10-QPeriod: Q3 FY2003

ONEOK INC /NEW/ Quarterly Report for Q3 Ended Sep 30, 2003

Filed November 5, 2003For Securities:OKE

Summary

ONEOK Inc. reported its financial results for the nine months ended September 30, 2003, showcasing a significant increase in operating revenues driven by higher commodity prices and strategic acquisitions, particularly the purchase of Texas distribution assets from Southern Union Company. Despite revenue growth, net income experienced a substantial decline compared to the prior year, largely influenced by a non-cash cumulative effect of accounting changes related to energy trading and risk management activities, which resulted in a $143.9 million charge. Financially, the company saw an increase in long-term debt and a shift in its capitalization structure due to recent equity offerings and debt repurchases. Operating cash flows decreased year-over-year, primarily due to changes in working capital and deferred income taxes. The company continues to strategically divest non-core assets, exemplified by the sale of a significant portion of its Production segment, which resulted in a substantial gain. ONEOK remains focused on growth through acquisitions while managing its market and regulatory risks.

Key Highlights

  • 1Operating revenues increased significantly in the first nine months of 2003 compared to 2002, driven by higher commodity prices and the acquisition of Texas distribution assets.
  • 2Net income for the nine months ended September 30, 2003, was substantially lower than the prior year, primarily due to a $143.9 million cumulative effect of accounting changes related to energy trading and risk management.
  • 3The company completed a major acquisition of Texas distribution assets for approximately $436.6 million in January 2003.
  • 4ONEOK sold approximately 70% of its Production segment's natural gas and oil producing properties in January 2003, recognizing a significant pre-tax gain of $59 million.
  • 5Public offerings of common stock and equity units in Q1 2003 raised substantial capital, alongside debt financings and repurchases, altering the company's capital structure.
  • 6Long-term debt increased to $1.9 billion at September 30, 2003, with the company maintaining compliance with debt covenants.
  • 7The company is managing market risk through derivative instruments and is subject to ongoing regulatory reviews, including an investigation by the CFTC.

Frequently Asked Questions

The primary driver for the significant decrease in net income was a $143.9 million cumulative effect of changes in accounting principle, net of tax, related to the rescission of EITF 98-10 (Accounting for Contracts Involved in Energy Trading and Risk Management Activities). This accounting change impacted how gas in storage and existing energy trading contracts were valued and recognized.

The acquisition of Texas distribution assets for approximately $436.6 million in January 2003 has contributed positively to revenues and net revenues. The Distribution segment's net revenues and operating income saw substantial increases due to this acquisition, adding a stable revenue source and expanding the company's customer base.

ONEOK received a subpoena from the CFTC regarding trading and trade reporting practices. The company has been cooperating with the investigation, providing documents and information, and has learned that some information furnished to industry publications was inaccurate. The outcome of the investigation and its potential impact on ONEOK are currently undetermined.

ONEOK's capital structure has shifted, with equity decreasing and long-term debt increasing. This was influenced by significant equity offerings (common stock and equity units) and substantial debt-related activities, including the repurchase of Series A Convertible Preferred Stock from Westar and the repurchase of its own common stock. Long-term debt stood at $1.9 billion at September 30, 2003.