UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001.
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
Commission file number 001-13643
ONEOK, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1520922
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
100 West Fifth Street, Tulsa, OK 74103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 588-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Common stock, with par value of $0.01 - 29,742,803 shares outstanding at May 11,
2001.
ONEOK, Inc.
QUARTERLY REPORT ON FORM 10-Q
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income -
Three Months Ended March 31, 2001 and 2000 3
Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000 4-5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Part II. Other Information
Item 1. Legal Proceedings 28-29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
ONEOK, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
(Unaudited) 2001 2000
- ------------------------------------------------------------------------------------------
(Thousands of Dollars,
except per share amounts)
Operating Revenues $ 2,956,256 $ 821,819
Cost of gas 2,688,661 619,275
- ------------------------------------------------------------------------------------------
Net Revenues 267,595 202,544
- ------------------------------------------------------------------------------------------
Operating Expenses
Operations and maintenance 72,197 51,052
Depreciation, depletion, and amortization 36,955 34,327
General taxes 16,065 12,239
- ------------------------------------------------------------------------------------------
Total Operating Expenses 125,217 97,618
- ------------------------------------------------------------------------------------------
Operating Income 142,378 104,926
- ------------------------------------------------------------------------------------------
Other income, net 3,967 16,412
Interest expense 37,535 21,985
Income taxes 41,800 38,446
- ------------------------------------------------------------------------------------------
Income before cumulative effect of a change in 67,010 60,907
accounting principle
Cumulative effect of a change in
accounting principle, net of tax (Notes H and J) (2,151) 2,115
- ------------------------------------------------------------------------------------------
Net Income 64,859 63,022
Preferred stock dividends 9,275 9,275
- ------------------------------------------------------------------------------------------
Income Available for Common Stock $ 55,584 $ 53,747
==========================================================================================
Earnings Per Share of Common Stock (Note D)
Basic $ 1.09 $ 1.07
==========================================================================================
Diluted $ 1.08 $ 1.07
==========================================================================================
Average Shares of Common Stock (Thousands)
Basic 49,607 49,188
Diluted 49,798 49,189
See accompanying Notes to Consolidated Financial Statements.
3
ONEOK, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Unaudited) 2001 2000
- ----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Assets
Current Assets
Cash and cash equivalents $ 249 $ 249
Trade accounts and notes receivable 1,354,772 1,627,714
Materials and supplies 18,176 18,119
Gas in storage 33,773 72,979
Deferred income taxes 10,425 10,425
Unrecovered purchased gas costs 86,639 1,578
Assets from price risk management activities 721,762 1,416,368
Deposits 12,990 120,800
Other current assets 32,631 71,906
- ----------------------------------------------------------------------------------------------------------
Total Current Assets 2,271,417 3,340,138
- ----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Marketing and Trading 2,817 2,795
Gathering and Processing 1,000,020 1,000,708
Transportation and Storage 767,673 758,618
Distribution 1,886,372 1,860,181
Production 440,278 428,701
Power 104,251 75,891
Other 68,374 64,056
- ----------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment 4,269,785 4,190,950
Accumulated depreciation, depletion, and amortization 1,138,306 1,110,616
- ----------------------------------------------------------------------------------------------------------
Net Property 3,131,479 3,080,334
- ----------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets
Regulatory assets, net (Note B) 234,454 238,605
Goodwill 97,038 93,409
Assets from price risk management activities 342,923 405,666
Investments and other 215,904 202,193
- ----------------------------------------------------------------------------------------------------------
Total Deferred Charges and Other Assets 890,319 939,873
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 6,293,215 $ 7,360,345
==========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
4
ONEOK, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Unaudited) 2001 2000
- --------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 10,000 $ 10,767
Notes payable 189,558 824,106
Accounts payable 1,062,885 1,247,519
Accrued taxes 35,994 8,735
Accrued interest 13,377 24,161
Customers' deposits 19,040 18,319
Liabilities from price risk management activities 667,590 1,296,041
Other 93,200 96,913
- --------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,091,644 3,526,561
- --------------------------------------------------------------------------------------------------------
Long-term Debt, excluding current maturities 1,732,329 1,336,082
Deferred Credits and Other Liabilities
Deferred income taxes 383,833 382,363
Liabilities from price risk management activities 481,538 543,278
Lease obligation 131,731 137,131
Other deferred credits 203,779 209,973
- --------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 1,200,881 1,272,745
- --------------------------------------------------------------------------------------------------------
Total Liabilities 5,024,854 6,135,388
- --------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note E)
Shareholders' Equity
Convertible preferred stock, $0.01 par value:
Series A authorized 20,000,000 shares; issued and
outstanding 19,946,448 shares at March 31, 2001,
and December 31, 2000 199 199
Common stock, $0.01 par value:
authorized 100,000,000 shares; issued 31,685,557 shares
and outstanding 29,737,219 shares at March 31, 2001;
issued 31,599,305 shares and outstanding 29,588,275
shares at December 31, 2000 317 316
Paid in capital (Note G) 900,184 895,668
Unearned compensation (2,743) (1,128)
Accumulated other comprehensive loss (Note I) (7,538) -
Retained earnings 434,117 387,789
Treasury stock at cost: 1,948,338 shares at March 31, 2001;
and 2,011,030 shares at December 31, 2000 (56,175) (57,887)
- --------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,268,361 1,224,957
- --------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 6,293,215 $ 7,360,345
========================================================================================================
5
ONEOK, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2001 2000
- ---------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Activities
Net income $ 64,859 $ 63,022
Depreciation, depletion, and amortization 36,955 34,327
Gain on sale of assets (363) (26,852)
Net income from equity investments (5,407) (1,236)
Deferred income taxes 4,936 5,765
Amortization of restricted stock 332 161
Changes in assets and liabilities:
Accounts and notes receivable 270,442 (23,131)
Inventories 39,149 73,526
Unrecovered purchased gas costs (85,061) 8,105
Deposits 107,810 11,026
Accounts payable and accrued liabilities (152,170) 101,331
Price risk management assets and liabilities 59,513 (317)
Other assets and liabilities 18,416 23,001
- ---------------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities 359,411 268,728
- ---------------------------------------------------------------------------------------------------------
Investing Activities
Changes in other investments, net 399 (1,102)
Acquisitions (626) (305,497)
Capital expenditures (91,013) (53,644)
Proceeds from sale of property 486 55,169
- ---------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (90,754) (305,074)
- ---------------------------------------------------------------------------------------------------------
Financing Activities
Payments of notes payable, net (237,500) (207,141)
Change in bank overdraft (15,268) (22,664)
Issuance of debt - 349,429
Payment of debt (1,568) (4,928)
Issuance of common stock 3,734 -
Issuance (acquisition) of treasury stock, net 377 (10,117)
Dividends paid (18,432) (18,304)
- ---------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Financing Activities (268,657) 86,275
- ---------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents - 49,929
Cash and Cash Equivalents at Beginning of Period 249 72
- ---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 249 $ 50,001
=========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
6
ONEOK, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Summary of Significant Accounting Policies
Interim Reporting - The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information. The interim
consolidated financial statements reflect all adjustments which, in the opinion
of management, are necessary for a fair presentation of the results for the
interim periods presented. All such adjustments are of a normal recurring
nature. Due to the seasonal nature of the business, the results of operations
for the three months ended March 31, 2001, 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 December 31,
2000.
Derivative Instruments and Hedging Activities - On January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133), as amended by
Statements 137 and 138. See Note H in the Notes to Consolidated Financial
Statements.
Reclassifications - Certain amounts in the consolidated financial statements
have been reclassified to conform to the current presentation.
B. Regulatory Assets
The following table is a summary of the Company's regulatory assets, net of
amortization.
March 31, December 31,
2001 2000
-----------------------------------------------------------------------------
(Thousands of Dollars)
Recoupable take-or-pay $ 78,051 $ 79,324
Pension costs 14,260 15,306
Postretirement costs other than pension 60,711 61,069
Transition costs 22,049 22,199
Reacquired debt costs 22,979 23,209
Income taxes 29,960 30,727
Other 6,444 6,771
-----------------------------------------------------------------------------
Regulatory assets, net $234,454 $238,605
=============================================================================
7
C. Supplemental Cash Flow Information
The following table is supplemental information relative to the Company's cash
flows.
Three Months Ended
March 31,
2001 2000
----------------------------------------------------------------------------
(Thousands of Dollars)
Cash paid during the period
Interest (including amounts capitalized) $ 48,318 $ 25,275
Noncash transactions
Treasury stock transferred to compensation plans $ 131 $ 61
Notes payable reclassified to long-term debt
based upon subsequent refinancing $ 397,048 $ -
----------------------------------------------------------------------------
The assets acquired in the Dynegy, Inc. acquisition in the first quarter of 2000
consisted primarily of property, plant and equipment.
D. Earnings per Share Information
In accordance with an announcement of the Financial Accounting Standards Board's
Staff at the Emerging Issues Task Force meeting in April 2001, codified as EITF
Topic No. D-95 (Topic D-95), the Company revised its computation of earnings per
common share (EPS). In accordance with Topic D-95, the dilutive effect of the
Company's Series A Convertible Preferred Stock is now considered in the
computation of basic EPS, utilizing the "if-converted" method. Under the
Company's "if-converted" method, the dilutive effect of the Series A Convertible
Preferred Stock on EPS cannot be less than the amount that would result from the
application of the "two-class" method of computing EPS. The "two-class" method
is an earnings allocation formula that determines EPS for the common stock and
the participating Series A Convertible Preferred Stock according to dividends
declared and participating rights in the undistributed earnings. The Series A
Convertible Preferred Stock is a participating instrument with the Company's
common stock with respect to the payment of dividends. For both periods
presented, the "two-class" method resulted in additional dilution. Accordingly,
EPS for such periods reflects this further dilution. The Company restated the
EPS amounts for the quarter ended March 31, 2000 to be consistent with the
revised methodology.
8
The following is a reconciliation of the basic and diluted EPS computations.
Three Months Ended March 31, 2001
Per Share
Income Shares Amount
- --------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Basic EPS
Income available for
common stock $55,584 29,661
Convertible preferred
stock 9,275 19,946
-------------------------------------------
Income available for
common stock
+ assumed conversion of
preferred stock $64,859 49,607 $ 1.31
===========================================
Further dilution from
applying the "two-
class" method (0.22)
--------------
Basic earnings per share $ 1.09
==============
Effect of Other Dilutive Securities
Options - 191
-------------------------------------------
Diluted EPS
Income available for
common stock
+ assumed exercise of
stock options $64,859 49,798 $ 1.30
===========================================
Further dilution from
applying the "two-
class" method (0.22)
--------------
Diluted earnings per
share $ 1.08
======================================================================================
Three Months Ended March 31, 2000
Per Share
Income Shares Amount
- --------------------------------------------------------------------------------------
(Thousands, except per share amounts)
Basic EPS
Income available for
common stock $53,747 29,242
Convertible preferred
stock 9,275 19,946
-------------------------------------------
Income available for
common stock
+ assumed conversion of
preferred stock $63,022 49,188 $ 1.28
===========================================
Further dilution from
applying the "two-
class" method (0.21)
--------------
Basic earnings per share $ 1.07
==============
Effect of Other Dilutive Securities
Options - 1
-------------------------------------------
Diluted EPS
Income available for
common stock
+ assumed exercise of
stock options $63,022 49,189 $ 1.28
===========================================
Further dilution from
applying the "two-
class" method (0.21)
--------------
Diluted earnings per
share $ 1.07
======================================================================================
There were 9,596 and 262,505 option shares excluded from the calculation of
Diluted EPS for the three months ended March 31, 2001 and 2000, respectively,
due to being antidilutive for the periods.
9
The following is a reconciliation of the basic and diluted EPS computations on
income before the cumulative effect of a change in accounting principle to net
income.
Three Months Ended March 31,
Basic Diluted
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Income available for common stock before
cumulative effect of a change in accounting
principle $ 1.13 $1.03 $ 1.12 $1.03
Cumulative effect of a change in accounting
principle, net of tax (0.04) 0.04 (0.04) 0.04
------------------------------------------------------------------
Income available for common stock $ 1.09 $1.07 $ 1.08 $1.07
================================================================================================================
E. Commitments and Contingencies
In connection with the now terminated proposed acquisition of Southwest Gas
Corporation (Southwest), the Company is party to various lawsuits. These
lawsuits contain allegations that include, but are not limited to, federal and
state Racketeer Influenced and Corrupt Organizations (RICO) Act violations and
improper interference in a contractual or other business relationship between
Southwest and Southern Union Corporation (Southern Union). Southern Union's
complaint asks for $750 million damages to be trebled for alleged RICO
violations, compensatory damages of not less than $750 million, punitive
damages, and rescission of the Confidentiality and Standstill Agreement. The
federal RICO claims have been dismissed. However, Southern Union has filed a
motion requesting reconsideration of these claims.
The Company, as third party beneficiary, has filed a lawsuit against Southern
Union for, among other things, breach of a confidentiality agreement with
Southern Union and Southwest and tortious interference with the Southwest merger
agreement. The Company filed suit against Southwest seeking a declaratory
judgment determining that it had properly terminated the merger agreement. In
response to this suit, Southwest brought a suit against the Company and Southern
Union alleging, among other things, fraud and breach of contract. Southwest is
seeking damages in excess of $75,000.
The lawsuits discussed above may be consolidated into one case. The court has
entered an order setting the cases for trial on November 5, 2001.
Two substantially identical derivative actions were filed 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 and waste of corporate assets. These two cases
were consolidated into one case. Such conduct allegedly caused the Company to
be sued by both Southwest and Southern Union which exposed the Company to
millions of dollars of potential liabilities. The plaintiffs seek an award of
compensatory and punitive damages and costs, disbursements and reasonable
attorney fees. The Company and its Independent Directors and officers, named as
defendants, filed motions to dismiss the action for failures of the plaintiffs
to make a pre-suit demand on ONEOK's Board of Directors. Additionally, the
Independent Directors and certain officers named as defendants, filed motions to
dismiss the action for failure to state a claim.
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. At the
present time, the Company is unable to estimate the possible loss, if any,
associated with these matters. The Company is defending itself vigorously
against all claims asserted by Southern Union and Southwest and all other
matters relating to the now terminated proposed acquisition with Southwest.
10
The Company has responsibility for 12 manufactured gas sites located in Kansas,
which may contain coal tar and other 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 (KDHE) 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 March 31, 2001, the costs of the
investigations and risk analysis have been immaterial. Limited information is
available about the sites and no testing has been performed. Management's best
estimate of the cost of remediation ranges from $100 thousand to $10 million per
site based on a limited comparison of costs incurred to remediate comparable
sites. These estimates do not give effect to potential insurance recoveries,
recoveries through rates or from third parties. The Kansas Corporation
Commission (KCC) has permitted others to recover their 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
degree of remediation required and number of years over which the remediation
must be 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.
F. Segments
The Company conducts its operations through seven segments: (1) the Marketing
and Trading segment markets natural gas to wholesale and retail customers and
markets electricity to wholesale customers; (2) the Gathering and Processing
segment gathers and processes natural gas and fractionates, stores and markets
natural gas liquids; (3) the Transportation and Storage segment transports and
stores natural gas for others and buys and sells natural gas; (4) the
Distribution segment distributes natural gas to residential, commercial and
industrial customers, leases pipeline capacity to others and provides
transportation services for end-use customers; (5) the Production segment
develops and produces natural gas and oil; (6) the Power segment produces and
sells electricity during peak periods to wholesale customers; and (7) the Other
segment primarily operates and leases the Company's headquarters building and a
related parking facility. The Company anticipates the peak electric generating
plant to be operational in mid-May 2001. Accordingly, for the three months ended
March 31, 2001, the Power segment did not generate revenues and had minimal
expenses. These expenses are reflected in the Other and Eliminations column.
Intersegment sales are recorded on the same basis as sales to unaffiliated
customers. All corporate overhead costs relating to a reportable segment have
been allocated for the purpose of calculating operating income. The Company's
equity method investments do not represent operating segments of the Company.
The Company has no single external customer from which it receives ten percent
or more of its revenues.
11
Marketing Gathering Transportation
Three Months Ended and and and Other and
March 31, 2001 Trading Processing Storage Distribution Production Power Elimination Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Sales to unaffiliated
customers $1,867,452 $ 273,687 $ 34,840 $ 761,175 $ 16,839 $ - $ 2,263 $2,956,256
Intersegment sales 420,038 202,905 18,363 733 12,447 - (654,486) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $2,287,490 $ 476,592 $ 53,203 $ 761,908 $ 29,286 $ - $(652,223) $2,956,256
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 28,613 $ 49,225 $ 37,561 140,772 $ 29,286 $ - $ (17,862) $ 267,595
Operating costs $ 4,353 $ 29,177 $ 12,889 $ 58,065 $ 7,805 $ - $ (24,027) $ 88,262
Depreciation, depletion and $ 137 $ 6,811 $ 4,750 $ 16,977 $ 7,585 $ - $ 695 $ 36,955
amortization
Operating income $ 24,123 $ 13,237 $ 19,922 $ 65,730 $ 13,896 $ - $ 5,470 $ 142,378
Cumulative effect of a change $ - $ - $ - $ - $ (2,151) $ - $ - $ (2,151)
in accounting principle,
net of tax
Income from equity $ - $ - $ 659 $ - $ 4,748 $ - $ - $ 5,407
investments
Total assets $1,735,203 $1,499,077 $636,633 $2,004,305 $366,122 $106,589 $ (54,714) $ 6,293,215
Capital expenditures $ 22 $ 7,151 $ 10,814 $ 27,178 $ 11,261 $ 28,361 $ 6,226 $ 91,013
- ------------------------------------------------------------------------------------------------------------------------------------
Marketing Gathering Transportation
Three Months Ended and and and Other and
March 31, 2000 Trading Processing Storage Distribution Production Power Elimination Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Sales to unaffiliated
customers $356,124 $ 50,049 $ 13,829 $ 379,710 $ 13,515 $ - $ 8,592 $ 821,819
Intersegment sales 92,716 18,396 14,364 912 5,316 - (131,704) $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $448,840 $ 68,445 $ 28,193 $ 380,622 $ 18,831 $ - $(123,112) $ 821,819
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 15,810 $ 16,040 $ 24,852 $ 135,431 $ 18,831 $ - $ (8,420) $ 202,544
Operating costs $ 2,539 $ 6,527 $ 8,078 $ 49,754 $ 5,646 $ - $ (9,253) $ 63,291
Depreciation, depletion and $ 191 $ 2,289 $ 4,193 $ 18,571 $ 8,462 $ - $ 621 $ 34,327
amortization
Operating income $ 13,080 $ 7,224 $ 12,581 $ 67,106 $ 4,723 $ - $ 212 $ 104,926
Cumulative effect of a change $ 2,115 $ - $ - $ - $ - $ - $ - $ 2,115
in accounting principle,
net of tax
Income from equity $ - $ - $ 1,229 $ - $ 7 $ - $ - $ 1,236
investments
Total assets $331,285 $624,524 $407,322 $1,761,383 $354,947 $28,283 $ 66,804 $3,574,548
Capital expenditures $ 45 $ 4,831 $ 7,603 $ 22,069 $ 8,212 $ 9,455 $ 1,429 $ 53,644
- ------------------------------------------------------------------------------------------------------------------------------------
G. Paid in Capital
Paid in capital was $336.0 million and $331.5 million for common stock at March
31, 2001, and December 31, 2000, respectively. Paid in capital for convertible
preferred stock was $564.2 million at March 31, 2001 and December 31, 2000.
12
H. Derivative Instruments and Hedging Activities
On January 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement 133), amended by Statement No. 137 and Statement No.138.
Statement 137 delayed the implementation of Statement 133 until fiscal years
beginning after June 15, 2000. Statement 138 amended the accounting and
reporting standards of Statement 133 for certain derivative instruments and
hedging activities. Statement 138 also amends Statement 133 for decisions made
by the Financial Accounting Standards Board (FASB) relating to the Derivatives
Implementation Group (DIG) process. The FASB DIG is addressing Statement 133
implementation issues the ultimate resolution of which may impact the
application of Statement 133.
Under Statement 133, entities are required to record 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 hedged 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.
In 2000, the Company entered into derivative instruments related to the
production of natural gas, most of which will expire by the end of 2001. These
derivative instruments are designed to hedge the Production segment's exposure
to changes in the price of natural gas. Changes in the fair value of the
derivative instruments are reflected initially in other comprehensive income
(loss) and subsequently realized in earnings when the forecasted transaction
affects earnings. The Company recorded a cumulative effect charge of $2.2
million, net of tax, in the income statement and $28 million, net of tax, in
accumulated other comprehensive loss to recognize at fair value the ineffective
and effective portions, respectively, of the losses on all derivative
instruments that are designated as cash flow hedging instruments, which
primarily consist of costless option collars and swaps on natural gas
production.
The Company recognized $1.0 million in earnings, representing the change in the
ineffective portion of the cash flow hedges for the three months ended March 31,
2001. The Company realized a $20.8 million loss in earnings that was
reclassified from accumulated other comprehensive loss resulting from the
settlement of contracts when the natural gas was sold. These gains and losses
are reported in Operating Revenues. Other comprehensive loss of $7.5 million at
March 31, 2001 is related to a cash flow exposure and will be realized in
earnings within the next ten months.
I. Comprehensive Income
Three Months Ended
March 31, 2001
-------------------------------------------------------------------------------------
Net Income $ 64,859
Other comprehensive income (loss):
Cumulative effect of a change in accounting principle $ (45,556)
Unrealized gains on derivative instruments 12,426
Realized losses in net income 20,836
-----------
Other comprehensive loss before taxes (12,294)
Income tax benefit on other comprehensive loss 4,756
------------------------
Other comprehensive loss $ (7,538)
-----------
Comprehensive income $ 57,321
=====================================================================================
13
J. Energy Trading and Risk Management Activities
The Company engages in price risk management activities for both trading and
non-trading purposes. On January 1, 2000, the Company adopted Emerging Issues
Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF 98-10) for its energy trading contracts. EITF 98-10 requires
entities involved in energy trading activities to account for energy trading
contracts using mark-to-market accounting. Prior to the adoption of EITF 98-10,
the Company accounted for its trading activities on the accrual method based on
settlement of physical positions. The adoption of EITF 98-10 was accounted for
as a change in accounting principle and the cumulative effect at January 1, 2000
of $2.1 million, net of tax, was recognized. Forwards, swaps, options, and
energy transportation and storage contracts utilized for trading activities are
reflected at fair value as assets and liabilities from price risk management
activities in the consolidated balance sheets. The fair value of these assets
and liabilities are affected by the actual timing of settlements related to
these contracts and current period changes resulting primarily from newly
originated transactions and the impact of price movements. Changes in fair
value are recognized in net revenues in the consolidated statement of income.
Market prices used to fair value these assets and liabilities reflect
management's best estimate considering various factors including closing
exchange and over-the-counter quotations, time value and volatility underlying
the commitments. Market prices are adjusted for the potential impact of
liquidating the Company's position in an orderly manner over a reasonable period
of time under present market conditions.
K. Subsequent Events
On May 11, 2001, the Oklahoma Corporation Commission (OCC) staff recommended to
the OCC that ONG's unrecovered purchased gas cost (UPGC) clause be suspended
because ONG allegedly failed to "act prudently" in acquiring its gas supply for
the 2000/2001 heating season resulting in an alleged $72.1 million in excess
charges to ratepayers through March 31, 2001. If the OCC staff is successful,
the Company would not be allowed to recover approximately $72.1 million in UPGC.
At the present time, the Company is unable to estimate the possible loss, if
any, associated with this matter. The Company believes that the OCC staff's
recommendation is without merit and is defending itself vigorously against this
recommendation.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains statements concerning Company expectations or
predictions of the future that are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are intended to be covered by the safe harbor provision of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking
statements are based on management's beliefs and assumptions based on
information currently available. It is important to note that actual results
could differ materially from those projected in such forward-looking statements.
Factors that may impact forward-looking statements include, but are not limited
to, the following:
. the effects of weather and other natural phenomena on sales and prices;
. increased competition from other energy suppliers as well as alternative
forms of energy;
. the capital intensive nature of the Company's business;
. further deregulation, or "unbundling" of the natural gas business;
. competitive changes in the natural gas gathering, transportation and storage
business resulting from deregulation, or "unbundling," of the natural gas
business;
. the profitability of assets or businesses acquired by the Company;
. risks of marketing, trading, and hedging activities as a result of changes in
energy prices;
. economic climate and growth in the geographic areas in which the Company does
business;
. the uncertainty of gas and oil reserve estimates;
the timing and extent of changes in commodity prices for natural gas, natural
gas liquids, electricity, and crude oil;
. the effects of changes in governmental policies and regulatory actions,
including income taxes, environmental compliance, and authorized rates;
. the results of litigation related to the Company's now terminated proposed
acquisition of Southwest Gas Corporation (Southwest) or to the termination
of the Company's merger agreement with Southwest; and
. the other factors listed in the reports the Company has filed and may file
with the Securities and Exchange Commission, which are incorporated by
reference.
Accordingly, while the Company believes these forward-looking statements to be
reasonable, there can be no assurance that they will approximate actual
experience or that the expectations derived from them will be realized. When
used in Company documents, the words "anticipate," "expect," "projection,"
"goal" or similar words are intended to identify forward-looking statements.
A. Acquisitions and Sales
Southwest Gas Corporation
In connection with the now terminated proposed acquisition of Southwest, the
Company is party to various lawsuits. These lawsuits contain allegations that
include, but are not limited to, federal and state Racketeer, Influenced and
Corrupt Organizations Act violations and improper interference in a contractual
relationship between Southwest and Southern Union Corporation (Southern Union).
Southern Union's complaint asks for $750 million damages to be trebled for
racketeering and unlawful violations, compensatory damages of not less than $750
million and rescission of the Confidentiality and Standstill Agreement. The
federal RICO claims have been dismissed. However, Southern Union has filed a
motion requesting reconsideration of these claims.
The Company, as third party beneficiary, has filed a lawsuit against Southern
Union for, among other things, breach of a confidentiality agreement with
Southern Union and Southwest and tortious interference with the Southwest merger
agreement. The Company filed suit against Southwest seeking a declaratory
judgment determining that it had properly terminated the merger agreement. In
response to this suit, Southwest brought a suit against the Company and Southern
Union alleging, among other things, fraud and breach of contract. Southwest is
seeking damages in excess of $75,000.
15
The lawsuits discussed above may be consolidated into one case. The court has
entered an order setting the cases for trial on November 5, 2001.
Two substantially identical derivative actions were filed 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 and waste of corporate assets. These two cases
were consolidated into one case. Such conduct allegedly caused the Company to
be sued by both Southwest and Southern Union which exposed the Company to
millions of dollars of potential liabilities. The plaintiffs seek an award of
compensatory and punitive damages and costs, disbursements and reasonable
attorney fees. The Company and its Independent Directors and officers, named as
defendants, filed Motions to Dismiss the actions for failures of the plaintiffs
to make a pre-suit demand on the Company's Board of Directors. Additionally, the
Independent Directors and certain officers named as defendants, filed Motions to
Dismiss the actions for failure to state a claim.
If any of the plaintiffs should be successful in any of their claims against the
Company and substantial damages are awarded, it could have a material adverse
effect on the Company's operations, cash flow and financial position. The
Company intends to vigorously defend against the claims asserted by Southern
Union and Southwest and all other matters relating to the now terminated merger
with Southwest. The Company charged $1.5 million of ongoing litigation costs
and $6.8 million of previously deferred transaction and ongoing litigation costs
to Other income, net for the three months ended March 31, 2001 and 2000,
respectively.
B. Results of Operations
Consolidated Operations
The Company is a diversified energy company whose objective is to maximize value
for shareholders by vertically integrating its business operations from the
wellhead to the burner tip. This strategy has led the Company to focus on
acquiring assets that provide synergistic trading and marketing opportunities
along the natural gas energy chain. Products and services are provided to its
customers through the following segments:
. Marketing and Trading
. Gathering and Processing
. Transportation and Storage
. Distribution
. Production
. Power
. Other
16
Three Months Ended
March 31,
2001 2000
----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Operating revenues $ 2,956,256 $ 821,819
Cost of gas 2,688,661 619,275
----------------------------------------------------------------------------------------------------------
Net revenues 267,595 202,544
Operating costs 88,262 63,291
Depreciation, depletion, and amortization 36,955 34,327
----------------------------------------------------------------------------------------------------------
Operating income $ 142,378 $ 104,926
==========================================================================================================
Other income, net $ 3,967 $ 16,412
==========================================================================================================
Cumulative effect of a change in accounting principle $ (3,508) $ 3,449
Income tax 1,357 1,334
----------------------------------------------------------------------------------------------------------
Cumulative effect of a change in accounting principle, net of tax $ (2,151) $ 2,115
==========================================================================================================
The Company's operating results increased for the three months ended March 31,
2001 compared to the same period in 2000 primarily due to the acquisition of
certain assets from Kinder Morgan, Inc. (KMI) in April 2000 and Dynegy, Inc.
(Dynegy) in March 2000 as well as the impact of strong natural gas prices on the
production segment. Strong natural gas prices coupled with increased volumes
sold resulting from the KMI and Dynegy acquisitions, led to increased revenues,
cost of sales and margins. An increase in the average hedged price for the
Production segment also led to higher net revenues for the three months ended
March 31, 2001 compared to the same period in 2000. Operating costs and
depreciation, depletion, and amortization increased primarily due to the KMI and
Dynegy acquisitions. Other income, net for the three months ended March 31,
2001 includes approximately $5.4 million in income from equity investments that
was partially offset by a charge of $1.5 million related to ongoing litigation
costs associated with the terminated acquisition of Southwest. Other income, net
decreased for the three months ended March 31, 2001 compared to the same period
in 2000 due to the prior period including a $26.7 million gain on the sale of
assets which was partially offset by a charge of $6.8 million of previously
deferred costs and ongoing litigation costs associated with the terminated
acquisition of Southwest, and other charges.
Marketing and Trading
The Marketing and Trading segment purchases, stores, markets and trades natural
gas to both the wholesale and retail sectors in 28 states. The acquisition of
KMI's marketing and trading operation, in April 2000, expanded firm transport
capacity and storage capacity in the mid-continent region. The transport
capacity of 1 Bcf per day, allows for trade from the California border,
throughout the Rockies, to the Chicago city gate. With total storage capacity
of 64 Bcf, withdrawal capability of 2.0 Bcf per day and injection of 1.1 Bcf per
day, the Company has direct access to all regions of the country with great
flexibility in capturing volatility in the energy markets.
17
Three Months Ended
March 31,
2001 2000
----------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 2,287,413 $ 448,639
Cost of gas 2,258,877 433,030
----------------------------------------------------------------------------------------------------------
Gross margin on gas sales 28,536 15,609
Other revenues 77 201
----------------------------------------------------------------------------------------------------------
Net revenues 28,613 15,810
Operating costs 4,353 2,539
Depreciation, depletion, and amortization 137 191
----------------------------------------------------------------------------------------------------------
Operating income $ 24,123 $ 13,080
==========================================================================================================
Other income, net $ 668 $ -
==========================================================================================================
Cumulative effect of change in accounting principle, before tax $ - $ 3,449
==========================================================================================================
Gas sales and cost of gas increased in the first quarter of 2001 compared with
the same period in 2000, primarily as a result of higher gas prices, increased
volumes sold and increased price volatility. Marketing and Trading sales
volumes averaged 3.3 Bcf/d for the three months ended March 31, 2001 compared
with 1.9 Bcf/d for the same period in 2000 reflecting the increase from the KMI
acquisition and colder weather. Gross margin on gas sales increased
approximately $12.9 million for the three months ended March 31, 2001 compared
to the same period in 2000 due to increased price volatility and volumes sold.
Operating costs increased approximately $1.8 million during the first quarter of
2001 compared to the same period in 2000 due to increased personnel costs
resulting from the acquisition of KMI's marketing and trading operations coupled
with increases in overall personnel to support the expanded base of marketing
and trading activities.
Three Months Ended
March 31,
2001 2000
------------------------------------------------------------------------
Operating Information
Natural gas volumes (MMcf) 297,354 170,614
Gross margin ($/Mcf) $ 0.095 $ 0.091
Capital expenditures (Thousands) $ 22 $ 45
Total assets (Thousands) $1,735,203 $ 331,285
------------------------------------------------------------------------
Gross margin per Mcf remained consistent for the three months ended March 31,
2001 with the same period in 2000 as the Company continued to execute on a
larger scale its transportation and storage arbitrage strategy that focuses on
capturing higher margin sales. The $1.4 billion increase in total assets at
March 31, 2001 from March 31, 2000 is due to a $1 billion increase in price risk
management assets and a $417 million increase in accounts receivable resulting
from increased sales at higher gas prices.
Gathering and Processing
The gathering and processing segment currently operates 20 gas processing plants
and has an ownership interest in four gas processing plants. The total
processing capacity of plants operated and the Company's proportionate interest
in plants not operated by the Company is 2.2 Bcf/d. A total of over 19,300 miles
of gathering pipelines support the gas processing plants. The gathering and
processing segment has experienced tremendous growth with the acquisition of
assets from Dynegy and KMI.
18
Three Months Ended
March 31,
2001 2000
-------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Natural gas liquids and condensate sales $ 185,387 $ 35,925
Gas sales 264,736 25,938
Gathering, compression and dehydration revenues 21,860 5,116
Processing revenues 4,471 -
Cost of sales 427,367 52,405
-------------------------------------------------------------------------------------------------
Gross margin 49,087 14,574
Other revenues 138 1,466
-------------------------------------------------------------------------------------------------
Net revenues 49,225 16,040
Operating costs 29,177 6,527
Depreciation, depletion, and amortization 6,811 2,289
-------------------------------------------------------------------------------------------------
Operating income $ 13,237 $ 7,224
=================================================================================================
Other income, net $ - $ 26,585
=================================================================================================
Natural gas liquids and condensate sales increased $149.5 million for the three
months ended March 31, 2001 compared to the same period in 2000, of which $93.1
million is due to strong market prices and $56.4 million is due to increased
volumes sold resulting from the KMI and Dynegy acquisitions. Natural gas sales
increased approximately $238.8 million for the three months ended March 31, 2001
compared to the same period in 2000. Higher natural gas prices resulted in a
$155.9 million increase and an increase in volumes sold due to the acquisitions
resulted in an $82.9 million increase. Gathering, compression and dehydration
revenues increased $16.7 million due to increased capacity acquired in the KMI
and Dynegy acquisitions. The increase in processing revenues for the three
months ended March 31, 2001 compared to the same period in 2000 is due to
revenues generated from fee based processing contracts acquired in the KMI
acquisition.
The increase in cost of sales for the three months ended March 31, 2001 compared
to the same period in 2000 is primarily due to a $231.2 million increase due to
higher prices and a $143.8 million increase resulting from increased volumes
sold. Gross margin increased $34.5 million for the three months ended March 31,
2001 compared to the prior period in 2000 due to an increase in volumes and
higher margin products being sold.
Operating costs increased $22.7 million for the three months ended March 31,
2001 compared to the same period in 2000. Approximately $13.4 million of the
increase is due to increased cost of operating the additional assets acquired in
the KMI and Dynegy acquisitions and $6 million of the increase is due to
increased personnel costs relating to the employees added in these acquisitions.
The increase in assets from the Dynegy and KMI acquisitions led to the increase
in depreciation, depletion, and amortization.
Other income, net in 2000 included the gain on the sale of the Company's 42.4
percent interest in the Indian Basin gas processing plant and gathering system.
19
Three Months Ended
March 31,
2001 2000
---------------------------------------------------------------------------------
Gas Processing Plants Operating Information
Average NGL price realized ($/Gal) $ 0.677 $ 0.332
Average gas sales price realized ($/Mcf) $ 7.44 $ 2.27
Total gas gathered (MMbtu/D) 1,451,989 547,475
Total gas processed (Mmcf/d) 1,074 410
Natural gas liquids sales (MBbls) 6,119 2,427
Natural gas liquids produced (Bbls/d) 61,535 27,223
Gas sales (MMcf) 35,606 11,448
Natural Gas Liquids by Component (%)
Ethane 34 50
Propane 35 26
Iso butane 6 4
Normal butane 14 9
Natural gasoline 11 11
Contract %
Percent of Proceeds 44 43
Keep Whole 32 36
Fee 24 21
Capital expenditures (Thousands) $ 7,151 $ 4,831
Total assets (Thousands) $1,499,077 $ 624,524
---------------------------------------------------------------------------------
Average NGL price realized and average gas sales price realized increased
compared to the corresponding previous period due to strong market prices for
oil and natural gas. The increased volumes of natural gas gathered, processed,
and sold and natural gas liquids sold increased due to the increased processing
and fractionation capacity acquired in the KMI and Dynegy acquisitions. These
acquisitions increased the Company's processing and fractionation capacity by
1.6 Bcf/d.
Ethane sales as a percentage of total product sales decreased in 2001 compared
to the same period in 2000 due to ethane rejection resulting from abnormally
high natural gas prices.
Capital expenditures increased for the three months ended March 31, 2001
compared to the corresponding prior period due to increased costs to sustain
operations due to having a higher asset base resulting from the KMI and Dynegy
acquisitions.
Total assets increased $873 million at March 31, 2001 from March 31, 2000 due
primarily to a $324.1 million increase in accounts receivable and a $340 million
increase in net property, plant and equipment. The increase in accounts
receivable is due to increased sales and higher prices. The increase in net
property, plant and equipment is due to the KMI acquisition.
Transportation and Storage
The transportation and storage segment represents the Company's intrastate
transmission pipelines and natural gas storage facilities. The Company has four
storage facilities in Oklahoma, two in Kansas and three in Texas with a combined
working capacity of approximately 58 Bcf. The Company's intrastate transmission
pipelines operate in Oklahoma, Kansas and Texas and are regulated by the
Oklahoma Corporation Commission (OCC), Kansas Corporation Commission (KCC), and
Texas Railroad Commission (TRC), respectively.
20
Three Months Ended
March 31,
2001 2000
-------------------------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Transportation revenues $ 36,166 $ 19,003
Storage revenues 9,954 7,314
Cost of fuel 11,056 3,341
-------------------------------------------------------------------------------------------
Gross margin on transportation and storage revenues 35,064 22,976
Gas sales 5,056 -
Cost of gas 4,586 -
-------------------------------------------------------------------------------------------
Gross margin on gas sales 470 -
Other revenues 2,027 1,876
-------------------------------------------------------------------------------------------
Net revenues 37,561 24,852
Operating costs 12,889 8,078
Depreciation, depletion, and amortization 4,750 4,193
-------------------------------------------------------------------------------------------
Operating income $ 19,922 $ 12,581
===========================================================================================
Other income (loss), net $ (841) $ 1,229
===========================================================================================
Transportation revenues increased $17.2 million for the three months ended March
31, 2001 compared to the same period in 2000 of which $9.4 million is due to
increased volumes transported and retained fuel volumes resulting from the KMI
acquisition and $6.5 million is due to the increased price of retained fuel.
Storage revenues increased $2.6 million for the three months ended March 31,
2001 compared to the same period in 2000 due to increased storage capacity
acquired in the KMI acquisition. Cost of fuel increased $7.7 million for the
three months ended March 31, 2001 compared to the same period in 2000 due to
higher gas prices associated with retained fuel. The $12.1 million increase in
gross margin for the three months ended March 31, 2001 compared to the same
period in 2000, is primarily due to higher margin on sales resulting from the
KMI acquisition, higher gas prices associated with retained fuel and increased
storage revenues. Gross margin on gas sales relate to merchant gas sales by
WesTex that was acquired in April 2000.
Operating costs increased $4.8 million for the three months ended March 31, 2001
compared to the same period in 2000 primarily as a result of increased costs of
operating additional assets and increased personnel costs resulting from the KMI
acquisition.
Three Months Ended
March 31,
2001 2000
--------------------------------------------------------------------
Operating Information
Volumes transported (MMcf) 159,845 113,422
Transportation rate ($/Mcf) $ 0.133 $ 0.123
Working gas in storage (MMcf) 9,808 8,263
Capital expenditures (Thousands) $ 10,814 $ 7,603
Total assets (Thousands) $ 636,633 $ 407,322
--------------------------------------------------------------------
Volumes transported increased 46,423 MMcf for the three months ended March 31,
2001 compared to the same period in 2000 primarily due to the increase in
transportation throughput acquired in the KMI acquisition and increased volumes
transported due to colder weather in the first quarter of 2001 compared to the
same period in 2000. This acquisition increased transportation throughput by an
average of 635 MMcf/d.
Working gas in storage represents both Company owned and third party gas
available to be withdrawn from the storage facilities while maintaining the
facilities' operating integrity. The Company's storage levels are approximately
16.9 percent and 17.2 percent full, at March 31, 2001 and 2000, respectively.
The five year average is 40.5 percent full. The low storage level at March 31,
2001 is due to the increased demand for natural gas associated with the colder
than normal winter and the higher than normal natural gas prices during the
first quarter.
21
Capital expenditures increased for the three months ended March 31, 2001
compared to the same period in 2000 due to sustaining an increased asset base.
Total assets increased at March 31, 2001 compared to March 31, 2000 due to a
$220 million increase in net property, plant and equipment resulting from the
acquisition of the KMI assets in April 2000.
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 (ONG) which serves residential, commercial, and
industrial customers and leases pipeline capacity. The Company's operations in
Kansas are conducted through Kansas Gas Service (KGS) which serves residential,
commercial, and industrial customers. The Distribution segment serves about 80
percent of Oklahoma and about 72 percent of Kansas. ONG is subject to
regulatory oversight by the OCC. KGS is subject to regulatory oversight by the
KCC.
An Order received in May 2000 from the OCC, provided for a $20 million net
revenue reduction in rates which will be offset by an annual reduction in
depreciation expense of $11.4 million. Pursuant to this Order, the Oklahoma
assets and customers of KGS were transferred to ONG. This Order also adjusted
rates for the removal of the gathering and storage assets no longer included in
base rates and provided for the recovery of gas purchase, operations and
maintenance expenses and line losses through a rider rather than base rates.
Three Months Ended
March 31,
2001 2000
--------------------------------------------------------------------------
(Thousands of Dollars)
Financial Results
Gas sales $ 737,716 $ 357,690
Cost of gas 621,136 245,191
--------------------------------------------------------------------------
Gross margin 116,580 112,499
PCL and ECT Revenues 18,130 18,851
Other revenues 6,062 4,081
--------------------------------------------------------------------------
Net revenues 140,772 135,431
Operating costs 58,065 49,754
Depreciation, depletion, and amortization 16,977 18,571
--------------------------------------------------------------------------
Operating income $ 65,730 $ 67,106
==========================================================================
Gas sales and cost of gas increased for the three months ended March 31, 2001
compared to the same period in 2000 primarily due to increased gas costs. Gross
margin on gas sales increased $4.1 million for the three months ended March 31,
2001 compared to the same period in 2000 primarily due to an increase in the
number of customers served resulting in an increase in customer service revenue
and increased revenue from a gathering and line loss rider. The increase in
margin for ONG was partially offset by the impact of the temperature adjustment
clause during a period when weather was colder than normal. KGS' margins
increased slightly due to an increase in volumes sold and the impact of weather
normalization. Weather was colder than normal for the three months ended March
31, 2001, accordingly, margins for customers whose rates are weather normalized
were adjusted to reflect the impact of normal weather. However, during the
three months ended March 31, 2000, KGS did not have weather normalized rates and
the weather was warmer than normal during this period.
Operating costs increased $8.3 million for the three months ended March 31, 2001
compared to the same period in 2000, primarily as a result of increased bad
debts due to the strong natural gas prices during the period.
22
Three Months Ended
March 31,
2001 2000
--------------------------------------------------------------
Gross Margin per Mcf
Oklahoma
Residential $1.99 $1.95
Commercial $1.93 $2.04
Industrial $1.05 $1.20
Pipeline capacity leases $0.31 $0.27
Kansas
Residential $1.53 $1.93
Commercial $1.31 $1.64
Industrial $1.41 $1.83
End-use customer transportation $0.73 $0.67
--------------------------------------------------------------
Residential gross margin per Mcf for the Oklahoma customers increased due to the
increase in the number of customers which was partially offset due to lower
tariff rates effective June 2000. The decrease in Oklahoma's gross margin per
Mcf for commercial and industrial customers is primarily due to reduced tariff
rates. Gross margin per Mcf for the Kansas residential, commercial, and
industrial customers decreased for the three months ended March 31, 2001
compared to the same period in 2000 primarily as a result of a KCC-ordered
reduction in rates that occurred in July 2000.
Three Months Ended
March 31,
2001 2000
-------------------------------------------------------------------
Operating Information
Average Number of Customers 1,478,225 1,442,457
Capital expenditures (Thousands) $ 27,178 $ 22,069
Total Assets (Thousands) $2,004,305 $1,761,383
Customers per employee 583 553
-------------------------------------------------------------------
Total assets increased $242.9 million at March 31, 2001 compared to the same
period in 2000 due to a $219.9 million increase in accounts receivable and an
$84.1 million increase in unrecovered purchased gas costs. The increase in
accounts receivable and unrecovered purchased gas costs is due to the increase
in natural gas prices and an increase in volumes sold. Customers per employee
for the three months ended March 31, 2001 increased compared to the same period
a year ago due to an increase in the number of customers and a decrease in the
number of employees. The number of employees decreased due to normal attrition.
Although the number of employees decreased, the Company has maintained quality
customer service.
Three Months Ended
March 31,
2001 2000
--------------------------------------------------------------
Volumes (MMcf)
Gas sales
Residential 53,772 51,389
Commercial 20,869 18,808
Industrial 1,951 2,082
--------------------------------------------------------------
Total volumes sold 76,592 72,279
PCL and ECT 40,749 51,903
--------------------------------------------------------------
Total volumes delivered 117,341 124,182
==============================================================
23
Total residential and commercial volumes increased for the three months ended
March 31, 2001 compared to the same period in 2000 due to colder weather and an
increase in the number of customers. PCL and ECT volumes decreased for the
three months ended March 31, 2001 compared to the same period a year ago due to
certain PCL customers curtailing manufacturing due to the strong natural gas
prices and lower as available gas sales due to higher demand by residential and
commercial customers. These decreases in volumes were partially offset by more
customers qualifying for PCL and ECT rates due to a reduction in the minimum
capacity requirements pursuant to regulatory orders.
Certain costs to be recovered through the rate making process have been recorded
as regulatory assets in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation".
As services continue to unbundle, certain of these assets may no longer meet the
criteria of a regulatory asset, and accordingly, a write-off of regulatory
assets and stranded costs may be required. The Company's most recent Orders did
not change the recoverability of regulatory assets. The Company has been
authorized to recover transition costs incurred due to natural gas industry
restructuring. An initial amount of $1.8 million has been authorized. This
recovery level will be updated annually. Accordingly, the Company does not
anticipate that write-off of costs, if any, will be material.
Production
Three Months Ended
March 31,
2001 2000
-----------------------------------------------------------------------------------------------------
Financial Results
Natural gas sales $ 26,553 $ 16,176
Oil sales 2,653 2,412
Other revenues 80 243
-----------------------------------------------------------------------------------------------------
Net revenues 29,286 18,831
Operating costs 7,805 5,646
Depreciation, depletion, and amortization 7,585 8,462
-----------------------------------------------------------------------------------------------------
Operating income $ 13,896 $ 4,723
=====================================================================================================
Other income, net $ 5,110 $ 1,174
=====================================================================================================
Cumulative effect of change in accounting principle, before tax $ (3,508) $ -
=====================================================================================================
Natural gas sales increased $10.4 million for the three months ended March 31,
2001 compared to the same period in 2000, due to the increase in gas prices.
The average realized price of natural gas was $4.34/Mcf and $2.32/Mcf for the
first quarter of 2001 and 2000, respectively. The increase in average realized
price is due to higher natural gas prices, net of hedging effects, in 2001
compared to 2000. The increase in prices led to $14.1 million increase in
revenues which was partially offset by the reduction in natural gas sales
volumes. Natural gas sales volumes decreased due to normal production declines.
The increase in oil sales for the three months ended March 31, 2001 compared to
the same period in 2000, is due to the increase in average realized sales price
resulting from higher market prices.
Operating costs increased $2.2 million for the three months ended March 31, 2001
compared to the same period in 2000, due to increased production taxes resulting
from higher natural gas and oil prices. Production taxes are calculated based
on wellhead price rather than realized price. The decrease in depreciation,
depletion, and amortization is due to natural declines in production.
24
Three Months Ended
March 31,
2001 2000
------------------------------------------------------------------------
Operating Information
Proved reserves
Gas (MMcf) 252,582 249,871
Oil (MBbls) 4,173 4,075
Production
Gas (MMcf) 6,122 6,975
Oil (MBbls) 95 128
Average realized price
Gas (MMcf) $ 4.34 $ 2.32
Oil (MBbls) $ 27.78 $ 18.82
Capital expenditures (Thousands) $ 11,261 $ 8,212
Total assets (Thousands) $ 366,122 $ 354,947
------------------------------------------------------------------------
The Production segment added 3.6 Bcfe of reserves compared to December 31, 2000,
and produced 6.7 Bcfe for the three months ended March 31, 2001. The reserve
additions are 3.7 Bcfe proved developed, 1.1 Bcfe proved behind pipe, 7.0 Bcfe
proved undeveloped. In addition, there was a 7.8 Bcfe of downward proved reserve
adjustments and .40 Bcfe of dispositions. Capital expenditures reflected above
include current drilling or completion projects with reserves yet to be
assigned.
Average realized price, above, reflects the impact of hedging activities.
Power
The Company created the Power segment on January 1, 2001, to include the
operating results of the peak electric generating plant the Company is in the
process of constructing. The Company will sell electricity generated from the
plant during peak demand periods. For the three months ended March 31, 2001, the
Power segment's operating results were diminimis due to the fact that
construction of the plant is ongoing, thus operations have not commenced. The
plant is expected to be operational in mid-May 2001. For the three months ended
March 31, 2001, capital expenditures relating to the construction of the
electric generating plant were $28.4 million compared to $9.5 million for the
same period in 2000.
C. Financial Flexibility and Liquidity
Operating Cash Flows
Operating cash flows for the three months ended March 31, 2001, as compared to
the same period one year ago, were $359.4 million compared to $268.7 million.
Cash flow from operating activities was positively impacted in the current year
as a result of an increase in accounts receivables collected for the three
months ended March 31, 2001 compared to the same period in 2000 and decreased
deposits. These decreases were partially offset by increased payments of
accounts payable and an increase in unrecovered purchased gas costs for the
three months ended March 31, 2001 compared to the same period in 2000. The
significant changes in working capital accounts was primarily the result of
increased activity resulting from the Kinder Morgan and Dynegy acquisitions and
the strong natural gas prices.
Investing Cash Flows
Cash paid for capital expenditures and acquisitions was $91 million and $0.6
million for the three months ended March 31, 2001, respectively. Capital
expenditures include $28.4 million for construction of an electric generating
plant. For the same period one year ago, capital expenditures were $53.6 million
and acquisitions were $305.5 million. Capital expenditures for the three months
ended March 31, 2000 relating to the construction of an electric generating
plant were $9.5 million. The increase in capital expenditures for the three
months ended March 31, 2001 compared to the same period in 2000 is primarily
attributable to increased cost of sustaining a higher asset base due to the KMI
and Dynegy acquisitions in April and March 2000, respectively.
25
Financing Cash Flows
The Company's capitalization structure is 40 percent equity and 60 percent debt
(including short-term debt) at March 31, 2001, compared to 36 percent equity and
64 percent debt at December 31, 2000. At March 31, 2001, $1.74 billion of long-
term debt was outstanding. As of that date, the Company could have issued $0.9
billion of additional long-term debt under the most restrictive provisions
contained in its various borrowing agreements. The increase in debt, incurred
to finance acquisitions, has led to a significant increase in interest costs for
the three months ended March 31, 2001 compared to the same period in 2000.
In April 2001, the Company issued $400 million of ten year, 7.125 percent, fixed
rate notes to pay off short-term debt. As a result, the short-term debt has
been classified as long-term in the financial statements.
The Board of Directors has authorized up to $1.2 billion of short and
intermediate term financing to be secured as necessary for the operation of the
corporation and its subsidiaries. The Company has an $800 million Revolving
Credit Facility with Bank of America, N.A. and other financial institutions with
a maturity date of June 30, 2001, which the Company intends to renew. This
credit facility is primarily used as a commercial paper back up and to replace
the previously existing $600 million Revolving Credit Facility dated July 2,
1999, that matured on June 30, 2000 and the $200 million Revolving Credit
Facility entered into in March 2000 that was terminated on June 1, 2000. The
$100 million Revolving Credit Facility that expired on March 31, 2001 was not
renewed. At March 31, 2001, $189.6 million of commercial paper was outstanding.
Under the terms of the Revolving Credit Facility, the Company could borrow an
additional $610.4 million.
Although cash provided by operating activities continues as the primary source
for meeting day-to-day cash requirements, due to seasonal fluctuations,
acquisitions, and additional capital requirements, the Company accesses funds
through commercial paper, and short-term credit agreements and, if necessary,
through long-term borrowing.
Liquidity
Competition continues to increase in all segments of the Company's business.
The loss of major customers without recoupment of those revenues is an event
that could have a material adverse effect on the Company's financial condition.
However, strategies such as aggressive negotiations with potential new
customers, weather normalization in Kansas and Oklahoma, and increased use of
storage in the day trading market are expected to reduce other risks to the
Company. Additionally, rates in the Distribution segment are structured to
reduce the Company's risk in serving its large customers.
The OCC staff recommended to the OCC that ONG's unrecovered purchased gas cost
(UPGC) clause be suspended because ONG allegedly failed to "act prudently" in
acquiring its gas supply for the 2000/2001 heating season resulting in an
alleged $72.1 million in excess charges to ratepayers through March 31, 2001. If
the OCC staff is successful, the Company would not be allowed to recover
approximately $72.1 million in UPGC which could have a material adverse effect
on the Company's operations, cash flow, and financial position. The Company
believes that the OCC staff's recommendation is without merit and is defending
itself vigorously against this recommendation.
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.
26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management - The Company, substantially through its nonutility segments, is
exposed to market risk in the normal course of its business operations and to
the impact of market fluctuations in the price of natural gas, NGLs and crude
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 and trading operation, and anticipated sales of natural gas and oil
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, NGLs and crude oil, the Company uses commodity derivative instruments such
as futures contracts, swaps and options to manage market risk of existing or
anticipated purchase and sale agreements, existing physical gas in storage, and
basis risk. The Company adheres to policies and procedures that limit its
exposure to market risk from open positions and monitors its exposure to market
risk.
To minimize the impact of weather on the Distribution segment's operations, the
Company has used weather derivative swaps to manage the risk of fluctuations in
heating degree days (HDD) during the heating season. Under the weather
derivative swap agreements, the Company receives a fixed payment per degree day
below the contracted normal HDD and pays a fixed amount per degree day above the
contracted normal HDD. The swaps contain a contract cap that limits the amount
either party is required to pay. At March 31, 2001, the Company is not a party
to any weather derivative swaps.
In the past, the Kansas Gas Service used 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. At March 31, 2001, KGS did not have any derivative instruments in place to
hedge the cost of gas purchases.
Interest Rate Risk - The Company is subject to the risk of fluctuation in
interest rates in the normal course of business. The Company manages interest
rate risk through the use of fixed rate debt, floating rate debt and at times
interest rate swaps. The Company had no interest rate swaps at March 31, 2001.
At March 31, 2001, a hypothetical 10 percent change in interest rates would
result in an annual $1.8 million change in interest costs related to short-term
and floating rate debt based on principal balances outstanding at this date.
Value-at-Risk Disclosure of Market Risk - ONEOK measures entity-wide market risk
in its trading, price risk management, and its non-trading portfolios using
value-at-risk. The quantification of market risk using value-at-risk provides a
consistent measure of risk across diverse energy markets and products with
different risk factors in order to set overall risk tolerance, to determine risk
targets and set position limits. The use of this methodology requires a number
of key assumptions including the selection of a confidence level and the holding
period to liquidation. ONEOK relies on value-at-risk to determine the potential
reduction in the trading and price risk management portfolio values arising from
changes in market conditions over a defined period.
ONEOK's value-at-risk exposure represents an estimate of potential losses that
would be recognized for its trading and price risk management portfolio of
derivative financial instruments, physical contracts and gas in storage assuming
hypothetical movements in commodity market assumptions with no change in
positions and are not necessarily indicative of actual results that may occur.
Value-at-risk 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 commodity prices, operating exposures
and timing thereof, and the changes in the Company's trading and price risk
management portfolio of derivative financial instruments and physical contracts.
At March 31, 2001, the Company's estimated potential one-day favorable or
unfavorable impact on future earnings, as measured by the value-at-risk, using a
95 percent confidence level and diversified correlation assuming one day to
liquidate positions is immaterial for both its trading and non-trading
portfolios.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
ONEOK, Inc. v. Southern Union Company, No. 99-CV-0345-H(M), United States
- -------------------------------------
District Court for the Northern District of Oklahoma, transferred, No. CIV-00-
1812-PHX-ROS, in the United States District Court for the District of Arizona.
On March 30, 2001, Southern Union Company ("Southern Union") filed a motion to
consolidate this action with Case No. CIV-99-1294-PHX-ROS, discussed below.
ONEOK filed a response on April 13, 2001, stating that it has no objection to
the consolidation of Case Nos. CIV-00-1812-PHX-ROS, CIV-99-1294-PHX-ROS, and
CIV-00-1775-PHX-ROS, but the actions should be consolidated into the first-filed
of the three cases, Case No. CIV-00-1812-PHX-ROS, and alternatively, that if the
cases are consolidated with Case No. CIV-99-1294-PHX-ROS, then ONEOK should be
aligned as a plaintiff in the consolidated action.
Southern Union Company v. Southwest Gas Corporation, et al., No. CIV-99-1294-
- -----------------------------------------------------------
PHX-ROS, United States District Court for the District of Arizona. On August
24, 2000, ONEOK and all the other defendants filed motions to dismiss the claims
asserted by Southern Union in its Second Amended Complaint. On December 15,
2000, the Court withdrew its previous order of August 28, 2000, and granted the
motions of ONEOK and Southwest Gas Corporation ("Southwest") to dismiss the
federal RICO claims made by Southern Union on the ground that they were
precluded by the Private Securities Litigation Reform Act. Motions have been
filed to apply the Court's December 15 ruling to the other defendants and to
Southern Union's state RICO claims. On December 28, 2000, Southern Union filed
a motion for reconsideration of the Court's December 15 ruling; on April 23,
2001, the Court entered an order requiring responses to that motion to be filed
by May 4, 2001, and a reply to those responses to be filed by May 11, 2001. On
January 12, 2001, the Special Master heard oral argument on the remaining
motions to dismiss, and on March 21, 2001, entered a report and recommendation
that Judge Silver deny all of those motions (with the exception of defendant
Thomas Y. Hartley's motion to dismiss Southern Union's fraudulent inducement
claim, which the Special Master recommended should be granted); Objections to
the report and recommendations of the Special Master recommending that Judge
Silver deny all of the motions to dismiss the claims asserted by Southern Union
in its Second Amended Complaint (with the exception of defendant Thomas Y.
Hartley's motion to dismiss Southern Union's fraudulent inducement claim against
him) were filed by ONEOK and other defendants on April 6, 2001 (Messrs. Dubay
and Gaberino joined ONEOK's objections on April 9, 2001); Southern Union
responded to the objections on April 18, 2001, and on April 23, 2001, the Court
scheduled a hearing on the objections for May 11, 2001. On May 7, 2001, the
Court entered an order setting the case for trial commencing on November 5,
2001. On March 27, 2001, Case Nos. CIV-00-0119-PHX-ROS and CIV-00-0452-PHX-ROS
were consolidated with this action. Discovery in the case is ongoing.
ONEOK, Inc. v. Southwest Gas Corporation, No. 00-CV-063-H(E), United States
- ----------------------------------------
District Court for the Northern District of Oklahoma, transferred, No. CIV-00-
1775-PHX-ROS, United States District Court for the District of Arizona.
Southwest's amended response to ONEOK's First Amended Complaint was filed on May
7, 2001. On March 30, 2001, Southern Union (though not a party to this action)
filed a motion to consolidate this action with Case No. CIV-99-1294-PHX-ROS,
discussed above. ONEOK filed a response on April 13, 2001, stating that it has
no objection to the consolidation of Case Nos. CIV-00-1812-PHX-ROS, CIV-99-1294-
PHX-ROS, and CIV-00-1775-PHX-ROS, but the actions should be consolidated into
the first-filed of the three cases, Case No. CIV-00-1812-PHX-ROS, and
alternatively, that if the cases are consolidated with Case No. CIV-99-1294-PHX-
ROS, then ONEOK should be aligned as a plaintiff in the consolidated action.
Discovery in the case is ongoing.
Southwest Gas Corporation v. ONEOK, Inc., CIV-00-0119-PHX-ROS, United States
- ----------------------------------------
District Court for the District of Arizona. ONEOK's response to Southwest's
Complaint, including counterclaims against Southwest, was filed on April 16,
2001. On March 27, 2001, this case was consolidated with Case No. CIV-99-1294-
PHX-ROS, discussed above. Discovery in the case is ongoing.
28
Cause PUD 01-57, Oklahoma Corporation Commission. In February, the Oklahoma
Corporation Commission (OCC) Staff filed an Application to review ONG's
procurement practices for 1999/2000 and 2000/2001 heating seasons. On May 11,
2001, the OCC Staff filed testimony concluding that ONG failed to act prudently
in acquiring its gas supply for the winter of 2000/2001 resulting in an alleged
$72,060,004 in excess charges to ratepayers through March 31, 2001. The Staff
alleges that approximately $57,000,000 of the $72,060,004 is a result of ONG's
failure to utilize gas storage services. The Staff also recommended that the
unrecovered purchased gas cost be suspended until further order of the OCC. ONG
will file its testimony in response on May 30, 2001. A hearing to set an interim
order in this matter is scheduled for June 25-26, 2001. It is the intent of the
OCC to then enter an interim order in this matter, pending resolution of issues
related to discovery from the unregulated affiliates of ONG (ONEOK Energy
Marketing & Trading [OEMT] and ONEOK Gas Storage Company [OGS]). OEMT and OGS
have declined to respond to discovery from the OCC Staff that is unrelated to
their transactions with ONG. The OCC Staff has filed contempt proceedings
against OEMT and OGS, and OEMT and OGS have filed for a writ of prohibition in
the Oklahoma Supreme Court (Case No. 96115). The parties are awaiting the
Court's decision. At the present time, the Company is unable to estimate the
possible loss, if any, associated with this matter. The Company believes that
the Staff's recommendation is without merit and ONG is defending itself
vigorously against this recommendation.
For additional information regarding the Company's legal proceedings, see the
Company's Form 10-K for the period ended December 31, 2000.
29
Item 6. Exhibits
(A) Documents Filed as Part of this Report
(4)(a) Eighth Supplemental Indenture dated April 6, 2001 between ONEOK, Inc.
and The Chase Manhattan Bank, formerly Chase Bank of Texas.
(12) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividend Requirement for the three months ended March 31, 2001 and
2000.
(12)(a) Computation of Ratio of Earnings to Fixed Charges for the three months
ended March 31, 2001 and 2000.
(B) Reports on Form 8-K
None.
30
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 15th day of May
2001.
ONEOK, Inc.
Registrant
By: /s/ Jim Kneale
----------------------------------
Jim Kneale
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
31