| ONEOK INC /NEW/ ITEM 1A RISK FACTORS Our investors should consider the following risks that could affect us and our business |
| Although we have tried to discuss key factors, please be aware that other risks may prove to be important in the future |
| New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance |
| Investors should carefully consider the following discussion of risks and the other information included or incorporated by reference in this Annual Report on Form 10-K, including Forward-Looking Information, which is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation |
| Our nonregulated businesses are riskier than our regulated businesses |
| Our nonregulated operations have a higher level of risk than our regulated operations, which include our utility and natural gas transportation businesses |
| We expect to continue investing in natural gas projects and other related projects, some or all of which may involve nonregulated businesses or assets |
| These projects could involve risks associated with operational factors, such as competition and dependence on certain suppliers and customers, and financial, economic and political factors, such as rapid and significant changes in prices of hydrocarbons and energy, the cost and availability of capital and counterparty risk, including the inability of a counterparty, customer or supplier to fulfill a contractual obligation |
| Our businesses are subject to market and credit risks |
| We are exposed to market and credit risks in all of our operations |
| To minimize the risk of commodity price fluctuations, we periodically enter into derivative transactions to hedge anticipated purchases and sales of natural gas, NGLs, crude oil, fuel requirements and firm transportation commitments |
| Interest rate swaps are also used to manage interest rate risk |
| However, financial derivative instrument contracts do not eliminate the risks |
| Specifically, such risks include commodity price changes, market supply shortages, interest rate changes and counterparty default |
| The impact of these variables could result in our inability to fulfill contractual obligations, significantly higher energy or fuel costs relative to corresponding sales contracts, or increased interest expense |
| Increased competition could have a significant adverse financial impact on us |
| The natural gas industry is expected to remain highly competitive, resulting from deregulation and other initiatives being pursued by the industry and regulatory agencies that allow customers increased options for energy supplies and service |
| The demand for natural gas is primarily a function of commodity prices, including prices for alternative energy sources, customer usage rates, weather, economic conditions and service costs |
| Our ability to compete also depends on a number of other factors, including competition from other pipelines for our existing load, the efficiency, quality and reliability of the services we provide, and competition for throughput for our gathering systems and processing plants |
| In the future, we may face additional competition from new entrants to the energy industry as a result of the Energy Policy Act of 2005 |
| This comprehensive legislation signed into law by President Bush in August 2005 will substantially affect the regulation of energy companies |
| Among the important changes to be implemented as a result of this act is the repeal of the Public Utility Holding Company Act of 1935 (PUHCA), which is effective in February 2006 |
| PUHCA imposed a number of restrictions, including restrictions on the structure of companies involved in the retail distribution of natural gas |
| As a result of the repeal of PUHCA, new competitors may enter the industry |
| 13 ______________________________________________________________________ [52]Table of Contents [53]Index to Financial Statements We cannot predict when we will be subject to other changes in legislation or regulation, nor can we predict the impact of these changes on our financial position, results of operations or cash flows |
| Although we believe our businesses are positioned to compete effectively in the energy market, there are no assurances that this will be true in the future |
| We may not be able to successfully make additional strategic acquisitions or integrate businesses we acquire into our operations |
| Our ability to successfully make strategic acquisitions and investments will depend on: (1) the extent to which acquisitions and investment opportunities become available; (2) our success in bidding for the opportunities that do become available; (3) regulatory approval, if required, of the acquisitions on favorable terms; and (4) our access to capital, including our ability to use our equity in acquisitions or investments, and the terms upon which we obtain capital |
| If we are unable to make strategic investments and acquisitions, we may be unable to grow |
| If we are unable to successfully integrate new businesses into our operations, we could experience increased costs and losses on our investments |
| Any reduction in our credit ratings could materially and adversely affect our business, financial condition, liquidity and results of operations |
| Our senior unsecured debt has been assigned a rating by Moody’s Investors Service, Inc |
| (Moody’s) of “Baa2” (Stable) and by Standard & Poor’s Ratings Group (S&P) of “BBB” (CreditWatch with negative implications) |
| We will seek to maintain an investment grade rating through prudent capital management and financing structures |
| However, we cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant |
| Specifically, if S&P or Moody’s were to downgrade our long-term rating, particularly below investment grade, our borrowing costs would increase, which would adversely affect our financial results, and our potential pool of investors and funding sources could decrease |
| Further, if our short-term ratings were to fall below A-2 (capacity to meet its financial commitment on the obligation is satisfactory) or P-2 (strong ability to repay short-term debt obligations), the current ratings assigned by S&P and Moody’s, respectively, it could significantly limit our access to the commercial paper market |
| Any such downgrade of our long- or short-term ratings could increase our cost of capital and reduce the availability of capital and, thus, have a material adverse effect on our business, financial condition, liquidity and results of operations |
| Ratings from credit agencies are not recommendations to buy, sell or hold our securities |
| Each rating should be evaluated independently of any other rating |
| We are subject to comprehensive energy regulation by governmental agencies and the recovery of our costs is dependent on regulatory action |
| We are subject to comprehensive regulation by several federal, state and municipal utility regulatory agencies, which significantly influences our operating environment and our ability to recover our costs from utility customers |
| The utility regulatory authorities in Oklahoma, Kansas and Texas regulate many aspects of our utility operations, including customer service and the rates that we can charge customers |
| Federal, state and local agencies also have jurisdiction over many of our other activities, including regulation by the FERC of our storage and interstate pipeline assets |
| The profitability of our regulated operations is dependent on our ability to pass costs related to providing energy and other commodities through to our customers |
| The current regulatory environment applicable to our regulated businesses could impair our ability to recover costs historically absorbed by our customers |
| On October 4, 2005, the OCC unanimously approved an annual rate increase of dlra57dtta5 million for Oklahoma Natural Gas |
| Kansas Gas Service began operating under a new rate schedule effective September 22, 2003 |
| As part of the order issued by the KCC, Kansas Gas Service cannot file a new rate case before May 15, 2006 |
| On November 23, 2005, Texas Gas Service filed requests for rate increases in its Port Arthur and north Texas services areas for dlra2dtta4 million and dlra1dtta1 million, respectively |
| The municipalities have suspended the proposed rates for 90 days in order to conduct further review of the filings |
| Texas Gas Service also has an appeal pending in the court of appeals from the RRC’s 2004 order authorizing an annual revenue increase of approximately dlra0dtta9 million in the cities of Grove, Port Neches and Nederland, Texas |
| We are unable to predict the impact that the future regulatory activities of these agencies will have on our operating results |
| Changes in regulations or the imposition of additional regulations could have an adverse impact on our business, financial condition and results of operations |
| 14 ______________________________________________________________________ [54]Table of Contents [55]Index to Financial Statements We are subject to environmental regulations that could be difficult and costly to comply with |
| We are subject to multiple environmental laws and regulations affecting many aspects of present and future operations, including air emissions, water quality, wastewater discharges, solid wastes and hazardous material and substance management |
| These laws and regulations generally require us to obtain and comply with a wide variety of environmental registrations, licenses, permits, inspections and other approvals |
| Failure to comply with these laws, regulations, permits and licenses may expose us to fines, penalties and/or interruptions in our operations that could be material to the results of operations |
| If an accidental leak or spill of hazardous materials occurs from our lines or facilities in the process of transporting natural gas or NGLs or at any facility that we own, operate or otherwise use, we could be held jointly and severally liable for all resulting liabilities, including investigation and cleanup costs, which could materially affect our results of operations and cash flow |
| In addition, emission controls required under the Federal Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities |
| We cannot provide assurance that existing environmental regulations will not be revised or that new regulations will not be adopted or become applicable to us |
| Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from customers, could have a material adverse effect on our business, financial condition and results of operations |
| We own or retain legal responsibility for the environmental conditions at 12 former manufactured gas sites in Kansas |
| These sites contain potentially harmful materials that are subject to control or remediation under various environmental laws and regulations |
| A consent agreement with the KDHE presently governs all remediation work at these sites |
| The terms of the consent agreement allow us to investigate these sites and set remediation activities based upon the results of the investigations and risk analysis |
| We have commenced active remediation on eight sites, with regulatory closure achieved at two of these locations, and have begun assessments at the four remaining sites |
| The site situations are not similar, and we have no previous experience with similar remediation efforts |
| We have completed some analysis of the four remaining sites, but are unable to accurately estimate individual or aggregate costs that may be required to satisfy our remedial obligations |
| Our preliminary review of similar cleanup efforts at former manufactured gas sites reveals that costs can range from dlra100cmam000 to dlra10 million per site |
| These estimates do not consider potential insurance recoveries, recoveries through rates or from unaffiliated parties, to which we may be entitled |
| At this time, we have not recorded any amounts for potential insurance recoveries or recoveries from unaffiliated parties, and we are not recovering any environmental amounts in rates |
| Total costs to remediate the two sites, which have achieved regulatory closure, were approximately dlra700cmam000 |
| Total remedial costs for each of the remaining sites are expected to exceed dlra500cmam000 per site, but there is no assurance that costs to investigate and remediate the remaining sites will not be significantly higher |
| As more information related to the site investigations and remediation activities becomes available, and to the extent such amounts are expected to exceed our current estimates, additional expenses could be recorded |
| Such amounts could be material to our results of operations and cash flows depending on the remediation done and number of years over which the remediation is completed |
| Our expenditures for environmental evaluation and remediation to date have not been significant in relation to our results of operations and there were no material effects upon earnings during 2005 related to compliance with environmental regulations |
| We are subject to risks that could limit our access to capital, thereby increasing our costs and adversely affecting our results of operations |
| We have grown rapidly in the last several years as a result of acquisitions |
| Further acquisitions may require additional external capital |
| If we are not able to access capital at competitive rates, our strategy of enhancing the earnings potential of our existing assets, including through acquisitions of complementary assets or businesses, will be adversely affected |
| A number of factors could adversely affect our ability to access capital, including: (1) general economic conditions; (2) capital market conditions; (3) market prices for natural gas, NGLs and other hydrocarbons; (4) the overall health of the energy and related industries; (5) our ability to maintain our investment-grade credit ratings; and (6) our capital structure |
| Much of our business is capital intensive, and achievement of our long-term growth targets is dependent, at least in part, upon our ability to access capital at rates and on terms we determine to be attractive |
| If our ability to access capital becomes significantly constrained, our interest costs will likely increase and our financial condition and future results of operations could be significantly harmed |
| Our business could be adversely affected by strikes or work stoppages by our unionized employees |
| As of February 28, 2006, approximately 782 of our 4cmam558 employees were represented by labor unions under collective bargaining agreements |
| We are involved periodically in discussions with labor unions representing some of our employees to negotiate or renegotiate labor agreements |
| We cannot predict the results of these negotiations, including whether any failure 15 ______________________________________________________________________ [56]Table of Contents [57]Index to Financial Statements to reach new agreements will have a negative effect on our business, financial condition and results of operations or whether we will be able to reach any agreement with the unions |
| Any failure to reach agreement on new labor contracts might result in a work stoppage |
| Any future work stoppage could, depending on the operations and the length of the work stoppage, have a material adverse effect on our business, financial condition and results of operations |
| We do not fully hedge against price changes in commodities |
| This could result in decreased revenues and increased costs, thereby resulting in lower margins and adversely affecting our results of operations |
| Our nonregulated businesses are exposed to market risk and the impact of market price fluctuations of natural gas, NGLs, crude oil and power prices |
| Market risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in commodity energy prices |
| Our primary exposure arises from fixed price purchase or sale agreements that extend for periods of up to five years, natural gas in storage utilized by our Energy Services segment, NGLs in storage utilized by our Natural Gas Liquids segment and the difference between natural gas and NGL prices with respect to our keep whole processing agreements |
| To a lesser extent, we are exposed to the risk of changing prices or the cost of transportation resulting from purchasing natural gas or NGLs at one location and selling it at another (referred to as basis risk) |
| To minimize the risk from market price fluctuations of natural gas, NGLs and crude oil, we use commodity derivative instruments such as futures contracts, swaps and options to manage market risk of existing or anticipated purchases and sales of natural gas, NGLs and crude oil |
| We adhere to policies and procedures that limit our exposure to market risk from open positions and that monitor our market risk exposure |
| Our distribution segment uses storage to minimize the volatility of natural gas costs by placing natural gas in storage during the summer months for consumption in the winter months |
| In addition, various natural gas supply contracts allow us the option to convert index-based purchases to fixed prices |
| Also, we use derivative instruments to hedge the cost of anticipated natural gas purchases during the winter heating months to protect Kansas Gas Services’ customers from upward volatility in the market price of natural gas |
| We could be subject to claims arising out of our ownership of a majority of the general partnership interest in Northern Border Partners, LP, a publicly traded limited partnership |
| In November 2004, we acquired Northern Plains, which owns 82dtta5 percent of the general partnership interest and 500cmam000 limited partnership units, together representing a 2dtta73 percent ownership interest, in Northern Border Partners, a publicly traded limited partnership |
| As the holder of a majority of the general partnership interests in Northern Border Partners we have certain duties and responsibilities |
| Although we do not expect to incur any material liability relating to such duties or responsibilities, we cannot provide assurance that such claims will not arise or that any claims that do arise will not have an adverse effect on our business, financial condition or results of operation |