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EX-32.2 - OKE CERTIFICATION OF REINERS SECTION 906 - ONEOK INC /NEW/okeq32016exhibit322.htm
EX-32.1 - OKE CERTIFICATION OF SPENCER SECTION 906 - ONEOK INC /NEW/okeq32016exhibit321.htm
EX-31.2 - OKE CERTIFICATION OF REINERS SECTION 302 - ONEOK INC /NEW/okeq32016exhibit312.htm
EX-31.1 - OKE CERTIFICATION OF SPENCER SECTION 302 - ONEOK INC /NEW/okeq32016exhibit311.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 September 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   001-13643



ONEOK, Inc.
(Exact name of registrant as specified in its charter)


Oklahoma
73-1520922
(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

On October 24, 2016, the Company had 210,521,971 shares of common stock outstanding.




























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2


ONEOK, Inc.
TABLE OF CONTENTS


Page No.
 
 
 
 
 
 
 

As used in this Quarterly Report, references to “we,” “our” or “us” refer to ONEOK, Inc., an Oklahoma corporation, and its predecessors, divisions and 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 IA, “Risk Factors,” in our Annual Report.

INFORMATION AVAILABLE ON OUR WEBSITE

We make available, free of charge, on our website (www.oneok.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, Corporate Governance Guidelines and Director Independence Guidelines 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.

3


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 Credit Agreement
ONEOK’s $300 million amended and restated revolving credit agreement
effective as of January 31, 2014
ONEOK Partners
ONEOK Partners, L.P.
ONEOK Partners Credit Agreement
ONEOK Partners’ $2.4 billion amended and restated revolving credit
agreement effective as of January 31, 2014, as amended
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
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
ONEOK Partners’ senior unsecured delayed-draw three-year $1.0 billion term
loan agreement dated January 8, 2016

4


West Texas LPG
West Texas LPG Pipeline Limited Partnership and Mesquite Pipeline
WTI
West Texas Intermediate
XBRL
eXtensible Business Reporting Language
 
 

5


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ONEOK, Inc. and Subsidiaries
 

 
 
 
 
 
CONSOLIDATED STATEMENTS OF INCOME
 

 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Unaudited)
2016
 
2015
 
2016

2015
 
(Thousands of dollars, except per share amounts)
Revenues
 
 
 
 
 
 
 
Commodity sales
$
1,840,523


$
1,484,350


$
4,757,306


$
4,642,320

Services
517,384


414,596


1,509,167


1,189,984

Total revenues
2,357,907

 
1,898,946

 
6,266,473

 
5,832,304

Cost of sales and fuel (exclusive of items shown separately below)
1,751,593


1,360,809


4,474,654


4,307,766

Operations and maintenance
165,664


146,979


488,476


442,179

Depreciation and amortization
98,550


88,299


292,275


261,241

General taxes
18,487


17,198


64,529


66,366

(Gain) loss on sale of assets
(5,744
)

726


(9,537
)

610

Operating income
329,357

 
284,935

 
956,076

 
754,142

Equity in net earnings from investments (Note J)
35,155


32,244


100,441


93,205

Allowance for equity funds used during construction


177


208


1,718

Other income
4,242


71


9,351


249

Other expense
(710
)

(7,508
)

(2,288
)

(7,754
)
Interest expense (net of capitalized interest of $3,806, $8,851, $9,265 and $26,008, respectively)
(118,240
)

(106,923
)

(355,463
)

(306,057
)
Income before income taxes
249,804

 
202,996

 
708,325

 
535,503

Income taxes
(55,012
)

(38,298
)

(157,536
)

(123,948
)
Income from continuing operations
194,792

 
164,698

 
550,789

 
411,555

Income (loss) from discontinued operations, net of tax (Note M)
(576
)

(3,860
)

(1,755
)

(4,144
)
Net income
194,216

 
160,838

 
549,034

 
407,411

Less: Net income attributable to noncontrolling interests
102,072


78,681


287,500


187,949

Net income attributable to ONEOK
$
92,144

 
$
82,157

 
$
261,534

 
$
219,462

Amounts attributable to ONEOK:
 

 
 

 
 

 
 

Income from continuing operations
$
92,720

 
$
86,017

 
$
263,289

 
$
223,606

Income (loss) from discontinued operations
(576
)
 
(3,860
)
 
(1,755
)
 
(4,144
)
Net income
$
92,144

 
$
82,157

 
$
261,534

 
$
219,462

Basic earnings per share:
 

 
 

 
 

 
 

Income from continuing operations (Note H)
$
0.44

 
$
0.41

 
$
1.25

 
$
1.06

Income (loss) from discontinued operations

 
(0.02
)
 
(0.01
)
 
(0.02
)
Net income
$
0.44

 
$
0.39

 
$
1.24

 
$
1.04

Diluted earnings per share:
 

 
 

 
 

 
 

Income from continuing operations (Note H)
$
0.44

 
$
0.41

 
$
1.24

 
$
1.06

Income (loss) from discontinued operations
(0.01
)
 
(0.02
)
 
(0.01
)
 
(0.02
)
Net income
$
0.43

 
$
0.39

 
$
1.23

 
$
1.04

Average shares (thousands)
 

 
 

 
 

 
 

Basic
211,309


210,296


211,038


210,138

Diluted
212,870


210,524


212,123


210,509

Dividends declared per share of common stock
$
0.615


$
0.605


$
1.845


$
1.815

See accompanying Notes to Consolidated Financial Statements.

6


ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Unaudited)
2016
 
2015
 
2016
 
2015
 
(Thousands of dollars)
Net income
$
194,216

 
$
160,838

 
$
549,034

 
$
407,411

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 
Unrealized gains (losses) on derivatives, net of tax of $(1,301), $(1,109), $15,033 and $(2,156), respectively
7,237

 
14,840

 
(83,580
)
 
19,217

Realized (gains) losses on derivatives in net income, net of tax of $(811), $2,957, $1,658 and $5,621, respectively
3,083

 
(15,259
)
 
(13,496
)
 
(35,530
)
Unrealized holding gains (losses) on available-for-sale securities, net of tax of $0, $0, $0 and $648, respectively

 

 

 
(955
)
Change in pension and postretirement benefit plan liability, net of tax of $(1,035), $(1,599), $(3,105) and $(4,798), respectively
1,553

 
2,441

 
4,658

 
7,320

Other comprehensive income (loss) on investments in unconsolidated affiliates, net of tax of $108, $0, $1,840 and $0, respectively
(600
)
 

 
(10,231
)
 

Total other comprehensive income (loss), net of tax
11,273

 
2,022

 
(102,649
)
 
(9,948
)
Comprehensive income
205,489

 
162,860

 
446,385

 
397,463

Less: Comprehensive income attributable to noncontrolling interests
108,450

 
81,481

 
211,960

 
177,760

Comprehensive income attributable to ONEOK
$
97,039

 
$
81,379

 
$
234,425

 
$
219,703

See accompanying Notes to Consolidated Financial Statements.

7


ONEOK, Inc. and Subsidiaries
 
 
 
 
CONSOLIDATED BALANCE SHEETS
 
 

 
 
 
 
 
 

 
September 30,

December 31,
(Unaudited)
 
2016

2015
Assets
 
(Thousands of dollars)
Current assets
 
 

 
Cash and cash equivalents
 
$
237,410


$
97,619

Accounts receivable, net
 
737,224


593,979

Materials and supplies
 
81,701


76,696

Natural gas and natural gas liquids in storage
 
217,769


128,084

Commodity imbalances
 
43,770


38,681

Other current assets
 
50,759


39,946

Assets of discontinued operations (Note M)
 
658


205

Total current assets
 
1,369,291


975,210

Property, plant and equipment
 
 


 

Property, plant and equipment
 
14,943,225


14,530,460

Accumulated depreciation and amortization
 
2,416,476


2,156,471

Net property, plant and equipment
 
12,526,749


12,373,989

Investments and other assets
 
 


 

Investments in unconsolidated affiliates
 
943,390


948,221

Goodwill and intangible assets
 
1,008,334


1,017,258

Other assets
 
121,529


112,598

Assets of discontinued operations (Note M)
 
12,742


18,835

Total investments and other assets
 
2,085,995


2,096,912

Total assets
 
$
15,982,035


$
15,446,111

See accompanying Notes to Consolidated Financial Statements.

8


ONEOK, Inc. and Subsidiaries
 
 

 
CONSOLIDATED BALANCE SHEETS
 
 

 
(Continued)
 
 
 
 

 
September 30,

December 31,
(Unaudited)
 
2016

2015
Liabilities and equity
 
(Thousands of dollars)
Current liabilities
 
 

 
Current maturities of long-term debt (Note E)
 
$
460,650


$
110,650

Short-term borrowings (Note D)
 
693,500


546,340

Accounts payable
 
711,817


615,982

Commodity imbalances
 
134,658


74,460

Accrued interest
 
104,137


129,043

Other current liabilities
 
214,662


132,556

Liabilities of discontinued operations (Note M)
 
22,540


29,235

Total current liabilities
 
2,341,964


1,638,266

Long-term debt, excluding current maturities (Note E)
 
8,320,144


8,323,582

Deferred credits and other liabilities
 





Deferred income taxes
 
1,573,950


1,436,715

Other deferred credits
 
296,751


264,248

Liabilities of discontinued operations (Note M)
 
9,012


16,964

Total deferred credits and other liabilities
 
1,879,713


1,717,927

Commitments and contingencies (Note L)
 





Equity (Note F)
 
 


 

ONEOK shareholders’ equity:
 
 


 

Common stock, $0.01 par value:
authorized 600,000,000 shares; issued 245,811,180 shares and outstanding
210,517,586 shares at September 30, 2016; issued 245,811,180 shares and
outstanding 209,731,028 shares at December 31, 2015
 
2,458


2,458

Paid-in capital
 
1,264,041


1,378,444

Accumulated other comprehensive loss (Note G)
 
(154,351
)

(127,242
)
Retained earnings
 



Treasury stock, at cost: 35,293,594 shares at September 30, 2016, and
36,080,152 shares at December 31, 2015
 
(897,852
)

(917,862
)
Total ONEOK shareholders’ equity
 
214,296


335,798

Noncontrolling interests in consolidated subsidiaries
 
3,225,918


3,430,538

Total equity
 
3,440,214


3,766,336

Total liabilities and equity
 
$
15,982,035


$
15,446,111

See accompanying Notes to Consolidated Financial Statements.


9



























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10


ONEOK, Inc. and Subsidiaries
 
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 

 
 
 
Nine Months Ended
 
 
September 30,
(Unaudited)
 
2016

2015
 
 
(Thousands of dollars)
Operating activities
 
 

 
Net income
 
$
549,034


$
407,411

Adjustments to reconcile net income to net cash provided by operating activities:
 





Depreciation and amortization
 
292,275


261,241

Equity in net earnings from investments
 
(100,441
)

(93,205
)
Distributions received from unconsolidated affiliates
 
106,381


92,042

Deferred income taxes
 
157,819


124,615

Share-based compensation expense
 
31,112


13,732

Pension and postretirement benefit expense, net of contributions
 
8,270


10,145

Allowance for equity funds used during construction
 
(208
)

(1,718
)
(Gain) loss on sale of assets
 
(9,537
)

610

Changes in assets and liabilities:
 
 


 

Accounts receivable
 
(145,430
)

157,742

Natural gas and natural gas liquids in storage
 
(89,685
)

(8,174
)
Accounts payable
 
138,198


(191,542
)
Commodity imbalances, net
 
55,109


25,728

Settlement of exit activities liabilities
 
(16,211
)

(31,207
)
Accrued interest
 
(24,906
)

3,577

Risk-management assets and liabilities
 
(48,695
)

(45,240
)
Other assets and liabilities, net
 
18,943


(30,680
)
Cash provided by operating activities
 
922,028


695,077

Investing activities
 
 


 

Capital expenditures (less allowance for equity funds used during construction)
 
(491,528
)

(930,316
)
Contributions to unconsolidated affiliates
 
(55,177
)

(27,540
)
Distributions received from unconsolidated affiliates in excess of cumulative earnings
 
43,018


25,111

Proceeds from sale of assets
 
19,099


3,171

Other
 


(12,607
)
Cash used in investing activities
 
(484,588
)

(942,181
)
Financing activities
 
 


 

Dividends paid
 
(388,103
)

(380,498
)
Distributions to noncontrolling interests
 
(412,539
)

(396,847
)
Borrowing (repayment) of short-term borrowings, net
 
147,160


(768,024
)
Issuance of long-term debt, net of discounts
 
1,000,000


1,291,506

Debt financing costs
 
(2,770
)

(17,126
)
Repayment of long-term debt
 
(656,117
)

(5,795
)
Issuance of common stock
 
14,948


13,839

Issuance of common units, net of issuance costs
 


375,660

Cash provided by (used in) financing activities
 
(297,421
)

112,715

Change in cash and cash equivalents
 
140,019


(134,389
)
Change in cash and cash equivalents included in discontinued operations
 
(228
)

(52
)
Change in cash and cash equivalents from continuing operations
 
139,791

 
(134,441
)
Cash and cash equivalents at beginning of period
 
97,619


172,812

Cash and cash equivalents at end of period
 
$
237,410


$
38,371

See accompanying Notes to Consolidated Financial Statements.


11


ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
 
 
 
 
 
ONEOK Shareholders’ Equity
(Unaudited)
Common
Stock Issued
 
Common
Stock
 
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
(Shares)
 
(Thousands of dollars)
January 1, 2016
245,811,180

 
$
2,458

 
$
1,378,444

 
$
(127,242
)
Net income

 

 

 

Other comprehensive income (loss) (Note G)

 

 

 
(27,109
)
Common stock issued

 

 
(531
)
 

Common stock dividends - $1.845 per share (Note F)

 

 
(126,569
)
 

Distributions to noncontrolling interests

 

 

 

Other

 

 
12,697

 

September 30, 2016
245,811,180

 
$
2,458

 
$
1,264,041

 
$
(154,351
)

 
ONEOK Shareholders’ Equity
(Unaudited)
Common
Stock Issued
 
Common
Stock
 
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
(Shares)
 
(Thousands of dollars)
January 1, 2015
245,811,180

 
$
2,458

 
$
1,541,583

 
$
(136,353
)
Net income

 

 

 

Other comprehensive income (loss) (Note G)

 

 

 
241

Common stock issued

 

 
(6,284
)
 

Common stock dividends - $1.815 per share (Note F)

 

 
(22,807
)
 

Issuance of common units of ONEOK Partners (Note K)

 

 
(34,446
)
 

Distributions to noncontrolling interests

 

 

 

Other

 

 
(415
)
 

September 30, 2015
245,811,180

 
$
2,458

 
$
1,477,631

 
$
(136,112
)


12


ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
 
 
(Continued)
 
 
 
 
 
 
 
 
ONEOK Shareholders’ Equity
 
 
 
 
(Unaudited)
Retained
Earnings
 
Treasury
Stock
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
Total
Equity
 
(Thousands of dollars)
January 1, 2016
$

 
$
(917,862
)
 
$
3,430,538

 
$
3,766,336

Net income
261,534

 

 
287,500

 
549,034

Other comprehensive income (loss) (Note G)

 

 
(75,540
)
 
(102,649
)
Common stock issued

 
20,010

 

 
19,479

Common stock dividends - $1.845 per share (Note F)
(261,534
)
 

 

 
(388,103
)
Distributions to noncontrolling interests

 

 
(412,539
)
 
(412,539
)
Other

 

 
(4,041
)
 
8,656

September 30, 2016
$

 
$
(897,852
)
 
$
3,225,918

 
$
3,440,214


 
ONEOK Shareholders’ Equity
 
 
 
 
(Unaudited)
Retained
Earnings
 
Treasury
Stock
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
Total
Equity
 
(Thousands of dollars)
January 1, 2015
$
138,128

 
$
(953,701
)
 
$
3,413,768

 
$
4,005,883

Net income
219,462

 

 
187,949

 
407,411

Other comprehensive income (loss) (Note G)

 

 
(10,189
)
 
(9,948
)
Common stock issued

 
24,196

 

 
17,912

Common stock dividends - $1.815 per share (Note F)
(357,691
)
 

 

 
(380,498
)
Issuance of common units of ONEOK Partners (Note K)

 

 
428,590

 
394,144

Distributions to noncontrolling interests

 

 
(396,847
)
 
(396,847
)
Other
101

 

 
(438
)
 
(752
)
September 30, 2015
$

 
$
(929,505
)
 
$
3,622,833

 
$
4,037,305



See accompanying Notes to Consolidated Financial Statements.



13


ONEOK, INC. 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.

Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our continuing operations.

Our significant accounting policies are consistent with those disclosed in Note A of the Notes to Consolidated Financial Statements in our Annual Report, except as described below.

Consolidation - Our consolidated financial statements include our accounts and the accounts of our subsidiaries over which we have control or are the primary beneficiary. Management’s judgment is required when:
determining whether an entity is a variable interest entity (VIE);
determining whether we are the primary beneficiary of a VIE; and
identifying events that require reconsideration of whether an entity is a VIE.

As a result of adopting ASU 2015-02 described below, we have concluded that ONEOK Partners is a VIE and that we are the primary beneficiary. Therefore, we continue to consolidate ONEOK Partners. See Note K for additional information.

We record noncontrolling interests in consolidated subsidiaries on our Consolidated Balance Sheets to recognize the portion of ONEOK Partners that we do not own. We reflect our ownership interest in ONEOK Partners’ accumulated other comprehensive income (loss) in our consolidated accumulated other comprehensive income (loss). The remaining portion is reflected as an adjustment to noncontrolling interests in consolidated subsidiaries.

Goodwill Impairment Test - We assess our goodwill for impairment at least annually on July 1, unless events or changes in circumstances indicate an impairment may have occurred before that time. As the commodity price environment has remained relatively unchanged since 2015, we elected to perform a quantitative assessment, or Step 1 analysis, to test our goodwill for impairment. The assessment included our current commodity price assumptions, expected contractual terms, anticipated operating costs and volume estimates. Our goodwill impairment analysis performed as of July 1, 2016, did not result in an impairment charge nor did our analysis reflect any reporting units at risk. In each reporting unit, the fair value substantially exceeded the carrying value. Subsequent to that date, no event has occurred indicating that the implied fair value of each of our reporting units is less than the carrying value of its net assets.


14


Recently Issued Accounting Standards Update - The following tables provide a brief description of recent accounting pronouncements and our analysis of the effects on our financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards that were adopted
 
 
 
 
 
 
ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”
 
The standard 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.
 
First quarter 2016
 
There was no impact, but it could impact us in the future if we complete any acquisitions with subsequent measurement period adjustments.
ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”
 
The standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient.
 
First quarter 2016
 
The impact of adopting this standard was not material.
ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”
 
The standard 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.
 
First quarter 2016
 
The impact of adopting this standard was not material.
ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”
 
The standard 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.
 
First quarter 2016
 
As a result of adopting this standard, we no longer consolidate ONEOK Partners under the presumption that a general partner should consolidate a limited partnership. We concluded, however, that ONEOK Partners is a VIE and ONEOK is the primary beneficiary, and we therefore consolidate ONEOK Partners under the variable interest model of consolidation. There was no financial statement impact due to the change in consolidation methodology. See Note K for additional information.
 
 
 
 
 
 
 

15


Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards that are not yet adopted
 
 
 
 
ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”
 
The standard 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.
 
First quarter 2017
 
We do not expect the adoption of this standard to materially impact us.
ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”
 
The standard 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 of that hedging relationship provided that all other hedge accounting criteria continue to be met.
 
First quarter 2017
 
We do not expect the adoption of this standard to materially impact us.
ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments”
 
The standard 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.
 
First quarter 2017
 
We do not expect the adoption of this standard to materially impact us.
ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
 
The standard provides simplified accounting for share-based payment transactions in relation to income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
 
First quarter 2017
 
We are evaluating the impact of this standard on us.
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”
 
The standard 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.
 
First quarter 2018
 
We are evaluating the impact of this standard on us. Our evaluation process includes a review of our and ONEOK Partners’ contracts and transaction types across all of the business segments. In addition, we are currently evaluating the methods of adoption and analyzing the impact of the standard on our internal controls, accounting policies and financial statements and disclosures.
ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”
 
The standard 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.
 
First quarter 2018
 
We are evaluating the impact of this standard on us.
ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
 
The standard clarifies the classification of certain cash receipts and cash payments on the statement of cash flows where diversity in practice has been identified.
 
First quarter 2018
 
We are evaluating the impact of this standard on us.
ASU 2016-02, “Leases (Topic 842)”
 
The standard 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.
 
First quarter 2019
 
We are evaluating the impact of this standard on us.
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
 
The standard 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.
 
First quarter 2020
 
We are evaluating the impact of this standard on us.


16


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 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 derivatives by discounting the projected future cash flows from the 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 executed derivative contracts, the ultimate market prices realized could differ from our estimates, and the differences could be material.

The fair value of 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.


17


Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:
 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting (a)
 
Total - Net (b)
 
(Thousands of dollars)
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
9,051

 
$

 
$
2,858

 
$
11,909

 
$
(7,389
)
 
$
4,520

Physical contracts

 

 
98

 
98

 

 
98

Total derivative assets
$
9,051

 
$

 
$
2,956

 
$
12,007

 
$
(7,389
)

$
4,618

Derivative liabilities
 

 
 

 
 

 
 
 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 

Financial contracts
$
(12,175
)
 
$

 
$
(9,846
)
 
$
(22,021
)
 
$
22,021

 
$

Physical contracts

 

 
(3,173
)
 
(3,173
)
 

 
(3,173
)
Interest-rate contracts

 
(69,103
)
 

 
(69,103
)
 

 
(69,103
)
Total derivative liabilities
$
(12,175
)
 
$
(69,103
)
 
$
(13,019
)
 
$
(94,297
)
 
$
22,021

 
$
(72,276
)
(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 September 30, 2016, we held no cash and posted $27.4 million of cash with various counterparties, including $14.6 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $12.8 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.


18


The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Derivative Assets (Liabilities)
2016
 
2015
 
2016
 
2015
 
(Thousands of dollars)
Net assets (liabilities) at beginning of period
$
(14,021
)
 
$
10,387

 
$
7,331

 
$
9,285

Total realized/unrealized gains (losses):
 
 
 
 
 
 
 
Included in earnings (a)
920

 
(15
)
 
492

 
95

Included in other comprehensive income (loss)
3,038

 
(5,076
)
 
(17,886
)
 
(4,084
)
Net assets (liabilities) at end of period
$
(10,063
)

$
5,296

 
$
(10,063
)
 
$
5,296

(a) - Included in commodity sales revenues in our Consolidated Statements of Income.

Realized/unrealized gains (losses) include the realization of derivative contracts through maturity. During the three and nine months ended September 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 nine months ended September 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 our consolidated long-term debt, including current maturities, was $9.3 billion and $7.4 billion at September 30, 2016, and December 31, 2015, respectively. The book value of our consolidated long-term debt, including current maturities, was $8.8 billion and $8.4 billion at September 30, 2016, and December 31, 2015, respectively. The estimated fair value of the aggregate of ONEOK’s and ONEOK Partners’ senior notes outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our consolidated 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 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.


19


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.

The Natural Gas Gathering and Processing segment is exposed to commodity price risk as a result of receiving commodities as a portion of its compensation for services associated with its POP with fee contracts. Under certain POP with fee contracts, ONEOK Partners’ fee revenues may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. The Natural Gas Gathering and Processing segment also is exposed to basis risk between the various production and market locations where it receives and sells 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.

The Natural Gas Liquids segment is 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. The Natural Gas Liquids segment also is 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.

The Natural Gas Pipelines segment is exposed to commodity price risk because its intrastate and interstate natural gas pipelines retain natural gas from its customers for operations or as part of its fee for services provided. When the amount of natural gas consumed in operations by these pipelines differs from the amount provided by its customers, these pipelines must buy or sell natural gas, or store or use natural gas from inventory, which can expose them to commodity price risk depending on the regulatory treatment for this activity. To the extent that commodity price risk in the 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 September 30, 2016, and December 31, 2015, there were no financial derivative instruments with respect to ONEOK Partners’ 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 September 30, 2016, ONEOK Partners had interest-rate swaps with notional amounts totaling $1.0 billion to hedge the variability of ONEOK Partners’ LIBOR-based interest payments. In addition, in June 2016, ONEOK Partners entered into forward-starting interest-rate swaps with notional amounts totaling $750 million to hedge the variability of interest payments on a portion of its forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued, resulting in total notional amounts of this type of interest-rate swap of $1.2 billion at September 30, 2016, compared with $400 million at December 31, 2015. All of ONEOK Partners’ interest-rate swaps are designated as cash flow hedges.

Accounting Treatment - Our accounting treatment of derivative instruments is consistent with that disclosed in Note A of the Notes to consolidated Financial Statements in our Annual Report.

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:
 
September 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
$
9,525

 
$
(20,376
)
 
$
39,255

 
$
(1,440
)
Physical contracts
98

 
(3,173
)
 
3,591

 

Interest-rate contracts

 
(69,103
)
 

 
(9,936
)
Total derivatives designated as hedging instruments
9,623

 
(92,652
)
 
42,846

 
(11,376
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
Financial contracts
2,384

 
(1,645
)
 
6,919

 
(6,586
)
Total derivatives not designated as hedging instruments
2,384

 
(1,645
)
 
6,919

 
(6,586
)
Total derivatives
$
12,007

 
$
(94,297
)
 
$
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.

20



Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
 
 
September 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

 
(43.3
)
 

 
(27.1
)
- Natural gas (Bcf)
Put options
68.3

 

 

 

- Crude oil and NGLs (MMBbl)
Futures, forwards
and swaps

 
(4.6
)
 

 
(2.3
)
Basis
 
 

 
 

 
 

 
 

- Natural gas (Bcf)
Futures and swaps

 
(43.3
)
 

 
(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
1.1

 
(0.9
)
 
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 actual exposure to market or credit risk.

Cash Flow Hedges - At September 30, 2016, our Consolidated Balance Sheet reflected a net loss of $154.4 million in accumulated other comprehensive loss. The portion of accumulated other comprehensive loss attributable to commodity derivative financial instruments is an unrealized loss of $7.1 million, net of tax, which will be realized within the next 27 months as the forecasted transactions affect earnings. If commodity prices remain at current levels, we will realize approximately $5.6 million in net losses, net of tax, over the next 12 months and approximately $1.5 million in net losses, net of tax, thereafter. The amount deferred in accumulated other comprehensive loss attributable to settled interest-rate swaps is a loss of $45.5 million, net of tax, which will be recognized over the life of the long-term, fixed-rate debt, including losses of $6.4 million, net of tax, 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:
Derivatives in Cash Flow
Hedging Relationships
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2016
 
2015
 
2016
 
2015
 
(Thousands of dollars)
Commodity contracts
$
7,580

 
$
36,559

 
$
(39,396
)
 
$
47,650

Interest-rate contracts
958

 
(20,610
)
 
(59,217
)
 
(26,277
)
Total unrealized gain (loss) recognized in other comprehensive income (loss) on derivatives (effective portion)
$
8,538

 
$
15,949

 
$
(98,613
)
 
$
21,373



21


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
 
Nine Months Ended
September 30,
 
September 30,
2016
 
2015
 
2016
 
2015
 
 
(Thousands of dollars)
Commodity contracts
Commodity sales revenues
$
908

 
$
22,770

 
$
29,456

 
$
54,020

Interest-rate contracts
Interest expense
(4,802
)
 
(4,554
)
 
(14,302
)
 
(12,869
)
Total gain (loss) reclassified from accumulated other comprehensive loss into net income on derivatives (effective portion)
$
(3,894
)
 
$
18,216

 
$
15,154

 
$
41,151


Ineffectiveness related to our cash flow hedges for the three and nine months ended September 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 nine months ended September 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, ONEOK Partners may enter into financial derivative instruments that contain provisions that require it to maintain an investment-grade credit rating from S&P and/or Moody’s. If ONEOK Partners’ credit ratings on its 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 September 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 September 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

ONEOK Credit Agreement - In January 2016, we extended the term of the ONEOK Credit Agreement by one year to January 2020. The ONEOK Credit Agreement is a $300 million revolving credit facility and contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a ratio of indebtedness to Consolidated EBITDA (EBITDA, as defined in our ONEOK Credit Agreement) of no more than 4.0 to 1. Upon breach of certain covenants by us in the ONEOK Credit Agreement, amounts outstanding under the ONEOK Credit Agreement, if any, may become due and payable immediately. At September 30, 2016, ONEOK’s ratio of indebtedness to Consolidated EBITDA was 2.1 to 1, and ONEOK was in compliance with all covenants under the ONEOK Credit Agreement.

The ONEOK Credit Agreement includes a $50 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swingline loans. Under the terms of the ONEOK Credit Agreement, ONEOK may request an increase in the size of the facility to an aggregate of $500 million from $300 million by either commitments from new lenders or increased commitments from existing lenders. The ONEOK Credit Agreement contains provisions for an applicable margin rate and an annual facility fee, both of which adjust with changes in our credit rating. Based on our current credit rating, borrowings, if any, will accrue interest at LIBOR plus 145 basis points, and the annual facility fee is 30 basis points.


22


At September 30, 2016, ONEOK had $1.1 million in letters of credit issued and no borrowings under the ONEOK Credit Agreement.

ONEOK Partners Credit Agreement - In January 2016, ONEOK Partners extended the term of the ONEOK Partners Credit Agreement by one year to January 2020. The ONEOK Partners 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. The ONEOK Partners Credit Agreement is available for general partnership purposes.

ONEOK Partners had $14 million of letters of credit issued, no borrowings outstanding and approximately $1.7 billion capacity available at September 30, 2016, under the ONEOK Partners Credit Agreement.

The ONEOK Partners Credit Agreement contains provisions for an applicable margin rate and an annual facility fee, both of which adjust with changes in its credit rating. Under the terms of the ONEOK Partners Credit Agreement, based on ONEOK Partners’ current credit ratings, borrowings, if any, will accrue at LIBOR plus 117.5 basis points, and the annual facility fee is 20 basis points. The ONEOK Partners Credit Agreement is guaranteed fully and unconditionally by the Intermediate Partnership. Borrowings under the ONEOK Partners Credit Agreement are nonrecourse to ONEOK.

The ONEOK Partners 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 the ONEOK Partners Credit 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 ONEOK Partners consummates 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 ONEOK Partners were to breach certain covenants in the ONEOK Partners Credit Agreement, amounts outstanding under the ONEOK Partners Credit Agreement, if any, may become due and payable immediately. At September 30, 2016, ONEOK Partners’ ratio of indebtedness to adjusted EBITDA was 4.1 to 1, and it was in compliance with all covenants under the ONEOK Partners Credit Agreement.

Neither ONEOK nor ONEOK Partners 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.

ONEOK Partners Commercial Paper Program - At September 30, 2016, ONEOK Partners had $694 million of commercial paper outstanding under its $2.4 billion commercial paper program with a weighted-average interest rate of 1.15 percent. Amounts outstanding under ONEOK Partners’ commercial paper program reduce the borrowing capacity under the ONEOK Partners Credit Agreement.

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E.
LONG-TERM DEBT

The following table sets forth our long-term debt for the periods indicated:
 
 
September 30,
 
December 31,
 
 
2016
 
2015
 
 
(Thousands of dollars)
ONEOK
 
 
 
 
$700,000 at 4.25% due 2022
 
$
547,397

 
$
547,397

$500,000 at 7.5% due 2023
 
500,000

 
500,000

$100,000 at 6.5% due 2028
 
87,137

 
87,516

$100,000 at 6.875% due 2028
 
100,000

 
100,000

$400,000 at 6.0% due 2035
 
400,000

 
400,000

Total ONEOK senior notes payable
 
1,634,534

 
1,634,913

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
 
46,170

 
51,907

Total ONEOK Partners long-term debt
 
7,196,170

 
6,851,907

Total long-term debt
 
8,830,704

 
8,486,820

Unamortized portion of terminated swaps
 
20,615

 
21,904

Unamortized debt issuance costs and discounts
 
(70,525
)
 
(74,492
)
Current maturities
 
(460,650
)
 
(110,650
)
Long-term debt, excluding current maturities
 
$
8,320,144

 
$
8,323,582


ONEOK Debt Issuance - In August 2015, we completed an underwritten public offering of $500 million, 7.5 percent senior notes due 2023. The net proceeds, after deducting underwriting discounts, commissions and other expenses, were approximately $487.1 million. We used the proceeds together with cash on hand to purchase $650 million of additional common units from ONEOK Partners.

ONEOK Partners Debt Issuances and Maturities - In January 2016, ONEOK Partners 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 ONEOK Partners’ senior, unsecured, long-term indebtedness. Based on ONEOK Partners’ current applicable credit rating, borrowings on the Term Loan Agreement accrue at LIBOR plus 130 basis points. At September 30, 2016, the interest rate was 1.83 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 the ONEOK Partners Credit Agreement. During the first quarter 2016, ONEOK Partners drew the full $1.0 billion available under the agreement and used the proceeds to repay its $650 million, 3.25 percent senior notes, to repay amounts outstanding under its commercial paper program and for general partnership purposes.


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At September 30, 2016, ONEOK Partners’ $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. In October 2016, ONEOK Partners repaid its $450 million, 6.15 percent senior notes with a combination of cash on hand and short-term borrowings.

In March 2015, ONEOK Partners 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. ONEOK Partners used the proceeds to repay amounts outstanding under its commercial paper program and for general partnership purposes.

F.
EQUITY

Dividends - Dividends paid on our common stock to shareholders of record at the close of business on February 1, 2016, May 2, 2016, and August 8, 2016, were $0.615 per share in each instance. A dividend of $0.615 per share was declared for shareholders of record at the close of business on October 31, 2016, payable November 14, 2016.

See Note K for a discussion of ONEOK Partners’ issuance of common units and distributions to noncontrolling interests.

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 (a)
 
Pension and
Postretirement
Benefit Plan
Obligations (a) (b)
 
Unrealized Gains
(Losses) on Risk-
Management
Assets/Liabilities of
Unconsolidated
Affiliates (a)
 
Accumulated
Other
Comprehensive
Loss (a)
 
(Thousands of dollars)
January 1, 2016
$
(42,199
)
 
$
(84,543
)
 
$
(500
)
 
$
(127,242
)
Other comprehensive income (loss) before reclassifications
(25,597
)
 
9

 
(3,133
)
 
(28,721
)
Amounts reclassified from accumulated other comprehensive loss
(3,037
)
 
4,649

 

 
1,612

Net current period other comprehensive income (loss) attributable to ONEOK
(28,634
)
 
4,658

 
(3,133
)
 
(27,109
)
September 30, 2016
$
(70,833
)
 
$
(79,885
)
 
$
(3,633
)
 
$
(154,351
)
(a) All amounts are presented net of tax.
(b) Includes amounts related to supplemental executive retirement plan.


25


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
 
Nine Months Ended
 
Affected Line Item in the
Consolidated
Statements of Income
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
(Thousands of dollars)
 
 
Unrealized gains (losses) on risk-management assets/liabilities
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
$
908

 
$
22,770

 
$
29,456

 
$
54,020

 
Commodity sales revenues
Interest-rate contracts
 
(4,802
)
 
(4,554
)
 
(14,302
)
 
(12,869
)
 
Interest expense
 
 
(3,894
)
 
18,216

 
15,154

 
41,151

 
Income before income taxes
 
 
811

 
(2,957
)
 
(1,658
)
 
(5,621
)
 
Income tax expense
 
 
(3,083
)

15,259

 
13,496

 
35,530

 
Net income
Noncontrolling interests
 
(1,774
)
 
10,150

 
10,459

 
25,745