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 May 31, 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 May 31, 1998, the Company had 31,515,976 shares of common stock outstanding.
2 ONEOK, INC. QUARTERLY REPORT ON FORM 10-Q <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE NO. <S> <C> Consolidated Condensed Statements of Income - Three Months and Nine Months Ended May 31, 1998 and 1997 3 Consolidated Condensed Balance Sheets - May 31, 1998, and August 31, 1997 4 Consolidated Condensed Statements of Cash Flows - Nine Months Ended May 31, 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 </TABLE> 2
3 PART 1 - FINANCIAL INFORMATION ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended May 31, May 31, (Thousands of Dollars, except per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATING REVENUES Regulated $256,434 $128,970 $845,385 $525,011 Nonregulated 187,614 102,657 634,877 429,020 - -------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 444,048 231,627 1,480,262 954,031 - -------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of gas 287,633 123,396 971,610 594,972 Operations and maintenance 69,798 52,439 202,433 156,752 Depreciation, depletion, and amortization 26,799 19,719 71,258 55,715 General taxes 9,768 5,960 25,176 16,983 Income taxes 17,270 8,174 71,319 39,655 - -------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 411,268 209,688 1,341,796 864,077 - -------------------------------------------------------------------------------------------------------------------- Operating Income 32,780 21,939 138,466 89,954 Interest 5,844 8,170 25,174 25,769 - -------------------------------------------------------------------------------------------------------------------- NET INCOME 26,936 13,769 113,292 64,185 Preferred Stock Dividends 8,983 71 17,959 285 - -------------------------------------------------------------------------------------------------------------------- Income Available for Common Stock $17,953 $13,698 $95,333 $63,900 ==================================================================================================================== Earnings Per Share of Common Stock - Basic $0.57 $0.49 $3.13 $2.32 ==================================================================================================================== Earnings Per Share of Common Stock - Diluted $0.52 $0.49 $2.59 $2.32 ==================================================================================================================== Dividends Per Share of Common Stock $0.30 $0.30 $0.90 $0.90 ==================================================================================================================== </TABLE> See accompanying notes to consolidated condensed financial statements. 3
4 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> MAY 31, August 31, (Thousands of Dollars) 1998 1997 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Property $2,239,680 $1,429,493 Accumulated depreciation, depletion, & amortization 596,810 586,156 - --------------------------------------------------------------------------------------------------------- Total property 1,642,870 843,337 - --------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents 26,734 14,377 Accounts and notes receivable 212,196 100,937 Inventories 99,814 78,330 Other current assets 12,598 13,633 - --------------------------------------------------------------------------------------------------------- Total current assets 351,342 207,277 - --------------------------------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS: Regulatory assets, net 171,764 144,712 Goodwill 90,924 4,756 Other 52,107 37,325 - --------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 314,795 186,793 - --------------------------------------------------------------------------------------------------------- Total assets $2,309,007 $1,237,407 ========================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY COMMON SHAREHOLDER'S EQUITY: Common stock with $0.01 par value: authorized 100,000,000 shares: issued and outstanding 31,515,976 shares at May 31, 1998 $316 - and no par value 28,079,783 shares at August 31, 1997. - $229,803 Premium on capital stock 326,821 - Retained earnings 300,786 232,823 - --------------------------------------------------------------------------------------------------------- Total common shareholders' equity 627,923 462,626 Convertible preferred stock: $0.01 par value, Series A authorized 20,000,000 shares; issued and outstanding 19,946,448 shares at May 31, 1998 199 - Series B authorized 30,000,000 shares; issued and outstanding 60,526 at May 31, 1998 1 - Premium on preferred stock 567,222 - TOTAL SHAREHOLDERS' EQUITY 1,195,345 462,626 - --------------------------------------------------------------------------------------------------------- LONG-TERM DEBT, EXCLUDING CURRENT PORTION 314,355 328,214 CURRENT LIABILITIES: Long-term debt 18,909 18,909 Notes payable 105,000 45,000 Accounts payable 158,177 80,155 Accrued taxes 36,901 12,996 Accrued interest 12,871 7,376 Unrecovered Purchased Gas Costs 22,154 - Other 48,778 24,611 - --------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 402,790 189,047 - --------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes 275,303 183,991 Customers' advances for construction and other deferred credits: 121,214 73,529 - --------------------------------------------------------------------------------------------------------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 396,517 257,520 - --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,309,007 $1,237,407 ========================================================================================================= </TABLE> See accompanying notes to consolidated condensed financial statements. 4
5 ONEOK INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) <TABLE> <CAPTION> Nine Months Ended May 31, (Thousands of Dollars) 1998 1997 - ---------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES Net Income 113,292 64,185 Depreciation, depletion, and amortization 75,353 55,715 Net losses of equity investees - 257 Deferred income taxes (2,156) (8,053) Other (17,564) - Changes in assets and liabilities 203,290 40,679 - ---------------------------------------------------------------------------------- Cash provided by operating activities 372,215 152,783 - ---------------------------------------------------------------------------------- INVESTING ACTIVITIES Changes in other investments, net (632) 1,560 Acquisition, net (2,829) - Capital expenditures, net of salvage (201,566) (58,583) - ---------------------------------------------------------------------------------- Cash used in investing activities (205,027) (57,023) - ---------------------------------------------------------------------------------- FINANCING ACTIVITIES Payments of notes payable, net (101,698) (54,413) Payment of long-term debt (13,859) (4,748) Issuance of common and preferred stock 6,055 6,704 Dividends paid (45,329) (21,510) Redemption of preferred stock - (9,540) - ---------------------------------------------------------------------------------- Cash used in financing activities (154,831) (83,507) - ---------------------------------------------------------------------------------- Change in cash and cash equivalents 12,357 12,253 Cash and cash equivalents at beginning of period 14,377 598 - ---------------------------------------------------------------------------------- Cash and cash equivalents at end of period $26,734 $12,851 ================================================================================== </TABLE> See accompanying notes to consolidated condensed financial statements. 5
6 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). The Company 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 nine months ended May 31, 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 May 1997 consolidated condensed financial statements have been reclassified to conform with the May 1998 presentation. B. SIGNIFICANT EVENTS ONEOK Resources, whose strategy is to acquire additional natural gas reserves in Oklahoma and Kansas which in turn adds value to all of the Company's operations, finalized the $127 million purchase of oil and gas reserves from OXY USA, Inc. The reserves purchased include low risk development potential with 400 wells located in Oklahoma and Kansas. 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. Based on projected reserves, this transaction will almost double the Company's oil and gas reserves and will provide the Company, for the first time, with reserves located in Kansas. On June 2, 1998, ONEOK Resources acquired a 40 percent equity interest in K. Stewart Petroleum Corp., an Oklahoma City-based independent oil and gas producer. This acquisition creates increased opportunities for the Company to expand its oil and gas reserve base in the Anadarko Basin, one of North America's most prolific gas fields. K. Stewart Petroleum Corp. has been successful in applying new exploration and drilling technologies including 3-D seismic, directional drilling, magnetic resonance imaging, and advanced completion and stimulation techniques. Gross cumulative discoveries through December 31, 1997, exceed 100 Bcfe. On May 29, 1998 the Company closed the purchase of an additional 55 percent interest in the Sycamore Gas Gathering System located in Carter County, Oklahoma, from Continental Natural Gas, Inc. (CNG). The Company is the operator of the Sycamore Gas Gathering System and a major gas producer in the area. The transaction increases the Company's ownership of the system to 97 percent. In a separate transaction, CNG acquired the Company's minority ownership in the Laverne gas processing plant located in Harper County, Oklahoma. On November 26, 1997 (the Acquisition Date), the Company acquired substantially all of the natural gas assets of Western Resources, Inc. (Western), 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, including transaction costs. 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 6
7 over assets acquired (goodwill) approximated $88 million and is being amortized over 40 years. The table of unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisition of the gas business 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. <TABLE> <CAPTION> Pro Forma Nine Months Ended (Thousands of dollars, May 31, except per share amounts) 1998 1997 - ------------------------------------------------------------------ <S> <C> <C> Total operating revenues $1,679,501 $1,680,002 Operating income $207,520 $194,343 Net income $116,005 $97,257 Preferred stock dividends $26,935 $26,935 Income available for common stock $89,070 $70,322 Earnings per share of common stock - basic $2.93 $2.30 Earnings per share of common stock - diluted $2.63 $1.96 - ------------------------------------------------------------------ </TABLE> C. REGULATORY ASSETS The table presents a summary of regulatory assets, net of amortization, outstanding at May 31, 1998, and August 31, 1997. The Western transaction increased regulatory assets by approximately $36 million. <TABLE> <CAPTION> MAY 31, August 31, (Thousands of Dollars) 1998 1997 - ----------------------------------------------------------- <S> <C> <C> Recoupable take-or-pay $91,911 $95,482 Pension costs 26,108 29,244 Postretirement costs other than pension 22,824 8,836 Postemployment benefits 4,485 3,327 Service line replacement 5,599 - Rate Case 171 - Transition Costs 13,242 - Income tax rate change 7,424 7,823 Regulatory Assets, Net $171,764 144,712 =========================================================== </TABLE> D. SUPPLEMENTAL CASH FLOW INFORMATION The table presents supplemental information relative to the Company's cash flows for the nine months ended May 31, 1998 and 1997. <TABLE> <CAPTION> Nine Months Ended May 31, (Thousands of Dollars) 1998 1997 - ----------------------------------------------------------- Cash paid during the period for: <S> <C> <C> Interest $19,679 $17,254 Income taxes $53,272 $9,018 Noncash transactions: Gas received as payment in kind $207 $320 Common stock issued under dividend reinvestment program - $1,894 Acquisition of assets and liabilities Plant, property and equipment $642,752 - Current assets $232,338 - Deferred debits 120,848 Current liabilities ($24,468) - Debt assumed ($161,698) - Deferred credits ($54,774) - Deferred income taxes ($93,468) - Stock ($658,701) - - ----------------------------------------------------------- Cash Paid $2,829 - =========================================================== </TABLE> 7
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. All prior periods have been restated. SFAS 128 replaces the "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. <TABLE> <CAPTION> Three Months Ended May 31, 1998 Nine Months Ended May 31, 1998 Per Share Per Share (In Thousands) Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> BASIC EPS Income available to common stockholders $17,953 31,536 $0.57 $95,333 30,424 $3.13 ===== ===== EFFECT OF DILUTIVE SECURITIES Options 75 56 Convertible preferred stock 8,983 19,978 17,959 13,248 ----- ------ ------ ------ DILUTED EPS Income available to common stockholders + assumed conversions $26,936 51,589 $0.52 $113,292 43,728 $2.59 ============================================================================================================ </TABLE> <TABLE> <CAPTION> Three Months Ended May 31, 1997 Nine Months Ended May 31, 1997 Per Share Per Share (In Thousands) Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> BASIC EPS Income available to common stockholders $13,698 27,897 $0.49 $63,900 27,518 $2.32 ===== ===== EFFECT OF DILUTIVE SECURITIES Options Convertible preferred stock DILUTED EPS Income available to common stockholders + assumed conversions $13,698 27,897 $0.49 $63,900 27,518 $2.32 ============================================================================================================ </TABLE> 8
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this discussion that include company expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. It is important to note that actual results of company earnings could differ materially from those projected in such forward-looking statements. 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 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, (Thousands of dollars) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> FINANCIAL RESULTS Operating revenues - regulated $256,434 $128,970 $845,385 $525,011 Operating revenues - nonregulated 187,614 102,657 634,877 429,020 - ------------------------------------------------------------------------------------------ Total operating revenues 444,048 231,627 1,480,262 954,031 Operating costs 367,199 181,795 1,199,219 768,707 Depreciation, depletion and amortization 26,799 19,719 71,258 55,715 - ------------------------------------------------------------------------------------------ Operating income before taxes $50,050 $30,113 $209,785 $129,609 ========================================================================================== </TABLE> 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 second quarter of operation of the gas assets acquired through the strategic alliance with Western. 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 purchased 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 other business operations, including natural gas distribution, marketing, processing, and transmission and storage. This purchase is significant because the Company, while being the major gas distributor in the state of Kansas, owned no reserves in Kansas prior to this acquisition. The additional reserves will almost double the Company's oil and gas reserve base. During the third quarter, the Company completed the purchase of an additional 55 percent ownership interest in the Sycamore Gas Gathering System, increasing ownership to 97 percent. The purchase, effective June 1, gives the Company control over the company- owned production in the area located near the gathering system. On June 2, 1998 the Company acquired a 40 percent interest in K. Stewart Petroleum Corp., an independent oil and gas producer. In a separate transaction the Company sold its minority ownership in the Laverne gas processing plant. [BASIC EARNINGS PER SHARE GRAPH] [DILUTED EARNINGS PER SHARE GRAPH] <TABLE> <CAPTION> 1998 1997 Diluted 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> E.P.S. $3.13 $2.32 E.P.S. $2.59 $2.32 </TABLE> 9
10 REGULATORY. The Kansas Corporation Commission (KCC) 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 hedges to cap the price of its anticipated winter heating season gas purchases in order to protect customers from the upward volatility during the winter heating months. During third quarter, the Company asked the KCC to approve a pilot program in Kansas that would offer some residential customers the option of paying a fixed monthly bill. The proposed program would allow a qualified residential customer the option of paying an amount based on the projected average annual bill rather than actual usage. A similar program is already in effect for customers in Oklahoma. Also during third quarter, the Company filed an application in Oklahoma in compliance with the Oklahoma Corporation Commission's (OCC) new rules governing the restructuring of the state's natural gas industry. The filing details how the Company plans to solicit competitive bids for "upstream" services, including gas transportation, storage and supply, that are required by the Company's distribution system. The filing also requests permission to lower the volume requirements for commercial and industrial customers who wish to participate in the Pipeline Capacity Lease program (PCL). If approved, the customer's bill would include the distribution service charge and the natural gas consumed, including associated transportation, gathering, and storage fees, taxes, and other Commission-approved charges. 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 and ONEOK Gas Transportation Company. ONEOK Gas Transportation, a wholly- owned subsidiary, has exclusive rights to competitively bid transmission service ("upstream activities") into the distribution system. ONG also leases space in its pipeline system under its PCL program to large volume customers for their use in transporting natural gas to their facilities. ONG is subject to regulatory oversight by the 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 and MCMC are subject to regulatory oversight by the KCC and/or the OCC. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, (Thousands of dollars) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> FINANCIAL RESULTS Gas Sales $230,306 $116,824 $779,197 $485,539 Cost of Gas 135,345 56,396 477,655 285,408 - --------------------------------------------------------------------------------------------- Gross margins on gas sales 94,961 60,428 301,542 200,131 Pipeline capacity lease margins 25,088 11,102 59,740 32,282 Other revenues 8,155 1,829 22,664 8,722 - --------------------------------------------------------------------------------------------- Net revenues 128,204 73,359 383,946 241,135 Operating expenses 68,533 35,958 167,784 103,112 Depreciation, depletion and amortization 22,117 12,892 57,402 38,667 - --------------------------------------------------------------------------------------------- Operating income before taxes $37,554 $24,509 $158,760 $99,356 ============================================================================================= </TABLE> 10
11 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 $431 million and $204 million, respectively, for the nine months ended 1998 as compared to $435 million and $220 million respectively, for the nine 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. Identifiable assets at May 31, 1998, included $972.6 million acquired through the alliance with Western. <TABLE> <CAPTION> May 31, 1998 1997 - ----------------------------------------------------------- Number of customers <S> <C> <C> Oklahoma 750,852 744,096 Kansas 661,633 - - ----------------------------------------------------------- Total 1,412,485 744,096 =========================================================== Customers per employee Oklahoma 491 421 Kansas 492 - Identifiable assets (thousands) $1,942,762 $1,061,272 =========================================================== </TABLE> <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, 1998 1997 1998 1997 - -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Gross Margin per Mcf OKLAHOMA Residential $3.42 $3.25 $2.73 $2.69 Commercial $2.46 $2.26 $2.33 $2.15 Industrial $1.07 $0.56 $1.12 $0.94 Pipeline capacity leases $0.27 $0.20 $0.24 $0.19 KANSAS Residential $2.22 - $2.04 - Commercial $1.77 - $1.68 - Industrial $1.91 - $1.90 - End-use customer transportation $0.55 - $0.61 - ========================================================================== </TABLE> The statistics presented for the nine months ended May 31 include volumes attributable to Kansas Gas Service since December 1, 1997. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, 1998 1997 1998 1997 - ------------------------------------------------------------------------ <S> <C> <C> <C> <C> Volumes (MMcf) Gas sales Residential 28,490 13,515 96,402 54,564 Commercial 11,192 6,599 38,756 26,816 Industrial 1,743 2,344 6,342 9,850 PCL and ECT 56,776 45,641 154,755 131,785 - ------------------------------------------------------------------------ Total Gas Sales, PCL AND ECT 98,201 68,099 296,255 223,015 ======================================================================== Capital expenditures (thousands) Oklahoma 16,679 17,762 51,824 39,096 Kansas 11,204 - 20,838 - ======================================================================== </TABLE> [GAS SALES, PCL & ECT VOLUMES GRAPH] [GAS SALES, PCL & ECT VOLUMES (MMcf)GRAPH] 11
12 Nonregulated Operations ONEOK's nonregulated operations are involved in the marketing, gathering and processing, and production of natural gas and natural gas liquids. The gas marketing subsidiary has directed its activities toward wholesale sales in the mid-continent region of the United States. The Company's interests in gas liquids extraction plants and 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, the nonregulated operations acquired additional marketing and processing businesses which complement 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, (Thousands of dollars) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> FINANCIAL RESULTS COMBINED NONREGULATED OPERATIONS Gas Sales $174,093 $82,618 $561,089 $362,754 Cost of Gas 167,948 79,890 545,873 350,981 - --------------------------------------------------------------------------------------- Gross margins on gas sales 6,145 2,728 15,216 11,773 Gas and oil production 8,776 10,374 28,881 29,961 Gas processing (net) 4,532 5,296 18,626 24,138 Other 7,542 3,410 30,818 7,241 - --------------------------------------------------------------------------------------- Net revenues 26,995 21,808 93,541 73,113 Operating expenses 9,817 9,377 28,660 25,814 Depreciation, depletion and amortization 4,682 6,827 13,856 17,048 - --------------------------------------------------------------------------------------- Operating income $ 12,496 $5,604 $51,025 $30,251 ======================================================================================= </TABLE> <TABLE> <CAPTION> COMBINED NONREGULATED Three Months Ended Nine Months Ended NATURAL GAS OPERATIONS May 31, May 31, 1998 1997 1998 1997 - ----------------------------------------------------------------- <S> <C> <C> <C> <C> Natural gas volumes (MMcf) Marketing 89,829 46,958 241,367 151,986 Natural gas production 3,710 3,521 10,989 10,172 Residue gas 1,380 1,541 4,354 4,536 - ----------------------------------------------------------------- Total natural gas volumes 94,919 52,020 256,710 166,694 - ----------------------------------------------------------------- Less intersegment sales Marketing 2,672 2,711 10,723 6,548 Natural gas production 1,177 2,046 3,646 5,978 Residue gas 1,380 1,541 4,354 4,536 - ----------------------------------------------------------------- Total intersegment sales 5,229 6,298 18,723 17,062 - ----------------------------------------------------------------- Net natural gas volumes 89,690 45,722 237,987 149,632 ================================================================= </TABLE> 12
13 MARKETING Gas margins increased over the same period one year ago due to increased volumes. For the quarter, the margin per Mcf increased over one year ago due to the effect of an abnormally cool spring. However, for the fiscal year, the margin per Mcf remained down over one year ago due to lack of extreme weather changes across the country during this year's winter. This resulted in less volatility in prices and less opportunity to take advantage of the volatility. Sales volumes increased partly due to additional customers acquired in the alliance with Western. The increase in other revenues includes the recovery of prior period costs. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, (Thousands of dollars) 1998 1997 1998 1997 - --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Natural gas sales $174,093 $82,618 $561,089 $362,754 Cost of Gas 167,948 79,890 545,873 350,981 - --------------------------------------------------------------------------------- Gross margins on gas sales 6,146 2,728 15,216 11,773 Other 772 16 3,585 504 - --------------------------------------------------------------------------------- Operating revenues 6,918 2,744 18,802 12,277 Operating costs, net 2,025 949 4,933 4,439 Depreciation, depletion and amortization 145 121 456 362 - --------------------------------------------------------------------------------- Operating income $4,749 $1,674 $13,412 $7,476 ================================================================================= </TABLE> <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, 1998 1997 1998 1997 - ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATING INFORMATION Natural gas volumes (MMcf) 89,829 46,958 241,367 151,986 Capital expenditures (thousands) $ 0 $ 60 $ 112 $ 295 ================= Identifiable assets (thousands) $170,384 $ 65,473 =============================== ==================== </TABLE> GATHERING AND PROCESSING The Company's sale in February 1998 of 11 gas processing plants resulted in a decrease in volumes for the third quarter over the same period one year ago. For the nine months, volumes remained up over one year ago as a result of the additional interest in the Indian Basin Plant. Average NGL price per gallon decreased for both the quarter and the nine months. NGL prices continued to experience a downward correction from the abnormally high prices prevalent throughout much of fiscal 1997 and coincide with a decline in crude oil prices. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, (Thousands of dollars) 1998 1997 1998 1997 - --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Gas processing (net) $4,352 $4,813 $17,666 $22,295 Gathering and other 3,703 (119) 18,395 (84) - --------------------------------------------------------------------------------- Operating revenues 8,055 4,694 36,061 22,211 Operating costs, net 2,007 1,896 5,717 5,885 Depreciation, depletion and amortization 550 649 1,709 1,744 - --------------------------------------------------------------------------------- Operating income $5,498 $2,149 $28,635 $14,582 ================================================================================= </TABLE> <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, 1998 1997 1998 1997 - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATING INFORMATION Residue gas (MMcf) 1,380 1,541 4,354 4,536 Natural gas liquids (MGal) 30,809 47,745 166,832 156,460 Average NGL's price (MGal) $ 0.274 $ 0.322 $0.313 $ 0.390 Fuel & Shrink price (MMbtu) $ 2.31 $ 1.99 $2.56 $ 2.07 Capital expenditures (thousands) $12,340 $ 495 $14,091 $ 9,982 =================== Identifiable assets (thousands) $70,652 $ 37,074 =============================== ================== </TABLE> The purchase of an additional 55 percent interest in the Sycamore Gas Gathering System effective June 1, 1998, gives the Company control over the company-owned production in that area. The sale of the Company's interest in the 12 gas processing plants during the second and third quarter resulted in a book gain and eliminated the Company's interest in "fuel-and-shrink" plants, which are subject to volatile swings in profitability. 13
14 PRODUCTION 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 nine 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, (Thousands of dollars) 1998 1997 1998 1997 - --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Natural gas sales $7,617 $8,759 $25,081 $24,849 Oil sales 1,160 1,617 3,801 5,114 Liquids and residue 180 483 960 1,844 Other 113 65 1,028 473 - --------------------------------------------------------------------------------- Operating revenues 9,070 10,924 30,870 32,280 Operating costs, net 3,251 2,998 10,311 8,652 Depreciation, depletion and amortization 3,893 5,967 11,409 14,672 - --------------------------------------------------------------------------------- Operating income $1,926 $1,959 $9,150 $8,956 ================================================================================= </TABLE> The Company finalized the purchase of natural gas and oil reserves from OXY USA, Inc. The reserves are located in Kansas and Oklahoma 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended May 31, May 31, 1998 1997 1998 1997 - ----------------------------------------------------------------------------- <S> <C> <C> Proved reserves Gas (MMcf) - - 175,327 78,844 Oil (MBbls) - - 3,676 1,583 - ----------------------------------------------------------------------------- Production Gas (MMcf) 3,710 3,521 10,989 10,886 Oil (MBbls) 79 80 221 246 - ----------------------------------------------------------------------------- Average price Gas (Mcf) $ 2.05 $2.49 $ 2.28 $ 2.28 Oil (Bbls) $ 14.68 $20.21 $ 17.20 $ 20.79 - ----------------------------------------------------------------------------- Capital expenditures (thousands) $ 133,750 $5,743 $160,184 $28,920 ================== Identifiable assets (thousands) $107,798 $98,860 =============================== ================= </TABLE> A 40 percent interest in the K. Stewart Petroleum Corp., was acquired on June 2, 1998. The acquisition creates opportunities to expand oil and gas reserves in the Anadarko Basin. The transaction helps the Company achieve its strategic objective of growing its reserves base in areas where it has other energy-related operations. 14
15 FINANCIAL FLEXIBILITY AND LIQUIDITY Due to the closing of the strategic alliance with Western, 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 73 percent equity and 27 percent debt at May 31, 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 strengthened market and financial positions. 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 nine months ended May 31, 1998, as compared to the same period in 1997 are higher due to increased operating income and changes in assets and liabilities. INVESTING CASH FLOWS Capital expenditures for the nine months ended May 31, 1998 and 1997 are as follows: <TABLE> <CAPTION> (Millions of Dollars) 1998 1997 - ------------------------------------------- <S> <C> <C> Regulated $ 72.6 $39.1 - ------------------------------------------- Processing $ 14.1 $10.0 Production $160.0 $28.9 Other $ 0.7 $ 0.9 - ------------------------------------------- Nonregulated $174.8 $39.8 =========================================== </TABLE> [CAPITAL EXPENDITURES GRAPH] <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> [ ] Regulated $ 72.6 $ 39.1 [ ] Nonregulated $174.8 $ 39.8 </TABLE> FINANCING CASH FLOW At May 31, 1998, $333 million of long-term debt was outstanding. As of that date, the Company could have issued $850 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 normal capital expenditures. Additional debt was issued to finance part of the purchase of natural gas and oil reserves from OXY USA, Inc., and 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. 15
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 in Tulsa and Oklahoma City by November 1998. While the Company will seek recovery of stranded costs, the Company's filing estimates these costs to be $10-12 million if the OCC does not allow any recovery through 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 May 31, 1998, the net deferred gain on these contracts was approximately $9.2 million. 16
17 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 Supreme Court granted Certiorari on April 20, 1998. The Company filed a Request to File Supplemental Briefs on April 30, 1998, which is pending. 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 responsible 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. On March 16, 1998, the Oklahoma Supreme Court denied the Petitions for Writ of Certiorari filed by the Company and the Commission and Jenk's Motion for Publication of Opinion. The case has been concluded. ITEM 5. OTHER INFORMATION. OTHER EVENTS. On January 15, 1998 ONEOK, Inc. filed an Amended Certificate of Incorporation in the state of Oklahoma. On November 26, 1997 ONEOK, Inc. filed a Certificate of Merger with the Secretary of State of the State of Oklahoma. EXHIBITS. <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <C> <C> 1.a. Amended Certificate of Incorporation of ONEOK, Inc. dated January 15, 1998. 1.b. Certificate of Merger dated November 26, 1997. </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27-1 Financial Data Schedule (b) Reports On May 26, 1998 the Company filed an 8-K report announcing the illness of its chairman and chief executive officer, Larry Brummett, 47. No financial statements were filed with the Form 8-K. 17
18 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 25th day of June 1998. ONEOK, Inc. Registrant By: J. D. Neal ----------------------------------- J. D. Neal Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer 18
19 INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 1.a Amended Certificate of Incorporation of ONEOK, Inc. dated January 15, 1998. 1.b Certificate of Merger dated November 26, 1997. 27.1 Financial Data Schedule. </TABLE>