-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vdktdj0batFy90sdFbUFps1mps70M11giEWyn43+G9xDNBMDM4T7dacC/2QSKrLa idXUdXoka+aEtKyeNTZ3sg== 0000950134-99-010556.txt : 19991124 0000950134-99-010556.hdr.sgml : 19991124 ACCESSION NUMBER: 0000950134-99-010556 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONEOK INC /NEW/ CENTRAL INDEX KEY: 0001039684 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 731520922 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13643 FILM NUMBER: 99763180 BUSINESS ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 BUSINESS PHONE: 9185887000 MAIL ADDRESS: STREET 1: 100 WEST 5TH ST CITY: TULSA STATE: OK ZIP: 74103 FORMER COMPANY: FORMER CONFORMED NAME: WAI INC DATE OF NAME CHANGE: 19970519 10-K405 1 FORM 10-K FOR FISCAL YEAR END AUGUST 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended AUGUST 31, 1999. OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________ to _______ Commission file number 001-13643 ONEOK, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1520922 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation of organization) 100 WEST FIFTH STREET, TULSA, OK 74103 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 588-7000 (Former name if changes since last report.) Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, WITH PAR VALUE OF $0.01 NEW YORK STOCK EXCHANGE (Title of Each Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act: (Title of Each Class) 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Aggregate market value of registrant's voting stock held by nonaffiliates as of August 31, 1999, was: Common stock of $959.3 million. On August 31, 1999, the Company had 30,884,225 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENTS PART OF FORM 10-K 2 ONEOK, INC. 1999 ANNUAL REPORT ON FORM 10-K
PART I. PAGE NO. Item 1. Business 3 - 13 Item 2. Properties 13 - 15 Item 3. Legal Proceedings 16 - 20 Item 4. Results of Votes of Security Holders 21 PART II. Item 5. Market Price and Dividends on the Registrant's Common Stock and Related Shareholder Matters 22 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 - 36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37 - 38 Item 8. Financial Statements and Supplementary Data 39 - 65 Item 9. Changes in and Disagreements with Accountants 65 On Accounting and Financial Disclosures PART III. Item 10. Directors, Executive Officers, Promoters, and Control Persons of the Registrant 66 - 68 Item 11. Executive Compensation 68 - 70 Item 12. Security Ownership of Certain Beneficial Owners and Management 71 - 73 Item 13. Certain Relationships and Related Transactions 73 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 74 - 77
2 3 PART I. ITEM 1. BUSINESS GENERAL - ONEOK, Inc., an Oklahoma corporation, was organized on May 16, 1997. On November 26, 1997, it acquired the gas business of Western Resources, Inc. (Western) (see Acquisitions and Mergers below) and merged with ONEOK Inc., a Delaware corporation organized in 1933. It was a successor to a company founded in 1906 as Oklahoma Natural Gas Company. ONEOK, Inc. and subsidiaries (collectively, the Company) engage in several aspects of the energy business. The Company purchases, gathers, compresses, transports, stores, and distributes natural gas. It also leases pipeline capacity to others. The Company drills for and produces oil and gas, extracts and sells natural gas liquids, and is engaged in the gas marketing business. The Company has begun wholesale marketing of electricity on a limited scale and has approval from the Company's Board of Directors for construction of a 300 megawatt electric power plant in Logan County, Oklahoma. In addition, the Company leases and operates a headquarters office building (leasing excess space to others) and owns and operates a related parking facility. As a regulated natural gas utility, the Company distributes natural gas to approximately 1.4 million customers in the states of Oklahoma and Kansas. The Company's operations are reported in the following segments: o Distribution o Transportation and Storage o Marketing o Gathering and Processing o Production o Other The Distribution segment provides natural gas distribution in Oklahoma and Kansas. The Company's operations in Oklahoma are conducted through Oklahoma Natural Gas Company Division (ONG) which serves residential, commercial, and industrial customers and leases pipeline capacity. ONG is regulated by the Oklahoma Corporation Commission (OCC). The Company's operations in Kansas are conducted through Kansas Gas Service Company Division (KGS) which serves residential, commercial, and industrial customers. KGS also conducts regulated gas distribution operations in northeastern Oklahoma. The Distribution segment serves 80 percent of Oklahoma and 67 percent of Kansas. KGS is regulated by the Kansas Corporation Commission (KCC) and the OCC. The Transportation and Storage segment provides natural gas transportation and storage services. These operations are conducted through ONEOK Gas Transportation, L.L.C. (OGT), ONEOK Sayre Storage Company (Sayre), Market Center Gathering, Inc., Mid Continent Market Center, Inc. (MCMC), Mid Continent Transportation, Inc. (MCTI), ONEOK Producer Services, Inc., and ONEOK Gas Storage, L.L.C (OGS). Some of the business units in this segment, OGT, OGS and Sayre, are currently regulated by the OCC, and MCMC and MCTI's operations are regulated by the KCC. In July, 1999, the OCC approved a plan for the removal of Oklahoma storage and gathering assets from utility regulation effective November 1, 1999. The Marketing segment markets natural gas to both wholesale and retail customers in the central part of the United States and leases gas storage from others with direct access to the west coast and the Texas intrastate market through ONEOK Gas Marketing Company (OGMC). It also conducts wholesale trading of electricity on a limited scale through ONEOK Power Marketing Company. The Gathering and Processing segment conducts gas gathering and gas processing activities in Oklahoma and New Mexico through ONEOK Gas Processing, L.L.C. and ONEOK Field Services Company. The Production segment produces natural gas and oil in several states including Oklahoma, Kansas and Texas through ONEOK Resources Company. 3 4 ONEOK Leasing Company which leases and operates a headquarters office building, and ONEOK Parking Company, which owns and operates a parking garage, comprise the significant operations of the Other segment. This Form 10-K (and certain other documents that are incorporated by reference in this Form 10-K) contains statements concerning Company expectations or predictions of the future that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are intended to be covered by the safe harbor provision of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are based on management's beliefs and assumptions based on information currently available. It is important to note that actual results could differ materially from those projected in such forward-looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: o the effects of weather and other natural phenomena; o increased competition from other energy suppliers as well as alternative forms of energy; o the capital intensive nature of the Company's business; o economic climate and growth in the geographic areas in which the Company does business; o the uncertainty of gas and oil reserve estimates; o the timing and extent of changes in commodity prices for natural gas, natural gas liquids, electricity, and crude oil; o the nature and projected profitability of potential projects and other investments available to the Company; o conditions of capital markets and equity markets; o Year 2000 issues; o the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance, authorized rates, and deregulation or "unbundling" of natural gas; o the pending merger with Southwest Gas Corporation (Southwest); and o regulatory delay or conditions imposed by regulatory bodies in, and the results of litigation involving, the Southwest merger. Accordingly, while the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in Company documents, the words "anticipate," "expect," "projection," "goal" or similar words are intended to identify forward-looking statements. The Company does not have any intention or obligation to update forward-looking statements after they distribute this Form 10-K even if new information, future events or other circumstances have made them incorrect or misleading. ACQUISITIONS AND MERGERS - On December 14, 1998, the Company entered into a merger agreement with Southwest Gas Corporation subject to shareholder and regulatory approvals. The Company agreed to pay $28.50 per share of common stock in cash. On February 1, 1999, Southern Union Company (Southern Union) made an unsolicited offer to purchase the Southwest shares for $32.00 in cash. Southern Union then signed a Confidentiality and Standstill Agreement with Southwest and completed its due diligence investigation. On April 25, 1999, the Board of Directors of Southwest rejected Southern Union's proposal as not being a superior proposal. Thereafter, the Company increased its price to $30.00 per share and the merger agreement was amended. Southern Union then increased its offer to $33.50 per share and intervened in a shareholders lawsuit in California state court in an effort to block the holding of a meeting of the Southwest shareholders to consider the merger with the Company. Southern Union brought an action in Nevada federal court to block the meeting and to block proceedings before the Arizona regulatory commission. Southern Union also intervened in the regulatory proceedings in California and Nevada. After Southern Union made statements in the public press that it intended to solicit proxies in opposition to the Company/Southwest merger in breach of the Confidentiality and Standstill Agreement, the Company (as third party beneficiary) filed an action in the Oklahoma federal courts. The court entered a temporary restraining order against Southern Union. It was later converted to a preliminary injunction requiring Southern Union to abide by terms of the Agreement. The issuance of the injunction is on appeal and efforts of Southern Union to have it lifted have been unsuccessful. 4 5 On July 19, 1999, Southern Union filed an action in the federal district court of Arizona in its further effort to block regulatory approval of the merger. Named as defendants in the case are the Company, Southwest, certain officers of the companies (including the Company's Eugene N. Dubay and John A. Gaberino, Jr.), a member of the Arizona Corporation Commission and a former employee of the Commissioner's staff. Southern Union alleges a scheme of "fraud and racketeering" by the companies and the individual defendants to block Southwest shareholders from voting on the Southern Union proposal and ensuring that only the merger with the Company would be considered. It also alleges a "secret campaign of deception, corruption and misrepresentation" by the defendants to influence the vote of the Arizona regulatory commission on the merger and to "mislead" the Board of Directors of Southwest. Southern Union further alleged that it was "fraudulently induced" to enter into the Confidentiality and Standstill Agreement. The complaint asks for $750 million to be trebled for racketeering and unlawful violations, compensatory damages of not less than $750 million and rescission of the Confidentiality and Standstill Agreement. On October 12, 1999, Southern Union filed an amended complaint asserting essentially the same claims as in the earlier complaint and named additional individual defendants (including the Company's Larry W. Brummett and James C. Kneale). The Company intends to file a motion to dismiss. On August 5, 1999, both the California state court and the Arizona federal court denied Southern Union's motions for temporary restraining orders. On August 10, 1999 the shareholders of Southwest approved the merger. The merger has been approved by the Public Utility Commission of Nevada. In California, a settlement document was filed with a 30-day comment period. No comments were filed and consideration is anticipated by year end. Upon approval by the California Commission, the only remaining regulatory commission required to approve the merger is the Arizona Corporation Commission where Southern Union is now directing its primary efforts to block the merger. At the Arizona Corporation Commission, consideration of the merger is in the procedural and discovery stage. Testimony has been filed and the staff is reviewing materials. At staff's request, a hearing on the merger has been delayed until February 11, 2000. Initially operating on the theory that the Company had funneled money through an Arizona law firm to a member of the Arizona Commission in order to influence improperly the Arizona regulatory proceedings, Southern Union attempted through discovery and other means to support their theory. Being unable to substantiate such claim, it was withdrawn in the Arizona federal court case. Southern Union has now shifted to a new theory that the Company intended to enter into an arrangement with a large national investment banking firm to funnel money to an individual who was formerly on the Commission's staff. The Company has denied that it has done anything illegal or improper in its efforts to obtain approval of the merger. It has categorically denied all substantive allegations against the Company in the complaint filed in the federal district court in Arizona. The Company intends to continue to defend vigorously the Company and its good reputation and continues to pursue regulatory approval for the merger. It is possible that Southern Union will continue its litigation against the Company, Southwest and the individual defendants claiming substantial damages. The merger cannot be consummated without all regulatory approvals. If such approvals are not obtained, or if not obtained in a timely manner, the merger agreement could be terminated by either the Company or Southwest which could result in further litigation. If, at the time of consummation of the merger, there are still outstanding claims against Southwest, those claims will become claims against the Company, as successor in the merger. If any of the plaintiffs should be successful in any of their claims against the Company or Southwest and substantial damages are awarded, it could have a material adverse effect on the Company's operations, cash flow and financial position. The Company believes the Southern Union allegations are without merit and is defending itself vigorously against all claims. During the 1998 fiscal year, the Company acquired from Western Resources, Inc. (Western) all of the gas distribution assets of Western and all of the outstanding capital stock of Western's directly or indirectly wholly-owned subsidiaries, Westar Gas Marketing, Inc. and MCMC, and assumed all of the liabilities of Western that arose 5 6 primarily out of the gas business and approximately $161 million in debt of Western. Western received 2,996,702 shares of the Company's Common Stock and 19,317,584 shares of the Company's Series A Convertible Preferred Stock. Such shares and additional shares purchased by Western represent in the aggregate 9.9 percent of the Common Stock and 45 percent of the capital stock of the Company. A shareholder agreement, which includes standstill provisions, prohibits Western from increasing its position in the Company above a capital stock interest of 45 percent and maintains control of the Company in the hands of the public shareholders of the Company. The transaction added 660,000 new distribution customers, 10,068 miles of pipeline, two gas processing plants with a 200 million cubic feet per day capacity, one of which has since been sold, and a natural gas marketing company with a retail market focus to the Company. The aggregate purchase price of $824 million was funded through the issuance to Western of a combination of preferred and common stock. The excess of the purchase price over the fair value of the net assets acquired approximated $74 million and is being amortized over 40 years. The Company's strategy is to acquire additional gas distribution and transmission facilities, gas producing properties, gas processing and gathering facilities or other assets which will further enhance its existing operations and will continue to pursue such opportunities in the future. The Company also from time to time sells assets when deemed less strategic or as other conditions warrant. ENVIRONMENTAL MATTERS - In connection with the Western transaction, the Company acquired responsibility for 12 manufactured gas sites located in Kansas which may contain coal tar and other potentially harmful materials that are classified as hazardous material. Hazardous materials are subject to control or remediation under various environmental laws and regulations. A consent agreement with the Kansas Department of Health and Environment (KDHE) presently governs all future work at these sites. The terms of the consent agreement allow the Company to investigate these sites and set remediation priorities based upon the results of the investigations and risk analysis. The prioritized sites will be investigated over a ten year period. At August 31, 1999, the costs of the investigations and risk analysis have been minimal. Limited information is available about the sites and no testing has been performed. Management's best estimate of the cost of remediation ranges from $100 thousand to $10 million per site based on a limited comparison of costs incurred to remediate comparable sites. These estimates do not give effect to potential insurance recoveries, recoveries through rates or from third parties. The KCC has permitted others to recover their remediation costs through rates and the Company anticipates it will be allowed to recover such costs. Additional information and testing could result in costs significantly below or in excess of the amounts estimated above. To the extent that such remediation costs are not recovered, any material costs could adversely affect the Company's results of operations and cash flows depending on the degree of remediation required and number of years over which the remediation must be completed. The Company's expenditures for environmental evaluation and remediation have not been significant in relation to the results of operations of the Company. Capital expenditures for environmental issues during the 1999 fiscal year totaled $456,000. There have been no material effects upon earnings or the Company's competitive position during the 1999 fiscal year related to compliance with these regulations. EMPLOYEES - The Company employed 3,252 persons at August 31, 1999. Nine hundred twenty-one employees of KGS are subject to collective bargaining contracts. The Company did not experience any strikes or work stoppages during 1999. The Company's current contracts with the Unions are as follows:
UNION EMPLOYEES CONTRACT EXPIRES ----- --------- ---------------- United Steelworkers of America 515 June 6, 2002 International Union of Operating Engineers 19 June 6, 2002 Gas Workers Metal Trades of the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada 13 June 6, 2002 International Brotherhood of Electrical Workers 374 July 1, 2003
6 7 FINANCIAL AND STATISTICAL INFORMATION - For financial and statistical information regarding the Company's business units by segment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note K of Notes to Consolidated Financial Statements. DESCRIPTION OF BUSINESS SEGMENTS (A) DISTRIBUTION GENERAL - ONG distributes natural gas to wholesale and retail customers located in the state of Oklahoma. It also leases pipeline capacity under its Pipeline Capacity Lease (PCL) program to large volume commercial and industrial customers for their use in transporting natural gas to their facilities. ONG delivered natural gas to approximately 750,000 customers at August 31, 1999, located in 295 communities in Oklahoma. ONG's largest markets are the Oklahoma City and Tulsa metropolitan areas. ONG also sells natural gas and/or leases pipeline capacity to other local gas distributors serving 46 Oklahoma communities. ONG serves an estimated population of over 2 million. KGS supplies natural gas to retail customers in 389 communities in Kansas and Oklahoma with approximately 95 percent of those gas deliveries to Kansas customers. It also makes wholesale delivery to seventeen customers. KGS's largest markets served include Johnson County, Wichita, and Topeka, Kansas, and Bartlesville, Oklahoma. Of the Company's consolidated revenues, revenues from the Distribution segment represent approximately 49.7, 52.5, and 51.0 percent for 1999, 1998, and 1997, respectively. Operating income from the Distribution segment is 44.7, 54.9, and 51.5 percent of the consolidated operating income for 1999, 1998, and 1997, respectively. GAS SUPPLY - Gas supplies available to ONG for purchase and resale include supplies of gas under both short and long-term contracts with gas marketers, independent producers, as well as pipeline companies, gas processors, and other suppliers that own or control reserves. Oklahoma is the third largest gas producing state in the nation, and ONG has direct access through the Transportation and Storage segment's transmission system and transmission systems belonging to third party companies to all of the major gas producing areas in the state. The Company's transmission system intersects with interstate pipelines, gas processing plants, and producing fields located throughout Oklahoma, allowing natural gas to be moved where needed across the state. Additionally, the Company's transmission system is directly connected to five gas storage fields that are operated by the Company and one non-operated gas storage field. ONG has awarded bids for gas supply for the 1999/2000 heating season with the majority of that supply to come from an affiliate, OGMC. On November 1, 1999, ONG issued bids for transportation and supply for two to five year terms beginning with the 2000/2001 heating season. KGS has transportation agreements for delivery of gas which have terms varying in length from one to twenty years with the following non-affiliated pipeline transmission companies: Williams Natural Gas Company ("WNG"), Kansas Pipeline Partnership, Panhandle Eastern Pipeline Company, and various other intrastate and interstate pipelines. Gas transported under these agreements represents approximately 80 percent of the total distribution system throughput. In October 1994, KGS executed a long-term gas purchase contract ("Base Contract") with Amoco Production Company ("Amoco") for the purpose of meeting the requirements of the customers served over the WNG pipeline system. The Company anticipates that the Base Contract will supply between 55 percent and 65 percent of KGS's demand served by the WNG pipeline system. Amoco is one of various suppliers over the WNG pipeline system and if this contract were canceled, management believes gas supplied by Amoco could be replaced with gas from other suppliers. Gas available under the Base Contract which is excess to the needs of the Company's residential and commercial customer base is also available for sale to other parties. 7 8 The remaining 20 percent of KGS's total distribution throughput is purchased from a combination of direct wellhead production, from the outlet of natural gas processing plants, and from natural gas marketers and production companies. The ONG rate schedule's "Order of Curtailment" and the KGS rate order's "Priority of Service" provide for first reducing or totally discontinuing gas service to the very large industrial users and graduating down to requesting residential and commercial customers to reduce their gas requirements to an amount essential for public health and safety. There is a surplus of natural gas available to its utility systems and the Company does not anticipate problems with securing additional gas supply as needed for its customers. CUSTOMERS - Residential and Commercial - ONG and KGS distribute natural gas as public utilities to approximately 80 percent of Oklahoma and 67 percent of Kansas. Natural gas sales to residential and commercial customers, which are used primarily for heating and cooking, account for approximately 65 and 29 percent of gas sales, respectively in Oklahoma and 74 and 25 percent of gas sales in Kansas, respectively. Gas sales to residential and commercial customers are seasonal, as a substantial portion of such gas is used principally for space heating. Accordingly, the volume of gas sales is consistently higher during the heating season (November through April) than in other months of the year. ONG's tariff rates include a temperature normalization adjustment clause during the heating season which mitigates the effect of fluctuations in weather. A WeatherProof Bill program, implemented in September, 1999, is designed to mitigate the effect of weather fluctuations in Kansas for customers electing to use this program. A franchise is a right to use the municipal streets, alleys, and other public ways for utility facilities for a defined period of time for a fee. Although the laws of the states of Oklahoma and Kansas prohibit exclusive utility franchises, management nevertheless believes there are advantages to having franchises in the larger municipalities in which operations are conducted. ONG has franchises in 44 municipalities including Tulsa and Oklahoma City while KGS holds franchises in 315 municipalities. In management's opinion, its franchises contain no unduly burdensome restrictions and are sufficient for the transaction of business in the manner in which it is now conducted. Industrial - A substantial portion of the ONG system throughput is transported for industrial customers. Under the Company's PCL program, the customer, for a fee, can have its gas, whether purchased from ONG or a third-party supplier, transported to its facilities utilizing lines owned by ONG or its affiliates. PCL services are at negotiated rates which are generally below the approved PCL tariff rates, and competition continues to drive the rates lower. Industrial sales and rentals for PCL's tend to remain relatively constant throughout the year. As contracts with PCL customers expire and there is increased competition for the transportation of gas to these customers, some of the customers may be lost to third party transporters. The Transportation and Storage segment may gain some of this business which would result in a shift of some revenues from the Distribution segment to the Transportation and Storage segment. No single customer accounted for more than ten percent of consolidated operating revenues. KGS industrial sales account for less than one percent of natural gas delivered. KGS transports gas for its large industrial customers through it's End-Use Customer Transportation (ECT) program. This program allows industrial customers to purchase gas on the spot market and have it transported by KGS. The potential impact of the loss of a significant portion of this volume is discussed at Management's Discussion and Analysis of Financial Conditions and Results of Operations, Liquidity. COMPETITION - The natural gas industry is expected to remain highly competitive. Management believes that it must maintain a competitive advantage in order to retain its customers and, accordingly, continues to focus on reducing costs and pursuing unbundling opportunities. The Company is subject to competition from electric utilities offering electricity as a rival energy source and competing for the space heating, water heating, and cooking markets. The principal means to compete against 8 9 alternative fuels is lower prices, and natural gas continues to maintain its price advantage in the residential, commercial, and both small and large industrial markets. In residential markets, the average cost of gas is less for ONG customers and for KGS customers than the average cost of gas nationwide and considerably less than the cost of an equivalent amount of electricity. The Company is subject to competition from other pipelines for its existing industrial load. The PCL program offered by ONG, in response to such competitive pressure, allows ONG to effectively compete in these markets and maintain throughput and therefore, load factors which benefit all customer classes. KGS, through the ECT program, is able to compete with other pipelines and continue to serve its large commercial and industrial customers. Competition, however, continues to lower rates. Unbundling is another response to competition. A competitive bidding system, made possible by the unbundling of services, and more customer choice provides the opportunity for lower costs for the consumer. GOVERNMENT REGULATIONS - Rates charged for gas services are established by the OCC for ONG and by the KCC and OCC for KGS. Gas purchase costs are included in the Purchased Gas Adjustment (PGA) clause. Other costs must be recovered through periodic rate adjustments approved by the OCC and KCC. A rate case will be heard by the OCC in early 2000 in Oklahoma. A joint stipulation between the Company and the OCC staff and approved by the OCC eliminated the interim rate case previously scheduled for summer of 1999 and provided for a one-time interim rate reduction of $5 million for residential customers in Oklahoma beginning September 1, 1999. A July 1999 order from the OCC removed the Oklahoma gathering and storage assets from utility regulation effective November 1, 1999. These assets are now included in the Transportation and Storage segment where they are being utilized in the competitive marketplace. The removal of the gathering and storage assets from rate base will result in a net reduction of revenues of $29.0 million on an annualized basis, based on the allocation of costs from the 1994 rate case. The Transportation and Storage and Marketing segments are aggressively seeking new business opportunities and have replaced a substantial portion of the revenues. Additionally, a charge to be collected through the PGA for ONG's current working gas in storage will replace a portion of the revenues. These revenue adjustments are subject to review in the current rate case. An August 1999 order from the OCC distinguished between upstream (transportation) and downstream (distribution) assets and cleared the way for future unbundling activities including competitive bidding for transportation services. A temperature adjustment clause, in effect for ONG customers since 1995, reduces the effect of extremes in weather for both the Company and the customer. In a step toward unbundling, in April, 1999, the KCC approved the reduction in the minimum requirement for transportation service to 3,000 Mcf annually. This will allow KGS to expand transportation services to an additional 650 commercial and industrial customers. The Company also requested and was granted approval to allow all school districts the choice of purchasing their gas supplies from a third party. This affects over 1,000 schools. Approval of the KCC has been received allowing the Company to expand the WeatherProof Bill program to all residential and commercial customers in Kansas. The program is designed to moderate the cost KGS customers pay for natural gas in cold weather months. Under this program, which was in effect as a pilot program during fiscal 1999, the Company used commodity derivative instruments to cap the price of its anticipated winter heating season gas purchases in order to protect customers and the Company from the upward volatility during the winter heating months. In connection with the Western transaction, KGS filed a stipulation which included an agreement not to file a general rate increase for three years. 9 10 The Company has settled all known claims arising out of long-term gas supply contracts containing "take-or-pay" provisions which purport to require the Company to pay for volumes of natural gas contracted for but not taken. The OCC has authorized recovery of the accumulated settlement costs over a 20 year period or approximately $6.7 million annually through a combination of a surcharge from customers and revenue from transportation under Section 311(a) of the NGPA and other intrastate transportation revenues. There are no significant potential claims or cases pending against the Company under remaining gas purchase contracts. OkTex Pipeline Company transports gas in interstate commerce under Section 311(a) of the NGPA and is treated as a separate entity by FERC. The Company has the capacity to move up to 200 million cubic feet per day into the Lone Star Gas Company's system in Texas and the Red River Pipeline. OkTex has complied with the requirements of Order 636. (B) TRANSPORTATION AND STORAGE GENERAL - Five underground storage facilities are owned in Oklahoma and capacity is leased to third parties under various terms with capacity in the Sayre gas storage facility leased, on a long-term basis, to and operated by the Natural Gas Pipeline Company of America. The Company retains capacity in Sayre for its own use. MCMC stores gas in two company-owned underground storage facilities in Kansas. A $10 million expansion project for the Kansas underground storage is to be completed in 2000, and is expected to increase the storage capacity from 4.6 to 6.3 Bcf. A $3.4 million expansion is expected to increase deliverability from the Depew storage field by spring 2000. A $20 million expansion of the Kansas transmission system, to be completed fall of 2000, extends the system to the Bushton processing facility operated by KN Energy. This expansion shall provide for opportunities for increased throughput and supply support for Kansas core and non-core businesses. No major expansions were developed for the Oklahoma transmission system during 1999, but the Company continues to pursue opportunities associated with power plant projects. The transmission system transported 234.9 and 285.8 Bcf in Oklahoma for 1999 and 1998, respectively, and 72.8 and 54.2 Bcf in Kansas for 1999 and 1998, respectively. A small amount of gathering pipelines owned by the Company and connected to the Company's transmission pipelines are included in this segment. The Company's transportation system provides access to all major natural gas producing areas in the state of Oklahoma. The system intersects with ten interstate pipelines at 26 interconnect points, 23 gas processing plants, and approximately 130 producing fields effectively allowing gas to be moved throughout the state. Of the Company's consolidated revenues, revenues from the Transportation and Storage segment represent approximately 1.6, 1.0 and 0.5 percent for 1999, 1998 and 1997, respectively. Operating income from the Transportation and Storage segment is 28.1, 24.8, and 26.5 percent of the consolidated operating income for 1999, 1998, and 1997, respectively. GOVERNMENT REGULATIONS - Under a July, 1999, order by the OCC, the Company's gathering and storage assets and services in Oklahoma were removed from utility regulation effective November 1, 1999. Assets, including current gas in storage, of $325.0 million were removed from rate base and are now included in this segment where they will be utilized in the competitive market place to replace earnings. A portion of the return on rate base related to these assets will be recovered from the distribution customers through a charge to be collected through the PGA for maintaining current working gas in storage. In August, 1999, the OCC approved a plan that distinguishes between upstream and downstream assets and laid the groundwork for a bidding process for transportation services that began November 1, 1999. COMPETITION - The Transportation and Storage segment competes directly with the other intrastate and interstate pipelines and storage facilities within each of their respective states. With the unbundling of services ordered by the OCC and the related competitive bid process, this segment will be competing with other companies at market - based rates to provide service to the Distribution segment and to other customers. 10 11 CUSTOMERS - The Transportation and Storage segment serves the affiliated companies of the Distribution segment as well as a number of transporters in the utilization of the transportation and storage facilities. Each of the companies provides flexible service alternatives to serve both core and non-core consumers. PROPERTY ACQUISITIONS - In March, 1999, the Company acquired assets in Kansas which consisted of 111 miles of transmission pipelines. These assets enhanced transportation access to the Wichita, Kansas area. (C) MARKETING GENERAL - The Company purchases and markets natural gas, primarily in the central part of the United States and stores gas in facilities leased from others. Due to expanded supply and storage capabilities, the Company can now market to the west coast. The marketing operation has evolved from an intrastate aggregator into an interstate aggregator. Of the Company's consolidated revenues, revenues from the Marketing segment represent approximately 41.9, 41.0 and 39.6 percent for 1999, 1998, and 1997, respectively. Operating income from the Marketing segment is 11.8, 6.5, and 6.3 percent of the consolidated operating income for 1999, 1998, and 1997, respectively. MARKET CONDITIONS - In response to a very competitive baseload marketing environment, the Company's strategy is to concentrate its efforts toward capitalizing on day-to-day pricing volatility through the use of gas storage facilities leased from others, hedging, and transportation arbitraging. Management believes that its location in the heart of the natural gas producing area of the United States as well as the benefits derived from vertically integrating the gas marketing operations with the Company's production, gathering, processing, storage, and transportation businesses, will provide the strategic advantage necessary to compete successfully. NEW PRODUCTS AND SERVICES - The Company has received approval from its Board of Directors for construction of a 300 megawatt electric power plant expected to be in service in June, 2001. In 1998, the Company was granted a rate schedule by the FERC to trade electricity at market-based wholesale rates. This has begun on a limited scale in preparation for the plant start-up in 2001. In 1997, the marketing operation was the successful bidder to provide firm and interruptible gas service to four natural gas-fired electric generating plants owned by Public Service Company of Oklahoma. PRICE RISK MANAGEMENT - In order to mitigate the financial risks arising from fluctuations in both the market price and transportation costs of natural gas, the Company routinely enters into natural gas futures, swaps, and options as a method of protecting its margins on the underlying physical transactions. However, while not material, net open positions in terms of price, volume, and specified delivery point do occur. (D) GATHERING AND PROCESSING GENERAL - The Company owns and operates nine gas processing plants and has nonoperating interests in three gas processing plants in Oklahoma and New Mexico. The Company also owns the related gathering systems connected to these plants. The gas processing operation includes the extraction of natural gas liquids (NGLs) and the separation (fractionation) of mixed NGLs into component products (ethane, propane, iso butane, normal butane and natural gasoline). The component products are used for petrochemical feedstock, residential heating and cooking, and blending into motor fuels. The gathering operation consists of the pipeline system laid to producing wells as well as compression and dehydration services. The Company has compensated its gas suppliers for fuel and shrinkage costs in one of two ways, either by returning a percentage of the proceeds from the extracted NGL's to the supplier (a "percent of proceeds" contract) or by replacing an equivalent amount of gas (a "fuel and shrink" contract). Due to the volatility of the natural gas and NGL prices, "percent of proceeds" contracts generally provide a more stable cash flow. Of the Company's consolidated revenues, revenues from the Gathering and Processing segment represent approximately 3.9, 3.5 and 6.3 percent for 1999, 1998, and 1997, respectively. Operating income from the Gathering 11 12 and Processing segment is 7.5, 8.2, and 10.1 percent of the consolidated operating income for 1999, 1998, and 1997, respectively. PROPERTY ACQUISITIONS - On April 30, 1999, the Company acquired the midstream natural gas gathering and processing assets from Koch Midstream Enterprises for $285 million. These assets included eight gas processing plants and approximately 3,250 miles of gathering pipeline connected to 1,460 gas wells located in Oklahoma. Capacity of the gas processing plants is 515 million cubic feet per day bringing total capacity to 900 million cubic feet per day. The Company's share of the capacity is 650 million cubic feet per day. Through the Western transaction in 1998, the Company acquired an additional 34 percent interest in the Indian Basin gas processing plant. An eight percent interest in the Indian Basin plant had been acquired in fiscal 1997. RISK MANAGEMENT - Derivative instruments are used to minimize volatility in NGLs and natural gas prices. (E) PRODUCTION GENERAL - The Company's strategy is to concentrate ownership of natural gas and oil reserves in its service territory in order to add value not only to its existing production operations but also to integrate it into its processing, marketing, transmission, gathering, and storage business. As a result, the Company is focusing its efforts on acquisitions and exploitation activities. Of the Company's consolidated revenues, revenues from the Production segment represent approximately 2.5, 1.7 and 2.3 percent for 1999, 1998, and 1997, respectively. Operating income from the Production segment is 7.3, 5.7, and 6.5 percent of the consolidated operating income for 1999, 1998, and 1997, respectively. PRODUCING RESERVES - Natural gas is the primary focus of the Company's production activities. As of August 31, 1999, the Company had a working interest in 1,860 gas wells and 299 oil wells located primarily in Oklahoma, Kansas and Texas. A number of these wells produce from multiple zones. MARKET CONDITIONS - The goal of the Company is to develop an economically viable reserve base through acquisition and development. The Company is an operator of the reserve base, which it controls. In doing so, the Company competes with many large integrated oil and gas companies and numerous independent oil and gas companies of various size. The Company, following industry standards, monitors well head prices on a daily basis and, on occasion, has curtailed some of its natural gas production due to low well head prices. Most production is sold to third party marketers, including OGMC, at spot-market prices. PROPERTY ACQUISITIONS - During the second quarter of fiscal 1999, the Company consummated a strategic alliance with Magnum Hunter Resources, Inc. (Magnum) adding $10 million in producing properties and becoming a 31 percent equity owner in Magnum at a cost of $50 million. The Company also closed on two other acquisitions with a purchase price of $53 million adding reserves located in Oklahoma. Property acquisitions in fiscal 1998 included gas and oil reserves located in Oklahoma and Kansas purchased from OXY USA, Inc. Other fiscal 1998 acquisitions included a 40 percent equity interest in K. Stewart Petroleum Corp., an Oklahoma City based independent oil and gas producer and Washita Production Company (Washita), a Tulsa based independent oil and gas producer. During fiscal 1997, the Company purchased PSEC, Inc., an independent oil and gas company in Oklahoma. These acquisitions contribute to the Company's long-term strategy of focusing on natural gas reserves in Oklahoma and Kansas to add value to all of the Company's gas-related operations. RISK MANAGEMENT - The Company's production segment continues to utilize derivatives in order to hedge anticipated sales of oil and natural gas production. These anticipated transactions have been hedged with commodity swaps agreements whereby the Company is able to set the price to be received for the future production and thus 12 13 reduce the risk of declining market prices between the origination date of the swap and the month of production. The Company's strategy in hedging anticipated transactions is to eliminate the variability in earnings of its production segment as a result of market fluctuations. To the extent that management does not terminate a hedge or enter into an opposing derivative, the current strategy will limit the potential gains which could result from increases in market prices above the level set by the hedge. (F) OTHER The Company, through two subsidiaries, owns a parking garage and leases an office building (ONEOK Plaza) in downtown Tulsa, Oklahoma, in which the Company's headquarters are located. The parking garage is owned and operated by ONEOK Parking Company. ONEOK Leasing Company leases excess office space to others. Almost all downtown Tulsa Class A office space is rented and very little Class A office space is available city-wide. As a result, Class A rental rates are increasing. ITEM 2. PROPERTIES (A) DESCRIPTION OF PROPERTY DISTRIBUTION The Company owned 15,152 miles of pipeline and other distribution facilities in Oklahoma and 10,184 miles of pipeline and other distribution facilities in Kansas at August 31, 1999. The Company owns a five-story office building in Oklahoma City, Oklahoma, as well as a number of warehouses, garages, meter and regulator houses, service buildings, and other buildings throughout Oklahoma and Kansas. The Company also owns a fleet of vehicles used primarily in Oklahoma and maintains an inventory of spare parts, equipment, and supplies. It leases approximately 50 percent of its vehicles operated in Kansas. TRANSMISSION AND STORAGE The Company owned a combined total of 3,787 miles of transmission and gathering pipeline in Oklahoma and 1,668 miles in Kansas at August 31, 1999. Compression and dehydration facilities are located at various points throughout the pipeline system. In addition, the Company owns five underground storage facilities located throughout Oklahoma and two storage facilities in Kansas. Four of the Oklahoma storage facilities are located in close proximity to its large market areas; the other storage facility is located in western Oklahoma and is leased to and operated by another company. However, 21.4 billion cubic feet of storage capacity in that facility has been retained for use by the Company. GATHERING AND PROCESSING The Company owns and operates nine gas processing plants in Oklahoma and has operating interests in three gas processing plants and related gathering systems in Oklahoma and New Mexico. The total capacity of the plants the Company has an interest ownership in is 900 million cubic feet per day. The Company's share of the capacity is 650 million cubic feet per day. The Company owns approximately 3,250 miles of gathering pipeline in Oklahoma. PRODUCTION The Company owns varying economic interests, including working, royalty and overriding royalty interests, in 2,010 gas wells and 315 oil wells, some of which are multiple completions. Such interests are in wells located primarily in Oklahoma, Kansas, and Texas. The Company owns 184,754 net onshore developed leasehold acres and 41,466 net onshore undeveloped acres, located primarily in Oklahoma, Kansas, and Texas. The Company owns no offshore acreage. 13 14 Lease acreage in producing units is held by production. Leases not held by production are generally for a term of three years and may require payment of annual rentals. OTHER The Company owns a parking garage and land, subject to a long-term ground lease expiring in year 2039 with six five-year extensions available, upon which has been constructed a seventeen-story office building with approximately 517,000 square feet of net rentable space. The office building is being leased to the Company at a lease term of 25 years with six five-year renewal options. After the primary term or any renewal period, the Company can purchase the property at its fair market value. The Company occupies approximately 194,000 square feet for its own use and leases the remaining space to others. (B) OTHER INFORMATION Oil and gas production is defined by the Securities and Exchange Commission (SEC) to include natural gas liquids in their natural state. The Company's processing operation produces natural gas liquids. The SEC excludes the production of natural gas liquids resulting from the operations of gas processing plants as an oil and gas activity. Accordingly, the following tables exclude information concerning the production of natural gas liquids by the Company's processing operations. OIL AND GAS RESERVES All of the oil and gas reserves are located in the United States. QUANTITIES OF OIL AND GAS RESERVES - See Note Q of Notes to Consolidated Financial Statements. PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES - See Note R of Notes to Consolidated Financial Statements. RESERVE ESTIMATES FILED WITH OTHERS None. QUANTITIES OF OIL AND GAS PRODUCED The net quantities of oil and natural gas produced and sold, including intercompany transactions, were as follows:
Sales 1999 1998 1997 - ----- ------ ------ ------ Oil (MBbls) 460 330 336 Gas (MMcf) 27,773 16,818 14,565
AVERAGE SALES PRICE AND PRODUCTION (LIFTING) COSTS Average sales prices and production costs are as follows:
1999 1998 1997 ------- -------- -------- Average Sales Price (a) Per Bbl of oil $ 13.56 $ 15.70 $ 19.84 Per Mcf of gas $ 2.12 $ 2.21 $ 2.16 Average Production Costs Per Mcfe (b) $ 0.49 $ 0.50 $ 0.48
(a) In determining the average sales price of oil and gas, sales to affiliated companies were recorded on the same basis as sales to unaffiliated customers. (b) For the purpose of calculating the average production costs per Mcf equivalent, barrels of oil were converted to Mcf using six Mcfs of natural gas to one barrel of oil. Production costs do not include depreciation or depletion. 14 15 WELLS AND DEVELOPED ACREAGE The table shows gross and net wells in which the Company has a working interest at August 31, 1999.
Gas Oil ----- ----- Gross wells 1,860 299 Net wells 542 140
Gross developed acres and net developed acres by well classification are not available. Net developed acres for both oil and gas is 184,754 acres. UNDEVELOPED ACREAGE The gross and net undeveloped leasehold acreage at the end of the fiscal year is as follows:
Gross Net --------- ------- Alabama 26 5 Colorado 5,748 1,050 Indiana 703 50 Kansas 7,457 4,987 Mississippi 2 1 Oklahoma 358,535 33,290 Texas 51,977 2,085
Of the net undeveloped acres, approximately 35.3 percent lies in the Anadarko Basin area, 12.9 percent in the Arkoma Basin area and 4.3 percent in the Ardmore Basin area of Oklahoma. The balance is located in major producing areas in other states including Kansas, Texas and Colorado. NET DEVELOPMENT WELLS DRILLED The net interest in total development wells drilled, by well classification, is as follows:
1999 1998 1997 ------- -------- -------- DEVELOPMENT Productive 22.5 14.0 3.8 Dry 1.4 0.6 1.5 ------ ------ ----- Total 23.9 14.6 5.3 ====== ====== =====
PRESENT DRILLING ACTIVITIES On August 31, 1999, the Company was participating in the drilling of 20 wells. The Company's net interest in these wells amounts to 6.4 wells. FUTURE OBLIGATIONS TO PROVIDE OIL AND GAS None. 15 16 ITEM 3. LEGAL PROCEEDINGS UNITED STATES EX REL. JACK J. GRYNBERG V. ONEOK, INC., ONEOK RESOURCES COMPANY, AND OKLAHOMA NATURAL GAS COMPANY, (CTN-8), No. CIV-97-1006-R (Judge Russell), in the United States District Court for the Western District of Oklahoma. The complaint asserts claims to recover alleged underpayments of royalties to the United States as a result of improper measurement of heating contents and volumes of natural gas which was purchased from federally owned or Indian lands by ONEOK, Inc., ONEOK Resources Company, and Oklahoma Natural Gas Company (collectively the "Company"). This case is what is known as a qui tam action which was brought by the plaintiff relator on behalf of the United States and himself. The complaint asserts essentially the same claims that the same plaintiff relator, Jack J. Grynberg ("Grynberg"), asserted in a previous action (United States et rel. Jack J. Grynberg v. Alaska Pipeline Company, et al., No. 95-725-TFH, in the United States District Court for the District of Columbia) against the Company and approximately sixty-five other pipeline companies. In the case, on behalf of the United States, Grynberg seeks to receive the proceeds for the underpayment of royalties, interest, treble damages, civil penalties and $5,000 to $10,000 for each violation of the Act. Grynberg also seeks to receive his expenses incurred in bringing the action, plus attorney fees and costs. This case is one of 77 similar cases filed by Grynberg. Many of the allegations in the complaint are virtually identical in all 77 cases. In addition, Grynberg has asserted claims for underpayment of royalties based upon generalized allegations of use of a portable chromatograph, affiliate transactions, use of storage facilities to purchase gas in summer months, and improper deduction of costs. On or about May 6, 1999, Grynberg filed a motion with the Judicial Panel on Multidistrict Litigation asking that all 68 actions currently pending in 8 different federal district courts be transferred and consolidated for pretrial proceedings before a single district court in either Colorado or Wyoming. The Judicial Panel accepted the filing. A notice of appearance was filed with the Judicial Panel on behalf of the Company. The Company joined with the majority of the other defendants in filing a joint recommendation to the Panel and the defendants' brief in response to Grynberg's motion to transfer in which it was argued that if the cases are to be consolidated for pretrial proceedings before a single district court, it should be transferred to the United States District Court for the District of Wyoming. An order was obtained on July 9, 1999, staying the proceedings in the Western District of Oklahoma until thirty days after the Judicial Panel for Multidistrict Litigation ruled on Grynberg's motion to transfer and for consolidation. A hearing on the motion to transfer was held on September 24, 1999 and the motion was subsequently approved transferring all the cases to the federal district court in Wyoming for pretrial proceedings under multi- district litigations procedures. ONEOK, INC. V. SOUTHERN UNION COMPANY, No. 99-CV-0345-H(M), United States District Court for the Northern District of Oklahoma, on appeal of preliminary injunction, United States Court of Appeals for the Tenth Circuit, Case Number 99-5103. On May 5, 1999, the Company filed a complaint against Southern Union Company ("Southern Union") for breaching the February 21, 1999 confidentiality and standstill agreement between Southern Union and Southwest Gas Corporation ("Southwest"). The Company is a third party beneficiary. ONEOK also sought to enjoin Southern Union from breaching the confidentiality and standstill agreement and from taking any other wrongful actions to disrupt the proposed merger of the Company with Southwest. On May 11, 1999, the District Court granted a temporary restraining order enjoining Southern Union from any future violation of its confidentiality and standstill agreement with Southwest, including soliciting proxies from Southwest shareholders. On May 17, 1999, the temporary restraining order became a preliminary injunction by stipulation of the parties and was appealed to the Tenth Circuit Court of Appeals. The Tenth Circuit received Southern Union's filing on May 18, 1999 and issued an order staying the injunction for the sole purpose of permitting Southern Union the opportunity to oppose Southwest's motion to transfer a related California lawsuit to the Northern District of Oklahoma and to file a motion to remand the same California lawsuit to the San Diego Superior Court. Southern Union subsequently filed supplements to its motion for stay seeking the opportunity to participate in ongoing administrative proceedings before state public utility commissions, including proceedings in Arizona, California and Nevada. On June 10, 1999, the Tenth Circuit Court of Appeals denied Southern Union's request for a stay of the District Court's injunction insofar as it pertains to state public utility commission proceedings. On June 9, 1999, Southern Union filed a motion with the Northern District of Oklahoma to dismiss the lawsuit on the grounds of lack of personal jurisdiction and improper venue and a motion to transfer the Oklahoma action to the District of Nevada (where Southwest is asserting claims against Southern Union similar to those being asserted against Southern Union by the Company), or alternatively to stay the Oklahoma 16 17 action pending the final disposition of the Nevada action. On July 19, 1999, the defendant, Southern Union, filed with the District Court a motion to vacate preliminary injunction and to suspend preliminary injunction based on newly discovered evidence alleged by the defendant to show a conspiracy between the plaintiff, ONEOK, and Southwest to corrupt the regulatory process so as to influence the Southwest Board of Directors to approve ONEOK's proposed merger and reject Southern Union's offer to acquire Southwest. A hearing on the issue of jurisdiction of the District Court to hear the motion to vacate while the order was pending on appeal to the Court of Appeals for the Tenth Circuit was held on July 23, 1999. By order dated July 23, 1999, the District Court determined that it lacked jurisdiction to modify the preliminary injunction as requested by the defendant, and the motion was denied. On August 2, 1999, ONEOK filed an amended complaint with the District Court and a motion for a contempt citation. The amended complaint added a claim for abuse of process stating that Southern Union's actions in filing the Arizona compliant (see Southern Union case below) were conducted with malice and intention to oppress ONEOK and as a result of such intentional wrongful conduct, Southern Union is liable for exemplary damages as a means of punishment and deterrence. The motion alleges that despite the preliminary injunction issued by the District Court against Southern Union, Southern Union and persons acting in concert with Southern Union have continued efforts to derail the ONEOK-Southwest merger at a critical time in the shareholder and regulatory process. On August 3, 1999, ONEOK filed a request for immediate hearing on its application for contempt citation and for an order specifically enjoining Southern Union and persons acting in concert from proceeding with the motion for temporary restraining order and preliminary injunction before the Arizona Court. A status hearing was held on August 11, 1999. On August 25, 1999, the Court denied Southern Union's motion to dismiss for lack of personal jurisdiction and motion to transfer to the District of Nevada. Southern Union was required to and did file its answer to the complaint on September 7, 1999, withdrawing its specific allegations of wrongdoing in its initial filing. In addition, Southern Union filed counterclaims against ONEOK for: (1) a declaratory judgment for fraud in the inducement and breach of the Letter Agreement; (2) a declaratory judgment for revocation of the Letter Agreement; (3) breach of the Letter Agreement and a declaratory judgment as to its non-enforceability; and (4) breach of the covenant of good faith and fair dealing. Southern Union seeks to recover damages in excess of $75,000. On August 26, 1999, ONEOK filed a motion for an emergency hearing regarding the preliminary injunction. On August 30, 1999, the Court held a hearing and took the matter under advisement. On August 31, 1999, the Court issued an order requiring Southern Union to file documents with the Court concerning its communications with the Arizona Corporation Commission. ONEOK has filed additional briefs supporting its motion. Southern Union filed additional briefs with the Tenth Circuit seeking a stay of the preliminary injunction based upon events in the other pending actions, including the subsequent remand of the Klein case. On August 23, 1999, the Tenth Circuit denied Southern Union's motion for a stay of the preliminary injunction which should leave it in place until final determination of the appeal. All briefs have been filed by the parties on the appeal as of September 1, 1999, and the appeal is awaiting decision by the Tenth Circuit. On October 12, 1999, ONEOK filed a motion to dismiss the counterclaims asserted by Southern Union in the District Court. On October 15, 1999, the District Court denied ONEOK's motion to file an amended complaint. On October 27, 1999 ONEOK filed a motion to reconsider which was denied November 4, 1999. On November 4, as a result of ONEOK's motion to dismiss, Southern Union filed an amended answer and counterclaims. In a related matter, on December 15, 1998, the case of KLEIN V. SOUTHWEST GAS CORPORATION, Superior Court of San Diego County, California, Case No. 726615, was filed as a class action against Southwest and its directors. The amended complaint alleges breach of fiduciary duty, duty of loyalty, due care, candor, good faith and fair dealing seeking to enjoin the merger between the Company and Southwest, a rescission of the merger agreement, the implementation of an auction or similar process for sale of Southwest and the voiding of the $30 million termination fee under the merger agreement. On May 4, 1999, Southern Union intervened seeking a decision that it was entitled to solicit Southwest's shareholders concerning approval of its proposed merger, rescission of a portion of the confidentiality and standstill agreement and a temporary restraining order and preliminary injunction to prevent Southwest from conducting a proxy solicitation in support of the merger during the pendency of the litigation. The case was removed to the United States District Court for the Southern District of California (Case No. 99-1004- IEG(CGA)). Southwest filed motions to dismiss the shareholder and Southern Union cases or alternatively to transfer the case to the Northern District of Oklahoma. The Shareholders' motions were heard on September 7, 1999 and August 23, 1999, respectively. Southern Union also filed a motion to remand. On June 9, 1999, Southwest signed a Memorandum of Understanding with shareholders' plaintiff counsel to settle the case with all plaintiffs except 17 18 Southern Union. The Memorandum of Understanding sets forth the parties' agreement in principle settling all shareholders' claims and is subject to several conditions, including consummation of the merger and entry of final judgment of dismissal with prejudice that is binding on all shareholders from December 11, 1998 through the date that the shareholders approve the merger. On June 25, 1999, the Klein plaintiffs filed a third amended complaint and withdrew the motion to remand the case back to state court. On the same day, Southwest withdrew its motion to dismiss the Klein plaintiffs' claims and motion to transfer the case to Oklahoma as to the Klein plaintiffs. On August 3, 1999, the United States District Court remanded the case back to state court. Southern Union immediately filed a motion for a temporary restraining order seeking to delay the Southwest shareholders' meeting scheduled for August 10, 1999. A hearing was held on the motion on August 5, 1999 at which time the court denied the motion for a temporary restraining order. On September 3, 1999, the Court granted Southwest's motion to stay pending resolution of the federal court actions in Nevada and Arizona. On September 13, 1999, Southern Union requested an ex parte hearing on the order granting stay which was denied. However, the Court did allow Southern Union to file a 5-page brief on its request which appears to be a motion to reconsider the stay. Southwest was allowed and filed a response brief on September 22, 1999. On September 24, 1999, the Court dismissed the Southern Union action and stated that Southern Union could not refile until the federal court actions are complete. SOUTHERN UNION COMPANY V. SOUTHWEST GAS CORPORATION, et al., No. CIV 99 1294 PHX ROS, United States District Court for the District of Arizona. On July 19, 1999, the plaintiff, Southern Union Gas Company ("Southern Union"), filed its complaint against Southwest Gas Corporation ("Southwest"), ONEOK, Inc. ("ONEOK"), Michael O. Maffie, Thomas Y. Hartley and Thomas R. Sheets (jointly "Southwest Individual Defendants") and Eugene N. Dubay and John A. Gaberino, Jr. (jointly "ONEOK Individual Defendants"), James M. Irvin ("Irvin") and Jack D. Rose ("Rose"). Southern Union alleges (1) that the action arises out of a fraud and racketeering scheme by Southwest and ONEOK and the individual defendants to block Southwest's shareholders from voting for Southern Union's offer to acquire Southwest and ensure that only ONEOK's offer would be approved, (2) the defendants entered into a secret campaign of deception, corruption and misrepresentation with members of regulatory commissions in order to influence their vote on the Southern Union proposal to acquire Southwest and to mislead the board and shareholders of Southwest to believe falsely that such an acquisition would face greater regulatory hurdles than the proposed Southwest-ONEOK merger, (3) Southwest and Southwest Individual Defendants fraudulently induced Southern Union to enter into a Confidentiality and Standstill Agreement (the "Agreement") with Southwest, and (4) that corruption and fraud were necessary to defeat the Southern Union offer. The complaint alleges numerous causes of action including (1) racketeering in violation of 18 U.S.C. Section 1962(c) and 1962(d), unlawful activity in violation of Arizona Criminal Code through a pattern of unlawful activities predicated on acts of extortion and a scheme or artifice to defraud against all defendants and conspiracy, (2) fraud in the inducement, breach of contracts, violation of the Securities Exchange Act of 1934, breach of covenant of good faith and fair dealing and rescission of the Agreement against Southwest, and (3) intentional interference with a business relationship and tortious interference of a contractual relationship against ONEOK, the ONEOK Individual Defendants, the Southwest Individual Defendants, Rose and Irvin. The complaint asks for the award of an amount of not less than $750,000,000 to be trebled for racketeering and unlawful violations (with attorneys' fees and investigators' fees); compensatory damages of not less than $750,000,000 for fraud in the inducement, breach of contract, breach of covenant of good faith and fair dealings, intentional interference with a business relationship, tortious interference with contractual relationship and civil conspiracy (with interest and costs); rescission of the Agreement (with costs), punitive damages, injunctive relief under the Securities Act of 1934 and any further relief the court deems just and proper. On August 2, 1999, Southern Union filed a motion with the district court for a temporary restraining order and preliminary injunction requesting, among other things, that ONEOK and Southwest be enjoined from participating in any regulatory approval procedures before the Arizona Corporation Commission or the California Public Utility Commission regarding approval of the pending ONEOK-Southwest Merger and from otherwise proceeding with or consummating the proposed merger. The motion was later modified to limit the request to the regulatory matters. A hearing was held on the motion on August 5, 1999 at which time the judge denied the motion for a temporary restraining order. On August 27, 1999, motions to dismiss the complaint for failure to state a cause of action were filed on behalf of ONEOK and the other defendants who had been served. Thomas R. Sheets with Southwest had previously been dismissed from the action. Rather than respond to the motion, on October 12, 1999, Southern Union filed an 18 19 amended complaint asserting the same claims as the earlier complaint. Larry Brummett and James C. Kneale were added as additional defendants. The Company has filed a new motion to dismiss. SOUTHWEST GAS CORPORATION MERGER. There are proceedings in process before the Arizona Corporation Commission, Public Utility Commission of California and the Public Utility Commission of Nevada requesting authorization to implement the Agreement and Plan of Merger, dated December 14, 1998, as amended. On July 1, 1999, the Public Utility Commission of Nevada issued an order approving the merger transaction. On July 30, 1000, a settlement conference was held and a settlement document filed in the merger approval proceeding before the Public Utility Commission of California. No comments were received during the 30-day comment period. The Company anticipates the California settlement will be considered for approval by year end. The Arizona Corporation Commission ("ACC") issued a procedural schedule on October 22, 1999 setting the application for merger approval for hearing on February 11, 2000. ONEOK, Southwest, the ACC staff and Arizona's consumer advocate have filed a stipulation and agreement recommending that the transaction be approved. JOINT APPLICATION OF OKLAHOMA NATURAL GAS COMPANY, A DIVISION OF ONEOK, INC., ONEOK GAS TRANSPORTATION COMPANY, A DIVISION OF ONEOK, INC., AND KANSAS GAS SERVICE COMPANY, A DIVISION OF ONEOK, INC., FOR APPROVAL OF THEIR UNBUNDLING PLAN FOR NATURAL GAS SERVICES UPSTREAM OF THE CITY GATES OR AGGREGATION POINTS, Cause PUD No. 980000177, before the Oklahoma Corporation Commission. On April 1, 1998, the Divisions filed a joint application to unbundle natural gas services upstream of the city gate. The following parties were granted intervention: Attorney General, Enogex, Inc., Public Service Company of Oklahoma, Transok, LLC, Williams Gas Pipelines Central, Inc., American Central Energy, LLC, Conoco, Inc., Oklahoma Industrial Energy Consumers, Williams Energy Services Company. A hearing was held on the merits before a Special Referee beginning July 6, 1998 and continuing through July 16, 1998. An Order was entered by the Commission on July 31, 1998. On August 6, 1998, a petition-in-error was filed with the Oklahoma Supreme Court appealing the order of the Commission. The Commission filed a motion to dismiss with the Oklahoma Supreme Court on August 17, 1998. The Commission issued an amended order on August 19, 1998, which the Company alleges is invalid due to the pending appeal. On September 1, 1998, the Company filed a response to the motion to dismiss of the Commission. On September 8, 1998, the Company filed a petition-in-error with the Oklahoma Supreme Court appealing the amended order. On October 5, 1998, the Oklahoma Supreme Court determined that the interim order was an appealable order and denied the motions to dismiss the appeal. In respect to the amended interim order, on October 22, 1998, the Oklahoma Supreme Court issued an order direction that the motion to dismiss the appeal filed by the Commission be withdrawn as moot and that the Company's motion to dismiss the petition was held in abeyance until the decision stage of the appeal. The Company filed its brief on April 19, 1999. On June 4, 1999, the Company and the Oklahoma Corporation Commission filed a joint motion in the Oklahoma Supreme Court to stay further appellate proceedings and for leave to proceed before the Commission. A joint stipulation was entered into and approved by the Oklahoma Corporation Commission. The joint stipulation established a process pursuant to which hearings would be conducted to identify the distribution, transmission, storage and gathering assets of ONEOK and to deregulate gathering and storage services if the Commission determines that competition exists for such services. The joint stipulation provides that the Company will dismiss its appeal upon the satisfaction of certain conditions. In light of the joint stipulation, the Company and the Commission Staff requested that the Supreme Court stay further appellate proceedings and allow the parties to proceed before the Commission. A stay was granted until August 31, 1999. On September 8, 1999, the Supreme Court granted a motion to further extend the stay until October 15, 1999, to allow the parties to work toward a resolution of the issues. On October 21, 1999, the Supreme Court granted a stay for an additional 20 days. As settlement had not been reached by the parties, the Company filed a motion to extend the stay until conclusion of the Commission proceeding. On November 2, 1999, the Supreme Court directed the parties to respond to its motion by November 17, 1999. Also on November 5, 1999, the commission staff filed a response to the motion and a motion to dismiss the appeal as moot. APPLICATION OF ERNEST G. JOHNSON, DIRECTOR OF THE PUBLIC UTILITY DIVISION, OKLAHOMA CORPORATION COMMISSION, TO REVIEW THE RATES, CHARGES, SERVICES AND SERVICE TERMS OF OKLAHOMA NATURAL GAS COMPANY, A DIVISION OF ONEOK, INC., AND ALL AFFILIATED COMPANIES AND ANY AFFILIATE OR NONAFFILIATE TRANSACTION RELEVANT TO SUCH INQUIRY, Cause PUD No. 980000683, Oklahoma Corporation Commission. On December 18, 1998, the Director of 19 20 the Commission's Public Utility Division filed an application on behalf of the Commission Staff to initiate a proceeding to review Oklahoma Natural's rates, charges, and services and any relevant affiliate and non-affiliate transactions, and to establish rates upon completion of such review. On May 13, 1999, the Company and the Commission Staff entered into a joint stipulation, which was orally approved by the Commission on May 26, 1999. Pursuant to the joint stipulation, the rates to customers of Oklahoma Natural Gas Company and Kansas Gas Service Company would be reduced by $5 million, which would be in lieu of the interim hearing. The joint stipulation also set up a process for the resolution of other issues presented in this case and Oklahoma Natural Gas Company's rate case (Cause PUD No. 990000166), which is consolidated with this case, including whether utility rate regulation for gathering and storage services should be discontinued if competition is determined to exist. Oklahoma Natural Gas Company will competitively bid for gas supply for the 1999-2000 heating season, and will competitively bid for upstream transportation services this fall, with service to commence November 1, 2000. On June 16, 1999, however, the joint stipulation was rejected by the Commission. On July 1, 1999, the Company filed a motion to approve a new joint stipulation. The principal difference between the new stipulation and the prior joint stipulation is that the $5 million interim rate reduction would be credited to residential customers only on the September, 1999 billing. The stipulation was signed by the other parties to the proceeding except the Attorney General of the State of Oklahoma. The Corporation Commission issued an order approving the stipulation on July 9, 1999. The Attorney General filed for a writ of prohibition from the Oklahoma Supreme Court. On July 12, 1999, the Oklahoma Supreme Court denied the Attorney General's emergency motion to stay the Commission hearings pertaining to deregulation of the Company's gathering and storage assets. The hearings proceeded and the Commission issued an order on July 15, 1999, deregulating the gathering and storage assets effective November 1, 1999. Hearings were held on August 24 and 25, 1999, pursuant to the stipulation to identify and designate the Company's distribution and transmission assets. Subsequent to the hearing, a distribution and transmission stipulation was executed by Oklahoma Natural Gas Company, ONEOK Gas Transportation, L.L.C., Enogex, Transok and the Attorney General which designated assets as either upstream transmission assets or downstream distribution assets and addressed competitive bidding. The stipulation was approved unanimously by the Commission and an order issued August 30, 1999. On September 20, 1999, Oklahoma Natural Gas filed updated financial information and requested a $33.6 million rate increase. 20 21 ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS (A) MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of the Company's security holders, through the solicitation of proxies or otherwise. (B) EXECUTIVE OFFICERS OF THE REGISTRANT All executive officers are elected at the annual meeting of directors and serve for a period of one year or until their successors are duly elected.
NAME AND POSITION AGE BUSINESS EXPERIENCE IN PAST FIVE YEARS - ----------------- ----- -------------------------------------- LARRY W. BRUMMETT 49 1997 to present Chairman of the Board of Directors and Chief Executive Officer Chairman of the Board 1994 to 1997 Chairman of the Board of Directors, President, and Chief Executive and Chief Executive Officer Officer - ------------------------------------------------------------------------------------------------------------------------------ DAVID L. KYLE 47 1997 to present President and Chief Operating Officer President of ONEOK 1995 to present Member of the Board of Directors and Chief Operating Officer 1994 to 1997 President and Chief Operating Officer of Oklahoma Natural Gas Company - ------------------------------------------------------------------------------------------------------------------------------ JOHN A. GABERINO, JR. 58 1998 to present Senior Vice President and General Council Senior Vice President 1994 to 1998 Stockholder, Officer and Director of Gable Gotwals Mock Schwabe Kihle and General Council Gaberino and predecessor firms - ------------------------------------------------------------------------------------------------------------------------------ JAMES C. KNEALE 48 1999 to present Vice President, Treasurer, and Chief Financial Officer (Principal Vice President, Treasurer, Financial and Accounting Officer) and Chief Financial Officer 1997 to 1999 President and Chief Operating Officer of Oklahoma Natural Gas Company (Principal Financial and 1996 to 1997 Vice President of ONEOK Resources Company Accounting Officer) 1995 to 1996 Vice President - Tulsa District of Oklahoma Natural Gas Company 1994 to 1995 Vice President - Accounting of Oklahoma Natural Gas Company - ------------------------------------------------------------------------------------------------------------------------------ BARRY D. EPPERSON 54 1997 to present Vice President, Controller, and Chief Accounting Officer Vice President, Controller, 1994 to 1997 Vice President - Accounting of Oklahoma Natural Gas Company and Chief Accounting Officer - ------------------------------------------------------------------------------------------------------------------------------ EUGENE N. DUBAY 50 1997 to present President and Chief Operating Officer of Kansas Gas Service Company President and Chief Operating 1996 to 1997 Vice President of Corporate Development Officer of Kansas Gas Service 1994 to 1995 Executive Vice President and Chief Operating Officer of Missouri Gas Company Energy - ------------------------------------------------------------------------------------------------------------------------------ EDMUND J. FARRELL 56 1999 to present President and Chief Operating Officer of Oklahoma Natural Gas Company President and Chief Operating 1997 to 1999 Vice President of ONEOK Gas Marketing Company Officer of Oklahoma Natural Gas 1996 to 1997 Vice President - Customer Services of Oklahoma Natural Gas Company Company 1995 to 1996 Vice President - Corporate Communications and Strategic Planning 1994 to 1995 President of Oklahoma Alliance for Manufacturing Excellence, Inc. - ------------------------------------------------------------------------------------------------------------------------------
21 22 PART II. ITEM 5. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS (A) MARKET INFORMATION The Company's common stock is listed on the New York Stock Exchange under the trading symbol OKE. The corporate name ONEOK is used in newspaper stock listings. The high and low market prices of the Company's common stock for each fiscal quarter during the last two fiscal years were as follows:
1999 1998 --------------------- ---------------------- HIGH LOW High Low -------- --------- -------- --------- First Quarter $37 15/16 $ 29 15/16 $ 37 5/8 $31 3/16 Second Quarter $37 3/16 $ 26 $ 40 11/16 $33 3/8 Third Quarter $30 1/2 $ 24 1/2 $ 44 1/4 $34 5/8 Fourth Quarter $33 1/8 $ 29 3/16 $ 40 15/16 $29 3/4
(B) HOLDERS There were 11,485 holders of the Company's common stock at August 31, 1999. (C) DIVIDENDS Quarterly dividends declared on the Company's common stock during the last two fiscal years were as follows:
1999 1998 ------ ------ First Quarter $0.31 $ 0.30 Second Quarter $0.31 $ 0.30 Third Quarter $0.31 $ 0.30 Fourth Quarter $0.31 $ 0.30
Debt agreements pursuant to which the Company's outstanding long-term and short-term debt has been issued limit dividends and other distributions on the Company's common stock. Under the most restrictive of these provisions, $50.1 million of retained earnings is so restricted. On August 31, 1999, $251.4 million was available for dividends on the Company's common stock. ITEM 6. SELECTED FINANCIAL DATA Following are selected financial data for the Company for each of the last five years.
1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- (Millions of Dollars, except per share amounts) Operating Revenues $ 1,842.8 $1,820.8 $1,161.9 $1,218.8 $ 954.2 Operating income $ 219.6 $ 188.8 $ 128.1 $ 115.2 $ 105.2 Net income $ 106.4 $ 101.8 $ 59.3 $ 52.8 $ 42.8 Total assets $ 3,024.9 $2,422.5 $1,237.4 $1,219.9 $1,181.2 Long-term debt $ 837.0 $ 329.3 $ 347.1 $ 351.9 $ 363.9 Diluted earnings per share $ 2.06 $ 2.23 $ 2.13 $ 1.93 $ 1.58 Dividends per common share $ 1.24 $ 1.20 $ 1.20 $ 1.18 $ 1.12 Percent of payout 60.2% 53.8% 56.2% 61.1% 70.9% Ratio of earnings to fixed charges 4.06X 5.50x 3.51x 3.28x 2.70x Ratio of earnings to combined fixed charges 1.93X 2.52x 3.48x 3.24x 2.67x and preferred stock dividend requirements
22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K (and certain other documents that are incorporated by reference in this Form 10-K) contains statements concerning Company expectations or predictions of the future that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are intended to be covered by the safe harbor provision of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are based on management's beliefs and assumptions based on information currently available. It is important to note that actual results could differ materially from those projected in such forward- looking statements. Factors that may impact forward-looking statements include, but are not limited to, the following: o the effects of weather and other natural phenomena; o increased competition from other energy suppliers as well as alternative forms of energy; o the capital intensive nature of the Company's business; o economic climate and growth in the geographic areas in which the Company does business; o the uncertainty of gas and oil reserve estimates; o the timing and extent of changes in commodity prices for natural gas, natural gas liquids, electricity, and crude oil; o the nature and projected profitability of potential projects and other investments available to the Company; o conditions of capital markets and equity markets; o Year 2000 issues; o the effects of changes in governmental policies and regulatory actions, including income taxes, environmental compliance, authorized rates, and deregulation or "unbundling" of natural gas business; o the pending merger with Southwest Gas Corporation (Southwest); and o regulatory delay or conditions imposed by regulatory bodies in, and the results of litigation involving, the Southwest merger. Accordingly, while the Company believes these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in Company documents, the words "anticipate", "expect", "projection", "goal", or similar words are intended to identify forward-looking statements. The Company does not have any intention or obligation to update forward-looking statements after they distribute this Form 10-K even if new information, future events or other circumstances have made them incorrect or misleading. OPERATING ENVIRONMENT AND OUTLOOK Management believes changes in the natural gas business have and will continue to significantly affect the manner in which natural gas and related services are marketed. Through a strategic review of its business and of ongoing developments in the natural gas distribution and energy related industry regarding competition, regulation, and consolidation, management concluded that the domestic natural gas business was undergoing a process of deregulation which would lead, over the next several years, to "unbundling" of services at the residential level. Management further concluded that markets for electricity and natural gas were converging and consolidating and that these trends and competition for customers would alter the structure and business practices of companies serving these markets in the future. In order to better position the Company competitively, management determined that it should seek both to expand its current operations and to become a provider of energy services not limited to natural gas through acquisitions or strategic alliances with companies that would enhance and expand its natural gas distribution, marketing, production, gathering, processing and transportation business. In a step toward this goal, ONEOK Power Marketing has begun construction of a $90 million electric generation plant. Gas powered and located near one of the Company's underground gas storage facilities, the plant will be designed to provide peaking capacity. 23 24 The Company continues to take steps to strengthen its competitive edge and position it to be a leader in the industry. The pending merger of the Company and Southwest is another of these steps. The merger will create the largest stand-alone gas distribution company in the United States serving 2.6 million customers in five states. The transaction is expected to be completed during 2000, subject to various conditions including regulatory approvals. Southwest shareholders approved the agreement on August 10, 1999. The Company and certain of its officers as well as Southwest have been named as defendants in a lawsuit brought by Southern Union Company in connection with the proposed acquisition in the total amount of $750 million. The Southern Union allegations include, but are not limited to, Racketeer, Influenced and Corrupt Organizations Act violations and improper interference in a contractual relationship between Southwest and Southern Union. The Company, as third party beneficiary, has filed a lawsuit against Southern Union for breach of a confidentiality agreement with Southern Union and Southwest. The parties are presently involved in discovery. The Company believes the Southern Union allegations are without merit and is defending itself vigorously against all claims. As a result of the acquisition of the gas business of Western Resources, Inc. (Western) November, 1997, the Company became the eighth largest natural gas distributor in the country serving approximately 1.4 million customers in two states. The Company continues to increase its investment in hydrocarbon reserves in its service territory, focusing on exploitation activities rather than exploratory drilling, and has increased its ownership of gathering and processing facilities in areas where it owns significant natural gas production and development acreage. The Company anticipates growth through acquisition opportunities that will add value to all of the Company's operations. The Company also sells assets from time to time when deemed less strategic or as other conditions warrant. OPERATING HIGHLIGHTS UNBUNDLING - Unbundling has the potential to enhance customer choices, provide savings to consumers, increase throughput, and allow broader use of the Company's assets. In January, 1998, the Oklahoma Corporation Commission (OCC) approved rule-making for the restructuring of Oklahoma's natural gas utility industry. Under the rules, the Company is required to unbundle its upstream (transportation) activities. During the fourth quarter of fiscal 1999, the OCC approved a plan distinguishing between upstream and downstream (distribution) activities, a plan which laid the groundwork for unbundling of services. Under a July, 1999, order by the OCC, certain of the Company's gathering and storage assets will be removed from utility regulation effective November 1, 1999. The Company has withdrawn its appeal to the Oklahoma Supreme Court related to the OCC's earlier unbundling order. The Company awarded bids for gas supply in Oklahoma for the 1999/2000 heating season. On November 1, 1999, the Company will issue bids for transportation and supply for two to five year terms beginning with the 2000/2001 heating season. In Kansas, the Company received approval from the Kansas Corporation Commission (KCC) in April, 1999 to reduce the minimum requirement for transportation service to 3,000 Mcf annually from 6,000 Mcf annually allowing more customers to choose their natural gas supplier. This will allow the Company to expand transportation services to an additional 650 commercial and industrial customers. The KCC also approved a proposal that would allow approximately 1,000 schools the opportunity to transport gas supplies. 24 25 CONSOLIDATED OPERATIONS
1999 1998 1997 ----------- ----------- ----------- (Thousands of Dollars) FINANCIAL RESULTS Operating revenues $ 1,842,810 $ 1,820,758 $ 1,161,927 Cost of gas 1,156,024 1,220,009 725,960 ----------- ----------- ----------- Net Revenue 686,786 600,749 435,967 Operating costs 337,499 310,285 233,343 Depreciation, depletion, and amortization 129,704 101,653 74,509 ----------- ----------- ----------- Operating income $ 219,583 $ 188,811 $ 128,115 =========== =========== =========== Other income $ 6,639 $ 14,644 $ -- =========== =========== ===========
RESULTS OF OPERATIONS - The Company's operations showed gains for the year, despite weather which was warmer than normal. Operating income increased for all segments except Distribution in fiscal 1999. These increases reflect the effect of additional gas reserves acquired, additional gathering revenues from acquisitions, operational changes and efficiencies, general market conditions and an aggressive marketing campaign by the Company's gas marketing operation. For the year, operating income increased 16.3 percent over 1998. During 1998, the Company's operations showed strong gains for the year as a result of the Company's acquisition strategy and operating efficiencies achieved. Acquisition of the gas business from Western added $45 million to operating income for the last three quarters of fiscal 1998 despite a warmer than normal winter. The majority of this increase is reflected in the Distribution segment which increased $37.7 million (57.2 percent) over 1997. The Transportation and Storage segment and the Marketing segment also benefitted from the Western transaction. Other income of $14.6 million represents the gain on the sale of certain gas processing plants. RISK MANAGEMENT - To minimize the risk from fluctuations in the price of natural gas, oil, natural gas liquids (NGLs) and weather, the Company uses derivative instruments such as future contracts, swaps, and options (collectively, derivatives) to hedge existing physical gas inventory, purchase or sale commitments, and degree days. None of these derivatives are held for speculative purposes and, in general, the Company's risk management policy requires that positions taken with derivatives be offset by positions in physical transactions or other derivatives. KGS uses derivatives to hedge the cost of anticipated gas purchases during the winter heating months to protect its customers from upward volatility in the market price of natural gas. The gain or loss resulting from such derivatives is combined with the physical cost of gas and recovered from the customer through the gas purchase clause in rates. The Company's Production segment utilizes derivatives in order to hedge anticipated sales of oil and natural gas production. With the use of derivatives, the Company is able to set the price to be received for the future production thus eliminating the risk of declining market prices between the origination date of the derivative and the month of production. The Company's strategy in hedging anticipated transactions is to eliminate the variability in earnings of its Production segment as a result of market fluctuations. To the extent that management does not terminate a hedge or enter into an opposing derivative, the current strategy will limit the potential gains which could result from increases in market prices above the level set by the hedge. The Company adheres to policies and procedures which limit its exposure to market risks from open positions and monitors daily its exposure to market risk. The results of the Company's derivative trading activities continue to meet its stated objectives. For further discussion, see Item 7A - Quantitative and Qualitative Disclosures About Market Risk and Note C of "Notes to Consolidated Financial Statements." YEAR 2000. The Year 2000 (Y2K) issue arose because most computer systems, including application software (IT applications) and computer technology embedded in plant and equipment (Embedded Technology) were constructed using a two digit date field that assumed the first two digits are always "19". On January 1, 2000, these systems may 25 26 incorrectly recognize the date as January 1, 1900. Some IT applications and Embedded Technology may incorrectly process critical financial and operating information or stop processing altogether. Management, under the direction of the Board of Directors, has implemented a program to proactively address the Y2K challenge. Beginning in 1996, the Company inventoried existing programs and systems and began the conversion process that is designed to make the Company Y2K compatible. The Company installed a new IBM Year 2000 compatible mainframe computer in August 1997. The Company believes that it has fully identified and remediated its critical automated business systems and the sensitive equipment for Y2K readiness. Testing of the remediated systems and equipment is underway and will continue throughout the remainder of 1999. The Company has assessed its operational risks related to suppliers and vendors with whom it conducts business. Based on this assessment, the Company has completed the process of contacting suppliers and vendors with whom the Company conducts business concerning their state of readiness and plans to complete Y2K compatibility of their systems. The Company tests such third-party compliance to the extent deemed reasonable and necessary to determine compliance. The primary business risk associated with Y2K is the Company's ability to continue to transport and distribute gas to its customers without significant interruption. In the event the Company and/or its suppliers and vendors are unable to remediate the Y2K problem prior to January 1, 2000, operations of the Company could be significantly impacted. In order to mitigate this risk, the Company has developed contingency plans to continue operations through January 1, 2000 and beyond. The contingency plans include strategically located backup electric generators, alternative telecommunication systems, including cellular phones, radios and satellite phones, key personnel meeting sites and command centers, establishment of natural gas service curtailment and rerouting procedures, computer record backup systems and specific staffing for manual operation of key supply points. In May 1999, the Company completed the asset acquisition from Koch Midstream Enterprises. The Company contracted with an independent third party to inventory, assess, and remediate the assets acquired to assure Y2K compliance. This work has been completed and reviewed by the Company. The Company believes its essential systems and equipment are ready for the Year 2000 and should be able to provide uninterrupted service provided its key vendors and suppliers are Y2K ready. There can be no assurance that the Company's systems will work entirely as anticipated, or that the systems of other companies on which the Company relies, will be converted in a timely manner or that any such failure to be Y2K ready would not have a material adverse effect on the Company operations, liquidity and financial conditions. The Company's direct cost to date is approximately $1.7 million for Y2K conversion. This does not include the cost of programs and equipment that are being replaced in the ordinary course of business that are Y2K compatible. The Company estimates it will spend an additional $300,000 in direct costs. ACCOUNTING POLICIES - For the periods presented, certain operations of the Company are subject to accounting requirements of the OCC, KCC, and the provisions of Statement of Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation." Accordingly, the allocation of costs and revenues to accounting periods for ratemaking and regulatory purposes may differ from those generally applied by companies not regulated. Such allocations to meet regulatory accounting requirements are considered to be generally accepted accounting principles for regulated utilities provided that there is a demonstrable ability to recover any deferred costs in future rates. Pursuant to the provisions of SFAS No. 71, the regulated operations of the Company have recognized regulatory assets of $246.7 million, of which $108.0 million is not currently being recovered in rates and has not been subject to filing and/or approval in a rate proceeding. As the Company continues to unbundle its services, certain of these assets will no longer meet the criteria for following SFAS No. 71, and accordingly, a write-off of regulatory assets and stranded costs may be required. The Company does not anticipate these costs will be significant. 26 27 SEGMENT OPERATIONS - The Company revised its presentation of business segment information beginning with this Form 10-K. The former regulated operations are now reported in two different segments; the Distribution segment and the Transportation and Storage segment. ONEOK Producer services is now reported in the Transportation and Storage segment rather than the Gathering and Processing operation as before. Transportation operations previously reported as part of the production operation and the marketing operation have been transferred to the Transportation and Storage segment. Prior periods have been restated to reflect these changes. The following segments characterize the Company's business units: o Distribution o Transportation and Storage o Marketing o Gathering and Processing o Production o Other DISTRIBUTION The Distribution segment provides natural gas distribution services in Oklahoma and Kansas. The Company's operations in Oklahoma are conducted through Oklahoma Natural Gas Company Division (ONG) which serves residential, commercial, and industrial customers and leases pipeline capacity. The Company's operations in Kansas are conducted through Kansas Gas Service Company Division (KGS) which serves residential, commercial, and industrial customers. KGS also conducts regulated gas distribution operations in northeastern Oklahoma. The Distribution segment serves about 80 percent of Oklahoma and about 67 percent of Kansas. ONG is subject to regulatory oversight by the OCC. KGS is subject to regulatory oversight by the KCC and the OCC. Assets of $972.6 million were acquired through the transaction with Western in the 1998 fiscal year.
1999 1998 1997 --------- --------- --------- (Thousands of Dollars) FINANCIAL RESULTS Gas sales $ 848,813 $ 883,786 $ 544,884 Cost of gas 519,566 585,452 369,853 --------- --------- --------- Gross margin on gas sales 329,247 298,334 175,031 PCL and ECT revenues 58,037 60,658 38,103 Other revenues 17,100 19,384 12,118 --------- --------- --------- Net revenues 404,384 378,376 225,252 Operating costs 230,868 208,513 116,325 Depreciation, depletion, and amortization 75,443 66,214 42,980 --------- --------- --------- Operating Income $ 98,073 $ 103,649 $ 65,947 ========= ========= ========= 1999 1998 1997 --------- --------- --------- GROSS MARGIN PER McF Oklahoma Residential $ 3.04 $ 2.99 $ 2.94 Commercial $ 2.47 $ 2.40 $ 2.19 Industrial $ 1.23 $ 1.13 $ 0.95 Pipeline capacity leases $ 0.25 $ 0.24 $ 0.19 Kansas Residential $ 2.44 $ 2.24 - Commercial $ 1.81 $ 1.75 - Industrial $ 2.28 $ 1.92 - End-use customer transportation $ 0.49 $ 0.56 - ------- ------ ------
27 28
1999 1998 1997 ---------- ---------- ---------- OPERATING INFORMATION Number of customers Oklahoma 748,445 739,684 733,621 Kansas 656,761 652,330 -- ---------- ---------- ---------- Total 1,405,206 1,392,014 733,621 ========== ========== ========== Capital expenditures (Thousands) Oklahoma $ 39,631 $ 41,059 $ 39,825 Kansas 59,054 36,139 -- ---------- ---------- ---------- Total $ 98,685 $ 77,198 $ 39,825 ========== ========== ========== Total assets (Thousands) $1,722,381 $1,771,999 $ 855,587 ========== ========== ========== Customers per employee Oklahoma 546 475 477 Kansas 510 489 -- ---------- ---------- ----------
OPERATIONAL HIGHLIGHTS - The Company dominates the core energy service markets in Oklahoma and Kansas with over a 90 percent market share for water heating, cooking, and home heating. Annual cost comparisons with electricity for these same services in Oklahoma and Kansas indicate that gas costs were at least 50 percent less, the largest difference being in home heating at 70 percent less. On a gas to gas comparison, the Company's rates in Oklahoma and Kansas were lower than the regional and national averages for residential, firm industrial, and interruptible service. The transaction with Western in the 1998 fiscal year added approximately 660,000 new distribution customers and 1,400 employees. Cost controls were strengthened throughout the organization. Total employees were reduced through attrition without compromising customer safety or service. REGULATORY INITIATIVES - In August, 1999, the OCC approved a plan to distinguish between upstream and downstream activities in Oklahoma. The Company began taking bids for transportation services this fall with bids to be awarded in spring 2000 for service beginning November 1, 2000. As contracts with PCL customers expire, these contracts may be renewed with the Distribution segment, the Transportation and Storage segment of the Company or nonaffiliated service providers. Consequently, this could result in reduced revenues in the Distribution segment. Two rate cases were combined in Oklahoma, eliminating an interim rate case scheduled for the summer of 1999 and providing for a one-time interim rate reduction beginning September 1, 1999 of $5 million for residential customers in Oklahoma. Hearings on the consolidated rate case are scheduled for spring 2000. In April, 1999, the Company received approval from the KCC to reduce the minimum requirement for transportation service to 3,000 Mcf annually from 6,000 annually allowing more customers to choose their natural gas supplier. The KCC also approved a proposal that would allow approximately 1,000 schools the opportunity to transport gas supplies. Also in 1999, approval was received to expand the Company's WeatherProof Bill program to all residential and commercial customers in Kansas. Customers electing to use this program will receive a set bill each month based on the customer's projected average usage. CAPITAL EXPENDITURES - The Company's capital expenditure program includes expenditures for extending service to new areas, increasing system capabilities, and general replacements and betterments. It is the Company's practice to maintain and periodically upgrade facilities to assure safe, reliable, and efficient operations. The capital expenditure program included $19.8 million, $15.6 million and $10.4 million for new business development in 1999, 1998 and 1997, respectively. 28 29 OPERATING RESULTS - Fiscal 1999 was the first complete year of service to the 660,000 customers added in the Western acquisition. However, warmer than normal weather, particularly in Kansas which was 16 percent warmer than normal and where there is no temperature normalization, reduced net revenues and more than offset the effect of having a full twelve months of gas sales volumes and revenues. Operating costs and depreciation, depletion and amortization increased in fiscal 1999 due to having the acquisition recorded for one full year compared to nine months for fiscal 1998. Operating costs per customer on a weighted average basis decreased to $164.29 in fiscal 1999 from $169.67 in fiscal 1998. This is a decrease of $5.38 per weighted average customer or 3.2%. Net revenues and operating expenses increased in 1998 fiscal year over 1997 fiscal year primarily due to inclusion of KGS's operations in fiscal 1998. The statistics presented for the 1998 fiscal year include volumes attributable to KGS since December 1, 1997. 1999 1998 1997 ------- ------- ------ VOLUMES (MMcf) Gas sales Residential 105,566 103,700 58,241 Commercial 41,398 42,486 29,408 Industrial 5,575 7,304 11,384 PCL and ECT 212,547 241,262 173,134 ------- ------- ------- Total gas sales, PCL and ECT 365,086 394,752 272,167 ======= ======= ======= TRANSPORTATION AND STORAGE OPERATIONAL HIGHLIGHTS - A $10 million project to increase the capacity of the two storage fields in Kansas is scheduled for completion in 2000. Total storage capacity in Kansas will be increased by almost 40 percent to 6.3 Bcf. A $3.4 million expansion is expected to increase deliverability from the Depew storage field in Oklahoma by spring 2000. In 1998, work was completed which increased injection capabilities by 70 percent and increased withdrawal capabilities by over 80 percent in one Oklahoma storage field. In another Oklahoma storage field, the injection capabilities were increased by 50 percent and the withdrawal capabilities were doubled. 1999 1998 1997 --------- -------- -------- (Thousands of Dollars) FINANCIAL RESULTS Transportation revenues $ 73,521 $ 68,759 $ 68,167 Storage revenues 27,763 14,772 -- Other revenues 8,102 7,170 2,332 --------- -------- -------- Net revenues 109,386 90,701 70,499 Operating costs 33,894 31,052 28,136 Depreciation, depletion, and amortization 13,852 12,818 8,395 --------- -------- -------- Operating income $ 61,640 $ 46,831 $ 33,968 ========= ======== ======== 1999 1998 1997 --------- -------- -------- OPERATING INFORMATION Volumes transported (MMcf) 307,726 340,059 313,074 Current gas in storage (MMcf) 1,014 804 -- Capital expenditures (Thousands) $ 32,618 $ 50,271 $ 27,922 Total assets (Thousands) $ 373,742 $ 351,692 $221,233 --------- --------- -------- REGULATORY INITIATIVES - Under a July, 1999, order by the OCC, the Company's gathering and storage assets and services in Oklahoma will be removed from utility regulation effective November 1, 1999. Gathering and storage assets, including current gas in storage, of $325.0 million will be removed from rate base. In August, 1999, the OCC approved a plan that distinguishes between upstream and downstream assets. The Distribution segment issued bids for these services in the fall of 1999 with bids to be awarded in the spring of 2000. With unbundling and deregulation of gathering and storage service the Company will be able to compete for business at market-based rates. 29 30 OPERATING RESULTS - The Company's strategy to increase its storage utilization and its injection and withdrawal capabilities has created opportunities for increased earnings. In 1999,volumes transported decreased while prices increased and volumes stored, along with the related prices, increased in fiscal 1999 over fiscal 1998. Increased injection and storage capabilities led to the increase storage revenues. In fiscal 1998, margins from gas stored for others increased operating income by $14.8 million over fiscal 1997. In fiscal 1998, gas volumes transported increased but were offset by decreased prices. MARKETING OPERATIONAL HIGHLIGHTS - The Company's marketing operation purchases, stores and markets natural gas at both the retail and wholesale level, primarily in the producing areas of the United States. The Company continues to develop its niche into new market areas by arbitraging storage in the day trading market rather than focusing on the baseload market. Gas volumes increased in 1999 primarily from the Company's expansion into the Permian/Waha region of the United States. The Company now leases from others more than 29 Bcf of storage capacity which gives direct access to the west coast and Texas intrastate markets. Construction of a 300 megawatt electric power plant has been approved by the Company's Board of Directors. The plant, to be located in Logan County, Oklahoma, adjacent to a Company natural gas storage facility, will be configured to supply electric power during peak periods with four gas-powered turbine generators manufactured by General Electric. Application has been made with the Oklahoma Air Quality Board for a permit, and the plant is expected to be operational June, 2001. In 1997, the Company was the successful bidder to serve four gas-fired electric generating plants owned by Public Service Company of Oklahoma.
1999 1998 1997 --------- --------- --------- (Thousands of Dollars) FINANCIAL RESULTS Gas sales $ 821,890 $ 774,455 $ 484,674 Cost of gas 789,955 758,687 470,878 --------- --------- --------- Gross margin on gas sales 31,935 15,768 13,796 Other revenues 3,508 4,159 (1,475) --------- --------- --------- Net revenues 35,443 19,927 12,321 Operating costs 9,069 7,024 3,707 Depreciation, depletion, and amortization 503 561 482 --------- --------- --------- Operating income $ 25,871 $ 12,342 $ 8,132 ========= ========= ========= 1999 1998 1997 --------- --------- --------- OPERATING INFORMATION Natural gas volumes (MMcf) 389,241 334,364 205,204 Capital expenditures (Thousands) $ 4,196 $ - $ 373 Total assets (Thousands) $ 273,491 $ 130,100 $ 64,190 --------- --------- ---------
PRICE RISK MANAGEMENT - In order to mitigate the financial risks arising from fluctuations in both the market price and transportation costs of natural gas, the Company routinely enters into natural gas futures contracts, swaps, and options as a method of protecting its margins on the underlying physical transactions. However, while not material, net open positions in terms of price, volume, and specified delivery point do occur. For further discussion, see Item 7A - Quantitative and Qualitative Disclosures About Market Risk. OPERATING RESULTS - The increase in gross margins is attributable to increased throughput and a more extensive use of storage. Warmer than normal temperatures across the country during this year's winter resulted in significant downward movement in prices which allowed the Company to take advantage of volatility. Increased sales volumes are primarily due to the expanded niche business into Texas and the west coast. The increase in operating costs is due to the additional expenses related to leasing storage and start-up costs for ONEOK Power Marketing Company. The Company has been granted a rate schedule by the Federal Energy Regulatory Commission (FERC) to trade electricity at market-based wholesale rates and has begun trading on a limited scale. 30 31 The increase in gross margins in fiscal 1998 over fiscal 1997 is primarily attributable to increased throughput due to customers added in the Western transaction and the addition of service to four gas-fired electric generating plants. Gross margins per Mcf were lower due primarily to less volatility in weather in 1998. GATHERING AND PROCESSING OPERATIONAL HIGHLIGHTS - On April 30, 1999, the Company acquired the midstream natural gas gathering and processing assets from Koch Midstream Enterprises (Koch). These assets included approximately 3,250 miles of gathering pipeline connected to 1,460 gas wells located in Oklahoma gathering approximately 350 million cubic feet per day. Also included is a 100 percent interest in eight gas processing plants with a total capacity of 515 million cubic feet per day. These plants are currently processing about 280 million cubic feet per day. The Company will add a new 25 million cubic feet per day processing plant (the Fox Plant) which will be started up in the fall of 1999. Through the Western transaction in fiscal 1998, the Company acquired the Minneola Gas Processing Plant located in Kansas and an additional 34 percent interest in the Indian Basin Gas Processing Plant. An eight percent interest in the Indian Basin had been acquired in fiscal 1997. The Minneola Gas Processing Plant was sold to Duke in February, 1999.
1999 1998 1997 -------- -------- -------- (Thousands of Dollars) FINANCIAL RESULTS Natural gas liquids and condensate sales $ 51,747 $ 59,668 $ 72,803 Gas sales 23,032 15,281 14,334 Gathering revenues 4,416 -- -- Other revenues 4,595 3,608 (65) --------- --------- -------- Total revenues 83,790 78,557 87,072 Cost of sales 52,479 53,162 63,895 --------- --------- -------- Gross margin 31,311 25,395 23,177 Operating costs 11,207 7,725 7,905 Depreciation, depletion, and amortization 3,562 2,249 2,393 --------- --------- -------- Operating income $ 16,542 $ 15,421 $ 12,879 ========= ========= ======== Other income $ 4,994 $ 14,644 $ -- ========= ========= =========
1999 1998 1997 -------- -------- -------- OPERATING INFORMATION Average NGL's price ($/Gal) $ 0.263 $ 0.302 $ 0.365 Average gas price ($/MMcf) $ 2.04 $ 2.30 $ 2.38 Capital expenditures (Thousands) $ 8,557 $ 4,735 $ 10,563 Total assets (Thousands) $ 343,133 $ 86,955 $ 46,602 Total gas gathered (Mcf/D) 229,255 219,971 231,010 Total gas processed (Mcf/D) 187,036 198,172 210,286 Natural gas liquids sales (MGal) 191,462 194,580 196,840 Gas sales (MMMbtu) 10,534 5,771 6,109 Natural Gas Liquids by Component (%) Ethane 47 42 51 Propane 26 31 25 Iso butane 5 4 5 Normal butane 9 10 9 Natural gasoline 13 13 10 Contracts % Percent of Proceeds (average for year) 65 54 17 Fuel and Shrink (average for year) 35 46 83 --------- --------- ---------
Note: At August 31, 1999, with Koch acquisition, Percent of Proceeds contracts are 34%, Fuel and Shrink contracts are 66% of total gas processed. 31 32 CAPITAL EXPENDITURES - In April, 1999, the Company acquired all of the Oklahoma midstream natural gas gathering and processing assets of Koch for $285 million. Capital expenditures for fiscal 1999 included $3 million for the Fox plant. The 1998 fiscal year capital was required to sustain operations and projects related to these operations. Fiscal 1997 capital expenditures included $9 million incurred to purchase an interest in the Indian Basin Gas Processing Plant as well as sustain and improve operations. OPERATING RESULTS - Revenues increased in fiscal 1999 due to the acquisition of the midstream assets from Koch. Average NGL price per gallon increased in late fiscal 1999, although the average price for fiscal 1999 was lower than fiscal 1998, as prices continued to experience an upward correction from the abnormally low prices prevalent throughout much of fiscal 1999 and 1998. The increase in prices corresponded in time with the increase in volumes from the Koch acquisition. The price of NGLs moves in a direct relationship to crude prices. Operating costs and depreciation, depletion and amortization also increased due to the additional assets and the cost of operating those assets. At 1999 fiscal year end, total gas gathered and total gas processed were 688 MMcf per day and 561 MMcf per day, three times the fiscal 1999 average. This increase in the average per day is due to the Koch acquisition in April, 1999. Other income in fiscal 1999 and 1998 consisted of the gains on sales of assets. RISK MANAGEMENT - Derivative instruments are used to minimize risk of volatility in NGL's and gas prices. PRODUCTION OPERATIONAL HIGHLIGHTS - The Company's strategy is to concentrate ownership of hydrocarbon reserves in its service territory in order to add value not only to its existing production operations but also to the related gathering and processing, marketing, transportation, and storage businesses. Accordingly, the Company focuses on exploitation activities rather than exploratory drilling. As a result of recent acquisitions, the number of wells the Company operates has increased. In its role as operator, the Company controls operating decisions which impact production volumes and lifting costs.
1999 1998 1997 -------- -------- -------- (Thousands of Dollars) FINANCIAL RESULTS Natural gas sales $ 58,776 $ 38,323 $ 33,715 Oil sales 6,169 5,192 6,663 Other revenues 4,309 367 137 -------- -------- -------- Net revenues 69,254 43,882 40,515 Operating costs 19,128 14,312 12,342 Depreciation, depletion, and amortization 34,073 18,872 19,899 -------- -------- -------- Operating income $ 16,053 $ 10,698 $ 8,274 ======== ======== ======== Other income $ 1,645 $ -- $ -- ======== ======== ========
1999 1998 1997 -------- -------- -------- OPERATING INFORMATION Proved reserves Gas (MMcf) 254,101 178,047 83,293 Oil (MBbls) 4,197 3,272 2,014 Production Gas (MMcf) 27,773 16,818 14,565 Oil (MBbls) 460 330 336 Average price Gas (Mcf) $ 2.12 $ 2.21 $ 2.16 Oil (Bbls) $ 13.56 $ 15.70 $ 19.84 Capital expenditures (Thousands) $ 95,431 $167,669 $ 32,911 Total assets (Thousands) $361,806 $282,765 $ 94,496 ======== ======== ========
32 33 RISK MANAGEMENT - Since the volatility of energy prices has a significant impact on the profitability of this segment, the Company utilizes commodity derivative instruments in order to offset this risk. As of August 31, 1999, approximately 86 percent of anticipated gas production in 2000 has been hedged primarily with swap agreements. This compares to 50 percent of 1999 production hedged at August 31, 1998. See Item 7A - Quantitative and Qualitative Disclosure about Market Risk. CAPITAL EXPENDITURES - The Company's strategy is to concentrate ownership of natural gas and oil reserves in its service territory in order to add value not only to its existing production operations but also to integrate it into its processing, marketing, gathering and storage business. As a result, the Company is focusing its efforts on acquisitions and exploitation activities. During the second quarter of fiscal 1999, the Company consummated the strategic alliance with Magnum Hunter Resources, Inc. (Magnum) adding $10 million in producing properties and becoming a 31 percent equity owner in Magnum at a cost of $50 million. The Company also closed on two other properties with a purchase price of $53 million adding reserves located in Oklahoma. The Company purchased natural gas and oil reserves from OXY USA, Inc. (Oxy) in fiscal 1998. The reserves are located in Oklahoma and Kansas 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 and includes a gas sweetening plant. The purchase price was approximately $131 million. Based on estimated reserves, this transaction almost doubled the Company's oil and gas reserves. A 40 percent equity interest in the K. Stewart Petroleum Corp., was acquired on June 2, 1998. The acquisition creates opportunities to expand ownership of oil and gas reserves in the Anadarko Basin and for the Company to achieve its strategic objective of growing its reserves base in areas where it has other energy-related operations. The acquisition of Washita Production Company (Washita) was closed in December, 1997. This acquisition, valued at approximately $20 million, was made with a combination of cash and ONEOK, Inc. common stock. The transaction included 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. During 1997, the Company purchased PSEC, Inc. (PSEC), an independent oil and gas company in Oklahoma. The transaction included 180 wells with proven reserves of 20 Bcf of natural gas and 167,000 barrels of oil. A 42 percent interest in the Sycamore Gas Gathering System, acquired as part of this transaction, is included in the Gathering and Processing Segment. The purchase was financed with $9.3 million in long-term debt and 334,252 shares of ONEOK Inc. common stock. Capital expenditures primarily related to a limited developmental drilling program were approximately $13.7 million, $16.5 million, and $6.7 million in 1999, 1998, and 1997, respectively. OPERATING RESULTS - Increased production from a successful developmental drilling program and properties acquired during fiscal 1999 and 1998 were the primary reasons for the increases in volumes in those years. Gas prices for the 1999 fiscal year decreased compared to the 1998 fiscal year, an industry-wide trend. Operating costs and depreciation, depletion, and amortization also increased over one year ago due to the Company operating and owning an interest in an increased number of wells. However, the Company, through efforts to contain costs, reduced production costs per Mcf equivalent to $0.49 in 1999 from $0.50 in 1998. The increased gas production in 1998 over 1997 is primarily related to the additional proved reserves acquired as a result of the OXY, PSEC and Washita property acquisitions. Production from these properties more than offset the natural decline in production from other fields. The increase in operating costs in 1998 as compared to 1997 is indicative of the increase in the total number of fields owned by the Company. 33 34 LIQUIDITY AND CAPITAL RESOURCES In April, 1999, the Company registered a shelf filing for $500 million in debt securities. The filing allows the Company to sell the debt securities over a two year period. These funds will be used in the future for general corporate purposes including repayment and refinancing of debt, acquisitions, working capital, capital expenditures and repurchases and redemptions of securities. In August, 1999, the Company issued $300 million in debt securities under this shelf filing, with the funds used primarily to fund the Koch acquisition. In July, 1999, the Company filed a registration statement to register preferred trust securities of $300 million. No securities have been issued under that registration. A $600 million short-term unsecured revolving credit facility was entered into with several banks in July, 1999. CASH FLOW ANALYSIS Cash provided by operating activities continues as the primary source for meeting operating cash requirements and dividend payout. 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 borrowing. The Company believes that internally generated funds and existing credit agreements will be sufficient to meet its debt service, dividend payment, and capital expenditure requirements, excluding significant capital acquisitions. The following discussion of cash flows should be read in conjunction with the Company's "Consolidated Statement of Cash Flows" and the supplemental cash flow information included in Note M of "Notes to Consolidated Financial Statements." OPERATING CASH FLOWS Operating cash flows for fiscal 1999 decreased due to increased prepayments related to hedging activities, increases in unrecovered purchased gas cost, increased accounts receivables primarily due to increased sales and increased regulatory assets. Operating cash flows for 1998 as compared to 1997 are higher as a result of the liquidation of the abnormally high net working capital acquired in the Western acquisition, increased operating income and favorable changes in assets and liabilities, including recovery of purchased gas costs. Cash provided by operating activities for the years ended August 31, 1999, 1998, and 1997 was $131.6, $346.5, and $152.1 million, respectively. INVESTING CASH FLOWS Cash used in investing activities totaled $549.3, $299.7, and $88.8 million in 1999, 1998, and 1997 respectively. CAPITAL EXPENDITURES - Capital expenditures totaled $533 million in 1999. This included $285 million for the acquisition of Oklahoma midstream assets by the Gathering and Processing segment. In 1998, capital expenditures totaled $306 million which included $164 million for acquisition of production and processing assets. Capital expenditures totaled $112 million in 1997. Capital expenditures for 2000 are estimated to be $236 million excluding acquisitions. ASSET SALES - Approximately $16.5 million of proceeds was received in fiscal 1999 from the sale of one-half interest in Sycamore and the Caddo gas processing plant. In 1998, approximately $30 million of proceeds was received from the sale of gas processing assets. 34 35 FINANCING CASH FLOW During fiscal 1999, the Company issued $700 million in debt securities. These funds were used for general corporate purposes including acquisitions, repayment of some short-term debt and refinancing certain long-term debt. Cash provided by financing activities for 1999 was $422.0 million, cash used in financing activities in 1998 and 1997 was $61.1, and $49.4 million, respectively. SHORT-TERM DEBT - At August 31, 1999, $264 million in commercial paper was outstanding. The Company has a $600 million short-term unsecured revolving credit facility. The short-term credit agreement primarily provides a back-up line of credit for commercial paper in addition to providing short-term funds. Maximum short-term debt from all sources as approved by the Company's Board of Directors is $750 million. Fluctuations in the amount of cash provided by/used in financing activities is primarily a factor of short-term borrowing and the increase in preferred stock dividend requirements for 1999 and 1998 and significant long-term borrowing in 1999. LONG-TERM DEBT - At August 31, 1999, $837 million of long-term debt was outstanding. As of that date, the Company could have issued $724 million of additional long-term debt under the most restrictive provisions contained in its various borrowing agreements. At August 31, 1999, the equity component was 52 percent as compared to 68 percent a year ago. In December, 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 of the gas business, including strengthened market and financial positions. The debt rating by Standard and Poor's Corporation was upgraded from A- to A. In December 1998, the Company was placed on CreditWatch with negative implications, reflecting the Company's plan to acquire Southwest. SOUTHWEST - Financing for the Company's proposed acquisition of Southwest is expected to be provided through a combination of a short-term bridge loan, long-term notes and equity. In addition, the Company will assume approximately $900 million of Southwest long-term indebtedness. STOCK AND DIVIDENDS - The Company had approximately 31 million shares of common stock outstanding at August 31, 1999. The Common stock dividends were $1.24, $1.20, and $1.20 per share in 1999, 1998, and 1997, respectively. Convertible preferred stock dividends were $1.86 and $1.55 per share in 1999, and $1.80 and $1.50 per share in 1998 for Series A and Series B, respectively. Preferred stock dividends were $1.78 per share in 1997. Through the Company's Stock Purchase and Dividend Reinvestment Program, $3.9 million, $4.1 million and $5.5 million of dividends and optional cash payments were reinvested into common stock in 1999, 1998 and 1997, respectively. On March 18, 1999, the Company authorized a stock buyback plan for up to 15 percent of its capital stock. The program authorizes the Company to make purchases of its common stock on the open market with the timing and terms of purchases and the number of shares purchased to be determined by management based on market conditions and other factors. Purchases began May 25, 1999, with 715,080 shares purchased through August 31, 1999. The purchased shares will be held in treasury and will be available for general corporate purposes, funding of stock-based compensation plans, resale at a future date, or retirement. Purchases will be financed with short-term debt or made from available funds. LIQUIDITY The Distribution segment continues to face competitive pressure to serve the transportation market which includes all customers who consume 30,000 MMBtu or more annually. The loss of a substantial portion of that load due to third party bypass, without recoupment of the revenues from that loss, could have a materially adverse effect on the 35 36 Company's financial condition. However, since 1995, rates have been structured to reduce the Company's risk in serving its large volume customers. OTHER ENVIRONMENTAL - In connection with the Western transaction, the Company acquired responsibility for 12 manufactured gas sites located in Kansas which may contain potentially harmful materials that are classified as hazardous material. Hazardous materials are subject to control or remediation under various environmental laws and regulations. A consent agreement with the Kansas Department of Health and Environment (KDHE) presently governs all future work at these sites. The terms of the consent agreement allow the Company to investigate these sites and set remediation priorities based upon the results of the investigations and risk analysis. The prioritized sites will be investigated over a ten year period. At August 31, 1999, the costs of the investigations and risk analysis have been minimal. Limited information is available about the sites and no testing has been performed. Management's best estimate of the cost of remediation ranges from $100 thousand to $10 million per site based on a limited comparison of costs incurred to remediate comparable sites. These estimates do not give effect to potential insurance recoveries, recoveries through rates or from third parties. The KCC has permitted others to recover remediation costs through rates. It should be noted that additional information and testing could result in costs significantly below or in excess of the amounts estimated above. To the extent that such remediation costs are not recovered, the costs could be material to the Company's results of operations and cash flows depending on the remediation done and number of years over which the remediation is completed. NEW ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards No. 133, Accounting for Derivatives Instruments and Hedging Activities (Statement 133), was issued by the FASB in June 1998. Statement 133 standardizes the accounting for derivatives instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedge exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Statement 133 required the Company to adopt this statement by September 1, 1999. Statement 133 was amended by Statement No. 137 in June, 1999 which delayed implementation until fiscal years beginning after June 15, 2000, with early adoption permitted. The Company has not determined the impact of adopting Statement 133. In December 1998, the Emerging Issues Task Force reached consensus on Issue 98-10, "Accounting for Contracts involved in Energy Trading and Risk Management Activities" (EITF 98-10). EITF 98-10 is effective for fiscal years beginning after December 15, 1998 and requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. Although the Company has not completed its assessment of the impact of adopting EITF 98-10, it believes that its contracts are designated as and effective as hedges of non trading activities and are not considered energy trading contracts. Accordingly, the Company does not believe the adoption of EITF 98-10 will have a material impact on the financial position or results of operations of the Company. 36 37 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK RISK MANAGEMENT - The Company, substantially through its nonutility segments, is exposed to market risk in the normal course of its business operations to the impact of market fluctuations in the price of natural gas and oil. Market risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in commodity energy prices. The Company's primary exposure arises from fixed price purchase or sale agreements which extend for periods of up to 48 months, gas in storage inventories utilized by the gas marketing operation, and anticipated sales of oil and gas production. To a lesser extent, the Company is exposed to risk of changing prices or the cost of intervening transportation resulting from purchasing gas at one location and selling it at another (hereinafter referred to as basis risk). To minimize the risk from market fluctuations in the price of natural gas and oil, the Company uses commodity derivative instruments such as future contracts, swaps and options to hedge existing or anticipated purchase and sale agreements, existing physical gas in storage, and basis risk. None of these derivatives are held for speculative purposes. The Company adheres to policies and procedures which limit its exposure to market risk from open positions and monitors its exposure to market risk. The results of the Company's derivative hedging activities continue to meet its stated objective. The Company's regulated distribution operations are exposed to market risk in the normal course of business operations due to the impact of fluctuations on gas sales resulting from weather as measured by heating degree days (HDD). Market risk refers to the risk of loss in cash flows and future earnings arising from adverse fluctuation in gross margins on gas sales. Kansas Gas Service has exposure arising from variances in gas consumption by residential and commercial customers caused by fluctuations in HDD from normal because it does not have a temperature adjustment clause in its rate structure. ONG has a TAC, which partially offsets this risk. From time to time, ONEOK uses weather derivative swaps to manage the effect of warm weather on its operations. All of the Company's long-term debt is fixed-rate and, therefore, does not expose the Company to the risk of earnings or cash flow loss due to changes in market interest rates. Kansas Gas Service uses derivative instruments to hedge the cost of some anticipated gas purchases during the winter heating months to protect their customers from upward volatility in the market price of natural gas. The gain or loss resulting from such derivatives is combined with the physical cost of gas and recovered from the customer through the gas purchase clause in rates. The Company has no market risk associated with such activities and, accordingly, these derivatives have been omitted from the value-at-risk disclosures below. VALUE-AT-RISK DISCLOSURE OF MARKET RISK - The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models that seek to predict risk of loss based on historical price and volatility patterns. The value-at-risk (VAR) measurement used by the Company is based on J.P. Morgan's RiskMetrics(TM) model, which measures recent volatility and correlation in the price of natural gas and oil, pulls through current price levels and net deltas, and applies estimates made by management regarding the time required to liquidate positions and the degree of confidence placed in the accuracy of the volatility and correlation estimates. The Company's VAR calculation presents a comprehensive market risk disclosure by combining its commodity derivative portfolio used to hedge price and basis risk together with the current portfolio of firm physical purchase and sale contracts and nonutility gas-in-storage inventory. At August 31, 1999, the Company's estimated potential one-day favorable or unfavorable impact on future earnings, as measured by the VAR, using a 95 percent confidence level, diversified correlation and assuming three days to liquidate positions is immaterial. The Company's calculated VAR exposure represents an estimate of potential losses that would be recognized for its portfolio of derivative financial instruments and firm physical contracts and nonutility gas-in-storage assuming hypothetical movements in future market rates and are not necessarily indicative of actual results that may occur. It does not represent the maximum possible loss nor any expected loss that may occur, because actual future gains and losses will differ from those estimated, based on actual fluctuations in the market rates, operating exposures, and the timing thereof, and changes in the Company's portfolio of derivative financial instruments and firm physical contracts. Under the weather derivative swap agreements, the Company receives a fixed payment per degree day below the 37 38 contracted normal HDD and pays a fixed amount per degree day above the contracted normal HDD. The swaps also contain a contract cap that limits the amount either party is required to pay. The Company estimates its VAR exposure on these swaps to be the total contract cap it would be required to pay if the weather were significantly coder that normal. At August 31, 1999, the total VAR for the 1999/2000 heating season is approximately $17.7 million. The Company believes that this risk would be substantially offset by an increase in gas sales margins resulting from additional gas sold due to the colder than normal temperatures. 38 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of ONEOK, Inc. is responsible for all information included in the Annual Report whether audited or unaudited. The financial statements have been prepared in accordance with generally accepted accounting principles, applied in a consistent manner, and necessarily included some amounts that are based on the best estimates and judgements of management. Management maintains a system of internal accounting policies, procedures, and controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the financial records are reliable for preparing financial statements. ONEOK, Inc. maintains an internal auditing staff responsible for evaluating the adequacy and application of financial and operating controls and for testing compliance with management's policies and procedures. The accompanying consolidated financial statements of ONEOK, Inc. and subsidiaries as of August 31, 1999 and 1998, and for each of the years in the three-year period ended August 31, 1999, have been audited by KPMG LLP, independent certified public accountants. Their audits include reviews of the system of internal controls to the extent considered necessary to determine the audit procedures required to support their opinion on the consolidated financial statements. The Independent Auditors' Report appears herein. The Board of Directors performs its oversight role for reviewing the accounting and auditing procedures and financial reporting of ONEOK, Inc. through its Audit Committee. Both KPMG LLP and the Company's internal auditors have free access to the Audit Committee, without the presence of management, to discuss accounting, auditing, and financial reporting matters. 39 40 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders ONEOK, Inc.: We have audited the accompanying consolidated balance sheets of ONEOK, Inc. and subsidiaries as of August 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended August 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ONEOK, Inc. and subsidiaries as of August 31, 1999 and 1998, and the results of their operations and cash flows for each of the years in the three-year period ended August 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Tulsa, Oklahoma October 21, 1999 40 41 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
1999 1998 1997 ----------- ----------- ----------- (Thousands of Dollars, except per share amounts) Operating Revenues $ 1,842,810 $ 1,820,758 $ 1,161,927 Cost of gas 1,156,024 1,220,009 725,960 ----------- ----------- ----------- Net Revenues 686,786 600,749 435,967 ----------- ----------- ----------- Operating Expenses Operations and maintenance 297,784 277,068 210,852 Depreciation, depletion, and amortization 129,704 101,653 74,509 General Taxes 39,715 33,217 22,491 ----------- ----------- ----------- Total Operating Expenses 467,203 411,938 307,852 ----------- ----------- ----------- Operating Income 219,583 188,811 128,115 ----------- ----------- ----------- Other Income 6,639 14,644 -- Interest 52,809 35,075 34,008 Income Taxes 67,056 66,585 34,839 ----------- ----------- ----------- Net Income 106,357 101,795 59,268 Preferred Stock Dividends 37,247 26,979 285 ----------- ----------- ----------- Income Available for Common Stock $ 69,110 $ 74,816 $ 58,983 =========== =========== =========== Earnings Per Share of Common Stock - Basic $ 2.19 $ 2.44 $ 2.13 =========== =========== =========== Earnings Per Share of Common Stock - Diluted $ 2.06 $ 2.23 $ 2.13 =========== =========== =========== Dividends Per Share of Common Stock $ 1.24 $ 1.20 $ 1.20 =========== =========== =========== Average Shares of Common Stock - Basic 31,498,002 30,674,475 27,644,181 Average Shares of Common Stock - Diluted 51,570,723 45,729,363 27,644,181
See accompanying notes to consolidated financial statements. 41 42 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
August 31, 1999 1998 ---------- ---------- (Thousands of Dollars) ASSETS CURRENT ASSETS Cash and cash equivalents $ 4,402 $ 86 Trade accounts and notes receivable 228,336 177,649 Materials and supplies 10,792 10,046 Gas in storage 108,159 128,334 Advance payments for gas 3,600 3,619 Deferred income taxes 9,702 10,094 Purchased gas cost adjustment 4,552 -- Other current assets 69,724 8,245 ---------- ---------- Total Current Assets 439,267 338,073 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Distribution 1,771,400 1,717,800 Transportation and Storage 483,983 424,489 Marketing 5,786 5,051 Gathering and Processing 358,439 68,688 Production 399,613 327,970 Other 38,405 57,932 ---------- ---------- Total Property, Plant and Equipment 3,057,626 2,601,930 Accumulated depreciation, depletion, and amortization 988,797 915,769 ---------- ---------- Net Property 2,068,829 1,686,161 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS Investments 73,777 10,505 Regulatory assets, net 246,658 229,543 Goodwill 81,560 77,422 Other 114,854 80,783 ---------- ---------- Total Deferred Charges and Other Assets 516,849 398,253 ---------- ---------- Total Assets $3,024,945 $2,422,487 ========== ==========
See accompanying notes to consolidated financial statements. 42 43 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
August 31, 1999 1998 - ---------- ----------- ----------- (Thousands of Dollars LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 22,817 $ 16,909 Notes payable 263,747 212,000 Accounts payable 183,759 136,601 Dividends payable 9,275 9,007 Accrued taxes 11,186 16,829 Accrued interest 7,042 7,814 Customers' deposits 17,139 17,042 Purchased gas cost adjustment -- 12,168 Other 28,617 32,443 ----------- ----------- Total Current Liabilities 543,582 460,813 ----------- ----------- LONG-TERM DEBT, excluding current maturities 810,087 312,355 DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 323,624 313,955 Other deferred credits 173,193 166,493 ----------- ----------- Total Deferred Credits and Other Liabilities 496,817 480,448 ----------- ----------- Total Liabilities 1,850,486 1,253,616 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note I) SHAREHOLDERS' EQUITY Convertible Preferred Stock, $0.01 par value: Series A authorized 20,000,000 shares; issued and outstanding 19,946,448 shares at August 31, 1999 and 1998 199 199 Series B authorized 30,000,000 shares; issued and outstanding 0 shares at August 31, 1999 and 83,826 shares at August 31, 1998 -- 1 Common stock, $0.01 par value: authorized 100,000,000 shares; issued 31,599,305 shares and outstanding 30,884,225 shares at August 31, 1999 and issued and outstanding 31,576,287 shares at August 31, 1998 316 316 Paid in capital 894,978 897,547 Retained earnings 301,536 270,808 Treasury stock at cost: 715,080 shares at August 31, 1999 (22,570) -- ----------- ----------- Total Shareholders' Equity 1,174,459 1,168,871 ----------- ----------- Total Liabilities and Shareholders' Equity $ 3,024,945 $ 2,422,487 =========== ===========
See accompanying notes to consolidated financial statements. 43 44 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
1999 1998 1997 ----------- ----------- ---------- (Thousands of Dollars Operating Activities Net income $ 106,357 $ 101,795 $ 59,268 Depreciation, depletion, and amortization 129,704 101,653 74,509 Gain on sale of assets (6,639) (14,644) -- Net (income) losses from other investments (3,861) -- 257 Deferred income taxes 14,925 (7,623) (2,988) Other -- (2,577) -- Changes in assets and liabilities (Increase) decrease in accounts and notes receivable (50,687) 53,400 18,401 (Increase) decrease in inventories 19,429 1,232 13,226 (Increase) decrease in other assets (88,930) 13,472 (10,096) (Increase) decrease in regulatory assets (6,261) -- 384 Increase (decrease) in accounts payable and accrued liabilities 41,320 51,957 (14,897) Changes in purchased gas cost adjustment (16,720) 54,257 10,539 Increase (decrease) in deferred credits and other liabilities (7,034) (6,396) 3,448 --------- --------- --------- Cash Provided by Operating Activities 131,603 346,526 152,051 --------- --------- --------- Investing Activities Changes in other investments, net (59,422) (3,778) 1,698 Acquisitions, net (296,287) (24,421) -- Capital expenditures, net of salvage (210,076) (301,515) (90,530) Proceeds from sale of property 16,500 30,000 -- --------- --------- --------- Cash Used in Investing Activities (549,285) (299,714) (88,832) --------- --------- --------- Financing Activities Issuance (payment) of notes payable, net 51,747 5,302 (5,230) Issuance of debt 695,888 -- -- Payment of debt (224,868) (17,859) (14,000) Issuance of common stock 1,380 6,257 7,363 Acquisition of treasury stock (22,570) -- -- Dividends paid (76,281) (54,803) (28,033) Acquisition and cancellation of preferred stock (3,298) -- (9,540) --------- --------- --------- Cash Provided by (Used in) Financing Activities 421,998 (61,103) (49,440) --------- --------- --------- Change in Cash and Cash Equivalents 4,316 (14,291) 13,779 Cash and Cash Equivalents at Beginning of Year 86 14,377 598 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 4,402 $ 86 $ 14,377 ========= ========= =========
See accompanying notes to consolidated financial statements. 44 45 ONEOK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Common Paid-in Retained Treasury Stock Stock Capital Earnings Stock Total ----------- ----------- ----------- ----------- ----------- ----------- (Thousands of Dollars) AUGUST 31, 1996 $ 9,000 $ 272 $ 206,812 $ 207,611 $ -- $ 423,695 Net income -- -- -- 59,268 -- 59,268 Issuance of common stock -- 9 22,710 -- -- 22,719 Preferred stock dividends - $2.375 per share -- -- -- (321) -- (321) Redemption of Series A Preferred Stock (9,000) -- -- (540) -- (9,540) Common stock dividends - $1.20 per share -- -- -- (33,195) -- (33,195) ----------- ----------- ----------- ----------- ----------- ----------- AUGUST 31, 1997 -- 281 229,522 232,823 -- 462,626 Net income -- -- -- 101,795 -- 101,795 Issuance of common stock Acquisitions -- 33 93,648 -- -- 93,681 Stock Purchase Plans -- 2 6,255 -- -- 6,257 Convertible preferred stock dividends - $1.80 and $1.50 per share for Series A and B, respectively -- -- -- (26,979) -- (26,979) Issuance of Series A and Series B Convertible Preferred Stock 200 -- 568,122 -- -- 568,322 Common stock dividends - $1.20 per share -- -- -- (36,831) -- (36,831) ----------- ----------- ----------- ----------- ----------- ----------- AUGUST 31, 1998 200 316 897,547 270,808 -- 1,168,871 Net income -- -- -- 106,357 -- 106,357 Issuance of common stock Stock Purchase Plans -- -- 1,380 -- -- 1,380 Convertible preferred stock dividends - $1.86 and $1.55 per share for Series A and B, respectively -- -- -- (37,247) -- (37,247) Acquisition and Cancellation of Series B Convertible Preferred Stock (1) -- (3,949) 652 -- (3,298) Acquisition of Treasury Stock -- -- -- -- (22,570) (22,570) Common stock dividends - $1.24 per share -- -- -- (39,034) -- (39,034) ----------- ----------- ----------- ----------- ----------- ----------- AUGUST 31, 1999 $ 199 $ 316 $ 894,978 $ 301,536 $ (22,570) $ 1,174,459 =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 45 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - ONEOK, Inc. acquired the gas business of Western Resources, Inc. (Western) on November 26, 1997. The transaction was effective November 30, 1997, for financial reporting purposes. See Note B of Notes to Consolidated Financial Statements. NATURE OF OPERATIONS - ONEOK, Inc. and subsidiaries (collectively, the Company) is a diversified energy company engaged in the production, processing, gathering, storage, transportation, distribution, and marketing of environmentally clean fuels and products. The Company manages its business in six segments: Distribution, Transportation and Storage, Marketing, Gathering and Processing, Production, and Other. The Company's Distribution segment provides natural gas distribution services in Oklahoma and Kansas through its divisions Oklahoma Natural Gas Company and Kansas Gas Service Company. The Transportation and Storage segment owns and leases natural gas storage facilities and transports gas in Oklahoma and Kansas. The Marketing segment purchases and markets natural gas, primarily in the central area of the United States and began trading electricity on a limited basis in 1999. The Company owns and operates gas processing plants as well as gathering pipeline in Oklahoma through its Gathering and Processing segment. The Production segment produces natural gas and oil and owns natural gas and oil reserves. The Company's Other segment, whose results of operations are not material, operates and leases the Company's headquarters building and parking facility. CONSOLIDATION - The consolidated financial statements include the accounts of ONEOK, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in twenty percent to 50 percent-owned affiliates are accounted for on the equity method. Investments in less than twenty percent owned affiliates are accounted for on the cost method. REGULATION - The distribution, transportation and portions of the storage and gathering operations of the Company are subject to the rate regulation and accounting requirements of the Oklahoma Corporation Commission (OCC) and of the Kansas Corporation Commission (KCC). Certain other transportation activities of the Company are subject to regulation by the Federal Energy Regulatory Commission (FERC). Accordingly, these operations follow the accounting and reporting guidance contained in Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." Allocation of costs and revenues to accounting periods for ratemaking and regulatory purposes may differ from bases generally applied by nonregulated companies. Such allocations to meet regulatory accounting requirements are considered to be generally accepted accounting principles for regulated utilities provided that there is a demonstrable ability to recover any deferred costs in future rates. A July, 1999 order by the OCC removed the Oklahoma gathering and storage assets from utility regulation effective November 1, 1999. An August, 1999 order from the OCC distinguished between upstream (transportation) and downstream (distribution) assets and cleared the way for competitive bidding of upstream services to begin fall, 1999. During the rate-making process, regulatory commissions may require a utility to defer recognition of certain costs to be recovered through rates over time as opposed to expensing such costs as incurred. This allows the utility to stabilize rates over time rather than passing such costs on to the customer for immediate recovery. This causes certain expenses to be deferred as a regulatory asset and amortized to expense as it is recovered through rates. Total regulatory assets resulting from this deferral process are approximately $247 million and $230 million at August 31, 1999 and 1998, respectively. As the Company continues to unbundle its services, certain of these assets will no longer meet the criteria for following SFAS No. 71, and accordingly, a write-off of regulatory assets and stranded costs may be required. However, the Company does not anticipate that these costs will be significant. See Note D of Notes to Consolidated Financial Statements. 46 47 REVENUE RECOGNITION - The Company recognizes revenue when services are rendered or product is delivered. Major industrial and commercial gas distribution customers are invoiced as of the end of each month. Certain gas distribution customers, primarily residential and some commercial, are invoiced on a cycle basis throughout the month, and the Company accrues unbilled revenues at the end of each month. Oklahoma Natural Gas Company's (ONG's) tariff rates for residential and commercial customers contain a temperature normalization clause that provides for billing adjustments from actual volumes to normalized volumes during the winter heating season. Revenues from marketing, gathering and processing, and production are recognized on the sales method. Credit is granted to these customers under customary terms. REGULATED PROPERTY - Regulated properties are stated at cost which includes personnel costs, general and administrative costs, and allowance for funds used during construction. The allowance for funds used during construction represents the capitalization of estimated average cost of borrowed funds (7.8 percent, 8.6 percent, and 8.6 percent, in 1999, 1998, and 1997, respectively) used during the construction of major projects and is recorded as a credit to earnings. Depreciation is calculated using the straight-line method based upon rates prescribed for ratemaking purposes. The average depreciation rate for property that is regulated by the OCC approximated 3.8 percent in 1999, and 3.7 percent in 1998 and 1997. The average depreciation rates for properties regulated by the KCC were approximately 3.2 percent in 1999 and 3.3 percent in 1998. The average depreciation rates for Mid Continent Market Center (MCMC) properties were 3.1 percent in 1999 and 3.4 percent in 1998. Maintenance and repairs are charged directly to expense. Generally, the cost of property retired or sold, plus removal costs, less salvage, is charged to accumulated depreciation. Gains and losses from sales or transfers of operating units or systems are recognized in income.
REMAINING SERVICE LIFE (YEARS) --------- ------- Distribution property 22-25 40 Gathering property 5-33 47 Storage property 5-19 40 Transmission property 18-33 47 Other property 6-24 40 - -------------------------------------------------------------------------
PRODUCTION PROPERTY - The Company uses the successful-efforts method to account for costs incurred in the acquisition and exploration of oil and natural gas reserves. Costs to acquire mineral interests in proved reserves and to drill and equip development wells are capitalized. Geological and geophysical costs and costs to drill exploratory wells which do not find proved reserves are expensed. Unproved oil and gas properties which are individually significant are periodically assessed for impairment. The remaining unproved oil and gas properties are aggregated, and amortized based upon remaining lease terms and exploratory and developmental drilling experience. Depreciation and depletion are calculated using the unit-of-production method based upon periodic estimates of proven oil and gas reserves. OTHER PROPERTY - Gas processing plants and all other properties are stated at cost. Gas processing plants are depreciated using various rates based on estimated lives of available gas reserves. All other property and equipment is depreciated using the straight-line method over its estimated useful life. INVENTORIES - Materials and supplies are priced at average cost. Noncurrent gas in storage is classified as property and is priced at cost. Cost of current gas in storage for ONG is determined under the last-in, first-out, (lifo) methodology. The estimated replacement cost of current gas in storage valued under the lifo method was $23.1 million and $73.6 million at August 31, 1999 and 1998, respectively, compared to its value under the lifo method of $18.1 million and $68.3 million at August 31, 1999 and 1998, respectively. Current gas in storage for all other companies is determined using the weighted average cost of gas method. 47 48 INCOME TAXES - Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is deferred and amortized for operations regulated by the OCC and for all other operations, is recognized in income in the period that includes the enactment date. The Company continues to amortize previously deferred investment tax credits on gas distribution and transmission properties over the period prescribed by the OCC and KCC for ratemaking purposes. COMMODITY PRICE RISK MANAGEMENT - To minimize the risk from market fluctuations in the price of natural gas and oil, the Company enters into futures transactions, swaps, and options in order to hedge certain natural gas in storage, existing physical gas purchases or sales commitments, as well as anticipated sales of natural gas production. In order to qualify as a hedge, the price movements in the underlying commodity derivatives must be sufficiently correlated with the hedged transaction. Changes in the market value of these financial instruments utilized as hedges are (1) recognized as an adjustment of the carrying value in the case of existing assets and liabilities, (2) included in the measurement of the transaction that satisfies the commitment in the case of existing commitments, and (3) included in the measurement of the subsequent transaction in the case of anticipated transactions. In cases where anticipated transactions do not occur, deferred gains and losses are recognized when such transactions were scheduled to occur. Some of these financial instruments carry off-balance sheet risks. See Note C of Notes to Consolidated Financial Statements. IMPAIRMENTS - The Company accounts for the impairment of long-lived assets to be recognized when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair values are based on discounted future cash flows or information provided by sales and purchases of similar assets. The Company evaluates impairment of production assets on the lowest possible level, (a field by field basis) rather than using a total company basis for its proved properties. USE OF ESTIMATES - Management has made a number of estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. GOODWILL - The Company amortizes goodwill, which represents the excess of the purchase price over the fair value of net assets acquired, over a period of 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. EARNINGS PER COMMON SHARE - Basic earnings per share are calculated based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are calculated based on the weighted average number of shares of common stock outstanding plus potentially dilutive securities. ENVIRONMENTAL EXPENDITURES - The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimatable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. CASH AND CASH EQUIVALENTS - Cash equivalents consist of highly liquid investments, which are readily convertible into cash and have original maturities of three months or less. COMMON STOCK OPTIONS AND AWARDS - The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation" which permits, but does not require, a fair value based method of accounting for stock-based employee compensation. Alternatively, SFAS No. 123 allows companies to continue applying the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), however, 48 49 such companies are required to disclose pro forma net income and earnings per share as if the fair value based method had been applied. The Company has elected to continue to apply the provisions of APB 25 for purposes of computing compensation expense and has provided the pro forma disclosure provisions of SFAS No. 123 in Note N of Notes to Consolidated Financial Statements. RECLASSIFICATION. Certain amounts in the 1997 and 1998 consolidated financial statements have been reclassified to conform with the 1999 presentation. In particular, the Company reclassified other income, including gains on sales of assets from operating revenue to a separate caption, and now presents operating income. (B) ACQUISITION On November 26, 1997, Old ONEOK acquired from Western all of the gas distribution assets of Western and all of the outstanding capital stock of Western's directly or indirectly wholly-owned subsidiaries, Westar Gas Marketing, Inc. and MCMC, and assumed all of the liabilities of Western that arose primarily out of the gas business and approximately $161 million in debt of Western; and Old ONEOK merged with and into New ONEOK, with New ONEOK as the surviving corporation. The shares of Old ONEOK common stock were converted on a one-for-one basis into shares of stock of New ONEOK, and Western received 2,996,702 shares of the Company's Common Stock and 19,317,584 shares of the Company's Series A Convertible Preferred Stock. Such shares and additional shares purchased by Western at the closing of the transaction represented in the aggregate 9.9 percent of the outstanding Common Stock or 45 percent of the Capital Stock of the Company. A shareholder agreement, which includes standstill provisions, prevents Western from increasing its position in the Company above a common stock interest of 45 percent on a fully converted basis and maintains control of the Company in the hands of the public shareholders of the Company. The acquisition was accounted for as a purchase and, accordingly, the operating results of the properties acquired from Western are included in the consolidated financial statements since December 1, 1997. The aggregate purchase price was approximately $824 million, including debt assumed and 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 value of the net assets. The excess of the purchase price over the fair value of the net assets acquired approximated $74 million and is being amortized over 40 years. (C) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT FINANCIAL INSTRUMENTS - The following table presents the carrying amounts and fair values of certain of the Company's financial instruments. Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. The estimated fair value of long-term debt and notes payable has been determined using quoted market prices of same or similar issues, discounted cash flows, and/or rates currently available to the Company for debt with similar terms and remaining maturities. The fair value of natural gas and oil swaps, options, and futures contracts generally reflect the estimated amounts that the Company would pay or receive to terminate the contracts at the reporting date, thereby taking into account the unrealized gains and losses on open contracts. There is no readily available market for natural gas swaps. The items presented without a carrying value are off-balance sheet financial instruments. All of the Company's financial instruments are held for purposes other than trading.
Approximate Fair Book Value Value ---------- ---------------- (Thousands of Dollars) AUGUST 31, 1999 CASH AND CASH EQUIVALENTS $ 4,402 $ 4,402 ACCOUNTS AND NOTES RECEIVABLE $ 228,336 $ 228,336 NATURAL GAS SWAPS -- $ 6,359 NATURAL GAS OPTIONS -- $ 6,522 NATURAL GAS FUTURES -- $ (24,421) NOTES PAYABLE $ 263,747 $ 263,747 LONG-TERM DEBT $ 836,975 $ 790,961 - ---------------------------------------------------------------------
49 50
Approximate Fair Book Value Value ---------- ---------------- (Thousands of Dollars) August 31, 1998 Cash and cash equivalents $ 86 $ 86 Accounts and notes receivable $ 177,649 $ 177,649 Natural gas swaps -- $ 750 Natural gas options -- $ 3,486 Natural gas futures -- $ 9,971 Notes payable $ 212,000 $ 212,000 Long-term debt $ 329,264 $ 358,207 - ----------------------------------------------------------------------
RISK MANAGEMENT - The Company's operations subject earnings to variability based on fluctuations in the market price and transportation costs of natural gas and oil and in the temperature during the heating season. The Company's exposure arises from fixed price purchase or sale agreements which extend for periods of up to 48 months, certain gas storage inventories, and anticipated sales of oil and gas production. In order to mitigate the financial risks associated with such activities, the Company routinely enters into natural gas and oil futures contracts, swaps, and options, collectively referred to herein as derivatives. Net open positions in terms of price, volume, and specified delivery point do occur. The Company is using derivative contracts to mitigate its risk associated with weather for the winter of 1999/2000 and reduce the impact of degree day variances from normal. The futures contracts are purchased and sold on the New York Mercantile Exchange (NYMEX) or the Kansas City Board of Trade (KCBOT) and require the Company to buy or sell natural gas at a fixed price. Swap agreements generally require one party to make payments based on the difference between a fixed price or fixed differential from the NYMEX or KCBOT price while the other party pays a price based on a published index. Swaps and options allow the Company to commit to purchase gas at one location and sell it at another location without assuming unacceptable risk with respect to changes in the price of gas or the cost of the intervening transportation. Natural gas options held to hedge price risk provide the right, but not the requirement, to buy or sell natural gas at a fixed price. The Company utilizes options to limit overall price risk exposure. None of these derivatives are held for speculative purposes and, in general, the Company's risk management policy requires that positions taken with derivatives be offset by positions in physical transactions or other derivatives. The notional value of futures contracts purchased and sold is $316.2 million and $407.2 million, respectively, at August 31, 1999. The term "notional amount" refers to the current contract unit price times the contract volume for the relevant derivative. In general, such amounts are not indicative of the cash requirements associated with these derivatives. The notional amount is intended to be indicative of the Company's level of activity in such derivatives, although the amounts at risk are significantly smaller because, in general, changes in market value of these derivatives are offset by changes in the value associated with the underlying physical transaction or other derivatives.
Estimated Volumes Volumes Fair Value Purchased Sales Gain (Loss)(A) --------- -------- -------------- (Volumes in Mmcf, Thousands of Dollars) AUGUST 31, 1999 OPTIONS 238,420 38,390 $ 6,522 SWAPS 49,545 47,110 $ 6,359 FUTURES 113,730 156,140 $ (24,421) - ----------------------------------------------------------------- August 31, 1998 Options 4,543 2,536 $ 3,486 Swaps 49,281 44,715 $ 750 Futures 5,375 35,492 $ 9,971 - -----------------------------------------------------------------
(A) represents the estimated amount which would have been recognized upon termination of the relevant derivatives as of the date indicated. The amount which is ultimately charged or credited to earnings is affected by subsequent changes in the fair value of these derivatives. 50 51 NYMEX- and KCBOT-traded futures and option contracts are guaranteed by NYMEX and KCBOT and have nominal credit risk. All other derivative transactions expose the Company to off-balance sheet risk in the event of non performance by the counterparts. In order to minimize this risk, the Company analyzes each counterpart's financial condition prior to entering into an agreement, establishes credit limits, and monitors the appropriateness of these limits on an on-going basis. Swap agreements are generally settled at the expiration of the contract term and may be subject to margin requirements with the counterparty. NYMEX- and KCBOT-traded futures and options contracts require daily cash settlement in margin accounts with brokers. (D) REGULATORY ASSETS The table presents a summary of regulatory assets, net of amortization, outstanding at August 31, 1999 and 1998.
August 31, 1999 1998 - ---------- --------- --------- (Thousands of Dollars) Recoupable take-or-pay $ 85,996 $ 90,708 Pension costs 20,881 25,061 Postretirement costs other than pension 61,830 59,963 Other 8,521 8,917 Transition costs 22,903 18,447 Reacquired debt costs 22,413 -- Income taxes 24,114 26,447 - -------------------------------------------------------------------- Regulatory assets, net $ 246,658 $ 229,543 ====================================================================
The remaining recovery period for these assets that the Company is not earning a return on is set forth in the table below.
REMAINING RECOVERY PERIOD (MONTHS) ------------------ Postretirement costs other than pension - Oklahoma 169 Income taxes - Oklahoma 142 - 158 Transition costs 459 - ----------------------------------------------------
The OCC has authorized recovery of the take-or-pay settlement, pension and postretirement benefit costs over a 10 to 20 year period. Kansas Gas Service has been deferring and recording postretirement benefits in excess of pay-as-you-go as a regulatory asset as authorized by the KCC. See Note H of Notes to Consolidated Financial Statements. The KCC has allowed certain transition costs to be amortized and recovered in rates over a forty year period with no rate of return on the unrecovered balance. Management believes that all transition costs recorded as a regulatory asset will be recovered through rates based on the accounting orders received and regulatory precedents established by the KCC. The Company amortizes reacquired debt costs, which includes unamortized debt costs, in accordance with the accounting rules prescribed by the OCC and KCC. These costs have been included in recent rate filings with the OCC and will be included in future rate filings with the KCC as a component of interest. In accordance with various rate orders received from the KCC and the OCC, Kansas Gas Service has not yet collected through rates the amounts necessary to pay a significant portion of the net deferred income tax liabilities. As management believes it is probable that the net future increases in income taxes payable will be recovered from customers, it has recorded a regulatory asset for these amounts. Amortization expense related to regulatory assets was approximately $13.7 million, $11.4 million, and $10.1 million in 1999, 1998, and 1997, respectively. 51 52 (E) CAPITAL STOCK The Company has approximately 68 million shares of unrestricted common stock available for issue. The Company redeemed all of its outstanding shares of Series A Preferred Stock, par value $50 per share, at its stated voluntary liquidation value of $53 per share during the third quarter of fiscal 1997. The Company issued Series A Convertible Preferred Stock, par value $0.01 per share, at the time of the transaction with Western. The holders of Series A Convertible Preferred Stock are entitled to receive a dividend payment, with respect to each dividend period of the common stock, equal to 1.5 times the dividend amount declared in respect of each share of common stock for the first five years of the agreement. After five years, the rate will be 1.25 times the dividend amount declared in respect of each share of common stock, and at no time, will the dividend be less that $1.80 per share. The terms of Series B Convertible Preferred Stock are the same as Series A Convertible Preferred Stock, except that the dividend amount is equal to the greater of 1.25 times the common stock dividend or $1.50 per share. In 1999, the Company acquired and canceled all of the Series B Convertible Preferred Stock it had issued in 1998 and 1999. Series C Preferred Stock is designed to protect ONEOK, Inc. shareholders from coercive or unfair takeover tactics. Holders of Series C Preferred Stock are entitled to receive, in preference to the holders of ONEOK common stock, quarterly dividends in an amount per share equal to the greater of $1 or subject to adjustment, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount of all non-cash dividends. No Series C Preferred Stock has been issued. The Series A and Series B Convertible Preferred Stock is convertible, subject to certain restrictions, at the option of the holder, into ONEOK, Inc., Common Stock at the rate of one share for each share of Series A or Series B Convertible Preferred Stock. During 1999, the Company initiated a stock buyback plan for up to 15 percent of its capital stock. The program authorizes the Company to make purchases of its common stock on the open market with the timing and terms of purchases and the number of shares purchased to be determined by management based on market conditions and other factors. Through August 31, 1999, the shares purchased totaled 715,080. The purchased shares will be held in treasury and will be available for general corporate purposes, funding of stock-based compensation plans, resale at a future date, or retirement. Purchases will be financed with short-term debt or made from available funds. The Board of Directors has reserved 3.0 million shares of ONEOK, Inc's common stock for the Direct Stock Purchase and Dividend Reinvestment Plan of which 127 thousand shares were issued in 1999 and 142 thousand shares were issued in 1998; and has reserved approximately 7.2 million shares for the Thrift Plan for Employees of ONEOK, Inc. and Subsidiaries. Under the most restrictive covenants of the Company's loan agreements, $251.4 million (83.4 percent) of retained earnings at August 31, 1999, was available to pay dividends. (F) LINES OF CREDIT AND SHORT-TERM NOTES PAYABLE Commercial paper and short-term notes payable totaling $264 million and $212 million were outstanding at August 31, 1999 and 1998, respectively. The commercial paper and notes carried average interest rates of 5.42 percent and 5.83 percent at August 31, 1999 and 1998, respectively. The Company has a $600 million short-term unsecured revolving credit facility which provides a back-up line of credit for commercial paper in addition to providing short-term funds. Interest rates and facility fees are based on prevailing market rates and the Company's credit ratings. No compensating balance requirements existed at August 31, 1999. Maximum short-term debt from all sources as approved by the Company's Board of Directors is $750 million. (G) LONG-TERM DEBT All long-term notes payable at August 31, 1999, are unsecured. The aggregate current maturities of long-term debt for each of the five years ending August 31, 2004, are $22.8 million; $18.2 million; $14.7 million; $14.7 million; 52 53 and $14.7 million, respectively, including $7.1 million which is callable at the option of the holder in each of those years. During fiscal 1999, the Company refinanced $116.2 million of the 9.7% and $59.7 million of the 9.75% long-term notes payable with new debt at a lower interest rate. In connection therewith, the Company paid a redemption premium of $18 million. See Note D of Notes to the Consolidated Financial Statements.
August 31, 1999 1998 - ---------- -------- -------- (Thousands of Dollars) Long-term Notes Payable 6.20% due 1999 $ -- $ 8,000 6.43% due 2000 5,000 5,000 6.5% due 2001 1,534 5,393 8.44% due 2004 40,000 40,000 7.75% due 2006 300,000 - 8.32% due 2007 32,000 36,000 6.00% due 2009 100,000 - 6.40% due 2019 99,794 - 9.70% due 2019 8,826 125,000 9.75 % due 2020 15,305 75,000 8.70% due 2021 34,871 34,871 6.50% due 2028 99,645 - 6 7/8% due 2028 100,000 - - ----------------------------------------------------------- Total Long-term Notes Payable 836,975 329,264 Unamortized debt discount 4,071 - Current maturities 22,817 16,909 - ----------------------------------------------------------- Long-term debt $810,087 $312,355 ===========================================================
(H) EMPLOYEE BENEFIT PLANS RETIREMENT PLANS - The Company has defined benefit retirement plans covering substantially all employees. Company officers and certain key employees are also eligible to participate in supplemental retirement plans. The Company generally funds pension costs at a level equal to the minimum amount required under the Employee Retirement Income Security Act of 1974. OTHER POSTRETIREMENT BENEFIT PLANS - The Company sponsors welfare care plans that provide postretirement medical benefits and life and accidental death and dismemberment benefits to substantially all employees who retire under the Retirement Plans at age 55 or older with at least five years of service. The plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance. The Company elected to delay recognition of the accumulated postretirement benefit obligation (APBO) of approximately $72.2 million and amortize it over 20 years as a component of net periodic postretirement benefit cost. 53 54 In 1999, the Company adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which standardized the disclosure requirements for pensions and other postretirement benefits. SFAS No. 132 did not change the measurement or recognition of amounts related to those plans. Prior-year amounts were reclassified to conform to the new standard. The status of the Company's pension and other postretirement benefit plans are summarized in the tables below.
PENSION BENEFITS POSTRETIREMENT BENEFITS 1999 1998 1999 1998 -------- --------- ---------- --------- (Thousands of Dollars) CHANGE IN BENEFIT OBLIGATIONS Benefit obligation, beginning of year $500,327 $ 327,127 $ 153,326 $ 76,068 Acquisition -- 128,279 -- 51,106 Service cost 9,282 7,221 4,036 2,570 Interest cost 32,832 30,875 10,055 8,223 Participant contributions -- -- 2,260 8,632 Plan amendments 7,600 -- 1,956 -- Actuarial loss (gain) (15,501) 32,404 (4,081) 13,604 Benefits paid (29,675) (25,579) (7,181) (6,877) - ------------------------------------------------------------------------------------------------------------ Benefit obligation, end of year $504,865 $ 500,327 $ 160,371 $ 153,326 ============================================================================================================= CHANGE IN PLAN ASSETS Fair value of assets, beginning of year $595,308 $ 326,384 $ 14,075 $ 5,871 Acquisition -- 174,468 -- -- Actual return on assets 93,854 116,640 (111) 2,296 Employer contributions 899 3,395 3,536 5,910 Benefits paid (29,675) (25,579) -- (2) - ------------------------------------------------------------------------------------------------------------ Fair value of assets, end of year $660,386 $ 595,308 $ 17,500 $ 14,075 ============================================================================================================ Funded status - over (under) $155,521 $ 94,981 $ (142,871) $(139,251) Unrecognized net asset (2,338) (2,805) -- -- Unrecognized transition obligation -- -- 43,048 48,522 Unrecognized prior service cost 8,030 607 4,195 -- Unrecognized net (gain) / loss (93,683) (30,388) 18,379 18,095 Activity subsequent to measurement date -- -- (1,306) (915) - ------------------------------------------------------------------------------------------------------------ (Accrued) / prepaid pension cost $ 67,530 $ 62,395 $ (78,555) $ (73,549) ============================================================================================================ ACTUARIAL ASSUMPTIONS Discount rate 7.00% 6.75% 7.00% 6.75% Expected rate of return 9.00% 9.00% 8.00% 8.00% Compensation increase rate 4.50% 4.00% 4.50% 4.00%
PENSION BENEFITS POSTRETIREMENT BENEFITS 1999 1998 1997 1999 1998 1997 -------- -------- -------- ------- -------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 9,282 $ 7,221 $ 5,126 $ 4,036 $ 2,570 $ 1,744 Interest cost 32,832 30,875 23,766 10,055 8,224 5,599 Expected return on assets (46,846) (38,686) (25,490) (1,325) (739) (297) Amortization of unrecognized net asset at adoption (467) (467) (467) -- -- -- Amortization of unrecognized net transition obligation at adoption -- -- 3,235 3,235 3,608 Amortization of unrecognized prior service cost 177 177 120 -- (212) -- Amortization of net (gain) / loss 786 146 546 688 -- (108) - ------------------------------------------------------------------------------------------------------------------------ Net periodic benefit cost $ (4,236) $ (734) $ 3,601 $16,689 $ 13,078 $ 10,546 ========================================================================================================================
For measurement purposes, a 7.2 percent annual rate of increase in the per capita cost of covered medical benefits (i.e., medical cost trend rate) was assumed for 1999, the rate was assumed to decrease gradually to 5 percent by the year 2003 and remain at that level thereafter. The medical cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed medical cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation as of August 31, 1999, by $14.6 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended 54 55 August 31, 1999, by $1.4 million. Decreasing the assumed medical cost trend by one percentage point in each year would decrease the accumulated postretirement benefit obligation as of August 31, 1999, by $11.9 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended August 31, 1999, by $1.1 million. EMPLOYEE THRIFT PLANS - The Company has Thrift Plans covering substantially all employees. Employee contributions are discretionary. Subject to certain limits, employee contributions are matched by the Company. The annual cost of the plans was $6.3 million in 1999; $4.7 million in 1998; and $3.4 million in 1997. POSTEMPLOYMENT BENEFITS - The Company pays postemployment benefits to former or inactive employees after employment but before normal retirement. REGULATORY TREATMENT - The OCC has approved the recovery of ONG pension costs and other postretirement benefit costs through rates. The costs recovered through rates are based on current funding requirements and the net periodic postretirement benefit cost for pension and postretirement costs, respectively. Differences, if any, between the expense and the amount ordered through rates are charged to earnings. Prior to the acquisition of the assets regulated by the KCC in fiscal 1998, Western had established a corporate-owned life insurance ("COLI") program which it believed in the long term would offset the expenses of its postretirement and postemployment benefit plans. Accordingly, the KCC issued an order permitting the deferral of postretirement and postemployment benefit expenses in excess of amounts recognized on a pay-as-you-go basis. The Company did not acquire the COLI program. In connection with the KCC's approval of the acquisition, the KCC granted the Company the benefit of all previous accounting orders issued to Western and requested that the Company submit a plan of recovery either through a general rate increase or through specific cost savings or revenue increases. Based on regulatory precedents established by the KCC, and the accounting order which permits the Company to seek recovery through rates, management believes that it is probable that accrued postretirement and postemployment benefits can be recovered in rates. The Company plans to file for recovery of these costs and anticipates that recovery will be allowed over a period not to exceed 20 years. If these costs cannot be recovered in rates charged to customers, the Company would be required to record a one-time charge to expense the regulatory asset established for postretirement and postemployment benefit costs totaling approximately $52.7 million at August 31, 1999. (I) COMMITMENTS AND CONTINGENCIES LEASES - The initial term of the Company's headquarters building, ONEOK Plaza, is for 25 years, expiring in 2009, with six five-year renewal options. At the end of the initial term or any renewal period, the Company can purchase the property at its fair market value. Rent for the lease accrues annually at $6.8 million until 2009. Rent payments were $5.8 million for 1999, 1998, and 1997. Estimated future minimum rental payments for the lease are $7.6 million for the year ending August 31, 2000, and $9.3 million for each of the years ending August 31, 2001 through 2009. The Company has the right to sublet excess office space in ONEOK Plaza. The Company received $2.8 million, $2.8 million, and $2.7 million in rental revenue during 1999, 1998, and 1997, respectively, for various subleases. Estimated minimum future rental payments to be received under existing contracts for subleases are $2.9 million in 2000, $2.9 million in 2001, $2.8 million in 2002, $2.4 million in 2003, $1.8 million in 2004, and a total of $2.9 million thereafter. Other operating leases include office buildings and equipment. The total estimated payments for these leases are $2.5 million in 2000, $1.5 million in 2001, and $1.4 million in 2002, $1.2 million in 2003 and $0.6 million in 2004. SOUTHWEST GAS CORPORATION - During the year ended August 31, 1999, the Company and Southwest Gas Corporation (Southwest) entered into a definitive agreement whereby the Company agreed to acquire Southwest for $30 per share in an all cash transaction valued at $918 million. The total transaction cost, including assumed debt, is estimated at $1.8 billion. The transaction is expected to be completed during 2000, subject to various conditions including regulatory approvals. Southwest shareholders approved the agreement on August 10, 1999. The Company and 55 56 certain of its officers as well as Southwest have been named as defendants in a lawsuit brought by Southern Union Company in connection with the proposed acquisition in the total amount of $750 million. The Southern Union allegations include, but are not limited to, Racketeer, Influenced and Corrupt Organizations Act violations and improper interference in a contractual relationship between Southwest and Southern Union. The Company, as third party beneficiary, has filed a lawsuit against Southern Union for breach of a confidentiality agreement with Southern Union and Southwest. The parties are presently involved in discovery. If any of the plaintiffs should be successful in any of their claims against the Company or Southwest and substantial damages are awarded, it could have a material adverse effect on the Company's operations, cash flow, and financial position. The Company believes the Southern Union allegations are without merit and is defending itself vigorously against all claims. ENVIRONMENTAL - In connection with the Western transaction, the Company acquired responsibility for 12 manufactured gas sites located in Kansas which may contain coal tar and other potentially harmful materials that are classified as hazardous material. Hazardous materials are subject to control or remediation under various environmental laws and regulations. A consent agreement with the Kansas Department of Health and Environment (KDHE) presently governs all future work at these sites. The terms of the consent agreement allow the Company to investigate these sites and set remediation priorities based upon the results of the investigations and risk analysis. The prioritized sites will be investigated over a ten year period. At August 31, 1999, the costs of the investigations and risk analysis have been minimal. Limited information is available about the sites and no testing has been performed. Management's best estimate of the cost of remediation ranges from $100 thousand to $10 million per site based on a limited comparison of costs incurred to remediate comparable sites. These estimates do not give effect to potential insurance recoveries, recoveries through rates or from third parties. The KCC has permitted others to recover their remediation costs through rates. It should be noted that additional information and testing could result in costs significantly below or in excess of the amounts estimated above. To the extent that such remediation costs are not recovered, the costs could be material to the Company's results of operations and cash flows depending on the degree of remediation required and number of years over which the remediation must be completed. OTHER - The Company is a party to other litigation matters and claims which are normal in the course of its operations, and while the results of litigation and claims cannot be predicted with certainty, management believes the final outcome of such matters will not have a materially adverse effect on consolidated results of operations, financial position, or liquidity. (J) INCOME TAXES The provisions for income taxes are as follows:
1999 1998 1997 -------- ------- ------- (Thousands of Dollars) Current income taxes Federal $ 48,760 $62,462 $32,207 State 3,371 11,746 5,620 - ------------------------------------------------------------------------ Total current income taxes 52,131 74,208 37,827 - ------------------------------------------------------------------------ Deferred income taxes Federal 13,671 (6,325) (2,551) State 1,254 (1,298) (437) - ------------------------------------------------------------------------ Total deferred income taxes 14,925 (7,623) (2,988) - ------------------------------------------------------------------------ Total provision for income taxes $ 67,056 $66,585 $34,839 ========================================================================
56 57 Following is a reconciliation of the provision for income taxes.
1999 1998 1997 -------- -------- ------- (Thousands of Dollars) Pretax income $173,413 $168,380 $94,107 Federal statutory income tax rate 35% 35% 35% - ----------------------------------------------------------------------------------------------- Provision for federal income taxes 60,695 58,933 32,937 Amortization of distribution property investment tax credit (1,103) (938) (655) State income taxes, net of federal tax benefit 5,737 6,253 2,936 Other, net 1,727 2,337 (379) - ----------------------------------------------------------------------------------------------- Actual income tax expense $ 67,056 $ 66,585 $34,839 ===============================================================================================
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities are shown in the accompanying table.
August 31, 1999 1998 - ---------- -------- -------- (Thousands of Dollars) Deferred tax assets Accrued liabilities not deductible until paid $ 16,856 $ 6,089 Net operating loss carry forward 1,315 854 Regulatory assets 8,728 4,894 Other 3,444 -- - ------------------------------------------------------------------------ Total deferred tax assets 30,343 11,837 Valuation allowance for net operating loss carryforward expected to expire prior to utilization 880 854 - ------------------------------------------------------------------------ Net deferred tax assets 29,463 10,983 - ------------------------------------------------------------------------ Deferred tax liabilities Excess of tax over book depreciation and depletion 265,493 220,064 Investment in joint ventures 7,458 4,543 Regulatory assets 66,932 77,454 Other 3,502 12,783 - ------------------------------------------------------------------------ Total deferred tax liabilities 343,385 314,844 - ------------------------------------------------------------------------ Net deferred tax liabilities $313,922 $303,861 ========================================================================
The Company has remaining net operating loss carry-forwards for income tax purposes of approximately $17.0 million at August 31, 1999, which expire, unless previously utilized, at various dates through the year 2011. At August 31, 1999, the Company had $8.5 million in deferred investment tax credits recorded in other deferred credits which will be amortized over the next 16 years. (K) SEGMENT INFORMATION In 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires the Company to define and report the Company's business segments based on how management currently evaluates its business. Management has segmented its business based on differences in products and services and management responsibility. The Company conducts its operations through six segments: (1) the Distribution segment distributes natural gas to residential, commercial and industrial customers and leases pipeline capacity to others; (2) the Transportation and Storage segment transports and stores natural gas for others; (3) the Marketing segment markets natural gas to wholesale and retail customers and markets electricity to wholesale customers; (4) the Gathering and Processing segment gathers and processes natural gas and natural gas liquids; (5) the Production segment produces natural gas and oil; and (6) the Other segment primarily operates and leases the Company's headquarters building and a related parking facility. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies. Intersegment oil and gas sales are recorded on the same basis as sales to unaffiliated customers. 57 58 All corporate overhead costs relating to a reportable segment have been allocated for the purpose of calculating operating income. The Company's equity method investments do not represent operating segments of the Company. The Company has no single external customer from which it receives ten percent or more of its revenues.
Gathering Transportation and Eliminations 1999 Distribution and Storage Marketing Processing Production and Other Total ---- ------------ -------------- --------- ---------- ---------- ------------ ---------- (Thousands of Dollars) Sales to unaffiliated customers $ 915,782 $ 29,393 $ 772,331 $ 72,277 $ 46,386 $ 6,641 $1,842,810 Intersegment sales 8,168 79,993 53,067 11,513 22,868 (175,609) -- - --------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 923,950 $ 109,386 $ 825,398 $ 83,790 $ 69,254 $ (168,968) $1,842,810 - --------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 404,384 $ 109,386 $ 35,443 $ 83,790 $ 69,254 $ (15,471) $ 686,786 Operating Expenses $ 230,868 $ 33,894 $ 9,069 $ 63,686 $ 19,128 $ (19,146) $ 337,499 Depreciation, depletion and amortization $ 75,443 $ 13,852 $ 503 $ 3,562 $ 34,073 $ 2,271 $ 129,704 Operating Income $ 98,073 $ 61,640 $ 25,871 $ 16,542 $ 16,053 $ 1,404 $ 219,583 Income from Equity Investments $ -- $ 1,501 $ -- $ -- $ 2,360 $ -- $ 3,861 Total Assets $ 1,722,381 $ 373,742 $ 273,491 $ 343,133 $ 361,806 $ (49,608) $3,024,945 Capital Expenditures $ 98,685 $ 32,618 $ 4,196 $ 8,557 $ 95,431 $ 4,068 $ 243,555 - ---------------------------------------------------------------------------------------------------------------------------
Gathering Transportation and Eliminations 1998 Distribution and Storage Marketing Processing Production and Other Total ---- ------------ -------------- --------- ---------- ---------- ------------ ---------- (Thousands of Dollars) Sales to unaffiliated customers $ 956,044 $ 17,399 $ 746,744 $ 63,248 $ 31,570 $ 5,753 $1,820,758 Intersegment sales 7,784 73,302 31,870 15,309 12,312 (140,577) -- - --------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 963,828 $ 90,701 $ 778,614 $ 78,557 $ 43,882 $ (134,824) $1,820,758 - --------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 378,376 $ 90,701 $ 19,927 $ 78,557 $ 43,882 $ (10,694) $ 600,749 Operating Expenses $ 208,513 $ 31,052 $ 7,024 $ 60,887 $ 14,312 $ (11,503) $ 310,285 Depreciation, depletion and amortization $ 66,214 $ 12,818 $ 561 $ 2,249 $ 18,872 $ 939 $ 101,653 Operating Income $ 103,650 $ 46,831 $ 12,342 $ 15,421 $ 10,698 $ (131) $ 188,811 Income from Equity Investments $ -- $ -- $ -- $ -- $ -- $ -- $ -- Total Assets $ 1,771,999 $ 351,692 $ 130,100 $ 86,955 $ 282,765 $ (201,024) $2,422,487 Capital Expenditures $ 77,198 $ 50,271 $ -- $ 4,735 $ 167,669 $ 6,533 $ 306,406 - ---------------------------------------------------------------------------------------------------------------------------
Gathering Transportation and Eliminations 1997 Distribution and Storage Marketing Processing Production and Other Total ---- ------------ -------------- --------- ---------- ---------- ------------ ---------- (Thousands of Dollars) Sales to unaffiliated customers $ 592,603 $ 5,229 $ 459,698 $ 72,739 $ 26,497 $ 5,161 $1,161,927 Intersegment sales 2,502 65,270 23,501 14,333 14,018 (119,624) -- - --------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 595,105 $ 70,499 $ 483,199 $ 87,072 $ 40,515 $ (114,463) $1,161,927 - --------------------------------------------------------------------------------------------------------------------------- Net Revenues $ 225,252 $ 70,499 $ 12,321 $ 87,072 $ 40,515 $ 308 $ 435,967 Operating Expenses $ 116,325 $ 28,136 $ 3,707 $ 71,800 $ 12,342 $ 1,033 $ 233,343 Depreciation, depletion and amortization $ 42,980 $ 8,395 $ 482 $ 2,393 $ 19,899 $ 360 $ 74,509 Operating Income $ 65,947 $ 33,968 $ 8,132 $ 12,879 $ 8,274 $ (1,085) $ 128,115 Income from Equity Investments $ -- $ -- $ -- $ -- $ -- $ -- $ -- Total Assets $ 855,587 $ 221,233 $ 64,190 $ 46,602 $ 94,496 $ (44,701) $1,237,407 Capital Expenditures $ 39,825 $ 27,922 $ 373 $ 10,563 $ 32,911 $ 413 $ 112,007 - ---------------------------------------------------------------------------------------------------------------------------
58 59 (L) QUARTERLY FINANCIAL DATA (UNAUDITED) Total operating revenues are consistently greater from November through May due to the large volume of natural gas sold to customers for heating. A summary of the unaudited quarterly results of operations for 1999 and 1998 follows:
First Second Third Fourth 1999 Quarter Quarter Quarter Quarter ---- --------- --------- --------- --------- (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 374,936 $ 592,664 $ 418,080 $ 457,130 Operating income $ 29,999 $ 125,137 $ 45,166 $ 19,281 Other income $ 4,993 $ -- $ -- $ 1,646 Income taxes $ 9,387 $ 44,596 $ 10,985 $ 2,089 Net Income $ 14,250 $ 68,532 $ 21,196 $ 2,379 Earnings (loss) per share of common stock Basic $ 0.16 $ 1.87 $ 0.38 $ (0.22) Diluted $ 0.16 $ 1.33 $ 0.38 $ (0.22) Dividends per share of common stock $ 0.31 $ 0.31 $ 0.31 $ 0.31 Average shares of common stock outstanding (000's) Basic 31,535 31,594 31,634 31,233 Diluted 31,578 51,687 31,640 31,233 - ----------------------------------------------------------------------------------------------------------
First Second Third Fourth 1998 Quarter Quarter Quarter Quarter ---- --------- --------- --------- --------- (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 314,160 $ 707,410 $ 444,048 $ 355,140 Operating income $ 28,486 $ 116,605 $ 50,050 $ (6,330) Other income $ -- $ 14,644 $ -- $ -- Income taxes $ 7,438 $ 46,611 $ 17,270 $ (4,734) Net Income (loss) $ 12,520 $ 73,836 $ 26,936 $ (11,497) Earnings (loss) per share of common stock Basic $ 0.44 $ 2.06 $ 0.57 $ (0.65) Diluted $ 0.44 $ 1.43 $ 0.52 $ (0.65) Dividends per share of common stock $ 0.30 $ 0.30 $ 0.30 $ 0.30 Average shares of common stock outstanding (000's) Basic 28,268 31,466 31,536 31,586 Diluted 28,268 51,576 51,589 31,586 - ----------------------------------------------------------------------------------------------------------
59 60 (M) SUPPLEMENTAL CASH FLOW INFORMATION The table presents supplemental information relative to the Company's cash flows for the years ended August 31, 1999, 1998, and 1997.
1999 1998 1997 --------- --------- --------- (Thousands of Dollars) Cash paid during the year Interest (including amounts capitalized) $ 50,498 $ 34,637 $ 39,993 Income taxes $ 59,466 $ 73,772 $ 34,618 Noncash transactions Gas received as payment in kind $ 135 $ 280 $ 478 Issuance of common stock related to Stock Performance Plan $ -- $ -- $ -- Dividend reinvestment plan $ -- $ -- $ 5,482 Acquisitions Plant, property and equipment $ 289,931 $ 642,742 -- Current assets -- 232,738 -- Current liabilities -- (42,575) -- Debt assumed -- (161,698) -- Regulatory assets and goodwill 10,817 169,983 -- Deferred debits -- 62,633 -- Deferred credits -- (89,655) -- Deferred income taxes (4,461) (127,744) -- Capital stock -- (662,003) -- --------- --------- Cash paid $ 296,287 $ 24,421 $ -- ========================================================================================
(N) STOCK BASED COMPENSATION LONG-TERM INCENTIVE PLAN - The Long-term Incentive Plan (Plan) provides for the granting of incentive stock options, fixed stock options, and stock bonus awards to key employees. This Plan replaces the Key Employee Stock Purchase Plan. Under the Plan, options may be granted by the Executive Compensation Committee (the Committee) at any time within ten years expiring August 17, 2005. Options may be granted which are not exercisable until a fixed future date or in installments. The Plan also provides for restored options in the event that the optionee surrenders shares of common stock which the optionee already owns in full or partial payment of the options price under this option and/or surrenders shares of common stock to satisfy withholding tax obligations incident to the exercise of this option. A restored option has an option price equal to the fair market value of the common stock on the date on which the exercise of the option resulted in the grant of the restored option. The Company has reserved one million shares of common stock for the Plan. 60 61 Options issued to date become void upon voluntary termination of employment other than retirement. In the event of retirement or involuntary termination, the optionee may exercise the option within three months. In the event of death, the option may be exercised by the personal representative of the optionee within a period to be determined by the Committee and stated in the option. Options issued to date can be exercised after one year from grant date and must be exercised no more than ten years after grant date. Activity to date has been as follows:
Weighted Number of Average Shares Exercise Price --------- -------------- Outstanding August 31, 1996 107,400 $ 23.69 Granted 100,700 $ 26.88 Exercised (20,700) $ 23.69 Expired (2,200) $ 26.69 Restored 4,147 $ 30.71 - -------------------------------------------------------------------- Outstanding August 31, 1997 189,347 $ 25.54 Granted 262,576 $ 33.39 Exercised (96,047) $ 25.55 Expired (4,900) $ 33.94 - -------------------------------------------------------------------- Outstanding August 31, 1998 350,976 $ 31.30 Granted 265,724 $ 35.22 Exercised (27,950) $ 26.88 Expired (2,500) $ 34.90 Restored 35,845 $ 35.95 - -------------------------------------------------------------------- Outstanding August 31, 1999 622,095 $ 33.09 - -------------------------------------------------------------------- Options Exercisable August 31, 1997 88,347 $ 24.00 August 31, 1998 94,469 $ 25.78 August 31, 1999 354,995 $ 31.49
At August 31, 1999, the Company had 283,524 outstanding options with exercise prices ranging between $23.69 to $34.03 and a weighted average remaining life of 7.68 years. All of these options were exercisable at August 31, 1999 with a weighted average exercise price of $30.26. The Company also had 338,571 options outstanding at August 31, 1999 with exercise prices ranging between $35.22 and $42.53 and a weighted average remaining life of 8.78 years. Of these options, 71,471 were exercisable at August 31, 1999 at a weighted average exercise price of $35.46. EMPLOYEE STOCK PURCHASE PLAN - In 1995, the Company authorized the Employee Stock Purchase Plan and reserved 350,000 shares of common stock for it. Almost all full-time employees are eligible to participate. Under the terms of the plan, employees can choose to have up to ten percent of their annual earnings withheld to purchase the Company's common stock. The Committee may allow contributions to be made by other means provided that in no event will contributions from all means exceed ten percent of the employee's annual earnings. The purchase price of the stock is 85 percent of the lower of its beginning-of-year or end-of-year market price. Approximately 54 percent, 60 percent and 55 percent of eligible employees participated in the plan in fiscal 1999, 1998 and 1997, respectively. Under the plan, the Company sold 97,091 shares in December 1998, 105,923 shares in December 1997 and 107,080 shares in December 1996. 61 62 ACCOUNTING TREATMENT - The Company continues to apply APB 25 in accounting for both plans and accordingly, no compensation has been recognized in the consolidated financial statements. Had the Company applied the provisions of SFAS 123 to determine the compensation cost under these plans, the Company's pro forma net income and diluted earnings per share would have been as follows:
1999 1998 1997 -------- -------- ------- Net Income (000's) As reported $106,357 $101,795 $59,268 Pro forma $ 99,887 $ 98,592 $58,247 Earnings per share - Diluted As reported $ 2.06 $ 2.23 $ 2.13 Pro forma $ 1.94 $ 2.16 $ 2.10 =============================================================
The fair market value of each option granted is estimated based on the Black-Scholes model. Based on previous stock performance, volatility is estimated to be 0.2151 for 1999, 0.2720 for 1998 and 0.2264 for 1997. Dividend yield is estimated to be 4.0 for 1999, 3.9 percent for 1998 and 3.7 percent for 1997, with a risk-free interest rate of 5.983 percent, 5.032 percent, and 6.590 percent in 1999, 1998, and 1997, respectively. Expected life ranged from 1 to 10 years based upon experience to date and the make-up of the optionees. Fair value of options granted under the Plan were $13.86, $8.75, and $11.58 for 1999, 1998, and 1997, respectively. (O) EARNINGS PER SHARE INFORMATION The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations. The effect of dilutive options in fiscal 1997 is insignificant.
Per Share August 31, 1999 Income Shares Amount - --------------- -------- -------- --------- (Thousands, except per share amounts) Basic EPS Income available to common stockholders $ 69,110 31,498 $ 2.19 Effect of Dilutive Securities Options -- 20 Convertible preferred stock 37,247 20,053 -------- -------- Diluted EPS Income available to common stockholders + assumed conversions $106,357 51,571 $ 2.06 ===============================================================================
Per Share August 31, 1998 Income Shares Amount - --------------- -------- -------- --------- (Thousands, except per share amounts) Basic EPS Income available to common stockholders $ 74,816 30,674 $ 2.44 Effect of Dilutive Securities Options -- 53 Convertible preferred stock 26,979 15,002 -------- -------- Diluted EPS Income available to common stockholders + assumed conversions $101,795 45,729 $ 2.23 ===============================================================================
Per Share August 31, 1997 Income Shares Amount - --------------- -------- -------- --------- (Thousands, except per share amount) Basic and Diluted EPS Income available to common stockholders $ 58,983 27,644 $ 2.13 ===============================================================================
62 63 (P) OIL AND GAS PRODUCING ACTIVITIES The following is historical revenue and cost information relating to the Company's production operations:
1999 1998 1997 -------- -------- -------- (Thousands of Dollars) Capitalized costs at end of year Unproved properties $ 4,245 $ 3,505 $ 2,994 Proved properties 393,096 320,055 155,208 - ------------------------------------------------------------------------------------------------- Total capitalized costs 397,341 323,560 158,202 Accumulated depreciation, depletion, and amortization 120,109 100,601 83,457 - ------------------------------------------------------------------------------------------------- Net capitalized costs $277,232 $222,959 $ 74,745 ================================================================================================= Costs incurred during the year Property acquisition costs (unproved) $ 948 $ 601 $ 174 Exploitation costs $ 17 $ 6 $ 71 Development costs $ 13,659 $ 15,315 $ 6,683 Purchase of minerals in place $ 79,385 $151,019 $ 21,489 - -------------------------------------------------------------------------------------------------
The accompanying schedule presents the results of operations of the Company's oil and gas producing activities. The results exclude general office overhead and interest expense attributable to oil and gas production.
1999 1998 1997 -------- -------- -------- (Thousands of Dollars) Net revenues from production Sales to unaffiliated customers $ 42,077 $ 30,003 $ 24,141 Gas sold to affiliates 22,868 12,312 14,018 - ------------------------------------------------------------------------------------ Net revenues from production 64,945 42,315 38,159 - ------------------------------------------------------------------------------------ Production costs 14,516 9,478 7,918 Exploitation costs 17 351 (12) Depreciation, depletion, and amortization 33,771 18,210 19,246 Income taxes 6,359 5,522 4,258 - ------------------------------------------------------------------------------------ Total expenses 54,663 33,561 31,410 - ------------------------------------------------------------------------------------ Results of operations from producing activities $ 10,282 $ 8,754 $ 6,749 ====================================================================================
(Q) OIL AND GAS RESERVES (UNAUDITED) Following are estimates of the Company's proved oil and gas reserves, net of royalty interests and changes herein, for the 1999, 1998, and 1997 fiscal years. 63 64 The Company emphasizes that the volumes of reserves shown are estimates, which, by their nature, are subject to later revision. The estimates are made by the Company utilizing all available geological and reservoir data as well as production performance data. These estimates are reviewed annually and revised, either upward or downward, as warranted by additional performance data.
Oil Gas (MBbls) (MMcf) ------- ------- August 31, 1996 2,010 74,068 Revisions of prior estimates 115 2,108 Extensions, discoveries, and other additions 111 3,009 Purchases of minerals in place 155 19,214 Sales of minerals in place (41) (515) Production (336) (14,565) - ----------------------------------------------------------------- August 31, 1997 2,014 83,319 Revisions of prior estimates (223) (1,255) Extensions, discoveries, and other additions 167 23,251 Purchases of minerals in place 1,645 89,724 Sales of minerals in place (1) (174) Production (330) (16,818) - ----------------------------------------------------------------- August 31, 1998 3,272 178,047 Revisions of prior estimates 300 8,397 Extensions, discoveries, and other additions 376 37,202 Purchases of minerals in place 884 61,286 Sales of minerals in place (175) (3,057) Production (460) (27,773) - ----------------------------------------------------------------- August 31, 1999 4,197 254,102 ================================================================= Proved developed reserves August 31, 1997 1,615 62,115 August 31, 1998 2,228 134,346 August 31, 1999 2,540 175,771 - -----------------------------------------------------------------
(R) DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED) Estimates of the standard measure of discounted future cash flows from proved reserves of oil and natural gas shown in the accompanying table are based on prices at the end of the year. Gas prices are escalated only for fixed and determinable amounts under provisions of applicable regulations in some contracts. These estimated future cash flows are reduced by estimated future development and production costs based on year-end cost levels, assuming continuation of existing economic conditions, and by estimated future income tax expense. The tax expense is calculated by applying the current year-end statutory tax rates to pretax net cash flows (net of tax depreciation, depletion, and lease amortization allowances) applicable to oil and gas production.
1999 1998 1997 --------- -------- -------- (Thousands of Dollars) Future cash inflows $ 639,721 $423,331 $218,708 Future production and development costs 194,077 129,128 67,962 Future income taxes 53,442 32,025 33,514 - -------------------------------------------------------------------------------------- Future net cash flows 392,202 262,178 117,232 10 percent annual discount for estimated timing of cash flows 161,156 99,549 40,621 - -------------------------------------------------------------------------------------- Standardized measure of discounted future net cash flows relating to oil and gas reserves $ 231,046 $162,629 $ 76,611 ======================================================================================
64 65 The changes in standardized measure of discounted future net cash flow relating to proved oil and gas reserves are as follows:
1999 1998 1997 -------- -------- -------- (Thousands of Dollars) Beginning of year $162,629 $ 76,611 $ 67,316 Changes resulting from: Sales of oil and gas produced, net of production costs (50,120) (32,837) (30,241) Net changes in price, development, and production costs 13,629 (6,269) 12,478 Extensions, discoveries, additions, and improved recovery, less related costs 37,379 26,217 5,047 Purchases of minerals in place 67,120 94,031 19,747 Sales of minerals in place (9,326) (142) (1,000) Revisions of previous quantity estimates 10,477 (2,750) 3,159 Accretion of discount 17,317 9,865 8,084 Net change in income taxes (11,618) 3,055 (7,372) Other, net (6,081) (5,152) (607) - ------------------------------------------------------------------------------------------ End of year $231,406 $162,629 $ 76,611 ==========================================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 65 66 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS OF THE REGISTRANT (A) DIRECTORS OF THE REGISTRANT EDWYNA G. ANDERSON Director since 1995 Age 69 Mrs. Anderson served as General Counsel of Duquesne Light Company from September 1988 until retirement in October 1994. She also served as Special Counsel to the President of Duquesne Light Company from October 1994 until March 1995, when she retired from that position. WILLIAM L. FORD Director since 1981 Age 56 Mr. Ford has served as President of Shawnee Milling Company since 1979. He serves on the boards of numerous civic and business organizations and not-for-profit associations. BERT H. MACKIE Director since 1989 Age 57 Mr. Mackie has been with Security National Bank since 1962, and is currently President and a director. Mr. Mackie serves on the Board of Governors of the United States Postal Service. GARY D. PARKER Director since 1991 Age 54 Mr. Parker, a certified public accountant, is also the majority shareholder of Moffitt, Parker & Company, Inc., and has been President of the firm since 1982. He is a director of First National Bank and Trust Company of Muskogee, Oklahoma. LARRY W. BRUMMETT Director since 1994 Age 49 Mr. Brummett has been employed by the Company for more than 24 years. He was employed by ONEOK's Oklahoma Natural Gas Company division as an engineer trainee in June 1974 and, after receiving a number of promotions within the division, was elected Vice President of Tulsa District September 1, 1986, and Executive Vice President in May 1990. He was elected Executive Vice President of ONEOK Inc. January 21, 1993. He was elected President and Chief Executive Officer February 17, 1994, and was elected to the additional position of Chairman of the Board effective June 1, 1994. Mr. Brummett is a director of the American Gas Association; Southern Gas Association; Oklahoma State Chamber of Commerce; Metropolitan Chamber of Commerce, Tulsa; and the Oklahoma City Branch of the Federal Reserve Bank. He is also an officer or director of numerous civic and business organizations and not-for-profit associations. DOUGLAS ANN NEWSOM, PH.D. Director since 1982 Age 65 Dr. Newsom is a Professor within the Department of Journalism at Texas Christian University, Fort Worth, Texas. In addition to her teaching position, Dr. Newsom is a textbook author and public relations counselor. Ms. Newsom has been a member of the Advisory Council of GRI for fifteen years. 66 67 J. D. SCOTT Director since 1979 Age 67 Mr. Scott served as President, Chief Executive Officer and Chairman of the Board of ONEOK Inc. from January 1987 until he retired in 1994. DOUGLAS T. LAKE Director since 1998 Age 49 Mr. Lake, Executive Vice President and Chief Strategic Officer of Western Resources, Inc., became a director of ONEOK, Inc. in October 1998. He joined Western Resources, Inc. in September 1998, having previously served as Senior Managing Director of the investment Banking Department of Bear Stearns & Co. Inc. He is Chairman of the Board of Directors of Protection One, Inc., and is currently a Director of Guardian International, Inc. WILLIAM M. BELL Director since 1981 Age 64 Mr. Bell is President and a director of Bank One, Oklahoma, N.A. He serves on the boards of numerous civic and business organizations and not-for-profit associations. DOUGLAS R. CUMMINGS Director since 1989 Age 69 Mr. Cummings has been President of Cummings Oil Company since 1972. He is an officer or director of numerous civic and business organizations and not-for-profit associations. HOWARD R. FRICKE Director since 1997 Age 63 Mr. Fricke is Chairman of the Board and Chief Executive Officer of Security Benefit Group of Companies. He joined the Security Benefit Group of Companies in 1988, having previously served as chairman and chief executive officer of the Anchor National Company in Phoenix, Arizona. He is currently a director of Payless ShoeSource, Inc., and UMB Financial Corp. He also serves on the board of directors of the American Council for Life Insurance and Life Officer Management Association. DAVID L. KYLE Director since 1995 Age 47 Mr. Kyle is the President and Chief Operating Officer of ONEOK, Inc. He was employed by Oklahoma Natural Gas Company, a division of ONEOK Inc., in 1974 as an engineer trainee. He served in a number of positions prior to being elected Vice President of Gas Supply September 1, 1986, and Executive Vice President May 17, 1990. He was elected President September 1, 1994. He was elected President of ONEOK Inc. effective September 1, 1997. (B) EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the executive officers of the Company is included in Part I of this Form 10-K. (C) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ONEOK believes that during Fiscal 1999 all Securities and Exchange Commission filings of its officers, directors and ten percent shareholders complied with the requirements of Section 16 of the Securities Exchange Act, based on a review of forms filed, or written notice that no annual forms were required, except for two reports covering two purchases of stock made by Ms. Douglas Ann Newsom's spouse, which were reported late on a Form 4 filed for April 67 68 1999. Ms. Newsom disclaims ownership of these shares. ITEM 11. EXECUTIVE COMPENSATION
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------------------------------------------------------- SECURITIES OTHER RESTRICTED UNDERLYING ANNUAL STOCK OPTIONS/ LTIP ALL OTHER NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION AWARD(S) SARS(2) PAYOUTS COMPENSATION(3) YEAR ($) ($) ($) ($) # ($) ($) ----------- ----------- ---------- ------------ ----------- ----------- ---------- --------------- L. W. BRUMMETT 1999 489,667 181,700 NONE NONE 31,200 NONE 20,325 Chairman of the Board, 1998 435,800 634,900 NONE NONE 44,179(4) NONE 12,800 and Chief Executive Officer 1997 400,933 500,000 NONE NONE 10,000 NONE 9,400 ----------- ----------- ---------- ------------ ----------- ----------- ---------- --------------- D. L. KYLE 1999 354,669 114,500 NONE NONE 21,000 NONE 14,412 President and 1998 317,472 400,000 NONE NONE 30,801(4) NONE 12,800 Chief Operating Officer 1997 297,600 375,000 NONE NONE 8,000 NONE 9,400 ----------- ----------- ---------- ------------ ----------- ----------- ---------- --------------- E. N. DUBAY 1999 234,667 48,100 NONE NONE 12,000 NONE 12,910 President - Kansas 1998 201,233 209,900 NONE NONE 10,000 NONE 10,000 Gas Service Company 1997 166,850 250,000 NONE NONE 2,500 NONE 3,200 ----------- ----------- ---------- ------------ ----------- ----------- ----------- --------------- J. A. GABERINO, Jr. 1999 235,000 38,500 NONE NONE 7,100 NONE 9,762 Senior Vice President 1998 131,250 78,400 NONE NONE 0 NONE 0 and General Counsel 1997 0 0 NONE NONE 0 ----------- ----------- ---------- ------------ ----------- ----------- ----------- --------------- J. C. KNEALE 1999 216,676 48,100 NONE NONE 6,500 NONE 12,300 Vice President, Treasurer, 1998 191,677 167,900 NONE NONE 9,965(4) NONE 9,234 and Chief Financial Officer 1997 143,733 105,340 NONE NONE 4,429(4) NONE 8,620 ----------- ----------- ---------- ------------ ----------- ----------- ----------- --------------- J. D. NEAL 1999 128,917 20,700 NONE NONE 4,000 NONE 7,595 RETIRED 05/31/99 1998 168,000 85,400 NONE NONE 5,900 NONE 9,600 Vice President, Treasurer, and Chief Financial Officer 1997 166,066 102,600 NONE NONE 2,500 NONE 9,400 ----------- ----------- ---------- ------------ ----------- ----------- ----------- ---------------
1. Included in this column are fees received in Fiscal 1999 by Mr. Brummett and Mr. Kyle for serving on the Board of Directors of Magnum Hunter Resources, Inc. ONEOK Resources Company is a 10% owner of Magnum Hunter Resources, Inc. 2. No SARs were granted in Fiscal Year 1999 to any of the named executive officers. 3. The table below shows the components of this column for Fiscal 1999:
Company Contributions Company Match to ONEOK, Inc. to Thrift Plan Employee Non-Qualified Deferred Compensation Plan --------------------- ------------------------------------------------- L. W. Brummett $10,325.00 $10,000.00 David L. Kyle 10,012.00 4,400.00 Eugene N. Dubay 12,910.00 0.00 John A. Gaberino, Jr. 9,762.00 0.00 James C. Kneale 12,300.00 0.00 Jerry D. Neal 7,595.00 0.00
4. A portion of the securities underlying these grants are restored or "reloaded" options. The stock option agreement provided that an additional option may be granted if, and when, the optionee exercises all or part of the option using Common Stock to pay the purchase price of the option or to satisfy tax obligations incident to the exercise of the option. The restored option will be exercisable for the number of shares tendered to pay the option price or to satisfy any tax obligation, and will be exercisable at any time after the date of grant (or at any other time as determined by the Company) and will expire on the expiration date of the original grant. The number of restored options included in these grants are as follows: L. W. Brummett 11,662 shares at an exercise price of $35.75 Expires 11-16-05 7,517 shares at an exercise price of $35.75 Expires 10-10-06 D. L. Kyle 5,919 shares at an exercise price of $35.75 Expires 11-16-05 1,369 shares at an exercise price of $35.75 Expires 11-16-05 6,013 shares at an exercise price of $35.75 Expires 10-10-06 J. C. Kneale 1,974 shares at an exercise price of $34.03 Expires 10-10-06 1,391 shares at an exercise price of $42.53 Expires 11-16-05 1,929 shares at an exercise price of $30.69 Expires 11-16-05
68 69 AGGREGATED OPTION EXERCISES AND YEAR-END VALUES The following table shows information for the Named Executive Officers, concerning: o exercises of stock options and SARs(1) during Fiscal 1999; and o the amount and values of unexercised stock options and SARs as of August 31, 1999. AGGREGATED OPTIONS/SAR EXERCISES IN 1999 AND YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT SHARES YEAR END (#) FISCAL YEAR-END ($) (2) ACQUIRED ON EXERCISE VALUE REALIZED NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------- ----------- -------------- ------------ ------------- ------------- ------------- L. W. BRUMMETT 0 0 44,179 31,200 $ 0.00 $ 0.00 Chairman of the Board and Chief Executive Officer - ------------------------------------------------------------------------------------------------------------------------------------ D. L. KYLE 0 0 30,801 21,000 $ 0.00 $ 0.00 President and Chief Operating Officer - ------------------------------------------------------------------------------------------------------------------------------------ E. N. DUBAY 0 0 10,000 12,000 $ 0.00 $ 0.00 President - Kansas Gas Service Company - ------------------------------------------------------------------------------------------------------------------------------------ J. A. GABERINO, Jr. 0 0 0 7,100 $ 0.00 $ 0.00 Senior Vice President and General Counsel - ----------------------------------------------------------------------------------------------------------------------------------- J. C. KNEALE 0 0 9,965 6,500 $ 0.00 $ 0.00 Vice President, Treasurer, and Chief Financial Officer - ----------------------------------------------------------------------------------------------------------------------------------- J. D. NEAL RETIRED 05/31/99 0 0 10,900 0 $ 27,650.00 $ 0.00 Vice President, Treasurer, and Chief Financial Officer - -----------------------------------------------------------------------------------------------------------------------------------
(1) No Stock Appreciation Rights ("SARs") were granted in Fiscal 1999. (2) Based on per share price for ONEOK, Inc. Common Stock of $30.812 per share. The price reflects the average of the high and low trading price on the New York Stock Exchange on August 31, 1999. 69 70 OPTION GRANT TABLE The following table represents additional information concerning the option awards shown in the Summary Compensation Table for Fiscal Year 1999. These options to purchase common stock were granted to the Named Executive Officers under the ONEOK, Inc. Long-Term Incentive Plan. OPTION GRANTS IN FISCAL YEAR 1999(1)
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF INDIVIDUAL GRANTS STOCK PRICE APPRECIATION FOR OPTION TERM(3) - ------------------------------------------------------------------------------------------------------------------------------ PERCENT OF TOTAL OPTIONS SECURITIES GRANTED TO EXERCISE UNDERLYING EMPLOYEES OR BASE 5% 10% OPTIONS IN FISCAL PRICE EXPIRATION GRANTED(2) YEAR ($/SHARE) DATE NAME DATE NUMBER ============================== ====================== ============= =========== ============== =========== ============== L. W. BRUMMETT 10-15-98 31,200 10.98% $ 35.218 10-15-08 $ 691,046 $1,751,247 Chairman of the Board and Chief Executive Officer - ------------------------------------------------------------------------------------------------------------------------------ D. L. KYLE 10-15-98 21,000 7.39% $ 35.218 10-15-08 $ 465,127 $1,178,724 President and Chief Operating Officer - ------------------------------------------------------------------------------------------------------------------------------ E. N. DUBAY 10-15-98 12,000 4.22% $ 35.218 10-15-08 $ 265,787 $ 673,556 President - Kansas Gas Service Company - ------------------------------------------------------------------------------------------------------------------------------ J. A. GABERINO, Jr 10-15-98 7,100 2.50% $ 35.218 10-15-08 $ 157,257 $ 398,521 Senior Vice President and General Counsel - ------------------------------------------------------------------------------------------------------------------------------ J. C. KNEALE 10-15-98 6,500 2.29% $ 35.218 10-15-08 $ 143,968 $ 364,843 Vice President, Treasurer, and Chief Financial Officer - ------------------------------------------------------------------------------------------------------------------------------ J. D. NEAL 10-15-98 4,000 1.41% $ 35.218 10-15-08 $ 88,596 $ 224,519 RETIRED 05/31/99 Vice President, Treasurer, and Chief Financial Officer - ------------------------------------------------------------------------------------------------------------------------------
1. No Stock Appreciation Rights ("SARs") were granted in Fiscal 1999. 2. Each option was awarded with an exercise price equal to the fair market value of a share of ONEOK, Inc. Common Stock on the date of the grant and will become exercisable in four equal installments commencing one year from the grant date. 3. These amounts represent assumed rates of appreciation only and are not intended to forecast future appreciation of the Common Stock price. Actual gains, if any, on stock option exercises depend on the future performance of the Common Stock and overall market conditions. There can be no assurances that the potential values reflected in this table will be achieved. 70 71 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
TITLE OF CLASS AND NAME & ADDRESS OF AMT. AND NATURE OF PERCENT OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP ----------------- -------------------- ----------------- COMMON STOCK: - ------------------------------------------------------------------------------------------------------------- Bank of Oklahoma, N.A. 3,475,105 11.25% Trustee for the Thrift Plan for Employees of ONEOK, Direct Inc. and Subsidiaries; P.O. Box 2300, Tulsa, OK 74192 - ------------------------------------------------------------------------------------------------------------- Western Resources, Inc.(1) 2,881,564 9.33% 818 Kansas Avenue Topeka, KS 66612-1217 Westar Capital, Inc.(2) 45,791 0.15% 818 Kansas Avenue Topeka, KS 66612-1217 ------------------------------- 2,927,355 9.48% - ------------------------------------------------------------------------------------------------------------- PREFERRED STOCK (SERIES A): - ------------------------------------------------------------------------------------------------------------- Western Resources, Inc.(1) 19,946,448 100% 818 Kansas Avenue Topeka, KS 66612-1217 - -------------------------------------------------------------------------------------------------------------
1 As of 08/31/99 Western Resources, Inc. and its affiliates owned approximately 45% of the outstanding shares of the capital stock of the Corporation. Holders of the outstanding convertible preferred stock are not entitled to vote on any matters being considered at this Annual Meeting. 2 Westar Capital, Inc. is an affiliate of Western Resources, Inc. 71 72 (B) SECURITY OWNERSHIP OF MANAGEMENT The following table shows how much ONEOK, Inc. Common Stock each Named Executive Officer and director owned as of August 31, 1999. No director or executive officer beneficially owns more than 1% of the Common Stock, and directors and executive officer as a group beneficially own approximately 1.89% of the Common Stock. DIRECTORS' & OFFICERS' STOCK OWNERSHIP
TOTAL OF SHARES OF SHARES OF COMMON STOCK COMMON DIRECTORS' BENEFICIALLY OWNED PLUS STOCK DEFERRED DIRECTORS' DEFERRED BENEFICIALLY COMPENSATION COMPENSATION PLAN NAME OWNED(1) PLAN PHANTOM STOCK(2) PHANTOM STOCK ==== ============ ===================== ======================= Edwyna G. Anderson 382 206 588 - -------------------------------------------------------------------------------------------------------------------- William M. Bell(3) 2,813 1,389 4,202 - -------------------------------------------------------------------------------------------------------------------- Larry W. Brummett(4,5) 96,569 -- 96,569 - -------------------------------------------------------------------------------------------------------------------- Douglas R. Cummings 2,200 938 3,138 - -------------------------------------------------------------------------------------------------------------------- Eugene N. Dubay(4,5) 22,451 -- 22,451 - -------------------------------------------------------------------------------------------------------------------- William L. Ford(6) 4,101 2,241 6,342 - -------------------------------------------------------------------------------------------------------------------- Howard R. Fricke -- 2,045 2,045 - -------------------------------------------------------------------------------------------------------------------- John A. Gaberino, Jr.(4,5) 11,190 -- 11,190 - -------------------------------------------------------------------------------------------------------------------- James C. Kneale(4,5,7) 30,507 -- 30,507 - -------------------------------------------------------------------------------------------------------------------- David L. Kyle(4,5) 74,748 -- 74,748 - -------------------------------------------------------------------------------------------------------------------- Douglas T. Lake 6,289 226 6,515 - -------------------------------------------------------------------------------------------------------------------- Bert H. Mackie 2,172 938 3,110 - -------------------------------------------------------------------------------------------------------------------- Jerry D. Neal(4,5,8) 37,424 -- 37,424 - -------------------------------------------------------------------------------------------------------------------- Douglas Ann Newsom(9) 1,990 -- 1,990 - -------------------------------------------------------------------------------------------------------------------- Gary D. Parker(10) 4,663 431 5,094 - -------------------------------------------------------------------------------------------------------------------- J.D. Scott(5) 128,483 -- 128,483 - -------------------------------------------------------------------------------------------------------------------- Stanton L. Young 62,500 -- 62,500 - -------------------------------------------------------------------------------------------------------------------- All directors and executive officers as a group including those named above 614,243 8,414 622,657 - --------------------------------------------------------------------------------------------------------------------
1. This column includes ONEOK, Inc. stock held by directors and officers, or by certain members of their families for which the directors and officers have sole or shared voting or investment power, shares of Common Stock they hold in the ONEOK, Inc. Direct Stock Purchase and Dividend Reinvestment Plan, and ONEOK, Inc. securities directors and officers have the right to acquire within 60 days of August 31, 1999. 2. Phantom Stock has a value equal to shares of Common Stock, but Phantom Stock has no voting rights or other shareholder rights. Phantom Stock suffers all the risks, and enjoys all the rewards, of changes in the price of Common Stock. 3. Includes 697 shares held in the Bell Family 1982 Revocable Trust. 4. The amounts shown include shares of ONEOK, Inc. Common Stock which the following persons have the right to acquire as a result of the exercise of stock options within 60 days after August 31, 1999 under the ONEOK, Inc. Long-Term Incentive Plan: L. W. Brummett 51,979 shares Eugene N. Dubay 13,000 shares John A. Gaberino, Jr. 1,775 shares
72 73 James C. Kneale 11,590 shares David L. Kyle 36,051 shares Jerry D. Neal 10,900 shares All directors and executive officers as a group including those names above 168,695 shares 5. The amounts shown include shares of ONEOK, Inc. Common Stock of the Company in the custody of the Trustee for the Thrift Plan for Employees of ONEOK, Inc. and Subsidiaries as of August 31, 1999: L. W. Brummett 18,724 shares Eugene N. Dubay 5,346 shares John A. Gaberino, Jr. 9,308 shares James C. Kneale 12,595 shares David L. Kyle 27,624 shares Jerry D. Neal 18,036 shares J. D. Scott 76,928 shares All directors and executive officers as a group including those names above 244,104 shares
6. Includes 1,136 shares owned by the 1979 Leslie A. Ford Trust, of which William L. Ford is a trustee. Mr. Ford is not a beneficial owner of these shares and disclaims ownership thereof. 7. Includes 3,475 shares owned by Mrs. James C. Kneale. Mr. Kneale disclaims ownership of these shares. Mr. Kneale also holds 640 shares in trust for his daughter. 8. Mr. Neal retired from the company effective 05/31/99. 9. Includes 1,000 shares owned by Ms. Newsom's spouse. Ms. Newsom disclaims ownership of these shares. 10. Includes 470 shares owned by Mrs. Gary D. Parker. In addition, Mr. Parker is holding 1,400 shares in trust as the Trustee of the Phillip Wilkinson Irrevocable Trust under agreement dated 07/13/95. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 73 74 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS A PART OF THIS REPORT
(1) Exhibits (3)(a) Certificate of Incorporation of WAI, Inc. (Now ONEOK, Inc.), filed May 16, 1997 (Incorporated by reference from Exhibit 3.1 to Amendment No. 3 to Registration Statement on Form S-4filed August 6, 1997). (3)(b) Certificate of Merger of ONEOK, Inc. (Formerly WAI, Inc.) Filed November 26, 1997 (Incorporated by reference from Exhibit (1)(b) to Form 10-Q dated May 31, 1998). (3)(c) Amendment to Certificate of Incorporation of ONEOK, Inc., filed January 16, 1998 (Incorporated by reference from Exhibit (1)(b) to Form 10-Q dated May 31, 1998). (3)(d) By-laws of ONEOK, Inc., as amended. (4)(a) Article "Fourth" of the Certificate of Incorporation of ONEOK, Inc. (Preferred Stock and Common Stock), Incorporated by reference from Exhibit 3.1 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997) (4)(b) Certificate of Designation for Convertible Preferred stock of WAI, Inc. (Now ONEOK, Inc.) filed November 26, 1997 (Incorporated by reference from Exhibit 3.3 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997). (4)(c) Certificate of Designation for Series C Participating Preferred Stock of ONEOK, Inc., filed November 26, 1998 (Incorporated by reference from Exhibit No. 1 to Form 8-A, filed November 26, 1997). (4)(d) Indenture, dated November 28, 1989, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form S-3 Registration Statement No. 33-31979. (4)(e) Indenture, dated December 1, 1990, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form 10-K dated August 31, 1991. (4)(f) First Supplemental Indenture dated December 1, 1990, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form 10-K dated August 31, 1991. (4)(g) Second Supplemental Indenture dated October 1, 1991, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form 10-K dated August 31, 1991. NOTE: Certain instruments defining the rights of holders of long-term debt are not being filed as exhibits hereto pursuant to Item 601(b)(4)(iii) of Registration S-K. The Company agrees to furnish copies of such agreements to the SEC upon request. (4)(h) Rights Agreement, dated November 26, 1997, between ONEOK, Inc. and Liberty Bank and Trust Company of Oklahoma City, N.A., as Rights Agent (Incorporated by reference from Exhibit 2.3 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997). (4)(i) Shareholder Agreement, dated November 26, 1997, between Western Resources, Inc. and ONEOK, Inc. (Incorporated by reference from Exhibit 2.2 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997).
74 75 (4)(j) Indenture, dated September 24, 1998, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-3 filed August 26, 1998. (4)(k) First Supplemental Indenture dated September 24, 1998, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 5(a) to Form 8-K filed September 24, 1998. (4)(l) Second Supplemental Indenture dated September 25, 1998, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 5(b) to Form 8-K filed September 24, 1998. (4)(m) Third Supplemental Indenture dated February 8, 1999, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4 to Form 8-K filed February 8, 1999. (4)(n) Fourth Supplemental Indenture dated February 17, 1999, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4.5 to Registration Statement on Form S-3 filed April 15, 1999. (4)(o) Fifth Supplemental Indenture dated August 17, 1999, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4 on Form 8-K filed August 17, 1999. (10)(a) ONEOK, Inc. Key Employee Annual Incentive Plan as amended and accepted on November 26, 1997. (10)(b) ONEOK, Inc. Long-Term Incentive Plan, incorporated by reference from Exhibit 99 on Form 8- K dated June 18, 1999. (10)(c) ONEOK, Inc. Supplemental Executive Retirement Plan as amended and restated July 1, 1999. (10)(d) Termination agreements between ONEOK, Inc., and ONEOK, Inc. Executives dated January 1, 1999. (10)(e) Indemnification agreement between ONEOK Inc., and ONEOK Inc. Officers and Directors. (10)(f) Ground Lease Between ONEOK Leasing Company and Southwestern Associates dated May 15, 1983, incorporated by reference from Form 10-K dated August 31, 1983. (10)(g) First Amendment to Ground Lease between ONEOK Leasing Company and Southwestern Associates dated October 1, 1984, incorporated by reference from Form 10-K dated August 31, 1984. (10)(h) Sublease Between RMZ Corp. and ONEOK Leasing Company dated May 15, 1983, incorporated by reference from Form 10-K dated August 31, 1983. (10)(i) First Amendment to Sublease between RMZ Corp. and ONEOK Leasing Company dated October 1, 1984, incorporated by reference from Form 10-K dated August 31, 1984. (10)(j) ONEOK Leasing Company Lease Agreement with Oklahoma Natural Gas Company dated August 31, 1984, incorporated by reference from Form 10-K dated August 31, 1985. (10)(k) Private Placement Agreement ONEOK Inc. and Paine Webber Incorporated, dated April 6, 1993, (Medium-Term Notes, Series A, up to U.S. $150,000,000), incorporated by reference from Form 10-K dated August 31, 1993.
75 76 (10)(l) Issuing and Paying Agency Agreement between Bank of America Trust Company of New York, as Issuing and Paying Agent, and ONEOK Inc, (Medium-Term Notes, Series A, up to U.S. $150,000,000), incorporated by reference from Form 10-K dated August 31, 1993. (10)(m) $600,000,000 364-Day Credit Agreement date July 2, 1999, among ONEOK, Inc., Bank of America National Trust and Savings Association, as Administrative Agent and as a Bank, Letter of Credit Issuing Bank and Swing Line Bank, and the other financial institutions party hereto incorporated by reference from Form 8-K filed November 8, 1999. (12) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirement. (12)(a) Computation of Ratio of Earnings to Fixed Charges. (21) Required information concerning the registrant's subsidiaries. (23) Independent Auditors' Consent, filed herewith on page 66. (27)(a) Financial Data Schedule for year ended August 31, 1999. (27)(b) Financial Data Schedule for year ended August 31, 1998. (27)(c) Financial Data Schedule for year ended August 31, 1997.
(2) Financial Statements Page No. (a) Independent Auditors' Report. 40 (b) Consolidated Statements of Income for the years ended August 31, 1999, 1998, and 1997. 41 (c) Consolidated Balance Sheets at August 31, 1999 and 1998. 42 - 43 (d) Consolidated Statements of Cash Flows for the years ended August 31, 1999, 1998, and 1997. 44 (e) Consolidated Statements of Shareholder's Equity for the years ended August 31, 1998, 1997, and 1996. 45 (f) Notes to Consolidated Financial Statements. 46 - 65 (3) Financial Statement Schedules None.
(B) REPORTS ON FORM 8-K June 22, 1999 - announced the Public Utility Commission of Nevada has approved the proposed merger between the Company and Southwest Gas. July 12, 1999 - updated financial information relating to the Southwest Gas and required pro forma financial information. July 28, 1999 - announced plans for moving into the electric generation and power marketing business. August 6, 1999 - information relating to legal matters on the pending Southwest Gas merger. 76 77 August 9, 1999 - announced Southern Union Company's failure in two separate court actions to delay shareholder vote and the regulatory approval process for the pending Southwest Gas merger. August 11, 1999 - announced the approval of the pending Southwest Gas merger by the shareholders of Southwest Gas. August 17, 1999 - announced public offering for $300 million 7 3/4% notes. October 14, 1999 - Chairman and CEO Larry Brummett addressed Oklahoma Corporation Commission to say the false allegations about a 1993 gas purchase contract may jeopardize the planned merger with Southwest Gas. October 21, 1999 - announced fiscal year change. November 8, 1999 - short-term credit agreement signed. OTHER MATTERS None. 77 78 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 18th day of November 1999. ONEOK, Inc. Registrant By: Jim Kneale ------------------------------------ Jim Kneale Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) 78 79 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on this 18th day of November 1999. Larry W. Brummett David L. Kyle - ------------------------------------ ----------------------------------- Larry W. Brummett David L. Kyle Chairman of the Board, President, Chief Operating Chief Executive Officer Officer and Director and Director Edwyna G. Anderson Bert H. Mackie - ------------------------------------ ----------------------------------- Edwyna G. Anderson Bert H. Mackie Director Director William M. Bell Douglas A. Newsom - ------------------------------------ ----------------------------------- William M. Bell Douglas A. Newsom Director Director Douglas R. Cummings Gary D. Parker - ------------------------------------ ----------------------------------- Douglas R. Cummings Gary D. Parker Director Director William L. Ford - ------------------------------------ ----------------------------------- William L. Ford J. D. Scott Director Director Stanton L. Young - ------------------------------------ ----------------------------------- Howard R. Fricke Stanton L. Young Director Director Douglas T. Lake - ------------------------------------ Douglas T. Lake Director
79 80 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION -------- ----------- (3)(a) Certificate of Incorporation of WAI, Inc. (Now ONEOK, Inc.), filed May 16, 1997 (Incorporated by reference from Exhibit 3.1 to Amendment No. 3 to Registration Statement on Form S-4filed August 6, 1997). (3)(b) Certificate of Merger of ONEOK, Inc. (Formerly WAI, Inc.) Filed November 26, 1997 (Incorporated by reference from Exhibit (1)(b) to Form 10-Q dated May 31, 1998). (3)(c) Amendment to Certificate of Incorporation of ONEOK, Inc., filed January 16, 1998 (Incorporated by reference from Exhibit (1)(b) to Form 10-Q dated May 31, 1998). (3)(d) By-laws of ONEOK, Inc., as amended. (4)(a) Article "Fourth" of the Certificate of Incorporation of ONEOK, Inc. (Preferred Stock and Common Stock), Incorporated by reference from Exhibit 3.1 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997) (4)(b) Certificate of Designation for Convertible Preferred stock of WAI, Inc. (Now ONEOK, Inc.) filed November 26, 1997 (Incorporated by reference from Exhibit 3.3 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997). (4)(c) Certificate of Designation for Series C Participating Preferred Stock of ONEOK, Inc., filed November 26, 1998 (Incorporated by reference from Exhibit No. 1 to Form 8-A, filed November 26, 1997). (4)(d) Indenture, dated November 28, 1989, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form S-3 Registration Statement No. 33-31979. (4)(e) Indenture, dated December 1, 1990, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form 10-K dated August 31, 1991. (4)(f) First Supplemental Indenture dated December 1, 1990, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form 10-K dated August 31, 1991. (4)(g) Second Supplemental Indenture dated October 1, 1991, between ONEOK Inc. and Security Pacific National Bank, incorporated by reference from Form 10-K dated August 31, 1991. NOTE: Certain instruments defining the rights of holders of long-term debt are not being filed as exhibits hereto pursuant to Item 601(b)(4)(iii) of Registration S-K. The Company agrees to furnish copies of such agreements to the SEC upon request. (4)(h) Rights Agreement, dated November 26, 1997, between ONEOK, Inc. and Liberty Bank and Trust Company of Oklahoma City, N.A., as Rights Agent (Incorporated by reference from Exhibit 2.3 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997). (4)(i) Shareholder Agreement, dated November 26, 1997, between Western Resources, Inc. and ONEOK, Inc. (Incorporated by reference from Exhibit 2.2 to Amendment No. 3 to Registration Statement on Form S-4 filed August 31, 1997). (4)(j) Indenture, dated September 24, 1998, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-3 filed August 26, 1998. (4)(k) First Supplemental Indenture dated September 24, 1998, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 5(a) to Form 8-K filed September 24, 1998. (4)(l) Second Supplemental Indenture dated September 25, 1998, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 5(b) to Form 8-K filed September 24, 1998. (4)(m) Third Supplemental Indenture dated February 8, 1999, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4 to Form 8-K filed February 8, 1999. (4)(n) Fourth Supplemental Indenture dated February 17, 1999, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4.5 to Registration Statement on Form S-3 filed April 15, 1999. (4)(o) Fifth Supplemental Indenture dated August 17, 1999, between ONEOK, Inc. and Chase Bank of Texas, incorporated by reference from Exhibit 4 on Form 8-K filed August 17, 1999. (10)(a) ONEOK, Inc. Key Employee Annual Incentive Plan as amended and accepted on November 26, 1997. (10)(b) ONEOK, Inc. Long-Term Incentive Plan, incorporated by reference from Exhibit 99 on Form 8- K dated June 18, 1999. (10)(c) ONEOK, Inc. Supplemental Executive Retirement Plan as amended and restated July 1, 1999. (10)(d) Termination agreements between ONEOK, Inc., and ONEOK, Inc. Executives dated January 1, 1999. (10)(e) Indemnification agreement between ONEOK Inc., and ONEOK Inc. Officers and Directors. (10)(f) Ground Lease Between ONEOK Leasing Company and Southwestern Associates dated May 15, 1983, incorporated by reference from Form 10-K dated August 31, 1983. (10)(g) First Amendment to Ground Lease between ONEOK Leasing Company and Southwestern Associates dated October 1, 1984, incorporated by reference from Form 10-K dated August 31, 1984. (10)(h) Sublease Between RMZ Corp. and ONEOK Leasing Company dated May 15, 1983, incorporated by reference from Form 10-K dated August 31, 1983. (10)(i) First Amendment to Sublease between RMZ Corp. and ONEOK Leasing Company dated October 1, 1984, incorporated by reference from Form 10-K dated August 31, 1984. (10)(j) ONEOK Leasing Company Lease Agreement with Oklahoma Natural Gas Company dated August 31, 1984, incorporated by reference from Form 10-K dated August 31, 1985. (10)(k) Private Placement Agreement ONEOK Inc. and Paine Webber Incorporated, dated April 6, 1993, (Medium-Term Notes, Series A, up to U.S. $150,000,000), incorporated by reference from Form 10-K dated August 31, 1993. (10)(l) Issuing and Paying Agency Agreement between Bank of America Trust Company of New York, as Issuing and Paying Agent, and ONEOK Inc, (Medium-Term Notes, Series A, up to U.S. $150,000,000), incorporated by reference from Form 10-K dated August 31, 1993. (10)(m) $600,000,000 364-Day Credit Agreement date July 2, 1999, among ONEOK, Inc., Bank of America National Trust and Savings Association, as Administrative Agent and as a Bank, Letter of Credit Issuing Bank and Swing Line Bank, and the other financial institutions party hereto incorporated by reference from Form 8-K filed November 8, 1999. (12) Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirement. (12)(a) Computation of Ratio of Earnings to Fixed Charges. (21) Required information concerning the registrant's subsidiaries. (23) Independent Auditors' Consent, filed herewith on page 66. (27)(a) Financial Data Schedule for year ended August 31, 1999. (27)(b) Financial Data Schedule for year ended August 31, 1998. (27)(c) Financial Data Schedule for year ended August 31, 1997.
EX-3.(D) 2 BY-LAWS OF ONEOK, INC., AS AMENDED 1 EXHIBIT (3)(d) BY-LAWS OF ONEOK, INC. (An Oklahoma Corporation) ARTICLE I - OFFICES SECTION 1.01 PRINCIPAL OFFICE. The principal office for the transaction of the business of the Corporation shall be located at 100 West Fifth Street, Tulsa, Oklahoma 74103. The Board of Directors (hereinafter called the "Board") is hereby granted full power and authority to change said principal office from one location to another. SECTION 1.02 OTHER OFFICES. The Corporation may also have an office or offices at such other place or places, either within or without the State of Oklahoma, as the Board may from time to time determine or as the business of the Corporation may require. ARTICLE II - MEETINGS OF SHAREHOLDERS SECTION 2.01 ANNUAL MEETINGS. An annual meeting of the shareholders for the election of directors and for the transaction of such other proper business as may come before such meetings may be held at such date, time and place as the Board shall determine by resolution. SECTION 2.02 SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by a majority of the whole Board. Shareholders may not call special meetings. At any special meeting of the shareholders, no business shall be transacted and no corporate action shall be taken other than as stated in the notice of meeting. SECTION 2.03 PLACE OF SPECIAL MEETINGS. All special meetings of the shareholders shall be held at such places, within or without the State of Oklahoma, as may be designated by the person or persons calling the respective meeting and specified in the respective notices or waivers of notice, thereof, otherwise, the meeting shall be held at the principal offices of the Corporation. SECTION 2.04 NOTICE OF MEETINGS. (a) Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. (b) Unless otherwise provided for in the Oklahoma General Corporation Act or in the Certificate of Incorporation, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each shareholder entitled to vote at such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the shareholder at such shareholder's address as it appears on the records of the Corporation. An affidavit of the secretary or an assistant secretary or of the stock transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (c) Notice of any meeting of shareholders shall not be required to be given to any shareholder who shall have waived such notice and such notice shall be deemed waived by any shareholder who shall have submitted a written waiver of notice or who shall have attended such meeting in person or by proxy, except a shareholder who shall have attended such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (d) Notice of any adjourned meeting of the shareholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken, provided, however, that when the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. 2 SECTION 2.05 QUORUM. Subject to the provisions of the Oklahoma General Corporation Act or the Certificate of Incorporation, a majority of the shares of stock of the Corporation entitled to vote, the holders of which shall be present in person or represented by proxy, shall constitute a quorum for, and the votes that shall be necessary for the transaction of any business at any meeting of the shareholders of the Corporation or any adjournment thereof. In the absence of a quorum at any meeting or any adjournment thereof, the holders of a majority of the shares entitled to vote thereat who are present in person or by proxy or, if none of the holders of any shares entitled to vote thereat are present, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.06 VOTING. (a) Each shareholder shall, at each meeting of the shareholders, be entitled to vote in person, or by proxy, each share of the stock of the Corporation having voting rights on the matter in question and which shall have been held by such shareholder and registered in such shareholder's name on the books of the Corporation: (i) on the date fixed pursuant to 2.07 of the By-laws as the record date for the determination of shareholders entitled to notice of and to vote at such meeting, or (ii) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice of the meeting shall be given or if notice of the meeting shall be waived, at the close of business on the day next preceding the day on which meeting shall be held. (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of Directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless the transfer by the pledgor on the books of the Corporation shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or the pledgees proxy, may represent such stock and vote thereon. Shares having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the General Corporation Act of the State of Oklahoma. (c) A shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for the shareholder by proxy, but no proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. The following shall constitute a valid means by which a shareholder may grant such authority: (i) by executing a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the shareholder or the shareholder's authorized officer, director, employee, or agent signing the writing or causing his or her signature to be affixed to the writing by any reasonable means including, but not limited to, by facsimile signature; or (ii) by authorizing another person or persons to act for him or her as proxy by transmitting or authorizing transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization, or like agent duly authorized by the person who will be the holder of the proxy to receive the transmission; provided, that any telegram, cablegram, or other means of electronic transmission must either set forth, or be submitted with information from which it can be determined, that the telegram, cablegram, or other electronic transmission was authorized by the shareholder. If it is determined that telegrams, cablegrams, or other electronic transmissions are valid, the inspectors or, if there are no inspectors, any other person making that determination shall specify the information upon which they relied. Any copy, facsimile telecommunication, or other reliable reproduction of the writing or transmission created pursuant 2 3 to this subsection may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used; provided, that the copy, facsimile telecommunication, or other reproduction shall be a complete reproduction of the entire original writing transmission. (d) The attendance at any meeting by a shareholder who may theretofore have given a proxy shall not have the effect of revoking the same unless the shareholder shall in writing so notify the secretary of the meeting prior to the voting of a proxy. (e) At any meeting of the shareholders, all matters, except as otherwise provided in the Certificate of Incorporation, in these By-laws or by law, shall be decided by the vote of the holders of shares representing a majority of the voting power of the shareholders present in person or by proxy and entitled to vote thereat and thereon, provided that a quorum is present. The vote at any meeting of the shareholders on any question need not be by written ballot, except election of Directors, unless so directed by the Chairman of the meeting. On a vote by ballot, each ballot shall be signed by the shareholder voting, or by the shareholder's proxy, if there be such a proxy, and it shall state the number of shares voted. SECTION 2.07 FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. In order that the Corporation may determine the shareholders entitled to notice of, or to vote at any meeting of shareholders or any adjournment thereof, the Board may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Directors, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of shareholders entitled to notice of, or to vote at, a meeting of shareholders shall apply to any adjournment of such meeting; provided however, that the Board may fix a new record date for the adjourned meeting. In order that the Corporation may determine shareholders entitled to receive payment of any dividend or other distribution, or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than 60 days prior such action, unless otherwise provided by the Certificate of Incorporation. If, in any case involving the determination of shareholders for any purpose other than notice of or voting at a meeting of shareholders, the Board shall not fix a record date, the record date for determining shareholders for such purpose shall be the close of business on the day on which the Board shall adopt the resolution relating thereto. SECTION 2.08 LIST OF SHAREHOLDERS. The Secretary of the Corporation shall cause to be prepared and made, at least 10 days before every meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at the place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the entire duration thereof, and may be inspected by any shareholder who is present for any purpose germane to the meeting. SECTION 2.09 CHAIRMAN AND SECRETARY OF THE MEETING. Meetings of the shareholders shall be presided over by the Chairman of the Board or, in his absence, by the next senior officer of the Corporation present. If no senior officers are present, the meeting of shareholders shall be presided over by a Chairman to be chosen by the shareholders. The Secretary of the Corporation, or in such officer's absence, an Assistant Secretary, shall act as Secretary of the Meeting, but if none are present, the Chairman of the meeting shall appoint a Secretary of the meeting. 3 4 SECTION 2.10 INSPECTORS. If at any meeting of the shareholders a vote by written ballot shall be taken on any question, the Chairman of the meeting may appoint an inspector or inspectors to act with respect to such vote. Each inspector so appointed shall first subscribe an oath faithfully to execute the duties of an inspector at such meeting with strict impartiality and according to the best of such inspector's ability. Such inspectors shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question, shall conduct and accept the votes, and when the voting is completed shall ascertain and report the number of shares voted respectively for and against the question. Reports of the inspectors shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The inspectors need not be shareholders of the Corporation, and any officer of the Corporation may be an inspector on any question other than a vote for or against a proposal in which such officer shall have a material interest. SECTION 2.11 CONDUCT OF MEETINGS. (a) At a meeting of the shareholders, only such business shall be proper as shall be brought before the meeting: (i) pursuant to the Corporation's notice of meeting; (ii) by or at the discretion of the Board of Directors of the Corporation; or (iii) by any shareholder of the Corporation who is a shareholder of record at the time of giving the notice provided for herein, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth herein. (b) For business to be properly brought before a meeting by a shareholder pursuant to clause (iii) above, the shareholder must have given timely notice thereof in writing to the Secretary. To be timely as to an annual meeting of shareholders, a shareholder's notice must be received at the principal executive office of the Corporation not less than 120 calendar days before the date of the Corporation's proxy statement released to shareholders in connection with the previous year's annual meeting; provided however, that if the date of the meeting is changed by more than 30 days from the date of the previous year's meeting, notice by shareholder to be timely must be received no later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed to shareholders or public disclosure of such date was made. To be timely as to a special meeting of shareholders, a shareholder notice must be received not later than the call of the meeting as provided for in Section 2 of this Article II. Such shareholder notice shall be set forth as to each matter the shareholder proposed to bring before the meeting: (1) a brief description of and the reasons for proposing such matter at the meeting; (2) the name and address, as they appear on the Corporation's books, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made; (3) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder of record and by the beneficial owner, if any, on whose behalf the proposal is made; and (4) any material interest of such shareholder of record and the beneficial owner, if any, on whose behalf the proposal is made, in such proposal. (c) Notwithstanding anything in these By-laws to the contrary, no business shall be proper at a meeting unless brought before it in accordance with the procedures set forth herein. Further, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth herein. (d) The Chairman of the Board of the Corporation or the individual designated as chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the procedures proscribed herein, and if the chairman should so determine, that any such business not properly brought before the meeting shall not be transacted. (e) Notwithstanding anything provided herein to the contrary, the procedures for submission of shareholder proposals have not expended, altered or affected in any manner, whatever rights or limitations may exist regarding the ability of a shareholder of the Corporation to submit a proposal for consideration by shareholders of the Corporation under Oklahoma or federal law. ARTICLE III - BOARD OF DIRECTORS SECTION 3.01 GENERAL POWERS. The property, business, and affairs of the Corporation shall be managed by and 4 5 under the direction of the Board, except as may be otherwise provided for in the Oklahoma General Corporation Act or in the Certificate of Incorporation. SECTION 3.02 NUMBER. The number of Directors of the Corporation shall not be less than nine nor more than thirty-one persons and shall be fixed from time to time by resolution of the Board. SECTION 3.03 ELECTION OF DIRECTORS. (a) The Directors shall be divided into three classes (A, B, and C), as nearly equally in number as possible. The initial term of office for members of Class A shall expire at the annual meeting of shareholders in January, 1998; the initial term of office for members of Class B shall expire at the next annual meeting of shareholders; and the initial term of office for members of Class C shall expire at the following annual meeting of shareholders. At each annual meeting of shareholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of shareholders after their election, and shall continue to hold office until their respective successors are elected and qualified. (b) In the event of any increase in the number of Directors fixed by the Board of Directors, the additional Directors shall be so classified that all classes of Directors have as nearly equal number of Directors as may be possible. In the event of any decrease in the number of Directors of the Corporation, all classes of Directors shall be decreased as nearly equally as possible. (c) A person shall not be elected or reelected to the Board to fill a vacancy on the Board after such person's 70th birthday. (d) Only persons nominated in accordance with the procedures set forth in this Section shall be eligible for election as Directors. Nominations of persons for election to the Board may be made at a meeting of shareholders (i) by or at the direction of the Board or a Committee thereof, or (ii) by any shareholder of the Corporation entitled to vote for the election of Directors at such meeting who complies with the notice procedures set forth in this subsection (d). Such nominations, other than those made by or at the direction of the Board or a Committee thereof, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received by the Secretary of the Corporation at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the date of a meeting; provided, however, that if fewer than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (i) the day on which such notice of the date of such meeting was mailed or (ii) the day on which such public disclosure was made. (e) A shareholder's notice to the Secretary shall set forth (i) as to each person whom the shareholder proposes to nominate for election as a Director: (a) the name, age, business address, and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the Corporation which are beneficially owned by such person on the date of such shareholder's notice, and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder giving the notice: (a) the name and address, as they appear on the Corporation's books, of such shareholder and any other shareholders known by such shareholder to be supporting such nominees, and (b) the class and number of shares of the Corporation which are beneficially owned by such shareholder on the date of such shareholder's notice and by any other shareholders known by such shareholder to be supporting such nominees on the date of such shareholder's notice. No person shall be eligible as a Director of the Corporation unless nominated in accordance with the procedures set forth in subsections (d) and (e). The presiding officer of the meeting shall, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by the By-laws, and if the presiding officer should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded. 5 6 SECTION 3.04 RESIGNATIONS. Any Director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.05 CHAIRMAN OF THE BOARD EMERITUS. The Board of Directors of the Corporation may from time to time designate a person as Chairman of the Board Emeritus in recognition of such person's long and faithful service to the Corporation and its Board of Directors. The Chairman of the Board Emeritus shall be an honorary officer of the Board and shall serve at the pleasure of the Board of Directors. SECTION 3.06 ADVISORY DIRECTORS. (a) The Chairman of the Board may from time to time designate persons as Advisory Directors who shall be available to advise and consult with the Chairman of the Board and the Board of Directors and shall serve in such capacity at the pleasure of the Chairman of the Board. Any person so designated as an Advisory Director may be invited to attend any meeting of the Board or any meeting of a Committee of the Board by the Chairman of the Board without further action of the Board. (b) The compensation to be received by Advisory Directors shall be established from time to time by the Board of Directors. (c) The business of the Corporation shall remain solely under the direction of the Board and any person designated as an Advisory Director SHALL BE A NON-VOTING MEMBER, and shall not by virtue of their designation as Advisory Directors or by virtue of their providing advise or consultation to the Corporation be deemed to have undertaken any duty to the Corporation or its shareholders. (d) Any person designated as an Advisory Director by the Board shall not have any liability to the Corporation and its shareholders. If, notwithstanding the foregoing, a claim should ever be asserted against any such Advisory Director by or on behalf of the Corporation or any shareholders or otherwise, the Advisory Director shall be entitled to the protection of Article VIII of the By-laws of this Corporation, and to the protection of any other indemnification or limitation of liability provisions that may exist from time to time with respect to members of the Board, either in the Certificate of Incorporation, By-laws, minutes, agreements or other documents of the Corporation or applicable law. (e) The Chairman of the Board or the Board of Directors may terminate the status of a person as an Advisory Director at any time without any liability or obligation to such person except that any indemnification provided to such person at the time of such termination shall continue for the benefit of such person. (f) The Corporation may enter into a contract with any person who is designated as an Advisory Director with such terms and condition as may be approved by the Chairman of the Board. SECTION 3.07 VACANCIES AND REMOVAL. (a) Newly created directorships resulting from any increase in the authorized number of Directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of the Directors then in office, though less than a quorum, or by the sole remaining Director, or by the shareholders at their next annual meeting, or at any special meeting of shareholders called for that purpose. Each Director so chosen shall hold office until the expiration of such term of the Director, if any, whom such person has been chosen to succeed, or, if none, until the expiration of the term of the class assigned to the additional directorship to which such person has been elected, or until such person's earlier death, resignation, retirement, or removal. No decrease in the number of Directors constituting the Board shall shorten the term of any incumbent Director. (b) Any Director or the entire Board may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least eighty percent (80%) of the voting interest of all outstanding voting stock. SECTION 3.08 PLACE OF MEETING, ETC. The Board may hold any of its meetings at such place or places within or 6 7 without the State of Oklahoma as the Board may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting. Directors may participate in any regular or special meeting of the Board or any meeting of a committee designated by such Board by means of conference telephone or similar communications equipment pursuant to which all persons participating in such meeting can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 3.09 FIRST MEETING. The Board shall meet as soon as practicable after each annual election of Directors and notice of such first meeting shall not be required. SECTION 3.10 REGULAR MEETINGS. Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine. If any day fixed for a meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day not a legal holiday. Except as provided by law, notice of regular meetings need not be given. SECTION 3.11 SPECIAL MEETINGS. (a) Special meetings of the Board may be called at any time by the Chairman of the Board or the President, or by any three Directors, to be held at the principal office of the Corporation, or at such other place or places, within or without the State of Oklahoma, as the person or persons calling the meeting may designate. Unless otherwise indicated in the notice thereof, any and all business, other than approval of contracts with another corporation or party (or subsidiary thereof) owning a majority of the stock of the Corporation and actions taken with respect to salaries, compensation, and other payments to be paid to, or contracts made with, a Director or executive officer, may be transacted at any special meeting. At any meeting at which all Directors shall be present, even though without any notice, any business may be transacted. (b) Notice of all special meetings of the Board shall be given by the Secretary or by the person or persons calling the meeting to each Director by mailing a copy thereof at least four days before the meeting or by two days, service of the same by telegram, cable, or wireless, or personally. If the Chairman, or the President, or three of the Directors determine that a special meeting of the Board on short notice is necessary, then notice may be given by telephone, telegraph or facsimile transmission not less than four hours in advance of the time when a meeting shall be held. Such notice may be waived by any Director and any meeting shall be a legal meeting without notice having been given if all the Directors shall be present thereat or if those not present shall, either before or after the meeting sign a written waiver of notice of, or a consent to, such meeting or shall, after the meeting, sign the approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or be made a part of the minutes of the meeting. SECTION 3.12 QUORUM AND MANNER OF ACTING. Except as otherwise provided in the Certificate of Incorporation, the By-laws, or by law, the presence of seven (7) or one-third, whichever is greater, of the authorized number of Directors shall be required to constitute a quorum for the transaction of business at any meeting of the Board, and all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the Directors present. In the absence of a quorum, a majority of Directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The Directors shall act only as a Board, and the individual Directors shall have no power as such. SECTION 3.13 ACTION BY CONSENT. Any action required or permitted to he taken at any meeting of the Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or such committee. SECTION 3.14 COMPENSATION. All salaries and compensation paid by the Corporation to its Directors shall be fixed from tire to time by the Board of Directors at a regular meeting of the Board to be held as provided by the By-laws, and any payment of any kind or character to any Director of the Corporation or any contract made with such Director or executive officer must be approved by a majority of the whole Board of Directors at a regular meeting of the Board, before such payment is made or contract executed. 7 8 SECTION 3.15 COMMITTEES. (a) The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have any power or authority to: (i) approve, adopt, or recommend to the shareholders any action or matter expressly required by the Oklahoma General Corporation Act to be submitted to shareholders for approval; or (ii) adopt, amend, or repeal any bylaw of the Corporation. Any such committee shall keep written minutes of its meetings and report the same to the Board at the next regular meeting of the Board. (b) Except as may otherwise be ordered by the Board of Directors, the Chairman of the Board shall appoint the members of all special or other committees of the Board. The Chairman of the Board shall be an ex-officio member of all standing committees, except the executive compensation committee, and shall be the Chairman of any executive committee of the Board. (c) In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at a meeting in the place of any such absent or disqualified member. SECTION 3.16 OFFICERS OF THE BOARD. The Chairman of the Board, or in the absence of the Chairman of the Board, the President, or in the President's absence, any other officer of the Corporation who is a Director, shall preside at all meetings of the Board, or in the absence of any such officers, a temporary chairman elected by the Directors present at the meeting. SECTION 3.17 INTERESTED DIRECTORS. (a) No Director shall vote on a question in which such Director is interested, except the election of the Chairman of the Board of Directors, a President, or other officer or members of any Committee of the Board, but in the absence of fraud, no contract or other transaction of the Corporation shall be affected or invalidated in any way by the fact that any of the Directors of the Corporation are in any way interested in or connected with any other party to such contract or transaction, or are themselves parties to such contract or transaction, provided that such interest or connection shall be fully disclosed or otherwise be known to the Board of Directors at the meeting of said Board at which such contract or transaction is authorized or confirmed, provided further that the contract or transaction is fair as to the Corporation at the time authorized or confirmed by the Board, and provided further that at the meeting of the Board at which such contract or transaction is to be authorized or confirmed, a quorum be present which may include common or interested Directors for purposes of determining the presence of a quorum, and the Board in good faith authorizes or confirms such contract or transaction by the affirmative votes of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum. Any Director may vote upon any contract or other transaction between the Corporation and any subsidiary, notwithstanding that such Director may also be a member of the board of directors of such subsidiary. The mere ownership of stock in another corporation by a Director shall not disqualify such Director to vote in respect of any transaction between the Corporation and such other corporation, provided the other provisions of this Section are complied with. (b) No contract or other transaction between the Corporation and any other corporation shall be affected by the fact that any of the Directors of the Corporation are interested in or are directors or officers of such other corporation, if such contract or transaction be made, authorized, or confirmed by the Board in the manner provided in the preceding paragraph, or by any committee of the Corporation having the requisite authority, by vote of a majority 8 9 of the members of such committee not so interested; and any Director individually may be a party to or may be interested in any contract or transaction of the Corporation, provided that such contract or transaction shall be approved or ratified by the Board or by any Committee of the Corporation having the requisite authority, in the manner herein set forth. (c) The Board of Directors, in its discretion, may submit any contract or act of the Corporation or of the Board for approval or ratification at any annual meeting of the shareholders, or at any special meeting of shareholders, the notice of which shall state that it is called for the purpose, or in part for the purpose, of considering any such act or contract, and any such contract or act that shall be approved or be ratified by the vote of the holders of a majority in voting interest of the shares of stock of the Corporation entitled to vote thereat, shall be as valid and as binding upon the Corporation and upon all the shareholders as though it had been approved and ratified by every shareholder of the Corporation. (d) Any Director of the Corporation may vote upon any contract or other transaction between the Corporation and any subsidiary corporation without regard to the fact that such person is also a Director of such subsidiary corporation. (e) No contract or agreement between the Corporation and any other corporation or party which owns a majority of the capital stock of the Corporation or any subsidiary of any such other corporation shall be made or entered into without the affirmative vote of a majority of the whole Board at a regular meeting of the Board. (f) Notwithstanding anything to the contrary in the foregoing paragraphs of this Section, in the case of contracts, transactions, and acts of the Corporation, of the Board of Directors, or of committees thereof that require shareholder and/or Director approval under any provision of the Certificate of Incorporation or of law by a higher proportion of the voting power of the outstanding voting stock than a majority of a quorum of the shareholders or approval by the Independent Directors as defined and required by the Certificate of Incorporation, ratification by the shareholders and/or approval by the Independent Directors of such contracts, transactions, and acts shall require the affirmative vote of such higher proportion of such voting power and/or approval by the Independent Directors, and any contract, transaction, act, or agreement referred to in the foregoing paragraphs shall be subject to any such applicable provisions of the Certificate of Incorporation or of law. ARTICLE IV - OFFICERS SECTION 4.01 OFFICERS. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, a Treasurer, such other officers as may be elected, from time to time, by the Board, and such other officers as may be appointed by the Board pursuant to 4.03 of the By-laws. One of the officers of the Corporation shall be designated by the Board of Directors as the Chief Executive Officer of the Corporation. Officers shall have such powers and duties as are permitted or required by law and as may be specified by or in accordance with resolutions of the Board. In the absence of any contrary determination by the Board, the person designated as the Chief Executive Officer, shall, subject to the power and authority of the Board, have general supervision, direction, and control of the officers (except the Chairman of the Board), employees, business, and affairs of the Corporation and shall have the right to remove any officer of the Corporation. One person may hold two or more offices, except that the Secretary may not also hold the office of President. Except where otherwise expressly provided in a written contract duly authorized by the Board, all officers, agents, and employees shall be subject to removal at any time by the affirmative vote of a majority of the Directors, and all officers, agents, and employees other than officers elected or appointed by the Board shall also be subject to removal at any time by the officer with supervisory responsibility over them. SECTION 4.02 ELECTION. The officers of the Corporation, except such officers as may be appointed pursuant to Sections 4.04 or 4.06 of the By-laws, shall be chosen annually by the Board, and each person shall hold office until such person shall resign or be removed or otherwise disqualified to serve, or such person's successor shall be elected and qualified. 9 10 SECTION 4.03 ELECTION OF CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall be designated by the affirmative vote of at least 80% of the Directors and shall hold such designation until such person shall resign or be removed or otherwise disqualified to serve, or such person's successor shall be designated, in accordance with this Section 4.03. SECTION 4.04 SUBORDINATE OFFICERS, ETC. The Board may appoint such other officers as the business of the Corporation may require, each of whom shall have such authority and perform such duties as are provided in the By-laws or as the Board may from time to time specify, and shall hold office until such person shall resign or shall be removed or otherwise disqualified to serve. SECTION 4.05 REMOVAL AND RESIGNATION. (a) Any officer may be removed, either with or without cause, by a majority of the Directors in office at the time, at any regular or special meeting of the Board, or except in case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. (b) Any officer may resign at any time by giving written notice to the Board, the Chairman of the Board, the President or the Secretary of the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.06 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, shall be filled in the manner prescribed in the By-laws for the regular appointments to such office. SECTION 4.07 VOTING STOCK IN OTHER CORPORATIONS, AND INTERESTS IN PARTNERSHIPS, LIMITED LIABILITY COMPANIES AND OTHER ENTITIES. Unless otherwise ordered by the Board, the person designated as the Chief Executive Officer, or in such officer's absence, or with such officer's consent, the next ranking officer of the Corporation, shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote: (i) at any meeting of shareholders of any corporation in which the Corporation may hold stock, (ii) at any meeting of partners of any partnerships (general or limited) in which the Corporation may hold a partnership interest, (iii) at any meeting of members of a limited liability company in which the Corporation may hold a capital interest, and (iv) at any meeting of any other entities in which the Corporation may hold an ownership interest and at any such meetings shall possess and may exercise, in person or by proxy, any and all rights, powers, and privileges incident to the ownership of such stock, partnership, capital, or other interest, or in lieu of a meeting to act or vote by written consent on behalf of the Corporation, without a meeting. The Board may, by resolution, from time to time, confer like powers upon any other person or persons. SECTION 4.08 COMPENSATION OF EXECUTIVE OFFICERS. All salaries and compensation paid by the Corporation to executive officers shall be fixed from time to time by the Board of Directors at a regular meeting of the Board to be held as provided by the By-laws, and any payment of any kind or character to any executive officer of the Corporation or any contract made with such executive officer must be approved by a majority of the whole Board of Directors at a regular meeting of the Board, before such payment is made or contract executed. ARTICLE V - OPERATING DIVISIONS OF THE CORPORATION SECTION 5.01 DIVISION BOARDS. The Board may appoint individuals who may, but need not be, Directors, officers, or employees of the Corporation to serve as members of a Division Board of Directors (the "Division Board") of one or more Divisions of the Corporation and may fix fees or compensation for attendance at meetings of any such Division Board. The members of any such Division Board may adopt and from time to time may amend By-laws or other rules and regulations for the conduct of their affairs and shall keep minutes of their meetings. The term of office of any member of a Division Board shall be at the pleasure of the Board and shall expire as provided for in 10 11 the By-laws of the Division. The function of any such Division Board shall be to manage and control the ordinary business and affairs of the Divisions and to advise the Board with respect to the business and affairs of their respective Division. SECTION 5.02 TITLES. The Division Board may, from time to time, confer on the employees of their Division or discontinue, the title of President, Executive Vice President, Senior Vice President, Vice President, and any other titles deemed appropriate. The designation of any such official titles for employees assigned to the Divisions of the Corporation shall not be permitted to conflict in any way with any executive or administrative authority established from time to time by the Corporation. Any employee so designated as an officer of a Division shall have authority, responsibilities, and duties with respect to such employee's Division, corresponding to those normally vested in the comparable officer of the Corporation, subject to such limitations as may be imposed by the Board. ARTICLE VI - CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 6.01 EXECUTION OF CONTRACTS. The Board, except as otherwise provided in the By-laws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances; and unless so authorized by the Board or by the By-laws, no officer, agent, or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. SECTION 6.02 CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for payment of money, notes, or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such person shall give such bond, if any, as the Board may require. SECTION 6.03 DEPOSIT. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the Chairman of the Board, the President, or the Treasurer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board) may endorse, assign, and deliver checks, drafts, and other orders for the payment of money which are payable to the order of the Corporation. SECTION 6.04 GENERAL AND SPECIAL BANK ACCOUNTS. (a) The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies, or other depositories as the Board may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of the By-laws, as it may deem expedient. (b) In addition to such bank accounts as may be authorized in the usual manner by resolution of the Board, the Treasurer of the Corporation with the approval of the Chief Executive Officer or any other officer designated by the Chief Executive Officer may authorize such bank accounts to be opened or maintained in the name and on behalf of the Corporation as the Treasurer or such other designated officer may deem necessary or appropriate, payments from such bank accounts to be made upon and according to the checks of the Corporation which may be signed jointly or singly by either the manual or facsimile signature or signatures of such officer or officers of the Corporation as shall be specified in the written instructions of the Treasurer of the Corporation with the approval of the Chief Executive Officer or such designated officer. 11 12 ARTICLE VII - SHARES AND THEIR TRANSFER SECTION 7.01 CERTIFICATES FOR STOCK. Every owner of stock of the Corporation shall be entitled to have a certificate or certificates, to be in such form as the Board shall prescribe, certifying the number and class of shares of the stock of the Corporation owned by such shareholder. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman of the Board, or the President and by the Secretary. Any or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon any such certificate shall thereafter have ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent, or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms, or corporations owning the stock represented by such certificates, the number and class of shares represented by such certificates, respectively, and the respective dates thereof, and in the case of cancellation the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in 7.04 of the By-laws. Notwithstanding the above, the Board may provide by resolution or resolutions that some or all of any and all classes or series of stock of the Corporation may be uncertificated shares provided the shares represented by a certificate shall not become uncertificated shares until such time as the certificate for such shares is surrendered to the Corporation and shall have been canceled and provided further that any holder of uncertificated shares who makes written request to the Corporation shall be entitled to receive a certificate representing such holder's shares of the stock in the Corporation. SECTION 7.02 TRANSFERS OF STOCK. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by the registered holder's attorney thereunto authorized by power of attorney duly executed and filed with the stock transfer agent as provided in 7.03 of the By-laws, and except for uncertificated shares upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be stated expressly in the entry of transfer if, when the certificate or certificates shall be presented for transfer, both the transferor and the transferee request the Corporation to do so. SECTION 7.03 REGULATIONS. The Board may make such rules and regulations as it may deem expedient, not inconsistent with the By-laws, concerning the issue, transfer, and registration of certificates for shares and uncertificated shares of the stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more stock transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. SECTION 7.04 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In any case of loss, theft, destruction, or mutilation of any certificate of stock, another certificate may be issued in its place upon proof of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Secretary may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Secretary, it is proper to do so. ARTICLE VIII - INDEMNIFICATION SECTION 8.01 ACTIONS, SUITS, OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation) by reason of the fact that the person is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise or as a member of any committee or similar body, against expenses (including attorneys' fees), judgments, fines, and amounts paid in 12 13 settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that the person's conduct was unlawful. SECTION 8.02 ACTIONS, SUITS, OR PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. SECTION 8.03 INDEMNITY IF SUCCESSFUL. Notwithstanding the other provisions of this Article, to the extent that a present or former Director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 8.01 and 8.02, or in defense of any claim, issue, or matter therein, the person shall be indemnified against expenses (including attorneys, fees) actually and reasonably incurred by such person in connection therewith. SECTION 8.04 DETERMINATION OF RIGHT OF INDEMNIFICATION. Any indemnification under 8.01 or 8.02 of the By-laws (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former Director, officer, employee, or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 8.01 and 8.02 of the By-laws. Such determination shall be made (i) by the Board by a majority vote of the Directors who were not parties to such action, suit, or proceeding, even though less than a quorum; (ii) by a committee of Directors designated by a majority vote of Directors, even though less than a quorum; (iii) if there are no such Directors, or if such Directors so direct, by independent legal counsel in a written opinion; or (iv) by the shareholders. SECTION 8.05 ADVANCE OF EXPENSES. Expenses (including attorney fees) incurred by an officer or Director in defending a civil or criminal action, suit, or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of such Director or officer to repay such amount if it shall ultimately be determined that the person is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorney fees) incurred by former Directors or officers or other employees and agents may be so paid under such terms and conditions, if any, as the Board may deem appropriate. SECTION 8.06 PROVISIONS OF BY-LAWS NOT EXCLUSIVE. The indemnification and advancement of expenses provided by, or granted pursuant to, the other sections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of shareholders or disinterested Directors or otherwise, both as to such person's official capacity and as to action in another capacity while holding such office. 13 14 SECTION 8.07 INSURANCE. Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise or as a member of any committee or similar body against any liability asserted against the person and incurred by the person in any such capacity, or arising out of the person's status as such, whether or not the Corporation would have the power to indemnify the person against such liability under the provisions of this Article. SECTION 8.08 CONSTITUENT CORPORATIONS. For the purposes of this Article, references to "the Corporation" include in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its Directors, officers, and employees, or agents, so that any person who is or was a Director, officer, employee, or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a Director, officer, employee, or agent of another corporation, partnership, joint venture, trust, limited liability company or other enterprise or as a member of any committee or similar body shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its existence had continued. SECTION 8.09 CERTAIN DEFINITIONS. For purposes of this Article, references to "other enterprises" shall include, but are not limited to, employee benefit plans; references to "fines" shall include, but are not limited to, any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include, but are not limited to, any service as a Director, officer, employee, or agent of the Corporation which imposes duties on, or involves services by, such Director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner the person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. SECTION 8.10 CONTINUATION OF RIGHTS PROVIDED BY THIS ARTICLE. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. SECTION 8.11 MISCELLANEOUS. In furtherance and not in limitation of the foregoing provisions of this Article VIII, the Corporation shall indemnify the persons referred to hereinabove to the fullest extent permitted by Oklahoma General Corporate Law, as the same may be amended from time to time. ARTICLE IX - MISCELLANEOUS SECTION 9.01 SEAL. The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that the Corporation was incorporated in the State of Oklahoma and the year of incorporation. SECTION 9.02 WAIVER OF NOTICES. Whenever notice is required to be given by the By-laws or the Certificate of Incorporation, or by law, the person entitled to such notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice. SECTION 9.03 FISCAL YEAR. The fiscal year of the Corporation shall end on the 31st day of December of each year commencing with 1999; provided, that in respect to the election of Directors at the next annual meeting after the commencement of the new fiscal year, a person who would have been eligible for election as a Director at the normal time for a meeting of shareholders for the prior fiscal year shall remain eligible notwithstanding the provision of Section 3.03 above. 14 15 SECTION 9.04 INSPECTION OF CORPORATE BOOKS AND RECORDS. The Board from time to time shall determine whether and to what extent and at what times and places, and under what conditions and regulations the accounts and books of the Corporation, or any of them, shall be open to the inspection of the shareholders, and no shareholder shall have any right to inspect any account, book, or documents of the Corporation except as conferred by statute or as authorized by resolution of the Board. SECTION 9.05 CERTIFICATE OF INCORPORATION. As used herein, the term "Certificate of Incorporation" shall mean the Certificate of Incorporation of the Corporation, as the same may be amended or restated from time to time. SECTION 9.06 AMENDMENTS. The By-laws, or any of them, may be rescinded, altered, amended, or repealed, and new By-laws may be made, (i) by the Board, by vote of a majority of the number of Directors then in office as Directors, acting at any meeting of the Board, or (ii) by the vote of the holders of not less than 80% of the total voting power of all outstanding shares of voting stock of the Corporation, entitled to vote generally on the election of directors, at any annual meeting of shareholders, without previous notice, or at any special meeting of shareholders, provided that notice of such proposed amendment, modification, repeal, or adoption is given in the notice of special meeting. Any By-laws made or altered by the shareholders may be altered or repealed by the Board or may be altered or repealed by the shareholders. 15 EX-10.(A) 3 KEY EMPLOYEE ANNUAL INCENTIVE PLAN 1 EXHIBIT (10)(a) ONEOK, INC. KEY EMPLOYEE ANNUAL INCENTIVE PLAN AS ACCEPTED AND ASSUMED ON NOVEMBER 26, 1997 1. Name and Effective Date. The plan hereby created shall be known as the ONEOK, Inc. Key Employee Annual Incentive Plan ("Plan"). The Plan shall be effective as of September 1, 1995, and shall first apply with respect to the fiscal year ending August 31, 1996. The Plan shall remain in effect until terminated by the Board of Directors of ONEOK, Inc. ("Board of Directors") pursuant to paragraph 8, below. 2. Purpose. The purpose of this Plan is to provide officers and other key employees of ONEOK, Inc., its divisions and subsidiaries ("Company"), selected for participation in the Plan under paragraph 3, below, with a direct financial interest in the performance and profitability of the Company, and particular business units thereof, and to reward performance in employment with the Company. It is the intention (but not the obligation) of the Company that cash payment of incentive awards ("Awards") will be made annually in accordance with the terms of this Plan. 3. Eligibility; Plan Participation. The Executive Compensation Committee ("Committee") of the Board of Directors, in its sole discretion, after taking into consideration any recommendations of the Chief Executive Officer of the Company, shall be authorized to determine and select the officers and other key employees of the Company eligible to participate ("Participants") in the Plan for a fiscal year. No member of the Committee shall be eligible to participate in the Plan. 4. Administration. The Plan shall be administered by the Committee which shall be composed of at least three members of the Board of Directors. The Committee is hereby vested with full powers of administration of the Plan, subject only to the provisions herein set forth. Members of the Committee shall not be eligible to receive Awards or any other financial benefit under the Plan. The Committee shall act by a vote of a majority of a quorum or by unanimous written consent. A majority of its members shall constitute a quorum. The Board may, from time to time, remove members from or add members to the Committee. Vacancies on the Committee, arising for any reason, shall be filled only by the Board of Directors. The Committee shall have the authority to define, prescribe, amend and rescind rules, regulations, procedures, terms and conditions relating to the Plan. The Committee shall also have the authority to make all determinations necessary or advisable, in its sole discretion, for the administration of the Plan, including but not limited to interpreting the Plan, correcting defects, reconciling inconsistencies and resolving ambiguities. The interpretation by the Committee of the terms and provisions of the Plan, and its administration of the Plan, and all actions taken by the Committee, shall be final, binding and conclusive on the Company, its stockholders, subsidiaries, all Participants in the Plan and employees, and upon their respective successors and assigns, and upon all other persons claiming under or through any of them. 2 5. Determination of Awards. The determination of incentive criteria and actual incentive Awards for Participants, and timing and terms of payment of such Awards shall be made pursuant to determinations, actions, rules, regulations and procedures adopted and established from time to time by the Committee. It is anticipated, subject in all cases to the determinations to be made by the Committee, in its sole discretion (which may differ in any way the Committee determines from the following), that Awards will be made payable to Participants subject to achievement of certain corporate and unit performance goals established and approved by the Committee before the start of a fiscal year of the Company; the measurement period for such achievement of such goals will correspond to the Company's fiscal year; payment of Awards approved by the Committee under the Plan will be made as soon as reasonably possible after the end of the fiscal year for which they are approved after the audited financial results are made available to the Committee; the Committee will be assisted in administering the Plan by the Chief Executive Officer, and the officers, employees and departments of the Company designated by the Chief Executive Officer; the committee will monitor the Plan and make adjustments and interpretations, from time to time as it determines, in its sole discretion, to be appropriate; goals established pursuant to the Plan can be modified by the Committee during the fiscal year of the Company for which such goals were established if conditions outside the control of the Company or unit arise that make such goals obsolete or unreasonable (including increasing or decreasing the standards involved or replacing them in their entirety); and periodic and frequent communication will be made by the Committee to Participants in the Plan of the Plan's provisions, the goals and standards established pursuant to the Plan, and the relevant operating and financial information of the Company, its divisions, subsidiaries, and business units thereof. 6. Payment of Awards. Any Award to a Participant in the Plan determined and approved by the Committee for performance in a fiscal year or other measurement period, in accordance with paragraph 5, above, shall be paid to such Participant in a cash lump sum payment as soon as is practicable after the Committee has approved the amount for that period. Said payments shall be deemed additional compensation to the Participant, and payroll taxes shall be withheld from said payments in accordance with all applicable federal, state and local laws. 7. Termination of Employment. This Plan does not create a contract of employment between the Company and any Participant. This Plan does not limit the right of the Company to discharge or terminate a Participant for any reason, or for no reason. The payment of any Award under this Plan is completely discretionary with the Committee and Board of Directors, and no person shall have any claim to be granted or to receive any Award or other amount, benefit or payment, and no Participant or other person shall have authority to assign or transfer any Award or other rights, benefits or payments hereunder, or to enter into any agreement with any person for the payment of any Award, or to make any representation or warranty with respect thereto. Upon a Participant's termination of employment with the Company for any reason, including but not limited to the death or disability of the Participant, the Participant's rights, if any, to an Award hereunder shall terminate. A Participant must be employed on September 30 of a fiscal year or the last day of any other applicable measurement period in order to receive an Award with respect to the fiscal year or measurement period, respectively. 8. Amendment or Termination. The Company reserves the right to amend or terminate the Plan at any time by action of its Board of Directors. Such amendment or termination may be made at any time during the year, and no such amendment or termination shall entitle any Participant to any claim for an Award, or for any other benefit or payment, under this Plan. 2 EX-10.(C) 4 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EXHIBIT (10)(c) ONEOK, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (As Amended and Restated July 1, 1999) 2 AMENDED AND RESTATED 7/1/99 ONEOK, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PURPOSE The purpose of the ONEOK, Inc. Supplemental Executive Retirement Plan is to provide the specified benefits to a select group of management and highly compensated employees who contribute materially to the continued growth, development and future business success of ONEOK, Inc., and its subsidiaries. It is the intention of ONEOK, Inc. that the Plan and the particular benefits provided to individuals hereunder be administered as an unfunded deferred compensation and excess benefit plans established and maintained for a select group of management or highly compensated employees. This Plan is an amendment, restatement, and continuation of the Supplemental Executive Retirement Plan for Employees of ONEOK, Inc. This amended and restated Plan replaces all prior documents and amendments and is effective as of the date determined by the Board of Directors. ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 DEFINITIONS. For purposes of the Plan, the following phrases or terms shall have the indicated meanings unless otherwise clearly apparent from the context: A. "Base Cash Compensation" shall mean the regular monthly salary paid to a Participant by the Company before any deductions or exclusions for taxes or other purposes, and excluding any vehicle allowance, incentives, commissions and any other special pay. B. "Beneficiary" shall mean the person or persons or the estate of a Participant entitled to receive any benefits under a Plan Agreement entered into in accordance with the terms of the Plan. C. "Board of Directors" shall mean the Board of Directors of ONEOK, Inc., unless otherwise indicated or the context otherwise requires. D. "Change of Control" shall mean a Change of Control as defined in the ONEOK, Inc. Severance Pay Plan. E. "Code" shall mean the Internal Revenue Code of 1986, as amended. F. "Committee" shall mean the Executive Compensation Committee of the Board of Directors or such other Committee appointed to manage and administer the Plan and individual Plan Agreements in accordance with the provisions of Article XIII hereof. G. "Company" shall mean ONEOK, Inc., an Oklahoma corporation, and its subsidiaries and predecessor entities. 2 3 AMENDED AND RESTATED 7/1/99 H. "Compensation" shall mean the Base and Short-Term Incentive Cash Compensation from the Company paid to or deferred by a Participant during a calendar year. I. "Death Benefit" shall mean the amount paid to a Participant's Beneficiary in accordance with the provisions of Article III hereof. J. "Disability Benefit" shall mean the amount paid to a Participant's Beneficiary in accordance with the provisions of Section 4.2 hereof. K. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. L. "Employee" shall mean any person who is in the regular full-time employment of the Company or is on authorized leave of absence therefrom, as determined by the personnel rules and practices of the Company. The term does not include persons who are retained by the Company solely as consultants or under contract. M. "KGS Supplemental Executive Retirement Plan" shall mean the ONEOK, Inc. Supplemental Retirement Plan for KGS Employees, merged and consolidated into this Plan effective July 1, 1999. N. "KGS SERP Participant" shall mean any person who was a participant in the KGS Supplemental Executive Retirement Plan on July 1, 1999, whose accrued benefits thereunder are, after June 30, 1999, to be paid pursuant to this Plan in accordance with Section 2.3 hereof. O. "Participant" shall mean an Employee who is selected and elects to participate in the Plan through the execution of a Plan Agreement in accordance with the provisions of Article II hereof. P. "Person" shall mean and include an individual, a trust, estate, partnership, limited liability company, association, company or corporation. Q. "Plan Agreement" shall mean the form of written agreement which is entered into by and between the Company and an Employee selected to become a Participant as a condition to participation in the Plan. The form of Plan Agreement to be used shall be substantially the same as the form attached hereto as Appendix I. R. "Plan" shall mean the ONEOK, Inc. Supplemental Executive Retirement Plan as embodied herein and as amended from time to time. S. "Rabbi Trust" shall mean the trust created to hold assets which will be used to pay the benefits provided hereunder, as provided in Section 7.4 hereof. 3 4 AMENDED AND RESTATED 7/1/99 T. "Retirement" and "Retire" shall mean termination of employment with the Company, other than as the result of death or Total and Permanent Disability. U. "Retirement Benefit" shall mean the monthly amount to be paid to a Participant under Sections 4.1, 4.2, or 4.3 hereof, and the Participant's Plan Agreement. V. "Retirement Plan" shall mean the Retirement Plan for Employees of ONEOK, Inc. and Subsidiaries, or the ONEOK, Inc. KGS Retirement Plan, whichever is applicable to the Participant. W. "Service" shall mean employment of a Participant by the Company as a regular full-time employee. X. "Short-Term Incentive Cash Compensation" shall mean any payment by the Company under the Key Employee Incentive Plan for Employees of ONEOK, Inc. and Subsidiaries or any other incentive or commission plan established by the Company to pay employees additional cash compensation to reward performance. Y. "Totally and Permanently Disabled" means when, on the basis of medical evidence, it is determined that a Participant: a) is totally disabled so as to be prevented from any comparable employment with the Company, including a disability resulting from an occupational cause; and b) will be disabled permanently. Z. "Years of Service" shall include each full year, but not any portion of a year, during which the Participant has been employed by the Company or any division or subsidiary thereof. 1.2 CONSTRUCTION. The singular when used herein may include the plural unless the context clearly indicates to the contrary. The words "hereof", "herein", "hereunder", and other similar compounds of the word "here" shall mean and refer to the entire Plan and not to any particular provision or section. Whenever the words "Article" or "Section" are used in the Plan, or a cross reference to an "Article" or "Section" is made, the Article or Section referred to shall be an Article or Section of the Plan unless otherwise specified. The Plan is intended to be an unfunded deferred compensation and excess benefit plan established and maintained for a select group of management and highly compensated employees of the Company within the meaning of Sections 201(2) and (7), 301(a)(3), (9) and 401(a)(1) of ERISA, and shall be construed, interpreted and administered in accordance with such intended purpose. 4 5 AMENDED AND RESTATED 7/1/99 ARTICLE II ELIGIBILITY AND PARTICIPATION 2.1 ELIGIBILITY. In order to be eligible for participation in the Plan, an Employee must be selected by the Chief Executive Officer, or in the case of the Chief Executive Officer by the Board of Directors, which, in the CEO\its sole and absolute discretion, shall determine eligibility for participation in accordance with the purposes of the Plan. 2.2 PARTICIPATION. An Employee, having been selected to participate in the Plan by the Chief Executive Officer/Board of Directors, shall, as a condition to participate, complete and return to the Committee a duly executed Plan Agreement electing to participate in the Plan and agreeing to the terms and conditions thereof. 2.3 KGS SERP PARTICIPANT PARTICIPATION. Any KGS SERP participant shall be eligible to receive payment by the Company under this Plan of his/her accrued benefits as of June 30, 1999, under the KGS Supplemental Executive Retirement Plan. The amount and form of such benefits shall be determined in accordance with the terms and provisions of the KGS Supplemental Executive Retirement Plan, which are incorporated herein by reference and made a part hereof; provided, that payment of such benefits and all related matters otherwise shall hereafter be administered by the Company in accordance with the terms and provisions of this Plan. A KGS SERP participant shall not otherwise be eligible for participation in or accrual of any other benefits under this Plan, unless expressly provided for in accordance with the provisions of the Plan. ARTICLE III DEATH BENEFIT 3.1 AMOUNT AND PAYMENT OF DEATH BENEFIT. In the event a Participant dies prior to Retirement from the Company, the Company will pay or cause to be paid a Death Benefit to such Participant's Beneficiary in the amount or amounts set forth in such Participant's Plan Agreement and as therein specified, commencing on the first day of the month following the date of such Participant's death, or as otherwise specified in such Participant's Plan Agreement. 3.2 PARTIAL DISTRIBUTION PRIOR TO DEATH. If a Participant shall die after becoming entitled to a Retirement Benefit, but before the total amount payable to such Participant as a Retirement Benefit has been paid, the Retirement Benefit payments then remaining unpaid to such Participant shall be paid to such Participant's Beneficiary, in accordance with the payment schedule pursuant to which payments are made under Sections 4.1, 4.2, or 4.3. ARTICLE IV RETIREMENT BENEFIT 4.1 RETIREMENT. If a Participant remains an Employee until attaining age sixty-five (65) and shall then retire, the Company will pay or cause to be paid to such Participant as a Retirement Benefit (as herein defined), the amount per month specified herein and in such Participant's Plan Agreement, commencing on the first day of the month following such Participant's Retirement, or as otherwise specified in such Participant's Plan Agreement. If a Participant Retires prior to attaining age sixty-five (65), the Company will pay or cause to be paid to such Participant as a Retirement Benefit, the amount (if any) per month specified herein and in such Participant's Plan 5 6 AMENDED AND RESTATED 7/1/99 Agreement, commencing on the first day of the month following such Participant's Retirement, or as otherwise specified by such Participant and as permitted by such Participant's Plan Agreement. Provided however, Retirement Benefit payments shall not commence until the later of (i) the Participant attaining the age of fifty (50), and (ii) the commencement of retirement benefit payments to the Participant under the Retirement Plan.
Retirement Benefit Retirement Age Percentage -------------- ---------- 50 & under 50.00% 51 51.20% 52 52.40% 53 53.60% 54 54.80% 55 56.00% 56 56.57% 57 57.14% 58 57.71% 59 58.28% 60 58.85% 61 59.42% 62 60.00% 63 60.56% 64 61.13% 65 & over 61.70%
4.2 DISABILITY. If a Participant shall become Totally and Permanently Disabled prior to Retirement and such total disability continues for more than six (6) months, such Participant shall be entitled to the same Retirement Benefit such Participant would have received had such Participant attained the age of sixty-five (65) at the time of such disability. 4.3 VESTING OF RETIREMENT BENEFIT. Notwithstanding any provision to the contrary expressed or implied herein, a Participant's Retirement Benefit shall unconditionally vest in such Participant and become nonforfeitable according to the following vesting schedule:
Years of Service Vested Percentage of with the Company Retirement Benefit ----------------- -------------------- 0 to 5 0% 6 10% 7 20% 8 30% 9 40% 10 50% 11 60% 12 70% 13 80% 14 90% 15 or more 100%
6 7 AMENDED AND RESTATED 7/1/99 If a Participant attains age sixty-five (65) prior to Retirement, such Participant shall be 100% vested regardless of the above schedule. Retirement Benefits hereunder offsetting the limitations of Internal Revenue Code Sections 401(a)(17) and 415(b) shall be immediately fully vested for all purposes. 4.4 FORFEITABILITY OF RETIREMENT BENEFIT. Notwithstanding any provision to the contrary expressed or implied herein, a Participant's right to receive a Retirement Benefit under the Plan and such Participant's Plan Agreement shall be forfeitable to the extent that such Retirement Benefit has not vested as described in Section 4.3. ARTICLE V BENEFICIARY A Participant shall designate a Beneficiary to receive benefits under the Plan and the Participant's Plan Agreement by completing the appropriate space in such Plan Agreement. If more than one Beneficiary is named, the shares and/or precedence of each Beneficiary shall be indicated. As a condition to any married Participant designating a Beneficiary other than such Participant's spouse, the Committee may require the spouse's consent. A Participant shall have the right to change the Beneficiary by submitting to the Committee a Change of Beneficiary in the form attached as Appendix II hereof; provided, however, that no change of Beneficiary shall be effective until acknowledged in writing by the Committee. If the Company has any doubt as to the proper Beneficiary to receive payments hereunder, the Company shall have the right to withhold such payments until the matter is finally adjudicated. Any payment made or caused to be made by the Company in good faith and in accordance with the provisions of the Plan and a Participant's Plan Agreement shall fully discharge the Company from all further obligations with respect to such payment. ARTICLE VI LEAVE OF ABSENCE If a Participant is authorized by the Company for any reason, including military, medical, or other, to take a leave of absence from employment, such Participant's Plan Agreement shall remain in effect. ARTICLE VII SOURCE OF BENEFITS 7.1 BENEFITS PAYABLE. Retirement Benefits and any other amounts payable hereunder shall be paid exclusively from the general assets of the Company or the Rabbi Trust to be established pursuant to Section 7.4; provided, that no person entitled to payment hereunder shall have any claim, right, security interest, or other interest in any fund, trust, account, insurance contract, or asset of the Company which may be looked to for such payment. The Company's liability for the payment of benefits hereunder shall be evidenced only by the Plan and each Plan Agreement entered into between the Company and a Participant. 7.2 INVESTMENTS TO FACILITATE PAYMENT OF BENEFITS. Although the Company is not obligated to invest in any specific asset or fund, or purchase any insurance contract, in order to provide the means for the payment of any Retirement Benefits under the Plan, the Company may elect to do so, and, in such event, no Participant shall have any interest whatever in such asset, fund, or 7 8 AMENDED AND RESTATED 7/1/99 insurance contract. In the event the Company elects to purchase or causes to be purchased insurance contracts on the life of a Participant as a means for making, offsetting, or contributing to any payment, in full or in part, which may become due and payable by the Company under the Plan or a Participant's Plan Agreement, such Participant agrees to cooperate in the securing of life insurance on such Participant's life by furnishing such information as the Company and the insurance carrier may require, including the results and reports of previous Company and other insurance carrier physical examinations as may be requested, and taking any other action which may be requested by the Company and the insurance carrier to obtain such insurance coverage. If a Participant does not cooperate in the securing of such life insurance, the Company shall have no further obligation to such Participant under the Plan, and such Participant's Plan Agreement shall terminate. 7.3 OWNERSHIP OF INSURANCE CONTRACTS. The Company shall be the sole owner of any insurance contracts acquired on the life of a Participant with all incidents of ownership therein, including, but not limited to, the right to cash and loan values, dividends, if any, death benefits, and the right to termination thereof, and a Participant shall have no interest whatsoever in such contracts, if any, and shall exercise none of the incidents of ownership thereof. Provided however, the Company may assign any such insurance contracts to the trustee of the Rabbi Trust. 7.4 TRUST FOR PAYMENT OF RETIREMENT BENEFITS. The Company shall create a Rabbi Trust for the purpose of facilitating any retirement benefits payable hereunder. Such trust will be funded to provide the applicable vested Retirement Benefits payable under the Plan and Plan Agreements upon the occurrence of any of the following events: a) At the Retirement of, and commencement of payment of Retirement Benefits to a Plan Participant; b) Upon a decision by the Committee, or by the Board of Directors; c) If the shareholders of the Company approve the merger or consolidation of the Company with or into any other corporation (other than a corporation wholly-owned by the Company immediately prior to such event) or the acquisition of substantially all of the business or assets of the Company by any other person or entity (other than a corporation wholly-owned by the Company immediately prior to such event); d) If a change occurs in the Board of Directors of the Company whereby Directors comprising a majority of the Board of Directors immediately prior to such change do not continue to comprise such a majority immediately after such change, provided that incremental and/or related changes (including but not limited to resignations from the Board of Directors) which occur within an eighteen (18) month period of time shall be considered to be but a single change for purposes of this subparagraph; or e) If, as a result of any tender offer or otherwise, any person or entity or affiliated group becomes the beneficial or record owner (directly or indirectly) of more than 10% of the outstanding voting securities of the Company. Such funding may be in the form of single premium annuities, or an amount sufficient for the trustee to purchase single premium annuities, or life insurance policies or contracts insuring 8 9 AMENDED AND RESTATED 7/1/99 the lives of Plan Participants, from qualified and financially sound insurance companies, and such other forms or types of investments the Company may select from time to time to provide the applicable vested Retirement Benefits payable under the Plan and Plan Agreements. Such funding and the purchase of insurance, if any, will not relieve the Company of its obligations to pay or cause to be paid the benefits hereunder. In lieu of such funding of such Rabbi Trust with respect to a Participant, the Participant may elect prior to such funding by the Company to receive the present value of such Participant's Retirement Benefit in a lump sum payment, less six percent (6%) of the amount thereof as a substantial penalty, which penalty will be forfeited by the Participant. Upon such lump sum payment the Company shall have no further obligation to the Participant. The Rabbi Trust may be maintained and administered to also provide for the funding of payment of amounts payable to participants in other deferred compensation and benefit plans of the Company. The funding, investments and administration of the Rabbi Trust in connection with such other separate plan or plans shall be separately administered and accounted for as determined to be necessary and appropriate by the Company and trustee pursuant to the terms of the Rabbi Trust. It shall be permissible for the trustee to invest funds of the Rabbi Trust in one or more forms of investment that is common to plans being funded thereunder. The Rabbi Trust shall be a grantor trust of which the Company is the grantor within the meaning of the Code. The principal of the Rabbi Trust and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Participants in the Plan and general creditors of the Company as specified hereinbelow and in the trust instrument. Participants in the Plan and their Beneficiaries shall have no preferred claim on, or any beneficial ownership in any assets of the Rabbi Trust; and any rights created under the Plan or Participant Plan Agreements, and the Rabbi Trust are to be made unsecured contractual rights of Participants and their Beneficiaries against the Company; and assets held by the Rabbi Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of insolvency of the Company. ARTICLE VIII TERMINATION OF EMPLOYMENT Neither the Plan nor a Participant's Plan Agreement, either singly or collectively, in any way obligate the Company, or any subsidiary of the Company, to continue the employment of a Participant with the Company, or any subsidiary of the Company, nor does either limit the right of the Company or any subsidiary of the Company at any time and for any reason to terminate the Participant's employment. Termination of a Participant's employment with the Company, or any subsidiary of the Company, for any reason, whether by action of the Company, subsidiary, or Participant, shall immediately terminate the Participant's participation in the Plan and such Participant's Plan Agreement, and all further obligations of either party thereunder, except as may be provided in Article X and the Participant's Plan Agreement. In no event shall the Plan or a Plan Agreement, either singly or collectively, by their terms or implications constitute an employment contract of any nature whatsoever between the Company, or any subsidiary, and a Participant. 9 10 AMENDED AND RESTATED 7/1/99 ARTICLE IX TERMINATION OF PARTICIPATION A Participant reserves the right to terminate participation in the Plan and such Participant's Plan Agreement at any time by giving the Company written notice of such termination not less than 30 days (i) prior to the anniversary date of any contract or contracts of insurance on the life of such Participant which may be in force and utilized by the Company in connection with the Plan, or (ii) prior to the date a Participant selects for termination if no insurance contract is in effect. ARTICLE X TERMINATION, AMENDMENT, MODIFICATION, OR SUPPLEMENT OF THE PLAN 10.1 TERMINATION. The Company reserves the right to terminate, amend, modify, or supplement the Plan, wholly or partially, from time to time, and at any time. The Company likewise reserves the right to amend, modify, or supplement any Plan Agreement, wholly or partially, from time to time. Such right to terminate, amend, modify, or supplement the Plan or any Plan Agreement shall be exercised for the Company by the Board of Directors; provided, however, that the Board of Directors shall take no action to terminate the Plan or a Plan Agreement or to reduce Retirement Benefits, with respect to any person who is a Participant (or a Beneficiary) at the time of the termination or reduction. This prohibition against the reduction of Participants' Retirement Benefits shall apply as well to Retirement Benefits Participants may earn (under the Plan and their Plan Agreement) by their future service and future increases in compensation. Any termination of the Plan shall be limited to Employees who at the time of such termination are not Participants. Provided however, in the event of a Change of Control of the Company, the surviving corporation, if other than the Company, may terminate the Plan and the Plan Agreements upon substitution by such corporation of a plan or program providing benefits no less favorable to the Participants. 10.2 RIGHTS AND OBLIGATIONS UPON TERMINATION. Upon the termination of the Plan by the Board of Directors, or the termination of any Plan Agreement by a Participant, in accordance with the provisions for such termination, neither the Plan nor the Plan Agreement shall be of any further force or effect, and no party shall have any further obligation under either the Plan or any Plan Agreement so terminated, except as provided in Sections 4.3, 10.1 or as elsewhere provided in the Plan. ARTICLE XI OTHER BENEFITS AND AGREEMENTS The Retirement Benefits provided for a Participant and such Participant's Beneficiary under the Plan and under such Participant's Plan Agreement are in addition to any other benefits available to such Participant under any other Plan, plan or agreement of the Company for its Employees and the Participants, and, except as may be otherwise expressly provided for, the Plan and Plan Agreements entered into hereunder shall supplement and shall not supersede, modify, or amend any other Plan, plan or agreement of the Company or a Participant. Moreover, Retirement Benefits under the Plan and Plan Agreements entered into hereunder shall not be considered compensation for the purpose of computing contributions or benefits 10 11 AMENDED AND RESTATED 7/1/99 under any plan maintained by the Company, or any of its subsidiaries, which is qualified under Section 401(a) of the Code. ARTICLE XII RESTRICTIONS ON ALIENATION OF BENEFITS No Retirement Benefit, or other right or benefit under the Plan or a Plan Agreement shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same shall be void. No Retirement Benefit, or right or benefit under the Plan or under any Plan Agreement shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such thereto. If any Participant or Beneficiary under the Plan or a Plan Agreement should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right to a benefit under the Plan or under any Plan Agreement, then such right or benefit shall, in the discretion of the Committee, cease, and in such event, the Committee may hold or apply the same or any part thereof for the benefit of such Participant or Beneficiary, his or her spouse, children, or other dependents, or any of them, in such portion as the Committee, in its sole and absolute discretion, may deem proper. ARTICLE XIII ADMINISTRATION OF THE PLAN 13.1 APPOINTMENT OF COMMITTEE. The general administration of the Plan, and any Plan Agreements executed hereunder, as well as construction and interpretation thereof, shall be vested in the Committee, the number and members of which shall be designated and appointed from time to time by, and shall serve at the pleasure of, the Board of Directors. Any such member of the Committee may resign by notice in writing filed with the Board of Directors. Vacancies shall be filled promptly by the Board of Directors. 13.2 COMMITTEE OFFICIALS. The Board of Directors may designate one of the members of the Committee as Chairman and may appoint a secretary who need not be a member of the Committee. The secretary shall keep minutes of the Committee's proceedings and all data, records, and documents relating to the Committee's administration of the Plan and any Plan Agreements executed hereunder. The Committee may appoint from its number such subcommittees with such powers as the Committee shall determine and may authorize one or more of its members or any agent to execute or deliver any instrument or make any payment on behalf of the Committee. 13.3 COMMITTEE ACTION. All resolutions or other actions taken by the Committee shall be by the vote of a majority of those present at a meeting at which a majority of the members are present, or in writing by all the members at the time in office if they act without a meeting. 13.4 COMMITTEE RULES AND POWERS - GENERAL. Subject to the provisions of the Plan, the Committee may from time to time establish rules, forms, and procedures for the administration of the Plan, including Plan Agreements. Except as herein otherwise expressly provided, the Committee shall have the exclusive right to interpret the Plan and any Plan Agreements, and to decide any and all matters arising thereunder or in connection with the administration of the Plan and any Plan Agreements, and it shall endeavor to act, whether by general rules or by particular decisions, so as not to discriminate in favor of or against any 11 12 AMENDED AND RESTATED 7/1/99 person. The Committee shall have the exclusive right to determine Total and Permanent Disability with respect to a Participant (consistent with the Plan's definition of the term), such determinations to be made on the basis of such medical and/or other evidence that the Committee, in its sole and absolute discretion, may require. Such decisions, actions, and records of the Committee shall be conclusive and binding upon the Company, the Participants, and all persons having or claiming to have rights or interests in or under the Plan. 13.5 RELIANCE ON CERTIFICATES, ETC. The members of the Committee and the Officers and Directors of the Company shall be entitled to rely on all certificates and reports made by any duly appointed accountants, and on all opinions given by any duly appointed legal counsel. Such legal counsel may be counsel for the Company. 13.6 LIABILITY OF COMMITTEE. No member of the Committee shall be liable for any act or omission of any other member of the Committee, or for any act or omission on his part, excepting only his own willful misconduct. The Company shall indemnify and save harmless each member of the Committee against any and all expenses and liabilities arising out of membership on the Committee, excepting only expenses and liabilities arising out of a Committee member's own willful misconduct. Expenses against which a member of the Committee shall be indemnified hereunder shall include, without limitation, the amount of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted, or a proceeding brought, or settlement thereof. The foregoing right of indemnification shall be in addition to any other rights to which any such member may be entitled. 13.7 DETERMINATION OF BENEFITS. In addition to the powers hereinabove specified, the Committee shall have the power to compute and certify, under the Plan and any Plan Agreement, the amount and kind of benefits from time to time payable to Participants and their Beneficiaries, and to authorize all disbursements for such purposes. 13.8 INFORMATION TO COMMITTEE. To enable the Committee to perform its functions, the Company shall supply full and timely information to the Committee on all matters relating to the compensation of all Participants, their retirement, death, or other cause for termination of employment, and such other pertinent facts as the Committee may require. 13.9 MANNER AND TIME OF PAYMENT OF BENEFITS. The Committee shall have the power, in its sole and absolute discretion, to change the manner and time of payment of Retirement Benefits to be made to a Participant or the Participant's Beneficiary from that set forth in the Participant's Plan Agreement if requested to do so by such Participant or Beneficiary. ARTICLE XIV ADOPTION OF PLAN BY SUBSIDIARY, AFFILIATED OR ASSOCIATED COMPANIES Any corporation which is a subsidiary of the Company may, with the approval of the Board of Directors, adopt the Plan and thereby come within the definition of Company in Article I hereof. 12 13 AMENDED AND RESTATED 7/1/99 ARTICLE XV EXCESS RETIREMENT BENEFIT PAYMENTS COMMENCED BEFORE SEPTEMBER 1, 1998 Notwithstanding anything expressed or implied to the contrary herein, the payment of excess retirement benefits to a retired Plan Participant that commenced under the Plan prior to September 1, 1998, shall be paid in accordance with, and to the extent provided by the applicable terms and provisions of the Plan in effect prior to September 1, 1998. ARTICLE XVI MISCELLANEOUS 16.1 EXECUTION OF RECEIPTS AND RELEASES. Any payment to a Participant, a Participant's legal representative, or Beneficiary in accordance with the provisions of the Plan or any Plan Agreement executed hereunder shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Company. The Company may require such Participant, legal representative, or Beneficiary, as a condition precedent to such payment, to execute a receipt and release therefor in such form as it may determine. 16.2 NO GUARANTEE OF INTERESTS. Neither the Committee nor any of its members guarantees the payment of any amounts which may be or becomes due to any person or entity under the Plan or any Plan Agreement executed hereunder. The liability of the Company to make any payment under the Plan or any Plan Agreement executed hereunder is limited to the then available assets of the Company and the Rabbi Trust established under Section 7.4 hereof. 16.3 COMPANY RECORDS. Records of the Company as to a Participant's employment, termination of employment and the reason therefor, reemployment, authorized leaves of absence, and compensation shall be conclusive on all persons and entities, unless determined to be incorrect. 16.4 EVIDENCE. Evidence required of anyone under the Plan and any Plan Agreement executed hereunder may be by certificate, affidavit, document, or other information which the person or entity acting on it considers pertinent and reliable, and signed, made, or presented by the proper party or parties. 16.5 NOTICE. Any notice which shall be or may be given under the Plan or a Plan Agreement executed hereunder shall be in writing and shall be mailed by United States mail, postage prepaid. If notice is to be given to the Company, such notice shall be addressed to the Company at: 100 West Fifth Street Tulsa, Oklahoma 74102 and marked to the attention of the Secretary, Supplemental Executive Retirement Plan Administrative Committee; or, if notice to a Participant, addressed to the address shown on such Participant's most recent employment file with the Company. 13 14 AMENDED AND RESTATED 7/1/99 16.6 CHANGE OF ADDRESS. Any party may, from time to time, change the address to which notices shall be mailed by giving written notice of such new address. 16.7 EFFECT OF PROVISIONS. The provisions of the Plan and of any Plan Agreement executed hereunder shall be binding upon the Company and its successors and assigns, and upon a Participant, the Participant's Beneficiary, assigns, heirs, executors, and administrators. 16.8 HEADINGS. The titles and headings of Articles and Sections are included for convenience of reference only and are not to be considered in the construction of the provisions hereof or any Plan Agreement executed hereunder. 16.9 GOVERNING LAW. All questions arising with respect to the Plan and any Plan Agreement executed hereunder shall be determined by reference to the laws of the State of Oklahoma in effect at the time of their adopting and execution, respectively. 16.10 EFFECTIVE DATE. Except to the extent explicitly stated otherwise herein, the terms and provisions of this amended and restated Plan shall be effective as to excess retirement benefits for Participants with respect to whom no Retirement, Disability, or Death Benefit payments have commenced as of September 1, 1998, and their Beneficiaries. The excess retirement benefits payable to any Participant or Beneficiary which have commenced prior to September 1, 1998, shall not be increased or decreased by amendment of the Plan. ONEOK, Inc. By ----------------------------------- Larry W. Brummett Chairman of the Board and Chief Executive Officer Attested by: - ----------------------------- (Secretary) (SEAL) 14 15 AMENDED AND RESTATED 7/1/99 - -------------------------------------------------------------------------------- APPENDIX I ONEOK, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT - -------------------------------------------------------------------------------- 15 16 AMENDED AND RESTATED 7/1/99 ONEOK, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT I acknowledge that, as an Employee of ONEOK, Inc., I have been offered an opportunity to participate in the ONEOK, Inc. Supplemental Executive Retirement Plan (Plan) described in the attached document (which is incorporated herein by reference), and that I have elected one of the alternatives set forth as indicated by the space which I have checked: To participate in the Plan - --------- Not to participate in the Plan - --------- My Retirement Benefit, Disability Benefit, Death Benefit, and commencement of such payments, and designated Beneficiary(ies) are agreed to be as follows: 1.A Retirement Benefit (Article IV of Plan). Subject to the vesting schedule in Section 4.3 of the Plan, and Paragraph 2, below, a monthly amount which, when combined with existing pension benefits payable to me under the Retirement Plan and any retirement plans (other than 401(k) plans) of any of my former employers, will provide the percentage of the highest thirty-six (36) consecutive months average Compensation (or average of all months of Compensation if employed less than thirty-six (36) months) of the last sixty (60) months of Service, for life (15 years minimum) as illustrated below.
Retirement Benefit Retirement Age Percentage -------------- ------------------ 50 & under 50.00% 51 51.20% 52 52.40% 53 53.60% 54 54.80% 55 56.00% 56 56.57% 57 57.14% 58 57.71% 59 58.28% 60 58.85% 61 59.42% 62 60.00% 63 60.56% 64 61.13% 65 & over 61.70%
16 17 AMENDED AND RESTATED 7/1/99 1.B Commencement of Retirement Benefit Payments. The amount of my Retirement Benefit payments will be based on the following table depending upon the Participant's age when Retirement Benefit payments to such Participant commence:
Age At Payout Percentage Factor Commencement of Of Retirement Benefit Retirement Benefit Payments Percentage ----------- 50 50% 51 55% 52 60% 53 65% 54 70% 55 75% 56 80% 57 85% 58 90% 59 95% 60 & older 100%
2. Code Sections 401(a)(17) and 415(b) Limitations. Notwithstanding Paragraphs 1A and 1B above, the Plan and this Plan Agreement shall provide a Retirement Benefit attributable to my annual eligible compensation under the Retirement Plan that is in excess of the limitations on my Retirement Plan benefits contained in Code Sections 401(a)(17) and 415(b). This portion of the Retirement Benefit will be computed by applying the same benefit formula, vesting provisions, and early retirement provisions as are in the Retirement Plan. Any part of the Retirement Benefit provided under this Paragraph 2 will offset and reduce that part of the Retirement Benefit provided under Paragraphs 1A and 1B above. 3. Disability Benefit (Article IV of Plan). If I should suffer a Total and Permanent Disability prior to my Retirement, an amount which, when combined with then existing pension benefits under the Retirement Plan and any retirement plans (other than 401(k) plans) of any of my former employers, will provide sixty-one and 7/10 percent (61.7%) of my highest thirty-six (36) consecutive months average Compensation (or average of all months of Compensation if employed less than thirty-six (36) months) of my last sixty (60) months of Service, for life (15 years minimum). 4. Death Benefit. (Article III of Plan). If my death should occur before my Retirement, an amount which, when combined with then existing pension benefits under the Retirement Plan and any retirement plans (other than 401(k) plans) of any of my former employers, will provide fifty percent (50%) (or the vested Retirement Benefit, whichever is greater) of my highest thirty-six (36) consecutive months average Compensation (or average of all months of Compensation if employed less than thirty-six (36) months) of my last sixty (60) months of Service, payable to the Beneficiary for one hundred eighty (180) months following death. 5. I hereby designate as my Primary Beneficiary under the Plan and the Plan Agreement: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 17 18 AMENDED AND RESTATED 7/1/99 and, I hereby designate as my Secondary Beneficiary under the Plan and the Plan Agreement: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The term "Beneficiary" as used herein shall mean the Primary Beneficiary if such Primary Beneficiary shall survive me by at least thirty (30) days, and shall mean the Secondary Beneficiary if Primary Beneficiary does not survive me by at least thirty (30) days, and shall mean my Estate, if neither Primary nor Secondary Beneficiary survives me by at least thirty (30) days. I shall have the right to change my designation of my Primary and/or Secondary Beneficiary from time to time, in such manner as shall be required by the Company, it being agreed that no change in Beneficiary shall be effective until acknowledged in writing by the Committee. (If designation of a Beneficiary is to be irrevocable, strike and initial previous sentence.) I further acknowledge that neither the Company nor any of its subsidiaries, affiliated companies, officers, employees, or agents has any responsibility whatsoever for the changes which I may make in other personal plans or programs as a result of my decision regarding the Plan and they are fully released to such extent. The Company agrees that although the Plan may be terminated or modified at any time, in the sole discretion of the Company, I shall have those rights provided for in Article X of the Plan to the extent such may be applicable to me at the time of such termination. IN WITNESS WHEREOF, ONEOK, Inc. and Plan Participant have executed the Plan Agreement as of , 1998. --------- ONEOK, Inc. By: ------------------------------- PARTICIPANT: ----------------------------------- (Signature) (Type or Print Name) 18 19 AMENDED AND RESTATED 7/1/99 - -------------------------------------------------------------------------------- APPENDIX II CHANGE OF BENEFICIARY FORM FOR ONEOK, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - -------------------------------------------------------------------------------- 19 20 AMENDED AND RESTATED 7/1/99 CHANGE OF BENEFICIARY FORM FOR ONEOK, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN I, ___________________, as a Participant in the above Plan, hereby request to change the Beneficiary Designation dated as follows: -------------- Primary Beneficiary: ---------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Secondary Beneficiary: ---------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The term "Beneficiary" as used herein shall mean the Primary Beneficiary if such Primary Beneficiary shall survive me by at least thirty (30) days, and shall mean the Secondary Beneficiary if Primary Beneficiary does not survive me by at least thirty (30) days, and shall mean my Estate, if neither the Primary nor Secondary Beneficiary survives me by at least thirty (30) days. I shall have the right to change my designation of a Primary Beneficiary and/or Secondary Beneficiary from time to time in such manner as shall be required by the Company, it being agreed that no change in beneficiary shall be effective until acknowledged in writing by the Committee. (If designation of a Beneficiary is to be irrevocable, strike and initial previous sentence.) DATE: PARTICIPANT: - ------------------------- ------------------------------------ (Signature) ------------------------------------ (Type or Print Name) ------------------------------------ (Authorized Plan Representative)
20 EX-10.(D) 5 TERMINATION AGREEMENTS BETWEEN EXECUTIVES 1 EXHIBIT (10)(d) TERMINATION AGREEMENT THIS AGREEMENT, dated this 1st day of January, 1999, between ONEOK, Inc., an Oklahoma corporation, or any division or subsidiary thereof, having its principal office in Tulsa, Oklahoma (the "Corporation"), and Larry W. Brummett (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive, as an employee of the Corporation, has rendered valuable service to the Corporation, and the Corporation wishes to retain the Executive's services, assuring both itself and the Executive of the continuity of management in the event of any actual or threatened change in control of the Corporation; and NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Termination Payments. In the event of a Termination (as hereinafter defined) the Executive shall: a. Be paid a lump sum termination payment by the Corporation in an amount equivalent to three (3) times the Executive's Annual Compensation, and b. Be deemed to have attained the age of sixty-five (65) as of the date of the Change in Control for purposes of determining the Retirement Benefit Percentage under Section 4.1 of the ONEOK, Inc. Supplemental Executive Retirement Plan, and c. Be deemed to have attained an age equal to the Executive's actual age plus five (5) years, for purposes of commencing the Retirement Benefit Payments as provided under Section 1.B of the Executive's Plan Agreement under the ONEOK, Inc. Supplemental Executive Retirement Plan, and d. Be paid a lump sum payment by the Corporation equal to the Executive's short-term incentive compensation "target percentage" under the Corporation's incentive compensation plan times the midpoint of the Executive's Pay Grade, prorated for the length of employment during the current performance period, and e. Be paid by, or receive from the Corporation the employee benefits (including, but not limited to, car allowances and coverage under any medical or insurance arrangements or programs) to which the Executive would have been entitled under all employee welfare plans, programs, or arrangements maintained by the Corporation if the Executive had remained in the employ of the Corporation for the three (3) year period following Termination. Such employee benefits shall be provided under plans sponsored by the Corporation on the Occurrence Date or the Termination Date, whichever produces the higher benefits, but if such benefits are not available under Corporation sponsored plans in effect during each of the three (3) years, the Corporation shall provide such benefits to the Executive under plans covering the Executive individually, or otherwise provide or pay such benefits to the Executive. f. The lump sum payments described above shall be calculated and paid not later than thirty (30) calendar days after the Termination Date. Any payment not made within the thirty (30) days shall thereafter bear interest at two percent (2%) over the "prime rate" as published in The Wall Street Journal from time to time, which is the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation's thirty (30) largest banks. 2. Non-Disclosure. The Executive agrees that the Executive shall not, during the three (3) years after the date of any such Termination, directly or indirectly, divulge, disclose, or communicate to any other person any trade secrets that the Corporation may use in its business operations. 2 3. Definitions. As used in this Agreement, a. A "Change in Control" will be deemed to have occurred if, within three years of the original execution date hereof (subject to automatic extension and renewal for additional one (1)-year periods, unless the Corporation provides notice to the Executive of its election not to renew this Agreement at least ninety (90) days prior to the January 1 next preceding a Termination Date), (i) Any "person" (as that term is defined in Section 3(a)(9) and used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")) shall acquire beneficial ownership (as defined in Rule 13d-3 under the Act), directly or indirectly, of fifteen percent (15%) or more of Corporation's then outstanding securities entitled to vote for the election of directors; or (ii) As a result of, or in connection with, any cash tender or exchange offer, merger, or other business combination, sale of assets, or contested election or any combination of such transactions, the individuals who were directors of the Corporation immediately before such transaction (or before the first in any combination of such transactions) cease to constitute a majority of the Board of Directors of the Corporation or any successor to the Corporation; (iii) provided, however, that the acquisition by any "person" (as defined in Subsection 3(a)(i) above) of beneficial ownership of fifteen percent (15%) or more of the Company's outstanding securities entitled to vote for the election of directors, pursuant to a certain Amended and Restated Agreement among ONEOK Inc., WAI, and Western Resources, Inc., dated May 19, 1997, (the "Transaction Agreement"), which securities are held under and subject to a Shareholder Agreement ("Shareholder Agreement") attached as an exhibit to the Transaction Agreement (which Transaction Agreement and Shareholder Agreement are hereby referred to and incorporated herein by reference), shall not be considered to be a Change in Control for the purposes of this Termination Agreement until either (1) the termination of the Shareholder Agreement, or (2) the successful consummation of a Buyout Tender Offer as defined in Section 3.6(b) of the Shareholder Agreement, in either of which events either the acquisition or existence of such percentage of beneficial ownership by any person (as so defined) shall constitute a Change in Control for the purposes hereof. b. The "Occurrence Date" shall be the date on which a Change in Control of the Corporation occurs. c. The term "Termination" shall mean termination of the Executive's employment with the Corporation, within three (3) years after the Occurrence Date and prior to such Executive's Normal Retirement Date, (i) By the Corporation for any reason other than death or Permanent and Total Disability of the Executive, or for "Just Cause". The following circumstances shall constitute "Just Cause": The Executive's conviction in a court of law of a felony, or any crime or offense in a court of law of a felony, or any crime or offense involving misuse or misappropriation of money or property, the Executive's violation of any covenant, agreement or obligation not to disclose confidential information regarding the business of the Corporation (or a division or subsidiary); any violation by the Executive of any covenant not to compete with the Corporation (or a division or subsidiary); any act of dishonesty by the Executive which adversely affects the business of the Corporation (or a division or subsidiary); any willful or intentional act of the Executive which adversely affects the business of, or reflects unfavorably on the reputation of the Corporation (or a division or subsidiary); the Executive's use of alcohol or drugs which interferes with the Optionee's performance of duties as an employee of the Corporation (or a division or subsidiary); or the Executive's failure or refusal to perform the specific directives of the Corporation's Board of Directors, or its officers which directives are consistent with the scope and nature of the Optionee's duties and responsibilities with the existence and occurrence of all of such causes to be determined by the Corporation, in its sole 2 3 discretion; provided, that nothing contained in the foregoing provisions of this paragraph shall be deemed to interfere in any way with the right of the Corporation (or a division or subsidiary), which is hereby acknowledged, to terminate the Optionee's employment at any time without cause. (ii) By the Executive with the consent of the Board of Directors, or for "Good Reason." The following circumstances shall constitute "Good Reason": Any reason by the Executive within twelve (12) months after the first year following the Occurrence Date, or A demotion, loss of title or significant authority or responsibility of the Executive with respect to the Executive's employment with the Corporation from those in effect on the Occurrence Date, a reduction in salary of the Executive from that received from the Corporation immediately prior to the Occurrence Date, a reduction in short-term and/or long-term incentive targets from those applicable to the Executive immediately prior to the Occurrence Date, or the relocation of the Corporation's principal executive offices to a location outside the metropolitan area of Tulsa, Oklahoma, or the Corporation's requiring a Relocation of principal place of employment of the Executive; provided, however, the Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 3(c)(ii) shall be strictly limited to the terms specified in such written consent. The Executive shall give notice of any Termination of the Executive's employment for Good Reason due to any of the events described above by delivery of written notice thereof to the Corporation within one hundred twenty (120) days after the first occurrence of the event giving rise to such Good Reason. d. The term "Termination Date" shall mean the date of the Executive's Termination. e. "Annual Compensation" shall mean the greater of (A) the sum of (i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Occurrence Date, plus (ii) the Executive's bonus for the year last preceding the Occurrence Date, or (B)(i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Executive's Termination, plus (ii) the Executive's bonus for the year last preceding the Executive's Termination. f. "Code" shall mean the Internal Revenue Code of 1986, as amended. g. "Weekly Basic Salary" shall mean the base salary paid to the Executive by the Corporation in the last payroll period of the Corporation ending prior to the Executive's Termination divided by the number of weeks included within such payroll period. h. "Normal Retirement Date" shall mean the Normal Retirement Date of the Executive under the Retirement Plan for Employees of ONEOK, Inc. and Subsidiaries. i. "Permanent and Total Disability" shall mean a condition of disability of the Executive that comes within the meaning of such term under Section 22(e) of the Code. j. "Relocation" shall mean the Corporation requiring the Executive to move and relocate to a new principal place of the Executive's employment by the Corporation, which is more than thirty-five (35) miles further from the Executive's principal place of residence than the Executive's principal place of employment was prior to such change. 3 4 4. Section 280G Limitation on Payments. The Company shall make the payment and provide the benefits under Section 1 of this Agreement; provided, however, that if all or any portion of the payments and benefits provided under Section 1 of this Agreement, either alone or together with other payments and benefits which the Executive receives or is then entitled to receive from the Corporation, would constitute a "parachute payment" within the meaning of Section 280G of the Code, the Corporation shall pay to the Executive a Tax Gross-up Payment to the extent necessary so that the net after-tax benefit to the Executive shall be equal to the net after-tax benefit if the excise tax associated with the "parachute payment" were not imposed. The "net after-tax benefit" for these purposes shall mean the sum of (i) the total amount payable to the Executive under Section 1 of this Agreement, plus (ii) all other payments and benefits which the Executive receives or is then entitled to receive from the Corporation that would constitute a "parachute payment" within the meaning of Section 280G of the Code, less (iii) the amount of federal income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based upon the rate in effect for such year as set forth in the Code at the time of the payment under Section 1), less (iv) the amount of excise taxes imposed with respect to the payments and benefits described in (i) and (ii) above by Section 4999 of the Code. 5. Fees and Expenses. The Corporation shall reimburse the Executive on a current basis, for all legal fees, arbitration fees and related expenses incurred by the Executive in connection with this Agreement following a Change in Control, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting any termination of employment or incurred by the Executive in seeking advice with respect to the matters set forth in Section 1 hereof, or (b) Executive seeking to enforce any benefit provided by this Agreement, in each case, regardless of whether or not the claim is upheld by a court of competent jurisdiction; provided, however, Executive shall be required to repay any such amounts to the extent that the arbitrator under Section 13 issues a final and non-appealable order determining that the Executive's position was frivolous. The Corporation shall reimburse the Executive for all reasonable attorneys' and accountants' fees incurred in connection with determining whether a reduction under Section 4(a) is appropriate. 6. Consideration. As consideration for the benefits to be provided by the Corporation under this Agreement, prior to the occurrence of a Change in Control the Executive agrees to deliver to the Corporation thirty (30) calendar days' prior written notice of any voluntary termination by the Executive of the Executive's employment with the Corporation. 7. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address the Executive has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices. 8. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Oklahoma. 9. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing and so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 10. Succession. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation with which it may merge or consolidate. 11. Severability. In the event that all or any part of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement or such 4 5 provision shall be unaffected thereby and shall remain in full force and effect. If any provision of this Agreement or portion thereof is so broad as to be unenforceable it shall be interpreted to be only so broad as is enforceable. Nothing in this Agreement is intended to or shall be construed to violate any Federal or State law or regulation. 12. Related Agreements. This Agreement shall supersede and terminate all prior individual agreements between the Corporation and the Executive relating to the matters contained herein. 13. Arbitration. a. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be settled by binding arbitration in accordance with the CPR NON-ADMINISTERED ARBITRATION RULES in effect on the date of this Agreement, by a sole arbitrator. b. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the Arbitrator may be entered by any court having jurisdiction thereof. c. The place of arbitration shall be Tulsa, Oklahoma. d. The statute of limitations of the State of Oklahoma applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. ----------------------------------- "Executive" ONEOK, Inc. By --------------------------------- David L. Kyle, President and Chief Operating Officer "Corporation" 5 6 TERMINATION AGREEMENT THIS AGREEMENT, dated this 1st day of January, 1999, between ONEOK, Inc., an Oklahoma corporation, or any division or subsidiary thereof, having its principal office in Tulsa, Oklahoma (the "Corporation"), and David L. Kyle (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive, as an employee of the Corporation, has rendered valuable service to the Corporation, and the Corporation wishes to retain the Executive's services, assuring both itself and the Executive of the continuity of management in the event of any actual or threatened change in control of the Corporation; and NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Termination Payments. In the event of a Termination (as hereinafter defined) the Executive shall: a. Be paid a lump sum termination payment by the Corporation in an amount equivalent to three (3) times the Executive's Annual Compensation, and b. Be deemed to have attained the age of sixty-five (65) as of the date of the Change in Control for purposes of determining the Retirement Benefit Percentage under Section 4.1 of the ONEOK, Inc. Supplemental Executive Retirement Plan, and c. Be deemed to have attained an age equal to the Executive's actual age plus five (5) years, for purposes of commencing the Retirement Benefit Payments as provided under Section 1.B of the Executive's Plan Agreement under the ONEOK, Inc. Supplemental Executive Retirement Plan, and d. Be paid a lump sum payment by the Corporation equal to the Executive's short-term incentive compensation "target percentage" under the Corporation's incentive compensation plan times the midpoint of the Executive's Pay Grade, prorated for the length of employment during the current performance period, and e. Be paid by, or receive from the Corporation the employee benefits (including, but not limited to, car allowances and coverage under any medical or insurance arrangements or programs) to which the Executive would have been entitled under all employee welfare plans, programs, or arrangements maintained by the Corporation if the Executive had remained in the employ of the Corporation for the three (3) year period following Termination. Such employee benefits shall be provided under plans sponsored by the Corporation on the Occurrence Date or the Termination Date, whichever produces the higher benefits, but if such benefits are not available under Corporation sponsored plans in effect during each of the three (3) years, the Corporation shall provide such benefits to the Executive under plans covering the Executive individually, or otherwise provide or pay such benefits to the Executive. f. The lump sum payments described above shall be calculated and paid not later than thirty (30) calendar days after the Termination Date. Any payment not made within the thirty (30) days shall thereafter bear interest at two percent (2%) over the "prime rate" as published in The Wall Street Journal from time to time, which is the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation's thirty (30) largest banks. 2. Non-Disclosure. The Executive agrees that the Executive shall not, during the three (3) years after the date of any such Termination, directly or indirectly, divulge, disclose, or communicate to any other person any trade secrets that the Corporation may use in its business operations. 6 7 3. Definitions. As used in this Agreement, a. A "Change in Control" will be deemed to have occurred if, within three years of the original execution date hereof (subject to automatic extension and renewal for additional one (1)-year periods, unless the Corporation provides notice to the Executive of its election not to renew this Agreement at least ninety (90) days prior to the January 1 next preceding a Termination Date), (i) Any "person" (as that term is defined in Section 3(a)(9) and used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")) shall acquire beneficial ownership (as defined in Rule 13d-3 under the Act), directly or indirectly, of fifteen percent (15%) or more of Corporation's then outstanding securities entitled to vote for the election of directors; or (ii) As a result of, or in connection with, any cash tender or exchange offer, merger, or other business combination, sale of assets, or contested election or any combination of such transactions, the individuals who were directors of the Corporation immediately before such transaction (or before the first in any combination of such transactions) cease to constitute a majority of the Board of Directors of the Corporation or any successor to the Corporation; (iii) provided, however, that the acquisition by any "person" (as defined in Subsection 3(a)(i) above) of beneficial ownership of fifteen percent (15%) or more of the Company's outstanding securities entitled to vote for the election of directors, pursuant to a certain Amended and Restated Agreement among ONEOK Inc., WAI, and Western Resources, Inc., dated May 19, 1997, (the "Transaction Agreement"), which securities are held under and subject to a Shareholder Agreement ("Shareholder Agreement") attached as an exhibit to the Transaction Agreement (which Transaction Agreement and Shareholder Agreement are hereby referred to and incorporated herein by reference), shall not be considered to be a Change in Control for the purposes of this Termination Agreement until either (1) the termination of the Shareholder Agreement, or (2) the successful consummation of a Buyout Tender Offer as defined in Section 3.6(b) of the Shareholder Agreement, in either of which events either the acquisition or existence of such percentage of beneficial ownership by any person (as so defined) shall constitute a Change in Control for the purposes hereof. b. The "Occurrence Date" shall be the date on which a Change in Control of the Corporation occurs. c. The term "Termination" shall mean termination of the Executive's employment with the Corporation, within three (3) years after the Occurrence Date and prior to such Executive's Normal Retirement Date, (i) By the Corporation for any reason other than death or Permanent and Total Disability of the Executive, or for "Just Cause". The following circumstances shall constitute "Just Cause": The Executive's conviction in a court of law of a felony, or any crime or offense in a court of law of a felony, or any crime or offense involving misuse or misappropriation of money or property, the Executive's violation of any covenant, agreement or obligation not to disclose confidential information regarding the business of the Corporation (or a division or subsidiary); any violation by the Executive of any covenant not to compete with the Corporation (or a division or subsidiary); any act of dishonesty by the Executive which adversely affects the business of the Corporation (or a division or subsidiary); any willful or intentional act of the Executive which adversely affects the business of, or reflects unfavorably on the reputation of the Corporation (or a division or subsidiary); the Executive's use of alcohol or drugs which interferes with the Optionee's performance of duties as an employee of the Corporation (or a division or subsidiary); or the Executive's failure or refusal to perform the specific directives of the Corporation's Board of Directors, or its officers which directives are consistent with the scope and nature of the Optionee's duties and responsibilities with the existence and occurrence of all of such causes to be determined by the Corporation, in its sole discretion; provided, that nothing contained in the foregoing provisions of this paragraph shall be 7 8 deemed to interfere in any way with the right of the Corporation (or a division or subsidiary), which is hereby acknowledged, to terminate the Optionee's employment at any time without cause. (ii) By the Executive with the consent of the Board of Directors, or for "Good Reason." The following circumstances shall constitute "Good Reason": Any reason by the Executive within twelve (12) months after the first year following the Occurrence Date, or A demotion, loss of title or significant authority or responsibility of the Executive with respect to the Executive's employment with the Corporation from those in effect on the Occurrence Date, a reduction in salary of the Executive from that received from the Corporation immediately prior to the Occurrence Date, a reduction in short-term and/or long-term incentive targets from those applicable to the Executive immediately prior to the Occurrence Date, or the relocation of the Corporation's principal executive offices to a location outside the metropolitan area of Tulsa, Oklahoma, or the Corporation's requiring a Relocation of principal place of employment of the Executive; provided, however, the Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 3(c)(ii) shall be strictly limited to the terms specified in such written consent. The Executive shall give notice of any Termination of the Executive's employment for Good Reason due to any of the events described above by delivery of written notice thereof to the Corporation within one hundred twenty (120) days after the first occurrence of the event giving rise to such Good Reason. d. The term "Termination Date" shall mean the date of the Executive's Termination. e. "Annual Compensation" shall mean the greater of (A) the sum of (i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Occurrence Date, plus (ii) the Executive's bonus for the year last preceding the Occurrence Date, or (B)(i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Executive's Termination, plus (ii) the Executive's bonus for the year last preceding the Executive's Termination. f. "Code" shall mean the Internal Revenue Code of 1986, as amended. g. "Weekly Basic Salary" shall mean the base salary paid to the Executive by the Corporation in the last payroll period of the Corporation ending prior to the Executive's Termination divided by the number of weeks included within such payroll period. h. "Normal Retirement Date" shall mean the Normal Retirement Date of the Executive under the Retirement Plan for Employees of ONEOK, Inc. and Subsidiaries. i. "Permanent and Total Disability" shall mean a condition of disability of the Executive that comes within the meaning of such term under Section 22(e) of the Code. j. "Relocation" shall mean the Corporation requiring the Executive to move and relocate to a new principal place of the Executive's employment by the Corporation, which is more than thirty-five (35) miles further from the Executive's principal place of residence than the Executive's principal place of employment was prior to such change. 4. Section 280G Limitation on Payments. The Company shall make the payment and provide the benefits under Section 1 of this Agreement; provided, however, that if all or any portion of the payments and benefits provided under Section 1 of this Agreement, either 8 9 alone or together with other payments and benefits which the Executive receives or is then entitled to receive from the Corporation, would constitute a "parachute payment" within the meaning of Section 280G of the Code, the Corporation shall pay to the Executive a Tax Gross-up Payment to the extent necessary so that the net after-tax benefit to the Executive shall be equal to the net after-tax benefit if the excise tax associated with the "parachute payment" were not imposed. The "net after-tax benefit" for these purposes shall mean the sum of (i) the total amount payable to the Executive under Section 1 of this Agreement, plus (ii) all other payments and benefits which the Executive receives or is then entitled to receive from the Corporation that would constitute a "parachute payment" within the meaning of Section 280G of the Code, less (iii) the amount of federal income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based upon the rate in effect for such year as set forth in the Code at the time of the payment under Section 1), less (iv) the amount of excise taxes imposed with respect to the payments and benefits described in (i) and (ii) above by Section 4999 of the Code. 5. Fees and Expenses. The Corporation shall reimburse the Executive on a current basis, for all legal fees, arbitration fees and related expenses incurred by the Executive in connection with this Agreement following a Change in Control, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting any termination of employment or incurred by the Executive in seeking advice with respect to the matters set forth in Section 1 hereof, or (b) Executive seeking to enforce any benefit provided by this Agreement, in each case, regardless of whether or not the claim is upheld by a court of competent jurisdiction; provided, however, Executive shall be required to repay any such amounts to the extent that the arbitrator under Section 13 issues a final and non-appealable order determining that the Executive's position was frivolous. The Corporation shall reimburse the Executive for all reasonable attorneys' and accountants' fees incurred in connection with determining whether a reduction under Section 4(a) is appropriate. 6. Consideration. As consideration for the benefits to be provided by the Corporation under this Agreement, prior to the occurrence of a Change in Control the Executive agrees to deliver to the Corporation thirty (30) calendar days' prior written notice of any voluntary termination by the Executive of the Executive's employment with the Corporation. 7. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address the Executive has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices. 8. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Oklahoma. 9. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing and so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 10. Succession. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation with which it may merge or consolidate. 11. Severability. In the event that all or any part of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement or such provision shall be unaffected thereby and shall remain in full force and effect. If any provision of this Agreement or portion thereof is so broad as to be unenforceable it shall be interpreted to be only so broad as is enforceable. Nothing in this Agreement is intended to or shall be construed to violate any Federal or State law or regulation. 9 10 12. Related Agreements. This Agreement shall supersede and terminate all prior individual agreements between the Corporation and the Executive relating to the matters contained herein. 13. Arbitration. a. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be settled by binding arbitration in accordance with the CPR NON-ADMINISTERED ARBITRATION RULES in effect on the date of this Agreement, by a sole arbitrator. b. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the Arbitrator may be entered by any court having jurisdiction thereof. c. The place of arbitration shall be Tulsa, Oklahoma. d. The statute of limitations of the State of Oklahoma applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. --------------------------------------- "Executive" ONEOK, Inc. By ------------------------------------- Larry W. Brummett, Chairman and Chief Executive Officer "Corporation" 10 11 TERMINATION AGREEMENT THIS AGREEMENT, dated this 1st day of January, 1999, between ONEOK, Inc., an Oklahoma corporation, or any division or subsidiary thereof, having its principal office in Tulsa, Oklahoma (the "Corporation"), and James C. Kneale (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive, as an employee of the Corporation, has rendered valuable service to the Corporation, and the Corporation wishes to retain the Executive's services, assuring both itself and the Executive of the continuity of management in the event of any actual or threatened change in control of the Corporation; and NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Termination Payments. In the event of a Termination (as hereinafter defined) the Executive shall: a. Be paid a lump sum termination payment by the Corporation in an amount equivalent to three (3) times the Executive's Annual Compensation, and b. Be deemed to have attained the age of sixty-five (65) as of the date of the Change in Control for purposes of determining the Retirement Benefit Percentage under Section 4.1 of the ONEOK, Inc. Supplemental Executive Retirement Plan, and c. Be deemed to have attained an age equal to the Executive's actual age plus five (5) years, for purposes of commencing the Retirement Benefit Payments as provided under Section 1.B of the Executive's Plan Agreement under the ONEOK, Inc. Supplemental Executive Retirement Plan, and d. Be paid a lump sum payment by the Corporation equal to the Executive's short-term incentive compensation "target percentage" under the Corporation's incentive compensation plan times the midpoint of the Executive's Pay Grade, prorated for the length of employment during the current performance period, and e. Be paid by, or receive from the Corporation the employee benefits (including, but not limited to, car allowances and coverage under any medical or insurance arrangements or programs) to which the Executive would have been entitled under all employee welfare plans, programs, or arrangements maintained by the Corporation if the Executive had remained in the employ of the Corporation for the three (3) year period following Termination. Such employee benefits shall be provided under plans sponsored by the Corporation on the Occurrence Date or the Termination Date, whichever produces the higher benefits, but if such benefits are not available under Corporation sponsored plans in effect during each of the three (3) years, the Corporation shall provide such benefits to the Executive under plans covering the Executive individually, or otherwise provide or pay such benefits to the Executive. f. The lump sum payments described above shall be calculated and paid not later than thirty (30) calendar days after the Termination Date. Any payment not made within the thirty (30) days shall thereafter bear interest at two percent (2%) over the "prime rate" as published in The Wall Street Journal from time to time, which is the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation's thirty (30) largest banks. 2. Non-Disclosure. The Executive agrees that the Executive shall not, during the three (3) years after the date of any such Termination, directly or indirectly, divulge, disclose, or communicate to any other person any trade secrets that the Corporation may use in its business operations. 11 12 3. Definitions. As used in this Agreement, a. A "Change in Control" will be deemed to have occurred if, within three years of the original execution date hereof (subject to automatic extension and renewal for additional one (1)-year periods, unless the Corporation provides notice to the Executive of its election not to renew this Agreement at least ninety (90) days prior to the January 1 next preceding a Termination Date), (i) Any "person" (as that term is defined in Section 3(a)(9) and used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")) shall acquire beneficial ownership (as defined in Rule 13d-3 under the Act), directly or indirectly, of fifteen percent (15%) or more of Corporation's then outstanding securities entitled to vote for the election of directors; or (ii) As a result of, or in connection with, any cash tender or exchange offer, merger, or other business combination, sale of assets, or contested election or any combination of such transactions, the individuals who were directors of the Corporation immediately before such transaction (or before the first in any combination of such transactions) cease to constitute a majority of the Board of Directors of the Corporation or any successor to the Corporation; (iii) provided, however, that the acquisition by any "person" (as defined in Subsection 3(a)(i) above) of beneficial ownership of fifteen percent (15%) or more of the Company's outstanding securities entitled to vote for the election of directors, pursuant to a certain Amended and Restated Agreement among ONEOK Inc., WAI, and Western Resources, Inc., dated May 19, 1997, (the "Transaction Agreement"), which securities are held under and subject to a Shareholder Agreement ("Shareholder Agreement") attached as an exhibit to the Transaction Agreement (which Transaction Agreement and Shareholder Agreement are hereby referred to and incorporated herein by reference), shall not be considered to be a Change in Control for the purposes of this Termination Agreement until either (1) the termination of the Shareholder Agreement, or (2) the successful consummation of a Buyout Tender Offer as defined in Section 3.6(b) of the Shareholder Agreement, in either of which events either the acquisition or existence of such percentage of beneficial ownership by any person (as so defined) shall constitute a Change in Control for the purposes hereof. b. The "Occurrence Date" shall be the date on which a Change in Control of the Corporation occurs. c. The term "Termination" shall mean termination of the Executive's employment with the Corporation, within three (3) years after the Occurrence Date and prior to such Executive's Normal Retirement Date, (i) By the Corporation for any reason other than death or Permanent and Total Disability of the Executive, or for "Just Cause". The following circumstances shall constitute "Just Cause": The Executive's conviction in a court of law of a felony, or any crime or offense in a court of law of a felony, or any crime or offense involving misuse or misappropriation of money or property, the Executive's violation of any covenant, agreement or obligation not to disclose confidential information regarding the business of the Corporation (or a division or subsidiary); any violation by the Executive of any covenant not to compete with the Corporation (or a division or subsidiary); any act of dishonesty by the Executive which adversely affects the business of the Corporation (or a division or subsidiary); any willful or intentional act of the Executive which adversely affects the business of, or reflects unfavorably on the reputation of the Corporation (or a division or subsidiary); the Executive's use of alcohol or drugs which interferes with the Optionee's performance of duties as an employee of the Corporation (or a division or subsidiary); or the Executive's failure or refusal to perform the specific directives of the Corporation's Board of Directors, or its officers which directives are consistent with the scope and nature of the Optionee's duties and responsibilities with the existence and occurrence of all of such causes to be determined by the Corporation, in its sole 12 13 discretion; provided, that nothing contained in the foregoing provisions of this paragraph shall be deemed to interfere in any way with the right of the Corporation (or a division or subsidiary), which is hereby acknowledged, to terminate the Optionee's employment at any time without cause. (ii) By the Executive with the consent of the Board of Directors, or for "Good Reason." The following circumstances shall constitute "Good Reason": A demotion, loss of title or significant authority or responsibility of the Executive with respect to the Executive's employment with the Corporation from those in effect on the Occurrence Date, a reduction in salary of the Executive from that received from the Corporation immediately prior to the Occurrence Date, a reduction in short-term and/or long-term incentive targets from those applicable to the Executive immediately prior to the Occurrence Date, or the relocation of the Corporation's principal executive offices to a location outside the metropolitan area of Tulsa, Oklahoma, or the Corporation's requiring a Relocation of principal place of employment of the Executive; provided, however, the Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 3(c)(ii) shall be strictly limited to the terms specified in such written consent. The Executive shall give notice of any Termination of the Executive's employment for Good Reason due to any of the events described above by delivery of written notice thereof to the Corporation within one hundred twenty (120) days after the first occurrence of the event giving rise to such Good Reason. d. The term "Termination Date" shall mean the date of the Executive's Termination. e. "Annual Compensation" shall mean the greater of (A) the sum of (i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Occurrence Date, plus (ii) the Executive's bonus for the year last preceding the Occurrence Date, or (B)(i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Executive's Termination, plus (ii) the Executive's bonus for the year last preceding the Executive's Termination. f. "Code" shall mean the Internal Revenue Code of 1986, as amended. g. "Weekly Basic Salary" shall mean the base salary paid to the Executive by the Corporation in the last payroll period of the Corporation ending prior to the Executive's Termination divided by the number of weeks included within such payroll period. h. "Normal Retirement Date" shall mean the Normal Retirement Date of the Executive under the Retirement Plan for Employees of ONEOK, Inc. and Subsidiaries. i. "Permanent and Total Disability" shall mean a condition of disability of the Executive that comes within the meaning of such term under Section 22(e) of the Code. j. "Relocation" shall mean the Corporation requiring the Executive to move and relocate to a new principal place of the Executive's employment by the Corporation, which is more than thirty-five (35) miles further from the Executive's principal place of residence than the Executive's principal place of employment was prior to such change. 4. Section 280G Limitation on Payments. a. The Company shall make the payment and provide the payments and benefits under Section 1 of this Agreement; provided, however, that if all or any portion of the payments and benefits provided under Section 1 of this Agreement, either alone or together with other payments and benefits which the Executive receives or is then entitled to receive from the Corporation, would constitute a "parachute payment" within the meaning of Section 280G 13 14 of the Code, the Corporation shall reduce such payments and benefits provided to the Executive under Section 1 of this Agreement to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code; but only if, by reason of such reduction, the net after-tax benefit to the Executive shall exceed the net after-tax benefit if such reduction were not made. "Net after-tax benefit" for these purposes shall mean the sum of (i) the total amount payable to the Executive under Section 1 of this Agreement, plus (ii) all other payments and benefits which the Executive receives or is then entitled to receive from the Corporation that would constitute a "parachute payment" within the meaning of Section 280G of the Code, less (iii) the amount of federal income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based upon the rate in effect for such year as set forth in the Code at the time of the payment under Section 1), less (iv) the amount of excise taxes imposed with respect to the payments and benefits described in (i) and (ii) above by Section 4999 of the Code. The amount of any reduction made under this Section 4(a) in the payment to which the Executive is entitled under Section 1 of this Agreement is hereinafter referred to as the "Relinquished Amount." b. If the Executive's payment under Section 1 of this Agreement is reduced under Section 4(a) and, notwithstanding such reduction, the Executive subsequently pays or becomes obligated to pay any excise tax under Section 4999 of the Code on any portion of any payment or benefit the Executive receives (whether pursuant to this Agreement or otherwise) in connection with the event giving rise to the Executive's right to receive payments and benefits under Section 1 of this Agreement, the Company shall pay to the Executive an amount equal to the Relinquished Amount, together with interest thereon at the rate set forth in Section 1(g) of this Agreement from the date of the payment to the Executive pursuant to Section 1 of this Agreement to and including the date of payment of the Relinquished Amount, and an amount ("Special Reimbursement") which, after payment by the Executive of any federal, state and local taxes, including any further excise tax under Section 4999 of the Code resulting from all payments and benefits received (whether pursuant to this Agreement or otherwise, and including the Relinquished Amount and this Special Reimbursement), equals the total excise tax paid or payable. 5. Fees and Expenses. The Corporation shall reimburse the Executive on a current basis, for all legal fees, arbitration fees and related expenses incurred by the Executive in connection with this Agreement following a Change in Control, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting any termination of employment or incurred by the Executive in seeking advice with respect to the matters set forth in Section 1 hereof, or (b) Executive seeking to enforce any benefit provided by this Agreement, in each case, regardless of whether or not the claim is upheld by a court of competent jurisdiction; provided, however, Executive shall be required to repay any such amounts to the extent that the arbitrator under Section 13 issues a final and non-appealable order determining that the Executive's position was frivolous. The Corporation shall reimburse the Executive for all reasonable attorneys' and accountants' fees incurred in connection with determining whether a reduction under Section 4(a) is appropriate. 6. Consideration. As consideration for the benefits to be provided by the Corporation under this Agreement, prior to the occurrence of a Change in Control the Executive agrees to deliver to the Corporation thirty (30) calendar days' prior written notice of any voluntary termination by the Executive of the Executive's employment with the Corporation. 7. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address the Executive has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices. 8. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Oklahoma. 14 15 9. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing and so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 10. Succession. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation with which it may merge or consolidate. 11. Severability. In the event that all or any part of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement or such provision shall be unaffected thereby and shall remain in full force and effect. If any provision of this Agreement or portion thereof is so broad as to be unenforceable it shall be interpreted to be only so broad as is enforceable. Nothing in this Agreement is intended to or shall be construed to violate any Federal or State law or regulation. 12. Related Agreements. This Agreement shall supersede and terminate all prior individual agreements between the Corporation and the Executive relating to the matters contained herein. 13. Arbitration. a. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be settled by binding arbitration in accordance with the CPR NON-ADMINISTERED ARBITRATION RULES in effect on the date of this Agreement, by a sole arbitrator. b. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the Arbitrator may be entered by any court having jurisdiction thereof. c. The place of arbitration shall be Tulsa, Oklahoma. d. The statute of limitations of the State of Oklahoma applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. ----------------------------------------- "Executive" ONEOK, Inc. By --------------------------------------- Larry W. Brummett, Chairman and Chief Executive Officer "Corporation" 15 16 TERMINATION AGREEMENT THIS AGREEMENT, dated this 1st day of January, 1999, between ONEOK, Inc., an Oklahoma corporation, or any division or subsidiary thereof, having its principal office in Tulsa, Oklahoma (the "Corporation"), and Eugene N. Dubay (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive, as an employee of the Corporation, has rendered valuable service to the Corporation, and the Corporation wishes to retain the Executive's services, assuring both itself and the Executive of the continuity of management in the event of any actual or threatened change in control of the Corporation; and NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Termination Payments. In the event of a Termination (as hereinafter defined) the Executive shall: a. Be paid a lump sum termination payment by the Corporation in an amount equivalent to three (3) times the Executive's Annual Compensation, and b. Be deemed to have the additional years of service with the Corporation for purposes of Vesting under Section 4.3 of the ONEOK, Inc. Supplemental Executive Retirement Plan, if any, that are necessary to cause the Executive to be at least thirty percent (30%) vested under such Plan as of the date of the Change in Control, and c. Be deemed to have attained an age equal to the Executive's actual age plus five (5) years, for purposes of determining the Retirement Benefit Percentage under Section 4.1 of the ONEOK, Inc. Supplemental Executive Retirement Plan, and d. Be deemed to have attained an age equal to the Executive's actual age plus five (5) years, for purposes of commencing the Retirement Benefit Payments as provided under Section 1.B of the Executive's Plan Agreement under the ONEOK, Inc. Supplemental Executive Retirement Plan, and e. Be paid a lump sum payment by the Corporation equal to the Executive's short-term incentive compensation "target percentage" under the Corporation's incentive compensation plan times the midpoint of the Executive's Pay Grade, prorated for the length of employment during the current performance period, and f. Be paid by, or receive from the Corporation the employee benefits (including, but not limited to, car allowances and coverage under any medical or insurance arrangements or programs) to which the Executive would have been entitled under all employee welfare plans, programs, or arrangements maintained by the Corporation if the Executive had remained in the employ of the Corporation for the three (3) year period following Termination. Such employee benefits shall be provided under plans sponsored by the Corporation on the Occurrence Date or the Termination Date, whichever produces the higher benefits, but if such benefits are not available under Corporation sponsored plans in effect during each of the three (3) years, the Corporation shall provide such benefits to the Executive under plans covering the Executive individually, or otherwise provide or pay such benefits to the Executive. g. The lump sum payments described above shall be calculated and paid not later than thirty (30) calendar days after the Termination Date. Any payment not made within the thirty (30) days shall thereafter bear interest at two percent (2%) over the "prime rate" as published in The Wall Street Journal from time to time, which is the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation's thirty (30) largest banks. 16 17 2. Non-Disclosure. The Executive agrees that the Executive shall not, during the three (3) years after the date of any such Termination, directly or indirectly, divulge, disclose, or communicate to any other person any trade secrets that the Corporation may use in its business operations. 3. Definitions. As used in this Agreement, a. A "Change in Control" will be deemed to have occurred if, within three years of the original execution date hereof (subject to automatic extension and renewal for additional one (1)-year periods, unless the Corporation provides notice to the Executive of its election not to renew this Agreement at least ninety (90) days prior to the January 1 next preceding a Termination Date), (i) Any "person" (as that term is defined in Section 3(a)(9) and used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")) shall acquire beneficial ownership (as defined in Rule 13d-3 under the Act), directly or indirectly, of fifteen percent (15%) or more of Corporation's then outstanding securities entitled to vote for the election of directors; or (ii) As a result of, or in connection with, any cash tender or exchange offer, merger, or other business combination, sale of assets, or contested election or any combination of such transactions, the individuals who were directors of the Corporation immediately before such transaction (or before the first in any combination of such transactions) cease to constitute a majority of the Board of Directors of the Corporation or any successor to the Corporation; (iii) provided, however, that the acquisition by any "person" (as defined in Subsection 3(a)(i) above) of beneficial ownership of fifteen percent (15%) or more of the Company's outstanding securities entitled to vote for the election of directors, pursuant to a certain Amended and Restated Agreement among ONEOK Inc., WAI, and Western Resources, Inc., dated May 19, 1997, (the "Transaction Agreement"), which securities are held under and subject to a Shareholder Agreement ("Shareholder Agreement") attached as an exhibit to the Transaction Agreement (which Transaction Agreement and Shareholder Agreement are hereby referred to and incorporated herein by reference), shall not be considered to be a Change in Control for the purposes of this Termination Agreement until either (1) the termination of the Shareholder Agreement, or (2) the successful consummation of a Buyout Tender Offer as defined in Section 3.6(b) of the Shareholder Agreement, in either of which events either the acquisition or existence of such percentage of beneficial ownership by any person (as so defined) shall constitute a Change in Control for the purposes hereof. b. The "Occurrence Date" shall be the date on which a Change in Control of the Corporation occurs. c. The term "Termination" shall mean termination of the Executive's employment with the Corporation, within three (3) years after the Occurrence Date and prior to such Executive's Normal Retirement Date, (i) By the Corporation for any reason other than death or Permanent and Total Disability of the Executive, or for "Just Cause". The following circumstances shall constitute "Just Cause": The Executive's conviction in a court of law of a felony, or any crime or offense in a court of law of a felony, or any crime or offense involving misuse or misappropriation of money or property, the Executive's violation of any covenant, agreement or obligation not to disclose confidential information regarding the business of the Corporation (or a division or subsidiary); any violation by the Executive of any covenant not to compete with the Corporation (or a division or subsidiary); any act of dishonesty by the Executive which adversely affects the business of the Corporation (or a division or subsidiary); any willful or intentional act of the Executive which adversely affects the business of, or reflects unfavorably on the reputation of the Corporation (or a division or subsidiary); the Executive's use of alcohol or drugs which interferes with the Optionee's performance of duties 17 18 as an employee of the Corporation (or a division or subsidiary); or the Executive's failure or refusal to perform the specific directives of the Corporation's Board of Directors, or its officers which directives are consistent with the scope and nature of the Optionee's duties and responsibilities with the existence and occurrence of all of such causes to be determined by the Corporation, in its sole discretion; provided, that nothing contained in the foregoing provisions of this paragraph shall be deemed to interfere in any way with the right of the Corporation (or a division or subsidiary), which is hereby acknowledged, to terminate the Optionee's employment at any time without cause. (ii) By the Executive with the consent of the Board of Directors, or for "Good Reason." The following circumstances shall constitute "Good Reason": A demotion, loss of title or significant authority or responsibility of the Executive with respect to the Executive's employment with the Corporation from those in effect on the Occurrence Date, a reduction in salary of the Executive from that received from the Corporation immediately prior to the Occurrence Date, a reduction in short-term and/or long-term incentive targets from those applicable to the Executive immediately prior to the Occurrence Date, or the relocation of the Corporation's principal executive offices to a location outside the metropolitan area of Tulsa, Oklahoma, or the Corporation's requiring a Relocation of principal place of employment of the Executive; provided, however, the Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 3(c)(ii) shall be strictly limited to the terms specified in such written consent. The Executive shall give notice of any Termination of the Executive's employment for Good Reason due to any of the events described above by delivery of written notice thereof to the Corporation within one hundred twenty (120) days after the first occurrence of the event giving rise to such Good Reason. d. The term "Termination Date" shall mean the date of the Executive's Termination. e. "Annual Compensation" shall mean the greater of (A) the sum of (i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Occurrence Date, plus (ii) the Executive's bonus for the year last preceding the Occurrence Date, or (B)(i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Executive's Termination, plus (ii) the Executive's bonus for the year last preceding the Executive's Termination. f. "Code" shall mean the Internal Revenue Code of 1986, as amended. g. "Weekly Basic Salary" shall mean the base salary paid to the Executive by the Corporation in the last payroll period of the Corporation ending prior to the Executive's Termination divided by the number of weeks included within such payroll period. h. "Normal Retirement Date" shall mean the Normal Retirement Date of the Executive under the Retirement Plan for Employees of ONEOK, Inc. and Subsidiaries. i. "Permanent and Total Disability" shall mean a condition of disability of the Executive that comes within the meaning of such term under Section 22(e) of the Code. j. "Relocation" shall mean the Corporation requiring the Executive to move and relocate to a new principal place of the Executive's employment by the Corporation, which is more than thirty-five (35) miles further from the Executive's principal place of residence than the Executive's principal place of employment was prior to such change. 18 19 4. Section 280G Limitation on Payments. a. The Company shall make the payment and provide the payments and benefits under Section 1 of this Agreement; provided, however, that if all or any portion of the payments and benefits provided under Section 1 of this Agreement, either alone or together with other payments and benefits which the Executive receives or is then entitled to receive from the Corporation, would constitute a "parachute payment" within the meaning of Section 280G of the Code, the Corporation shall reduce such payments and benefits provided to the Executive under Section 1 of this Agreement to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code; but only if, by reason of such reduction, the net after-tax benefit to the Executive shall exceed the net after-tax benefit if such reduction were not made. "Net after-tax benefit" for these purposes shall mean the sum of (i) the total amount payable to the Executive under Section 1 of this Agreement, plus (ii) all other payments and benefits which the Executive receives or is then entitled to receive from the Corporation that would constitute a "parachute payment" within the meaning of Section 280G of the Code, less (iii) the amount of federal income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based upon the rate in effect for such year as set forth in the Code at the time of the payment under Section 1), less (iv) the amount of excise taxes imposed with respect to the payments and benefits described in (i) and (ii) above by Section 4999 of the Code. The amount of any reduction made under this Section 4(a) in the payment to which the Executive is entitled under Section 1 of this Agreement is hereinafter referred to as the "Relinquished Amount." b. If the Executive's payment under Section 1 of this Agreement is reduced under Section 4(a) and, notwithstanding such reduction, the Executive subsequently pays or becomes obligated to pay any excise tax under Section 4999 of the Code on any portion of any payment or benefit the Executive receives (whether pursuant to this Agreement or otherwise) in connection with the event giving rise to the Executive's right to receive payments and benefits under Section 1 of this Agreement, the Company shall pay to the Executive an amount equal to the Relinquished Amount, together with interest thereon at the rate set forth in Section 1(g) of this Agreement from the date of the payment to the Executive pursuant to Section 1 of this Agreement to and including the date of payment of the Relinquished Amount, and an amount ("Special Reimbursement") which, after payment by the Executive of any federal, state and local taxes, including any further excise tax under Section 4999 of the Code resulting from all payments and benefits received (whether pursuant to this Agreement or otherwise, and including the Relinquished Amount and this Special Reimbursement), equals the total excise tax paid or payable. 5. Fees and Expenses. The Corporation shall reimburse the Executive on a current basis, for all legal fees, arbitration fees and related expenses incurred by the Executive in connection with this Agreement following a Change in Control, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting any termination of employment or incurred by the Executive in seeking advice with respect to the matters set forth in Section 1 hereof, or (b) Executive seeking to enforce any benefit provided by this Agreement, in each case, regardless of whether or not the claim is upheld by a court of competent jurisdiction; provided, however, Executive shall be required to repay any such amounts to the extent that the arbitrator under Section 13 issues a final and non-appealable order determining that the Executive's position was frivolous. The Corporation shall reimburse the Executive for all reasonable attorneys' and accountants' fees incurred in connection with determining whether a reduction under Section 4(a) is appropriate. 6. Consideration. a. As consideration for the benefits to be provided by the Corporation under this Agreement, prior to the occurrence of a Change in Control the Executive agrees to deliver to the Corporation thirty (30) calendar days' prior written notice of any voluntary termination by the Executive of the Executive's employment with the Corporation. b. As further consideration, the Corporation waives and forfeits its right to offset Retirement Benefits under the ONEOK, Inc. Supplemental Executive Retirement Plan by any existing pension benefits payable to the Executive under any retirement plans of any of the Executive's former employers. Notwithstanding the terms of the Executive's Plan Agreement under the ONEOK, Inc. Supplemental Executive Retirement Plan, the Executive shall 19 20 have the right to receive Retirement Benefits under the ONEOK, Inc. Supplemental Executive Retirement Plan which are not offset by any existing pension benefits payable to the Executive under any retirement plans of any of the Executive's former employers. Any offsets as a result of benefits payable to the Executive from the Retirement Plan of the Corporation shall still be applicable. 7. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address the Executive has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices. 8. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Oklahoma. 9. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing and so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 10. Succession. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation with which it may merge or consolidate. 11. Severability. In the event that all or any part of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement or such provision shall be unaffected thereby and shall remain in full force and effect. If any provision of this Agreement or portion thereof is so broad as to be unenforceable it shall be interpreted to be only so broad as is enforceable. Nothing in this Agreement is intended to or shall be construed to violate any Federal or State law or regulation. 12. Related Agreements. This Agreement shall supersede and terminate all prior individual agreements between the Corporation and the Executive relating to the matters contained herein. 13. Arbitration. a. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be settled by binding arbitration in accordance with the CPR NON-ADMINISTERED ARBITRATION RULES in effect on the date of this Agreement, by a sole arbitrator. b. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the Arbitrator may be entered by any court having jurisdiction thereof. c. The place of arbitration shall be Tulsa, Oklahoma. d. The statute of limitations of the State of Oklahoma applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder. 20 21 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. ------------------------------------ "Executive" ONEOK, Inc. By ---------------------------------- Larry W. Brummett, Chairman and Chief Executive Officer "Corporation" 21 22 TERMINATION AGREEMENT THIS AGREEMENT, dated this 1st day of January, 1999, between ONEOK, Inc., an Oklahoma corporation, or any division or subsidiary thereof, having its principal office in Tulsa, Oklahoma (the "Corporation"), and John A. Gaberino (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive, as an employee of the Corporation, has rendered valuable service to the Corporation, and the Corporation wishes to retain the Executive's services, assuring both itself and the Executive of the continuity of management in the event of any actual or threatened change in control of the Corporation; and NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Termination Payments. In the event of a Termination (as hereinafter defined) the Executive shall: a. Be paid a lump sum termination payment by the Corporation in an amount equivalent to three (3) times the Executive's Annual Compensation, and b. Be deemed to have the additional years of service with the Corporation for purposes of Vesting under Section 4.3 of the ONEOK, Inc. Supplemental Executive Retirement Plan, if any, that are necessary to cause the Executive to be at least thirty percent (30%) vested under such Plan as of the date of the Change in Control, and c. Be deemed to have attained an age equal to the Executive's actual age plus five (5) years, for purposes of determining the Retirement Benefit Percentage under Section 4.1 of the ONEOK, Inc. Supplemental Executive Retirement Plan, and d. Be deemed to have attained an age equal to the Executive's actual age plus five (5) years, for purposes of commencing the Retirement Benefit Payments as provided under Section 1.B of the Executive's Plan Agreement under the ONEOK, Inc. Supplemental Executive Retirement Plan, and e. Be paid a lump sum payment by the Corporation equal to the Executive's short-term incentive compensation "target percentage" under the Corporation's incentive compensation plan times the midpoint of the Executive's Pay Grade, prorated for the length of employment during the current performance period, and f. Be paid by, or receive from the Corporation the employee benefits (including, but not limited to, car allowances and coverage under any medical or insurance arrangements or programs) to which the Executive would have been entitled under all employee welfare plans, programs, or arrangements maintained by the Corporation if the Executive had remained in the employ of the Corporation for the three (3) year period following Termination. Such employee benefits shall be provided under plans sponsored by the Corporation on the Occurrence Date or the Termination Date, whichever produces the higher benefits, but if such benefits are not available under Corporation sponsored plans in effect during each of the three (3) years, the Corporation shall provide such benefits to the Executive under plans covering the Executive individually, or otherwise provide or pay such benefits to the Executive. g. The lump sum payments described above shall be calculated and paid not later than thirty (30) calendar days after the Termination Date. Any payment not made within the thirty (30) days shall thereafter bear interest at two percent (2%) over the "prime rate" as published in The Wall Street Journal from time to time, which is the base rate on corporate loans posted by at least seventy-five percent (75%) of the nation's thirty (30) largest banks. 22 23 2. Non-Disclosure. The Executive agrees that the Executive shall not, during the three (3) years after the date of any such Termination, directly or indirectly, divulge, disclose, or communicate to any other person any trade secrets that the Corporation may use in its business operations. 3. Definitions. As used in this Agreement, a. A "Change in Control" will be deemed to have occurred if, within three years of the original execution date hereof (subject to automatic extension and renewal for additional one (1)-year periods, unless the Corporation provides notice to the Executive of its election not to renew this Agreement at least ninety (90) days prior to the January 1 next preceding a Termination Date), (i) Any "person" (as that term is defined in Section 3(a)(9) and used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")) shall acquire beneficial ownership (as defined in Rule 13d-3 under the Act), directly or indirectly, of fifteen percent (15%) or more of Corporation's then outstanding securities entitled to vote for the election of directors; or (ii) As a result of, or in connection with, any cash tender or exchange offer, merger, or other business combination, sale of assets, or contested election or any combination of such transactions, the individuals who were directors of the Corporation immediately before such transaction (or before the first in any combination of such transactions) cease to constitute a majority of the Board of Directors of the Corporation or any successor to the Corporation; (iii) provided, however, that the acquisition by any "person" (as defined in Subsection 3(a)(i) above) of beneficial ownership of fifteen percent (15%) or more of the Company's outstanding securities entitled to vote for the election of directors, pursuant to a certain Amended and Restated Agreement among ONEOK Inc., WAI, and Western Resources, Inc., dated May 19, 1997, (the "Transaction Agreement"), which securities are held under and subject to a Shareholder Agreement ("Shareholder Agreement") attached as an exhibit to the Transaction Agreement (which Transaction Agreement and Shareholder Agreement are hereby referred to and incorporated herein by reference), shall not be considered to be a Change in Control for the purposes of this Termination Agreement until either (1) the termination of the Shareholder Agreement, or (2) the successful consummation of a Buyout Tender Offer as defined in Section 3.6(b) of the Shareholder Agreement, in either of which events either the acquisition or existence of such percentage of beneficial ownership by any person (as so defined) shall constitute a Change in Control for the purposes hereof. b. The "Occurrence Date" shall be the date on which a Change in Control of the Corporation occurs. c. The term "Termination" shall mean termination of the Executive's employment with the Corporation, within three (3) years after the Occurrence Date and prior to such Executive's Normal Retirement Date, (i) By the Corporation for any reason other than death or Permanent and Total Disability of the Executive, or for "Just Cause". The following circumstances shall constitute "Just Cause": The Executive's conviction in a court of law of a felony, or any crime or offense in a court of law of a felony, or any crime or offense involving misuse or misappropriation of money or property, the Executive's violation of any covenant, agreement or obligation not to disclose confidential information regarding the business of the Corporation (or a division or subsidiary); any violation by the Executive of any covenant not to compete with the Corporation (or a division or subsidiary); any act of dishonesty by the Executive which adversely affects the business of the Corporation (or a division or subsidiary); any willful or intentional act of the Executive which adversely affects the business of, or reflects unfavorably on the reputation of the Corporation (or a division or subsidiary); the Executive's use of alcohol or drugs which interferes with the Optionee's performance of duties 23 24 as an employee of the Corporation (or a division or subsidiary); or the Executive's failure or refusal to perform the specific directives of the Corporation's Board of Directors, or its officers which directives are consistent with the scope and nature of the Optionee's duties and responsibilities with the existence and occurrence of all of such causes to be determined by the Corporation, in its sole discretion; provided, that nothing contained in the foregoing provisions of this paragraph shall be deemed to interfere in any way with the right of the Corporation (or a division or subsidiary), which is hereby acknowledged, to terminate the Optionee's employment at any time without cause. (ii) By the Executive with the consent of the Board of Directors, or for "Good Reason." The following circumstances shall constitute "Good Reason": A demotion, loss of title or significant authority or responsibility of the Executive with respect to the Executive's employment with the Corporation from those in effect on the Occurrence Date, a reduction in salary of the Executive from that received from the Corporation immediately prior to the Occurrence Date, a reduction in short-term and/or long-term incentive targets from those applicable to the Executive immediately prior to the Occurrence Date, or the relocation of the Corporation's principal executive offices to a location outside the metropolitan area of Tulsa, Oklahoma, or the Corporation's requiring a Relocation of principal place of employment of the Executive; provided, however, the Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 3(c)(ii) shall be strictly limited to the terms specified in such written consent. The Executive shall give notice of any Termination of the Executive's employment for Good Reason due to any of the events described above by delivery of written notice thereof to the Corporation within one hundred twenty (120) days after the first occurrence of the event giving rise to such Good Reason. d. The term "Termination Date" shall mean the date of the Executive's Termination. e. "Annual Compensation" shall mean the greater of (A) the sum of (i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Occurrence Date, plus (ii) the Executive's bonus for the year last preceding the Occurrence Date, or (B)(i) fifty-two (52) times the Executive's Weekly Basic Salary for the week last preceding the Executive's Termination, plus (ii) the Executive's bonus for the year last preceding the Executive's Termination. f. "Code" shall mean the Internal Revenue Code of 1986, as amended. g. "Weekly Basic Salary" shall mean the base salary paid to the Executive by the Corporation in the last payroll period of the Corporation ending prior to the Executive's Termination divided by the number of weeks included within such payroll period. h. "Normal Retirement Date" shall mean the Normal Retirement Date of the Executive under the Retirement Plan for Employees of ONEOK, Inc. and Subsidiaries. i. "Permanent and Total Disability" shall mean a condition of disability of the Executive that comes within the meaning of such term under Section 22(e) of the Code. j. "Relocation" shall mean the Corporation requiring the Executive to move and relocate to a new principal place of the Executive's employment by the Corporation, which is more than thirty-five (35) miles further from the Executive's principal place of residence than the Executive's principal place of employment was prior to such change. 24 25 4. Section 280G Limitation on Payments. a. The Company shall make the payment and provide the payments and benefits under Section 1 of this Agreement; provided, however, that if all or any portion of the payments and benefits provided under Section 1 of this Agreement, either alone or together with other payments and benefits which the Executive receives or is then entitled to receive from the Corporation, would constitute a "parachute payment" within the meaning of Section 280G of the Code, the Corporation shall reduce such payments and benefits provided to the Executive under Section 1 of this Agreement to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code; but only if, by reason of such reduction, the net after-tax benefit to the Executive shall exceed the net after-tax benefit if such reduction were not made. "Net after-tax benefit" for these purposes shall mean the sum of (i) the total amount payable to the Executive under Section 1 of this Agreement, plus (ii) all other payments and benefits which the Executive receives or is then entitled to receive from the Corporation that would constitute a "parachute payment" within the meaning of Section 280G of the Code, less (iii) the amount of federal income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based upon the rate in effect for such year as set forth in the Code at the time of the payment under Section 1), less (iv) the amount of excise taxes imposed with respect to the payments and benefits described in (i) and (ii) above by Section 4999 of the Code. The amount of any reduction made under this Section 4(a) in the payment to which the Executive is entitled under Section 1 of this Agreement is hereinafter referred to as the "Relinquished Amount." b. If the Executive's payment under Section 1 of this Agreement is reduced under Section 4(a) and, notwithstanding such reduction, the Executive subsequently pays or becomes obligated to pay any excise tax under Section 4999 of the Code on any portion of any payment or benefit the Executive receives (whether pursuant to this Agreement or otherwise) in connection with the event giving rise to the Executive's right to receive payments and benefits under Section 1 of this Agreement, the Company shall pay to the Executive an amount equal to the Relinquished Amount, together with interest thereon at the rate set forth in Section 1(g) of this Agreement from the date of the payment to the Executive pursuant to Section 1 of this Agreement to and including the date of payment of the Relinquished Amount, and an amount ("Special Reimbursement") which, after payment by the Executive of any federal, state and local taxes, including any further excise tax under Section 4999 of the Code resulting from all payments and benefits received (whether pursuant to this Agreement or otherwise, and including the Relinquished Amount and this Special Reimbursement), equals the total excise tax paid or payable. 5. Fees and Expenses. The Corporation shall reimburse the Executive on a current basis, for all legal fees, arbitration fees and related expenses incurred by the Executive in connection with this Agreement following a Change in Control, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting any termination of employment or incurred by the Executive in seeking advice with respect to the matters set forth in Section 1 hereof, or (b) Executive seeking to enforce any benefit provided by this Agreement, in each case, regardless of whether or not the claim is upheld by a court of competent jurisdiction; provided, however, Executive shall be required to repay any such amounts to the extent that the arbitrator under Section 13 issues a final and non-appealable order determining that the Executive's position was frivolous. The Corporation shall reimburse the Executive for all reasonable attorneys' and accountants' fees incurred in connection with determining whether a reduction under Section 4(a) is appropriate. 6. Consideration. a. As consideration for the benefits to be provided by the Corporation under this Agreement, prior to the occurrence of a Change in Control the Executive agrees to deliver to the Corporation thirty (30) calendar days' prior written notice of any voluntary termination by the Executive of the Executive's employment with the Corporation. b. As further consideration, the Corporation waives and forfeits its right to offset Retirement Benefits under the ONEOK, Inc. Supplemental Executive Retirement Plan by any existing pension benefits payable to the 25 26 Executive under any retirement plans of any of the Executive's former employers. Notwithstanding the terms of the Executive's Plan Agreement under the ONEOK, Inc. Supplemental Executive Retirement Plan, the Executive shall have the right to receive Retirement Benefits under the ONEOK, Inc. Supplemental Executive Retirement Plan which are not offset by any existing pension benefits payable to the Executive under any retirement plans of any of the Executive's former employers. Any offsets as a result of benefits payable to the Executive from the Retirement Plan of the Corporation shall still be applicable. 7. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address the Executive has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices. 8. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Oklahoma. 9. Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing and so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 10. Succession. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation with which it may merge or consolidate. 11. Severability. In the event that all or any part of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement or such provision shall be unaffected thereby and shall remain in full force and effect. If any provision of this Agreement or portion thereof is so broad as to be unenforceable it shall be interpreted to be only so broad as is enforceable. Nothing in this Agreement is intended to or shall be construed to violate any Federal or State law or regulation. 12. Related Agreements. This Agreement shall supersede and terminate all prior individual agreements between the Corporation and the Executive relating to the matters contained herein. 13. Arbitration. a. Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be settled by binding arbitration in accordance with the CPR NON-ADMINISTERED ARBITRATION RULES in effect on the date of this Agreement, by a sole arbitrator. b. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the Arbitrator may be entered by any court having jurisdiction thereof. c. The place of arbitration shall be Tulsa, Oklahoma. d. The statute of limitations of the State of Oklahoma applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder. 26 27 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. ------------------------------------ "Executive" ONEOK, Inc. By ---------------------------------- Larry W. Brummett, Chairman and Chief Executive Officer "Corporation" 27 EX-10.(E) 6 INDEMNIFICATION AGREEMENT 1 EXHIBIT (10)(e) INDEMNIFICATION AGREEMENT AGREEMENT, effective as of [date], between ONEOK, Inc., an Oklahoma corporation (the "Corporation"), and [name] (the "Indemnitee"). WHEREAS, it is essential to the Corporation to retain and attract as directors and officers the most capable persons available; WHEREAS, Indemnitee is a director or officer of the Corporation; WHEREAS, both the Corporation and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies in today's environment; WHEREAS, basic protection against undue risk of personal liability of directors and officers heretofore has been provided through insurance coverage providing reasonable protection at reasonable cost, and Indemnitee has relied on the availability of such coverage; but as a result of substantial changes in the marketplace for such insurance it has become increasingly more difficult to obtain such insurance on terms providing reasonable protection at reasonable cost; WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Corporation in an effective manner, the Corporation wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Corporation's directors' and officers' liability insurance policies; NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to serve the Corporation directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions: (a) Change in Control: Shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Corporation representing 20 percent (20%) or more of the total voting power represented by the Corporation's then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation and any new director whose election by the Board of Directors or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80 percent (80%) of the total voting power represented by the Voting Securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Corporation approve a plan of complete liquidation of the 2 Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all the Corporation's assets. (b) Claim: Any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether conducted by the Corporation or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil, criminal, administrative, investigative or other. (c) Expenses: Include attorney's fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any Indemnifiable Event. (d) Indemnifiable Event: Any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. (e) Potential Change in Control: Shall be deemed to have occurred if (i) the Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any person (including the Corporation) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control; (iii) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the corporation or a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock in the Corporation, who is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 9.5 percent (9.5%) or more of the combined voting power of the Corporation's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5 percent (5%) or more over the percentage so owned by such person on the date hereof; or (iv) the Board adopts a resolution to the effect that, for the purposes of this Agreement, a Potential Change in Control has occurred. (f) Reviewing Party: Any appropriate person or body consisting of a member or members of the Corporation's Board of Directors or any other person or body appointed by the Board (including the special, independent counsel referred to in Section 3) who is not a party to the particular Claim for which Indemnitee is seeking indemnification. (g) Voting Securities: Any securities of the Corporation which vote generally in the election of directors. 2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is or becomes a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Corporation shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than thirty (30) days after written demand is presented to the Corporation, against any and all expenses, judgments, fines, penalties, and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection or in respect of such expenses, judgments, fines, penalties or amounts paid in settlement) of such claim. If so requested by Indemnitee, the Corporation shall advance (within two (2) business days of such request) any and all Expenses to Indemnitee (an "Expense 2 3 Advance"). (b) Notwithstanding the foregoing, (i) the obligations of the Corporation under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the special, independent counsel referred to in Section 3 hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Corporation to make an Expense Advance pursuant to Section 2(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Corporation shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Corporation) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Corporation for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has not been a Change in Control, the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control, the Reviewing Party shall be the special, independent counsel referred to in Section 3 hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the state or domicile of Oklahoma having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, and the Corporation hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Corporation and Indemnitee. 3. Change in Control. The Corporation agrees that if there is a Change in Control of the Corporation (other than a Change in Control which has been approved by a majority of the Corporation's Board of Directors who were directors immediately prior to such Change in Control) then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or Corporate By-law now or hereafter in effect relating to Claims for Indemnifiable Events, the Corporation shall seek legal advice only from special, independent counsel selected by Indemnitee and approved by the Corporation (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Corporation or Indemnitee within the last five (5) years (other than in connection with such matters). Such counsel, among other things, shall render its written opinion to the Corporation and Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Corporation agrees to pay the reaonable fees of the special, independent counsel referred to above and fully indemnify such counsel against any and all expense (including attorneys' fees), claims, liabilities, and damages arising out of or relating to this Agreement or its engagement pursuant hereto. 4. Establishment of Trust. In the event of a Potential Change in Control, the Corporation shall, upon written request by Indemnitee, create a Trust for the benefit of the Indemnitee and from time to time upon written request of Indemnitee shall fund such Trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any Claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties and settlement amounts of any and all Claims relating to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Party, in any case in which the special, independent counsel referred to above is involved. The terms of the Trust shall provide that upon a Change in Control (i) the Trust shall 3 4 not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the Trustee shall advance, within two (2) business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under the circumstances under which the Indemnitee would be required to reimburse the Corporation under Section 2(b) of this Agreement), (iii) the Trust shall continue to be funded by the Corporation in accordance with the funding obligation set forth above, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such Trust shall revert to the Corporation upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified under the terms of this Agreement, or that it is no longer anticipated that expenses will be incurred or amounts will be paid in connection with the Indemnifiable Event. The Trustee shall be chosen by the Indemnitee. Nothing in this Section 4 shall relieve the Corporation of any of its obligations under this Agreement. 5. Indemnification for Additional Expenses. The Corporation shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall within two (2) business days of such request advance such expenses to Indemnitee which are incurred by Indemnitee in connection with any claim asserted against or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Corporation under this Agreement or any other agreement or Corporate Bylaw now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Corporation, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery as the case may be. 6. Partial Indemnity, Etc. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder the burden of proof shall be on the Corporation to establish that Indemnitee is not so entitled. 7. Notice by Indemnitee and Defense of Claim. Indemnitee shall promptly notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter, whether civil, criminal, administrative, or investigative, but the omission so to notify the Corporation will not relieve it from any liability which it may have to Indemnitee if such omission does not prejudice the Corporation's rights. If such omission does prejudice the Corporation's rights, the Corporation will be relieved from any liability only to the extent of such prejudice; nor will such omission relieve the Corporation from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any Indemnifiable Event as to which Indemnitee notifies the Corporation of the commencement thereof: (a) The Corporation will be entitled to participate therein at its own expense; and (b) The Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee; provided, however, that the Corporation shall not be entitled to assume the defense of any Indemnifiable event if there has been a Change in Control or if Indemnitee shall have reasonably concluded that there may be a conflict of 4 5 interest between the Corporation and Indemnitee with respect to such Indemnifiable Event. After notice from the Corporation to Indemnitee of its election to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Agreement for any Expenses subsequently incurred by Indemnitee in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ its own counsel in such Indemnifiable Event but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless: (i) The employment of counsel by Indemnitee has been authorized by the Corporation; (ii) The Indemnitee shall have reasonably concluded that counsel employed by the Corporation may not adequately represent Indemnitee; (iii) The Corporation shall not in fact have employed counsel to assume the defense in such Indemnifiable Event or shall not in fact have assumed such defense and be acting in connection therewith with reasonable diligence; in each of which cases the fees and expenses of such counsel shall be at the expense of the Corporation. (c) The Corporation shall not settle any Indemnifiable Event in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent; provided, however, that Indemnitee will not unreasonably withhold his consent to any proposed settlement. 8. No Presumption. For purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 9. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Corporation's Bylaws or the Oklahoma General Corporation Act or otherwise. To the extent that a change in the Oklahoma General Corporation Act (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Corporation's Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy this Agreement or the greater benefits so afforded by such change. 10. Liability Insurance. To the extent the Corporation maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms to the maximum extent of the coverage under such policy or policies in effect for any other Corporation director or officer. 11. Amendments, Etc. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 12. Subrogation. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recover of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation effectively to bring suit to enforce such rights. 13. No Duplication of Payments. The Corporation shall not be liable under this Agreement to make any 5 6 payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 14. Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or assets of the Corporation, spouses, heirs, and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Corporation or of any other enterprise at the Corporation's request. 15. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. 16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Oklahoma applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. ONEOK, Inc. By -------------------------------- Larry W. Brummett, Chairman and Chief Executive Officer ----------------------------------- (Indemnitee) 6 EX-12 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT (12) ONEOK, INC. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS AUGUST 31, 1999
YEARS ENDED AUGUST 31, 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Thousands of Dollars) Fixed Charges, as defined Interest on long-term debt $ 37,087 $ 30,846 $ 31,354 $ 31,748 $ 32,345 Other interest 14,440 3,723 3,376 3,184 4,934 Amortization of debt discount and expense 1,282 506 518 530 512 Interest on lease agreements 2,604 2,325 2,266 2,266 2,266 -------- -------- -------- -------- -------- Total Fixed Charges 55,413 37,400 37,514 37,728 40,057 Preferred dividend requirements 61,061 44,228 285 428 428 -------- -------- -------- -------- -------- Total fixed charges and preferred dividend requirements $116,474 $ 81,628 $ 37,799 $ 38,156 $ 40,485 ======== ======== ======== ======== ======== Earnings before income taxes and income from equity investees $169,552 $168,380 $ 94,107 $ 85,873 $ 68,146 Total fixed charges 55,413 37,400 37,514 37,728 40,057 -------- -------- -------- -------- -------- Earnings available for combined fixed charges and preferred dividend requirements $224,965 $205,780 $131,621 $123,601 $108,203 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and preferred dividend requirements 1.93x 2.52x 3.48x 3.24x 2.67x ======== ======== ======== ======== ========
For purposes of computing the ratio of earnings to combined fixed charges and preferred dividend requirements, "earnings" consists of net income plus fixed charges and income taxes, less undistributed income from equity investees. "Fixed charges" consists of interest charges, the amortization of debt discounts and issue costs and the representative interest portion of operating leases. "Preferred dividend requirements" consists of the pre-tax preferred dividend requirement. EX-12.(A) 8 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT (12)(a) ONEOK, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AUGUST 31, 1999
YEARS ENDED AUGUST 31, 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Thousands of Dollars) Fixed Charges, as defined Interest on long-term debt $ 37,087 $ 30,846 $ 31,354 $ 31,748 $ 32,345 Other interest 14,440 3,723 3,376 3,184 4,934 Amortization of debt discount and expense 1,282 506 518 530 512 Interest on lease agreements 2,604 2,325 2,266 2,266 2,266 -------- -------- -------- -------- -------- Total Fixed Charges 55,413 37,400 37,514 37,728 40,057 -------- -------- -------- -------- -------- Earnings before income taxes and income from equity investees 169,552 168,380 94,107 85,873 68,146 -------- -------- -------- -------- -------- Earnings available for fixed charges $224,965 $205,780 $131,621 $123,601 $108,203 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges 4.06x 5.50x 3.51x 3.28x 2.70x ======== ======== ======== ======== ========
For purposes of computing the ratio of earnings to fixed charges, "earnings" consists of net income plus fixed charges and income taxes, less undistributed income from equity investees. "Fixed charges" consists of interest charges, the amortization of debt discounts and issue costs and the representative interest portion of operating leases. EX-21 9 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT (21) Following are ONEOK, Inc.'s wholly-owned subsidiaries:
Year of State of Establishment or Incorporation Incorporation ONEOK, Inc. Oklahoma May 16, 1997 Kansas Gas Marketing Company Kansas December 2, 1997 Kansas Gas Service Company Kansas June 30, 1997 ONEOK Sayre Storage Company Delaware March 9, 1964 ONEOK Technology Company Delaware August 31, 1992 Oklahoma Natural Energy Service Company Oklahoma February 17, 1998 OkTex Pipeline Company Delaware September 18, 1990 ONEOK Resources Company Delaware October 5, 1970 ONEOK Services Company Oklahoma June 19, 1998 ONEOK Gas Processing, L.L.C. Oklahoma August 24, 1998 ONEOK Gas Transportation, L.L.C. Oklahoma August 25, 1998 ONEOK International, Inc. Delaware February 6, 1997 ONEOK Producer Services, L.L.C. Oklahoma August 25, 1998 ONEOK Gas Marketing Company Delaware September 10, 1992 Mid Continent Market Center Gathering, Inc. (A subsidiary of Mid Continent Market Center, Inc.) Kansas December 13, 1994 Mid Continent Market Center, Inc. Kansas December 13, 1994 ONEOK Power Marketing Company Delaware September 6, 1996 ONEOK Leasing Company Delaware March 18, 1983 ONEOK Parking Company Delaware March 18, 1983 ONEOK Financing Company Kansas August 31, 1998 ALPHA Transmission Company Oklahoma September 16, 1997 Mid Continent Transportation, Inc. Delaware May 12, 1976 ONEOK Field Service Company Oklahoma April 7, 1999 ONEOK Field Services Processing, L. L. C. Oklahoma April 23, 1999 ONEOK Field Services Gathering, L. L. C. Oklahoma April 23, 1999 ONEOK Field Services Transmission, L. L. C. Oklahoma April 23, 1999 ONEOK Gas Storage, L.L.C. Oklahoma July 21, 1999
EX-23 10 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT (23) INDEPENDENT AUDITORS' CONSENT To the Board of Directors ONEOK, Inc.: We consent to incorporation by reference in the Registration Statements Nos. 333-41263, 333-41265, 333-41267, 333-41269, and 333-81043 on Form S-8 and nos 333-44915, 333-57433, 333-65059, 333-76375, and 333-82717 on Form S-3 of ONEOK, Inc. of our report dated October 21, 1999, relating to the consolidated balance sheets of ONEOK, Inc. and subsidiaries as of August 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended August 31, 1999, which report appears in the August 31, 1999, annual report on Form 10-K of ONEOK, Inc. KPMG LLP Tulsa, Oklahoma November 22, 1999 EX-27.(A) 11 FINANCIAL DATA SCHEDULE-YEAR END AUGUST 31, 1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ONEOK, INC. FOR THE PERIOD ENDED AUGUST 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS AUG-31-1999 SEP-01-1998 AUG-31-1999 4,402 0 228,336 0 118,951 439,267 3,057,626 988,797 3,024,945 543,582 810,087 0 199 316 1,173,944 3,024,945 1,842,810 1,842,810 0 1,156,024 467,203 0 52,809 173,413 67,056 106,357 0 0 0 106,357 2.19 2.06
EX-27.(B) 12 FINANCIAL DATA SCHEDULE-YEAR END AUGUST 31, 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ONEOK, INC. FOR THE PERIOD ENDED AUGUST 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS AUG-31-1998 SEP-01-1997 AUG-31-1998 86 0 177,649 0 138,380 338,073 2,601,930 915,769 2,422,487 460,813 312,355 0 200 316 1,168,355 2,422,487 1,820,758 1,820,758 0 1,220,009 411,938 0 35,075 168,380 66,585 101,795 0 0 0 101,795 2.44 2.23
EX-27.(C) 13 FINANCIAL DATA SCHEDULE-YEAR END AUGUST 31, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ONEOK, INC. FOR THE PERIOD ENDED AUGUST 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS AUG-31-1997 SEP-01-1996 AUG-31-1997 14,377 0 100,937 0 78,330 207,277 1,429,493 586,156 1,237,407 189,047 328,214 0 0 281 462,345 1,237,407 1,161,927 1,161,927 0 725,960 307,852 0 34,008 94,107 34,839 59,268 0 0 0 59,268 2.13 2.13
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