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EX-32.2 - OKE CERTIFICATION OF HULSE SECTION 906 - ONEOK INC /NEW/okeq22017exhibit322.htm
EX-32.1 - OKE CERTIFICATION OF SPENCER SECTION 906 - ONEOK INC /NEW/okeq22017exhibit321.htm
EX-31.2 - OKE CERTIFICATION OF HULSE SECTION 302 - ONEOK INC /NEW/okeq22017exhibit312.htm
EX-31.1 - OKE CERTIFICATION OF SPENCER SECTION 302 - ONEOK INC /NEW/okeq22017exhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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   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, 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

On July 24, 2017, the Company had 380,008,256 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 1A, “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 and Ethics, 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:
2017 Credit Agreement
ONEOK’s $2.5 billion revolving credit agreement, effective June 30, 2017
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
Foundation
ONEOK Foundation, Inc.
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 Transaction
The transaction, effective June 30, 2017, in which ONEOK acquired 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 Credit Agreement
ONEOK’s $300 million amended and restated revolving credit agreement, which terminated June 30, 2017
ONEOK Partners
ONEOK Partners, L.P.
ONEOK Partners Credit Agreement
ONEOK Partners’ $2.4 billion amended and restated revolving credit
agreement, which terminated June 30, 2017
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
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, a 50 percent owned joint venture
S&P
S&P Global Ratings

4


SCOOP
South Central Oklahoma Oil Province, an area in the Anadarko Basin in Oklahoma
SEC
Securities and Exchange Commission
Series E Preferred Stock
Series E Non-Voting, Perpetual Preferred Stock, par value $0.01 per share
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, as amended
West Texas LPG
West Texas LPG Pipeline Limited Partnership and Mesquite Pipeline
WTI
West Texas Intermediate
WTLPG
West Texas LPG Pipeline Limited Partnership
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

Six Months Ended
 
June 30,

June 30,
(Unaudited)
2017

2016

2017

2016
 
(Thousands of dollars, except per share amounts)
Revenues
 
 
 
 
 
 
 
Commodity sales
$
2,161,009


$
1,633,272


$
4,377,726


$
2,916,783

Services
564,763


500,835


1,097,657


991,783

Total revenues
2,725,772


2,134,107


5,475,383


3,908,566

Cost of sales and fuel (exclusive of items shown separately below)
2,091,022


1,527,323


4,234,865


2,723,061

Operations and maintenance
193,501


167,667


358,270


322,812

Depreciation and amortization
100,849


99,247


200,268


193,725

General taxes
24,304


24,172


51,457


46,042

(Gain) loss on sale of assets
(637
)

413


(630
)

(3,793
)
Operating income
316,733


315,285


631,153


626,719

Equity in net earnings from investments (Note J)
39,363


32,372


78,927


65,286

Allowance for equity funds used during construction
22




35


208

Other income
4,033


4,804


8,374


5,109

Other expense
(21,843
)

(941
)

(22,593
)

(1,578
)
Interest expense (net of capitalized interest of $1,745, $2,572, $3,186, and $5,459, respectively)
(118,473
)

(118,976
)

(234,935
)

(237,223
)
Income before income taxes
219,835


232,544


460,961


458,521

Income taxes
(43,844
)

(52,458
)

(98,785
)

(102,524
)
Income from continuing operations
175,991


180,086


362,176


355,997

Income (loss) from discontinued operations, net of tax

 
(227
)
 

 
(1,179
)
Net income
175,991

 
179,859

 
362,176

 
354,818

Less: Net income attributable to noncontrolling interests
104,298


93,915


203,122


185,428

Net income attributable to ONEOK
71,693


85,944


159,054


169,390

Less: Preferred stock dividends
217

 

 
217

 

Net income available to common shareholders
$
71,476

 
$
85,944

 
$
158,837

 
$
169,390

Amounts available to common shareholders:
 


 


 


 

Income from continuing operations
$
71,476

 
$
86,171

 
$
158,837

 
$
170,569

Income (loss) from discontinued operations

 
(227
)
 

 
(1,179
)
Net income
$
71,476

 
$
85,944

 
$
158,837

 
$
169,390

Basic earnings per common share:
 
 
 
 
 
 
 
Income from continuing operations (Note H)
$
0.34

 
$
0.41

 
$
0.75

 
$
0.81

Income (loss) from discontinued operations

 

 

 
(0.01
)
Net income
$
0.34

 
$
0.41

 
$
0.75

 
$
0.80

Diluted earnings per common share:
 
 
 
 
 
 
 
Income from continuing operations (Note H)
$
0.33

 
$
0.41

 
$
0.74

 
$
0.81

Income (loss) from discontinued operations

 
(0.01
)
 

 
(0.01
)
Net income
$
0.33

 
$
0.40

 
$
0.74

 
$
0.80

Average shares (thousands)
 
 
 
 
 
 
 
Basic
211,785

 
211,075

 
211,702

 
210,928

Diluted
214,012

 
212,618

 
213,807

 
211,663

Dividends declared per share of common stock
$
0.615

 
$
0.615

 
$
1.23

 
$
1.23

See accompanying Notes to Consolidated Financial Statements.

6


ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Unaudited)
2017
 
2016
 
2017
 
2016
 
(Thousands of dollars)
Net income
$
175,991

 
$
179,859

 
$
362,176

 
$
354,818

Other comprehensive income (loss), net of tax
 

 
 
 
 

 
 

Unrealized gains (losses) on derivatives, net of tax of $874, $13,295, $(3,527) and $16,334, respectively
(5,123
)
 
(73,923
)
 
19,333

 
(90,817
)
Realized (gains) losses on derivatives recognized in net income, net of tax of $(2,041), $1,193, $(5,406) and $2,469, respectively
9,927

 
(8,054
)
 
27,210

 
(16,579
)
Change in pension and postretirement benefit plan liability, net of tax of $(1,361), $(1,035), $(2,721) and $(2,070) respectively.
2,040

 
1,552

 
4,081

 
3,105

Other comprehensive income (loss) on investments in unconsolidated affiliates, net of tax of $246, $848, $188 and $1,732, respectively
(1,370
)
 
(4,714
)
 
(1,045
)
 
(9,631
)
Total other comprehensive income (loss), net of tax
5,474

 
(85,139
)
 
49,579

 
(113,922
)
Comprehensive income
181,465

 
94,720

 
411,755

 
240,896

Less: Comprehensive income attributable to noncontrolling interests
106,507

 
33,408

 
234,148

 
103,510

Comprehensive income attributable to ONEOK
$
74,958

 
$
61,312

 
$
177,607

 
$
137,386

See accompanying Notes to Consolidated Financial Statements.

7


ONEOK, Inc. and Subsidiaries
 
 

 
CONSOLIDATED BALANCE SHEETS
 
 

 

 
June 30,

December 31,
(Unaudited)
 
2017

2016
Assets
 
(Thousands of dollars)
Current assets
 
 

 
Cash and cash equivalents
 
$
332,371


$
248,875

Accounts receivable, net
 
749,345


872,430

Materials and supplies
 
75,172

 
60,912

Natural gas and natural gas liquids in storage
 
200,133


140,034

Commodity imbalances
 
39,325


60,896

Other current assets
 
51,465


45,986

Assets of discontinued operations
 

 
551

Total current assets
 
1,447,811


1,429,684

Property, plant and equipment
 
 


 

Property, plant and equipment
 
15,241,140


15,078,497

Accumulated depreciation and amortization
 
2,694,148


2,507,094

Net property, plant and equipment
 
12,546,992


12,571,403

Investments and other assets
 
 


 

Investments in unconsolidated affiliates
 
944,562


958,807

Goodwill and intangible assets
 
999,409


1,005,359

Deferred income taxes
 
563,364

 

Other assets
 
170,785


162,998

Assets of discontinued operations
 

 
10,500

Total investments and other assets
 
2,678,120


2,137,664

Total assets
 
$
16,672,923


$
16,138,751




8


ONEOK, Inc. and Subsidiaries
 
 
 
 
CONSOLIDATED BALANCE SHEETS
 
 
 
 
(Continued)
 
 
 
 
 
 
June 30,
 
December 31,
(Unaudited)
 
2017
 
2016
Liabilities and equity
 
(Thousands of dollars)
Current liabilities
 
 
 
 
Current maturities of long-term debt (Note E)
 
$
494,703

 
$
410,650

Short-term borrowings (Note E)
 
1,274,407

 
1,110,277

Accounts payable
 
696,834

 
874,731

Commodity imbalances
 
114,941

 
142,646

Accrued interest
 
111,697

 
112,514

Other current liabilities
 
167,937

 
166,042

Liabilities of discontinued operations
 

 
19,841

Total current liabilities
 
2,860,519

 
2,836,701

Long-term debt, excluding current maturities (Note E)
 
7,835,606

 
7,919,996

Deferred credits and other liabilities
 
 
 
 
Deferred income taxes
 
73,983

 
1,623,822

Other deferred credits
 
337,584

 
321,846

Liabilities of discontinued operations
 

 
7,471

Total deferred credits and other liabilities
 
411,567

 
1,953,139

Commitments and contingencies (Note K)
 

 

Equity (Note F)
 
 
 
 
ONEOK shareholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value:
issued 20,000 shares at June 30, 2017, and no shares at December 31, 2016
 

 

Common stock, $0.01 par value:
authorized 1,200,000,000 shares, issued 414,732,011 shares and outstanding
380,004,718 shares at June 30, 2017; authorized 600,000,000 shares, issued 245,811,180 shares and outstanding 210,681,661 shares at December 31, 2016
 
4,147

 
2,458

Paid-in capital
 
6,463,130

 
1,234,314

Accumulated other comprehensive loss (Note G)
 
(176,085
)
 
(154,350
)
Retained earnings
 

 

Treasury stock, at cost: 34,727,293 shares at June 30, 2017, and
35,129,519 shares at December 31, 2016
 
(883,445
)
 
(893,677
)
Total ONEOK shareholders’ equity
 
5,407,747

 
188,745

Noncontrolling interests in consolidated subsidiaries
 
157,484

 
3,240,170

Total equity
 
5,565,231

 
3,428,915

Total liabilities and equity
 
$
16,672,923

 
$
16,138,751

See accompanying Notes to Consolidated Financial Statements.


9




























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10


ONEOK, Inc. and Subsidiaries
 
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 

 
 
 
Six Months Ended
 
 
June 30,
(Unaudited)
 
2017

2016
 
 
(Thousands of dollars)
Operating activities
 
 

 
Net income
 
$
362,176


$
354,818

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





Depreciation and amortization
 
200,268


193,725

Noncash contribution of preferred stock, net of tax
 
12,600

 

Equity in net earnings from investments
 
(78,927
)

(65,286
)
Distributions received from unconsolidated affiliates
 
81,744


72,204

Deferred income taxes
 
90,685


105,567

Share-based compensation expense
 
13,477

 
23,194

Pension and postretirement benefit expense, net of contributions
 
(1,576
)
 
6,172

Allowance for equity funds used during construction
 
(35
)

(208
)
Gain on sale of assets
 
(630
)

(3,793
)
Changes in assets and liabilities:
 
 




Accounts receivable
 
123,085


(85,435
)
Natural gas and natural gas liquids in storage
 
(60,099
)

(117,862
)
Accounts payable
 
(134,334
)

103,976

Commodity imbalances, net
 
(6,134
)

31,465

Settlement of exit activities liabilities
 
(6,546
)
 
(11,590
)
Accrued interest
 
(817
)

(9,269
)
Risk-management assets and liabilities
 
66,940


(60,016
)
Other assets and liabilities, net
 
(18,986
)

(6,056
)
Cash provided by operating activities
 
642,891


531,606

Investing activities
 
 


 

Capital expenditures (less allowance for equity funds used during construction)
 
(195,232
)

(333,254
)
Contributions to unconsolidated affiliates
 
(4,653
)

(19,830
)
Distributions received from unconsolidated affiliates in excess of cumulative earnings
 
14,936


36,373

Proceeds from sale of assets
 
1,218


18,232

Cash used in investing activities
 
(183,731
)

(298,479
)
Financing activities
 
 


 

Dividends paid
 
(259,758
)
 
(258,508
)
Distributions to noncontrolling interests
 
(273,460
)
 
(275,259
)
Borrowing (repayment) of short-term borrowings, net
 
164,130


29,967

Issuance of long-term debt, net of discounts
 


1,000,000

Debt financing costs
 
(38
)

(2,770
)
Repayment of long-term debt
 
(3,898
)

(654,151
)
Issuance of common stock
 
10,845

 
11,101

Other
 
(13,485
)
 

Cash used in financing activities
 
(375,664
)

(149,620
)
Change in cash and cash equivalents
 
83,496

 
83,507

Change in cash and cash equivalents included in discontinued operations
 

 
(272
)
Change in cash and cash equivalents from continuing operations
 
83,496


83,235

Cash and cash equivalents at beginning of period
 
248,875


97,619

Cash and cash equivalents at end of period
 
$
332,371


$
180,854

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
 
Preferred Stock Issued
 
Common
Stock
 
Preferred Stock
 
Paid-in
Capital
 
 
(Shares)
 
(Thousands of dollars)
January 1, 2017
 
245,811,180

 

 
$
2,458

 
$

 
$
1,234,314

Cumulative effect adjustment for adoption of ASU 2016-09
 

 

 

 

 

Net income
 

 

 

 

 

Other comprehensive income (loss) (Note G)
 

 

 

 

 

Common stock issued
 

 

 

 

 
1,199

Preferred stock issued
 

 
20,000

 

 

 
20,000

Common stock dividends - $1.23 per share (Note F)
 

 

 

 

 
(27,336
)
Preferred stock dividends (Note F)
 

 

 

 

 
(217
)
Distributions to noncontrolling interests
 

 

 

 

 

Acquisition of ONEOK Partners’ noncontrolling interests (Note B)
 
168,920,831

 

 
1,689

 

 
5,228,580

Other
 

 

 

 

 
6,590

June 30, 2017
 
414,732,011

 
20,000

 
$
4,147

 
$

 
$
6,463,130


 
 
ONEOK Shareholders’ Equity
(Unaudited)
 
Common
Stock Issued
 
Preferred Stock Issued
 
Common
Stock
 
Preferred Stock
 
Paid-in
Capital
 
 
(Shares)
 
(Thousands of dollars)
January 1, 2016
 
245,811,180

 

 
$
2,458

 
$

 
$
1,378,444

Net income
 

 

 

 

 

Other comprehensive income (loss)
 

 

 

 

 

Common stock issued
 

 

 

 

 
(2,034
)
Common stock dividends - $1.23 per share (Note F)
 

 

 

 

 
(89,118
)
Distributions to noncontrolling interests
 

 

 

 

 

Other
 

 

 

 

 
7,291

June 30, 2016
 
245,811,180

 

 
$
2,458

 
$

 
$
1,294,583



12


ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
 
 
(Continued)
 
 
 
 
 
 
 
 
 
 
 
 
ONEOK Shareholders’ Equity
 
 
 
 
(Unaudited)
 
Accumulated
Other
Comprehensive
Loss
 
Retained Earnings
 
Treasury
Stock
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
Total
Equity
 
 
(Thousands of dollars)
January 1, 2017
 
$
(154,350
)
 
$

 
$
(893,677
)
 
$
3,240,170

 
$
3,428,915

Cumulative effect adjustment for adoption of ASU 2016-09
 

 
73,368

 

 

 
73,368

Net income
 

 
159,054

 

 
203,122

 
362,176

Other comprehensive income (loss) (Note G)
 
18,553

 

 

 
31,026

 
49,579

Common stock issued
 

 

 
10,232

 

 
11,431

Preferred stock issued
 

 

 

 

 
20,000

Common stock dividends - $1.23 per share (Note F)
 

 
(232,422
)
 

 

 
(259,758
)
Preferred stock dividends (Note F)
 

 

 

 

 
(217
)
Distributions to noncontrolling interests
 

 

 

 
(273,460
)
 
(273,460
)
Acquisition of ONEOK Partners’ noncontrolling interests (Note B)
 
(40,288
)
 

 

 
(3,043,519
)
 
2,146,462

Other
 

 

 

 
145

 
6,735

June 30, 2017
 
$
(176,085
)
 
$

 
$
(883,445
)
 
$
157,484

 
$
5,565,231


 
 
ONEOK Shareholders’ Equity
 
 
 
 
(Unaudited)
 
Accumulated
Other
Comprehensive
Loss
 
Retained Earnings
 
Treasury
Stock
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
Total
Equity
 
 
(Thousands of dollars)
January 1, 2016
 
$
(127,242
)
 
$

 
$
(917,862
)
 
$
3,430,538

 
$
3,766,336

Net income
 

 
169,390

 

 
185,428

 
354,818

Other comprehensive income (loss)
 
(32,004
)
 

 

 
(81,918
)
 
(113,922
)
Common stock issued
 

 

 
17,496

 

 
15,462

Common stock dividends - $1.23 per share (Note F)
 

 
(169,390
)
 

 

 
(258,508
)
Distributions to noncontrolling interests
 

 

 

 
(275,259
)
 
(275,259
)
Other
 

 

 

 
(4,041
)
 
3,250

June 30, 2016
 
$
(159,246
)
 
$

 
$
(900,366
)
 
$
3,254,748

 
$
3,492,177

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 2016 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 and our Current Report on Form 8-K filed on July 6, 2017, which updates Item 8 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.

Merger Transaction - On June 30, 2017, we completed the acquisition of all of the outstanding common units of ONEOK Partners that we did not already own. See Note B for additional information, including a discussion of the impact of the Merger Transaction on our Consolidated Financial Statements.

Discontinued Operations - Beginning in 2017, the results of operations and financial position of our former energy services business are no longer reflected as discontinued operations in our Consolidated Financial Statements and Notes to the Consolidated Financial Statements, as they are not material.

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.
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
 
As a result of adopting this guidance, we recorded an adjustment increasing beginning retained earnings and deferred tax assets in the first quarter 2017 of approximately $73 million to recognize previously unrecognized cumulative excess tax benefits related to share-based payments on a modified retrospective basis. Beginning in January 2017, all share-based payment tax effects are recorded in earnings. The other effects of adopting this standard were not material.

14


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, which we have substantially completed. For the majority of our contracts, we do not expect material changes in our accounting policies or revenue recognition. However, we are reviewing the potential impact on certain contract types where there remains diversity of thought across our industry in the application of the standard. Due to this ongoing analysis, we cannot yet determine the quantitative impact on revenues or cost of sales from the adoption of Topic 606, but we do not currently believe the adoption will have a material impact on net income. We are developing our required disclosures under the standard and expect to disaggregate revenues similar to our current presentation in Note L - Segments. We have not identified material unsatisfied performance obligations that would require disclosure. We are currently evaluating methods of adoption and analyzing the impact of the standard on our internal controls. We expect to determine our method of adoption when we complete our evaluation of the quantitative 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 do not have any equity investments classified as available-for-sale or accounted for using the cost method, therefore we do not expect adoption of this standard to have a material impact 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 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”
 
The standard requires the service cost component of net benefit cost to be reported in the same line item or items as other compensation costs from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations.
 
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 other contracts that may be considered leases under the new standard and the impact on our internal controls, accounting policies and financial statements and disclosures.

15


Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards that are not yet adopted (continued)
 
 
 
 
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 June 30, 2017, we completed the Merger Transaction at a fixed exchange ratio of 0.985 of a share of our common stock for each ONEOK Partners common unit that we did not already own. We issued 168.9 million shares of our common stock to third-party common unitholders of ONEOK Partners in exchange for all of the 171.5 million outstanding common units of ONEOK Partners that we previously did not own. No fractional shares were issued in the Merger Transaction, and ONEOK Partners common unitholders instead received cash in lieu of fractional shares. As a result of the completion of the Merger Transaction, common units of ONEOK Partners are no longer publicly traded.

As we controlled ONEOK Partners and continue to control ONEOK Partners after the Merger Transaction, the change in our ownership interest was accounted for as an equity transaction, and no gain or loss was recognized in our Consolidated Statements of Income resulting from the Merger Transaction. The Merger Transaction was a taxable exchange to the ONEOK Partners unitholders resulting in a book/tax difference in the basis of the underlying assets acquired.  We recorded a deferred tax asset of approximately $2.1 billion, computed as the net of the equity value exchanged of $8.8 billion and noncontrolling interests of $3.0 billion at a tax rate of 37 percent, based on a preliminary tax allocation of the transaction value. Final allocation is subject to completion of our valuation study.

Prior to June 30, 2017, we and our subsidiaries owned all of the general partner interest, which included incentive distribution rights, and a portion of the limited partner interest, which, together represented a 41.2 percent ownership interest in ONEOK Partners. The equity interests in ONEOK Partners (which are consolidated in our financial statements) that were owned by the public until June 30, 2017, are reflected in “Noncontrolling interests” in our accompanying Consolidated Balance Sheet as of December 31, 2016. The earnings of ONEOK Partners that are attributed to its units held by the public until June 30, 2017, are reported as “Net income attributable to noncontrolling interest” in our accompanying Consolidated Statements of Income. Our general partner incentive distribution rights effectively terminated at the closing of the Merger Transaction.

Effective with the close of the Merger Transaction, we, ONEOK Partners and the Intermediate Partnership issued, to the extent not already in place, guarantees of the indebtedness of ONEOK and ONEOK Partners.


16


Supplemental Cash Flow Information - Our noncash balance sheet activity related to the Merger Transaction is as follows (in millions):
 
 
June 30, 2017
Common stock
 
$
1.7

Paid-in capital
 
$
5,228.6

Accumulated other comprehensive loss
 
$
(40.3
)
Noncontrolling interests in consolidated subsidiaries
 
$
(3,043.5
)
Deferred income taxes
 
$
(2,146.5
)

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 composed 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.


17


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:
 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting (a)
 
Total - Net (b)
 
(Thousands of dollars)
Derivative assets
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
4,349

 
$

 
$
11,865

 
$
16,214

 
$
(15,786
)
 
$
428

Physical contracts

 

 
710

 
710

 

 
710

Interest-rate contracts

 
38,006

 

 
38,006

 

 
38,006

Total derivative assets
$
4,349

 
$
38,006

 
$
12,575

 
$
54,930

 
$
(15,786
)
 
$
39,144

Derivative liabilities
 

 
 

 
 

 
 

 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
(5,973
)
 
$

 
$
(10,792
)
 
$
(16,765
)
 
$
16,656

 
$
(109
)
Physical contracts

 

 
(1,033
)
 
(1,033
)
 

 
(1,033
)
Interest-rate contracts

 
(16,872
)
 

 
(16,872
)
 

 
(16,872
)
Total derivative liabilities
$
(5,973
)
 
$
(16,872
)
 
$
(11,825
)
 
$
(34,670
)
 
$
16,656

 
$
(18,014
)
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At June 30, 2017, we held no cash and posted $11.8 million of cash with various counterparties, including $0.9 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $10.9 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.


18


The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Derivative Assets (Liabilities)
2017
 
2016
 
2017
 
2016
 
(Thousands of dollars)
Net assets (liabilities) at beginning of period
$
(772
)
 
$
34

 
$
(23,319
)
 
$
7,331

Total realized/unrealized gains (losses):


 


 
 
 
 
Included in earnings (a)
(656
)
 
318

 
258

 
(427
)
Included in other comprehensive income (loss)
2,178

 
(14,373
)
 
23,811

 
(20,925
)
Net assets (liabilities) at end of period
$
750

 
$
(14,021
)
 
$
750

 
$
(14,021
)
(a) - Included in commodity sales revenues in our Consolidated Statements of Income.

Realized/unrealized gains (losses) include the realization of our derivative contracts through maturity. During the three and six months ended June 30, 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 and six months ended June 30, 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 composed 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 $9.1 billion and $8.8 billion at June 30, 2017, and December 31, 2016, respectively. The book value of our consolidated long-term debt, including current maturities, was $8.3 billion at June 30, 2017, and December 31, 2016. The estimated fair value of the aggregate of our 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.

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 are also subject to the risk of interest-rate fluctuation in the normal course of business. 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.

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.

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 buy 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 June 30, 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 June 30, 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.

In July 2017, we settled $400 million of our forward-starting interest-rate swaps upon the completion of our underwritten public offering of $1.2 billion senior unsecured notes and $500 million of our interest-rate swaps used to hedge our LIBOR-based interest payments.

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.


20


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:
 
 
 
June 30, 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
 
$
7,577

 
$
(13,082
)
 
$
1,155

 
$
(49,938
)
 
Other assets/deferred credits and other liabilities
 
5,510

 
(225
)
 
210

 
(2,142
)
Physical contracts
Other current assets/other current liabilities
 
330

 
(1,033
)
 

 
(3,022
)
 
Other assets
 
380

 

 

 

Interest-rate contracts
Other current assets/other current liabilities
 
493

 
(16,872
)
 

 
(12,795
)
 
Other assets
 
37,513

 

 
47,457

 

Total derivatives designated as hedging instruments
 
 
51,803

 
(31,212
)
 
48,822

 
(67,897
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
Financial contracts
Other current assets/other current liabilities
 
2,587

 
(2,967
)
 
4,346

 
(4,239
)
 
Other assets/deferred credits and other liabilities
 
540

 
(491
)
 

 

Total derivatives not designated as hedging instruments
 
 
3,127

 
(3,458
)
 
4,346

 
(4,239
)
Total derivatives
 
 
$
54,930

 
$
(34,670
)
 
$
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:
 
 
June 30, 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

 
(34.3
)
 

 
(38.4
)
- Natural gas (Bcf)
Put options
22.5

 

 
49.5

 

- Crude oil and NGLs (MMBbl)
Futures, forwards
and swaps
0.7

 
(5.0
)
 

 
(3.6
)
Basis
 
 

 
 

 
 
 
 
- Natural gas (Bcf)
Futures and swaps

 
(34.3
)
 

 
(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
1.8

 

 
0.4

 

- NGLs (MMBbl)
Futures, forwards
and swaps
0.6

 
(1.1
)
 
0.5

 
(0.7
)
Basis
 
 
 
 
 
 
 
 
- Natural gas (Bcf)
Futures and swaps
1.8

 

 
0.4

 


21



These notional amounts are used to summarize the volume of financial instruments; however, they do not reflect the extent to which the positions offset one another and, consequently, do not reflect our actual exposure to market or credit risk.

Cash Flow Hedges - At June 30, 2017, our Consolidated Balance Sheet reflected a net loss of $176.1 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 $3.1 million, net of tax, which is expected to be realized within the next 18 months as the forecasted transactions affect earnings. If commodity prices remain at current levels, we will realize approximately $6.6 million in net losses, net of tax, over the next 12 months and approximately $3.5 million in net gains, net of tax, thereafter. The amount deferred in accumulated other comprehensive loss attributable to our settled interest-rate swaps is a loss of $84.3 million, net of tax, which will be recognized over the life of the long-term, fixed-rate debt, including losses of $12.9 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 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
 
Six Months Ended
Derivatives in Cash Flow
Hedging Relationships
June 30,
 
June 30,
2017
 
2016
 
2017
 
2016
 
(Thousands of dollars)
Commodity contracts
$
8,998

 
$
(58,654
)
 
$
36,326

 
$
(46,976
)
Interest-rate contracts
(14,995
)
 
(28,564
)
 
(13,466
)
 
(60,175
)
Total unrealized gain (loss) recognized in other comprehensive income (loss) on derivatives (effective portion)
$
(5,997
)
 
$
(87,218
)
 
$
22,860

 
$
(107,151
)

The following table sets forth the effect of cash flow hedges in our Consolidated Statements of Income for the periods indicated:
Derivatives in Cash Flow
Hedging Relationships
Location of Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Loss into Net Income (Effective Portion)
Three Months Ended
 
Six Months Ended
June 30,
 
June 30,
2017
 
2016
 
2017
 
2016
 
 
(Thousands of dollars)
Commodity contracts
Commodity sales revenues
$
(6,796
)
 
$
14,049

 
$
(22,115
)
 
$
28,548

Interest-rate contracts
Interest expense
(5,172
)
 
(4,802
)
 
(10,501
)
 
(9,500
)
Total gain (loss) reclassified from accumulated other comprehensive loss into net income on derivatives (effective portion)
$
(11,968
)
 
$
9,247

 
$
(32,616
)
 
$
19,048


Credit Risk - We monitor the creditworthiness of our counterparties and compliance with policies and limits established by our Risk Oversight and Strategy Committee. We maintain credit policies with regard to our counterparties that we believe minimize overall credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit ratings, bond yields and credit default swap rates), collateral requirements under certain circumstances and the use of standardized master-netting agreements that allow us to net the positive and negative exposures associated with a single counterparty. We have counterparties whose credit is not rated, and for those customers, we use internally developed credit ratings.

From time to time, we may enter into financial derivative instruments that contain provisions that require us to maintain an investment-grade credit rating from S&P and/or Moody’s. If our credit ratings on our senior unsecured long-term debt were to decline below investment grade, the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions. There were no financial derivative instruments with contingent features related to credit risk at June 30, 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

22


conditions. Based on our policies, exposures, credit and other reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty nonperformance.

At June 30, 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 consolidated debt for the periods indicated:
 
 
June 30,
2017
 
December 31,
2016
 
 
(Thousands of dollars)
ONEOK
 
 
 
 
Senior unsecured obligations:
 
 
 
 
$700,000 at 4.25% due February 2022
 
$
547,397

 
$
547,397

$500,000 at 7.5% due September 2023
 
500,000

 
500,000

$100,000 at 6.5% due September 2028
 
87,053

 
87,126

$100,000 at 6.875% due September 2028
 
100,000

 
100,000

$400,000 at 6.0% due June 2035
 
400,000

 
400,000

ONEOK Partners
 
 
 
 
Commercial paper outstanding, bearing a weighted-average interest rate of 1.80% and 1.27%, respectively (a)
1,274,407

 
1,110,277

Senior unsecured obligations:
 
 
 
 
$400,000 at 2.0% due October 2017
 
400,000

 
400,000

$425,000 at 3.2% due September 2018
 
425,000

 
425,000

$1,000,000 term loan, variable rate, due January 2019 (b)
 
1,000,000

 
1,000,000

$500,000 at 8.625% due March 2019
 
500,000

 
500,000

$300,000 at 3.8% due March 2020
 
300,000

 
300,000

$900,000 at 3.375 % due October 2022
 
900,000

 
900,000

$425,000 at 5.0 % due September 2023
 
425,000

 
425,000

$500,000 at 4.9 % due March 2025
 
500,000

 
500,000

$600,000 at 6.65% due October 2036
 
600,000

 
600,000

$600,000 at 6.85% due October 2037
 
600,000

 
600,000

$650,000 at 6.125% due February 2041
 
650,000

 
650,000

$400,000 at 6.2% due September 2043
 
400,000

 
400,000

Guardian Pipeline