1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 for the quarterly period ended November 30, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 for the transition period from to
---------- ---------
Commission file number 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
incorporation of organization) Identification No.)
100 WEST FIFTH STREET, TULSA, OK 74103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 588-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
On November 30, 1997, the Company had 31,253,119 shares of common stock
outstanding.
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ONEOK, INC.
QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE NO.
Consolidated Condensed Statements of Income -
Three Months Ended November 30, 1997 and 1996 3
Consolidated Condensed Balance Sheets -
November 30, 1997, and August 31, 1997 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended November 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6 - 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 14
PART II - OTHER INFORMATION 14 - 15
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PART 1 - FINANCIAL INFORMATION
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
- -------------------------------------------------------------------------
Three Months Ended
November 30,
(Thousands of Dollars, except per share amounts) 1997 1996
- -------------------------------------------------------------------------
OPERATING REVENUES
Regulated $118,637 $113,246
Nonregulated 195,523 135,506
- -------------------------------------------------------------------------
Total Operating Revenues 314,160 248,752
- -------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 209,273 147,432
Operations and maintenance 53,762 50,566
Depreciation, depletion, and amortization 17,194 16,984
General taxes 5,445 5,092
Income taxes 7,438 7,665
- -------------------------------------------------------------------------
Total Operating Expenses 293,112 227,739
- -------------------------------------------------------------------------
Operating Income 21,048 21,013
Interest 8,528 8,839
- -------------------------------------------------------------------------
NET INCOME 12,520 12,174
Preferred Stock Dividends 0 107
- -------------------------------------------------------------------------
Income Available for Common Stock $12,520 $12,067
=========================================================================
Earnings Per Share of Common Stock $0.44 $0.44
=========================================================================
Dividends Per Share of Common Stock $0.30 $0.30
=========================================================================
Average Shares of Common Stock Outstanding 28,268 27,305
=========================================================================
See accompanying notes to consolidated condensed financial statements.
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ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
- ----------------------------------------------------------------------------------------
NOVEMBER 30, August 31,
(Thousands of Dollars) 1997 1997
- ----------------------------------------------------------------------------------------
ASSETS
Property $2,075,037 $1,429,493
Accumulated depreciation, depletion, & amortization 597,296 586,156
- ----------------------------------------------------------------------------------------
Total property 1,477,741 843,337
- ----------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 12,895 14,377
Accounts and notes receivable 322,826 100,937
Inventories 143,801 78,330
Other current assets 53,159 13,633
- ----------------------------------------------------------------------------------------
Total current assets 532,681 207,277
- ----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets, net 166,608 144,712
Goodwill 79,871 4,756
Other 37,341 37,325
- ----------------------------------------------------------------------------------------
Total deferred charges and other assets 283,820 186,793
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $2,294,242 $1,237,407
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
COMMON SHAREHOLDERS' EQUITY:
Common stock with $0.01 par value: authorized
60,000,000 shares: issued and outstanding
31,253,119 shares at November 30, 1997 $313 --
and no par value 27,274,322 shares at August 31, 1997. -- $229,803
Premium on capital stock 883,816
Retained earnings 236,914 232,823
- ----------------------------------------------------------------------------------------
Total common shareholders' equity 1,121,043 462,626
Convertible preferred stock: $0.01 par value,
Series A authorized 100,000,000 shares;
issued and outstanding 19,946,448 shares at
November 30, 1997 199 --
- ----------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,121,242 462,626
- ----------------------------------------------------------------------------------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 328,214 328,214
CURRENT LIABILITIES:
Long-term debt 18,909 18,909
Notes payable 221,406 45,000
Accounts payable 131,775 80,155
Accrued taxes 32,373 12,996
Accrued interest 6,783 7,376
Other 31,834 24,611
- ----------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 443,080 189,047
- ----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 273,650 183,991
Customers' advances for construction
and other deferred credits: 128,056 73,529
- ----------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 401,706 257,520
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,294,242 $1,237,407
========================================================================================
See accompanying notes to consolidated condensed financial statements.
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ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
November 30,
(Thousands of Dollars) 1997 1996
- ----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $12,520 $12,174
Depreciation, depletion, and amortization 17,513 16,984
Net losses of equity investees -- 91
Deferred income taxes (159) (647)
Changes in assets and liabilities (50,252) (31,898)
- ----------------------------------------------------------------------------------------
Cash used by operating activities (20,378) (3,296)
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Changes in other investments, net 928 569
Capital expenditures, net of salvage (26,207) (12,701)
- ----------------------------------------------------------------------------------------
Cash used in investing activities (25,279) (12,132)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of notes payable, net 50,199 34,997
Issuance of common stock 2,404 578
Dividends paid (8,428) (7,717)
- ----------------------------------------------------------------------------------------
Cash provided by financing activities 44,175 27,858
- ----------------------------------------------------------------------------------------
Change in cash and cash equivalents (1,482) 12,430
Cash and cash equivalents at beginning of period 14,377 598
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $12,895 $13,028
========================================================================================
See accompanying notes to consolidated condensed financial statements.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. ONEOK, Inc. (The Company or New ONEOK) is
successor by merger of ONEOK Inc. (Old ONEOK) with and into WAI, Inc. See
footnote B for discussion of transaction.
INTERIM REPORTING. The interim consolidated condensed financial
statements reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results for the interim periods
presented. All such adjustments are of a normal recurring nature. Due to the
seasonal nature of the business, the results of operations for the three months
ended November 30, 1997, are not necessarily indicative of the results that may
be expected for the year ended August 31, 1998. 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, 1997.
RECLASSIFICATION. Certain amounts in the November 1996 consolidated
condensed financial statements have been reclassified to conform with the
November 1997 presentation.
B. SIGNIFICANT EVENTS
On November 26, 1997 (the Acquisition Date), Old ONEOK, through a
series of transactions, acquired certain natural gas assets of Western
Resources, Inc. (Western Resources). The transactions provided for Western
Resources to transfer all of its natural gas assets located in Kansas and
Oklahoma into a wholly-owned subsidiary, WAI, Inc. Old ONEOK then merged into
WAI, Inc. The surviving entity, WAI, Inc., then changed its name to ONEOK, Inc.
The assets included property and interests used, related to, or
generated by the field operations of Western Resources' local natural gas
distribution business and related properties and rights; all of the capital
stock of Western Resources' wholly-owned subsidiaries, Mid Continent Market
Center, Inc. (MCMC), and Westar Gas Marketing, Inc.; and all of the debts,
claims and liabilities that arose out of, related to, or were generated by, the
field operations of Western Resources' local natural gas distribution business
in the states of Kansas and Oklahoma (such liabilities and debts included an
aggregate principal amount of debt of Western Resources of $35 million, subject
to the Working Capital Adjustment) and of the wholly-owned subsidiaries.
The transaction brought 660,000 new distribution customers, 10,068 miles of
pipeline, a Kansas gas processing plan with 15 million cubic feet per day
capacity, an additional 42 percent interest in a New Mexico gas processing plant
with a 200 million cubic feet per day capacity, and a natural gas marketing
company with a retail market focus to the Company.
The transactions were accounted for as a reverse acquisition wherein Old ONEOK
is deemed the acquiring entity and, accordingly, New ONEOK has made a
preliminary assignment of the purchase price of approximately $783 million,
which includes fair value of the stock and debt assumed, to the assets and
liabilities of WAI, Inc. The purchase allocation was made based on the estimated
fair market value of the net assets with the residual assigned to goodwill. The
preliminary allocation of the purchase price estimates the working capital
adjustment to be approximately $117 million. This adjustment will be finalized
in the Company's second fiscal quarter.
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Simultaneous with closing of the transaction, Western Resources exercised its
rights as defined in the agreement to purchase an additional 97,555 shares of
common stock and an additional 628,864 shares of convertible preferred stock
giving Western Resources a total of 3,094,257 shares of common stock and
19,946,448 shares of convertible preferred stock and maintaining its 45 percent
capital stock interest in the Company including a 9.9 percent common stock
interest. The total cost of the purchase by Western Resources was approximately
$25.6 million and was paid for through a reduction of the Working Capital
Adjustment. A shareholder agreement including standstill provisions prevents
Western Resources from increasing its position in the Company above the 45
percent interest and maintains control of the corporation in the hands of the
public shareholders of the corporation.
As the transaction closed November 26, 1997, and was effective November 30,
1997, no operations of the acquired properties are reflected during this
quarter. Illustrative pro forma data have been prepared as if the merger had
taken place at the beginning of each period presented. These results do not
necessarily reflect the results which would have been obtained if the merger
had actually occurred on the dates indicated or the results which may be
expected in the future. The pro forma operating results of the natural gas
operations acquired for the three months ended November 30, 1997 are
preliminary and subject to change when the working capital adjustment is
finalized.
SELECTED FINANCIAL DATA
Pro Forma
Three Months Ended
(Thousands of dollars, November 30,
except per share amounts 1997 1996
- -------------------------------------------------------------------------
Total operating revenues $507,202 $421,469
Operating income $ 23,884 $ 25,322
Net income $ 14,317 $ 15,645
Preferred stock dividends $ 8,975 $ 8,975
Income available for common stock $ 5,342 $ 6,669
Earnings per share of common stock $ 0.17 $ 0.22
- -------------------------------------------------------------------------
C. Regulatory Assets
The following table is a summary of regulatory assets, net of
amortization, outstanding at November 30, 1997, and August 31, 1997. The
alliance with Western Resources transaction increased recoupable take-or-pay
assets by $655, postretirement costs other than pensions by $14,400,
postemployment benefits by $1,158, and added a regulatory asset for service line
replacement of $8,183.
NOV. 30, Aug. 31,
(Thousands of Dollars) 1997 1997
- -----------------------------------------------------------
Recoupable take-or-pay $ 94,953 $95,482
Pension costs 28,199 29,244
Postretirement costs other than pension 23,099 8,836
Postemployment benefits 4,484 3,327
Service line replacement 8,183 --
Income tax rate change 7,690 7,823
Regulatory Assets, Net $ 166,608 $144,712
===========================================================
D. Supplemental Cash Flow Information
The following table is supplemental information relative to the
Company's cash flows for the three months ended November 30, 1997 and 1996.
THREE MONTHS ENDED
NOVEMBER 30,
(Thousands of Dollars) 1997 1996
- -------------------------------------------------------
Cash paid during the period for:
Interest $8,945 $7,019
Income taxes $2,307 --
Noncash transactions:
Gas received as payment in kind $ 59 $ 163
=======================================================
The Company acquired the following assets and liabilities of Western
Resources: plant, $623,500; accounts receivable, $135,600; inventories, $50,100;
regulatory assets, $24,400; prepayments $1,800; unrecovered gas costs $39,500;
notes and accounts payable, $126,800; customer deposits $7,500; accrued taxes
$10,700; miscellaneous current liabilities, $5,300; deferred credits, $53,700;
and deferred income taxes $89,300. Total consideration paid was $546,916 in
convertible preferred stock and $79,413 in common stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
ONEOK, Inc. provides natural gas and related products and services to
its customers through regulated and nonregulated segments. The regulated
business unit provides natural gas distribution and transmission services in
Oklahoma and Kansas. The closing of the transaction pursuant to the agreement
with Western Resources on November 26, 1997, made the Company the eighth largest
natural gas distribution company in the United States in terms of numbers of
customers. The nonregulated business unit is primarily involved in the
marketing, processing, and production of natural gas and natural gas liquids.
The Company has agreed to sell for cash certain interests in natural gas
processing plants and a small gathering system in Oklahoma. The sale is to
take place after expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976.
CONSOLIDATED OPERATIONS
The closing of the transaction with Western Resources culminated an intensive
effort to acquire additional gas distribution and transmission facilities to
enhance operations. Under the resulting alliance, the Company owns and operates
the natural gas assets previously owned by Western Resources in the states of
Kansas and Oklahoma. Western Resources has become the largest equity holder of
the Company through a combination of common and convertible preferred stock;
however, a shareholder agreement containing standstill provisions prevents
Western Resources from increasing their position in the Company and restricts
the conditions under which Western Resources can vote any common shares received
upon conversion of its preferred stock.
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- ----------------------------------------------------------------
FINANCIAL RESULTS
Operating revenues - regulated $118,637 $113,246
Operating revenues - nonregulated 195,523 135,506
- ----------------------------------------------------------------
Total operating revenues 314,160 248,752
Operating costs 268,480 203,090
Depreciation, depletion and amortization 17,194 16,984
- ----------------------------------------------------------------
Operating income before taxes $ 28,486 $ 28,678
================================================================
EARNINGS PER SHARE
[GRAPH]
1997 1996
- ------------------------------------
E.P.S. $0.44 $0.44
- ------------------------------------
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REGULATED OPERATIONS
ONEOK's regulated operations in Oklahoma are conducted through Oklahoma Natural
Gas Company Division (ONG), an integrated intrastate natural gas distribution
and transmission business which serves residential, commercial, and industrial
customers in the state of Oklahoma. ONG also leases space in its pipeline system
under its Pipeline Capacity Lease (PCL) program to large volume customers for
their use in transporting natural gas to their facilities. ONG is subject to
regulatory oversight by the Oklahoma Corporation Commission (OCC). As a result
of the alliance with Western Resources, the Company also conducts regulated
operations in the state of Kansas through Kansas Gas Service Company Division
(KGS) and Mid Continent Market Center, an affiliated transmission company. KGS
also conducts regulated gas distribution operations in the state of Oklahoma.
KGS is subject to regulatory oversight by the Kansas Corporation Commission and
the Oklahoma Corporation Commission.
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- -----------------------------------------------------------------
FINANCIAL RESULTS
Gas Sales $106,365 $102,061
Cost of Gas 57,435 50,214
- -----------------------------------------------------------------
Gross margins on gas sales 48,930 51,847
Pipeline capacity lease margins 8,192 9,606
Other revenues 4,901 1,836
- -----------------------------------------------------------------
Net revenues 62,023 63,289
Operating expenses 32,112 33,390
Depreciation, depletion and amortization 13,295 12,889
- -----------------------------------------------------------------
Operating income before taxes $ 16,616 $ 17,010
=================================================================
GAS SALES VOLUMES
[GRAPH]
Three Months Ended
November 30,
1997 1996
- ------------------------------------------------------
Gross Margin per Mcf
Residential $3.50 $3.40
Commercial $2.28 $2.49
Industrial $1.04 $0.96
Pipeline capacity leases $0.18 $0.19
======================================================
Three Months Ended
November 30,
1997 1996
- -------------------------------------------------
Volumes (MMcf)
Gas sales
Residential 11,358 10,826
Commercial 5,253 5,419
Industrial 1,681 2,758
Pipeline capacity leases 40,865 40,727
- -------------------------------------------------
Total 59,157 59,730
=================================================
Three Months Ended
November 30,
1997 1996
- ---------------------------------------------------------
Number of customers 750,104 744,437
Capital expenditures (thousands) $ 20,977 10,201
Identifiable assets (thousands $1,939,168 $1,067,877
=========================================================
Net revenues and gross margins from base sales rates decreased from the same
period one year ago. Unrecovered gas costs and decreases in average use per
customer contributed to the decrease. Other revenues increased primarily due to
a non-recurring charge during the first quarter of 1996.
Identifiable assets at November 30, 1997, included $744,831 acquired through the
alliance with Western Resources. Operating costs decreased from the same period
one year ago while the number of customers served increased.
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NONREGULATED OPERATIONS
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- ----------------------------------------------------------------
FINANCIAL RESULTS
COMBINED NONREGULATED OPERATIONS
Gas Sales $167,330 $108,665
Cost of Gas 165,655 105,237
- ----------------------------------------------------------------
Gross margins on gas sales 1,675 3,428
Gas and oil production 8,322 9,171
Gas processing (net) 9,326 7,981
Other 5,090 3,918
- ----------------------------------------------------------------
Net revenues 24,413 24,498
Operating expenses 8,644 8,734
Depreciation, depletion and amortization 3,899 4,095
- ----------------------------------------------------------------
Operating income $ 11,870 $11,669
================================================================
Three Months Ended
November 30,
1997 1996
- ---------------------------------------------------
COMBINED NONREGULATED
NATURAL GAS OPERATIONS
Natural gas volumes (MMcf)
Marketing 57,477 54,587
Natural gas production 3,173 3,577
Residue gas 1,478 1,549
- ---------------------------------------------------
62,128 59,713
- ---------------------------------------------------
Less intersegment sales
Marketing 2,886 969
Natural gas production 1,127 1,700
Residue gas 492 1,549
- ---------------------------------------------------
4,505 4,218
- ---------------------------------------------------
Net Natural gas volumes 57,623 55,495
===================================================
ONEOK's nonregulated operations are involved in the marketing, processing, and
production of natural gas and natural gas liquids. The gas marketing subsidiary
has directed its activities, with a wholesale focus, to the mid-continent region
of the United States. The Company's interest in gas liquids extraction plants
and its producing properties have been concentrated principally in Oklahoma. The
Company also with the closing of the transaction with Western Resources, the
nonregulated operations acquired additional marketing and processing businesses
which compliment the existing businesses. For the marketing operation, the
acquisition provided a marketing business with a retail focus. In the processing
operation, an additional 42 percent interest in the Indian Basin plant in New
Mexico was acquired.
The Company adheres to a prudent risk management strategy of hedging fixed price
or location differential transactions using natural gas contracts or other
derivative agreements to offset potential price risk exposure.
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MARKETING
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- -----------------------------------------------------------------
Natural gas sales $167,330 $108,665
Cost of Gas 165,655 105,237
- -----------------------------------------------------------------
Gross margins on gas sales 1,675 3,428
Other 2,441 454
- -----------------------------------------------------------------
Operating revenues 4,116 3,882
Operating costs, net 947 805
Depreciation, depletion and amortization 129 114
- -----------------------------------------------------------------
Operating income $ 3,040 $ 2,963
=================================================================
Three Months Ended
November 30,
1997 1996
- --------------------------------------------------------
OPERATING INFORMATION
Natural gas volumes (MMcf) 57,477 54,587
Capital expenditures (thousands) -- $ 40
Identifiable assets (thousands) $164,993 $97,620
- --------------------------------------------------------
Gas margins are lower this quarter compared to the same quarter one year ago
when a market anomaly resulted in unprecedented intra-month pricing movement
and increased gas margins. The weather extremes which created fiscal 1997's
increased gas margins have not occurred in fiscal 1998. The increase in other
revenues includes the recovery of prior period costs.
PROCESSING
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- ----------------------------------------------------------------
Gas processing (net) $8,821 $7,327
Other 24 1
- ----------------------------------------------------------------
Operating revenues 8,845 7,328
Operating costs, net 1,683 1,850
Depreciation, depletion and amortization 566 521
- ----------------------------------------------------------------
Operating income $6,596 $4,957
================================================================
Three Months Ended
November 30,
1997 1996
- --------------------------------------------------------
OPERATING INFORMATION
Residue gas (MMcf) 1,478 1,549
Natural gas liquids (MGal) 58,616 52,772
Average NGL's price (MGal) $ 0.342 $ 0.370
Fuel & Shrink price (MMbtu) $ 2.52 $ 1.84
Capital expenditures (thousands) $ 1,017 $ 316
Identifiable assets (thousands) $58,025 $30,086
- --------------------------------------------------------
Residue gas sales volumes were slightly lower for the quarter ended November 30,
1997, compared to the same quarter one year ago; however, gas prices were
higher, resulting in higher margins. NGL volumes were significantly higher due
to the additional volumes from the interest acquired in the Indian Basin plant
in the second quarter of fiscal 1997 and the sales this period of NGL's stored
last spring and summer.
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PRODUCTION
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- -----------------------------------------------------------
Natural gas sales $6,997 $7,288
Oil sales 1,325 1,883
Liquids and residue 505 654
Other 378 100
- -----------------------------------------------------------
Operating revenues 9,205 9,925
Operating costs, net 3,460 2,584
Depreciation, depletion and amortization 3,110 3,370
- -----------------------------------------------------------
Operating income $2,635 $3,971
===========================================================
Three Months Ended
November 30,
1997 1996
- ------------------------------------------------------
Proved reserves
Gas (MMcf) 84,125 74,766
Oil (MBbls) 2,076 1,715
- ------------------------------------------------------
Production
Gas (MMcf) 3,173 3,577
Oil (MBbls) 70 90
- ------------------------------------------------------
Average price
Gas (Mcf) $ 2.21 $ 2.04
Oil (Bbls) $ 18.93 $ 21.00
- ------------------------------------------------------
Capital expenditures (thousands) $ 3,633 $ 1,380
Identifiable assets (thousands) $102,583 $72,606
- ------------------------------------------------------
Although gas volumes were down this quarter compared to the same quarter one
year ago, this was offset by higher gas prices. Deliverability from the wells
acquired through the PSEC acquisition in the second quarter of fiscal 1997 has
been as good or better than anticipated, but this increased production has been
offset by the natural decline in other fields. Additionally, the gas production
for the first quarter of fiscal 1997 included production adjustments which
increased the volume and sales reported for that quarter. The production
operation experienced a 93 percent success rate for development drilling during
the first quarter of fiscal 1998. Operating costs increased over the same
quarter one year ago primarily due to the additional cost of operating the wells
acquired from PSEC.
During the first quarter of fiscal 1998, a definitive agreement was signed to
acquire 100 percent of the privately held stock of Washita Production Company, a
Tulsa based independent oil and gas producer. This transaction was closed in
December 1997. The acquisition of Washita, valued at approximately $20 million
subject to closing adjustments, was made with a combination of cash and ONEOK
common stock. The transaction includes 235 producing wells and significant
behind pipe and development drilling opportunities with proven reserves of
approximately 23 billion cubic feet equivalent. The wells are primarily located
in the Anadarko and Arkoma Basins of Oklahoma but include some properties in the
Hugoton Basin of Kansas.
FINANCIAL FLEXIBILITY AND LIQUIDITY
Due to the closing of the strategic alliance with Western Resources, the Company
went from a ratio of 54 percent equity and 46 percent debt (including short-term
debt) at August 31, 1997, to 66 percent equity and 34 percent debt at November
30, 1997. On December 1, 1997, Moody's Investors Service announced that it had
upgraded the Company's debt rating from A3 to A2 due to the benefits expected
from the acquisition, including a strengthened market and financial position.
The debt rating by Standard and Poor's Corporation remains at A-. The Company's
long-term debt represents 34 percent of the total capital at November 30, 1997.
Cash provided by operating activities remains strong and continues as the
primary source for meeting cash requirements. However, due to seasonal
fluctuations and additional capital requirements, the Company periodically
accesses funds through short-term credit agreements and, if necessary, through
long-term borrowings.
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OPERATING CASH FLOWS
Operating cash flows for the three months ended November 30, 1997, as compared
to the same period in 1996 are lower due to increased receivables and gas in
storage.
INVESTING CASH FLOWS
Capital expenditures for the three months ended November 30, 1997 and 1996 are
as follows:
CAPITAL EXPENDITURES
[GRAPH]
(MILLIONS OF DOLLARS) 1997 1996
- ------------------------------------------
Non-regulated $ 4.6 $ 2.0
Processing 1.0 0.3
Production 3.6 1.4
Other -- 0.3
- ------------------------------------------
Regulated $ 20.4 $10.2
==========================================
FINANCING CASH FLOW
At November 30, 1997, $347 million of long-term debt was outstanding. As of that
date, the Company could have issued $845 million of additional long-term debt
under the most restrictive provisions contained in its various borrowing
agreements.
The Company believes that internally generated funds and access to financial
markets will be sufficient to meet its normal debt service, dividend
requirements, and capital expenditures. However, the adjustment of the debt
acquired from Western Resources or events such as other significant
acquisitions, may require additional debt or equity financing.
LIQUIDITY
The regulated segment continues to face competitive pressure to serve the
substantial market represented by its large volume customers. The loss of a
substantial portion of that load, without recoupment of the revenues from that
loss, could have a materially adverse effect on the Company's financial
condition. However, since 1995, rates have been structured to reduce the
Company's risk in serving its large volume customers.
OTHER
Commodity futures contracts and swaps are periodically used in the production,
gas processing, and marketing operations to hedge the impact of price
fluctuations. Natural gas futures contracts require the Company to buy or sell
natural gas at a fixed price. Swap agreements are non-exchange trades between
parties whereby one party pays a fixed price and the other a floating price.
Swaps allow for the creation of customized transactions. The Company's
production operation periodically uses commodity futures contracts and swaps to
hedge the impact of oil and natural gas price fluctuations. The Company's gas
processing operation uses futures and swaps to hedge the price of gas used in
the natural gas liquid extraction process. The gas marketing operation uses
futures and swaps to lock in margins on preexisting purchase or sale commitments
for physical
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quantities of natural gas. The Company adheres to policies and procedures which
limit its exposure to market risk. Gains and losses on commodity futures
contracts and swaps are recognized when the related physical gas purchases or
sales transactions are recognized. At November 30, 1997, the net deferred gain
on these contracts was approximately $0.5 million.
NEW ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Accounting
Standards Board issued Statement of financial Accounting Standards NO. 128,
"Earnings per Share" ("SFAS 128"), which is required to be implemented for
fiscal years ending after December 15, 1997 and earlier application is not
permitted. SFAS 128 replaced the current "primary earnings per share" ("primary
EPS") and "fully diluted earnings per share" ("fully diluted EPS") with "basic
earnings per share" ("basic EPS") and "diluted earnings per share" ("diluted
EPS"). Unlike the calculation of primary EPS which includes , in its
denominator, the sum of (1) actual weighted shares outstanding and (2) "common
stock equivalents" as the term is defined in the authoritative literature,
basic EPS is calculated using only the actual weighted average shares
outstanding during the relevant periods.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Fent, et ux v. Oklahoma Natural Gas Company, a division of ONEOK Inc., No.
CJ-88-10148. On December 16, 1997, the Court of Appeals decided in favor of the
Company, upholding the trial court's denial of class certification. Fent filed a
Petition for Rehearing on January 5, 1998.
Application of Oklahoma Natural Gas Company, a division of ONEOK Inc. for a
Determination that under the Commission's existing Natural Gas Utility Rules and
Regulations and Oklahoma Natural's existing Service Rules and Regulations, the
gas utility customers of Oklahoma Natural Gas Company, except Jerry R. Fent and
Margaret B. Fent, are reasonable for installing and maintaining all piping
between the Customers' property or curb lines and such Customers' Points of
Consumption of Gas, Cause PUD No. 95000223. In respect to the Jenks' appeal, on
November 17, 1997, the Court of Appeals reversed the Commission Order finding
that although Jenks and other customers may be similarly situated, it could not
determine that their situations are so similar as to be the same and as such
future action may or may not be identical and fall into the same class. The
Court further stated although the Commission could interpret its rules when a
dispute arises, it could not determine whether there would be liability in any
future case because each situation may be different. As such, the Commission's
Order fails because it was an attempt to pre-judge future disputes. On December
8, 1997, the Company filed a petition for Certiorari with the Oklahoma Supreme
Court. Jenks has also filed Motions for Attorney Fees and publication of the
Order. The Company and the Commission have filed responses to the motions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports
On December 12, 1997, the Company filed two 8-K reports. The first report
concerned the appointment of two new directors to the ONEOK Board of Directors.
The second report concerned the upgrading of ONEOK's senior unsecured debt by
Moody's Investor Service.
No financial statements were filed with the Form 8-K.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 14th day of
January 1998.
ONEOK, Inc.
Registrant
By: J. D. Neal
---------------------------------
Vice President, Chief Financial
Officer, and Treasurer (Principal
Financial and Accounting Officer
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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27 Financial Data Schedule