Attached files
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EX-32.2 - OKS CERTIFICATION OF REINERS SECTION 906 - ONEOK Partners LP | oksq22016exhibit322.htm |
EX-32.1 - OKS CERTIFICATION OF SPENCER SECTION 906 - ONEOK Partners LP | oksq22016exhibit321.htm |
EX-31.2 - OKS CERTIFICATION OF REINERS SECTION 302 - ONEOK Partners LP | oksq22016exhibit312.htm |
EX-31.1 - OKS CERTIFICATION OF SPENCER SECTION 302 - ONEOK Partners LP | oksq22016exhibit311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016.
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 1-12202
ONEOK PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware | 93-1120873 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
100 West Fifth Street, Tulsa, OK | 74103 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (918) 588-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer __ Non-accelerated filer __ Smaller reporting company__
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at July 25, 2016 | |
Common units | 212,837,980 units | |
Class B units | 72,988,252 units |
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ONEOK PARTNERS, L.P.
TABLE OF CONTENTS
Page No. | ||
As used in this Quarterly Report, references to “we,” “our,” “us” or the “Partnership” refer to ONEOK Partners, L.P., its subsidiary, ONEOK Partners Intermediate Limited Partnership, and its subsidiaries, unless the context indicates otherwise.
The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements. Forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled” and other words and terms of similar meaning. Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations “Forward-Looking Statements,” in this Quarterly Report and under Part I, Item 1A, “Risk Factors,” in our Annual Report.
INFORMATION AVAILABLE ON OUR WEBSITE
We make available, free of charge, on our website (www.oneokpartners.com) copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and reports of holdings of our securities filed by our officers and directors under Section 16 of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of our Code of Business Conduct and Ethics, Governance Guidelines, Partnership Agreement and the written charter of our Audit Committee are also available on our website, and we will provide copies of these documents upon request. Our website and any contents thereof are not incorporated by reference into this report.
We also make available on our website the Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T.
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4
GLOSSARY
The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:
AFUDC | Allowance for funds used during construction |
Annual Report | Annual Report on Form 10-K for the year ended December 31, 2015 |
ASU | Accounting Standards Update |
Bbl | Barrels, 1 barrel is equivalent to 42 United States gallons |
BBtu/d | Billion British thermal units per day |
Bcf | Billion cubic feet |
CFTC | U.S. Commodity Futures Trading Commission |
Clean Air Act | Federal Clean Air Act, as amended |
EBITDA | Earnings before interest expense, income taxes, depreciation and amortization |
EPA | United States Environmental Protection Agency |
Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
GAAP | Accounting principles generally accepted in the United States of America |
Intermediate Partnership | ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary of ONEOK Partners, L.P. |
LIBOR | London Interbank Offered Rate |
MBbl/d | Thousand barrels per day |
MDth/d | Thousand dekatherms per day |
MMBbl | Million barrels |
MMBtu | Million British thermal units |
MMcf/d | Million cubic feet per day |
Moody’s | Moody’s Investors Service, Inc. |
NGL(s) | Natural gas liquid(s) |
NGL products | Marketable natural gas liquid purity products, such as ethane, ethane/propane mix, propane, iso-butane, normal butane and natural gasoline |
NYMEX | New York Mercantile Exchange |
NYSE | New York Stock Exchange |
ONEOK | ONEOK, Inc. |
ONEOK Partners | ONEOK Partners, L.P. |
ONEOK Partners GP | ONEOK Partners GP, L.L.C., a wholly owned subsidiary of ONEOK and the sole general partner of ONEOK Partners |
OPIS | Oil Price Information Service |
Partnership Agreement | Third Amended and Restated Agreement of Limited Partnership of ONEOK Partners, L.P., as amended |
Partnership Credit Agreement | The Partnership’s $2.4 billion amended and restated revolving credit agreement effective as of January 31, 2014, as amended |
PHMSA | United States Department of Transportation Pipeline and Hazardous Materials Safety Administration |
POP | Percent of Proceeds |
Quarterly Report(s) | Quarterly Report(s) on Form 10-Q |
Roadrunner | Roadrunner Gas Transmission, LLC |
S&P | S&P Global Ratings |
SCOOP | South Central Oklahoma Oil Province, an area in the Anadarko Basin in Oklahoma |
SEC | Securities and Exchange Commission |
STACK | Sooner Trend Anadarko Canadian Kingfisher, an area in the Anadarko Basin in Oklahoma |
Term Loan Agreement | The Partnership’s senior unsecured delayed-draw three-year $1.0 billion term loan agreement dated January 8, 2016 |
West Texas LPG | West Texas LPG Pipeline Limited Partnership and Mesquite Pipeline |
WTI | West Texas Intermediate |
XBRL | eXtensible Business Reporting Language |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONEOK Partners, L.P. and Subsidiaries | |||||||||||||||
CONSOLIDATED STATEMENTS OF INCOME | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(Unaudited) | 2016 | 2015 | 2016 | 2015 | |||||||||||
(Thousands of dollars, except per unit amounts) | |||||||||||||||
Revenues | |||||||||||||||
Commodity sales | $ | 1,633,272 | $ | 1,722,254 | $ | 2,916,783 | $ | 3,157,970 | |||||||
Services | 500,322 | 405,253 | 990,756 | 774,296 | |||||||||||
Total revenues | 2,133,594 | 2,127,507 | 3,907,539 | 3,932,266 | |||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | 1,527,323 | 1,603,093 | 2,723,061 | 2,946,957 | |||||||||||
Operations and maintenance | 157,803 | 143,131 | 306,543 | 298,252 | |||||||||||
Depreciation and amortization | 98,507 | 86,199 | 192,243 | 172,046 | |||||||||||
General taxes | 23,935 | 23,481 | 45,575 | 46,519 | |||||||||||
(Gain) loss on sale of assets | 414 | (122 | ) | (3,731 | ) | (116 | ) | ||||||||
Operating income | 325,612 | 271,725 | 643,848 | 468,608 | |||||||||||
Equity in net earnings from investments (Note I) | 32,372 | 30,040 | 65,286 | 60,961 | |||||||||||
Allowance for equity funds used during construction | — | 742 | 208 | 1,541 | |||||||||||
Other income | 552 | 24 | 697 | 2,547 | |||||||||||
Other expense | (939 | ) | (1,953 | ) | (1,573 | ) | (2,578 | ) | |||||||
Interest expense (net of capitalized interest of $2,572, $9,927, $5,459 and $17,157, respectively) | (93,263 | ) | (86,492 | ) | (185,818 | ) | (167,201 | ) | |||||||
Income before income taxes | 264,334 | 214,086 | 522,648 | 363,878 | |||||||||||
Income taxes | (2,370 | ) | (2,476 | ) | (4,398 | ) | (5,236 | ) | |||||||
Net income | 261,964 | 211,610 | 518,250 | 358,642 | |||||||||||
Less: Net income attributable to noncontrolling interests | 496 | 1,840 | 3,265 | 3,278 | |||||||||||
Net income attributable to ONEOK Partners, L.P. | $ | 261,468 | $ | 209,770 | $ | 514,985 | $ | 355,364 | |||||||
Limited partners’ interest in net income: | |||||||||||||||
Net income attributable to ONEOK Partners, L.P. | $ | 261,468 | $ | 209,770 | $ | 514,985 | $ | 355,364 | |||||||
General partner’s interest in net income | (105,768 | ) | (95,989 | ) | (211,376 | ) | (188,790 | ) | |||||||
Limited partners’ interest in net income | $ | 155,700 | $ | 113,781 | $ | 303,609 | $ | 166,574 | |||||||
Limited partners’ net income per unit, basic and diluted (Note H) | $ | 0.54 | $ | 0.44 | $ | 1.06 | $ | 0.65 | |||||||
Number of units used in computation (thousands) | 285,826 | 257,179 | 285,826 | 255,627 |
See accompanying Notes to Consolidated Financial Statements.
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ONEOK Partners, L.P. and Subsidiaries | |||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(Unaudited) | 2016 | 2015 | 2016 | 2015 | |||||||||||
(Thousands of dollars) | |||||||||||||||
Net income | $ | 261,964 | $ | 211,610 | $ | 518,250 | $ | 358,642 | |||||||
Other comprehensive income (loss) | |||||||||||||||
Unrealized gains (losses) on derivatives | (87,218 | ) | 17,981 | (107,151 | ) | 5,424 | |||||||||
Realized (gains) losses on derivatives recognized in net income | (10,124 | ) | (13,358 | ) | (20,804 | ) | (24,691 | ) | |||||||
Other comprehensive income (loss) on investments in unconsolidated affiliates | (5,562 | ) | — | (11,363 | ) | — | |||||||||
Total other comprehensive income (loss) | (102,904 | ) | 4,623 | (139,318 | ) | (19,267 | ) | ||||||||
Comprehensive income | 159,060 | 216,233 | 378,932 | 339,375 | |||||||||||
Less: Comprehensive income attributable to noncontrolling interests | 496 | 1,840 | 3,265 | 3,278 | |||||||||||
Comprehensive income attributable to ONEOK Partners, L.P. | $ | 158,564 | $ | 214,393 | $ | 375,667 | $ | 336,097 |
See accompanying Notes to Consolidated Financial Statements.
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ONEOK Partners, L.P. and Subsidiaries | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
June 30, | December 31, | |||||||
(Unaudited) | 2016 | 2015 | ||||||
Assets | (Thousands of dollars) | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 3,745 | $ | 5,079 | ||||
Accounts receivable, net | 671,556 | 593,448 | ||||||
Affiliate receivables | 2,316 | 7,969 | ||||||
Natural gas and natural gas liquids in storage | 245,946 | 128,084 | ||||||
Commodity imbalances | 38,300 | 38,681 | ||||||
Materials and supplies | 85,127 | 76,696 | ||||||
Other current assets | 49,117 | 33,207 | ||||||
Total current assets | 1,096,107 | 883,164 | ||||||
Property, plant and equipment | ||||||||
Property, plant and equipment | 14,588,127 | 14,307,546 | ||||||
Accumulated depreciation and amortization | 2,215,951 | 2,050,755 | ||||||
Net property, plant and equipment | 12,372,176 | 12,256,791 | ||||||
Investments and other assets | ||||||||
Investments in unconsolidated affiliates | 913,813 | 948,221 | ||||||
Goodwill and intangible assets | 818,927 | 824,877 | ||||||
Other assets | 16,853 | 14,533 | ||||||
Total investments and other assets | 1,749,593 | 1,787,631 | ||||||
Total assets | $ | 15,217,876 | $ | 14,927,586 | ||||
Liabilities and equity | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt (Note E) | $ | 457,650 | $ | 107,650 | ||||
Short-term borrowings (Note D) | 576,307 | 546,340 | ||||||
Accounts payable | 691,775 | 605,431 | ||||||
Affiliate payables | 31,517 | 27,137 | ||||||
Commodity imbalances | 105,544 | 74,460 | ||||||
Accrued interest | 94,390 | 102,615 | ||||||
Other current liabilities | 183,610 | 116,667 | ||||||
Total current liabilities | 2,140,793 | 1,580,300 | ||||||
Long-term debt, excluding current maturities (Note E) | 6,691,950 | 6,695,312 | ||||||
Deferred credits and other liabilities | 183,200 | 154,631 | ||||||
Commitments and contingencies (Note K) | ||||||||
Equity (Note F) | ||||||||
ONEOK Partners, L.P. partners’ equity: | ||||||||
General partner | 228,324 | 231,344 | ||||||
Common units: 212,837,980 units issued and outstanding at June 30, 2016, and December 31, 2015 | 4,904,748 | 5,014,952 | ||||||
Class B units: 72,988,252 units issued and outstanding at June 30, 2016, and December 31, 2015 | 1,162,412 | 1,200,204 | ||||||
Accumulated other comprehensive loss (Note G) | (252,600 | ) | (113,282 | ) | ||||
Total ONEOK Partners, L.P. partners’ equity | 6,042,884 | 6,333,218 | ||||||
Noncontrolling interests in consolidated subsidiaries | 159,049 | 164,125 | ||||||
Total equity | 6,201,933 | 6,497,343 | ||||||
Total liabilities and equity | $ | 15,217,876 | $ | 14,927,586 |
See accompanying Notes to Consolidated Financial Statements.
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ONEOK Partners, L.P. and Subsidiaries | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
Six Months Ended | ||||||||
June 30, | ||||||||
(Unaudited) | 2016 | 2015 | ||||||
(Thousands of dollars) | ||||||||
Operating activities | ||||||||
Net income | $ | 518,250 | $ | 358,642 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 192,243 | 172,046 | ||||||
Allowance for equity funds used during construction | (208 | ) | (1,541 | ) | ||||
Gain on sale of assets | (3,731 | ) | (116 | ) | ||||
Deferred income taxes | 4,675 | 3,983 | ||||||
Equity in net earnings from investments | (65,286 | ) | (60,961 | ) | ||||
Distributions received from unconsolidated affiliates | 72,204 | 61,969 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (85,238 | ) | 51,062 | |||||
Affiliate receivables | 5,653 | 6,763 | ||||||
Natural gas and natural gas liquids in storage | (117,862 | ) | (16,003 | ) | ||||
Accounts payable | 108,467 | (126,645 | ) | |||||
Affiliate payables | 4,380 | (7,802 | ) | |||||
Commodity imbalances, net | 31,465 | 20,497 | ||||||
Accrued interest | (8,225 | ) | 10,206 | |||||
Risk-management assets and liabilities | (61,771 | ) | (66,298 | ) | ||||
Other assets and liabilities, net | (1,858 | ) | (25,535 | ) | ||||
Cash provided by operating activities | 593,158 | 380,267 | ||||||
Investing activities | ||||||||
Capital expenditures (less allowance for equity funds used during construction) | (332,276 | ) | (628,396 | ) | ||||
Contributions to unconsolidated affiliates | (19,830 | ) | (33,222 | ) | ||||
Distributions received from unconsolidated affiliates in excess of cumulative earnings | 36,373 | 18,814 | ||||||
Proceeds from sale of assets | 18,170 | 691 | ||||||
Other | — | (12,607 | ) | |||||
Cash used in investing activities | (297,563 | ) | (654,720 | ) | ||||
Financing activities | ||||||||
Cash distributions: | ||||||||
General and limited partners | (666,001 | ) | (593,435 | ) | ||||
Noncontrolling interests | (4,300 | ) | (4,694 | ) | ||||
Borrowing (repayment) of short-term borrowings, net | 29,967 | (184,812 | ) | |||||
Issuance of long-term debt, net of discounts | 1,000,000 | 798,896 | ||||||
Debt financing costs | (2,770 | ) | (7,850 | ) | ||||
Repayment of long-term debt | (653,825 | ) | (3,825 | ) | ||||
Issuance of common units, net of issuance costs | — | 275,098 | ||||||
Contribution from general partner | — | 5,670 | ||||||
Cash provided by (used in) financing activities | (296,929 | ) | 285,048 | |||||
Change in cash and cash equivalents | (1,334 | ) | 10,595 | |||||
Cash and cash equivalents at beginning of period | 5,079 | 42,530 | ||||||
Cash and cash equivalents at end of period | $ | 3,745 | $ | 53,125 |
See accompanying Notes to Consolidated Financial Statements.
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ONEOK Partners, L.P. and Subsidiaries | ||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||||||||||||
ONEOK Partners, L.P. Partners’ Equity | ||||||||||||||
(Unaudited) | Common Units | Class B Units | General Partner | Common Units | ||||||||||
(Units) | (Thousands of dollars) | |||||||||||||
January 1, 2016 | 212,837,980 | 72,988,252 | $ | 231,344 | $ | 5,014,952 | ||||||||
Net income | — | — | 211,376 | 226,080 | ||||||||||
Other comprehensive income (loss) (Note G) | — | — | — | — | ||||||||||
Distributions paid (Note F) | — | — | (214,396 | ) | (336,284 | ) | ||||||||
Other | — | — | — | — | ||||||||||
June 30, 2016 | 212,837,980 | 72,988,252 | $ | 228,324 | $ | 4,904,748 |
ONEOK Partners, L.P. Partners’ Equity | ||||||||||||||
(Unaudited) | Common Units | Class B Units | General Partner | Common Units | ||||||||||
(Units) | (Thousands of dollars) | |||||||||||||
January 1, 2015 | 180,826,973 | 72,988,252 | $ | 211,914 | $ | 4,456,372 | ||||||||
Net income | — | — | 188,790 | 118,918 | ||||||||||
Other comprehensive income (loss) (Note G) | — | — | — | — | ||||||||||
Issuance of common units (Note F) | 7,151,875 | — | — | 273,991 | ||||||||||
Contribution from general partner (Note F) | — | — | 5,684 | — | ||||||||||
Distributions paid (Note F) | — | — | (191,037 | ) | (287,078 | ) | ||||||||
Other | — | — | — | — | ||||||||||
June 30, 2015 | 187,978,848 | 72,988,252 | $ | 215,351 | $ | 4,562,203 |
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ONEOK Partners, L.P. and Subsidiaries | ||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||||||||||||||
(Continued) | ||||||||||||||||
ONEOK Partners, L.P. Partners’ Equity | ||||||||||||||||
(Unaudited) | Class B Units | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests in Consolidated Subsidiaries | Total Equity | ||||||||||||
(Thousands of dollars) | ||||||||||||||||
January 1, 2016 | $ | 1,200,204 | $ | (113,282 | ) | $ | 164,125 | $ | 6,497,343 | |||||||
Net income | 77,529 | — | 3,265 | 518,250 | ||||||||||||
Other comprehensive income (loss) (Note G) | — | (139,318 | ) | — | (139,318 | ) | ||||||||||
Distributions paid (Note F) | (115,321 | ) | — | (4,300 | ) | (670,301 | ) | |||||||||
Other | — | — | (4,041 | ) | (4,041 | ) | ||||||||||
June 30, 2016 | $ | 1,162,412 | $ | (252,600 | ) | $ | 159,049 | $ | 6,201,933 |
ONEOK Partners, L.P. Partners’ Equity | ||||||||||||||||
(Unaudited) | Class B Units | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests in Consolidated Subsidiaries | Total Equity | ||||||||||||
(Thousands of dollars) | ||||||||||||||||
January 1, 2015 | $ | 1,374,375 | $ | (91,823 | ) | $ | 167,937 | $ | 6,118,775 | |||||||
Net income | 47,656 | — | 3,278 | 358,642 | ||||||||||||
Other comprehensive income (loss) (Note G) | — | (19,267 | ) | — | (19,267 | ) | ||||||||||
Issuance of common units (Note F) | — | — | — | 273,991 | ||||||||||||
Contribution from general partner (Note F) | — | — | — | 5,684 | ||||||||||||
Distributions paid (Note F) | (115,320 | ) | — | (4,694 | ) | (598,129 | ) | |||||||||
Other | — | — | 38 | 38 | ||||||||||||
June 30, 2015 | $ | 1,306,711 | $ | (111,090 | ) | $ | 166,559 | $ | 6,139,734 |
See accompanying Notes to Consolidated Financial Statements.
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ONEOK PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Our accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. These statements have been prepared in accordance with GAAP and reflect all adjustments that, in our opinion, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The 2015 year-end consolidated balance sheet data was derived from our audited financial statements but does not include all disclosures required by GAAP. Certain reclassifications have been made in the prior-year financial statements to conform to the current-year presentation. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements in our Annual Report.
Our significant accounting policies are consistent with those disclosed in Note A of the Notes to Consolidated Financial Statements in our Annual Report.
Recently Issued Accounting Standards Update - In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendment also requires the acquirer to record the income statement effects of changes to provisional amounts in the financial statements in the period in which the adjustments occurred. This guidance was effective for public companies for fiscal years beginning after December 15, 2015. We adopted this guidance in the first quarter 2016, and there was no impact, but it could impact us in the future if we complete any acquisitions with subsequent measurement period adjustments.
In April 2015, the FASB issued ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which clarifies whether a cloud computing arrangement includes a software license. If it does, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses; if not, the customer should account for the arrangement as a service contract. This guidance was effective for public companies for fiscal years beginning after December 15, 2015. We adopted this guidance in the first quarter 2016. The impact of adopting this guidance was not material.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which eliminates the presumption that a general partner should consolidate a limited partnership. It also modifies the evaluation of whether limited partnerships are variable interest entities or voting interest entities and adds requirements that limited partnerships must meet to qualify as voting interest entities. This guidance was effective for public companies for fiscal years beginning after December 15, 2015. We adopted this guidance in the first quarter 2016. The impact of adopting this guidance was not material.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented net of the allowance for credit losses to reflect the net carrying value at the amount expected to be collected on the financial asset; and the initial allowance for credit losses for purchased financial assets, including available-for-sale debt securities, to be added to the purchase price rather than being reported as a credit loss expense. This guidance is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for the fiscal years beginning after December 15, 2018. We expect to adopt this guidance in the first quarter 2020, and we are evaluating the impact on us.
In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments,” which clarifies the requirements for assessing whether a contingent call (put) option that can accelerate the payment of principal on a debt instrument is clearly and closely related to its debt host. Under the amendments in the update, assessments must be performed in accordance with the four-step decision sequence to conclude which call (put) options should be bifurcated and accounted for separately as derivatives. This guidance is effective for public companies for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We expect to adopt this guidance in the first quarter 2017, and we are evaluating the impact on us.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships,” which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation
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of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We expect to adopt this guidance in the first quarter 2017, and we are evaluating the impact on us.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. It also requires qualitative disclosures along with specific quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We expect to adopt this guidance in the first quarter 2019, and we are evaluating the impact on us.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires all equity investments other than those accounted for using the equity method of accounting or those that result in consolidation of the investee to be measured at fair value with changes in fair value recognized in net income, eliminates the available-for-sale classification for equity securities with readily determinable fair values and eliminates the cost method for equity investments without readily determinable fair values. Additionally, this guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost and requires the use of the exit price when measuring the fair value of such instruments for disclosure purposes. This guidance will be effective for public companies in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is only permitted for certain portions of the ASU. We expect to adopt this guidance in the first quarter 2018, and we are evaluating the impact on us.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which requires that inventory, excluding inventory measured using last-in, first-out (LIFO) or the retail inventory method, be measured at the lower of cost or net realizable value. This guidance will be effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We expect to adopt this guidance in the first quarter 2017, and we are evaluating the impact on us.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The standard applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We expect to adopt this guidance beginning in the fourth quarter 2016, and we do not expect it to materially impact us.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which outlines the principles an entity must apply to measure and recognize revenue for entities that enter into contracts to provide goods or services to their customers. The core principle is that an entity should recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. The amendment also requires more extensive disaggregated revenue disclosures in interim and annual financial statements. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” that deferred the effective date of ASU 2014-09 by one year. This update is now effective for interim and annual periods that begin after December 15, 2017, with either retrospective application for all periods presented or retrospective application with a cumulative effect adjustment. The FASB has issued additional ASUs, which provide further guidance and clarification on implementation issues. We expect to adopt this guidance beginning in the first quarter 2018, and we are evaluating the impact on us.
B. | FAIR VALUE MEASUREMENTS |
Determining Fair Value - We define fair value as the price that would be received from the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. We use market and income approaches to determine the fair value of our assets and liabilities and consider the markets in which the transactions are executed. We measure the fair value of a group of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.
While many of the contracts in our portfolio are executed in liquid markets where price transparency exists, some contracts are executed in markets for which market prices may exist, but the market may be relatively inactive. This results in limited price
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transparency that requires management’s judgment and assumptions to estimate fair values. For certain transactions, we utilize modeling techniques using NYMEX-settled pricing data and implied forward LIBOR curves. Inputs into our fair value estimates include commodity-exchange prices, over-the-counter quotes, historical correlations of pricing data, data obtained from third-party pricing services and LIBOR and other liquid money-market instrument rates. We validate our valuation inputs with third-party information and settlement prices from other sources, where available.
In addition, as prescribed by the income approach, we compute the fair value of our derivative portfolio by discounting the projected future cash flows from our derivative assets and liabilities to present value using interest-rate yields to calculate present-value discount factors derived from LIBOR, Eurodollar futures and the LIBOR interest-rate swaps market. We also take into consideration the potential impact on market prices of liquidating positions in an orderly manner over a reasonable period of time under current market conditions. We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using specific and sector bond yields and monitoring the credit default swap markets. Although we use our best estimates to determine the fair value of the derivative contracts we have executed, the ultimate market prices realized could differ from our estimates, and the differences could be material.
The fair value of our forward-starting interest-rate swaps are determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest-rate swap settlements.
Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:
• | Level 1 - fair value measurements are based on unadjusted quoted prices for identical securities in active markets, including NYMEX-settled prices. These balances are comprised predominantly of exchange-traded derivative contracts for natural gas and crude oil. |
• | Level 2 - fair value measurements are based on significant observable pricing inputs, such as NYMEX-settled prices for natural gas and crude oil, and financial models that utilize implied forward LIBOR yield curves for interest-rate swaps. |
• | Level 3 - fair value measurements are based on inputs that may include one or more unobservable inputs, including internally developed natural gas basis and NGL price curves that incorporate observable and unobservable market data from broker quotes, third-party pricing services, market volatilities derived from the most recent NYMEX close spot prices and forward LIBOR curves, and adjustments for the credit risk of our counterparties. We corroborate the data on which our fair value estimates are based using our market knowledge of recent transactions, analysis of historical correlations and validation with independent broker quotes. These balances categorized as Level 3 are comprised of derivatives for natural gas and NGLs. We do not believe that our Level 3 fair value estimates have a material impact on our results of operations, as the majority of our derivatives are accounted for as hedges for which ineffectiveness has not been material. |
Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives for which fair value is determined using multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety.
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Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:
June 30, 2016 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net (b) | ||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | 13,966 | $ | — | $ | 3,205 | $ | 17,171 | $ | (10,970 | ) | $ | 6,201 | ||||||||||
Physical contracts | — | — | 68 | 68 | — | 68 | |||||||||||||||||
Total derivative assets | $ | 13,966 | $ | — | $ | 3,273 | $ | 17,239 | $ | (10,970 | ) | $ | 6,269 | ||||||||||
Derivative liabilities | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | (15,352 | ) | $ | — | $ | (12,365 | ) | $ | (27,717 | ) | $ | 27,717 | $ | — | ||||||||
Physical contracts | — | — | (4,929 | ) | (4,929 | ) | — | (4,929 | ) | ||||||||||||||
Interest-rate contracts | — | (70,111 | ) | — | (70,111 | ) | — | (70,111 | ) | ||||||||||||||
Total derivative liabilities | $ | (15,352 | ) | $ | (70,111 | ) | $ | (17,294 | ) | $ | (102,757 | ) | $ | 27,717 | $ | (75,040 | ) |
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At June 30, 2016, we had no cash held and posted $33.5 million of cash with various counterparties, including $16.7 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $16.8 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheets.
(b) - Included in other current assets, other assets, other current liabilities or deferred credits and other liabilities in our Consolidated Balance Sheets.
December 31, 2015 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net (b) | ||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | 38,921 | $ | — | $ | 7,253 | $ | 46,174 | $ | (42,414 | ) | $ | 3,760 | ||||||||||
Physical contracts | — | — | 3,591 | 3,591 | — | 3,591 | |||||||||||||||||
Total derivative assets | $ | 38,921 | $ | — | $ | 10,844 | $ | 49,765 | $ | (42,414 | ) | $ | 7,351 | ||||||||||
Derivative liabilities | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | (4,513 | ) | $ | — | $ | (3,513 | ) | $ | (8,026 | ) | $ | 8,026 | $ | — | ||||||||
Interest-rate contracts | — | (9,936 | ) | — | (9,936 | ) | — | (9,936 | ) | ||||||||||||||
Total derivative liabilities | $ | (4,513 | ) | $ | (9,936 | ) | $ | (3,513 | ) | $ | (17,962 | ) | $ | 8,026 | $ | (9,936 | ) |
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At December 31, 2015, we held $34.4 million of cash from various counterparties that is offsetting derivative net asset positions in the table above under master-netting arrangements and had no cash collateral posted.
(b) - Included in other current assets or other current liabilities in our Consolidated Balance Sheets.
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The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Derivative Assets (Liabilities) | 2016 | 2015 | 2016 | 2015 | |||||||||||
(Thousands of dollars) | |||||||||||||||
Net assets at beginning of period | $ | 34 | $ | 7,040 | $ | 7,331 | $ | 9,285 | |||||||
Total realized/unrealized gains (losses): | |||||||||||||||
Included in earnings (a) | 318 | (159 | ) | (427 | ) | 110 | |||||||||
Included in other comprehensive income (loss) | (14,373 | ) | 3,506 | (20,925 | ) | 992 | |||||||||
Net assets (liabilities) at end of period | $ | (14,021 | ) | $ | 10,387 | $ | (14,021 | ) | $ | 10,387 |
(a) - Included in commodity sales revenues in our Consolidated Statements of Income.
Realized/unrealized gains (losses) include the realization of our derivative contracts through maturity. During the three and six months ended June 30, 2016 and 2015, gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the end of each reporting period were not material.
We recognize transfers into and out of the levels in the fair value hierarchy as of the end of each reporting period. During the three and six months ended June 30, 2016 and 2015, there were no transfers between levels.
Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value, due to the short-term nature of these items. Our cash and cash equivalents are comprised of bank and money market accounts and are classified as Level 1. Our short-term borrowings are classified as Level 2 since the estimated fair value of the short-term borrowings can be determined using information available in the commercial paper market.
The estimated fair value of the aggregate of our long-term debt, including current maturities, was $7.4 billion and $6.2 billion at June 30, 2016, and December 31, 2015, respectively. The book value of the aggregate of our long-term debt, including current maturities, was $7.1 billion and $6.8 billion at June 30, 2016, and December 31, 2015, respectively. The estimated fair value of the aggregate of our senior notes outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our long-term debt is classified as Level 2.
C. | RISK-MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES |
Risk-Management Activities - We are sensitive to changes in natural gas, crude oil and NGL prices, principally as a result of contractual terms under which these commodities are processed, purchased and sold. We use physical-forward purchases and sales and financial derivatives to secure a certain price for a portion of our natural gas, condensate and NGL products; to reduce our exposure to commodity price and interest-rate fluctuations; and to achieve more predictable cash flows. We follow established policies and procedures to assess risk and approve, monitor and report our risk-management activities. We have not used these instruments for trading purposes. We are also subject to the risk of interest-rate fluctuation in the normal course of business.
Commodity price risk - Commodity price risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in the price of natural gas, NGLs and condensate. We use the following commodity derivative instruments to mitigate the near-term commodity price risk associated with a portion of the forecasted sales of these commodities:
• | Futures contracts - Standardized contracts to purchase or sell natural gas and crude oil for future delivery or settlement under the provisions of exchange regulations; |
• | Forward contracts - Nonstandardized commitments between two parties to purchase or sell natural gas, crude oil or NGLs for future physical delivery. These contracts are typically nontransferable and can only be canceled with the consent of both parties; |
• | Swaps - Exchange of one or more payments based on the value of one or more commodities. These instruments transfer the financial risk associated with a future change in value between the counterparties of the transaction, without also conveying ownership interest in the asset or liability; and |
• | Options - Contractual agreements that give the holder the right, but not the obligation, to buy or sell a fixed quantity of a commodity at a fixed price within a specified period of time. Options may either be standardized and exchange-traded or customized and nonexchange-traded. |
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We may also use other instruments including collars to mitigate commodity price risk. A collar is a combination of a purchased put option and a sold call option, which places a floor and a ceiling price for commodity sales being hedged.
In our Natural Gas Gathering and Processing segment, we are exposed to commodity price risk as a result of receiving commodities as a portion of our compensation for services associated with our POP with fee contracts. Under certain POP with fee contracts, our fee revenues may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. We also are exposed to basis risk between the various production and market locations where we receive and sell commodities. As part of our hedging strategy, we use the previously described commodity derivative financial instruments and physical-forward contracts to reduce the impact of price fluctuations related to natural gas, NGLs and condensate.
In our Natural Gas Liquids segment, we are exposed to location price differential risk, primarily as a result of the relative value of NGL purchases at one location and sales at another location. We are also exposed to commodity price risk resulting from the relative values of the various NGL products to each other, NGLs in storage and the relative value of NGLs to natural gas. We utilize physical-forward contracts and commodity derivative financial instruments to reduce the impact of price fluctuations related to NGLs.
In our Natural Gas Pipelines segment, we are exposed to commodity price risk because our intrastate and interstate natural gas pipelines retain natural gas from our customers for operations or as part of our fee for services provided. When the amount of natural gas consumed in operations by these pipelines differs from the amount provided by our customers, our pipelines must buy or sell natural gas, or store or use natural gas from inventory, which can expose us to commodity price risk depending on the regulatory treatment for this activity. To the extent that commodity price risk in our Natural Gas Pipelines segment is not mitigated by fuel cost-recovery mechanisms, we use physical-forward sales or purchases to reduce the impact of price fluctuations related to natural gas. At June 30, 2016, and December 31, 2015, there were no financial derivative instruments with respect to our natural gas pipeline operations.
Interest-rate risk - We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. As of June 30, 2016, we had interest-rate swaps with notional amounts totaling $1.0 billion to hedge the variability of our LIBOR-based interest payments. In June 2016, we entered into forward-starting interest-rate swaps with notional amounts totaling $750 million to hedge the variability of interest payments on a portion of our forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued. At June 30, 2016, and December 31, 2015, we had forward-starting interest-rate swaps with notional amounts totaling $1.2 billion and $400 million, respectively, to hedge the variability of interest payments on a portion of our forecasted debt issuances. All of our interest-rate swaps are designated as cash flow hedges.
Accounting Treatment - We record all derivative instruments at fair value, with the exception of normal purchases and normal sales transactions that are expected to result in physical delivery. Commodity price and interest-rate volatility may have a significant impact on the fair value of derivative instruments as of a given date. 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, the reason for holding it.
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The table below summarizes the various ways in which we account for our derivative instruments and the impact on our consolidated financial statements:
Recognition and Measurement | ||||
Accounting Treatment | Balance Sheet | Income Statement | ||
Normal purchases and normal sales | - | Fair value not recorded | - | Change in fair value not recognized in earnings |
Mark-to-market | - | Recorded at fair value | - | Change in fair value recognized in earnings |
Cash flow hedge | - | Recorded at fair value | - | Ineffective portion of the gain or loss on the derivative instrument is recognized in earnings |
- | Effective portion of the gain or loss on the derivative instrument is reported initially as a component of accumulated other comprehensive income (loss) | - | Effective portion of the gain or loss on the derivative instrument is reclassified out of accumulated other comprehensive income (loss) into earnings when the forecasted transaction affects earnings | |
Fair value hedge | - | Recorded at fair value | - | The gain or loss on the derivative instrument is recognized in earnings |
- | Change in fair value of the hedged item is recorded as an adjustment to book value | - | Change in fair value of the hedged item is recognized in earnings |
To reduce our exposure to fluctuations in natural gas, NGLs and condensate prices, we periodically enter into futures, forward purchases and sales, options or swap transactions in order to hedge anticipated purchases and sales of natural gas, NGLs and condensate. Interest-rate swaps are used from time to time to manage interest-rate risk. Under certain conditions, we designate our derivative instruments as a hedge of exposure to changes in fair values or cash flows. We formally document all relationships between hedging instruments and hedged items, as well as risk-management objectives and strategies for undertaking various hedge transactions, and methods for assessing and testing correlation and hedge ineffectiveness. We specifically identify the forecasted transaction that has been designated as the hedged item in a cash flow hedge relationship. We assess the effectiveness of hedging relationships quarterly by performing an effectiveness analysis on our fair value and cash flow hedging relationships to determine whether the hedge relationships are highly effective on a retrospective and prospective basis. We also document our normal purchases and normal sales transactions that we expect to result in physical delivery and that we elect to exempt from derivative accounting treatment.
The realized revenues and purchase costs of our derivative instruments not considered held for trading purposes and derivatives that qualify as normal purchases or normal sales that are expected to result in physical delivery are reported on a gross basis.
Cash flows from futures, forwards and swaps that are accounted for as hedges are included in the same category as the cash flows from the related hedged items in our Consolidated Statements of Cash Flows.
Fair Values of Derivative Instruments - See Note B for a discussion of the inputs associated with our fair value measurements. The following table sets forth the fair values of derivative instruments for the periods indicated:
June 30, 2016 | December 31, 2015 | ||||||||||||||
Assets (a) | (Liabilities) (a) | Assets (b) | (Liabilities) (b) | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||
Commodity contracts | |||||||||||||||
Financial contracts | $ | 14,591 | $ | (25,028 | ) | $ | 39,255 | $ | (1,440 | ) | |||||
Physical contracts | 68 | (4,929 | ) | 3,591 | — | ||||||||||
Interest-rate contracts | — | (70,111 | ) | — | (9,936 | ) | |||||||||
Total derivatives designated as hedging instruments | 14,659 | (100,068 | ) | 42,846 | (11,376 | ) | |||||||||
Derivatives not designated as hedging instruments | |||||||||||||||
Commodity contracts | |||||||||||||||
Financial contracts | 2,580 | (2,689 | ) | 6,919 | (6,586 | ) | |||||||||
Total derivatives not designated as hedging instruments | 2,580 | (2,689 | ) | 6,919 | (6,586 | ) | |||||||||
Total derivatives | $ | 17,239 | $ | (102,757 | ) | $ | 49,765 | $ | (17,962 | ) |
(a) - Included on a net basis in other current assets, other assets, other current liabilities or deferred credits and other liabilities in our Consolidated Balance Sheets.
(b) - Included on a net basis in other current assets or other current liabilities in our Consolidated Balance Sheets.
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Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
June 30, 2016 | December 31, 2015 | |||||||||||||||
Contract Type | Purchased/ Payor | Sold/ Receiver | Purchased/ Payor | Sold/ Receiver | ||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||
Cash flow hedges | ||||||||||||||||
Fixed price | ||||||||||||||||
- Natural gas (Bcf) | Futures and swaps | — | (41.2 | ) | — | (27.1 | ) | |||||||||
- Natural gas (Bcf) | Put options | 89.7 | — | — | — | |||||||||||
- Crude oil and NGLs (MMBbl) | Futures, forwards and swaps | — | (5.5 | ) | — | (2.3 | ) | |||||||||
- Propane (MMBbl) | Put options | 1.5 | — | — | — | |||||||||||
Basis | ||||||||||||||||
- Natural gas (Bcf) | Futures and swaps | — | (41.2 | ) | — | (27.1 | ) | |||||||||
Interest-rate contracts (Millions of dollars) | Swaps | $ | 2,150.0 | $ | — | $ | 400.0 | $ | — | |||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Fixed price | ||||||||||||||||
- NGLs (MMBbl) | Futures, forwards and swaps | 0.8 | (1.0 | ) | 0.6 | (0.6 | ) |
These notional amounts are used to summarize the volume of financial instruments; however, they do not reflect the extent to which the positions offset one another and, consequently, do not reflect our actual exposure to market or credit risk.
Cash Flow Hedges - At June 30, 2016, our Consolidated Balance Sheet reflected a net loss of $252.6 million in accumulated other comprehensive loss. The portion of accumulated other comprehensive loss attributable to our commodity derivative financial instruments is an unrealized loss of $34.0 million, which will be realized within the next 18 months as the forecasted transactions affect earnings. If commodity prices remain at current levels, we will realize approximately $22.3 million in net losses over the next 12 months and approximately $11.7 million in net losses thereafter. The amount deferred in accumulated other comprehensive loss attributable to our settled interest-rate swaps is a loss of $133.9 million, which will be recognized over the life of the long-term, fixed-rate debt, including losses of $16.1 million that will be reclassified into earnings during the next 12 months as the hedged items affect earnings. The remaining amounts in accumulated other comprehensive loss are attributable primarily to forward-starting interest-rate swaps with future settlement dates, which will be amortized to interest expense over the life of long-term, fixed-rate debt upon issuance of the debt.
The following table sets forth the unrealized effect of cash flow hedges recognized in other comprehensive income (loss) for the periods indicated:
Three Months Ended | Six Months Ended | ||||||||||||||
Derivatives in Cash Flow Hedging Relationships | June 30, | June 30, | |||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Commodity contracts | $ | (58,654 | ) | $ | 1,072 | $ | (46,976 | ) | $ | 11,091 | |||||
Interest-rate contracts | (28,564 | ) | 16,909 | (60,175 | ) | (5,667 | ) | ||||||||
Total unrealized gain (loss) recognized in other comprehensive income (loss) on derivatives (effective portion) | $ | (87,218 | ) | $ | 17,981 | $ | (107,151 | ) | $ | 5,424 |
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The following table sets forth the effect of cash flow hedges in our Consolidated Statements of Income for the periods indicated:
Derivatives in Cash Flow Hedging Relationships | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion) | Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(Thousands of dollars) | ||||||||||||||||
Commodity contracts | Commodity sales revenues | $ | 14,049 | $ | 17,078 | $ | 28,548 | $ | 31,250 | |||||||
Interest-rate contracts | Interest expense | (3,925 | ) | (3,720 | ) | (7,744 | ) | (6,559 | ) | |||||||
Total gain (loss) reclassified from accumulated other comprehensive loss into net income on derivatives (effective portion) | $ | 10,124 | $ | 13,358 | $ | 20,804 | $ | 24,691 |
Ineffectiveness related to our cash flow hedges for the three and six months ended June 30, 2016 and 2015, was not material. In the event that it becomes probable that a forecasted transaction will not occur, we would discontinue cash flow hedge treatment, which would affect earnings. For the three and six months ended June 30, 2016 and 2015, there were no gains or losses due to the discontinuance of cash flow hedge treatment.
Credit Risk - We monitor the creditworthiness of our counterparties and compliance with policies and limits established by our Risk Oversight and Strategy Committee. We maintain credit policies with regard to our counterparties that we believe minimize overall credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit ratings, bond yields and credit default swap rates), collateral requirements under certain circumstances and the use of standardized master-netting agreements that allow us to net the positive and negative exposures associated with a single counterparty. We have counterparties whose credit is not rated, and for those customers, we use internally developed credit ratings.
From time to time, we may enter into financial derivative instruments that contain provisions that require us to maintain an investment-grade credit rating from S&P and/or Moody’s. If our credit ratings on our senior unsecured long-term debt were to decline below investment grade, the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions. There were no financial derivative instruments with contingent features related to credit risk at June 30, 2016.
The counterparties to our derivative contracts consist primarily of major energy companies, financial institutions and commercial and industrial end users. This concentration of counterparties may affect our overall exposure to credit risk, either positively or negatively, in that the counterparties may be affected similarly by changes in economic, regulatory or other conditions. Based on our policies, exposures, credit and other reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty nonperformance.
At June 30, 2016, the net credit exposure from our derivative assets is primarily with investment-grade companies in the financial services sector.
D. | SHORT-TERM BORROWINGS |
Partnership Credit Agreement - In January 2016, we extended the term of our Partnership Credit Agreement by one year to January 2020. Our Partnership Credit Agreement is a $2.4 billion revolving credit facility and includes a $100 million sublimit for the issuance of standby letters of credit and a $150 million swingline sublimit. Our Partnership Credit Agreement is available for general partnership purposes.
We had $14 million of letters of credit issued, no borrowings outstanding and approximately $1.8 billion capacity available at June 30, 2016, under our Partnership Credit Agreement.
Our Partnership Credit Agreement contains provisions for an applicable margin rate and an annual facility fee, both of which adjust with changes in our credit rating. Under the terms of the Partnership Credit Agreement, based on our current credit ratings, borrowings, if any, will accrue at LIBOR plus 117.5 basis points, and the annual facility fee is 20 basis points. Our Partnership Credit Agreement is guaranteed fully and unconditionally by the Intermediate Partnership. Borrowings under our Partnership Credit Agreement are nonrecourse to ONEOK.
Our Partnership Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a ratio of indebtedness to adjusted EBITDA (EBITDA, as defined in our Partnership Credit
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Agreement, adjusted for all noncash charges and increased for projected EBITDA from certain lender-approved capital expansion projects) of no more than 5.0 to 1. If we consummate one or more acquisitions in which the aggregate purchase price is $25 million or more, the allowable ratio of indebtedness to adjusted EBITDA will increase to 5.5 to 1 for the quarter in which the acquisition was completed and the two following quarters. If we were to breach certain covenants in our Partnership Credit Agreement, amounts outstanding under our Partnership Credit Agreement, if any, may become due and payable immediately. At June 30, 2016, our ratio of indebtedness to adjusted EBITDA was 4.2 to 1, and we were in compliance with all covenants under our Partnership Credit Agreement.
Neither we nor ONEOK guarantees the debt or other similar commitments of unaffiliated parties. ONEOK does not guarantee the debt, commercial paper or other similar commitments of ONEOK Partners, and ONEOK Partners does not guarantee the debt or other similar commitments of ONEOK.
Commercial Paper Program - At June 30, 2016, we had $576 million of commercial paper outstanding under our $2.4 billion commercial paper program with weighted-average interest rates of 1.17 percent. Amounts outstanding under our commercial paper program reduce the borrowing capacity under our Partnership Credit Agreement.
E. | LONG-TERM DEBT |
The following table sets forth our long-term debt for the periods indicated:
June 30, | December 31, | |||||||
2016 | 2015 | |||||||
(Thousands of dollars) | ||||||||
ONEOK Partners | ||||||||
$650,000 at 3.25% due 2016 | $ | — | $ | 650,000 | ||||
$450,000 at 6.15% due 2016 | 450,000 | 450,000 | ||||||
$400,000 at 2.0% due 2017 | 400,000 | 400,000 | ||||||
$425,000 at 3.2% due 2018 | 425,000 | 425,000 | ||||||
$1,000,000 term loan, variable rate, due 2019 | 1,000,000 | — | ||||||
$500,000 at 8.625% due 2019 | 500,000 | 500,000 | ||||||
$300,000 at 3.8% due 2020 | 300,000 | 300,000 | ||||||
$900,000 at 3.375% due 2022 | 900,000 | 900,000 | ||||||
$425,000 at 5.0% due 2023 | 425,000 | 425,000 | ||||||
$500,000 at 4.9% due 2025 | 500,000 | 500,000 | ||||||
$600,000 at 6.65% due 2036 | 600,000 | 600,000 | ||||||
$600,000 at 6.85% due 2037 | 600,000 | 600,000 | ||||||
$650,000 at 6.125% due 2041 | 650,000 | 650,000 | ||||||
$400,000 at 6.2% due 2043 | 400,000 | 400,000 | ||||||
Guardian Pipeline | ||||||||
Average 7.85% due 2022 | 48,082 | 51,907 | ||||||
Total long-term debt | 7,198,082 | 6,851,907 | ||||||
Unamortized debt issuance costs and discounts | (48,482 | ) | (48,945 | ) | ||||
Current maturities | (457,650 | ) | (107,650 | ) | ||||
Long-term debt, excluding current maturities | $ | 6,691,950 | $ | 6,695,312 |
Debt Issuances and Maturities - In January 2016, we entered into the $1.0 billion senior unsecured delayed-draw Term Loan Agreement with a syndicate of banks. The Term Loan Agreement matures in January 2019 and bears interest at LIBOR plus a margin that is based on the credit ratings assigned to our senior, unsecured, long-term indebtedness. Based on our current applicable credit rating, borrowings on the Term Loan Agreement accrue at LIBOR plus 130 basis points. At June 30, 2016, the interest rate was 1.74 percent. The Term Loan Agreement contains an option, which may be exercised up to two times, to extend the term of the loan, in each case, for an additional one-year term, subject to approval of the banks. The Term Loan Agreement allows prepayment of all or any portion outstanding without penalty or premium and contains substantially the same covenants as our Partnership Credit Agreement. During the first quarter 2016, we drew the full $1.0 billion available under the agreement and used the proceeds to repay our $650 million, 3.25 percent senior notes, to repay amounts outstanding under our commercial paper program and for general partnership purposes. At June 30, 2016, our $450 million, 6.15 percent senior notes due October 1, 2016, are reflected in current maturities of long-term debt in our Consolidated Balance Sheet.
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In March 2015, we completed an underwritten public offering of $800 million of senior notes, consisting of $300 million, 3.8 percent senior notes due 2020, and $500 million, 4.9 percent senior notes due 2025. The net proceeds, after deducting underwriting discounts, commissions and other expenses, were approximately $792.3 million. We used the proceeds to repay amounts outstanding under our commercial paper program and for general partnership purposes.
F. | EQUITY |
ONEOK - ONEOK and its affiliates owned all of the Class B units, 41.3 million common units and the entire 2 percent general partner interest in us, which together constituted a 41.2 percent ownership interest in us at June 30, 2016.
Equity Issuances - In August 2015, we completed a private placement of 21.5 million common units at a price of $30.17 per unit with ONEOK. Additionally, we completed a concurrent sale of approximately 3.3 million common units at a price of $30.17 per unit to funds managed by Kayne Anderson Capital Advisors in a registered direct offering, which were issued through our existing “at-the-market” equity program. The combined offerings generated net proceeds of approximately $749 million. In conjunction with these issuances, ONEOK Partners GP contributed approximately $15.3 million in order to maintain its 2 percent general partner interest in us. We used the proceeds for general partnership purposes, including capital expenditures and repayment of commercial paper borrowings.
We have an “at-the-market” equity program for the offer and sale from time to time of our common units, up to an aggregate amount of $650 million. The program allows us to offer and sell our common units at prices we deem appropriate through a sales agent. Sales of common units are made by means of ordinary brokers’ transactions on the NYSE, in block transactions or as otherwise agreed to between us and the sales agent. We are under no obligation to offer and sell common units under the program. At June 30, 2016, we had approximately $138 million of registered common units available for issuance through our “at-the-market” equity program.
During the three and six months ended June 30, 2016, no common units were sold through our “at-the-market” equity program.
During the three months ended June 30, 2015, we sold 5.5 million common units through our “at-the-market” equity program. The net proceeds, including ONEOK Partners GP’s contribution to maintain its 2 percent general partner interest in us, were approximately $208.1 million, which were used for general partnership purposes, including repayment of commercial paper borrowings.
During the six months ended June 30, 2015, we sold 7.2 million common units through our “at-the-market” equity program. The net proceeds, including ONEOK Partners GP’s contribution to maintain its 2 percent general partner interest in us, were approximately $279.7 million, which were used for general partnership purposes, including repayment of commercial paper borrowings.
During the year ended December 31, 2015, we sold 10.5 million common units through our “at-the-market” equity program, including the units sold to funds managed by Kayne Anderson Capital Advisors in the offering discussed above. The net proceeds, including ONEOK Partners GP’s contribution to maintain its 2 percent general partner interest in us, were approximately $381.6 million, which were used for general partnership purposes, including repayment of commercial paper borrowings.
Partnership Agreement - Available cash, as defined in our Partnership Agreement, generally will be distributed to our general partner and limited partners according to their partnership percentages of 2 percent and 98 percent, respectively. Our general partner’s percentage interest in quarterly distributions is increased after certain specified target levels are met during the quarter. Under the incentive distribution provisions, as set forth in our Partnership Agreement, our general partner receives:
• | 15 percent of amounts distributed in excess of $0.3025 per unit; |
• | 25 percent of amounts distributed in excess of $0.3575 per unit; and |
• | 50 percent of amounts distributed in excess of $0.4675 per unit. |
Cash Distributions - In July 2016, our general partner declared a cash distribution of $0.79 per unit ($3.16 per unit on an annualized basis) for the second quarter 2016, which will be paid on August 14, 2016, to unitholders of record at the close of business on August 8, 2016.
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The following table sets forth our distributions paid during the periods indicated:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(Thousands, except per unit amounts) | |||||||||||||||
Distribution per unit | $ | 0.79 | $ | 0.79 | $ | 1.58 | $ | 1.58 | |||||||
General partner distributions | $ | 6,660 | $ | 5,955 | $ | 13,320 | $ | 11,869 | |||||||
Incentive distributions | 100,538 | 89,889 | 201,076 | 179,168 | |||||||||||
Distributions to general partner | 107,198 | 95,844 | 214,396 | 191,037 | |||||||||||
Limited partner distributions to ONEOK | 90,323 | 73,302 | 180,646 | 146,604 | |||||||||||
Limited partner distributions to other unitholders | 135,479 | 128,583 | 270,959 | 255,794 | |||||||||||
Total distributions paid | $ | 333,000 | $ | 297,729 | $ | 666,001 | $ | 593,435 |
Distributions are declared and paid within 45 days of the completion of each quarter. The following table sets forth our distributions declared for the periods indicated:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(Thousands, except per unit amounts) | |||||||||||||||
Distribution per unit | $ | 0.79 | $ | 0.79 | $ | 1.58 | $ | 1.58 | |||||||
General partner distributions | $ | 6,660 | $ | 6,081 | $ | 13,320 | $ | 12,036 | |||||||
Incentive distributions | 100,538 | 91,794 | 201,076 | 181,683 | |||||||||||
Distributions to general partner | 107,198 | 97,875 | 214,396 | 193,719 | |||||||||||
Limited partner distributions to ONEOK | 90,323 | 73,302 | 180,646 | 146,604 | |||||||||||
Limited partner distributions to other unitholders | 135,479 | 132,862 | 270,959 | 261,445 | |||||||||||
Total distributions declared | $ | 333,000 | $ | 304,039 | $ | 666,001 | $ | 601,768 |
G. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following table sets forth the balance in accumulated other comprehensive loss for the period indicated:
Unrealized Gains (Losses) on Risk- Management Assets/Liabilities | Unrealized Gains (Losses) on Risk- Management Assets/Liabilities of Unconsolidated Affiliates | Accumulated Other Comprehensive Loss | ||||||||||
(Thousands of dollars) | ||||||||||||
January 1, 2016 | $ | (111,357 | ) | $ | (1,925 | ) | $ | (113,282 | ) | |||
Other comprehensive income (loss) before reclassifications | (107,151 | ) | (11,363 | ) | (118,514 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss | (20,804 | ) | — | (20,804 | ) | |||||||
Net current-period other comprehensive income (loss) attributable to ONEOK Partners | (127,955 | ) | (11,363 | ) | (139,318 | ) | ||||||
June 30, 2016 | $ | (239,312 | ) | $ | (13,288 | ) | $ | (252,600 | ) |
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The following table sets forth the effect of reclassifications from accumulated other comprehensive loss in our Consolidated Statements of Income for the periods indicated:
Details about Accumulated Other Comprehensive Loss Components | Three Months Ended | Six Months Ended | Affected Line Item in the Consolidated Statements of Income | |||||||||||||||
June 30, | June 30, | |||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||
(Thousands of dollars) | ||||||||||||||||||
Unrealized gains (losses) on risk-management assets/liabilities | ||||||||||||||||||
Commodity contracts | $ | 14,049 | $ | 17,078 | $ | 28,548 | $ | 31,250 | Commodity sales revenues | |||||||||
Interest-rate contracts | (3,925 | ) | (3,720 | ) | (7,744 | ) | (6,559 | ) | Interest expense | |||||||||
Total reclassifications for the period attributable to ONEOK Partners | $ | 10,124 | $ | 13,358 | $ | 20,804 | $ | 24,691 | Net income attributable to ONEOK Partners |
H. | LIMITED PARTNERS’ NET INCOME PER UNIT |
Limited partners’ net income per unit is computed by dividing net income attributable to ONEOK Partners, L.P., after deducting the general partner’s allocation as discussed below, by the weighted-average number of outstanding limited partner units, which includes our common and Class B limited partner units. Because ONEOK has conditionally waived its right to increased quarterly distributions, until it gives 90 days notice of the withdrawal of the waiver, currently each Class B and common unit share equally in the earnings of the Partnership, and neither has any liquidation or other preferences.
ONEOK Partners GP owns the entire 2 percent general partnership interest in us, which entitles it to incentive distribution rights that provide for an increasing proportion of cash distributions from the Partnership as the distributions made to limited partners increase above specified levels. For purposes of our calculation of limited partners’ net income per unit, net income attributable to ONEOK Partners, L.P. is allocated to the general partner as follows: (i) an amount based upon the 2 percent general partner interest in net income attributable to ONEOK Partners, L.P.; and (ii) the amount of the general partner’s incentive distribution rights based on the total cash distributions declared for the period.
The terms of our Partnership Agreement limit the general partner’s incentive distribution to the amount of available cash calculated for the period. As such, incentive distribution rights are not allocated on undistributed earnings. For additional information regarding our general partner’s incentive distribution rights, see “Partnership Agreement” in Note F.
I. | UNCONSOLIDATED AFFILIATES |
Equity in Net Earnings from Investments - The following table sets forth our equity in net earnings from investments for the periods indicated:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Northern Border Pipeline | $ | 15,723 | $ | 15,273 | $ | 34,397 | $ | 34,975 | |||||||
Overland Pass Pipeline Company | 13,608 | 9,623 | 26,912 | 16,510 | |||||||||||
Other | 3,041 | 5,144 | 3,977 | 9,476 | |||||||||||
Equity in net earnings from investments | $ | 32,372 | $ | 30,040 | $ | 65,286 | $ | 60,961 |
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Unconsolidated Affiliates Financial Information - The following table sets forth summarized combined financial information of our unconsolidated affiliates for the periods indicated:
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Income Statement | |||||||||||||||
Operating revenues | $ | 142,631 | $ | 125,738 | $ | 279,203 | $ | 255,319 | |||||||
Operating expenses | $ | 66,674 | $ | 55,959 | $ | 125,373 | $ | 113,538 | |||||||
Net income | $ | 69,420 | $ | 62,643 | $ | 141,457 | $ | 129,002 | |||||||
Distributions paid to us | $ | 62,024 | $ | 41,354 |