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EX-32.2 - OKS CERTIFICATION OF REINERS SECTION 906 - ONEOK Partners LPoksq12017exhibit322.htm
EX-32.1 - OKS CERTIFICATION OF SPENCER SECTION 906 - ONEOK Partners LPoksq12017exhibit321.htm
EX-31.2 - OKS CERTIFICATION OF REINERS SECTION 302 - ONEOK Partners LPoksq12017exhibit312.htm
EX-31.1 - OKS CERTIFICATION OF SPENCER SECTION 302 - ONEOK Partners LPoksq12017exhibit311.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 March 31, 2017.
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, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X                         Accelerated filer __                         Non-accelerated filer __
Smaller reporting company__                 Emerging growth company__

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.__

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 April 24, 2017
Common units
 
212,837,980 units
Class B units
 
72,988,252 units





























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2


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.

3


GLOSSARY

The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:
2017 Credit Agreement
ONEOK’s $2.5 billion revolving credit agreement effective upon the closing of the Merger Transaction and the terminations of the Partnership Credit Agreement and the existing ONEOK credit facility
AFUDC
Allowance for funds used during construction
Annual Report
Annual Report on Form 10-K for the year ended December 31, 2016
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
Bcf/d
Billion cubic feet per day
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
FERC
Federal Energy Regulatory Commission
GAAP
Accounting principles generally accepted in the United States of America
GHG
Greenhouse gas
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
Merger Agreement
Agreement and Plan of Merger, dated as of January 31, 2017, by and among ONEOK, Merger Sub, ONEOK Partners and ONEOK Partners GP
Merger Sub
New Holdings Subsidiary, LLC, a wholly owned subsidiary of ONEOK
Merger Transaction
The transaction contemplated by the Merger Agreement pursuant to which ONEOK will acquire all of ONEOK Partners’ outstanding common units representing limited partner interests in ONEOK Partners not already directly or indirectly owned by ONEOK
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

4


Quarterly Report(s)
Quarterly Report(s) on Form 10-Q
Roadrunner
Roadrunner Gas Transmission, LLC, a 50 percent owned joint venture
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, as amended
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 Partners, L.P. and Subsidiaries

 

 
CONSOLIDATED STATEMENTS OF INCOME

 

 
 

Three Months Ended
 

March 31,
(Unaudited)

2017

2016
 
 
(Thousands of dollars, except per unit amounts)
Revenues
 
 
 
 
Commodity sales

$
2,216,717


$
1,283,511

Services

532,356


490,434

Total revenues

2,749,073


1,773,945

Cost of sales and fuel (exclusive of items shown separately below)

2,143,843


1,195,738

Operations and maintenance

155,282


148,740

Depreciation and amortization

98,626


93,736

General taxes

26,892


21,640

(Gain) loss on sale of assets

7


(4,145
)
Operating income

324,423


318,236

Equity in net earnings from investments (Note I)

39,564


32,914

Allowance for equity funds used during construction

13


208

Other income

1,253


145

Other expense

(683
)

(634
)
Interest expense (net of capitalized interest of $1,441 and $2,887, respectively)

(90,707
)

(92,555
)
Income before income taxes

273,863


258,314

Income taxes

(3,837
)

(2,028
)
Net income

270,026


256,286

Less: Net income attributable to noncontrolling interests

905


2,769

Net income attributable to ONEOK Partners, L.P.

$
269,121


$
253,517

Limited partners’ interest in net income:

 


 

Net income attributable to ONEOK Partners, L.P.

$
269,121


$
253,517

General partner’s interest in net income

(105,920
)

(105,608
)
Limited partners’ interest in net income

$
163,201


$
147,909

Limited partners’ net income per unit, basic and diluted (Note H)

$
0.57


$
0.52

Number of units used in computation (thousands)

285,826


285,826

Distributions declared per limited partner unit (Note F)
 
$
0.79

 
$
0.79

See accompanying Notes to Consolidated Financial Statements.


6


ONEOK Partners, L.P. and Subsidiaries
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Three Months Ended
 
 
March 31,
(Unaudited)
 
2017
 
2016
 
 
(Thousands of dollars)
Net income
 
$
270,026

 
$
256,286

Other comprehensive income (loss)
 
 

 
 

Unrealized gains (losses) on derivatives
 
28,857

 
(19,933
)
Realized (gains) losses on derivatives recognized in net income
 
19,770

 
(10,680
)
Other comprehensive income (loss) on investments in unconsolidated affiliates
 
383

 
(5,801
)
Total other comprehensive income (loss)
 
49,010

 
(36,414
)
Comprehensive income
 
319,036

 
219,872

Less: Comprehensive income attributable to noncontrolling interests
 
905

 
2,769

Comprehensive income attributable to ONEOK Partners, L.P.
 
$
318,131

 
$
217,103

See accompanying Notes to Consolidated Financial Statements.

7


ONEOK Partners, L.P. and Subsidiaries
 
 

 
CONSOLIDATED BALANCE SHEETS
 
 

 

 
March 31,

December 31,
(Unaudited)
 
2017

2016
Assets
 
(Thousands of dollars)
Current assets
 
 

 
Cash and cash equivalents
 
$
8,476


$
406

Accounts receivable, net
 
734,780


872,310

Affiliate receivables
 
152


984

Natural gas and natural gas liquids in storage
 
193,339


140,034

Commodity imbalances
 
30,904


60,896

Materials and supplies
 
59,726


60,912

Other current assets
 
38,368


38,703

Total current assets
 
1,065,745


1,174,245

Property, plant and equipment
 
 


 

Property, plant and equipment
 
14,930,541


14,854,696

Accumulated depreciation and amortization
 
2,482,974


2,392,004

Net property, plant and equipment
 
12,447,567


12,462,692

Investments and other assets
 
 


 

Investments in unconsolidated affiliates
 
956,388


958,807

Goodwill and intangible assets
 
810,003


812,977

Other assets
 
62,232


60,626

Total investments and other assets
 
1,828,623


1,832,410

Total assets
 
$
15,341,935


$
15,469,347

Liabilities and equity
 
 


 

Current liabilities
 
 


 

Current maturities of long-term debt (Note E)
 
$
407,650


$
407,650

Short-term borrowings (Note E)
 
1,290,729


1,110,277

Accounts payable
 
691,736


862,436

Affiliate payables
 
22,685


68,233

Commodity imbalances
 
114,542


142,646

Accrued interest
 
72,240


87,130

Other current liabilities
 
94,949


146,004

Total current liabilities
 
2,694,531


2,824,376

Long-term debt, excluding current maturities (Note E)
 
6,290,952


6,291,307

Deferred credits and other liabilities
 
193,797


175,844

Commitments and contingencies (Note K)
 





Equity (Note F)
 
 


 

ONEOK Partners, L.P. partners’ equity:
 
 


 

General partner
 
224,761


226,039

Common units: 212,837,980 units issued and outstanding at
March 31, 2017, and December 31, 2016
 
4,774,781


4,821,397

Class B units: 72,988,252 units issued and outstanding at
March 31, 2017, and December 31, 2016
 
1,117,842


1,133,828

Accumulated other comprehensive loss (Note G)
 
(112,516
)

(161,526
)
Total ONEOK Partners, L.P. partners’ equity
 
6,004,868


6,019,738

Noncontrolling interests in consolidated subsidiaries
 
157,787


158,082

Total equity
 
6,162,655


6,177,820

Total liabilities and equity
 
$
15,341,935


$
15,469,347

See accompanying Notes to Consolidated Financial Statements.

8


ONEOK Partners, L.P. and Subsidiaries
 
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 

 
 
 
Three Months Ended
 
 
March 31,
(Unaudited)
 
2017

2016
 
 
(Thousands of dollars)
Operating activities
 
 

 
Net income
 
$
270,026


$
256,286

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





Depreciation and amortization
 
98,626


93,736

Equity in net earnings from investments
 
(39,564
)

(32,914
)
Distributions received from unconsolidated affiliates
 
39,520


34,789

Deferred income taxes
 
3,035


2,254

Allowance for equity funds used during construction
 
(13
)

(208
)
(Gain) loss on sale of assets
 
7


(4,145
)
Changes in assets and liabilities:
 
 




Accounts receivable
 
137,530


68,618

Affiliate receivables
 
832


4,406

Natural gas and natural gas liquids in storage
 
(53,305
)

(27,991
)
Accounts payable
 
(122,090
)

(62,401
)
Affiliate payables
 
(45,548
)

(7,067
)
Commodity imbalances, net
 
1,888


2,968

Accrued interest
 
(14,890
)

(15,897
)
Risk-management assets and liabilities
 
45,100


(24,691
)
Other assets and liabilities, net
 
(40,848
)

(21,490
)
Cash provided by operating activities
 
280,306


266,253

Investing activities
 
 


 

Capital expenditures (less allowance for equity funds used during construction)
 
(112,584
)

(195,896
)
Contributions to unconsolidated affiliates
 
(4,422
)

(158
)
Distributions received from unconsolidated affiliates in excess of cumulative earnings
 
7,400


11,764

Proceeds from sale of assets
 
161


14,797

Cash used in investing activities
 
(109,445
)

(169,493
)
Financing activities
 
 


 

Cash distributions:
 
 


 

General and limited partners
 
(333,001
)

(333,001
)
Noncontrolling interests
 
(1,200
)

(2,500
)
Borrowing (repayment) of short-term borrowings, net
 
180,452


(101,773
)
Issuance of long-term debt, net of discounts
 


1,000,000

Debt financing costs
 


(2,770
)
Repayment of long-term debt
 
(1,912
)

(651,913
)
Other
 
(7,130
)
 

Cash used in financing activities
 
(162,791
)

(91,957
)
Change in cash and cash equivalents
 
8,070


4,803

Cash and cash equivalents at beginning of period
 
406


5,079

Cash and cash equivalents at end of period
 
$
8,476


$
9,882

See accompanying Notes to Consolidated Financial Statements.

9


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, 2017
 
212,837,980

 
72,988,252

 
$
226,039

 
$
4,821,397

Net income
 

 

 
105,920

 
121,526

Other comprehensive income (loss) (Note G)
 

 

 

 

Distributions paid (Note F)
 

 

 
(107,198
)
 
(168,142
)
March 31, 2017
 
212,837,980

 
72,988,252

 
$
224,761

 
$
4,774,781


 
 
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
 

 

 
105,608

 
110,140

Other comprehensive income (loss)
 

 

 

 

Distributions paid (Note F)
 

 

 
(107,198
)
 
(168,143
)
Other
 

 

 

 

March 31, 2016
 
212,837,980

 
72,988,252

 
$
229,754

 
$
4,956,949



10


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
Loss
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
Total
Equity
 
 
(Thousands of dollars)
January 1, 2017
 
$
1,133,828

 
$
(161,526
)
 
$
158,082

 
$
6,177,820

Net income
 
41,675

 

 
905

 
270,026

Other comprehensive income (loss) (Note G)
 

 
49,010

 

 
49,010

Distributions paid (Note F)
 
(57,661
)
 

 
(1,200
)
 
(334,201
)
March 31, 2017
 
$
1,117,842

 
$
(112,516
)
 
$
157,787

 
$
6,162,655


 
 
ONEOK Partners, L.P. Partners’ Equity
 
 
 
 
(Unaudited)
 
Class B
Units
 
Accumulated
Other
Comprehensive 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
 
37,769

 

 
2,769

 
256,286

Other comprehensive income (loss)
 

 
(36,414
)
 

 
(36,414
)
Distributions paid (Note F)
 
(57,660
)
 

 
(2,500
)
 
(335,501
)
Other
 

 

 
(4,040
)
 
(4,040
)
March 31, 2016
 
$
1,180,313

 
$
(149,696
)
 
$
160,354

 
$
6,377,674



See accompanying Notes to Consolidated Financial Statements.


11


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 2016 year-end consolidated balance sheet data was derived from our audited financial statements but does not include all disclosures required by GAAP. 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, except as described below.

Recently Issued Accounting Standards Update - Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of ASUs to the FASB Accounting Standards Codification. We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or clarifications of ASUs listed below. 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 2015-11, “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
 
As a result of adopting this guidance, we updated our accounting policy for inventory valuation accordingly. The financial impact of adopting this guidance was not material.
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
 
The impact of adopting this standard was not material.
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
 
The impact of adopting this standard was not material.
 
 
 
 
 
 
 

12


Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards that are not yet adopted
 
 
 
 
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 contracts and transaction types across all our business segments. In addition, we are currently evaluating methods of adoption and analyzing the impact of the standard on our internal controls, accounting policies and financial statements and disclosures. We expect to determine our method of adoption when we complete our evaluation of the impact of the standard and the implications of each adoption method.
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 our current leases and the impact of the standard on our internal controls, accounting policies and financial statements and disclosures.
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.
ASU 2017-04, “Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
 
The standard simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill under step 2. Instead, an entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard does not change step zero or step 1 assessments.
 
First quarter 2020
 
We are evaluating the impact of this standard on us.

B.
ACQUISITION OF ONEOK PARTNERS

On January 31, 2017, we and ONEOK entered into the Merger Agreement pursuant to which ONEOK will acquire all of our outstanding common units representing limited partner interests in us not already directly or indirectly owned by ONEOK in an all stock-for-unit transaction at a ratio of 0.985 of a share of ONEOK common stock per common unit of ONEOK Partners, in a taxable transaction to our common unitholders. Following completion of the Merger Transaction, all of our outstanding common units will be directly or indirectly owned by ONEOK and will no longer be publicly traded. All of our outstanding debt is expected to remain outstanding. We, ONEOK and the Intermediate Partnership expect to issue, to the extent not already in place, guarantees of the indebtedness of ONEOK and ONEOK Partners.


13


A Special Committee of the Board of Directors of ONEOK, the Conflicts Committee of the Board of Directors of our general partner and the Board of Directors of our general partner each unanimously approved the Merger Agreement. Subject to customary approvals and conditions, the Merger Transaction is expected to close late in the second quarter or early in the third quarter of 2017. The Merger Transaction is subject to the approval of our common unitholders and the approval by ONEOK shareholders of the issuance of ONEOK common shares in the Merger Transaction.

The Merger Agreement contains certain termination rights, including the right for either us or ONEOK, as applicable, to terminate the Merger Agreement if the closing of the transactions contemplated by the Merger Agreement has not occurred on or before September 30, 2017. In the event of termination of the Merger Agreement under certain circumstances, we may be required to pay ONEOK a termination fee of (up to, in certain instances, $300 million in cash) and, under other certain circumstances, ONEOK may be required to pay us a termination fee in the form of a temporary reduction in incentive distributions (up to, in certain instances, $300 million).

C.
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 derivative 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 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

14


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.

Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:
 
March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting (a)
 
Total - Net (b)
 
(Thousands of dollars)
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
3,293

 
$

 
$
14,675

 
$
17,968

 
$
(17,217
)
 
$
751

Physical contracts

 

 
508

 
508

 

 
508

Interest-rate contracts

 
47,914

 

 
47,914

 

 
47,914

Total derivative assets
$
3,293

 
$
47,914

 
$
15,183

 
$
66,390

 
$
(17,217
)
 
$
49,173

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
(15,757
)
 
$

 
$
(14,562
)
 
$
(30,319
)
 
$
29,973

 
$
(346
)
Physical contracts

 

 
(1,393
)
 
(1,393
)
 

 
(1,393
)
Interest-rate contracts

 
(11,316
)
 

 
(11,316
)
 

 
(11,316
)
Total derivative liabilities
$
(15,757
)
 
$
(11,316
)
 
$
(15,955
)
 
$
(43,028
)
 
$
29,973

 
$
(13,055
)
(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 March 31, 2017, we held no cash and posted $30.6 million of cash with various counterparties, including $12.8 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $17.8 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 or other current liabilities in our Consolidated Balance Sheets.

 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting (a)
 
Total - Net (b)
 
(Thousands of dollars)
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
1,147

 
$

 
$
4,564

 
$
5,711

 
$
(4,760
)
 
$
951

Interest rate contracts

 
47,457

 

 
47,457

 

 
47,457

Total derivative assets
$
1,147

 
$
47,457

 
$
4,564

 
$
53,168

 
$
(4,760
)
 
$
48,408

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
(31,458
)
 
$

 
$
(24,861
)
 
$
(56,319
)
 
$
56,319

 
$

Physical contracts

 

 
(3,022
)
 
(3,022
)
 

 
(3,022
)
Interest-rate contracts

 
(12,795
)
 

 
(12,795
)
 

 
(12,795
)
Total derivative liabilities
$
(31,458
)
 
$
(12,795
)
 
$
(27,883
)
 
$
(72,136
)
 
$
56,319

 
$
(15,817
)
(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, 2016, we held no cash and posted $67.7 million of cash with various counterparties, including $51.6 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $16.1 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 or other current liabilities in our Consolidated Balance Sheets.


15


The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
 
 
Three Months Ended
 
 
March 31,
Derivative Assets (Liabilities)
 
2017
 
2016
 
(Thousands of dollars)
Net assets (liabilities) at beginning of period
 
$
(23,319
)
 
$
7,331

Total realized/unrealized gains (losses):
 
 
 
 
Included in earnings (a)
 
913

 
(745
)
Included in other comprehensive income (loss)
 
21,634

 
(6,552
)
Net assets (liabilities) at end of period
 
$
(772
)
 
$
34

(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 months ended March 31, 2017 and 2016, 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 months ended March 31, 2017 and 2016, 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 long-term debt, including current maturities, was $7.2 billion and $7.1 billion at March 31, 2017, and December 31, 2016, respectively. The book value of our long-term debt, including current maturities, was $6.7 billion at March 31, 2017, and December 31, 2016. 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.

D.
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 purchased, processed 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.


16


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 retaining a portion of the commodity sales proceeds 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 may expose this segment 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 may use physical-forward sales or purchases to reduce the impact of price fluctuations related to natural gas. At March 31, 2017, and December 31, 2016, 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 March 31, 2017 and December 31, 2016, we had interest-rate swaps with notional amounts totaling $1 billion to hedge the variability of our LIBOR-based interest payments and forward-starting interest-rate swaps with notional amounts totaling $1.2 billion 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. All of our 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.


17


Fair Values of Derivative Instruments - See Note C 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:
 
 
 
March 31, 2017
 
December 31, 2016
 
Location in our Consolidated Balance Sheets
 
Assets
 
(Liabilities)
 
Assets
 
(Liabilities)
 
 
 
(Thousands of dollars)
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
Financial contracts
Other current assets/other current liabilities
 
$
6,154

 
$
(25,855
)
 
$
1,155

 
$
(49,938
)
 
Other assets/deferred credits and other liabilities
 
6,683

 

 
210

 
(2,142
)
Physical contracts
Other current assets/other current liabilities
 
87

 
(1,393
)
 

 
(3,022
)
 
Other assets
 
421

 

 

 

Interest-rate contracts
Other current assets/other current liabilities
 
90

 
(11,316
)
 

 
(12,795
)
 
Other assets
 
47,824

 

 
47,457

 

Total derivatives designated as hedging instruments
 
 
61,259

 
(38,564
)
 
48,822

 
(67,897
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
Financial contracts
Other current assets/other current liabilities
 
4,451

 
(3,796
)
 
4,346

 
(4,239
)
 
Other assets/deferred credits and other liabilities
 
680

 
(668
)
 

 

Total derivatives not designated as hedging instruments
 
 
5,131

 
(4,464
)
 
4,346

 
(4,239
)
Total derivatives
 
 
$
66,390

 
$
(43,028
)
 
$
53,168

 
$
(72,136
)

Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
 
 
March 31, 2017
 
December 31, 2016
 
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

 
(38.2
)
 

 
(38.4
)
- Natural gas (Bcf)
Put options
36.0

 

 
49.5

 

- Crude oil and NGLs (MMBbl)
Futures, forwards
and swaps
0.3

 
(4.5
)
 

 
(3.6
)
Basis
 
 

 
 

 
 
 
 
- Natural gas (Bcf)
Futures and swaps

 
(38.2
)
 

 
(38.4
)
Interest-rate contracts (Millions of dollars)
Swaps
$
2,150.0

 
$

 
$
2,150.0

 
$

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Fixed price
 
 
 
 
 
 
 
 
-Natural gas (Bcf)
Futures and swaps
3.5

 

 
0.4

 

- NGLs (MMBbl)
Futures, forwards
and swaps
0.7

 
(2.6
)
 
0.5

 
(0.7
)
Basis
 
 
 
 
 
 
 
 
- Natural gas (Bcf)
Futures and swaps
3.5

 

 
0.4

 


18



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 March 31, 2017, our Consolidated Balance Sheet reflected a net loss of $112.5 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 $20.8 million, which is expected to be realized within the next 21 months as the forecasted transactions affect earnings. If commodity prices remain at current levels, we will realize approximately $27.9 million in net losses over the next 12 months and approximately $7.1 million in net gains thereafter. The amount deferred in accumulated other comprehensive loss attributable to our settled interest-rate swaps is a loss of $121.9 million, which will be recognized over the life of the long-term, fixed-rate debt, including losses of $16.8 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 is expected to 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
Derivatives in Cash Flow
Hedging Relationships
 
March 31,
 
2017
 
2016
 
(Thousands of dollars)
Commodity contracts
 
$
27,328

 
$
11,678

Interest-rate contracts
 
1,529

 
(31,611
)
Total unrealized gain (loss) recognized in other comprehensive income (loss) on derivatives (effective portion)
 
$
28,857

 
$
(19,933
)

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
 
March 31,
 
2017
 
2016
 
 
(Thousands of dollars)
Commodity contracts
Commodity sales revenues
 
$
(15,319
)
 
$
14,499

Interest-rate contracts
Interest expense
 
(4,451
)
 
(3,819
)
Total gain (loss) reclassified from accumulated other comprehensive loss into net income on derivatives (effective portion)
 
$
(19,770
)
 
$
10,680


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 March 31, 2017.

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.

19



At March 31, 2017, the net credit exposure from our derivative assets is with investment-grade companies in the financial services sector.

E.
DEBT

The following table sets forth our debt for the periods indicated:
 
 
March 31, 2017
 
December 31, 2016
 
 
(Thousands of dollars)
ONEOK Partners
 
 
 
 
Commercial paper outstanding, bearing a weighted-average interest rate of 1.51% and 1.27% respectively
$
1,290,729

 
$
1,110,277

Senior unsecured obligations:
 
 
 
 
$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

 
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
 
 

 
 
Weighted average 7.85% due 2022
 
42,345

 
44,257

Total debt
 
8,033,074

 
7,854,534

Unamortized debt issuance costs and discounts
 
(43,743
)
 
(45,300
)
Current maturities of long-term debt
 
(407,650
)
 
(407,650
)
Short-term borrowings (a) 
 
(1,290,729
)
 
(1,110,277
)
Long-term debt
 
$
6,290,952

 
$
6,291,307

(a) - Individual issuances of commercial paper under our $2.4 billion commercial paper program generally mature in 90 days or less. However, these issuances are supported by and reduce the borrowing capacity under our Partnership Credit Agreement.

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. At March 31, 2017, and December 31, 2016, we had $14 million in letters of credit issued and no borrowings under the Partnership Credit Agreement. Our Partnership Credit Agreement is available for general partnership purposes and had available capacity of approximately $1.1 billion at March 31, 2017.

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 interest 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 currently 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 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

20


immediately. At March 31, 2017, 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.

In April 2017, ONEOK entered into the 2017 Credit Agreement with a syndicate of banks, to replace the existing ONEOK credit facility and the Partnership Credit Agreement, effective upon the closing of the Merger Transaction described in Note B and the termination of the existing ONEOK credit facility and the Partnership Credit Agreement. ONEOK’s obligations under the 2017 Credit Agreement will be guaranteed by ONEOK Partners and the Intermediate Partnership.

Senior Unsecured Obligations - All notes are senior unsecured obligations, ranking equally in right of payment with all of our existing and future unsecured senior indebtedness, and are structurally subordinate to any of the existing and future debt and other liabilities of any nonguarantor subsidiaries.

Issuances and maturities - In January 2016, we entered into the $1.0 billion senior unsecured Term Loan Agreement with a syndicate of banks. The Term Loan Agreement matures in January 2019 and bears interest at LIBOR plus 130 basis points based on our current credit ratings. At March 31, 2017, the interest rate was 2.28 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 $650 million of senior notes at maturity, to repay amounts outstanding under our commercial paper program and for general partnership purposes.

In April 2017, we entered into the first amendment to the Term Loan Agreement which, among other things, will add ONEOK as a guarantor to the Term Loan Agreement effective upon the closing of the Merger Transaction described in Note B.

Debt Guarantees - Neither we nor ONEOK guarantee the debt or other similar commitments of unaffiliated parties. ONEOK currently does not guarantee the debt, commercial paper, borrowings under the Partnership Credit Agreement or other similar commitments of ONEOK Partners, and ONEOK Partners currently does not guarantee the debt or other similar commitments of ONEOK. Following the completion of the Merger Transaction described in Note B, we, ONEOK and the Intermediate Partnership expect to issue, to the extent not already in place, guarantees of the indebtedness of ONEOK and ONEOK Partners.

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 March 31, 2017.

Equity Issuances - 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 March 31, 2017, we had approximately $138 million of registered common units available for issuance through our “at-the-market” equity program.

During the three months ended March 31, 2017, and the year ended December 31, 2016, no common units were sold through our “at-the-market” equity program.

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 April 2017, our general partner declared a cash distribution of $0.79 per unit ($3.16 per unit on an annualized basis) for the first quarter 2017, which will be paid on May 15, 2017, to unitholders of record at the close of business on May 1, 2017.


21


The following table sets forth our distributions paid during the periods indicated:
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
 
(Thousands, except per unit amounts)
Distribution per unit
 
$
0.79

 
$
0.79

 
 
 
 
 
General partner distributions
 
$
6,660

 
$
6,660

Incentive distributions
 
100,538

 
100,538

Distributions to general partner
 
107,198

 
107,198

Limited partner distributions to ONEOK
 
90,323

 
90,323

Limited partner distributions to other unitholders
 
135,480

 
135,480

Total distributions paid
 
$
333,001

 
$
333,001


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
 
 
March 31,
 
 
2017
 
2016
 
(Thousands, except per unit amounts)
Distribution per unit
 
$
0.79

 
$
0.79

 
 
 
 
 
General partner distributions
 
$
6,660

 
$
6,660

Incentive distributions
 
100,538

 
100,538

Distributions to general partner
 
107,198

 
107,198

Limited partner distributions to ONEOK
 
90,323

 
90,323

Limited partner distributions to other unitholders
 
135,480

 
135,480

Total distributions declared
 
$
333,001

 
$
333,001


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, 2017
 
$
(157,826
)
 
$
(3,700
)
 
$
(161,526
)
Other comprehensive income (loss) before reclassifications
 
28,857

 
287

 
29,144

Amounts reclassified from accumulated other comprehensive loss
 
19,770

 
96

 
19,866

Net current-period other comprehensive income (loss) attributable to ONEOK Partners
 
48,627

 
383

 
49,010

March 31, 2017
 
$
(109,199
)
 
$
(3,317
)
 
$
(112,516
)


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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
 
Affected Line Item in the
Consolidated
Statements of Income
 
March 31,
 
 
2017
 
2016
 
 
 
(Thousands of dollars)
 
 
Unrealized gains (losses) on risk-management assets/liabilities
 
 
 
 
 
 
Commodity contracts
 
$
(15,319
)
 
$
14,499

 
Commodity sales revenues
Interest-rate contracts
 
(4,451
)
 
(3,819
)
 
Interest expense
 
 
$
(19,770
)
 
$
10,680

 
Net income attributable to ONEOK Partners
 
 
 
 
 
 
 
Unrealized gains (losses) on risk-management assets/liabilities of unconsolidated affiliates
 
 
 
 
 
 
Interest-rate contracts
 
$
(96
)
 
$

 
Equity in net earnings from investments
 
 
 
 
 
 
 
Total reclassifications for the period attributable to ONEOK Partners
 
$
(19,866
)
 
$
10,680

 
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
 
 
March 31,
 
 
2017
 
2016
 
(Thousands of dollars)
Northern Border Pipeline
 
$
18,817

 
$
18,674

Overland Pass Pipeline Company
 
13,566

 
13,304

Other
 
7,181

 
936

Equity in net earnings from investments
 
$
39,564

 
$
32,914



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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
 
 
March 31,
 
 
2017
 
2016
 
(Thousands of dollars)
Income Statement
 
 
 
 
Operating revenues
 
$
154,280

 
$
136,572

Operating expenses
 
$
66,936

 
$
58,699

Net income
 
$
81,131

 
$
72,037

 
 
 
 
 
Distributions paid to us
 
$
46,920

 
$
46,553


We incurred expenses in transactions with unconsolidated affiliates of $36.7 million and $33.6 million for the three months ended March 31, 2017 and 2016, respectively, primarily related to Overland Pass Pipeline Company and Northern Border Pipeline. Accounts payable to our equity-method investees at March 31, 2017, and December 31, 2016, were $13.1 million and $11.1 million, respectively.

Northern Border Pipeline - The Northern Border Pipeline partnership agreement provides that distributions to Northern Border Pipeline’s partners are to be made on a pro rata basis according to each partner’s percentage interest. The Northern Border Pipeline Management Committee determines the amount and timing of such distributions. Any changes to, or suspension of, the cash distribution policy of Northern Border Pipeline requires the unanimous approval of the Northern Border Pipeline Management Committee. Cash distributions are equal to 100 percent of distributable cash flow as determined from Northern Border Pipeline’s financial statements based upon EBITDA less interest expense and maintenance capital expenditures. Loans or other advances from Northern Border Pipeline to its partners or affiliates are prohibited under its credit agreement.

Overland Pass Pipeline Company - The Overland Pass Pipeline Company limited liability company agreement provides that distributions to Overland Pass Pipeline Company’s members are to be made on a pro rata basis according to each member’s percentage interest. The Overland Pass Pipeline Company Management Committee determines the amount and timing of such distributions. Any changes to, or suspension of, cash distributions from Overland Pass Pipeline Company requires the unanimous approval of the Overland Pass Pipeline Company Management Committee. Cash distributions are equal to 100 percent of available cash as defined in the limited liability company agreement.

Roadrunner Gas Transmission - The Roadrunner limited liability company agreement provides that distributions to members are made on a pro rata basis according to each member’s ownership interest. As the operator, we have been delegated the authority to determine such distributions in accordance with, and on the frequency set forth in, the Roadrunner limited liability company agreement. Cash distributions are equal to 100 percent of available cash, as defined in the limited liability company agreement.

J.
RELATED-PARTY TRANSACTIONS

On January 31, 2017, we and ONEOK entered into the Merger Agreement pursuant to which ONEOK will acquire all of our outstanding common units representing limited partner interests in us not already directly or indirectly owned by ONEOK. For additional information on this transaction, see Note B.

Under the Services Agreement with ONEOK and ONEOK Partners GP (the Services Agreement), our operations and the operations of ONEOK and its affiliates can combine or share certain common services in order to operate more efficiently and cost effectively. Under the Services Agreement, ONEOK provides to us similar services that it provides to its affiliates, including those services required to be provided pursuant to our Partnership Agreement. ONEOK Partners GP may purchase services from ONEOK and its affiliates pursuant to the terms of the Services Agreement. ONEOK Partners GP has no employees and utilizes the services of ONEOK to fulfill its operating obligations.

ONEOK and its affiliates provide a variety of services to us under the Services Agreement, including cash management and financial services, employee benefits provided through ONEOK’s benefit plans, legal and administrative services, insurance and office space leased in ONEOK’s headquarters building and other field locations. Where costs are incurred specifically on behalf of one of our affiliates, the costs are billed directly to us by ONEOK. In other situations, the costs may be allocated to

24


us through a variety of methods, depending upon the nature of the expenses and activities. For the three months ended March 31, 2017 and 2016, $100.8 million and $87.7 million, respectively, of our operating expenses were incurred with ONEOK and its affiliates.

We have an operating agreement with Roadrunner that provides for reimbursement or payment to us for management services and certain operating costs. Charges to Roadrunner included in operating income in our Consolidated Statements of Income for the three months ended March 31, 2017 and 2016, were not material.

K.
COMMITMENTS AND CONTINGENCIES

Environmental Matters and Pipeline Safety - The operation of pipelines, plants and other facilities for the gathering, processing, transportation and storage of natural gas, NGLs, condensate and other products is subject to numerous and complex laws and regulations pertaining to health, safety and the environment. As an owner and/or operator of these facilities, we must comply with United States laws and regulations at the federal, state and local levels that relate to air and water quality, hazardous and solid waste management and disposal, and other environmental matters. The cost of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and potentially criminal enforcement measures, including citizen suits, which can include the assessment of monetary penalties, the imposition of remedial requirements and the issuance of injunctions or restrictions on operation. Management believes that, based on currently known information, compliance with these laws and regulations will not have a material adverse effect on our results of operations, financial condition or cash flows.

Legal Proceedings - Class Action Litigation - On March 28, 2017, and April 7, 2017, two putative class action lawsuits captioned Juergen Krueger, Individually And On Behalf Of All Others Similarly Situated v. ONEOK Partners, L.P., et al (the First Complaint) and Max Federman, On Behalf of Himself and All Others Similarly Situated v. ONEOK Partners, L.P., et al (the Second Complaint, together with the First Complaint, the Complaints) were filed in the United States District Court for the Northern District of Oklahoma against us and each of the members of the ONEOK Partners GP board of directors as defendants.  The Complaints allege that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder, by causing a materially incomplete and misleading preliminary proxy statement to be filed with the SEC on March 7, 2017.  Both Complaints seek various forms of relief, including injunctive relief and an award of attorneys’ fees and expenses.  Each of the defendants believes the claims asserted in the Complaints are without merit and intends to vigorously defend against this lawsuit. At this time, however, it is not possible to predict the outcome of the proceedings or their impact on us or the Merger Transaction.

Other Legal Proceedings - We are a party to various other litigation matters and claims that have arisen in the normal course of our operations. While the results of these litigation matters and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable final outcome of such matters will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.

L.
SEGMENTS

Segment Descriptions - Our operations are divided into three reportable business segments, as follows:
our Natural Gas Gathering and Processing segment gathers, treats and processes natural gas;
our Natural Gas Liquids segment gathers, treats, fractionates and transports NGLs and stores, markets and distributes NGL products; and
our Natural Gas Pipelines segment operates regulated interstate and intrastate natural gas transmission pipelines and natural gas storage facilities.

Accounting Policies - The accounting policies of the segments are described in Note A of the Notes to Consolidated Financial Statements in our Annual Report. Our chief operating decision-maker reviews the financial performance of each of our three segments, as well as the financial performance of the Partnership as a whole, on a regular basis. Adjusted EBITDA by segment is utilized in this evaluation. We believe this financial measure is useful to investors because it and similar measures are used by many companies in our industry as a measurement of financial performance and are commonly employed by financial analysts and others to evaluate our financial performance and to compare financial performance among companies in our industry. Adjusted EBITDA for each segment is defined as net income adjusted for interest expense, depreciation and amortization, noncash impairment charges, income taxes, allowance for equity funds used during construction and other noncash items. This calculation may not be comparable with similarly titled measures of other companies.

25



Customers - The primary customers of our Natural Gas Gathering and Processing segment are crude oil and natural gas producers, which include both large integrated and independent exploration and production companies. Our Natural Gas Liquids segment’s customers are primarily NGL and natural gas gathering and processing companies; large integrated and independent crude oil and natural gas production companies; propane distributors; ethanol producers; and petrochemical, refining and NGL marketing companies. Our Natural Gas Pipelines segment’s customers are primarily local natural gas distribution companies, electric-generation companies, large industrial companies, municipalities, irrigation customers and marketing companies.

For the three months ended March 31, 2017, we had no single customer from which we received 10 percent or more of our consolidated revenues. For the three months ended March 31, 2016, we had one customer, BP p.l.c. or its affiliates, from which we received approximately 12 percent of our consolidated revenues.

Operating Segment Information - The following tables set forth certain selected financial information for our operating segments for the periods indicated:
Three Months Ended
March 31, 2017
Natural Gas
Gathering and
Processing
 
Natural Gas
Liquids (a)
 
Natural Gas
Pipelines (b)
 
Total
 
(Thousands of dollars)
Sales to unaffiliated customers
$
400,149

 
$
2,244,000

 
$
104,924

 
$
2,749,073

Intersegment revenues
261,127

 
147,984

 
1,894

 
411,005

Total revenues
661,276

 
2,391,984

 
106,818

 
3,160,078

Cost of sales and fuel (exclusive of depreciation and items shown separately below)
(488,384
)
 
(2,048,693
)
 
(16,603
)
 
(2,553,680
)
Operating costs
(71,789
)
 
(78,743
)
 
(31,753
)
 
(182,285
)
Equity in net earnings from investments
2,630

 
13,722

 
23,212

 
39,564

Other
234

 
(41
)
 
1,284

 
1,477

Segment adjusted EBITDA
$
103,967

 
$
278,229

 
$
82,958

 
$
465,154

 
 
 
 
 
 
 
 
Depreciation and amortization
$
(44,968
)
 
$
(41,115
)
 
$
(12,543
)
 
$
(98,626
)
Total assets
$
5,296,359

 
$
8,194,835

 
$
1,945,407

 
$
15,436,601

Capital expenditures
$
63,151

 
$
20,453

 
$
25,014

 
$
108,618

(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $296.3 million, of which $252.9 million related to sales within the segment and cost of sales and fuel of $116.5 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $68.9 million and cost of sales and fuel of $14.1 million.

Three Months Ended
March 31, 2017
 
Total
Segments
 
Other and
Eliminations
 
Total
 
 
(Thousands of dollars)
Reconciliations of total segments to consolidated
 
 
 
 
 
 
Sales to unaffiliated customers
 
$
2,749,073

 
$

 
$
2,749,073

Intersegment revenues
 
411,005

 
(411,005
)
 

Total revenues
 
$
3,160,078

 
$
(411,005
)
 
$
2,749,073

 
 
 
 
 
 
 
Cost of sales and fuel (exclusive of depreciation and operating costs)
 
$
(2,553,680
)
 
$
409,837

 
$
(2,143,843
)
Operating costs
 
$
(182,285
)
 
$
111

 
$
(182,174