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, 2012
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 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 27, 2012, the Company had 205,056,209 shares of common stock outstanding.

 
 


 

 
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2
 
 

 
ONEOK, Inc.
TABLE OF CONTENTS


Page No.
 
 
6
 
7
 
8-9
 
11
 
12-13
 
14-36
37-62
62-63
63
 
64
64
64
64
64
64
65
 
66

As used in this Quarterly Report, references to “we,” “our” or “us” refer to ONEOK, Inc., an Oklahoma corporation, and its predecessors, divisions and subsidiaries, unless the context indicates otherwise.

The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements.  Forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled” and other words and terms of similar meaning.  Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved.  Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations “Forward-Looking Statements,” in this Quarterly Report and under Part I, Item IA, “Risk Factors,” in our Annual Report.

INFORMATION AVAILABLE ON OUR WEBSITE

We make available, free of charge, on our website (www.oneok.com) copies of our Annual Reports, 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.  Copies of our Code of Business Conduct, Corporate Governance Guidelines and Director Independence Guidelines are also available on our website, and we will provide copies of these documents upon request.  Our website and any contents thereof are not incorporated by reference into this report.

We also make available on our website the Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T.
 
 
3
 
 
GLOSSARY

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

 
AFUDC
Allowance for funds used during construction
 
Annual Report
Annual Report on Form 10-K for the year ended December 31, 2011
 
ASU
Accounting Standards Update
 
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
 
CFTC
Commodities Futures Trading Commission
 
Clean Air Act
Federal Clean Air Act, as amended
 
Clean Water Act
Federal Water Pollution Control Act Amendments of 1972, as amended
 
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
 
DOT
United States Department of Transportation
 
EBITDA
Earnings before interest expense, income taxes, depreciation and amortization
 
EPA
United States Environmental Protection Agency
 
Exchange Act
Securities Exchange Act of 1934, as amended
 
FASB
Financial Accounting Standards Board
 
FERC
Federal Energy Regulatory Commission
 
GAAP
Accounting principles generally accepted in the United States of America
 
Intermediate Partnership
ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary
 
 
of ONEOK Partners, L.P.
 
KCC
Kansas Corporation Commission
 
KDHE
Kansas Department of Health and Environment
 
LDCs
Local distribution companies
 
LIBOR
London Interbank Offered Rate
 
MBbl
Thousand barrels
 
MBbl/d
Thousand barrels per day
 
Mcf
Thousand cubic feet
 
MDth/d
Thousand dekatherms per day
 
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.
 
Natural Gas Policy Act
Natural Gas Policy Act of 1978, as amended
 
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)
 
NYMEX
New York Mercantile Exchange
 
OCC
Oklahoma Corporation Commission
 
ONEOK
ONEOK, Inc.
 
ONEOK 2011 Credit Agreement
ONEOK’s five-year, $1.2 billion revolving credit agreement dated April 5, 2011
 
ONEOK Partners
ONEOK Partners, L.P.
 
ONEOK Partners 2011 Credit Agreement
ONEOK Partners’ five-year, $1.2 billion revolving credit agreement dated
 
 
August 1, 2011
 
ONEOK Partners GP
ONEOK Partners GP, L.L.C., a wholly owned subsidiary of ONEOK and the sole
 
 
general partner of ONEOK Partners
 
 
4
 
 
Quarterly Report(s)
Quarterly Report(s) on Form 10-Q
 
POP
Percent of Proceeds
 
S&P
Standard & Poor’s Rating Services
 
SEC
Securities and Exchange Commission
 
Securities Act
Securities Act of 1933, as amended
 
XBRL
eXtensible Business Reporting Language
 
 
5
 
 
 

 
                       
                       
                       
CONSOLIDATED  STATEMENTS OF INCOME
                       
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Unaudited)
 
2012
   
2011
   
2012
   
2011
 
   
(Thousands of dollars, except per share amounts)
 
                         
Revenues
  $ 2,529,260     $ 3,444,798     $ 5,943,860     $ 7,205,398  
Cost of sales and fuel
    1,980,298       2,925,965       4,751,311       6,056,688  
Net margin
    548,962       518,833       1,192,549       1,148,710  
Operating expenses
                               
Operations and maintenance
    204,126       197,772       397,007       390,531  
Depreciation and amortization
    84,586       78,793       167,995       158,150  
Goodwill impairment
    -       -       10,255       -  
General taxes
    27,137       25,837       58,314       54,759  
Total operating expenses
    315,849       302,402       633,571       603,440  
Gain (loss) on sale of assets
    966       (212 )     1,023       (722 )
Operating income
    234,079       216,219       560,001       544,548  
Equity earnings from investments (Note K)
    29,169       29,544       63,789       61,636  
Allowance for equity funds used during construction
    1,849       400       2,824       866  
Other income
    686       340       6,446       3,692  
Other expense
    (4,898 )     (772 )     (3,071 )     (3,057 )
Interest expense
    (71,535 )     (75,498 )     (147,350 )     (154,847 )
Income before income taxes
    189,350       170,233       482,639       452,838  
Income taxes
    (40,412 )     (35,904 )     (114,251 )     (120,224 )
Income from continuing operations
    148,938       134,329       368,388       332,614  
Income from discontinued operations, net of tax (Note B)
    -       437       762       1,498  
Gain on sale of discontinued operations, net of tax (Note B)
    267       -       13,517       -  
Net income
    149,205       134,766       382,667       334,112  
Less: Net income attributable to noncontrolling interests
    88,212       79,624       198,809       148,840  
Net income attributable to ONEOK
  $ 60,993     $ 55,142     $ 183,858     $ 185,272  
                                 
Amounts attributable to ONEOK:
                               
       Income from continuing operations
  $ 60,726     $ 54,705     $ 169,579     $ 183,774  
       Income from discontinued operations
    267       437       14,279       1,498  
           Net income
  $ 60,993     $ 55,142     $ 183,858     $ 185,272  
                                 
Basic earnings per share:
                               
       Income from continuing operations (Note I)
  $ 0.29     $ 0.26     $ 0.82     $ 0.87  
       Income from discontinued operations
    -       -       0.07       -  
           Net income
  $ 0.29     $ 0.26     $ 0.89     $ 0.87  
                                 
Diluted earnings per share:
                               
       Income from continuing operations (Note I)
  $ 0.29     $ 0.25     $ 0.80     $ 0.85  
       Income from discontinued operations
    -       -       0.07       -  
           Net income
  $ 0.29     $ 0.25     $ 0.87     $ 0.85  
                                 
Average shares (thousands)
                               
       Basic
    207,292       210,674       207,454       212,358  
   Diluted
    211,784       216,060       211,818       217,210  
                                 
Dividends declared per share of common stock
  $
0.330
    $ 0.260    
0.635
    $ 0.520  
See accompanying Notes to Consolidated Financial Statements.
                               
 
 
6
 
 
 

 
                       
                   
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Unaudited)
 
2012
   
2011
   
2012
   
2011
 
   
(Thousands of dollars)
 
                         
Net income
  $ 149,205     $ 134,766     $ 382,667     $ 334,112  
Other comprehensive income (loss), net of tax
                               
Unrealized gains (losses) on energy marketing and risk-management
                               
assets/liabilities, net of tax of $4,773, $(5,028), $(14,229) and
                               
$(3,614), respectively
    (12,634 )     16,819       34,939       (69 )
Realized (gains) losses in net income, net of tax of $8,449, $(301),
                               
$6,835 and $11,934, respectively
    (22,556 )     3,407       (23,736 )     (16,709 )
Unrealized holding gains (losses) on available-for-sale securities,
                               
net of tax of $65, $31, $(76) and $94, respectively
    (104 )     (49 )     120       (148 )
Change in pension and postretirement benefit plan liability, net of tax
                               
of $3,644, $2,947, $7,288 and $5,895, respectively
    (5,777 )     (4,672 )     (11,554 )     (9,345 )
Other, net of tax of $0, $39, $0 and $50, respectively
    -       (62 )     -       (80 )
Total other comprehensive income (loss), net of tax
    (41,071 )     15,443       (231 )     (26,351 )
Comprehensive income
    108,134       150,209       382,436       307,761  
Less: Comprehensive income attributable to noncontrolling interests
    73,936       91,196       198,097       144,953  
Comprehensive income attributable to ONEOK
  $ 34,198     $ 59,013     $ 184,339     $ 162,808  
See accompanying Notes to Consolidated Financial Statements.
                               
 
 
7
 
 

 
           
CONSOLIDATED BALANCE SHEETS
           
   
June 30,
   
December 31,
 
(Unaudited)
 
2012
   
2011
 
Assets
 
(Thousands of dollars)
 
Current assets
           
Cash and cash equivalents
  $ 114,920     $ 65,953  
Accounts receivable, net
    793,842       1,339,933  
Gas and natural gas liquids in storage
    561,802       549,915  
Commodity imbalances
    37,716       63,452  
Energy marketing and risk management assets (Notes C and D)
    90,335       40,280  
Other current assets
    208,704       185,143  
Assets of discontinued operations (Note B)
    -       74,136  
Total current assets
    1,807,319       2,318,812  
                 
Property, plant and equipment
               
Property, plant and equipment
    11,953,916       11,177,934  
Accumulated depreciation and amortization
    2,855,863       2,733,601  
Net property, plant and equipment
    9,098,053       8,444,333  
                 
Investments and other assets
               
Investments in unconsolidated affiliates (Note K)
    1,210,268       1,223,398  
Goodwill and intangible assets
    1,000,039       1,014,127  
Other assets
    701,512       695,965  
Total investments and other assets
    2,911,819       2,933,490  
Total assets
  $ 13,817,191     $ 13,696,635  
See accompanying Notes to Consolidated Financial Statements.
               
 
 
8
 
 

 
ONEOK, Inc. and Subsidiaries
           
CONSOLIDATED BALANCE SHEETS
           
   
June 30,
   
December 31,
 
(Unaudited)
 
2012
   
2011
 
Liabilities and equity
 
(Thousands of dollars)
 
Current liabilities
           
Current maturities of long-term debt
  $ 12,262     $ 364,391  
Notes payable (Note E)
    595,931       841,982  
Accounts payable
    911,977       1,341,718  
Commodity imbalances
    201,515       202,206  
Energy marketing and risk management liabilities (Notes C and D)
    138,028       137,680  
Other current liabilities
    396,964       345,383  
Liabilities of discontinued operations (Note B)
    -       12,815  
Total current liabilities
    2,256,677       3,246,175  
                 
Long-term debt, excluding current maturities (Note F)
    5,224,623       4,529,551  
                 
Deferred credits and other liabilities
               
Deferred income taxes
    1,457,896       1,446,591  
Other deferred credits
    672,007       674,586  
Total deferred credits and other liabilities
    2,129,903       2,121,177  
                 
Commitments and contingencies (Note M)
               
                 
Equity (Note G)
               
ONEOK shareholders' equity:
               
Common stock, $0.01 par value:
               
authorized 600,000,000 shares; issued 245,811,180 shares and outstanding
               
205,041,894 shares at June 30, 2012; issued 245,809,848 shares and
               
outstanding 206,509,960 shares at December 31, 2011
    2,458       2,458  
Paid-in capital
    1,326,204       1,417,185  
Accumulated other comprehensive loss (Note H)
    (205,640 )     (206,121 )
Retained earnings
    2,017,460       1,960,374  
Treasury stock, at cost: 40,769,286 shares at June 30, 2012, and
               
39,299,888 shares at December 31, 2011
    (1,050,942 )     (935,323 )
Total ONEOK shareholders' equity
    2,089,540       2,238,573  
                 
Noncontrolling interests in consolidated subsidiaries
    2,116,448       1,561,159  
                 
Total equity
    4,205,988       3,799,732  
Total liabilities and equity
  $ 13,817,191     $ 13,696,635  
See accompanying Notes to Consolidated Financial Statements.
               
 
 
9
 
 

 
 
 
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10
 
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
   
Six Months Ended
 
   
June 30,
 
(Unaudited)
 
2012
   
2011
 
   
(Thousands of dollars)
 
Operating activities
           
Net income
  $ 382,667     $ 334,112  
Depreciation and amortization
    168,003       158,215  
Impairment of goodwill
    10,255       -  
Gain on sale of discontinued operations
    (13,517 )     -  
Reclassified loss on energy price risk management assets and liabilities
    29,861       -  
Equity earnings from investments
    (63,789 )     (61,636 )
Distributions received from unconsolidated affiliates
    69,490       55,302  
Deferred income taxes
    111,172       108,504  
Share-based compensation expense
    16,928       29,615  
Allowance for equity funds used during construction
    (2,824 )     (866 )
Loss (gain) on sale of assets
    (1,023 )     722  
Other
    (1,308 )     (1,013 )
Changes in assets and liabilities:
               
Accounts receivable
    541,053       209,112  
Gas and natural gas liquids in storage
    (11,445 )     134,760  
Accounts payable
    (404,006 )     (20,199 )
Commodity imbalances, net
    25,045       (12,452 )
Energy marketing and risk management assets and liabilities
    (56,590 )     (4,437 )
Other assets and liabilities
    (147,362 )     (54,140 )
Cash provided by operating activities
    652,610       875,599  
                 
Investing activities
               
Capital expenditures (less allowance for equity funds used during construction)
    (780,697 )     (523,772 )
Proceeds from sale of discontinued operations, net of cash sold
    32,008       -  
Contributions to unconsolidated affiliates
    (7,237 )     (1,655 )
Distributions received from unconsolidated affiliates
    14,705       15,750  
Proceeds from sale of assets
    1,828       788  
Other
    942       -  
Cash used in investing activities
    (738,451 )     (508,889 )
                 
Financing activities
               
Borrowing (repayment) of notes payable, net
    (246,051 )     (30,222 )
Issuance of debt, net of discounts
    699,657       1,295,450  
Long-term debt financing costs
    (5,395 )     (10,986 )
Repayment of debt
    (356,173 )     (631,316 )
Repurchase of common stock
    (150,000 )     (300,105 )
Issuance of common stock
    4,591       4,920  
Issuance of common units, net of issuance costs
    459,680       -  
Dividends paid
    (126,772 )     (111,356 )
Distributions to noncontrolling interests
    (153,588 )     (136,556 )
Cash provided by financing activities
    125,949       79,829  
Change in cash and cash equivalents
    40,108       446,539  
Change in cash and cash equivalents included in discontinued operations
    8,859       (4,701 )
Change in cash and cash equivalents from continuing operations
    48,967       441,838  
Cash and cash equivalents at beginning of period
    65,953       30,341  
Cash and cash equivalents at end of period
  $ 114,920     $ 472,179  
See accompanying Notes to Consolidated Financial Statements.
               
 
 
11
 
 

 
                       
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
             
                         
                         
   
ONEOK Shareholders' Equity
 
                     
Accumulated
 
  Common              
Other
 
   
Stock
  Common  
Paid-in
   
Comprehensive
 
(Unaudited)
 
Issued
   
Stock
   
Capital
   
Income (Loss)
 
   
(Shares)
 
(Thousands of dollars)
 
                         
December 31, 2011
    245,809,848     $ 2,458     $ 1,417,185     $ (206,121 )
Net income
    -       -       -       -  
Other comprehensive income
    -       -       -       481  
Repurchase of common stock
    -       -       -       -  
Common stock issued
    1,332       -       (27,829 )     -  
Common stock dividends -
                               
    $0.61 per share
    -       -       -       -  
Issuance of common units of ONEOK Partners
    -       -       (51,100 )     -  
Distributions to noncontrolling interests
    -       -       -       -  
Other
    -       -       (12,052 )     -  
June 30, 2012
    245,811,180     $ 2,458     $ 1,326,204     $ (205,640 )
See accompanying Notes to Consolidated Financial Statements.
         
 
 
12
 
 

 
ONEOK, Inc. and Subsidiaries
                       
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
             
(Continued)
                       
                         
   
ONEOK Shareholders' Equity
         
                    Noncontrolling      
               
Interests in
     
   
Retained
   
Treasury
   
Consolidated
 
Total
 
(Unaudited)
 
Earnings
   
Stock
   
Subsidiaries
 
Equity
 
 
(Thousands of dollars)
 
                         
December 31, 2011
  $ 1,960,374     $ (935,323 )   $ 1,561,159     $ 3,799,732  
Net income
    183,858       -       198,809       382,667  
Other comprehensive income
    -       -       (712 )     (231 )
Repurchase of common stock
    -       (150,000 )     -       (150,000 )
Common stock issued
    -       34,381       -       6,552  
Common stock dividends -
                               
    $0.61 per share
    (126,772 )     -       -       (126,772 )
Issuance of common units of ONEOK Partners
    -       -       510,780       459,680  
Distributions to noncontrolling interests
    -       -       (153,588 )     (153,588 )
Other
    -       -       -       (12,052 )
June 30, 2012
  $ 2,017,460     $ (1,050,942 )   $ 2,116,448     $ 4,205,988  
 
 
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 presentation of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  The 2011 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, 2012, are not necessarily indicative of the results that may be expected for a 12-month period.

Stock Split - In June 2012, we completed our previously announced two-for-one split of our common stock.  The two-for-one split was effected by a distribution on June 1, 2012, of one share of stock for each share outstanding and held by shareholders of record on May 24, 2012.  We have adjusted all share and per-share amounts contained herein, to be presented on a post-split basis.

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

Recently Issued Accounting Standards Update - In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS),” which provides a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS.  This new guidance changes some fair value measurement principles and disclosure requirements.  We adopted this guidance with our March 31, 2012, Quarterly Report, and the impact was not material.  See Note C for information on our fair value measurements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which provides two options for presenting items of net income, other comprehensive income and total comprehensive income either by creating one continuous statement of comprehensive income or two separate consecutive statements, and requires certain other disclosures.  In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred certain presentation requirements in ASU 2011-05 for items reclassified out of accumulated other comprehensive income.  We adopted this guidance, except for the portions deferred by ASU 2011-12, with our March 31, 2012, Quarterly Report, and the impact was not material.
 
In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-lived Intangible Assets for Impairment,” which allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary.  Under the revised standard, an entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired.  An entity has the option to bypass the qualitative assessment and perform the quantitative impairment test for any indefinite-lived intangible assets in any period.  We are evaluating the impact of this recently issued guidance, which is required to be adopted for our annual assessments beginning in 2013.
 
B.           DISCONTINUED OPERATIONS

On February 1, 2012, we sold ONEOK Energy Marketing Company, our retail natural gas marketing business, to Constellation Energy Group, Inc. for $22.5 million plus working capital.  We received net proceeds of approximately $32.9 million, $0.9 million of which was received in July 2012, and recognized a gain on the sale of approximately $13.5 million, net of taxes of $8.3 million.  The proceeds from the sale were used to reduce short-term borrowings.  The financial information of ONEOK Energy Marketing Company is reflected as discontinued operations in this Quarterly Report.  All prior periods presented have been recast to reflect the discontinued operations.
 
14
 
 

 
The amounts of revenue, costs and income taxes reported in discontinued operations are set forth in the table below for the periods indicated:
 
   
One Month Ended
  Three Months Ended
Six Months Ended
 
   
January 31,
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2011
 
   
(Thousands of dollars)
 
Revenues
  $ 27,607     $ 69,677     $ 175,966  
Cost of sales and fuel
    25,961       66,862       169,479  
Net margin
    1,646       2,815       6,487  
Operating costs
    408       2,084       4,017  
Depreciation and amortization
    8       33       65  
Operating income
    1,230       698       2,405  
Other income (expense), net
    -       (1 )     15  
Income taxes
    (468 )     (260 )     (922 )
Income from discontinued operations, net
  $ 762     $ 437     $ 1,498  
 
The following table discloses the major classes of discontinued assets and liabilities included on our Consolidated Balance Sheet for the period indicated:
   
December 31,
 
   
2011
 
Assets
  (Thousands of dollars)
Cash and cash equivalents
  $ 8,859  
Accounts receivable, net
    47,967  
Gas in storage
    2,101  
Energy marketing and risk management assets
    15,016  
Other assets
    193  
Assets of discontinued operations
  $ 74,136  
         
Liabilities
       
Accounts payable
  $ 11,435  
Energy marketing and risk management liabilities
    629  
Other liabilities
    751  
Liabilities of discontinued operations   
  $ 12,815  
 
At December 31, 2011, the liabilities of our discontinued operations exclude $45.7 million of intercompany payables due to its parent or other affiliates.

C.           FAIR VALUE MEASUREMENTS

Fair Value Measurements - 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 the 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 groups of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.

While many of the contracts in our portfolio are executed in liquid markets where price transparency exists, some contracts are executed in markets for which market prices may exist, but the market may be relatively inactive.  This results in limited price transparency that requires management’s judgment and assumptions to estimate fair values.  Inputs into our fair value estimates include commodity exchange prices, over-the-counter quotes, volatility, historical correlations of pricing data and LIBOR and other liquid money market instrument rates.  We also utilize internally developed basis curves that incorporate
 
 
15
 
observable and unobservable market data.  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 interest-rate swaps.  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 also monitor 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.

Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for our continuing and discontinued operations for the periods indicated:
 
   
June 30, 2012
 
   
Level 1
 
Level 2
 
Level 3
 
Netting
   
Total
 
   
(Thousands of dollars)
 
Assets
                             
Derivatives (a)
                         
Commodity contracts
       
Financial contracts
  $ 330,358     $ 27,248     $ 46,636     $ -     $ 404,242  
Physical contracts
    -       12,308       2,944       -       15,252  
Netting
    -       -       -       (320,001 )     (320,001 )
Total derivatives
    330,358       39,556       49,580       (320,001 )     99,493  
Trading securities (b)
    6,326       -       -       -       6,326  
Available-for-sale investment securities (c)
    2,145       -       -       -       2,145  
Total assets
  $ 338,829     $ 39,556     $ 49,580     $ (320,001 )   $ 107,964  
                                         
Liabilities
                                       
Derivatives (a)
                                 
Commodity contracts
         
Financial contracts
  $ (304,810 )   $ (5,171 )   $ (11,148 )   $ -     $ (321,129 )
Physical contracts
    -       (2 )     (687 )     -       (689 )
Netting
    -       -       -       299,848       299,848  
Interest-rate contracts
    -       (116,166 )     -       -       (116,166 )
Total derivatives
    (304,810 )     (121,339 )     (11,835 )     299,848       (138,136 )
Fair value of firm commitments (d)
    -       -       (4,250 )     -       (4,250 )
Total liabilities
  $ (304,810 )   $ (121,339 )   $ (16,085 )   $ 299,848     $ (142,386 )
(a) - Our derivative assets and liabilities are presented in our Consolidated Balance Sheets as energy marketing and risk
management assets and liabilities and other assets on a net basis. We net derivative assets and liabilities, including cash collateral,
when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At June
30, 2012, we held $21.7 million of cash collateral and had posted $8.4 million of cash collateral with various counterparties.
 
(b) - Included in our Consolidated Balance Sheets as other current assets.
 
(c) - Included in our Consolidated Balance Sheets as other assets.
 
(d) - Included in our Consolidated Balance Sheets as other current liabilities and other deferred credits.
 
 
 
16
 
 

 
   
December 31, 2011
 
   
Level 1
 
Level 2
 
Level 3
 
Netting
   
Total
 
   
(Thousands of dollars)
 
Assets
                             
Derivatives (a)
                         
Commodity contracts
       
Financial contracts
  $ 545,247     $ 13,874     $ 32,931     $ -     $ 592,052  
Physical contracts
    -       23,879       14,916       -       38,795  
Netting
    -       -       -       (569,243 )     (569,243 )
Total derivatives
    545,247       37,753       47,847       (569,243 )     61,604  
Trading securities (b)
    5,749       -       -       -       5,749  
Available-for-sale investment securities (c)
    1,949       -       -       -       1,949  
Total assets
  $ 552,945     $ 37,753     $ 47,847     $ (569,243 )   $ 69,302  
                                         
Liabilities
                                       
Derivatives (a)
                                 
Commodity contracts
         
Financial contracts
  $ (479,073 )   $ (6,498 )   $ (20,995 )   $ -     $ (506,566 )
Physical contracts
    -       (261 )     (1,748 )     -       (2,009 )
Netting
    -       -       -       497,608       497,608  
Interest-rate contracts
    -       (128,666 )     -       -       (128,666 )
Total derivatives
    (479,073 )     (135,425 )     (22,743 )     497,608       (139,633 )
Fair value of firm commitments (d)
    -       -       (7,283 )     -       (7,283 )
Total liabilities
  $ (479,073 )   $ (135,425 )   $ (30,026 )   $ 497,608     $ (146,916 )
(a) - Our derivative assets and liabilities are presented in our Consolidated Balance Sheets as energy marketing and risk
management assets and liabilities, other assets and other deferred credits on a net basis. We net derivative assets and liabilities,
including cash collateral, when a legally enforceable master-netting arrangement exists between the counterparty to a derivative
contract and us. At December 31, 2011, we held $73.3 million of cash collateral and had posted $1.7 million of cash collateral
with various counterparties.
 
(b) - Included in our Consolidated Balance Sheets as other current assets.
 
(c) - Included in our Consolidated Balance Sheets as other assets.
 
(d) - Included in our Consolidated Balance Sheets as other current liabilities and other deferred credits.
 
 
The December 31, 2011, table above includes balances for ONEOK Energy Marketing Company that have been reflected as discontinued operations in our Consolidated Balance Sheet.  At December 31, 2011, we had $15.0 million in derivative assets and $0.6 million in derivative liabilities related to this discontinued operation.

Our Level 1 fair value measurements are based on NYMEX-settled prices and actively quoted prices for equity securities.  These balances are comprised predominantly 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.

Our Level 2 fair value inputs are based on NYMEX-settled prices for natural gas and crude oil that are utilized to determine the fair value of certain nonexchange-traded financial instruments, including natural gas and crude oil swaps, as well as physical forwards.  Also, included in Level 2 are interest-rate swaps that are valued using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest swap settlements.

Our Level 3 inputs include internally developed basis curves incorporating observable and unobservable market data, NGL price curves from independent broker quotes, 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.  The derivatives categorized as Level 3 include natural gas basis swaps, swing swaps, options, other commodity swaps and physical forward contracts.  Also included in Level 3 are the fair values of firm commitments.  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 significant unobservable inputs used in the fair value measurement of our swaps, forwards and firm commitments are the unpublished forward basis and index curves.  Significant increases or decreases in either of those inputs in isolation would not have a material impact on our fair value measurements.
 
17
 
 

 
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
   
Total
 
   
(Thousands of dollars)
 
April 1, 2012
  $ 17,948     $ (3,770 )   $ 14,178  
Total realized/unrealized gains (losses):
                 
Included in earnings (a)
    (1,117 )     (480 )     (1,597 )
Included in other comprehensive income (loss)
    20,942       -       20,942  
Transfers into Level 3
    (28 )     -       (28 )
June 30, 2012
  $ 37,745     $ (4,250 )   $ 33,495  
                         
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, 2012 (a)
  $ 1,571     $ (1,318 )   $ 253  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
 
 
   
Derivative
Assets
(Liabilities)
   
Fair Value of
Firm
Commitments
   
Total
 
   
(Thousands of dollars)
 
April 1, 2011
  $ 30,615     $ (28,991 )   $ 1,624  
Total realized/unrealized gains (losses):
                 
Included in earnings (a)
    (12,329 )     7,779       (4,550 )
Included in other comprehensive income (loss)
    1,297       -       1,297  
Transfers into Level 3
    4,757       -       4,757  
Transfers out of Level 3
    (482 )     -       (482 )
June 30, 2011
  $ 23,858     $ (21,212 )   $ 2,646  
                         
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, 2011 (a)
  $ 11,278     $ (3,672 )   $ 7,606  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
 
 
   
Derivative
Assets
(Liabilities)
   
Fair Value of
Firm
Commitments
   
Total
 
   
(Thousands of dollars)
 
January 1, 2012
  $ 25,104     $ (7,283 )   $ 17,821  
Total realized/unrealized gains (losses):
                 
Included in earnings (a)
    (7,873 )     3,033       (4,840 )
Included in other comprehensive income (loss)
    26,727       -       26,727  
Sale of discontinued operations
    (3,636 )     -       (3,636 )
Transfers out of Level 3
    (2,577 )     -       (2,577 )
June 30, 2012
  $ 37,745     $ (4,250 )   $ 33,495  
                         
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, 2012 (a)
  $ (419 )   $ (640 )   $ (1,059 )
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
 
 
 
18
 
 

 
   
Derivative
Assets
(Liabilities)
   
Fair Value of
Firm
Commitments
   
Total
 
   
(Thousands of dollars)
 
January 1, 2011
  $ 49,266     $ (29,536 )   $ 19,730  
Total realized/unrealized gains (losses):
                 
Included in earnings (a)
    (20,333 )     8,324       (12,009 )
Included in other comprehensive income (loss)
    (8,558 )     -       (8,558 )
Transfers into Level 3
    4,182       -       4,182  
Transfers out of Level 3
    (699 )     -       (699 )
June 30, 2011
  $ 23,858     $ (21,212 )   $ 2,646  
                         
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, 2011 (a)
  $ 12,524     $ (6,634 )   $ 5,890  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
 
 
Realized/unrealized gains (losses) include the realization of our derivative contracts through maturity and changes in fair value of our hedged firm commitments.  We recognize transfers into and out of the levels in the fair value hierarchy as of the end of each reporting period.  We had no transfers into or out of Level 1 during the periods presented.  Transfers into Level 3 represent existing assets or liabilities that were previously categorized at a higher level for which the unobservable inputs became a more significant portion of the fair value estimates.  Transfers out of Level 3 represent existing assets and liabilities that were classified previously as Level 3 for which the observable inputs became a more significant portion of the fair value estimates.

Our Level 3 fair value measurements based on unobservable inputs, excluding the portion of our fair value measurements based on third-party pricing information without adjustment, are not material at June 30, 2012.
 
Goodwill Impairment - As a result of the continued decline in natural gas prices and its effect on location and seasonal price differentials, we performed an interim impairment assessment of our Energy Services segment’s goodwill balance as of March 31, 2012.  As a result of this assessment, goodwill with a carrying amount of $10.3 million was written down to its implied fair value of zero, with a resulting impairment charge of $10.3 million recorded in earnings for the three months ended March 31, 2012.  The fair value of our Energy Services reporting unit and the implied fair value of its goodwill were calculated using Level 3, significant unobservable inputs.

Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and notes payable is equal to book value, due to the short-term nature of these items.

Our cash and cash equivalents are comprised of bank and money market accounts and are classified as Level 1.  Our notes payable are classified as Level 2 since the estimated fair value of the notes payable 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 $5.9 billion at June 30, 2012, and $5.6 billion at December 31, 2011.  The book value of long-term debt, including current maturities, was $5.2 billion and $4.9 billion at June 30, 2012, and December 31, 2011, respectively.  The estimated fair value of the aggregate of ONEOK’s and ONEOK Partners’ senior notes outstanding was determined using quoted market prices for similar issues with similar terms and maturities.  Our consolidated long-term debt is classified as Level 2.

D.           RISK MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES

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 reduce the commodity price risk associated with a portion of the
19
 
 

 
 
forecasted purchases and sales of commodities and natural gas and natural gas liquids in storage.  Commodity price volatility may have a significant impact on the fair value of our derivative instruments as of a given date;
·  
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 natural gas at a pipeline receipt point and sell natural gas at a pipeline delivery point.  As market conditions permit, 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 United States 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 United States dollars for Canadian dollars with another party; and
·  
Interest-rate risk - We are also subject to fluctuations in interest rates.  We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps.

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 physical delivery at some specified time in the future.  We also may use currency forward contracts to manage our currency exchange-rate risk.  Forward contracts are different from futures in that forwards are customized and nonexchange traded;
·  
Swaps - Financial trades involving the exchange of payments based on two different pricing structures for a commodity or other instrument.  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.  Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts; 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.

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 a 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;
·  
reducing our exposure to fluctuations in interest and foreign currency exchange rates; and
·  
reducing variability in cash flows from changes in interest rates associated with forecasted debt issuances.

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 inefficiencies, which allow us to capture additional margin.  Financial trading activities are executed generally 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 Natural Gas Distribution segment also uses derivative instruments to hedge the cost of a portion 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 Texas jurisdictions.
 
 
20
 
 

 
ONEOK and ONEOK Partners each entered into forward-starting interest-rate swaps designated as cash flow hedges of the variability of interest payments on a portion of forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued.  ONEOK had interest-rate swaps with notional values totaling $500 million at December 31, 2011.  In January 2012, ONEOK entered into additional interest-rate swaps with notional amounts totaling $200 million.  Upon issuance in January 2012 of our $700 million, 4.25-percent senior notes due 2022, ONEOK settled all $700 million of its interest-rate swaps and realized a loss of $44.1 million in accumulated other comprehensive income that will be amortized to interest expense over the term of the hedged debt.  At June 30, 2012, and December 31, 2011, ONEOK Partners had forward-starting interest-rate swaps with notional amounts totaling $1 billion and $750 million, respectively.  In July 2012, ONEOK Partners entered into additional forward-starting interest-rate swaps with settlement dates greater than 12 months that were also designated as cash flow hedges with notional amounts totaling $400 million.

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

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 an effectiveness analysis on our cash flow and fair value hedging relationships to determine whether the hedge relationships are highly effective on a retrospective and prospective basis.  We also document our normal purchases and normal sales transactions that we expect to result in physical delivery and that we elect to exempt from derivative accounting treatment.

The presentation of settled derivative instruments on either a gross or net basis in our Consolidated Statements of Income is dependent on the relevant facts and circumstances of our different types of activities rather than based solely on the terms of the individual contracts.  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 nonderivative contracts are reported on a gross basis.  Derivatives that qualify as normal purchases or normal sales that are expected to result in physical delivery are also reported on a gross basis.
 
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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 category as the cash flows from the related hedged items in our Consolidated Statements of Cash Flows.

Fair Values of Derivative Instruments - The following table sets forth the fair values of our derivative instruments for our continuing and discontinued operations for the periods indicated:
 
   
June 30, 2012
   
December 31, 2011
 
   
Fair Values of Derivatives (a)
   
Fair Values of Derivatives (a)
 
   
Assets
   
(Liabilities)
   
Assets
   
(Liabilities)
 
   
(Thousands of dollars)
 
Derivatives designated as hedging instruments
                       
Commodity contracts
                       
Financial contracts
  $ 136,655  (b)   $ (48,014 )(b)   $ 184,184  (c)   $ (73,346 )(c)
Physical contracts
    165       (71 )     62       (344 )
Interest-rate contracts
    -       (116,166 )     -       (128,666 )
Total derivatives designated as hedging instruments
    136,820       (164,251 )     184,246       (202,356 )
Derivatives not designated as hedging instruments
                               
Commodity contracts
                               
Nontrading instruments
                               
Financial contracts
    190,780       (197,993 )     295,948       (323,170 )
Physical contracts
    15,087       (618 )     38,733       (1,665 )
Trading instruments
                               
Financial contracts
    76,807       (75,122 )     111,920       (110,050 )
Total derivatives not designated as hedging instruments
    282,674       (273,733 )     446,601       (434,885 )
Total derivatives
  $ 419,494     $ (437,984 )   $ 630,847     $ (637,241 )
(a) - Included on a net basis in energy marketing and risk management assets and liabilities, other assets and other deferred credits on our
Consolidated Balance Sheets.
 
(b) - Includes $7.5 million of derivative assets associated with cash flow purchase hedges tied to injections of inventory into storage that
were adjusted to reflect the lower of cost or market value in a prior period. The deferred gains associated with these assets have been
reclassified from accumulated other comprehensive loss.
 
(c) - Includes $88.9 million of derivative assets associated with cash flow hedges of inventory that were adjusted to reflect the lower of cost
or market value. The deferred gains associated with these assets have been reclassified from accumulated other comprehensive loss.
 
 
 
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Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for our continuing and discontinued operations for the periods indicated:
 
     
June 30, 2012
   
December 31, 2011
 
 
Contract
Type
 
Purchased/
Payor
 
Sold/
Receiver
   
Purchased/
Payor
 
Sold/
Receiver
 
Derivatives designated as hedging instruments:                    
Cash flow hedges
                     
Fixed price
                     
- Natural gas (Bcf)
Exchange futures
    8.1     (16.7 )     21.2     (23.4 )
 
Swaps
    8.5     (90.3 )     19.5     (111.9 )
- Crude oil and NGLs (MMBbl)
Swaps
    -     (2.6 )