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

FORM 10-Q

X  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2017.
OR
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________.


Commission file number   001-13643


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


Oklahoma
73-1520922
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
100 West Fifth Street, Tulsa, OK
74103
(Address of principal executive offices)
(Zip Code)


Registrant’s telephone number, including area code   (918) 588-7000


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes X  No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes X No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X                         Accelerated filer __                         Non-accelerated filer __
Smaller reporting company__                 Emerging growth company__

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

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

On April 24, 2017, the Company had 210,909,327 shares of common stock outstanding.


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ONEOK, Inc.
TABLE OF CONTENTS


Page No.
 
 
 
 
 
 
 

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

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

INFORMATION AVAILABLE ON OUR WEBSITE

We make available, free of charge, on our website (www.oneok.com) copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and reports of holdings of our securities filed by our officers and directors under Section 16 of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of our Code of Business Conduct, Corporate Governance Guidelines and Director Independence Guidelines are also available on our website, and we will provide copies of these documents upon request. Our website and any contents thereof are not incorporated by reference into this report.

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

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GLOSSARY

The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:
2017 Credit Agreement
ONEOK’s $2.5 billion revolving credit agreement effective upon the closing of the Merger Transaction and the terminations of the ONEOK Credit Agreement and ONEOK Partners Credit Agreement
AFUDC
Allowance for funds used during construction
Annual Report
Annual Report on Form 10-K for the year ended December 31, 2016
ASU
Accounting Standards Update
Bbl
Barrels, 1 barrel is equivalent to 42 United States gallons
BBtu/d
Billion British thermal units per day
Bcf
Billion cubic feet
Bcf/d
Billion cubic feet per day
CFTC
U.S. Commodity Futures Trading Commission
Clean Air Act
Federal Clean Air Act, as amended
EBITDA
Earnings before interest expense, income taxes, depreciation and amortization
EPA
United States Environmental Protection Agency
Exchange Act
Securities Exchange Act of 1934, as amended
FERC
Federal Energy Regulatory Commission
GAAP
Accounting principles generally accepted in the United States of America
GHG
Greenhouse gas
Intermediate Partnership
ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary of
ONEOK Partners, L.P.
LIBOR
London Interbank Offered Rate
MBbl/d
Thousand barrels per day
MDth/d
Thousand dekatherms per day
Merger Agreement
Agreement and Plan of Merger, dated as of January 31, 2017, by and among
ONEOK, Merger Sub, ONEOK Partners and ONEOK Partners GP
Merger Sub
New Holdings Subsidiary, LLC, a wholly owned subsidiary of ONEOK
Merger Transaction
The transaction contemplated by the Merger Agreement pursuant to which
ONEOK will acquire all of ONEOK Partners’ outstanding common units
representing limited partner interests in ONEOK Partners not already directly
or indirectly owned by ONEOK
MMBbl
Million barrels
MMBtu
Million British thermal units
MMcf/d
Million cubic feet per day
Moody’s
Moody’s Investors Service, Inc.
NGL(s)
Natural gas liquid(s)
NGL products
Marketable natural gas liquid purity products, such as ethane, ethane/propane
mix, propane, iso-butane, normal butane and natural gasoline
NYMEX
New York Mercantile Exchange
NYSE
New York Stock Exchange
ONEOK
ONEOK, Inc.
ONEOK Credit Agreement
ONEOK’s $300 million amended and restated revolving credit agreement
effective as of January 31, 2014
ONEOK Partners
ONEOK Partners, L.P.
ONEOK Partners Credit Agreement
ONEOK Partners’ $2.4 billion amended and restated revolving credit
agreement effective as of January 31, 2014, as amended
ONEOK Partners GP
ONEOK Partners GP, L.L.C., a wholly owned subsidiary of ONEOK and the sole
general partner of ONEOK Partners
OPIS
Oil Price Information Service
Partnership Agreement
Third Amended and Restated Agreement of Limited Partnership of ONEOK
Partners, L.P., as amended

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PHMSA
United States Department of Transportation Pipeline and Hazardous Materials
Safety Administration
POP
Percent of Proceeds
Quarterly Report(s)
Quarterly Report(s) on Form 10-Q
Roadrunner
Roadrunner Gas Transmission, LLC, a ONEOK Partners 50 percent owned joint venture
S&P
S&P Global Ratings
SCOOP
South Central Oklahoma Oil Province, an area in the Anadarko Basin in
Oklahoma
SEC
Securities and Exchange Commission
STACK
Sooner Trend Anadarko Canadian Kingfisher, an area in the Anadarko Basin in
Oklahoma
Term Loan Agreement
ONEOK Partners’ senior unsecured delayed-draw three-year $1.0 billion term loan agreement dated January 8, 2016, as amended
West Texas LPG
West Texas LPG Pipeline Limited Partnership and Mesquite Pipeline
WTI
West Texas Intermediate
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
 
March 31,
(Unaudited)
2017

2016
 
(Thousands of dollars, except per share amounts)
Revenues
 
 
 
Commodity sales
$
2,216,717


$
1,283,511

Services
532,894


490,948

Total revenues
2,749,611

 
1,774,459

Cost of sales and fuel (exclusive of items shown separately below)
2,143,843


1,195,738

Operations and maintenance
164,769


155,145

Depreciation and amortization
99,419


94,478

General taxes
27,153


21,870

(Gain) loss on sale of assets
7


(4,206
)
Operating income
314,420

 
311,434

Equity in net earnings from investments (Note J)
39,564


32,914

Allowance for equity funds used during construction
13


208

Other income
4,341


305

Other expense
(750
)

(637
)
Interest expense (net of capitalized interest of $1,441 and 2,887, respectively)
(116,462
)

(118,247
)
Income before income taxes
241,126

 
225,977

Income taxes
(54,941
)

(50,066
)
Income from continuing operations
186,185

 
175,911

Income (loss) from discontinued operations, net of tax


(952
)
Net income
186,185

 
174,959

Less: Net income attributable to noncontrolling interests
98,824


91,513

Net income attributable to ONEOK
$
87,361

 
$
83,446

Amounts attributable to ONEOK:
 

 
 

Income from continuing operations
$
87,361

 
$
84,398

Income (loss) from discontinued operations

 
(952
)
Net income
$
87,361

 
$
83,446

Basic earnings per share:
 

 
 

Income from continuing operations (Note H)
$
0.41

 
$
0.40

Income (loss) from discontinued operations

 

Net income
$
0.41

 
$
0.40

Diluted earnings per share:
 

 
 

Income from continuing operations (Note H)
$
0.41

 
$
0.40

Income (loss) from discontinued operations

 

Net income
$
0.41

 
$
0.40

Average shares (thousands)
 

 
 

Basic
211,619


210,781

Diluted
213,602


211,071

Dividends declared per share of common stock
$
0.615


$
0.615

See accompanying Notes to Consolidated Financial Statements.

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ONEOK, Inc. and Subsidiaries
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
March 31,
(Unaudited)
 
2017
 
2016
 
(Thousands of dollars)
Net income
 
$
186,185

 
$
174,959

Other comprehensive income (loss), net of tax
 
 

 
 

Unrealized gains (losses) on derivatives, net of tax of $(4,401) and $3,039, respectively
 
24,456

 
(16,894
)
Realized (gains) losses on derivatives in net income, net of tax of $(3,365) and $1,276, respectively
 
17,283

 
(8,525
)
Change in pension and postretirement benefit plan liability, net of tax of $(1,360) and $(1,035), respectively
 
2,041

 
1,553

Other comprehensive income (loss) on investments in unconsolidated affiliates, net of tax of $(58) and $884, respectively
 
325

 
(4,917
)
Total other comprehensive income (loss), net of tax
 
44,105

 
(28,783
)
Comprehensive income
 
230,290

 
146,176

Less: Comprehensive income attributable to noncontrolling interests
 
127,641

 
70,102

Comprehensive income attributable to ONEOK
 
$
102,649

 
$
76,074

See accompanying Notes to Consolidated Financial Statements.

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ONEOK, Inc. and Subsidiaries
 
 
 
 
CONSOLIDATED BALANCE SHEETS
 
 

 
 
 
 
 
 

 
March 31,

December 31,
(Unaudited)
 
2017

2016
Assets
 
(Thousands of dollars)
Current assets
 
 

 
Cash and cash equivalents
 
$
310,808


$
248,875

Accounts receivable, net
 
734,844


872,430

Natural gas and natural gas liquids in storage
 
193,339


140,034

Commodity imbalances
 
30,904


60,896

Other current assets
 
108,552


106,898

Assets of discontinued operations
 


551

Total current assets
 
1,378,447


1,429,684

Property, plant and equipment
 
 


 

Property, plant and equipment
 
15,154,360


15,078,497

Accumulated depreciation and amortization
 
2,600,776


2,507,094

Net property, plant and equipment
 
12,553,584


12,571,403

Investments and other assets
 
 


 

Investments in unconsolidated affiliates
 
956,388


958,807

Goodwill and intangible assets
 
1,002,384


1,005,359

Other assets
 
176,755


162,998

Assets of discontinued operations
 


10,500

Total investments and other assets
 
2,135,527


2,137,664

Total assets
 
$
16,067,558


$
16,138,751

See accompanying Notes to Consolidated Financial Statements.

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ONEOK, Inc. and Subsidiaries
 
 

 
CONSOLIDATED BALANCE SHEETS
 
 

 
(Continued)
 
 
 
 

 
March 31,

December 31,
(Unaudited)
 
2017

2016
Liabilities and equity
 
(Thousands of dollars)
Current liabilities
 
 

 
Current maturities of long-term debt (Note E)
 
$
410,650


$
410,650

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


1,110,277

Accounts payable
 
703,278


874,731

Commodity imbalances
 
114,542


142,646

Accrued interest
 
90,151


112,514

Other current liabilities
 
122,624


166,042

Liabilities of discontinued operations
 


19,841

Total current liabilities
 
2,731,974


2,836,701

Long-term debt, excluding current maturities (Note E)
 
7,919,826


7,919,996

Deferred credits and other liabilities
 





Deferred income taxes
 
1,612,039


1,623,822

Other deferred credits
 
334,206


321,846

Liabilities of discontinued operations
 


7,471

Total deferred credits and other liabilities
 
1,946,245


1,953,139

Commitments and contingencies (Note L)
 





Equity (Note F)
 
 


 

ONEOK shareholders’ equity:
 
 


 

Common stock, $0.01 par value:
authorized 600,000,000 shares; issued 245,811,180 shares and outstanding
210,906,018 shares at March 31, 2017; issued 245,811,180 shares and
outstanding 210,681,661 shares at December 31, 2016
 
2,458


2,458

Paid-in capital
 
1,232,069


1,234,314

Accumulated other comprehensive loss (Note G)
 
(139,062
)

(154,350
)
Retained earnings
 
30,887



Treasury stock, at cost: 34,905,162 shares at March 31, 2017, and
35,129,519 shares at December 31, 2016
 
(887,970
)

(893,677
)
Total ONEOK shareholders’ equity
 
238,382


188,745

Noncontrolling interests in consolidated subsidiaries
 
3,231,131


3,240,170

Total equity
 
3,469,513


3,428,915

Total liabilities and equity
 
$
16,067,558


$
16,138,751

See accompanying Notes to Consolidated Financial Statements.


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ONEOK, Inc. and Subsidiaries
 
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 

 
 
 
Three Months Ended
 
 
March 31,
(Unaudited)
 
2017

2016
 
 
(Thousands of dollars)
Operating activities
 
 

 
Net income
 
$
186,185


$
174,959

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





Depreciation and amortization
 
99,419


94,478

Equity in net earnings from investments
 
(39,564
)

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


34,789

Deferred income taxes
 
53,397


53,725

Share-based compensation expense
 
5,907


8,232

Pension and postretirement benefit expense, net of contributions
 
(5,018
)

3,039

Allowance for equity funds used during construction
 
(13
)

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


(4,206
)
Changes in assets and liabilities:
 
 


 

Accounts receivable
 
137,586


68,326

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

(27,991
)
Accounts payable
 
(122,843
)

(64,088
)
Commodity imbalances, net
 
1,888


2,968

Settlement of exit activities liabilities
 
(4,119
)

(6,186
)
Accrued interest
 
(22,363
)

(24,413
)
Risk-management assets and liabilities
 
45,977


(23,813
)
Other assets and liabilities, net
 
(53,571
)

(26,030
)
Cash provided by operating activities
 
269,090


230,667

Investing activities
 
 


 

Capital expenditures (less allowance for equity funds used during construction)
 
(112,737
)

(196,411
)
Contributions to unconsolidated affiliates
 
(4,422
)

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


11,764

Proceeds from sale of assets
 
296


14,858

Cash used in investing activities
 
(109,463
)

(169,947
)
Financing activities
 
 


 

Dividends paid
 
(129,842
)

(129,235
)
Distributions to noncontrolling interests
 
(136,680
)

(137,980
)
Borrowing (repayment) of short-term borrowings, net
 
180,452


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


1,000,000

Debt financing costs
 


(2,770
)
Repayment of long-term debt
 
(1,951
)

(652,148
)
Issuance of common stock
 
3,722


3,964

Other
 
(13,395
)
 
(1,189
)
Cash used in financing activities
 
(97,694
)

(21,131
)
Change in cash and cash equivalents
 
61,933


39,589

Change in cash and cash equivalents included in discontinued operations
 


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Change in cash and cash equivalents from continuing operations
 
61,933

 
39,600

Cash and cash equivalents at beginning of period
 
248,875


97,619

Cash and cash equivalents at end of period
 
$
310,808


$
137,219

See accompanying Notes to Consolidated Financial Statements.


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ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
 
 
 
 
 
ONEOK Shareholders’ Equity
(Unaudited)
Common
Stock Issued
 
Common
Stock
 
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
(Shares)
 
(Thousands of dollars)
January 1, 2017
245,811,180

 
$
2,458

 
$
1,234,314

 
$
(154,350
)
Cumulative effect adjustment for adoption of ASU 2016-09

 

 

 

Net income

 

 

 

Other comprehensive income (loss) (Note G)

 

 

 
15,288

Common stock issued

 

 
(2,506
)
 

Common stock dividends - $0.615 per share (Note F)

 

 

 

Distributions to noncontrolling interests

 

 

 

Other

 

 
261

 

March 31, 2017
245,811,180

 
$
2,458

 
$
1,232,069

 
$
(139,062
)

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

 
$
2,458

 
$
1,378,444

 
$
(127,242
)
Net income

 

 

 

Other comprehensive income (loss)

 

 

 
(7,372
)
Common stock issued

 

 
(3,679
)
 

Common stock dividends - $0.615 per share (Note F)

 

 
(45,789
)
 

Distributions to noncontrolling interests

 

 

 

Other

 

 
(1,425
)
 

March 31, 2016
245,811,180

 
$
2,458

 
$
1,327,551

 
$
(134,614
)


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

 
$
(893,677
)
 
$
3,240,170

 
$
3,428,915

Cumulative effect adjustment for adoption of ASU 2016-09
73,368

 

 

 
73,368

Net income
87,361

 

 
98,824

 
186,185

Other comprehensive income (loss) (Note G)

 

 
28,817

 
44,105

Common stock issued

 
5,707

 

 
3,201

Common stock dividends - $0.615 per share (Note F)
(129,842
)
 

 

 
(129,842
)
Distributions to noncontrolling interests

 

 
(136,680
)
 
(136,680
)
Other

 

 

 
261

March 31, 2017
$
30,887

 
$
(887,970
)
 
$
3,231,131

 
$
3,469,513


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

 
$
(917,862
)
 
$
3,430,538

 
$
3,766,336

Net income
83,446

 

 
91,513

 
174,959

Other comprehensive income (loss)

 

 
(21,411
)
 
(28,783
)
Common stock issued

 
9,355

 

 
5,676

Common stock dividends - $0.615 per share (Note F)
(83,446
)
 

 

 
(129,235
)
Distributions to noncontrolling interests

 

 
(137,980
)
 
(137,980
)
Other

 

 
(4,041
)
 
(5,466
)
March 31, 2016
$

 
$
(908,507
)
 
$
3,358,619

 
$
3,645,507



See accompanying Notes to Consolidated Financial Statements.



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ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. These statements have been prepared in accordance with GAAP and reflect all adjustments that, in our opinion, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The 2016 year-end consolidated balance sheet data was derived from our audited financial statements but does not include all disclosures required by GAAP. Certain reclassifications have been made in the prior-year financial statements to conform to the current-year presentation. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements in our Annual Report.

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

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

Recently Issued Accounting Standards Update - Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of ASUs to the FASB Accounting Standards Codification. We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or clarifications of ASUs listed below. The following tables provide a brief description of recent accounting pronouncements and our analysis of the effects on our financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards that were adopted
 
 
 
 
 
 
ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”
 
The standard requires that inventory, excluding inventory measured using last-in, first-out (LIFO) or the retail inventory method, be measured at the lower of cost or net realizable value.
 
First quarter 2017
 
As a result of adopting this guidance, we updated our accounting policy for inventory valuation accordingly. The financial impact of adopting this guidance was not material.
ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”
 
The standard clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met.
 
First quarter 2017
 
The impact of adopting this standard was not material.
ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments”
 
The standard clarifies the requirements for assessing whether a contingent call (put) option that can accelerate the payment of principal on a debt instrument is clearly and closely related to its debt host.
 
First quarter 2017
 
The impact of adopting this standard was not material.
ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
 
The standard provides simplified accounting for share-based payment transactions in relation to income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
 
First quarter 2017
 
As a result of adopting this guidance, we recorded an adjustment increasing beginning retained earnings and deferred tax assets in the first quarter 2017 of approximately $73 million to recognize previously unrecognized cumulative excess tax benefits related to share-based payments on a modified retrospective basis.  Prospectively, all share-based payment tax effects will be recorded in earnings. The other effects of adopting this standard were not material.

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Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
Standards that are not yet adopted
 
 
 
 
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”
 
The standard outlines the principles an entity must apply to measure and recognize revenue for entities that enter into contracts to provide goods or services to their customers. The core principle is that an entity should recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. The amendment also requires more extensive disaggregated revenue disclosures in interim and annual financial statements.
 
First quarter 2018
 
We are evaluating the impact of this standard on us. Our evaluation process includes a review of our and ONEOK Partners’ contracts and transaction types across all of the business segments. In addition, we are currently evaluating the methods of adoption and analyzing the impact of the standard on our internal controls, accounting policies and financial statements and disclosures. We expect to determine our method of adoption when we complete our evaluation of the impact of the standard and the implications of each adoption method.
ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”
 
The standard requires all equity investments, other than those accounted for using the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income, eliminates the available-for-sale classification for equity securities with readily determinable fair values and eliminates the cost method for equity investments without readily determinable fair values.
 
First quarter 2018
 
We are evaluating the impact of this standard on us.
ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
 
The standard clarifies the classification of certain cash receipts and cash payments on the statement of cash flows where diversity in practice has been identified.
 
First quarter 2018
 
We are evaluating the impact of this standard on us.
ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”
 
The standard requires the service cost component of net benefit cost to be reported in the same line item or items as other compensation costs from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations.
 
First quarter 2018
 
We are evaluating the impact of this standard on us.
ASU 2016-02, “Leases (Topic 842)”
 
The standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. It also requires qualitative disclosures along with specific quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
 
First quarter 2019
 
We are evaluating our current leases and the impact of the standard on our internal controls, accounting policies and financial statements and disclosures.
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
 
The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented net of the allowance for credit losses to reflect the net carrying value at the amount expected to be collected on the financial asset; and the initial allowance for credit losses for purchased financial assets, including available-for-sale debt securities, to be added to the purchase price rather than being reported as a credit loss expense.
 
First quarter 2020
 
We are evaluating the impact of this standard on us.
ASU 2017-04, “Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
 
The standard simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill under step 2. Instead, an entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard does not change step zero or step 1 assessments.
 
First quarter 2020
 
We are evaluating the impact of this standard on us.


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Table of Contents

B.
ACQUISITION OF ONEOK PARTNERS

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

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

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

If the Merger Transaction closes, the expected changes in our ownership interest in ONEOK Partners will be accounted for as an equity transaction pursuant to ASC 810 as we expect to continue to control ONEOK Partners, and no gain or loss will be recognized in our consolidated statements of income resulting from the Merger Transaction. In addition, the tax effects of the Merger Transaction will be reported as adjustments to other assets, deferred income taxes and additional paid-in capital consistent with ASC 740, Income Taxes (ASC 740).

C.
FAIR VALUE MEASUREMENTS

Determining Fair Value - We define fair value as the price that would be received from the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. We use market and income approaches to determine the fair value of our assets and liabilities and consider the markets in which the transactions are executed. We measure the fair value of a group of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.

While many of the contracts in our derivative portfolio are executed in liquid markets where price transparency exists, some contracts are executed in markets for which market prices may exist, but the market may be relatively inactive. This results in limited price transparency that requires management’s judgment and assumptions to estimate fair values. For certain transactions, we utilize modeling techniques using NYMEX-settled pricing data and implied forward LIBOR curves. Inputs into our fair value estimates include commodity-exchange prices, over-the-counter quotes, historical correlations of pricing data, data obtained from third-party pricing services and LIBOR and other liquid money-market instrument rates. We validate our valuation inputs with third-party information and settlement prices from other sources, where available.

In addition, as prescribed by the income approach, we compute the fair value of the derivative portfolio by discounting the projected future cash flows from the derivative assets and liabilities to present value using interest-rate yields to calculate present-value discount factors derived from LIBOR, Eurodollar futures and the LIBOR interest-rate swaps market. We also take into consideration the potential impact on market prices of liquidating positions in an orderly manner over a reasonable period of time under current market conditions. We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using specific and sector bond yields and monitoring the credit default swap markets. Although we use our best estimates to determine the fair value of the executed derivative contracts, the ultimate market prices realized could differ from our estimates, and the differences could be material.

The fair value of forward-starting interest-rate swaps are determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest-rate swap settlements.


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Table of Contents

Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:
Level 1 - fair value measurements are based on unadjusted quoted prices for identical securities in active markets, including NYMEX-settled prices. These balances are comprised predominantly of exchange-traded derivative contracts for natural gas and crude oil.
Level 2 - fair value measurements are based on significant observable pricing inputs, such as NYMEX-settled prices for natural gas and crude oil, and financial models that utilize implied forward LIBOR yield curves for interest-rate swaps.
Level 3 - fair value measurements are based on inputs that may include one or more unobservable inputs, including internally developed natural gas basis and NGL price curves that incorporate observable and unobservable market data from broker quotes, third-party pricing services, market volatilities derived from the most recent NYMEX close spot prices and forward LIBOR curves, and adjustments for the credit risk of our counterparties. We corroborate the data on which our fair value estimates are based using our market knowledge of recent transactions, analysis of historical correlations and validation with independent broker quotes. These balances categorized as Level 3 are comprised of derivatives for natural gas and NGLs. We do not believe that our Level 3 fair value estimates have a material impact on our results of operations, as the majority of our derivatives are accounted for as hedges for which ineffectiveness has not been material.

Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives for which fair value is determined using multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety.

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

 
$

 
$
14,675

 
$
17,968

 
$
(17,217
)
 
$
751

Physical contracts

 

 
508

 
508

 

 
508

Interest-rate contracts

 
47,914

 

 
47,914

 

 
47,914

Total derivative assets
$
3,293

 
$
47,914

 
$
15,183

 
$
66,390

 
$
(17,217
)

$
49,173

Derivative liabilities
 

 
 

 
 

 
 
 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 

Financial contracts
$
(15,757
)
 
$

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

 
$
(346
)
Physical contracts

 

 
(1,393
)
 
(1,393
)
 

 
(1,393
)
Interest-rate contracts

 
(11,316
)
 

 
(11,316
)
 

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

 
$
(13,055
)
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At March 31, 2017, we held no cash and posted $30.6 million of cash with various counterparties, including $12.8 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $17.8 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheets.
(b) - Included in other current assets, other assets or other current liabilities in our Consolidated Balance Sheets.


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Table of Contents

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

 
$

 
$
4,564

 
$
5,711

 
$
(4,760
)
 
$
951

Interest-rate contracts

 
47,457

 

 
47,457

 

 
47,457

Total derivative assets
$
1,147

 
$
47,457

 
$
4,564

 
$
53,168

 
$
(4,760
)
 
$
48,408

Derivative liabilities
 
 
 

 
 

 
 
 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 

Financial contracts
$
(31,458
)
 
$

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

 
$

Physical contracts

 

 
(3,022
)
 
(3,022
)
 

 
(3,022
)
Interest-rate contracts

 
(12,795
)
 

 
(12,795
)
 

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

 
$
(15,817
)
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At December 31, 2016, we held no cash and posted $67.7 million of cash with various counterparties, including $51.6 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $16.1 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheets.
(b) - Included in other current assets, other assets or other current liabilities in our Consolidated Balance Sheets.

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

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

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

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

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

Realized/unrealized gains (losses) include the realization of derivative contracts through maturity. During the three months ended March 31, 2017 and 2016, gains or losses included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the end of each reporting period were not material.

We recognize transfers into and out of the levels in the fair value hierarchy as of the end of each reporting period. During the three months ended March 31, 2017 and 2016, there were no transfers between levels.

Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value, due to the short-term nature of these items. Our cash and cash equivalents are comprised of bank and money market accounts and are classified as Level 1. Our short-term borrowings are classified as Level 2 since the estimated fair value of the short-term borrowings can be determined using information available in the commercial paper market.

The estimated fair value of our consolidated long-term debt, including current maturities, was $8.9 billion and $8.8 billion at March 31, 2017, and December 31, 2016, respectively. The book value of our consolidated long-term debt, including current maturities, was $8.3 billion at March 31, 2017, and December 31, 2016. The estimated fair value of the aggregate of ONEOK’s and ONEOK Partners’ senior notes outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our consolidated long-term debt is classified as Level 2.


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Table of Contents

D.
RISK-MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES

Risk-Management Activities - We are sensitive to changes in natural gas, crude oil and NGL prices, principally as a result of contractual terms under which these commodities are purchased, processed and sold. We use physical-forward purchases and sales and financial derivatives to secure a certain price for a portion of our natural gas, condensate and NGL products; to reduce our exposure to commodity price and interest-rate fluctuations; and to achieve more predictable cash flows. We follow established policies and procedures to assess risk and approve, monitor and report risk-management activities. We have not used these instruments for trading purposes. We are also subject to the risk of interest-rate fluctuation in the normal course of business.

Commodity price risk - Commodity price risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in the price of natural gas, NGLs and condensate. We use the following commodity derivative instruments to mitigate the near-term commodity price risk associated with a portion of the forecasted sales of these commodities:
Futures contracts - Standardized contracts to purchase or sell natural gas and crude oil for future delivery or settlement under the provisions of exchange regulations;
Forward contracts - Nonstandardized commitments between two parties to purchase or sell natural gas, crude oil or NGLs for future physical delivery. These contracts are typically nontransferable and can only be canceled with the consent of both parties;
Swaps - Exchange of one or more payments based on the value of one or more commodities. These instruments transfer the financial risk associated with a future change in value between the counterparties of the transaction, without also conveying ownership interest in the asset or liability; and
Options - Contractual agreements that give the holder the right, but not the obligation, to buy or sell a fixed quantity of a commodity at a fixed price within a specified period of time. Options may either be standardized and exchange-traded or customized and nonexchange-traded.

We may also use other instruments including collars to mitigate commodity price risk. A collar is a combination of a purchased put option and a sold call option, which places a floor and a ceiling price for commodity sales being hedged.

The Natural Gas Gathering and Processing segment is exposed to commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with its POP with fee contracts. Under certain POP with fee contracts, ONEOK Partners’ fee revenues may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. The Natural Gas Gathering and Processing segment also is exposed to basis risk between the various production and market locations where it receives and sells commodities. As part of our hedging strategy, we use the previously described commodity derivative financial instruments and physical-forward contracts to reduce the impact of price fluctuations related to natural gas, NGLs and condensate.

The Natural Gas Liquids segment is exposed to location price differential risk, primarily as a result of the relative value of NGL purchases at one location and sales at another location. The Natural Gas Liquids segment also is exposed to commodity price risk resulting from the relative values of the various NGL products to each other, NGLs in storage and the relative value of NGLs to natural gas. We utilize physical-forward contracts and commodity derivative financial instruments to reduce the impact of price fluctuations related to NGLs.

The Natural Gas Pipelines segment is exposed to commodity price risk because its intrastate and interstate natural gas pipelines retain natural gas from its customers for operations or as part of its fee for services provided. When the amount of natural gas consumed in operations by these pipelines differs from the amount provided by its customers, these pipelines must buy or sell natural gas, or store or use natural gas from inventory, which may expose them to commodity price risk depending on the regulatory treatment for this activity. To the extent that commodity price risk in the Natural Gas Pipelines segment is not mitigated by fuel cost-recovery mechanisms, we may use physical-forward sales or purchases to reduce the impact of price fluctuations related to natural gas. At March 31, 2017, and December 31, 2016, there were no financial derivative instruments with respect to ONEOK Partners’ natural gas pipeline operations.

Interest-rate risk - We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. As of March 31, 2017 and December 31, 2016, ONEOK Partners had interest-rate swaps with notional amounts totaling $1 billion to hedge the variability of its LIBOR-based interest payments and forward-starting interest-rate swaps with notional amounts totaling $1.2 billion to hedge the variability of interest payments on a portion of its forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued. All of ONEOK Partners’ interest-rate swaps are designated as cash flow hedges.

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Table of Contents


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

Fair Values of Derivative Instruments - See Note C for a discussion of the inputs associated with our fair value measurements. The following table sets forth the fair values of derivative instruments for the periods indicated:
 
 
 
March 31, 2017
 
December 31, 2016
 
Location in our Consolidated Balance Sheets
 
Assets
 
(Liabilities)
 
Assets
 
(Liabilities)
 
 
 
(Thousands of dollars)
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
Financial contracts
Other current assets/other current liabilities
 
$
6,154

 
$
(25,855
)
 
$
1,155

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

 

 
210

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

 
(1,393
)
 

 
(3,022
)
 
Other assets
 
421

 

 

 

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

 
(11,316
)
 

 
(12,795
)
 
Other assets
 
47,824

 

 
47,457

 

Total derivatives designated as hedging instruments
 
 
61,259

 
(38,564
)
 
48,822

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

 
(3,796
)
 
4,346

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

 
(668
)
 

 

Total derivatives not designated as hedging instruments
 
 
5,131

 
(4,464
)
 
4,346

 
(4,239
)
Total derivatives
 
 
$
66,390

 
$
(43,028
)
 
$
53,168

 
$
(72,136
)


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Table of Contents

Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
 
 
March 31, 2017
 
December 31, 2016
 
Contract
Type
Purchased/
Payor
 
Sold/
Receiver
 
Purchased/
Payor
 
Sold/
Receiver
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
Fixed price
 
 
 
 
 
 
 
 
- Natural gas (Bcf)
Futures and swaps

 
(38.2
)
 

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

 

 
49.5

 

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

 
(4.5
)
 

 
(3.6
)
Basis
 
 

 
 

 
 

 
 

- Natural gas (Bcf)
Futures and swaps

 
(38.2
)
 

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

 
$

 
$
2,150.0

 
$

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

 

 
0.4

 

- NGLs (MMBbl)
Futures, forwards
and swaps
0.7

 
(2.6
)
 
0.5

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

 

 
0.4

 


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

Cash Flow Hedges - At March 31, 2017, our Consolidated Balance Sheet reflected a net loss of $139.1 million in accumulated other comprehensive loss. The portion of accumulated other comprehensive loss attributable to commodity derivative financial instruments is an unrealized loss of $5.4 million, net of tax, which is expected to be realized within the next 21 months as the forecasted transactions affect earnings. If commodity prices remain at current levels, we will realize approximately $7.2 million in net losses, net of tax, over the next 12 months and approximately $1.8 million in net gains, net of tax, thereafter. The amount deferred in accumulated other comprehensive loss attributable to settled interest-rate swaps is a loss of $42.3 million, net of tax, which will be recognized over the life of the long-term, fixed-rate debt, including losses of $6.5 million, net of tax, that will be reclassified into earnings during the next 12 months as the hedged items affect earnings. The remaining amounts in accumulated other comprehensive loss are attributable primarily to forward-starting interest-rate swaps with future settlement dates, which is expected to be amortized to interest expense over the life of long-term, fixed-rate debt upon issuance of the debt.

The following table sets forth the unrealized effect of cash flow hedges recognized in other comprehensive income (loss) for the periods indicated:
Derivatives in Cash Flow
Hedging Relationships
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(Thousands of dollars)
Commodity contracts
 
$
27,328

 
$
11,678

Interest-rate contracts
 
1,529

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

 
$
(19,933
)


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Table of Contents

The following table sets forth the effect of cash flow hedges in our Consolidated Statements of Income for the periods indicated:
Derivatives in Cash Flow
Hedging Relationships
Location of Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Loss into Net Income (Effective Portion)
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
 
(Thousands of dollars)
Commodity contracts
Commodity sales revenues
 
$
(15,319
)
 
$
14,499

Interest-rate contracts
Interest expense
 
(5,329
)
 
(4,698
)
Total gain (loss) reclassified from accumulated other comprehensive loss into net income on derivatives (effective portion)
 
$
(20,648
)
 
$
9,801


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

From time to time, ONEOK Partners may enter into financial derivative instruments that contain provisions that require it to maintain an investment-grade credit rating from S&P and/or Moody’s. If ONEOK Partners’ credit ratings on its senior unsecured long-term debt were to decline below investment grade, the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions. There were no financial derivative instruments with contingent features related to credit risk at March 31, 2017.

The counterparties to our derivative contracts consist primarily of major energy companies, financial institutions and commercial and industrial end users. This concentration of counterparties may affect our overall exposure to credit risk, either positively or negatively, in that the counterparties may be affected similarly by changes in economic, regulatory or other conditions. Based on our policies, exposures, credit and other reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty nonperformance.

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


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Table of Contents

E.
DEBT

The following table sets forth our debt for the periods indicated:
 
 
March 31, 2017
 
December 31, 2016
 
 
(Thousands of dollars)
ONEOK
 
 
 
 
Senior unsecured obligations:
 
 
 
 
$700,000 at 4.25% due 2022
 
$
547,397

 
$
547,397

$500,000 at 7.5% due 2023
 
500,000

 
500,000

$100,000 at 6.5% due 2028
 
87,088

 
87,126

$100,000 at 6.875% due 2028
 
100,000

 
100,000

$400,000 at 6.0% due 2035
 
400,000

 
400,000

Total ONEOK senior notes payable
 
1,634,485

 
1,634,523

ONEOK Partners
 
 
 
 
Commercial paper outstanding, bearing a weighted-average interest rate of 1.51% and 1.27%, respectively
 
1,290,729

 
1,110,277

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

 
400,000

$425,000 at 3.2% due 2018
 
425,000

 
425,000

$1,000,000 term loan, variable rate, due 2019
 
1,000,000

 
1,000,000

$500,000 at 8.625% due 2019
 
500,000

 
500,000

$300,000 at 3.8% due 2020
 
300,000

 
300,000

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

 
900,000

$425,000 at 5.0 % due 2023
 
425,000

 
425,000

$500,000 at 4.9 % due 2025
 
500,000

 
500,000

$600,000 at 6.65% due 2036
 
600,000

 
600,000

$600,000 at 6.85% due 2037
 
600,000

 
600,000

$650,000 at 6.125% due 2041
 
650,000

 
650,000

$400,000 at 6.2% due 2043
 
400,000

 
400,000

Guardian Pipeline
 
 

 
 
Weighted average 7.85% due 2022
 
42,345

 
44,257

Total debt
 
9,667,559

 
9,489,057

Unamortized portion of terminated swaps
 
19,756

 
20,186

Unamortized debt issuance costs and discounts
 
(66,110
)
 
(68,320
)
Current maturities of long-term debt
 
(410,650
)
 
(410,650
)
Short-term borrowings (a)
 
(1,290,729
)
 
(1,110,277
)
Long-term debt
 
$
7,919,826

 
$
7,919,996

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

ONEOK Credit Agreement - In January 2016, we extended the term of the ONEOK Credit Agreement by one year to January 2020. The ONEOK Credit Agreement is a $300 million revolving credit facility and contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a ratio of indebtedness to consolidated EBITDA (EBITDA, as defined in our ONEOK Credit Agreement) of no more than 4.0 to 1. Upon breach of certain covenants by us in our ONEOK Credit Agreement, amounts outstanding under our ONEOK Credit Agreement, if any, may become due and payable immediately. At March 31, 2017, ONEOK’s ratio of indebtedness to consolidated EBITDA was 2.2 to 1, and ONEOK was in compliance with all covenants under the ONEOK Credit Agreement.

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


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Table of Contents

At March 31, 2017 and December 31, 2016, we had $1.1 million in letters of credit issued and no borrowings under the ONEOK Credit Agreement.

ONEOK Partners Credit Agreement - In January 2016, ONEOK Partners extended the term of the ONEOK Partners Credit Agreement by one year to January 2020. The ONEOK Partners Credit Agreement is a $2.4 billion revolving credit facility and includes a $100 million sublimit for the issuance of standby letters of credit and a $150 million swingline sublimit. At March 31, 2017, and December 31, 2016, ONEOK Partners had $14 million in letters of credit issued and no borrowings under the ONEOK Partners Credit Agreement. The ONEOK Partners Credit Agreement is available for general partnership purposes and had available capacity of approximately $1.1 billion at March 31, 2017.

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

The ONEOK Partners Credit Agreement contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a ratio of indebtedness to adjusted EBITDA (EBITDA, as defined in the ONEOK Partners Credit Agreement, adjusted for all noncash charges and increased for projected EBITDA from certain lender-approved capital expansion projects) of no more than 5.0 to 1. If ONEOK Partners consummates one or more acquisitions in which the aggregate purchase price is $25 million or more, the allowable ratio of indebtedness to adjusted EBITDA will increase to 5.5 to 1 for the quarter in which the acquisition was completed and the two following quarters. If ONEOK Partners were to breach certain covenants in the ONEOK Partners Credit Agreement, amounts outstanding under the ONEOK Partners Credit Agreement, if any, may become due and payable immediately. At March 31, 2017, ONEOK Partners’ ratio of indebtedness to adjusted EBITDA was 4.2 to 1, and it was in compliance with all covenants under the ONEOK Partners Credit Agreement.

2017 Credit Agreement - In April 2017, we entered into the 2017 Credit Agreement with a syndicate of banks, effective upon the closing of the Merger Transaction and the terminations of the ONEOK Credit Agreement and ONEOK Partners Credit Agreement. The 2017 Credit Agreement is a $2.5 billion revolving credit facility and contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a ratio of indebtedness to adjusted EBITDA (EBITDA, as defined in our 2017 Credit Agreement, adjusted for all noncash charges and increased for projected EBITDA from certain lender-approved capital expansion projects) of no more than 5.75 to 1 at the end of the quarter the Merger Transaction closes and the following two quarters; 5.5 to 1 for the subsequent two quarters; and 5.0 to 1 thereafter. If we consummate one or more acquisitions in which the aggregate purchase is $25 million or more, the allowable ratio of indebtedness to adjusted EBITDA will increase to 5.5 to 1 for the quarter in which the acquisition is completed and the two following quarters.

The 2017 Credit Agreement includes a $100 million sublimit for the issuance of standby letters of credit and a $200 million sublimit for swingline loans. Under the terms of the 2017 Credit Agreement, we may request an increase in the size of the facility to an aggregate of $3.5 billion by either commitments from new lenders or increased commitments from existing lenders. The 2017 Credit Agreement contains provisions for an applicable margin rate and an annual facility fee, both of which adjust with changes in our credit ratings. Based on our expected credit ratings following the closing of the Merger Transaction, borrowings, if any, will accrue at LIBOR plus 110 basis points, and the annual facility fee is 15 basis points. The facility has the option to request two one-year extensions, subject to lender approval, and may be used for working capital, capital expenditures, acquisitions and mergers, the issuance of letters of credit, and for other general corporate purposes.

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

ONEOK Partners issuances and maturities - In January 2016, ONEOK Partners entered into the $1.0 billion senior unsecured Term Loan Agreement with a syndicate of banks. The Term Loan Agreement matures in January 2019 and bears interest at LIBOR plus 130 basis points based on ONEOK Partners’ current credit ratings. At March 31, 2017, the interest rate was 2.28 percent. The Term Loan Agreement contains an option, which may be exercised up to two times, to extend the term of the loan, in each case, for an additional one-year term, subject to approval of the banks. The Term Loan Agreement allows prepayment of all or any portion outstanding without penalty or premium and contains substantially the same covenants as the ONEOK Partners Credit Agreement. During the first quarter 2016, ONEOK Partners drew the full $1.0 billion available under the agreement and used the proceeds to repay $650 million of senior notes at maturity, to repay amounts outstanding under ONEOK Partners’ commercial paper program and for general partnership purposes.

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

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

F.
EQUITY

Dividends - Dividends paid on our common stock to shareholders of record at the close of business on January 30, 2017, were $0.615 per share. A dividend of $0.615 per share was declared for shareholders of record at the close of business on May 1, 2017, payable May 15, 2017.

In April 2017, through a wholly owned subsidiary, we contributed 20,000 shares of newly issued Series E Non-Voting Perpetual Preferred Stock (Series E Preferred Stock), par value $0.01 per share, having an aggregate value of $20 million, to ONEOK Foundation, Inc. (the Foundation) for use in future charitable and nonprofit causes. The contribution will be recorded as a $20 million noncash expense in the second quarter of 2017. The Series E Preferred Stock is expected to pay quarterly dividends on each share of Series E Preferred Stock, when, as and if declared by our Board of Directors, at a rate of 5.5 percent per year.

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

G.
ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table sets forth the balance in accumulated other comprehensive loss for the period indicated:
 
Unrealized Gains
(Losses) on Risk-
Management
Assets/Liabilities (a)
 
Pension and
Postretirement
Benefit Plan
Obligations (a) (b)
 
Unrealized Gains
(Losses) on Risk-
Management
Assets/Liabilities of
Unconsolidated
Affiliates (a)
 
Accumulated
Other
Comprehensive
Loss (a)
 
(Thousands of dollars)
January 1, 2017
$
(52,155
)
 
$
(101,236
)
 
$
(959
)
 
$
(154,350
)
Other comprehensive income (loss) before reclassifications
7,491

 
3

 
73

 
7,567

Amounts reclassified from accumulated other comprehensive loss
5,658

 
2,038

 
25

 
7,721

Net current period other comprehensive income (loss) attributable to ONEOK
13,149

 
2,041

 
98

 
15,288

March 31, 2017
$
(39,006
)
 
$
(99,195
)
 
$
(861
)
 
$
(139,062
)
(a) All amounts are presented net of tax.
(b) Includes amounts related to supplemental executive retirement plan.


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Table of Contents

The following table sets forth the effect of reclassifications from accumulated other comprehensive loss in our Consolidated Statements of Income for the periods indicated:
Details about Accumulated Other
Comprehensive Loss
Components
 
Three Months Ended
 
Affected Line Item in the
Consolidated
Statements of Income
 
March 31,
 
 
2017
 
2016
 
 
 
(Thousands of dollars)
 
 
Unrealized gains (losses) on risk-management assets/liabilities
 
 
 
 
 
 
Commodity contracts
 
$
(15,319
)
 
$
14,499

 
Commodity sales revenues
Interest-rate contracts
 
(5,329
)
 
(4,698
)
 
Interest expense
 
 
(20,648
)
 
9,801

 
Income before income taxes
 
 
3,365

 
(1,276
)
 
Income tax expense
 
 
(17,283
)
 
8,525

 
Net income
Noncontrolling interests
 
(11,625
)
 
6,280

 
Less: Net income attributable to noncontrolling interests
 
 
$
(5,658
)
 
$
2,245

 
Net income attributable to ONEOK
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement benefit plan obligations (a)
 
 
 
 
 
 
Amortization of net loss
 
$
(3,812
)
 
$
(2,998
)
 
 
Amortization of unrecognized prior service cost
 
415

 
415

 
 
 
 
(3,397
)
 
(2,583
)
 
Income before income taxes
 
 
1,359

 
1,033

 
Income tax expense
 
 
$
(2,038
)
 
$
(1,550
)
 
Net income attributable to ONEOK
 
 
 
 
 
 
 
Unrealized gains (losses) on risk-management assets/liabilities of unconsolidated affiliates
 
 
 
 
 
 
 
 
$
(96
)
 
$

 
Equity in net earnings from investments
 
 
15

 

 
Income tax expense
 
 
(81
)
 

 
Net income
Noncontrolling interests
 
(56
)
 

 
Less: Net income attributable to noncontrolling interests
 
 
$
(25
)
 
$

 
Net income attributable to ONEOK
 
 
 
 
 
 
 
Total reclassifications for the period attributable to ONEOK
 
$
(7,721
)
 
$
695

 
Net income attributable to ONEOK
(a) These components of accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note I for additional detail of our net periodic benefit cost.

H.
EARNINGS PER SHARE

The following tables set forth the computation of basic and diluted EPS from continuing operations for the periods indicated:
 
Three Months Ended March 31, 2017
 
Income
 
Shares
 
Per Share
Amount
 
(Thousands, except per share amounts)
Basic EPS from continuing operations
 
 
 
 
 
Income from continuing operations attributable to ONEOK available for common stock
$
87,361

 
211,619

 
$
0.41

Diluted EPS from continuing operations
 
 
 

 
 

Effect of dilutive securities

 
1,983

 
 

Income from continuing operations attributable to ONEOK available for common stock and common stock equivalents
$
87,361

 
213,602

 
$
0.41



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Table of Contents

 
Three Months Ended March 31, 2016
 
Income
 
Shares
 
Per Share
Amount
 
(Thousands, except per share amounts)
Basic EPS from continuing operations
 
 
 
 
 
Income from continuing operations attributable to ONEOK available for common
stock
$
84,398

 
210,781

 
$
0.40

Diluted EPS from continuing operations
 
 
 

 
 

Effect of dilutive securities

 
290

 
 

Income from continuing operations attributable to ONEOK available for common
stock and common stock equivalents
$
84,398

 
211,071

 
$
0.40


I.
EMPLOYEE BENEFIT PLANS

The following tables set forth the components of net periodic benefit cost for our pension and postretirement benefit plans for our continuing operations for the periods indicated:
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2017
 
2016
 
2017
 
2016
 
(Thousands of dollars)
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
1,722

 
$
1,622

 
$
165

 
$
149

Interest cost
4,655

 
4,947

 
565

 
601

Expected return on plan assets
(5,336
)
 
(5,077
)
 
(564
)
 
(531
)
Amortization of prior service cost (credit)

 

 
(415
)
 
(415
)
Amortization of net loss
3,392

 
2,737

 
420

 
261

Net periodic benefit cost
$
4,433

 
$
4,229

 
$
171

 
$
65


J.
UNCONSOLIDATED AFFILIATES

Equity in Net Earnings from Investments - The following table sets forth our equity in net earnings from ONEOK Partners’ investments for the periods indicated:
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(Thousands of dollars)
Northern Border Pipeline
$
18,817

 
$
18,674

Overland Pass Pipeline Company
13,566

 
13,304

Other
7,181

 
936

Equity in net earnings from investments
$
39,564

 
$
32,914



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Table of Contents

Unconsolidated Affiliates Financial Information - The following table sets forth summarized combined financial information of ONEOK Partners’ unconsolidated affiliates for the periods indicated:
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
 
(Thousands of dollars)
Income Statement