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 February 28, 1998.
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 February 28, 1998, the Company had 31,570,789 shares of common stock
outstanding.
2
ONEOK, INC.
QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE NO.
Consolidated Condensed Statements of Income -
Three Months and Six Months Ended
February 28, 1998 and 1997 3
Consolidated Condensed Balance Sheets -
February 28, 1998, and August 31, 1997 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended February 28, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
PART II - OTHER INFORMATION 17
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PART 1 - FINANCIAL INFORMATION
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of Dollars, except per share amounts) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Regulated $470,314 $282,794 $ 588,951 $396,041
Nonregulated 251,740 190,859 447,263 326,363
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 722,054 473,653 1,036,214 722,404
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 474,704 324,144 683,977 471,576
Operations and maintenance 78,873 53,615 132,635 104,313
Depreciation, depletion, and amortization 27,265 19,012 44,459 35,996
General taxes 9,963 5,930 15,408 11,023
Income taxes 46,611 23,818 54,049 31,481
- -----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 637,416 426,519 930,528 654,389
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 84,638 47,134 105,686 68,015
Interest 10,802 8,893 19,330 17,599
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME 73,836 38,241 86,356 50,416
Preferred Stock Dividends 8,976 107 8,976 214
- -----------------------------------------------------------------------------------------------------------------------------
Income Available for Common Stock $ 64,860 $ 38,134 $ 77,380 $ 50,202
=============================================================================================================================
Earnings Per Share of Common Stock - Basic $ 2.06 $ 1.39 $ 2.59 $ 1.84
=============================================================================================================================
Earnings Per Share of Common Stock - Diluted $ 1.43 $ 1.39 $ 2.17 $ 1.84
=============================================================================================================================
Dividends Per Share of Common Stock $ 0.30 $ 0.30 $ 0.60 $ 0.60
=============================================================================================================================
See accompanying notes to consolidated condensed financial statements.
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4
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
FEBRUARY 28, August 31,
(Thousands of Dollars) 1998 1997
- --------------------------------------------------------------------------------------------------
ASSETS
Property $2,072,420 $1,429,493
Accumulated depreciation, depletion, and amortization 580,448 586,156
- --------------------------------------------------------------------------------------------------
Total property 1,491,972 843,337
- --------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 86,701 14,377
Accounts and notes receivable 368,899 100,937
Inventories 67,170 78,330
Other current assets 17,178 13,633
- --------------------------------------------------------------------------------------------------
Total current assets 539,948 207,277
- --------------------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets, net 175,671 144,712
Goodwill 91,075 4,756
Other 36,179 37,325
- --------------------------------------------------------------------------------------------------
Total deferred charges and other assets 302,925 186,793
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,334,845 $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 31,570,789 shares at February 28, 1998 $ 316
and no par value 28,079,783 shares at August 31, 1997 $ 229,803
Premium on common stock 329,284
Retained earnings 292,303 232,823
- --------------------------------------------------------------------------------------------------
Total common shareholders' equity 621,903 462,626
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 -
Premium on preferred stock 564,712 -
- --------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,186,814 462,626
- --------------------------------------------------------------------------------------------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 324,355 328,214
CURRENT LIABILITIES:
Long-term debt 18,909 18,909
Notes payable 152,115 45,000
Accounts payable 151,280 80,155
Accrued taxes 43,074 12,996
Accrued interest 9,618 7,376
Other 52,843 24,611
- --------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 427,839 189,047
- --------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 270,677 183,991
Customers' advances for construction
and other deferred credits: 125,160 73,529
- --------------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 395,837 257,520
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,334,845 $1,237,407
==================================================================================================
See accompanying notes to consolidated condensed financial statements.
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5
ONEOK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
February 28,
(Thousands of Dollars) 1998 1997
- -----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income 86,356 50,416
Depreciation, depletion, and amortization 47,052 35,996
Net losses of equity investees - 155
Deferred income taxes (4,650) (1,086)
Other (14,644) -
Changes in assets and liabilities 73,534 (15,916)
- -----------------------------------------------------------------------------
Cash provided by operating activities 187,648 69,565
- -----------------------------------------------------------------------------
INVESTING ACTIVITIES
Changes in other investments, net (253) 798
Acquisition, net (2,802) -
Capital expenditures, net of salvage (33,459) (38,304)
- -----------------------------------------------------------------------------
Cash used in investing activities (36,514) (37,506)
- -----------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of notes payable, net (54,083) (15,158)
Payment of debt (3,858) -
Issuance of common stock 6,007 3,327
Dividends paid (26,876) (14,731)
- -----------------------------------------------------------------------------
Cash used in financing activities (78,810) (26,562)
- -----------------------------------------------------------------------------
Change in cash and cash equivalents 72,324 5,497
Cash and cash equivalents at beginning of period 14,377 598
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 86,701 $ 6,095
=============================================================================
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., formerly WAI, Inc. (The Company or
New ONEOK) is successor by merger of ONEOK Inc. (Old ONEOK). It acquired the gas
business of Western Resources, Inc. and merged with Old ONEOK on November 26,
1997, however, the transaction was effective November 30, 1997, for financial
reporting purposes.
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 six months
ended February 28, 1998, 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 February 1997 consolidated
condensed financial statements have been reclassified to conform with the
February 1998 presentation.
B. SIGNIFICANT EVENTS
ONEOK Resources, continuing its strategy of focusing on natural gas
reserves in Oklahoma and Kansas to add value to all of ONEOK's gas-related
operations, signed a definitive agreement with OXY USA, Inc., to purchase
natural gas and oil reserves in Oklahoma and Kansas outside the Hugoton field
for approximately $135 million before adjustments. The acquisition includes more
than 400 wells located in both states. Net production is approximately 30
million cubic feet of gas per day and 400 barrels of oil per day and includes a
gas sweetening plant located in the Aledo Field in Oklahoma that will generate
additional revenues and provide attractive income potential. Based on current
projected reserves, this transaction will almost double ONEOK's oil and gas
reserves.
The acquisition of 100 percent of the privately held stock of Washita Production
Company, a Tulsa based independent oil and gas producer, was closed in December
1997. The acquisition of Washita, valued at approximately $20 million, 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 Basin of
Oklahoma and include some properties in the Hugoton Basin of Kansas.
On November 26, 1997 (the Acquisition Date), the Company acquired substantially
all of the natural gas assets of Western Resources, Inc. (Western). Western is a
diversified natural gas and electric utility company. For accounting purposes
the acquisition became effective November 30, 1997, and Western received the
financial benefits of the Gas Business through that date. The acquisition was
accounted for as a purchase and, accordingly, the operating results of the gas
properties acquired from Western are included in the consolidated financial
statements since December 1, 1997. The aggregate purchase price, prior to the
working capital adjustment, was approximately $666 million, which includes costs
of acquisition. The aggregate purchase price, which was funded through the
issuance of a combination of preferred and common stock, was allocated based on
the estimated fair market value of the net assets. The excess of the purchase
price over assets acquired (goodwill) approximated $88 million and is being
amortized over 40 years.
6
7
- --------------------------------------------------------------------------------
Pro Forma
Six Months Ended
(Thousands of dollars, February 28,
except per share amounts) 1998 1997
- --------------------------------------------------------------------------------
Total operating revenues $1,235,453 $1,267,095
Operating income $ 157,991 $ 157,332
Net income $ 89,680 $ 82,136
Preferred stock dividends $ 17,952 $ 17,952
Income available for common stock $ 71,728 $ 64,184
Earnings per share of common stock - basic $ 2.82 $ 2.12
Earnings per share of common stock - diluted $ 1.74 $ 1.67
- --------------------------------------------------------------------------------
The table of unaudited pro forma information presents a summary of consolidated
results of operations of the Company as if the acquisition had occurred at the
beginning of fiscal 1997, with pro forma adjustments to give effect to the
working capital adjustment. 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.
In January, the Oklahoma Corporation Commission approved rule making for the
restructuring of the state's natural gas industry. Under the rules the Company
would be required to competitively bid transmission service ("upstream
activities") into its distribution system. ONG Transmission, a wholly-owned
subsidiary, has had exclusive rights to provide this service. However, a new
division, ONEOK Gas Transportation Company, was created in January 1998, and the
operations were transferred to that division. On April 1, 1998, the Company
filed a plan for upstream unbundling. This is expected to allow adequate time
for the competitive bidding process to be in place and unbundling to be
implemented in or by November 1998.
C. REGULATORY ASSETS
- --------------------------------------------------------------------------------
February 28, August 31,
(Thousands of Dollars) 1998 1997
- --------------------------------------------------------------------------------
Recoupable take-or-pay $ 93,108 $ 95,482
Pension costs 27,153 29,244
Postretirement costs other than pension 8,562 8,836
Postemployment benefits 18,884 3,327
Service line replacement 6,891 -
Rate case 218 -
Transition costs 13,299 -
Income tax rate change 7,556 7,823
- --------------------------------------------------------------------------------
Regulatory Assets, Net $175,671 $144,712
================================================================================
The table presents a summary of regulatory assets, net of amortization,
outstanding at February 28, 1997, and August 31, 1997. The Western Resources
transaction increased regulatory assets by approximately
$36 million.
D. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
Six Months Ended
February 28,
(Thousands of Dollars) 1998 1997
- --------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 16,890 $ 17,254
Income taxes $ 34,682 $ 9,018
Noncash transactions:
Gas received as payment in kind $ 149 $ 320
Common stock issued under dividend
reinvestment program - $ 1,894
Acquisition of assets and liabilities
Plant, property and equipment $ 638,940 -
Current assets $ 232,520 -
Deferred debits 120,845
Current liabilities ($ 23,494) -
Debt assumed ($161,198) -
Deferred credits ($ 54,774) -
Deferred income taxes ($ 91,336) -
Stock ($658,701) -
---------
Cash Paid $ 2,802 -
================================================================================
The table presents supplemental information relative to the Company's
cash flows for the six months ended February 28, 1998 and 1997.
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8
E. EARNINGS PER SHARE INFORMATION
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"), during the second quarter. SFAS 128
replaces 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, "common stock
equivalents" basic EPS is calculated using only the actual weighted average
shares outstanding during the relevant periods. The following is a required
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for income.
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended February 28, 1998 Six Months Ended February 28, 1998
Per Share Per Share
(Thousands of dollars except per share amounts) Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income available to common stockholders $64,860 31,466 $2.06 $77,380 29,859 $2.59
===== =====
EFFECT OF DILUTIVE SECURITIES
Options 164 35
Convertible preferred stock 8,976 19,946 8,976 9,973
------- ------ ------- -----
DILUTED EPS
Income available to common stockholders
+ assumed conversions $73,836 51,576 $1.43 $86,356 39,867 $2.17
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended February 28, 1997 Six Months Ended February 28, 1997
Per Share Per Share
(Thousands of dollars except per share amounts) Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income available to common stockholders $38,134 27,378 $1.39 $50,202 27,326 $1.84
===== =====
EFFECT OF DILUTIVE SECURITIES
Options
Convertible preferred stock
DILUTED EPS
Income available to common stockholders
+ assumed conversions $38,134 27,378 $1.39 $50,202 27,326 $1.84
==============================================================================================================================
8
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of dollars) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
FINANCIAL RESULTS
Operating revenues - regulated $470,314 $282,794 $ 588,951 $396,041
Operating revenues - nonregulated 251,740 190,859 447,263 326,363
- ----------------------------------------------------------------------------------------
Total operating revenues 722,054 473,653 1,036,214 722,404
Operating costs 563,540 383,689 832,020 586,912
Depreciation, depletion and amortization 27,265 19,012 44,459 35,996
- ----------------------------------------------------------------------------------------
Operating income before taxes $131,249 $ 70,952 $ 159,735 $ 99,496
========================================================================================
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 to
three-fourths of Oklahoma and two-thirds of Kansas. The Company is 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.
CONSOLIDATED OPERATIONS
The Company continues to seek opportunities to strengthen its
competitive edge and position itself to be a leader in the industry. The Company
just completed the first quarter of operation of the gas assets acquired through
the strategic alliance with Western Resources. This alliance allowed the Company
to extend its regulated operation into the state of Kansas and serve two-thirds
of that state. Additionally, the Company has signed a definitive agreement to
purchase natural gas and oil reserves located in Kansas and Oklahoma from OXY
USA, Inc. The purchase is consistent with the Company's strategy of focusing
reserve ownership close to our business operations, including natural gas
distribution, marketing, processing, and transmission and storage. The
additional reserves will almost double the Company's oil and gas reserve base.
During the second quarter, the Company has sold its 50 percent interest in 11
gas processing plants primarily due to its lack of ownership of the gathering
systems upstream of the plants.
Basic Earnings Per Share
Six Months Ended February
[GRAPH]
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
E.P.S. $2.59 $1.84
- --------------------------------------------------------------------------------
Diluted Earnings Per Share
Six Months ended February
[GRAPH]
- --------------------------------------------------------------------------------
DILUTED 1998 1997
- --------------------------------------------------------------------------------
E.P.S $2.17 $1.84
- --------------------------------------------------------------------------------
Graph shows Basic earnings per share for six months ended February of $2.59 and
$1.84 for 1998 and 1997, respectively.
Graph shows Diluted earnings per share for six months ended February of $2.17
and $1.84 for 1998 and 1997, respectively.
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REGULATORY. The Kansas Corporation Commission has approved a pilot program
designed to moderate the cost its customers pay for natural gas in cold weather
months. Under the program, the Company will use hedging to cap the price the
Company pays for its supply of gas during the coldest months and protect
customers from sharply higher winter heating costs.
YEAR 2000. Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the year 2000. The Company
expects to incur internal installation costs as well as other expenses related
to infrastructure and facilities enhancements necessary to prepare the systems
for the year 2000. Testing and conversion of system applications is estimated
to cost between $1.0 million and $1.5 million and be completed by early 1999. A
significant proportion of these costs are not likely to be incremental costs to
the Company, but rather will represent the redeployment of existing information
technology resources.
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). ONEOK's
regulated operations in Kansas are conducted through Kansas Gas Service Company
Division (KGS) and Mid Continent Market Center (MCMC), an affiliated
transmission company. KGS serves residential, commercial, and industrial
customers and provides end-use customer transportation (ECT). KGS also conducts
regulated gas distribution operations in northeastern Oklahoma. KGS is subject
to regulatory oversight by the Kansas Corporation Commission (KCC) and the OCC.
- ----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of dollars) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
FINANCIAL RESULTS
Gas Sales $442,526 $266,654 $548,891 $368,715
Cost of Gas 284,875 178,798 342,310 229,012
- ----------------------------------------------------------------------------------------
Gross margins on gas sales 157,651 87,856 206,581 139,703
PCL, ECT and transportation margins 26,460 11,574 34,652 21,180
Other revenues 9,608 5,057 14,509 6,893
- ----------------------------------------------------------------------------------------
Net revenues 193,719 104,487 255,742 167,776
Operating expenses 67,139 33,632 99,251 67,154
Depreciation, depletion and amortization 21,990 12,886 35,285 25,775
- ----------------------------------------------------------------------------------------
Operating income before taxes $104,590 $57,969 $121,206 $74,847
========================================================================================
Net revenues and operating expenses increased over the same period one year ago,
primarily due to inclusion of KGS's and MCMC's operations since December 1,
1997. On a pro forma basis, assuming the Western acquisition had occurred at the
beginning of fiscal 1997, net revenues and operating expenses would have been
$303 million and $136 million, respectively, for the six months ended 1998 as
compared to $311 million and $145 million respectively, for the six months ended
1997. The decrease in pro forma net revenues in the current year reflects the
fact that KGS's rates are not weather normalized as are ONG's and, accordingly,
were negatively impacted by warmer than normal weather. Pro forma operating
expenses have declined in the current year reflecting ongoing efforts to improve
operating efficiencies while increasing total customers served. Personnel costs,
including pensions and postretirement costs, on a pro forma basis, decreased
from the prior year partially due to a reduced personnel complement achieved
solely through attrition. Other cost reductions related to occupancy costs and
reduced levels of contract labor.
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- --------------------------------------------------------------------------------
February 28,
1998 1997
- --------------------------------------------------------------------------------
Number of customers
Oklahoma 757,662 752,775
Kansas 661,633 -
- --------------------------------------------------------------------------------
Total 1,419,295 752,775
================================================================================
Identifiable assets (thousands) $2,018,902 $1,115,637
================================================================================
Identifiable assets at February 28, 1998, included $972.6 million acquired
through the alliance with Western Resources.
- -------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------
Gross Margin per Mcf
OKLAHOMA
Residential $ 2.22 $ 2.20 $ 2.53 $ 2.51
Commercial $ 2.29 $ 2.12 $ 2.29 $ 2.11
Industrial $ 1.19 $ 1.10 $ 1.13 $ 1.05
Pipeline capacity leases $ 0.25 $ 0.19 $ 0.21 $ 0.19
KANSAS
Residential $ 1.94 - $ 1.94 -
Commercial $ 1.62 - $ 1.62 -
Industrial $ 1.89 - $ 1.89 -
End-use customer transportation $ 0.66 - $ 0.66 -
=====================================================================================
- ------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------
Volumes (MMcf)
Gas sales
Residential 58,225 30,617 67,912 41,049
Commercial 22,865 14,794 27,565 20,217
Industrial 2,917 4,748 4,599 7,506
PCL and ECT 57,114 45,417 97,979 86,144
- ------------------------------------------------------------------------------------
Total Gas Sales, PCL and ECT 141,121 95,576 198,055 154,916
====================================================================================
Capital expenditures (thousands)
Oklahoma $ 14,168 $ 11,133 $ 35,145 $ 21,334
Kansas $ 9,634 - $ 9,634 -
====================================================================================
The numbers presented in the volume table include volumes attributable to Kansas
Gas Service since December 1, 1997.
Gas Sales, PCL & ECT Volumes (MMcf)
Three Months Ended February
[GRAPH]
Gas Sales, PCL & ECT Volumes (MMcf)
Six Months Ended February
[GRAPH]
Graph shows gas sales, PCL & ECT volumes in Mmcf for three months ended February
of Residential 58,225, Commercial 22,865, Industrial 2,917 and PCL & ECT 57,114
for 1998 and Residential 30,617, Commercial 14,794, Industrial 4,748 and PCL &
ECT 45,417 for 1997.
Graph shows gas sales, PCL & ECT volumes in Mmcf for six months ended February
of Residential 67,912, Commercial 27,565, Industrial 4,599 and PCL & ECT 97,979
for 1998 and Residential 41,049, Commercial 20,217, Industrial 7,506 and PCL &
ECT 86,144 for 1997.
11
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NONREGULATED OPERATIONS
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 operates its headquarters office building and a parking garage.
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 retail focus. In the processing operation, an additional 34 percent
interest in the Indian Basin Plant in New Mexico was acquired, bringing the
total to 42 percent.
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.
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of dollars) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------
FINANCIAL RESULTS
COMBINED NONREGULATED OPERATIONS
Gas Sales $219,666 $171,471 $386,996 $280,136
Cost of Gas 212,271 165,854 377,926 271,091
- ---------------------------------------------------------------------------------
Gross margins on gas sales 7,395 5,617 9,070 9,045
Gas and oil production 11,783 10,416 20,105 19,587
Gas processing (net) 4,768 10,862 14,094 18,842
Other 18,187 (87) 23,276 3,831
- ---------------------------------------------------------------------------------
Net revenues 42,133 26,808 66,545 51,305
Operating expenses 10,199 7,699 18,843 16,437
Depreciation, depletion and amortization 5,275 6,126 9,174 10,221
- ---------------------------------------------------------------------------------
Operating income $ 26,659 $ 12,983 $ 38,528 $ 24,647
=================================================================================
- --------------------------------------------------------------------------------
COMBINED NONREGULATED Three Months Ended Six Months Ended
NATURAL GAS OPERATIONS February 28, February 28,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Natural gas volumes (MMcf)
Marketing 94,061 50,441 151,537 105,028
Natural gas production 4,107 3,451 7,280 6,627
Residue gas 1,684 1,446 3,163 3,012
- --------------------------------------------------------------------------------
99,852 55,338 161,980 114,667
- --------------------------------------------------------------------------------
Less intersegment sales
Marketing 8,956 2,868 11,842 3,837
Natural gas production 1,342 2,232 2,469 3,932
Residue gas 1,684 1,446 3,163 2,995
- --------------------------------------------------------------------------------
11,982 6,546 17,474 10,764
- --------------------------------------------------------------------------------
Net Natural gas volumes 87,870 48,792 144,506 103,903
================================================================================
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MARKETING
- --------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of dollars) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
Natural gas sales $219,666 $171,471 $386,996 $280,136
Cost of Gas 212,271 165,854 377,926 271,091
- --------------------------------------------------------------------------------------------
Gross margins on gas sales 7,395 5,617 9,070 9,045
Other 373 34 2,813 488
- --------------------------------------------------------------------------------------------
Operating revenues 7,768 5,651 11,883 9,533
Operating costs, net 1,961 2,685 2,908 3,490
Depreciation, depletion and amortization 182 127 311 241
- --------------------------------------------------------------------------------------------
Operating income $ 5,625 $ 2,839 $ 8,664 $ 5,802
============================================================================================
- ----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
OPERATING INFORMATION
Natural gas volumes (MMcf) 94,061 50,441 151,537 105,028
Capital expenditures (thousands) $ 112 $ 195 $ 112 $ 235
=====================
Identifiable assets (thousands) $165,824 $106,969
========================================================================================
Gas margins are higher this quarter compared to the same quarter one year ago
but show little change for the fiscal year. The increase in sales volumes more
than offset the effect of the decline in margin per Mcf. Lack of extreme weather
changes across the country this year has resulted in less volatility in prices
and less opportunity to take advantage of the volatility. The increase in other
revenues includes the recovery of prior period costs.
PROCESSING
- ----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of dollars) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
Gas processing (net) $ 4,493 $10,155 $13,314 $17,482
Other 14,668 33 14,692 35
- ----------------------------------------------------------------------------------------
Operating revenues 19,161 10,188 28,006 17,517
Operating costs, net 2,027 2,138 3,710 3,989
Depreciation, depletion and amortization 593 574 1,159 1,095
- ----------------------------------------------------------------------------------------
Operating income $16,541 $ 7,476 $23,137 $12,433
========================================================================================
All of the Company's processing plants have been operating at capacity in fiscal
1998 which accounts for a portion of the increased sales volume. The Company
also acquired additional production capabilities through the Western alliance
and liquidated significant levels of NGL's inventory stored last spring and
summer. Despite these increases in volume, gross revenue declined by 23 percent
and 2 percent for the three and six months periods in 1998 as compared to 1997,
respectively. NGL prices experienced a downward correction from the abnormally
high prices prevalent throughout much of fiscal 1997 and coincide with a decline
in crude oil prices. Net processing revenues were further eroded by an increase
in natural gas prices which affects the Company's fuel and shrink plants; this
increase was only partially offset by a decrease in the cost of the Company's
percent of proceed plants.
Three Months Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------
OPERATING INFORMATION
Residue gas (MMcf) 1,684 1,446 3,163 3,012
Natural gas liquids (MGal) 63,018 55,943 136,023 108,715
Average NGL's price (MGal) $ 0.299 $ 0.470 $ 0.322 $ 0.420
Fuel & Shrink price (MMbtu) $ 2.60 $ 2.37 $ 2.56 $ 2.10
Capital expenditures (thousands) $ 734 $ 9,171 $ 1,751 $ 9,487
=====================
Identifiable assets (thousands) $ 46,633 $ 36,081
====================================================================================
The Company completed the sale of its interest in 11 gas processing plants
located in Western Oklahoma on February 1, 1998, resulting in a book gain. The
principal reason for the sale of these assets was the lack of ownership by the
Company in the gathering systems behind the plants. The Company will continue to
pursue gas processing opportunities that meet with its strategic objectives.
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PRODUCTION
- ----------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
(Thousands of dollars) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
Natural gas sales $10,467 $ 8,802 $17,464 $16,090
Oil sales 1,316 1,614 2,641 3,497
Liquids and residue 275 707 780 1,361
Other 537 308 915 408
- ----------------------------------------------------------------------------------------
Operating revenues 12,595 11,431 21,800 21,356
Operating costs, net 3,600 3,070 7,060 5,654
Depreciation, depletion and amortization 4,406 5,335 7,516 8,705
- ----------------------------------------------------------------------------------------
Operating income $ 4,589 $ 3,026 $ 7,224 $ 6,997
========================================================================================
The increased gas production is primarily related to the additional proved
reserves acquired from PSEC and Washita Production Company in the second quarter
of 1997 and 1998, respectively. Production from these properties more than
offset the natural decline in production from other fields. The increase in
operating costs for the three and six month periods in 1998 as compared to the
same periods in the prior year is indicative of the increase in the total number
of fields owned or operated by the Company. Depreciation, depletion, and
amortization expense is higher in 1998 reflecting the increased level of
production; this, however, was offset in the prior year by an impairment loss on
certain marginal properties. No impairment expense has been recognized in fiscal
1998.
- --------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
Proved reserves
Gas (MMcf) - - 100,380 88,626
Oil (MBbls) - - 2,101 1,829
- --------------------------------------------------------------------------------------------
Production
Gas (MMcf) 4,107 3,451 7,280 6,627
Oil (MBbls) 75 73 144 163
- --------------------------------------------------------------------------------------------
Average price
Gas (Mcf) $ 2.55 $ 2.32 $ 2.40 $ 2.18
Oil (Bbls) $ 18.05 $ 21.60 $ 18.48 $ 21.27
- --------------------------------------------------------------------------------------------
Capital expenditures (thousands) $ 22,849 $ 28,725 $ 26,482 $ 30,105
=====================
Identifiable assets (thousands) $109,056 $ 94,872
============================================================================================
The Company has signed a definitive agreement to purchase natural gas and oil
reserves from OXY USA, Inc. The reserves are located in Kansas and Oklahoma
outside the Hugoton field and include more than 400 wells. Net production is
approximately 30 million cubic feet of gas per day and 400 barrels of oil per
day. The purchase price is approximately $135 million before adjustments.
The acquisition of 100 percent of the privately held stock of Washita Production
Company, a Tulsa based independent oil and gas producer, was closed in December
1997. The acquisition of Washita, valued at approximately $20 million, 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 Basin of
Oklahoma and include some properties in the Hugoton Basin of Kansas.
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FINANCIAL FLEXIBILITY AND LIQUIDITY
Due to the closing of the strategic alliance with Western Resources, the
Company's capitalization structure changed from a ratio of 54 percent equity and
46 percent debt (including short-term debt) at August 31, 1997, to 71 percent
equity and 29 percent debt at February 28, 1998. 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-.
Cash provided by operating activities remains strong and continues as the
primary source for meeting cash requirements. However, due to seasonal
fluctuations and additional capital requirements, the Company periodically
accesses funds through short-term credit agreements and, if necessary, through
long-term borrowings.
OPERATING CASH FLOWS
Operating cash flows for the six months ended February 28, 1998, as compared to
the same period in 1997 are higher due to increased operating income, changes in
accounts receivables and payables, and decreased inventories.
Investing Cash Flows
Capital expenditures for the six months ended February 28, 1998 and 1997 are as
follows:
CAPITAL EXPENDITURES
SIX MONTHS ENDED FEBRUARY
[GRAPH]
- --------------------------------------------------------------------------------
(Millions of Dollars) 1998 1997
- --------------------------------------------------------------------------------
Regulated $44.8 $21.3
- --------------------------------------------------------------------------------
Processing $ 1.8 $ 9.4
Production $26.4 $30.1
Other $ 0.3 $ 0.6
- --------------------------------------------------------------------------------
Nonregulated $28.5 $40.1
================================================================================
Graph shows capital expenditures in millions for six months ended February of
regulated $44.8 and nonregulated $28.5 for 1998 and regulated $21.3 and
nonregulated $40.1 for 1997.
FINANCING CASH FLOW
At February 28, 1998, $344 million of long-term debt was outstanding. As of that
date, the Company could have issued $844 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. 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.
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16
In response to the rules issued by the OCC in January 1998 which would require
the Company to competitively bid transmission service into its distribution
system, the Company filed a plan on April 1, 1998, for upstream unbundling. It
is expected that the bidding process will be in place, and unbundling will be
implemented by November 1998. While the Company will seek recovery of stranded
costs, the Company's filing estimates a potential $10-12 million in stranded
costs if the OCC does not allow any recovery in rates, and the Company is not
able to otherwise mitigate the costs.
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 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 February 28, 1998, the
net deferred gain on these contracts was approximately $10.0 million.
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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. et al.,
No. CJ-88-10148, District Court, Oklahoma County. The Petition for Rehearing
filed by Fent was denied on February 17, 1998. The Fent's filed a Petition for
Writ of Certiorari with the Oklahoma Supreme Court on March 5, 1998. The
Company's Response is due March 20, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27-1 Financial Data Schedule
27-2 Updated Financial Data Schedule
(b) Reports
On February 10, 1998, and March 11, 1998, the Company filed 8-K reports.
The report filed on February 10, 1998, concerned the announcement of the sale of
the Company's interest in 11 processing plants located in Western Oklahoma to
Koch Midstream Processing Company. The report filed March 11, 1998, concerned
the purchase of natural gas and oil reserves in Oklahoma and Kansas from OXY
USA, Inc.
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 6th day of April
1998.
ONEOK, Inc.
Registrant
By: J. D. Neal
--------------------------------
J. D. Neal
Vice President, Chief
Financial Officer, and
Treasurer (Principal
Financial and Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule