throughput is approximately 240 million cubic
foot per day with an approximate 375 million cubic foot per day capacity.
Natural gas liquids production averages 25,000 barrels per day. Closing of the
transaction is expected by the end of the first quarter of fiscal 2000.
On February 8, 2000, the Company announced the purchase of gathering and
processing assets located in Oklahoma, Kansas and West Texas from Kinder Morgan,
Inc. (KMI). The marketing and trading business of KMI as well as certain storage
and transmission pipelines in the mid-continent region will also be purchased.
The Company will pay approximately $114.0 million plus an amount equal to net
working capital at closing. The purchase includes over 12,000 miles of pipeline,
six gas processing plants with capacity of 1.26 billion cubic feet per day and
10.5 billion cubic feet of storage.
Production
Increased production from a successful developmental drilling program and
properties acquired were the primary reasons for the increases in volumes for
the Transition Period compared to the same period one year ago. Gas and oil
prices for the Transition Period also increased compared to the same period one
year ago. Dividends earned from an investment increased other revenues.
Operating costs also increased over one year ago due to the Company operating
and owning an interest in an increased number of wells.
Four Months Ended
December 31,
1999 1998
- ----------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Natural gas sales $ 20,789 $ 15,757
Oil sales 2,613 1,742
Other revenues 1,391 163
- ----------------------------------------------------------------------
Net revenues 24,793 17,662
Operating costs 7,245 5,227
Depreciation, depletion, and amortization 9,715 10,292
- ----------------------------------------------------------------------
Operating income $ 7,833 $ 2,143
======================================================================
19
Four Months Ended
December 31,
1999 1998
- ----------------------------------------------------------
Operating Information
Proved reserves
Gas (MMcf) 247,708 165,933
Oil (MBbls) 4,070 3,112
Production
Gas (MMcf) 8,306 7,700
Oil (MBbls) 138 145
Average price
Gas (Mcf) $ 2.50 $ 2.03
Oil (Bbls) $ 18.99 $ 12.50
Capital expenditures (Thousands) $ 7,206 $ 39,533
Total assets (Thousands) $ 352,912 $ 275,840
- ----------------------------------------------------------
C. Financial Flexibility and Liquidity
The Company's capitalization structure is 48 percent equity and 52 percent debt
(including short-term debt) at December 31, 1999, compared to 64 percent equity
and 36 percent debt at December 31, 1998. Cash provided by operating activities
continues as the primary source for meeting day-to-day cash requirements.
However, due to seasonal fluctuations, acquisitions, and additional capital
requirements, the Company accesses funds through commercial paper, short-term
credit agreements and, if necessary, through long-term borrowing.
Operating cash flows for the Transition Period as compared to the same period
one year ago are higher primarily because no tax payments have been made during
the Transition Period due to the accelerated depreciation on the assets acquired
from Koch. Competition continues to increase in all segments of the Company's
business. The loss of major customers without recoupment of those revenues and
negative effects of weather are among the events which could have a material
adverse effect on the Company's financial condition. However, rates in the
Distribution segment are structured to reduce the Company's risk in serving its
large customers. Other strategies, such as the use of derivative instruments to
offset the effect of weather variances, and aggressive negotiations with
potential new customers are expected to reduce other risks to the Company.
Capital expenditures totaled $94.0 million for the Transition Period. This
included $13.2 million for construction of an electric generating plant and
$12.3 million for the purchase of a gathering pipeline in western Oklahoma. For
the same period one year ago, capital expenditures totaled $84.2 million
including $34.9 million for the purchase of production assets.
At December 31, 1999, $796.8 million of long-term debt was outstanding. As of
that date, the Company could have issued $737.9 million of additional long-term
debt under the most restrictive provisions contained in its various borrowing
agreements. The recently announced purchases of assets from Dynegy, Inc. and
Kinder Morgan, Inc. are expected to be financed through short-term and long-term
debt.
On March 18, 1999, the Company authorized a stock buyback plan for up to 15
percent of its capital stock. The program authorizes the Company to make
purchases of its common stock on the open market with the timing and terms of
purchases and the number of shares purchased to be determined by management
based on market conditions and other factors. Purchases began May 25, 1999, with
2,111,337 shares purchased through December 31, 1999. The purchased shares are
held in treasury and are available for general corporate purposes, funding of
stock-based compensation plans, resale, or retirement. Purchases are financed
with short-term debt.
The Company believes that internally generated funds and access to financial
markets will be sufficient to meet its normal debt services, dividend
requirements, and capital expenditures.
20
D. Quantitative and Qualitative Disclosures about Market Risk
Risk Management - The Company, substantially through its nonutility segments, is
exposed to market risk in the normal course of its business operations through
the impact of market fluctuations in the price of natural gas and oil. Market
risk refers to the risk of loss in cash flows and future earnings arising from
adverse changes in commodity energy prices. The Company's primary exposure
arises from fixed price purchase or sale agreements which extend for periods of
up to 48 months, gas in storage inventories utilized by the gas marketing
operation, and anticipated sales of oil and gas production. To a lesser extent,
the Company is exposed to risk of changing prices or the cost of intervening
transportation resulting from purchasing gas at one location and selling it at
another (hereinafter referred to as basis risk). To minimize the risk from
market fluctuations in the price of natural gas and oil, the Company uses
commodity derivative instruments such as future contracts, swaps and options to
hedge existing or anticipated purchase and sale agreements, existing physical
gas in storage, and basis risk. None of these derivatives are held for
speculative purposes. The Company adheres to policies and procedures which limit
its exposure to market risk from open positions and monitors its exposure to
market risk. The results of the Company's derivative hedging activities continue
to meet its stated objective.
The Company's regulated distribution operations are exposed to market risk in
the normal course of business operations due to the impact of fluctuations on
gas sales resulting from weather as measured by heating degree days (HDD).
Market risk refers to the risk of loss in cash flows and future earnings arising
from adverse fluctuation in gross margins on gas sales. To minimize this risk,
the Company is using weather derivative swaps to manage the risk of fluctuations
in HDD during the 1999/2000 heating season.
Under the weather derivative swap agreements, the Company receives a fixed
payment per degree day below the contracted normal HDD and pays a fixed amount
per degree day above the contracted normal HDD. The swaps also contain a
contract cap that limits the amount either party is required to pay.
Kansas Gas Service uses derivative instruments to hedge the cost of some
anticipated gas purchases during the winter heating months to protect their
customers from upward volatility in the market price of natural gas. The gain or
loss resulting from such derivatives is combined with the physical cost of gas
and recovered from the customer through the gas purchase clause in rates. The
Company has no market risk associated with such activities and, accordingly,
these derivatives and the weather derivative swap agreements have been omitted
from the value-at-risk disclosures below.
All of the Company's long-term debt is fixed-rate and, therefore, does not
expose the Company to the risk of earnings or cash flow loss due to changes in
market interest rates. During the Transition Period, the Company entered into an
interest rate swap on $300 million in long-term debt. The rate resets
semiannually based on the six-month LIBOR at the reset date.
Value-at-Risk Disclosure of Market Risk - The estimation of potential losses
that could arise from changes in market conditions is typically accomplished
through the use of statistical models that seek to predict risk of loss based on
historical price and volatility patterns. The value-at-risk (VAR) measurement
used by the Company is based on J.P. Morgan's RiskMetrics/TM/ model, which
measures recent volatility and correlation in the price of natural gas and oil,
pulls through current price levels and net deltas, and applies estimates made by
management regarding the time required to liquidate positions and the degree of
confidence placed in the accuracy of the volatility and correlation estimates.
The Company's VAR calculation presents a comprehensive market risk disclosure by
combining its commodity derivative portfolio used to hedge price and basis risk
together with the current portfolio of firm physical purchase and sale contracts
and nonutility gas-in-storage inventory. At December 31, 1999, the Company's
estimated potential one-day favorable or unfavorable impact on future earnings,
as measured by the VAR, using a 95 percent confidence level, diversified
correlation and assuming three days to liquidate positions is immaterial.
The Company's calculated VAR exposure represents an estimate of potential losses
that would be recognized for
21
its portfolio of derivative financial instruments and firm physical contracts
and nonutility gas-in-storage assuming hypothetical movements in future market
rates and are not necessarily indicative of actual results that may occur. It
does not represent the maximum possible loss nor any expected loss that may
occur, because actual future gains and losses will differ from those estimated,
based on actual fluctuations in the market rates, operating exposures, and the
timing thereof, and changes in the Company's portfolio of derivative financial
instruments and firm physical contracts.
E. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, Accounting for Derivatives
Instruments and Hedging Activities (Statement 133), was issued by the FASB in
June, 1998. Statement 133 standardizes the accounting for derivatives
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the balance sheet at fair value. The accounting for changes in
the fair value of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedge exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. Statement 133 was amended
by Statement No. 137 in June, 1999 which delayed implementation until fiscal
years beginning after June 15, 2000, with early adoption permitted. The Company
has not determined the impact of adopting Statement 133.
In December 1998, the Emerging Issues Task Force reached a consensus on Issue
98-10, "Accounting for Contracts involved in Energy Trading and Risk Management
Activities" (EITF 98-10). EITF 98-10 is effective for the Company's fiscal year
beginning January 1, 2000, and requires energy trading contracts to be recorded
at fair value on the balance sheet, with changes in fair value included in
earnings. Although management has not completed its assessment of the impact of
adopting EITF 98-10, the Marketing segment operates as an interstate natural gas
aggregator and follows a strategy of concentrating its efforts toward
capitalizing on day-to-day pricing volatility through the use of gas storage
facilities leased from others, hedging, and transportation arbitraging.
Accordingly, the impact of implementing EITF 98-10 on the Marketing segment is
not expected to be material to the Company's financial position or results of
operations. Energy contracts held by other segments are designated as and
considered effective as hedges and non-trading activities and are not considered
energy trading contracts.
22
F. Supplemental Calendar Year Information by Quarter
In October, 1999, the Company's Board of Directors approved a change in the
Company's fiscal year-end from August 31 to December 31 beginning January 1,
2000. The consolidated condensed financial statements included in this Form 10-Q
represent the period from September 1, 1999 through December 31, 1999, the
Company's Transition Period preceding the beginning of the new fiscal year. The
following information is intended to supplement the consolidated condensed
financial statements by providing calendar year financial information by
quarters for the years 1999 and 1998.
Consolidated Condensed Statements of Income
Calendar Year 1999
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars, except per share amounts)
Operating Revenues $ 547,171 $ 399,081 $ 471,499 $ 653,232 $ 2,070,983
Cost of gas 331,071 239,194 317,310 423,199 1,310,774
- ------------------------------------------------------------------------------------------------------------------------------------
Net Revenues 216,100 159,887 154,189 230,033 760,209
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Operations and maintenance 61,248 88,551 91,972 107,235 349,006
Depreciation, depletion, and amortization 32,092 34,168 32,115 32,820 131,195
General taxes 10,298 9,953 10,540 11,194 41,985
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 103,638 132,672 134,627 151,249 522,186
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 112,462 27,215 19,562 78,784 238,023
- ------------------------------------------------------------------------------------------------------------------------------------
Other income - - 1,646 - 1,646
Interest 12,582 14,337 17,704 21,116 65,739
Income taxes 39,430 3,397 1,705 22,525 67,057
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income 60,450 9,481 1,799 35,143 106,873
Preferred Stock Dividends 9,324 9,307 9,276 9,275 37,182
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Available for Common Stock $ 51,126 $ 174 $ (7,477) $ 25,868 $ 69,691
====================================================================================================================================
Earnings (Loss) Per Share of Common Stock - Basic $ 1.62 $ 0.01 $ (0.24) $ 0.85 $ 2.24
====================================================================================================================================
Earnings (Loss) Per Share of Common Stock - Diluted $ 1.17 $ 0.01 $ (0.24) $ 0.70 $ 2.09
====================================================================================================================================
Average Shares of Common Stock - Basic (Thousands) 31,629 31,590 31,030 30,276 31,127
Average Shares of Common Stock - Diluted (Thousands) 51,715 31,603 31,030 50,233 51,153
There were 19,985,151 shares of convertible preferred stock and 86,871 option
shares excluded from the calculation of Diluted Earnings per Share due to being
antidilutive for the second quarter of 1999. For the third quarter of 1999,
there were 19,912,313 shares of convertible preferred stock and 61,741 option
shares excluded.
Other income includes the gains on sales of assets.
23
Consolidated Condensed Statements of Income
Calendar Year 1998
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars, except per share amounts)
Operating Revenues $ 654,253 $ 362,777 $ 344,317 $ 480,132 $ 1,841,479
Cost of gas 434,164 230,742 238,889 303,571 1,207,366
- ------------------------------------------------------------------------------------------------------------------------------------
Net Revenues 220,089 132,035 105,428 176,561 634,113
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Operations and maintenance 78,784 70,325 69,785 68,053 286,947
Depreciation, depletion, and amortization 27,129 28,062 30,833 31,170 117,194
General taxes 10,226 8,458 9,267 9,337 37,288
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 116,139 106,845 109,885 108,560 441,429
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 103,950 25,190 (4,457) 68,001 192,684
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 14,644 - - 4,993 19,637
Interest 10,575 6,536 9,803 11,885 38,799
Income taxes 41,723 8,313 (4,784) 24,067 69,319
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 66,296 10,341 (9,476) 37,042 104,203
Preferred Stock Dividends 8,983 8,999 9,016 9,423 36,421
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Available for Common
Stock $ 57,313 $ 1,342 $ (18,492) $ 27,619 $ 67,782
====================================================================================================================================
Earnings (Loss) Per Share of Common Stock -
Basic $ 1.82 $ 0.04 $ (0.59) $ 0.88 $ 2.15
====================================================================================================================================
Earnings (Loss) Per Share of Common Stock -
Diluted $ 1.29 $ 0.04 $ (0.59) $ 0.72 $ 2.02
====================================================================================================================================
Average Shares of Common Stock - Basic
(Thousands) 31,543 31,544 31,566 31,534 31,547
Average Shares of Common Stock - Diluted
(Thousands) 51,548 31,617 31,566 51,650 51,621
There were 20,005,643 shares of convertible preferred stock excluded from the calculation of Diluted Earnings per Share due to being
antidilutive for the second quarter of 1998. For the third quarter of 1998, there were 20,040,474 shares of convertible preferred
stock and 43,951 option shares excluded.
Other income includes the gains on sales of assets.
24
Distribution
Calendar Year 1999
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 342,926 $ 146,622 $ 115,520 $ 274,329 $ 879,397
Cost of gas 210,166 89,337 69,242 179,380 548,125
- ---------------------------------------------------------------------------------------------------------
Gross margin on gas sales 132,760 57,285 46,278 94,949 331,272
PCL and ECT revenues 18,085 11,969 12,776 13,855 56,685
Other revenues 4,400 5,946 3,622 2,671 16,639
- ---------------------------------------------------------------------------------------------------------
Net revenues 155,245 75,200 62,676 111,475 404,596
Operating costs 55,384 60,126 55,647 54,495 225,652
Depreciation, depletion, and amortization 19,858 19,103 18,100 18,594 75,655
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) $ 80,003 $ (4,029) $ (11,071) $ 38,386 $ 103,289
=========================================================================================================
Calendar Year 1998
First Second Third Fourth Total
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 407,202 $ 151,376 $ 104,692 $ 248,865 $ 912,135
Cost of gas 274,452 92,586 65,924 153,535 586,497
- ---------------------------------------------------------------------------------------------------------
Gross margin on gas sales 132,750 58,790 38,768 95,330 325,638
PCL and ECT revenues 21,821 16,311 15,256 15,078 68,466
Other revenues 5,006 5,503 3,884 3,159 17,552
- ---------------------------------------------------------------------------------------------------------
Net revenues 159,577 80,604 57,908 113,567 411,656
Operating costs 63,492 59,439 60,369 58,039 241,339
Depreciation, depletion, and amortization 18,846 18,835 17,372 18,440 73,493
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) $ 77,239 $ 2,330 $ (19,833) $ 37,088 $ 96,824
=========================================================================================================
25
Transportation and Storage
Calendar Year 1999
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Transportation revenues $ 18,097 $ 18,038 $ 18,380 $ 14,956 $ 69,471
Storage revenues 6,387 7,095 8,240 10,160 31,882
Other revenues 2,180 2,127 3,506 4,448 12,261
- -------------------------------------------------------------------------------------------------------
Net revenues 26,664 27,260 30,126 29,564 113,614
Operating costs 6,748 9,206 8,984 11,851 36,789
Depreciation, depletion, and amortization 3,415 3,419 3,748 3,840 14,422
- -------------------------------------------------------------------------------------------------------
Operating income $ 16,501 $ 14,635 $ 17,394 $ 13,873 $ 62,403
=======================================================================================================
Calendar Year 1998
First Second Third Fourth Total
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Transportation revenues $ 16,247 $ 18,078 $ 18,744 $ 18,197 $ 71,266
Storage revenues 7,227 4,376 4,404 7,653 23,660
Other revenues 2,285 2,110 2,342 1,917 8,654
- -------------------------------------------------------------------------------------------------------
Net revenues 25,759 24,564 25,490 27,767 103,580
Operating costs 7,674 8,037 8,226 10,045 33,982
Depreciation, depletion, and amortization 3,292 3,302 4,161 3,449 14,204
- -------------------------------------------------------------------------------------------------------
Operating income $ 14,793 $ 13,225 $ 13,103 $ 14,273 $ 55,394
=======================================================================================================
26
Marketing
Calendar Year 1999
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 189,095 $ 193,389 $ 276,694 $ 301,586 $ 960,764
Cost of gas 178,089 186,910 271,335 291,367 927,701
- --------------------------------------------------------------------------------------------------------
Gross margin on gas sales 11,006 6,479 5,359 10,219 33,063
Other revenues 91 172 820 354 1,437
- --------------------------------------------------------------------------------------------------------
Net revenues 11,097 6,651 6,179 10,573 34,500
Operating costs 2,016 2,501 2,540 2,621 9,678
Depreciation, depletion, and amortization 151 150 160 181 642
- --------------------------------------------------------------------------------------------------------
Operating income $ 8,930 $ 4,000 $ 3,479 $ 7,771 $ 24,180
========================================================================================================
Calendar Year 1998
First Second Third Fourth Total
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 202,277 $ 171,972 $ 203,354 $ 190,370 $ 767,973
Cost of gas 196,117 167,389 202,493 181,765 747,764
- --------------------------------------------------------------------------------------------------------
Gross margin on gas sales 6,160 4,583 861 8,605 20,209
Other revenues 1,785 785 387 2,537 5,494
- --------------------------------------------------------------------------------------------------------
Net revenues 7,945 5,368 1,248 11,142 25,703
Operating costs 1,938 2,075 1,957 2,158 8,128
Depreciation, depletion, and amortization 182 222 62 10 476
- --------------------------------------------------------------------------------------------------------
Operating income (loss) $ 5,825 $ 3,071 $ (771) $ 8,974 $ 17,099
========================================================================================================
27
Gathering and Processing
Calendar Year 1999
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Natural gas liquids and condensate sales $ 6,307 $ 17,165 $ 30,819 $ 32,806 $ 87,097
Gas sales 2,932 14,599 7,043 23,125 47,699
Gathering revenues - 3,136 5,005 5,051 13,192
Other revenues (135) 140 96 96 197
- --------------------------------------------------------------------------------------------------------
Total revenues 9,104 35,040 42,963 61,078 148,185
Cost of sales 5,789 23,517 27,958 46,315 103,579
- --------------------------------------------------------------------------------------------------------
Gross margin 3,315 11,523 15,005 14,763 44,606
Operating costs 1,531 3,191 6,280 6,531 17,533
Depreciation, depletion, and amortization 359 1,334 1,781 1,920 5,394
- --------------------------------------------------------------------------------------------------------
Operating income $ 1,425 $ 6,998 $ 6,944 $ 6,312 $ 21,679
========================================================================================================
Calendar Year 1998
First Second Third Fourth Total
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Natural gas liquids and condensate sales $ 15,926 $ 8,548 $ 6,860 $ 6,776 $ 38,110
Gas sales 3,830 3,656 3,571 3,087 14,144
Other revenues 21 3,340 333 1,280 4,974
- --------------------------------------------------------------------------------------------------------
Total revenues 19,777 15,544 10,764 11,143 57,228
Cost of sales 14,526 7,911 6,745 6,255 35,437
- --------------------------------------------------------------------------------------------------------
Gross margin 5,251 7,633 4,019 4,888 21,791
Operating costs 2,335 1,843 1,762 1,736 7,676
Depreciation, depletion, and amortization 569 559 539 508 2,175
- --------------------------------------------------------------------------------------------------------
Operating income $ 2,347 $ 5,231 $ 1,718 $ 2,644 $ 11,940
========================================================================================================
Other income $ 14,644 $ - $ - $ 4,993 $ 19,637
========================================================================================================
Other income includes the gains on sales of assets.
28
Production
Calendar Year 1999
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Natural gas sales $ 16,408 $ 16,680 $ 14,451 $ 16,269 $ 63,808
Oil sales 1,289 1,866 1,866 2,019 7,040
Other revenues 1,606 1,350 1,553 1,028 5,537
- -------------------------------------------------------------------------------------------------------------
Net revenues 19,303 19,896 17,870 19,316 76,385
Operating costs 4,991 4,901 5,735 5,516 21,143
Depreciation, depletion, and amortization 8,487 9,595 7,753 7,661 33,496
- -------------------------------------------------------------------------------------------------------------
Operating income $ 5,825 $ 5,400 4,382 6,139 21,746
=============================================================================================================
Other income $ - $ - $ 1,646 $ - $ 1,646
=============================================================================================================
Other income includes gains on sales of assets.
Calendar Year 1998
First Second Third Fourth Total
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Natural gas sales $ 9,504 $ 8,320 $ 11,979 $ 12,406 $ 42,209
Oil sales 1,220 1,279 1,327 1,312 5,138
Other revenues 350 78 (108) 160 480
- -------------------------------------------------------------------------------------------------------------
Net revenues 11,074 9,677 13,198 13,878 47,827
Operating costs 3,442 3,437 4,234 3,962 15,075
Depreciation, depletion, and amortization 4,146 5,051 7,713 7,619 24,529
- -------------------------------------------------------------------------------------------------------------
Operating income $ 3,486 $ 1,189 $ 1,251 $ 2,297 $ 8,223
=============================================================================================================
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
United States ex rel. Jack J. Grynberg v. ONEOK, Inc., ONEOK Resources Company,
and Oklahoma Natural Gas Company, (CTN-8), No. CIV-97-1006-R (Judge Russell), in
the United States District Court for the Western District of Oklahoma. On
September 24, 1999, a hearing on the motion to transfer and consolidate actions
before a single district court was held. An order was issued on October 20,
1999, transferring all the actions to the federal district court in Wyoming for
pretrial proceedings under multidistrict litigation procedures. The Company and
most other defendants filed motions to dismiss the case in early December. This
motion is set for hearing on March 14, 2000.
ONEOK, Inc. v. Southern Union Company, No. 99-CV-0345-H(M), United States
District Court for the Northern District of Oklahoma, on appeal of preliminary
injunction, United States Court of Appeals for the Tenth Circuit, Case Number
99-5103. On October 12, 1999, ONEOK filed a motion to dismiss the counterclaims
of Southern Union. On October 15, 1999, the Court denied ONEOK's motion to amend
its complaint and on October 27, 1999, ONEOK filed a motion for reconsideration
which was denied on November 4, 1999. On November 10, 1999, as a result of
ONEOK's motion to dismiss, Southern Union filed an amended answer and
counterclaims. ONEOK filed a reply to the amended answer and counterclaims on
November 26, 1999. The case is now in the discovery stage. Oral argument on the
appeal of the preliminary injunction has been scheduled for March 8, 2000. In
the related case of Klein v. Southwest Gas Corporation, Superior Court of San
Diego County, California, Case No. 726615, on September 24, 1999, the Court
dismissed Southern Union from the case and stated that Southern Union would not
be allowed to refile until all federal court actions were complete.
Southern Union Company v. Southwest Gas Corporation, et al., No. CIV 99 1294 PHX
ROS, United States District Court for the District of Arizona. Rather than
respond to motions filed by the defendants on October 12, 1999, Southern Union
filed an amended complaint with substantially the same claims as in the original
complaint except that it specifically eliminated its previous allegations that
ONEOK had made payments to Tiffany & Bosco for the benefit of Jack Rose, and
James C. Kneale and Larry W. Brummett were added as additional defendants. The
Company and the other defendants filed motions to dismiss the amended complaint
on December 6, 1999. The motions are to be heard by the Court on June 16, 2000.
Joint Application of Oklahoma Natural Gas Company, a Division of ONEOK, Inc.,
ONEOK Gas Transportation Company, a Division of ONEOK, Inc., and Kansas Gas
Service Company, a Division of ONEOK, Inc., for Approval of Their Unbundling
Plan for Natural Gas Services Upstream of the City Gates or Aggregation Points,
Cause PUD No. 980000177, before the Oklahoma Corporation Commission. On October
21, 1999, the Supreme Court granted a new stay for an additional twenty days. As
settlement had not been reached between the parties, the Company filed a motion
to extend the stay until conclusion of the Commission proceedings. On November
2, 1999, the Supreme Court issued an order directing the parties to respond to
the Company's motion by November 17, 1999. Also, on November 5, 1999, the
Commission Staff filed a response to the Company's motion and a motion to
dismiss the appeal as moot and the Attorney General filed a motion to dismiss on
November 12, 1999. The Company filed a response to the motions to dismiss on
November 29, 1999. On December 13, 1999, the Court issued an order denying an
extension of the stay and the motions to dismiss and directed the parties to
file briefs. The Company filed its reply brief on January 27, 2000.
Application of Ernest G. Johnson, Director of the Public Utility Division,
Oklahoma Corporation Commission, to Review the Rates, Charges, Services and
Service Terms of Oklahoma Natural Gas Company, a division of ONEOK, Inc., and
All Affiliated Companies and Any Affiliate or Nonaffiliate Transaction Relevant
to Such Inquiry, Cause PUD No. 980000683, Oklahoma Corporation Commission.
30
On September 20, 1999, Oklahoma Natural filed updated financial information and
requested a $33.6 million rate increase. The case is set for hearing before the
Administrative Law Judges on March 27, 2000.
In the Matter of the Application of Southwest Gas Corporation and ONEOK, Inc.
for an Order Authorizing Implementation of the Agreement and Plan of Merger
dated December 14, 1998, Docket Nos. G-01551A-99-0112 and G-03713A-99-0112,
before the Arizona Corporation Commission. On January 4, 2000, the staff of the
ACC advised the ACC that approval of the proposed merger was premature due to
unresolved issues raised in the litigation, citing the Company's "appearance of
impropriety" and raising concerns about the Company's integrity and
truthfulness. Accordingly, the staff recommended that any decision on the merger
be deferred until these issues and allegations could be resolved so as to allow
the ACC to make an informed decision on whether the proposed merger was in the
public interest. On January 21, 2000, the Company advised the Commission of its
termination of the merger agreement and gave notice that the Company withdrew
its application. On January 25, 2000, Southwest Gas filed an objection to the
Company's notice of withdrawal and a motion to reject the Company's notice of
withdrawal on the grounds that neither Southwest Gas nor the Company were
empowered to withdraw unilaterally the joint application. The motion was heard
on February 4, 2000, before a hearing officer and the withdrawal was granted and
the docket was closed.
ONEOK, Inc. v. Southwest Gas Corporation, No. CV 066H (E), United States
District Court for the Northern District of Oklahoma. On January 18, 2000, the
Company received a letter (the "Southwest Letter") from Michael O. Maffie,
President and Chief Executive Officer of Southwest asserting that the Company
had breached its previous merger agreement with Southwest and demanding that the
breach be cured. On January 21, 2000, the Company sent a letter (the "ONEOK
Letter") denying that it was in breach of the merger agreement. In the ONEOK
Letter, the Company also advised Southwest of the Company's election to
terminate the merger agreement under Section 8.1(b) of the merger agreement
because of the fact that the conditions to closing under the merger agreement
were not fulfilled or capable of being fulfilled on the first anniversary of the
merger agreement. The failed condition of the pending lawsuit instituted by
Southern Union against Southwest and the Company. On January 21, 2000, the
Company filed a complaint in Federal District Court in Tulsa, Oklahoma asking
the Court to declare that under the terms of the merger agreement, the Company
has properly terminated the Agreement.
Southwest Gas Corporation v. ONEOK, Inc., CIV 119 PHX VAM, United States
District Court for the District of Arizona. On January 24, 2000, Southwest filed
a complaint against the Company and Southern Union. Southwest alleges that: (1)
under the merger agreement between the Company and Southwest, the Company agreed
to furnish all information concerning itself that is required or customary for
inclusion in the Southwest proxy statement related to the merger and that none
of such information would contain any untrue statement of material facts or omit
to state any material facts required to be stated therein or necessary to make
31
the statements therein in light of the circumstances under which they are made,
not misleading; (2) under the merger agreement the Company promised to use its
commercially reasonable efforts to obtain all necessary governmental
authorization for the merger (consult with Southwest in respect thereto) and to
take all other necessary actions and do all things necessary, proper or
advisable to consummate and make effective the merger transaction; (3) the
Company failed to disclose to the Southwest Board that (i) the Company had
participated in improper lobbying efforts in support of the Company's bid for
Southwest (including help in drafting a certain letter to the Board from a state
regulatory commissioner concerning regulatory approval); (ii) the Company's
improper involvement in efforts to lobby regulators in Arizona, California and
Nevada; and (iii) certain relationships involving a former employee of the
Arizona commission, all of which breached the merger agreement; (4) if the
Company had disclosed such lobby efforts and relationships, it would have caused
the Board of Southwest to have serious questions about the integrity of the
Company's senior management and the chances of obtaining regulatory approvals,
the Southwest Board would not have entered into an amendment of the merger
agreement without answers to such questions and the Board would have demanded
the Company cure its breach of the merger agreement; (5) the Company's failure
to make full and truthful disclosure of such lobbying and relationships and the
providing of false information and misleading answers to the Arizona Corporation
Commission has resulted in staff withdrawing its support for the merger citing
concerns over the integrity, veracity and fitness of the Company and as a result
the Company failed to use its commercially reasonable efforts to obtain such
approval as required by the merger agreement; and (6) the Company has refused to
cure its breach of and has wrongfully terminated the merger agreement. The
complaint alleges numerous causes of action including: (1) fraud in the
inducement; (2) fraud; (3) breach of contract; (4) breach of implied covenant of
good faith and fair dealing; and (5) declaratory relief. The complaint asks that
the merger agreement be declared null and void and Southwest be awarded its
actual, consequential, incidental and punitive damages in an amount in excess of
$75,000 for fraud in the inducement and fraud or alternatively (1) damages for
breach of the contract and implied covenant, or (2) a declaration that the
Company has breached the merger agreement.
The Company intends to vigorously defend all claims and other charges against
the Company in the above litigation proceedings.
Gaetan Lavalla, Derivatively on Behalf of Nominal Defendant ONEOK, Inc. v. Larry
W. Brummett, et al. District Court of Tulsa County, No. CJ-2000-598 and Hayward
Lane, Derivatively on Behalf of Nominal Defendant ONEOK, Inc. v. Larry W.
Brummett, et al., District Court of Tulsa County, No. CJ-2000-593. On February
3, 2000, two substantially identical derivative actions were filed in the
District Court in Tulsa, Oklahoma by shareholders against the members of the
Board of Directors of the Company for violation of their fiduciary duties to the
Company by allegedly causing or allowing the Company to engage in fraudulent and
improper schemes designed to "sabotage" Southern Union's competitive bid to
acquire Southwest and secure regulatory approval for the Company's own planned
merger with Southwest. Such conduct allegedly caused the Company to be sued by
both Southwest and Southern Union which exposed the Company to millions of
dollars in liabilities. The allegations are used as a basis for causes of action
for intentional breach of fiduciary duty, derivative claim for negligent breach
of fiduciary duty, class and derivative claims for constructive fraud, and
derivative claims for gross mismanagement. Each plaintiff seeks a declaration
that the lawsuit is properly maintained as a derivative action, the defendants,
and each of them, have breached their fiduciary duties to the Company, an
injunction permanently enjoining defendants from further abuse of control and
committing of gross management and constructive fraud, and asks for an award of
compensatory and punitive damages and costs, disbursements and reasonable
attorney fees.
32
Item 6. Exhibits and Reports on Form 8-K and 8-K/A.
(g) Reports
January 7, 2000 - Announced plans to move forward with the Company's
proposed merger with Southwest Gas Corporation.
January 24, 2000 - Announced that the Company had terminated its
proposed merger with Southwest Gas Corporation.
January 27, 2000 - Announced that Southwest Gas Corporation filed a
complaint against the Company and Southern Union Company in the
United States District Court in Arizona.
February 1, 2000 - Announced that the Company had purchased the mid-
continent midstream assets of Dynegy, Inc.
February 8, 2000 - Announced that the Company had purchased the
natural gas gathering and processing businesses, marketing and
trading business, and storage and transmission pipelines from Kinder-
Morgan, Inc.
33
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this/ 10tth/ day of
February 2000.
ONEOK, Inc.
Registrant
By: Jim Kneale
-------------------------------
Jim Kneale
Vice President, Chief Financial Officer,
and Treasurer (Principal Financial Officer)
34