ONEOK Inc.

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ONEOK Inc.

100 West Fifth Street
P.O. Box 871
Tulsa, Oklahoma 74102-0871
U.S.A.
(918) 588-7000
Fax: (918) 588-7273

Public Company
Incorporated: 1906 as Oklahoma Natural Gas
Sales: $677 million
Employees: 2,229
Stock Exchanges: New York Chicago
SICs: 1311 Crude Petroleum & Natural Gas; 4923 Gas Transmission & Distribution; 6719 Holding Companies Nec

ONEOK Inc. (pronounced “one oak”) is a diversified energy company headquartered in Tulsa, Oklahoma. Among its utility subsidiaries, Oklahoma Natural Gas Company serves three-quarters of Oklahoma and, in terms of the number of customers it serves, is the twentieth-largest gas utility company in the United States. ONG Transmission Company, another utility division, leases pipeline capacity and provides the link for interstate gas transportation. ONEOK’s non-utility division, the Energy Companies of ONEOK, is an important natural gas liquids processor and a mid-sized gas and oil exploration and production company.

ONEOK began as Oklahoma Natural Gas (ONG) and was formed in an era when natural gas was treated as a nuisance in the oil fields. In 1906 Territorial Congressman Dennis T. Flynn and businessman C. B. Ames decided to pipe gas from northeastern Oklahoma to Oklahoma City, which at the time was served by a manufactured gas facility. To do this, on October 12, 1906, they formed the Oklahoma Natural Gas Company with backers Theodore N. Barnsdall of the Barnsdall Oil Company and former Standard Oil officer Glen T. Braden.

Flynn, who was ONG’s first president, signed contracts to supply local distributors, and on December 28, 1907—a month after Oklahoma was admitted to the union as the 46th state—a 100-mile pipeline, costing $1.7 million, was completed from Tulsa to Oklahoma City.

Braden replaced Flynn after the pipeline’s completion, and managed the nascent company in an Oklahoma that had no highways and few schools, but more than its share of “high noon” law that was enforced by the fastest gun. This was the period when state legislators were expected to check their side-arms with the Sergeant at Arms in each legislative body. During World War I, Braden increased the company’s capitalization to $10 million and reduced the price of its stock from $100 to $25 per share.

In 1921, Harry Heasley replaced an ill Braden as president. Heasley soon created two oil companies to exploit the extensive oil-bearing properties ONG had found while seeking natural gas. The second of these, Oklahoma Eastern, was later merged with Devonian Oil through an exchange of stock.

In the mid-1920s, the American economy boomed and the oil and gas business boomed with it. With such increased economic activity, ONG became a takeover target. On July 31, 1926, the company was sold to New York investment bankers White, Weld, and Company.

White, Weld, and Company promptly renamed the company Oklahoma Natural Gas Corporation, and sold it to Phillips Petroleum, which wanted it as an outlet for its vast Texas Panhandle gas holdings. Phillips elected a new board, named R. C. Sharp as president, and moved the company’s headquarters to Tulsa, which was rapidly becoming a center of the nation’s oil and gas industry. In Tulsa, Phillips also arranged for the building of a new ten-story, $600,000 headquarters.

Phillips used ONG until it could complete its own pipeline to the Midwest and then, on October 15, 1927, sold it to the American Natural Gas Corporation, a holding company subsidiary of utility company financiers G. L. Ohrstrom and Company, Inc.

Ohrstrom’s aim, like that of many utility holding companies, was to extract cash from its holdings. It used a variety of methods to do this, including taking a profit from brokered acquisitions. For instance, it purchased and then sold to ONG the Southern Kansas Gas Company, the Western Gas Service Company of Texas, and the gas properties of Oklahoma Gas and Electric Company.

At this point, ONG’s shares were moving up sharply because of the large dividends it was paying in the form of preferred stock. As was common, ONG’s dividends bore no relation to its true rate of growth. What revenue increases the company did experience came from stock sales rather than productivity. In fact, during this period, employees sold stock house to house. It was inevitable that the situation would correct itself and it did. On October 29, 1929, the stock market crashed and the company and Ohrstrom were plunged into turmoil along with the rest of American industry.

At ONG, management changed rapidly. In June, 1930, Oklahoma Natural Gas Corporation president Thomas R. Weymouth resigned and was replaced by E. C. Deal, who traded the company’s Texas properties for the Oklahoma Natural Gas Corporation in eastern Oklahoma. Then, through arrangements with Tri-Utilities, which was an Ohrstrom holding company, Deal constructed a pipeline from the Quinton field in eastern Oklahoma to Sand Springs, just west of Tulsa.

In October 1931, Deal resigned as president and was elected chair of the board of directors. To meet obligations, his successor, retired army colonel E. A. Olsen, interrupted dividends on common stock, paid little or no dividends on preferred stock, cut salaries, canceled vacations, and laid off employees.

In 1932, Olsen resigned and was replaced by Robert W. Hen-dee. Within a year, the company brought in A. E. Bradshaw, executive vice president of the First National Bank and Trust Company of Tulsa, to reorganize its finances. Bradshaw dissolved the Oklahoma Natural Gas Corporation and reincorpo-rated it in Delaware as the Oklahoma Natural Gas Company. He exchanged stock, extended short-term debt, and honored current bonds. After the company completed Bradshaw’s $30 million refinancing program in 1936, it shed its holding company and contracted Stone and Webster Service Corporation for management advisory services previously provided by the holding company.

Service had suffered during the Ohrstrom years, and the public was so dissatisfied that it almost built a municipal gas plant in Oklahoma City. To make matters worse, the Oklahoma legislature, responding to the demands of retailers, prohibited ONG from merchandising appliances. A return to normalcy began on June 1, 1936, when Joseph “Jos” Bowes gained the ONG presidency. Smart and tough, Bowes improved customer relations and emphasized that as an Oklahoma company, ONG owed allegiance to its customers and shareholders only.

Bowes fostered ONG’s financial health through the late 1930s, and by 1940, when a sustained cold spell froze wells and threatened to interrupt service, he was able to initiate a heavy construction program to upgrade major lines and build additional ones. That year ONG also paid $4.7 million for Central States Power and Light Corporation, a gas utility that served Stillwater, Henryetta, Holdenville, and what was to become the Clinton area of western Oklahoma.

World War II drew many employees into the military and increased demands on ONG’s distribution system. In fact, the necessity of supplying eight major military installations in Tulsa, Oklahoma City, Enid, Norman, and Muskogee led the company to build a 96-mile high-pressure pipeline from the Cement and Chickasha fields to the Stroud junction, halfway between Tulsa and Oklahoma City.

During the war, ONG also began storing gas in depleted gas formations. In the late 1930s, the company pioneered research and development of what became a widely used technology in which gas was injected into formations that effectively became underground storages. The injections would take place principally in the summer months when there was low customer demand. The gas was withdrawn later, usually in the winter, to meet high demand. The process subsequently alleviated the demands on the transmission system to transport large amounts of gas long distances if underground storages could be located near population centers. The company continued to develop underground storages and created five of them strategically located throughout the system.

Following the war, ONG acquired distribution operations in the Oklahoma communities of Sand Springs, Crescent, Dover, Guthrie, Hennessey, and Kingfisher, bringing its 1950 customer total to 270,000. That year it also renovated its Tulsa office building and purchased the five-story Key Building in Oklahoma City. Both buildings were provided with gas air-conditioning, which was a relatively new innovation.

In the early 1950s the company acquired an interest in a natural gas gathering system and in three gasoline plants in Oklahoma’s Garvin and McClain counties. It spent $10 million annually on capital improvements as it linked its Depew underground gas storage facility with Oklahoma City and Tulsa, constructed service centers in Oklahoma City and Tulsa, built a gas processing plant in the Ringwood Field of Major County, and installed an advanced microwave and VHF radio communications system.

Bowes reported to shareholders that 1954 had been the company’s best financial year. Earnings rose to $1.62 a share from $.94 a year earlier, and for the first time gas-fired central heating installations in homes edged out floor furnaces as a means of residential heating.

The company grew internally through the mid-1950s, and in the late 1950s and early 1960s returned to acquisition and expansion. It expanded its Garvin County gasoline plant, and in 1959 bought an interest in the Laverne gas processing plant in northwestern Oklahoma. In 1960, it acquired the Northern Oklahoma Gas Company, the Standard Gas Company, and the State Fuel Supply Company, gaining distribution operations in Ponca City, Newkirk, Perry, Madill, Tishomingo, Anadarko, Wewoka, and Lindsey.

In 1964, H. A. “Tex” Eddins replaced Bowes as chair of the board. Eddins, who had become president in 1955, had already made his mark on ONG, creating, in June 1962, the company’s first wholly owned subsidiary, Oklahoma Natural Gas Gathering Company (ONGGC). ONGGC gathered gas from around the state and sold it in interstate commerce. Unlike its parent, ONGGC operated interstate and was therefore subject to federal regulation.

Eddins was concerned with ensuring an adequate long-term gas supply. He began a program of securing reserves in the Red Oak Field of southeastern Oklahoma. In 1965, he acquired Zenith Natural Gas Company and converted Zenith’s Kansas properties into a second subsidiary. In 1966 he formed Oklahoma Natural Gas Transmission Company, which built and operated a 93-mile transmission pipe from Red Oak in eastern Oklahoma to Sapulpa, southwest of Tulsa.

Tragically, Eddins died suddenly on April 26, 1966, while attending an employee service awards meeting. He was replaced by Executive Vice President C. C. “Charlie” Ingram, an engineer who had joined the company in 1940 as an engineer trainee following his graduation from the University of Oklahoma.

Ingram emphasized exploration and gas purchases and reacted quickly to changing economic conditions and technologies. In his first two years as CEO, he began the process of computerization, adopted plastic pipe for distribution systems, embraced new and less expensive techniques of laying pipe, and launched a major sales campaign to combat the electric industry’s “total electric home” promotional program. In 1968, he formed Thermal Systems, Inc., which built central cooling and heating plants in Tulsa and Oklahoma City and, eventually, a cold storage warehouse.

In 1970, with gas supply as a primary concern, Ingram reorganized ONG’s operating department, established a gas supply department, and formed Oklahoma Natural Development Corporation.

Gas supply was a problem everywhere. But while oil was encountering foreign interruptions, in the natural gas industry the federal government itself was the cause of shortages. Wellhead prices for gas transported across state lines was set at politically attractive but economically unrealistic levels, and interstate gas companies found it increasingly difficult to compete for new supplies. Being an intrastate gas utility and not subject to federal regulation of what price it could pay, ONG was able to acquire adequate gas supplies in the midst of shortages throughout the rest of the industry.

In 1971, ONG served 500,000 customers and generated more than $100 million in revenues. But Ingram and newly named president Wayman E. Humphrey remained focused on supply. In 1972, they formed ONG Exploration Company and encouraged customers to conserve. In 1973 the company’s intrastate status allowed it to remain competitive for new gas supplies even as the Arab oil embargo tightened energy supplies and many companies within the U.S. energy industry were caught short.

To insure access to new supplies, Ingram in 1973 created ONG Western Inc. to build a 200-mile, $20 million pipeline into the gas-rich Anadarko basin of western Oklahoma. He incorporated ONG of Norway, Inc., to bid on oil and gas leases in the North Sea, and by 1974 was spending a yearly $9 million for exploration and production, including a $3 million wildcat program.

The mid-1970s was a time of customer growth for ONG, despite real and threatened shortages. In 1974, it began making large deliveries to the first of five large new fertilizer plants. Its 1976 earnings increased by 51 percent, and in 1977 it extended pipelines 500 miles and installed a computerized customer information system.

Nevertheless, an overall solution to the continuing shortages in the interstate market was needed. Although Oklahoma Natural survived without interruption in service to its customers and sold emergency deliveries to interstate companies, pressure was building on Congress to act.

Congress provided a solution when it passed the Natural Gas Policy Act of 1978. The NGPA deregulated wellhead prices for newly found gas and therefore provided incentive for exploration. But the act, which eventually released vast supplies, caused price fluctuation during the 1980s, which resulted in major changes in the industry.

In December 1980 ONG changed its corporate name to ONEOK Inc. Pronounced “one oak,” the new name was meant to change perceptions. “What we’ve become,” ONG’s annual report stated, “is a company with a good, solid foundation in the utility business and increasing success and growth in non-utility areas.”

The company had indeed grown and diversified. Oklahoma Natural Gas had become a major player in the industry. It distributed gas to 215 communities, wholesaled it to distributors serving 47 states, and had some 600,000 residential customers. Within ONEOK’s non-utility division, the ONEOK Energy Companies, ONEOK Exploration Company explored for oil and natural gas, while Smart Drilling Company, acquired in 1979, was a contract-drilling operation.

In 1981 and 1982, sales reached record $1 billion levels. Revenues were also reaching record heights, as was capital spending, which topped $181 million in 1982. This spending included subsidiary TransTex Pipeline Company’s share of the new Red River Pipeline, and Caney River Transmission Company’s share of the new Ozark Gas Transmission System, which crossed the Arkoma Basin from Oklahoma to Arkansas.

But despite these records, by 1982 the company was feeling the pinch of recession-caused weaknesses in the industrial market. This market was especially important because ONEOK had signed take-or-pay contracts with its own suppliers and was therefore obliged to pay for gas even when it had no customers. Since 1982 take-or-pay claims amounted to some $108 million, Ingram and newly named CEO J. E. Tyree were faced with the necessity to economize. They cut costs, reduced ONG’s capital budget, and fought these claims in court. Nevertheless, a weak economy, sparse contract-drilling demand, lower investment tax credits, increased interest costs, and a $12.8 million drilling write-off in Malta all cut 1983 earnings per share to $2.51 from 1982’s $4.88.

To make matters worse, even though executives did what they could to keep industrial deliveries high by cutting prices to ONG’s five fertilizer plant customers to keep them in business, deliveries continued to fall from 1982’s 281 billion cubic feet (bcf) to 242 bcf. The erosion of deliveries exposed ONEOK to heavy take-or-pay claims.

Weather and rate increases helped the company recover to a degree in 1984. But while ONEOK tried to look optimistic as it opened a new 17-story company headquarters in downtown Tulsa, it cut capital expenditures, moved away from natural gas exploration, and reduced the number of rigs in its contract-drilling operation.

Events of 1985 continued to be sobering. Earnings per share continued to fall, as did demand. New federal regulations allowed industrial users to purchase gas from the wellhead and transport it through pipeline-capacity leases. On the energy side, ONEOK drilling company reported a net loss of $5 million, about half of which was attributable to a three-rig writedown.

On the positive side, executives instituted a long-range planning strategy, moved strongly into oil production by acquiring Imperial Oil for $9.4 million, and formed ONG Transmission Company to handle opportunities in pipeline capacity leases. These opportunities were made more lucrative by the fact that Oklahoma was the nation’s third most prolific gas-producing state.

In 1986, a sluggish economy, warm weather, and unrecoverable take-or-pay settlements of almost $6.2 million forced ONEOK into drastic economies. It consolidated offices, cut down on drilling, and through early retirement policies, reduced its work force by 380, or nearly 15 percent. Things continued to deteriorate in 1987. After a jury awarded Forest Oil $50 million in a take-or-pay suit, banks withdrew an $85 million line of credit and ratings services downgraded ONEOK’s debt.

To get ONEOK back on its financial feet, J. D. Scott, who had become president and CEO in 1986, interrupted regular dividends, appealed the Forest Oil verdict, and established reserves of $112.3 million for unresolved take-or-pay disputes. In 1988, he continued downsizing by providing an early retirement package and incentives for 113 employees to resign or retire. He also sold slightly more than 50 percent of the company’s exploration leases. A light at the end of the tunnel began to appear in 1989, when earnings per share rose 71 percent, dividends were restored, and exploration and production activities became profitable for the first time in five years. In 1990, Standard and Poors and Duff and Phelps upgraded ONEOK’s debt to A- from BBB + .

Scott evidenced his own confidence through acquisitions and expansions. He committed to a major expansion of the Ozark Gas Transmission System, announced a ONEOK Exploration strategy committed to riskier plays with bigger payoffs, acquired the Lone Star Gas Company in central Oklahoma, and continued a research, development, and demonstration project, begun in 1980, that used natural gas as an alternative fuel for vehicles.

By 1991, Harlan S. Byrne of Barrens commented that “for the first time in several years, most things that count were starting to click for ONEOK.” In 1992 ONEOK remained optimistic despite a significantly warmer than normal winter and unprofitable spot market prices. The company formed ONEOK Gas Marketing to pool and market the products of Oklahoma’s independent producers, and ONEOK Technology Company to develop and market a new meter-setting device. Looking to the future, ONEOK planned to introduce a natural gas-fired heat pump and to promote compressed natural gas fleet vehicles in a state that already has more natural-gas fueled vehicles than any state in the union.

Principal Subsidiaries

Caney River Transmission Company; ONG Red Oak Transmission Company; ONG Sayre Storage Company; ONG Western, Inc.; TransTex Pipeline Company; OkTex Pipeline Company; ONEOK Services, Inc.; ONEOK Technology Company; ONEOK Drilling Company; ONEOK Exploration Company; ONEOK Products Company; ONEOK Resources Company; ONEOK Gas Marketing Company; ONEOK Leasing Company; ONEOK Parking Company.