form_10-q.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, 2009
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 Web site, 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 checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X             Accelerated filer __             Non-accelerated filer __             Smaller reporting company__

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X

On July 31, 2009, the Company had 105,394,349 shares of common stock outstanding.
 

ONEOK, Inc.
QUARTERLY REPORT ON FORM 10-Q

Financial Information
 
Page No.
Item 1.
Financial Statements (Unaudited)
 
 
 
 
5
 
 
6-7
 
 
9
 
 
 
10-11
 
 
12
 
 
 
13-32
 
Item 2.
33-54
 
Item 3.
 
54-55
 
Item 4.
 
55-56
 
Part II.
Other Information
 
 
Item 1.
 
56
 
Item 1A.
 
56
 
Item 2.
 
57
 
Item 3.
 
57
Item 4.
 
57
Item 5.
 
57
Item 6.
 
58
 
59

As used in this Quarterly Report, references to “we,” “our” or “us” refer to ONEOK, Inc., an Oklahoma corporation, and its predecessors 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,” “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 and 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” and Part II, Item 1A, “Risk Factors” in this Quarterly Report and under Part I, Item 1A, “Risk Factors,” in our Annual Report.

INFORMATION AVAILABLE ON OUR WEB SITE

We make available on our Web site copies of our Annual Report, Quarterly Reports, 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.  Our Web site and any contents thereof are not incorporated by reference into this report.

We also make available on our Web site the Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T.  In accordance with Rule 402 of Regulation S-T, the Interactive Data Files shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
 
 
- 2 -

 
GLOSSARY
The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:

AFUDC
Allowance for funds used during construction
Annual Report
Annual Report on Form 10-K for the year ended December 31, 2008
ARB
Accounting Research Bulletin
Bbl
Barrels, 1 barrel is equivalent to 42 United States gallons
Bbl/d
Barrels per day
BBtu/d
Billion British thermal units per day
Bcf
Billion cubic feet
Bcf/d
Billion cubic feet per day
Btu(s)
British thermal units, a measure of the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit
Bushton Plant
Bushton Gas Processing Plant
EBITDA
Earnings before interest, taxes, depreciation and amortization
EITF
Emerging Issues Task Force
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
FSP
FASB Staff Position
GAAP
Accounting principles generally accepted in the United States of America
Guardian Pipeline
Guardian Pipeline, L.L.C.
KCC
Kansas Corporation Commission
KDHE
Kansas Department of Health and Environment
LDC
Local Distribution Company
LIBOR
London Interbank Offered Rate
MBbl
Thousand barrels
MBbl/d
Thousand barrels per day
Mcf
Thousand cubic feet
MMBbl
Million barrels
MMBtu
Million British thermal units
MMBtu/d
Million British thermal units per day
MMcf
Million cubic feet
MMcf/d
Million cubic feet per day
Moody’s
Moody’s Investors Service, Inc.
NGL products
Marketable natural gas liquid purity products, such as ethane, ethane/propane mix, propane, iso-butane, normal butane and natural gasoline
NGL(s)
Natural gas liquid(s)
Northern Border Pipeline
Northern Border Pipeline Company
NYMEX
New York Mercantile Exchange
OBPI
ONEOK Bushton Processing Inc.
OCC
Oklahoma Corporation Commission
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, L.P.
OPIS
Oil Price Information Service
Overland Pass Pipeline Company
Overland Pass Pipeline Company LLC
Quarterly Report(s)
Quarterly Report(s) on Form 10-Q
S&P
Standard & Poor’s Rating Group
SEC
Securities and Exchange Commission
Statement
Statement of Financial Accounting Standards
XBRL
eXtensible Business Reporting Language
 

























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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)
 
2009
   
2008
   
2009
   
2008
 
   
(Thousands of dollars, except per share amounts)
 
                         
Revenues
  $ 2,227,627     $ 4,172,866     $ 5,017,454     $ 9,074,942  
Cost of sales and fuel
    1,795,201       3,752,038       4,033,617       8,068,202  
Net margin
    432,426       420,828       983,837       1,006,740  
Operating expenses
                               
Operations and maintenance
    184,874       171,431       346,593       339,423  
Depreciation and amortization
    71,249       59,701       143,375       119,180  
General taxes
    25,261       16,680       50,488       42,011  
Total operating expenses
    281,384       247,812       540,456       500,614  
Gain (loss) on sale of assets
    3,762       (4 )     4,426       9  
Operating income
    154,804       173,012       447,807       506,135  
Equity earnings from investments (Note L)
    14,188       17,610       35,410       45,393  
Allowance for equity funds used during construction
    9,468       11,676       18,471       20,172  
Other income
    7,939       704       9,604       3,936  
Other expense
    (1,399 )     (407 )     (5,343 )     (5,015 )
Interest expense
    (73,392 )     (59,059 )     (151,353 )     (121,920 )
Income before income taxes
    111,608       143,536       354,596       448,701  
Income taxes
    (30,258 )     (30,574 )     (109,697 )     (122,942 )
Net income
    81,350       112,962       244,899       325,759  
Less: Net income attributable to noncontrolling interests
    39,671       71,097       80,935       140,057  
Net income attributable to ONEOK
  $ 41,679     $ 41,865     $ 163,964     $ 185,702  
                                 
Earnings per share of common stock (Note M)
                               
Net earnings per share, basic
  $ 0.40     $ 0.40     $ 1.56     $ 1.78  
Net earnings per share, diluted
  $ 0.39     $ 0.39     $ 1.55     $ 1.75  
                                 
Average shares of common stock (thousands)
                               
Basic
    105,335       104,340       105,249       104,255  
Diluted
    105,950       106,072       105,848       105,947  
                                 
Dividends declared per share of common stock
  $ 0.40     $ 0.38     $ 0.80     $ 0.76  
See accompanying Notes to Consolidated Financial Statements.
                         
 

ONEOK, Inc. and Subsidiaries
           
CONSOLIDATED BALANCE SHEETS
           
   
June 30,
 
  December 31,
(Unaudited)
 
2009
   
2008
 
Assets
 
(Thousands of dollars)
 
Current assets
           
Cash and cash equivalents
  $ 47,038     $ 510,058  
Accounts receivable, net
    771,196       1,265,300  
Gas and natural gas liquids in storage
    564,530       858,966  
Commodity exchanges and imbalances
    53,417       56,248  
Energy marketing and risk management assets (Notes B and C)
    168,457       362,808  
Other current assets
    189,277       324,222  
Total current assets
    1,793,915       3,377,602  
                 
Property, plant and equipment
               
Property, plant and equipment
    9,880,620       9,476,619  
Accumulated depreciation and amortization
    2,289,760       2,212,850  
Net property, plant and equipment (Note J)
    7,590,860       7,263,769  
                 
Investments and other assets
               
Goodwill and intangible assets
    1,034,393       1,038,226  
Energy marketing and risk management assets (Notes B and C)
    47,163       45,900  
Investments in unconsolidated affiliates (Note L)
    735,394       755,492  
Other assets
    631,998       645,073  
Total investments and other assets
    2,448,948       2,484,691  
Total assets
  $ 11,833,723     $ 13,126,062  
See accompanying Notes to Consolidated Financial Statements.
               


ONEOK, Inc. and Subsidiaries
           
CONSOLIDATED BALANCE SHEETS
           
   
June 30,
 
  December 31,
(Unaudited)
 
2009
   
2008
 
Liabilities and shareholders’ equity
 
(Thousands of dollars)
 
Current liabilities
           
Current maturities of long-term debt (Note G)
  $ 268,205     $ 118,195  
Notes payable (Note F)
    689,910       2,270,000  
Accounts payable
    826,414       1,122,761  
Commodity exchanges and imbalances
    166,847       188,030  
Energy marketing and risk management liabilities (Notes B and C)
    41,485       175,006  
Other current liabilities
    444,182       319,772  
Total current liabilities
    2,437,043       4,193,764  
                 
Long-term debt, excluding current maturities (Note G)
    4,346,285       4,112,581  
                 
Deferred credits and other liabilities
               
Deferred income taxes
    867,015       890,815  
Energy marketing and risk management liabilities (Notes B and C)
    8,301       46,311  
Other deferred credits
    762,213       715,052  
Total deferred credits and other liabilities
    1,637,529       1,652,178  
                 
Commitments and contingencies (Note I)
               
                 
Shareholders’ equity
               
                 
ONEOK shareholders’ equity
               
Common stock, $0.01 par value:
               
authorized 300,000,000 shares; issued 122,180,571 shares and outstanding
               
105,371,561 shares at June 30, 2009; issued 121,647,007 shares and
               
outstanding 104,845,231 shares at December 31, 2008
    1,222       1,216  
Paid in capital
    1,308,141       1,301,153  
Accumulated other comprehensive loss (Note D)
    (82,960 )     (70,616 )
Retained earnings
    1,632,795       1,553,033  
Treasury stock, at cost: 16,809,010 shares at June 30, 2009 and
               
16,801,776 shares at December 31, 2008
    (696,805 )     (696,616 )
Total ONEOK shareholders’ equity
    2,162,393       2,088,170  
                 
Noncontrolling interests in consolidated subsidiaries
    1,250,473       1,079,369  
                 
Total shareholders’ equity
    3,412,866       3,167,539  
Total liabilities and shareholders’ equity
  $ 11,833,723     $ 13,126,062  
See accompanying Notes to Consolidated Financial Statements.
               



























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ONEOK, Inc. and Subsidiaries
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
   
Six Months Ended
 
   
June 30,
 
(Unaudited)
 
2009
   
2008
 
   
(Thousands of dollars)
 
Operating activities
           
Net income
  $ 244,899     $ 325,759  
Depreciation and amortization
    143,375       119,180  
Allowance for equity funds used during construction
    (18,471 )     (20,172 )
Gain on sale of assets
    (4,426 )     (9 )
Equity earnings from investments
    (35,410 )     (45,393 )
Distributions received from unconsolidated affiliates
    38,233       39,904  
Deferred income taxes
    40,865       65,374  
Stock-based compensation expense
    8,551       14,416  
Allowance for doubtful accounts
    1,663       6,965  
Changes in assets and liabilities:
               
Accounts receivable
    492,441       194,146  
Gas and natural gas liquids in storage
    285,271       (85,083 )
Accounts payable
    (324,364 )     261,530  
Commodity exchanges and imbalances, net
    (18,352 )     53,881  
Energy marketing and risk management assets and liabilities
    35,373       77,033  
Unrecovered purchased gas costs
    42,766       18,185  
Fair value of firm commitments
    179,582       (350,626 )
Other assets and liabilities
    (36,144 )     (140,285 )
Cash provided by operating activities
    1,075,852       534,805  
                 
Investing activities
               
Changes in investments in unconsolidated affiliates
    17,393       6,480  
Capital expenditures (less allowance for equity funds used during construction)
    (407,600 )     (640,048 )
Proceeds from sale of assets
    10,029       201  
Proceeds from insurance
    -       9,792  
Acquisitions
    -       2,450  
Cash used in investing activities
    (380,178 )     (621,125 )
                 
Financing activities
               
Borrowing (repayment) of notes payable, net
    (710,090 )     598,893  
Repayment of notes payable with maturities over 90 days
    (870,000 )     -  
Issuance of debt, net of discounts
    498,325       -  
Long-term debt financing costs
    (4,000 )     -  
Payment of debt
    (107,970 )     (408,789 )
Repurchase of common stock
    (250 )     (29 )
Issuance of common stock
    4,342       5,786  
Issuance of common units, net of discounts
    220,458       146,969  
Dividends paid
    (84,202 )     (79,212 )
Distributions to noncontrolling interests
    (105,307 )     (97,659 )
Cash provided by (used in) financing activities
    (1,158,694 )     165,959  
Change in cash and cash equivalents
    (463,020 )     79,639  
Cash and cash equivalents at beginning of period
    510,058       19,105  
Cash and cash equivalents at end of period
  $ 47,038     $ 98,744  
See accompanying Notes to Consolidated Financial Statements.
               
 

ONEOK, Inc. and Subsidiaries
                       
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                   
                         
                         
   
ONEOK Shareholders
 
                     
Accumulated
 
   
Common
               
Other
 
   
Stock
   
Common
   
Paid-in
   
Comprehensive
 
(Unaudited)
 
Issued
   
Stock
   
Capital
   
Income (Loss)
 
   
(Shares)
 
(Thousands of dollars)
 
                         
December 31, 2008
    121,647,007     $ 1,216     $ 1,301,153     $ (70,616 )
Net income
    -       -       -       -  
Other comprehensive income (loss) (Note D)
    -       -       -       (12,344 )
Repurchase of common stock
    -       -       -       -  
Common stock issued
    533,564       6       6,988       -  
Common stock dividends -
                               
$0.80 per share
    -       -       -       -  
Issuance of equity units
    -       -       -       -  
Distributions paid
    -       -       -       -  
June 30, 2009
    122,180,571     $ 1,222     $ 1,308,141     $ (82,960 )
See accompanying Notes to Consolidated Financial Statements.
                         
 
 
- 10 -


ONEOK, Inc. and Subsidiaries
                       
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
             
(Continued)
                       
                         
 
ONEOK Shareholders
   
Noncontrolling Interests in Consolidated Subsidiaries
       
                   
               
Total
 
   
Retained
   
Treasury
   
Shareholders’
 
(Unaudited)
 
Earnings
   
Stock
   
Equity
 
 
(Thousands of dollars)
 
                         
December 31, 2008
  $ 1,553,033     $ (696,616 )   $ 1,079,369     $ 3,167,539  
Net income
    163,964       -       80,935       244,899  
Other comprehensive income (loss) (Note D)
    -       -       (24,982 )     (37,326 )
Repurchase of common stock
    -       (250 )     -       (250 )
Common stock issued
    -       61       -       7,055  
Common stock dividends -
                               
$0.80 per share
    (84,202 )     -       -       (84,202 )
Issuance of equity units
    -       -       220,458       220,458  
Distributions paid
    -       -       (105,307 )     (105,307 )
June 30, 2009
  $ 1,632,795     $ (696,805 )   $ 1,250,473     $ 3,412,866  
                                 
 
 
- 11 -


ONEOK, Inc. and Subsidiaries
                       
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                   
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Unaudited)
 
2009
   
2008
   
2009
   
2008
 
   
(Thousands of dollars)
 
                         
Net income
  $ 81,350     $ 112,962     $ 244,899     $ 325,759  
Other comprehensive income (loss), net of tax
                               
Unrealized gains (losses) on energy marketing and risk management
                               
assets/liabilities, net of tax
    (22,177 )     (66,249 )     38,469       (118,570 )
Realized (gains) losses in net income, net of tax
    (16,793 )     11,267       (70,713 )     4,000  
Unrealized holding gains (losses) arising during the period, net of tax
    318       (682 )     505       (5,446 )
Change in pension and postretirement benefit plan liability, net of tax
    (3,260 )     (2,468 )     (5,795 )     (4,937 )
Other
    18       -       208       -  
Total other comprehensive income (loss), net of tax (Note D)
    (41,894 )     (58,132 )     (37,326 )     (124,953 )
Comprehensive income
    39,456       54,830       207,573       200,806  
Less: Comprehensive income attributable to noncontrolling interests
    24,731       51,184       55,953       121,431  
Comprehensive income attributable to ONEOK
  $ 14,725     $ 3,646     $ 151,620     $ 79,375  
See accompanying Notes to Consolidated Financial Statements.
                               

 
- 12 -


ONEOK, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A.           SUMMARY OF ACCOUNTING POLICIES

Our accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP and reflect all adjustments that, in our opinion, are necessary for a fair presentation of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  The 2008 year-end consolidated balance sheet data was derived from 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.  Due to the seasonal nature of our business, the results of operations for the three and six months ended June 30, 2009, are not necessarily indicative of the results that may be expected for a 12-month period.

Our accounting policies are consistent with those disclosed in Note A of the Notes to Consolidated Financial Statements in our Annual Report.  The following recently issued accounting pronouncements will affect our consolidated financial statements during 2009.

Noncontrolling Interests - Statement 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51,” requires noncontrolling interest (previously referred to as minority interest) to be reported as a component of equity.  Statement 160 was effective for our year beginning January 1, 2009, and requires retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests.

Derivative Instruments and Hedging Activities - Statement 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment to FASB Statement No. 133,” requires enhanced disclosures about how derivative and hedging activities affect our financial position, financial performance and cash flows.  Statement 161 was effective for our year beginning January 1, 2009, and was applied prospectively.  See Note C for applicable disclosures.

Fair Value Measurements - As of January 1, 2009, we have applied the provisions of Statement 157, “Fair Value Measurements,” to assets and liabilities that are measured at fair value on a nonrecurring basis subsequent to initial recognition, and the impact was not material.  See Note B for disclosures of our fair value measurements.

Interim Disclosures about Fair Value - FSP 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” require disclosures of fair value of financial instruments for interim reporting periods, which were effective for our quarter ended June 30, 2009.  These disclosures are included in Note B.

Postretirement Benefit Plan Assets - FSP 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” requires enhanced disclosures about our plan assets, including our investment policies, major categories of plan assets, significant concentrations of risk within plan assets, and inputs and valuation techniques used to measure the fair value of plan assets, is effective for our fiscal year ending December 31, 2009, and will be applied prospectively. 

Subsequent Events - Statement 165, “Subsequent Events,” establishes standards of accounting for and disclosures of events that occur after the balance sheet date but before consolidated financial statements are issued.  We have evaluated subsequent events through August 6, 2009, the date our consolidated financial statements were issued, and all required disclosures have been made.

FASB Accounting Standards Codification - Statement 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Statement 168 will change the manner in which we reference authoritative accounting principles in our consolidated financial statements and will be effective for our September 30, 2009, Quarterly Report.
 
 
- 13 -


B.           FAIR VALUE MEASUREMENTS

Refer to Notes A and C of the Notes to Consolidated Financial Statements in our Annual Report for a discussion of our fair value measurements and the fair value hierarchy.

Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated.
 
   
June 30, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Netting (a)
   
Total
 
   
(Thousands of dollars)
 
Assets
                             
Derivatives
  $ 258,603     $ 103,849     $ 635,094     $ (781,926 )   $ 215,620  
Trading securities
    7,341       -       -       -       7,341  
Available-for-sale investment securities
    2,489       -       -       -       2,489  
Total assets
  $ 268,433     $ 103,849     $ 635,094     $ (781,926 )   $ 225,450  
                                         
Liabilities
                                       
Derivatives
  $ (230,180 )   $ (38,227 )   $ (464,680 )   $ 683,301     $ (49,786 )
Fair value of firm commitments
    -       -       (137,403 )     -       (137,403 )
Total liabilities
  $ (230,180 )   $ (38,227 )   $ (602,083 )   $ 683,301     $ (187,189 )
(a) - Our derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master netting arrangement exists between us and the counterparty to a derivative contract. At June 30, 2009, we held $127.1 million of cash collateral and had posted $28.5 million of cash collateral with various counterparties.
 
 
   
December 31, 2008
 
   
Level 1
   
Level 2
   
Level 3
   
Netting (a)
   
Total
 
   
(Thousands of dollars)
 
Assets
                             
Derivatives
  $ 580,029     $ 215,116     $ 454,377     $ (840,814 )   $ 408,708  
Trading securities
    4,910       -       -       -       4,910  
Available-for-sale investment securities
    1,665       -       -       -       1,665  
Fair value of firm commitments
    -       -       42,179       -       42,179  
Total assets
  $ 586,604     $ 215,116     $ 496,556     $ (840,814 )   $ 457,462  
                                         
Liabilities
                                       
Derivatives
  $ (501,726 )   $ (55,705 )   $ (412,022 )   $ 748,136     $ (221,317 )
Long-term debt swapped to floating
    -       -       (171,455 )     -       (171,455 )
Total liabilities
  $ (501,726 )   $ (55,705 )   $ (583,477 )   $ 748,136     $ (392,772 )
(a) - Our derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master netting arrangement exists between us and the counterparty to a derivative contract. At December 31, 2008, we held $92.7 million of cash collateral.
 

In accordance with Statement 157, we categorize derivatives for which fair value is determined based on multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety.

Our Level 1 fair value measurements are based on NYMEX-settled prices, actively quoted prices for equity securities and foreign currency forward exchange rates.  These balances are predominantly comprised of exchange-traded derivative contracts, including futures and certain options for natural gas and crude oil, which are valued based on unadjusted quoted prices in active markets.  Also included in Level 1 are equity securities and foreign currency forwards.

Our Level 2 fair value inputs are based on NYMEX-settled prices that are utilized to determine the fair value of certain non-exchange traded financial instruments, including natural gas and crude oil swaps.

 
- 14 -


Our Level 3 inputs are based on market volatilities derived from the NYMEX natural gas volatility curve, internally developed basis curves incorporating observable and unobservable market data, a pricing service for NGL products, historical correlations of NGL product prices to crude oil, forward NYMEX curves for crude oil, spot and forward LIBOR curves, and adjustments for the credit risk of our counterparties.  The derivatives categorized as Level 3 include over-the-counter basis and swing swaps, physical forward contracts and options for natural gas, NGL swaps and interest-rate swaps.  Also included in Level 3 are the fair values of firm commitments and long-term debt that have been hedged.  We corroborate the data on which our fair value estimates are based using quotes from an independent broker of natural gas, our market knowledge of recent transactions and analysis of historical relationships of data from the pricing service compared with actual settlements and correlations.  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 is not material.

The following tables set forth the reconciliation of our Level 3 fair value measurements for the periods indicated.
 
   
Derivative
Assets (Liabilities)
 
Fair Value of
Firm Commitments
 
Long-Term
Debt
Total
 
   
(Thousands of dollars)
 
April 1, 2009
  $ 170,238       $ (111,212 )     $ -     $ 59,026  
   Total realized/unrealized gains (losses):
                                   
       Included in earnings
    34,202  
 (a)
    (26,191 )
 (a)
    -       8,011  
       Included in other comprehensive income (loss)
    (52,330 )       -         -       (52,330 )
   Transfers in and/or out of Level 3
    18,304         -         -       18,304  
June 30, 2009
  $ 170,414       $ (137,403 )     $ -     $ 33,011  
                                     
Total gains (losses) for the period included in earnings attributable
    to the change in unrealized gains (losses) relating to assets
    and liabilities still held as of June 30, 2009 (a)
  $ 57,041       $ (44,189 )       -     $ 12,852  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
               

   
Derivative
Assets (Liabilities)
 
Fair Value of
Firm Commitments
 
Long-Term
Debt
Total
 
   
(Thousands of dollars)
 
April 1, 2008
  $ (131,942 )     $ 135,538       $ (347,705 )   $ (344,109 )
   Total realized/unrealized gains (losses):
                                   
       Included in earnings
    (283,285 )
 (a)
    257,772  
 (a)
    7,497
(
b)
  (18,016 )
       Included in other comprehensive income (loss)
    (27,272 )       -         -       (27,272 )
   Transfers in and/or out of Level 3
    32,138         -         -       32,138  
June 30, 2008
  $ (410,361 )     $ 393,310       $ (340,208 )   $ (357,259 )
                                     
Total gains (losses) for the period included in earnings attributable
    to the change in unrealized gains (losses) relating to assets
    and liabilities still held as of June 30, 2008 (a)
  $ (260,918 )     $ 275,631       $ 7,497     $ 22,210  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
               
(b) - Reported in interest expense in our Consolidated Statements of Income.
                   
 
 
- 15 -

 
   
Derivative
Assets (Liabilities)
     
Fair Value of
Firm Commitments
     
Long-Term
Debt
     
Total
 
   
(Thousands of dollars)
 
January 1, 2009
  $ 42,355       $ 42,179       $ (171,455 )     $ (86,921 )
   Total realized/unrealized gains (losses):
                                     
       Included in earnings
    188,038  
 (a)
    (179,582 )
 (a)
    1,455  
 (b)
    9,911  
       Included in other comprehensive income (loss)
    (60,060 )       -         -         (60,060 )
   Maturities
    -         -         100,000         100,000  
   Terminations prior to maturity
    -         -         70,000         70,000  
   Transfers in and/or out of Level 3
    81         -         -         81  
June 30, 2009
  $ 170,414       $ (137,403 )     $ -       $ 33,011  
                                       
Total gains (losses) for the period included in earnings attributable
    to the change in unrealized gains (losses) relating to assets
    and liabilities still held as of June 30, 2009 (a)
  $ 189,866       $ (162,734 )     $ -       $ 27,132  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
                 
(b) - Reported in interest expense in our Consolidated Statements of Income.
                     

   
Derivative
Assets (Liabilities)
     
Fair Value of
Firm Commitments
     
Long-Term
Debt
     
Total
 
   
(Thousands of dollars)
 
January 1, 2008
  $ (54,582 )     $ 42,684       $ (338,538 )     $ (350,436 )
   Total realized/unrealized gains (losses):
                                     
       Included in earnings
    (356,375 )
 (a)
    350,626  
 (a)
    (1,670 )
 (b)
    (7,419 )
       Included in other comprehensive income (loss)
    (4,007 )       -         -         (4,007 )
   Transfers in and/or out of Level 3
    4,603         -         -         4,603  
June 30, 2008
  $ (410,361 )     $ 393,310       $ (340,208 )     $ (357,259 )
                                       
Total gains (losses) for the period included in earnings attributable
    to the change in unrealized gains (losses) relating to assets
    and liabilities still held as of June 30, 2008 (a)
  $ (373,399 )     $ 351,150       $ (1,670 )     $ (23,919 )
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
                 
(b) - Reported in interest expense in our Consolidated Statements of Income.
                     
 
Realized/unrealized gains (losses) include the realization of our fair value derivative contracts through maturity and changes in fair value of our hedged firm commitments and fixed-rate debt swapped to a floating rate.  Maturities represent the long-term debt associated with an interest-rate swap that matured during the period.  Terminations prior to maturity represent the long-term debt associated with an interest rate swap that was terminated during the period.  Transfers into Level 3 represent existing assets or liabilities that were previously categorized at a higher level for which the inputs to our fair value estimates became unobservable.  Transfers out of Level 3 represent existing assets and liabilities that were previously classified as Level 3 for which the inputs became observable in accordance with our hierarchy policy discussed in Note A of the Notes to Consolidated Financial Statements in our Annual Report.

Investment Securities - Net unrealized holding gains, net of tax, for our investment securities classified as available for sale and reported in accumulated other comprehensive income (loss) were $1.3 million and $0.8 million as of June 30, 2009, and December 31, 2008, respectively.  For the three and six months ended June 30, 2009, net unrealized holding gains on available-for-sale securities included in other comprehensive income were immaterial.  For the three and six months ended June 30, 2009, we recorded net gains of $1.5 million and $2.4 million, respectively, which represents the total mark-to-market effect of trading securities still held as of June 30, 2009.

 
- 16 -


Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable and accounts payable is equal to book value, due to their short-term nature.  The fair value of notes payable approximates the carrying value since the interest rates, prescribed by each borrowing’s respective credit agreement, are periodically adjusted to reflect current market conditions.

The estimated fair value of long-term debt, including current maturities, was $4.52 billion at June 30, 2009.  The book value of long-term debt, including current maturities, was $4.61 billion at June 30, 2009.  The estimated fair value of long-term debt has been determined using quoted market prices of the same or similar issues with similar terms and maturities.

C.           RISK MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES

Energy Marketing and Risk Management Activities

Our Energy Services and ONEOK Partners segments are exposed to various risks that we manage by periodically entering into derivative instruments.  These risks include the following:
·  
Commodity price risk - We are exposed to the risk of loss in cash flows and future earnings arising from adverse changes in the price of natural gas, NGLs and crude oil.  We use commodity derivative instruments such as futures, physical forward contracts, swaps and options to mitigate the commodity price risk associated with a portion of the forecasted purchases and sales of commodities and natural gas and natural gas liquids in storage.
·  
Basis risk - We are exposed to the risk of loss in cash flows and future earnings arising from adverse changes in the price differentials between pipeline receipt and delivery locations.  Our firm transportation capacity allows us to purchase gas at a pipeline receipt point and sell gas at a pipeline delivery point.  Our Energy Services segment periodically enters into basis swaps between the transportation receipt and delivery points in order to protect the fair value of these location price differentials related to our firm commitments.
·  
Currency exchange rate risk - As a result of our Energy Services segment’s activities in Canada, we are exposed to the risk of loss in cash flows and future earnings from adverse changes in currency exchange rates on our commodity purchases and sales primarily related to our firm transportation and storage contracts that are transacted in a currency other than our functional currency, the U.S. dollar.  To reduce our exposure to exchange-rate fluctuations, we use physical forward transactions, which result in an actual two-way flow of currency on the settlement date in which we exchange U.S. dollars for Canadian dollars with another party.

The following derivative instruments are used to manage our exposure to these risks.
·  
Futures contracts - Standardized exchange-traded contracts to purchase or sell natural gas and crude oil at a specified price, requiring delivery on or settlement through the sale or purchase of an offsetting contract by a specified future date under the provisions of exchange regulations. 
·  
Forward contracts - Commitments to purchase or sell natural gas, crude oil or NGLs for delivery at some specified time in the future.  Forward contracts are different from futures in that forwards are customized and non-exchange traded.
·  
Swaps - Financial trades involving the exchange of payments based on two different pricing structures for a commodity.  In a typical commodity swap, parties exchange payments based on changes in the price of a commodity or a market index, while fixing the price they effectively pay or receive for the physical commodity.  As a result, one party assumes the risks and benefits of movements in market prices, while the other party assumes the risks and benefits of a fixed price for the commodity.
·  
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, exchange traded or customized and non-exchange traded.

Our objectives for entering into such contracts include, but are not limited to:
·  
reducing the variability of cash flows by locking in the price for all or a portion of anticipated index-based physical purchases and sales, transportation fuel requirements, asset management transactions and customer-related business activities;
·  
locking in price differential to protect the fair value between transportation receipt and delivery points and to protect the fair value of natural gas or NGLs that are purchased in one month and sold in a later month; and
·  
reducing our exposure to fluctuations in foreign currency exchange rates.

Our Energy Services segment also enters into derivative contracts for financial trading purposes primarily to capitalize on opportunities created by market volatility, weather-related events, supply-demand imbalances and market liquidity

 
- 17 -


inefficiency, which allows us to capture additional margin.  Financial trading activities are generally executed using financially settled derivatives and are normally short term in nature.

With respect to the net open positions that exist within our marketing and financial trading operations, fluctuating commodity prices can impact our financial position and results of operations.  The net open positions are actively managed, and the impact of the changing prices on our financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year.

Our Distribution segment also uses derivative instruments to hedge the cost of anticipated natural gas purchases during the winter heating months to protect our customers from upward volatility in the market price of natural gas.  The use of these derivative instruments and the associated recovery of these costs have been approved by the OCC, KCC and regulatory authorities in certain of our Texas jurisdictions.

We are also subject to fluctuation in interest rates.  We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps.  Floating-rate swaps may be used to convert the fixed rates of long-term borrowings into short-term variable rates.  Interest-rate swaps are agreements to exchange an interest payment at some future point based on the differential between two interest rates.

Accounting Treatment

We account for derivative instruments and hedging activities in accordance with Statement 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.  Under Statement 133, entities are required to record derivative instruments at fair value, with the exception of normal purchases and normal sales that are expected to result in physical delivery.  The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it.

If certain conditions are met, we may elect to designate a derivative instrument as a hedge of exposure to changes in fair values, cash flows or foreign currency.  Certain non-trading derivative transactions, which are economic hedges of our accrual transactions, such as our storage and transportation contracts, do not qualify for hedge accounting treatment.

The table below summarizes the various ways in which we account for our derivative instruments and the impact on our consolidated financial statements.
 
Accounting
Treatment
 
Recognition and Measurement
 
Balance Sheet
 
Income Statement
Normal purchases and normal sales
-
Fair value not recorded
-
Change in fair value not recognized in earnings
Mark-to-market
-
Recorded at fair value
-
Change in fair value recognized in earnings
Cash flow hedge
-
Recorded at fair value
-
Ineffective portion of the gain or loss on the derivative instrument is recognized in earnings
 
-
Effective portion of the gain or loss on the derivative instrument is reported initially as a component of accumulated other comprehensive income (loss)
-
Effective portion of the gain or loss on the derivative instrument is reclassified out of accumulated other comprehensive income (loss) into earnings when the forecasted transaction affects earnings
Fair value hedge
-
Recorded at fair value
-
The gain or loss on the derivative instrument is recognized in earnings
 
-
Change in fair value of the hedged item is recorded as an adjustment to book value
-
Change in fair value of the hedged item is recognized in earnings
         
Gains or losses associated with the fair value of derivative instruments entered into by our Distribution segment are included in, and recoverable through, the monthly purchased-gas cost mechanism.

As required by Statement 133, we formally document all relationships between hedging instruments and hedged items, as well as risk management objectives, strategies for undertaking various hedge transactions and methods for assessing and testing correlation and hedge ineffectiveness.  We specifically identify the asset, liability, firm commitment or forecasted transaction that has been designated as the hedged item.  We assess the effectiveness of hedging relationships quarterly by performing a regression analysis on our cash flow and fair value hedging relationships to determine whether the hedge

 
- 18 -


relationships are highly effective on a retrospective and prospective basis.  We also document our normal purchases and normal sales transactions that we expect to result in physical delivery and which we elect to exempt from derivative accounting treatment.

We evaluate the presentation of revenues from our different types of activities to determine which amounts should be reported on a gross or net basis in accordance with the following literature:
·  
EITF 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ as Defined in EITF Issue No. 02-3;”
·  
EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities;” and
·  
EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.”

In accordance with this guidance, all financially settled derivative instruments, as well as derivative instruments considered held for trading purposes that result in physical delivery, are reported on a net basis in revenues in our Consolidated Statements of Income.  The realized revenues and purchase costs of derivative instruments that are not considered held for trading purposes and non-derivative contracts are reported on a gross basis.  Derivatives that qualify for the normal purchase or sale exception as defined in Statement 133 are also reported on a gross basis.

Revenues in our Consolidated Statements of Income include financial trading margins, as well as certain physical natural gas transactions with our trading counterparties.  Revenues and cost of sales and fuel from such physical transactions are reported on a net basis.

Cash flows from futures, forwards, options and swaps that are accounted for as hedges are included in the same Consolidated Statements of Cash Flows category as the cash flows from the related hedged items.

Fair Values of Derivative Instruments

Statement 157 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.  See Note B for a discussion of the inputs associated with our fair value measurements and our fair value hierarchy disclosures.

The following table sets forth the fair values of our derivative instruments for the period indicated.
 
   
June 30, 2009
 
   
Fair Values of Derivatives (a)
 
   
Assets
   
(Liabilities)
 
 
 
(Thousands of dollars) 
               
Derivative commodity contracts designated as hedging instruments
  731,942      (467,630  ) 
                 
Derivatives not designated as hedging instruments
               
Commodity contracts
    265,604       (264,693 )
Foreign exchange contracts
    -       (764 )
Total derivatives not designated as hedging instruments
  $ 265,604     $ (265,457 )
Total derivatives
  $ 997,546     $ (733,087 )
                 
(a) - Included on a net basis in energy marketing and risk management assets and liabilities on our Consolidated Balance Sheet.
 
 
 
- 19 -


The following table sets forth the notional quantities for derivative instruments held for the period indicated.
 
   
June 30, 2009
     
Contract
Type
 
Purchased/
Payor
 
Sold/
Receiver
 
Derivatives designated as hedging instruments:
         
Cash flow hedges
           
Fixed price
           
- Natural gas (Bcf)
Exchange futures
    6.9     (29.4 )
 
Swaps
    23.5     (82.8 )
- Crude oil and NGLs (MMBbl)
Swaps
    -     (2.0 )
Basis
               
- Natural gas (Bcf)
Swaps
    29.5     (111.1 )
Fair value hedges
               
Basis
               
- Natural gas (Bcf)
Forwards and swaps
    411.4     (411.3 )
                     
Derivatives not designated as hedging instruments:
             
Fixed price
               
- Natural gas (Bcf)
Exchange futures
    31.7     (13.0 )
 
Forwards and swaps
    90.1     (109.4 )
 
Options
    118.6     (95.0 )
- Foreign currency (Millions of dollars)
Swaps
  $ 7.1   $ -  
Basis
               
- Natural gas (Bcf)
Forwards and swaps
    891.0     (914.8 )
Index
               
- Natural gas (Bcf)
Forwards and swaps
    74.4     (34.8 )
                     
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 - Our Energy Services and ONEOK Partners segments use derivative instruments to hedge the cash flows associated with anticipated purchases and sales of natural gas, NGLs and condensate and cost of fuel used in the transportation of natural gas.  Accumulated other comprehensive income (loss) at June 30, 2009, includes gains of approximately $23.3 million, net of tax, related to these hedges that will be realized within the next 21 months as the forecasted transactions affect earnings.  If prices remain at current levels, we will recognize $25.4 million in net gains over the next 12 months, and we will recognize net losses of $2.1 million thereafter.

For the six months ended June 30, 2009, cost of sales and fuel in our Consolidated Statements of Income includes $11.3 million reflecting an adjustment to inventory at the lower of cost or market.  We reclassified $11.3 million of deferred gains, before income taxes, on associated cash flow hedges from accumulated other comprehensive income (loss) into earnings.

The following table sets forth the 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, 2009
   
June 30, 2009
 
   
(Thousands of dollars)
 
Commodity contracts
  $ (32,363 )   $ 66,245  
Interest rate contracts
    443       564  
Total gain (loss) recognized in other comprehensive income (loss)
on derivatives (effective portion)
  $ (31,920 )   $ 66,809  
                 
 
 
- 20 -


The following tables set forth the effect of cash flow hedges on our Consolidated Statements of Income for the periods indicated.
 
Derivatives in Cash Flow
Hedging Relationships 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Net Income (Effective Portion) 
 
Three Months Ended
June 30, 2009
   
Six Months Ended
June 30, 2009
 
     
(Thousands of dollars)
 
Commodity contracts
Revenues
  $ 31,157     $ 113,872