OKE-2013.3.31-10Q
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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, 2013.
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, 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X

On April 25, 2013, the Company had 206,107,055 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:
AFUDC
Allowance for funds used during construction
Annual Report
Annual Report on Form 10-K for the year ended December 31, 2012
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
Bighorn Gas Gathering
Bighorn Gas Gathering, L.L.C.
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/d
Thousand barrels per day
Mcf
Thousand cubic feet
MDth/d
Thousand dekatherms per day
Midwestern Gas Transmission
Midwestern Gas Transmission Company
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 Act
Natural Gas Act of 1938, as amended
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)
Northern Border Pipeline
Northern Border Pipeline Company
NYMEX
New York Mercantile Exchange
NYSE
New York Stock Exchange
OCC
Oklahoma Corporation Commission
ONEOK
ONEOK, Inc.
ONEOK Credit Agreement
ONEOK’s $1.2 billion revolving credit agreement dated April 5, 2011,
as amended
ONEOK Partners
ONEOK Partners, L.P.

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ONEOK Partners Credit Agreement
ONEOK Partners’ $1.2 billion revolving credit agreement dated August 1, 2011,
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
Overland Pass Pipeline Company
Overland Pass Pipeline Company LLC
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
S&P
Standard & Poor’s Rating Services
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
VAR
Value-at-Risk
Viking Gas Transmission
Viking Gas Transmission Company
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)
2013

2012
 
(Thousands of dollars, except per share amounts)
Revenues
$
3,541,445


$
3,414,600

Cost of sales and fuel
2,917,993


2,771,013

Net margin
623,452


643,587

Operating expenses
 


 

Operations and maintenance
223,603


192,881

Depreciation and amortization
90,221


83,409

Goodwill impairment


10,255

General taxes
35,820


31,177

Total operating expenses
349,644


317,722

Gain on sale of assets
41


57

Operating income
273,849


325,922

Equity earnings from investments (Note K)
25,855


34,620

Allowance for equity funds used during construction
9,087


975

Other income
7,364


9,861

Other expense
(2,596
)

(2,274
)
Interest expense (net of capitalized interest of $12,868 and $8,977, respectively)
(80,437
)

(75,815
)
Income before income taxes
233,122


293,289

Income taxes
(67,417
)

(73,839
)
Income from continuing operations
165,705


219,450

Income from discontinued operations, net of tax (Note B)


762

Gain on sale of discontinued operations, net of tax (Note B)


13,250

Net income
165,705


233,462

Less: Net income attributable to noncontrolling interests
53,184


110,597

Net income attributable to ONEOK
$
112,521


$
122,865

Amounts attributable to ONEOK:
 


 

Income from continuing operations
$
112,521


$
108,853

Income from discontinued operations


14,012

Net income
$
112,521


$
122,865

Basic earnings per share:
 


 

Income from continuing operations (Note I)
$
0.55


$
0.52

Income from discontinued operations


0.07

Net income
$
0.55


$
0.59

Diluted earnings per share:
 


 

Income from continuing operations (Note I)
$
0.54


$
0.51

Income from discontinued operations


0.07

Net Income
$
0.54


$
0.58

Average shares (thousands)
 


 

Basic
205,479


207,617

Diluted
209,458


211,852

Dividends declared per share of common stock
$
0.36


$
0.305

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)
2013
 
2012
 
(Thousands of dollars)
Net income
$
165,705

 
$
233,462

Other comprehensive income (loss), net of tax
 

 
 

Unrealized gains (losses) on energy marketing and risk-management assets/liabilities, net of tax of $3,958 and $(19,094), respectively
(13,652
)
 
47,573

Realized (gains) losses in net income, net of tax of $(4,695) and $(1,615), respectively
7,295

 
(1,180
)
Unrealized holding gains (losses) on available-for-sale securities, net of tax of $38 and $(141), respectively
(62
)
 
224

Change in pension and postretirement benefit plan liability, net of tax of $4,708 and $3,644, respectively
(7,462
)
 
(5,777
)
Total other comprehensive income (loss), net of tax
(13,881
)
 
40,840

Comprehensive income
151,824

 
274,302

Less: Comprehensive income attributable to noncontrolling interests
45,658

 
124,161

Comprehensive income attributable to ONEOK
$
106,166

 
$
150,141

See accompanying Notes to Consolidated Financial Statements.

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ONEOK, Inc. and Subsidiaries
 
 
 
CONSOLIDATED BALANCE SHEETS
 

 

March 31,

December 31,
(Unaudited)
2013

2012
Assets
(Thousands of dollars)
Current assets
 

 
Cash and cash equivalents
$
143,947


$
583,618

Accounts receivable, net
1,261,804


1,349,371

Gas and natural gas liquids in storage
302,473


517,014

Commodity imbalances
75,629


90,211

Energy marketing and risk management assets (Notes C and D)
11,656


48,577

Other current assets
154,154


175,869

Total current assets
1,949,663


2,764,660

Property, plant and equipment
 


 

Property, plant and equipment
13,560,483


13,088,991

Accumulated depreciation and amortization
3,039,265


2,974,651

Net property, plant and equipment
10,521,218


10,114,340

Investments and other assets
 


 

Investments in unconsolidated affiliates (Note K)
1,220,129


1,221,405

Goodwill and intangible assets
994,289


996,206

Other assets
760,920


758,664

Total investments and other assets
2,975,338


2,976,275

Total assets
$
15,446,219


$
15,855,275

See accompanying Notes to Consolidated Financial Statements.


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ONEOK, Inc. and Subsidiaries
 

 
CONSOLIDATED BALANCE SHEETS
 

 
(Continued)
 
 
 

March 31,

December 31,
(Unaudited)
2013

2012
Liabilities and equity
(Thousands of dollars)
Current liabilities
 

 
Current maturities of long-term debt
$
10,771


$
10,855

Notes payable (Note E)
551,250


817,170

Accounts payable
1,205,248


1,333,489

Commodity imbalances
201,553


272,436

Energy marketing and risk management liabilities (Notes C and D)
10,323


9,990

Other current liabilities
357,880


369,054

Total current liabilities
2,337,025


2,812,994

Long-term debt, excluding current maturities (Note F)
6,513,327


6,515,372

Deferred credits and other liabilities



 
Deferred income taxes
1,678,887


1,592,802

Other deferred credits
712,847


701,657

Total deferred credits and other liabilities
2,391,734


2,294,459

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 206,088,765 shares at March 31, 2013; issued 245,811,180 shares and
outstanding 204,935,043 shares at December 31, 2012
2,458


2,458

Paid-in capital
1,267,735


1,324,698

Accumulated other comprehensive loss (Note H)
(223,153
)

(216,798
)
Retained earnings
2,097,764


2,059,024

Treasury stock, at cost: 39,722,415 shares at March 31, 2013, and
40,876,137 shares at December 31, 2012
(1,010,450
)

(1,039,773
)
Total ONEOK shareholders’ equity
2,134,354


2,129,609

Noncontrolling interests in consolidated subsidiaries
2,069,779


2,102,841

Total equity
4,204,133


4,232,450

Total liabilities and equity
$
15,446,219


$
15,855,275

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)
2013

2012
 
(Thousands of dollars)
Operating activities
 

 
Net income
$
165,705


$
233,462

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
90,221


83,417

Impairment of goodwill


10,255

Gain on sale of discontinued operations


(13,250
)
Equity earnings from investments
(25,855
)

(34,620
)
Distributions received from unconsolidated affiliates
23,495


36,879

Deferred income taxes
68,107


51,411

Share-based compensation expense
16,756


5,008

Allowance for equity funds used during construction
(9,087
)

(975
)
Gain on sale of assets
(41
)

(57
)
Other
(2,227
)

28,501

Changes in assets and liabilities:
 


 

Accounts receivable
90,953


180,413

Gas and natural gas liquids in storage
214,541


251,227

Accounts payable
(103,690
)

(176,674
)
Commodity imbalances, net
(56,301
)

(101,604
)
Energy marketing and risk management assets and liabilities
21,346


(122,900
)
Other assets and liabilities, net
(22,425
)

(4,408
)
Cash provided by operating activities
471,498


426,085

Investing activities
 


 

Capital expenditures (less allowance for equity funds used during construction)
(501,065
)

(348,437
)
Proceeds from sale of discontinued operations, net of cash sold


32,008

Contributions to unconsolidated affiliates
(3,036
)

(2,577
)
Distributions received from unconsolidated affiliates
6,698


4,062

Proceeds from sale of assets
2,596


521

Other


24

Cash used in investing activities
(494,807
)

(314,399
)
Financing activities
 


 

Repayment of notes payable, net
(265,920
)

(422,225
)
Issuance of debt, net of discounts


699,657

Long-term debt financing costs


(5,392
)
Repayment of debt
(1,975
)

(3,082
)
Issuance of common stock
2,831


2,228

Issuance of common units, net of issuance costs
12,819


459,735

Dividends paid
(73,781
)

(63,375
)
Distributions to noncontrolling interests
(90,336
)

(72,852
)
Cash provided by (used in) financing activities
(416,362
)

594,694

Change in cash and cash equivalents
(439,671
)

706,380

Change in cash and cash equivalents included in discontinued operations


8,859

Change in cash and cash equivalents from continuing operations
(439,671
)

715,239

Cash and cash equivalents at beginning of period
583,618


65,953

Cash and cash equivalents at end of period
$
143,947


$
781,192

See accompanying Notes to Consolidated Financial Statements.

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ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 
 
 
 
 
ONEOK Shareholders’ Equity
(Unaudited)
Common
Stock Issued
 
Common
Stock
 
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
(Shares)
 
(Thousands of dollars)
January 1, 2013
245,811,180

 
$
2,458

 
$
1,324,698

 
$
(216,798
)
Net income

 

 

 

Other comprehensive income (loss)

 

 

 
(6,355
)
Common stock issued

 

 
(26,492
)
 

Common stock dividends - $0.36 per share

 

 

 

Issuance of common units of ONEOK Partners

 

 
2,956

 

Distributions to noncontrolling interests

 

 

 

Other

 

 
(33,427
)
 

March 31, 2013
245,811,180

 
$
2,458

 
$
1,267,735

 
$
(223,153
)
See accompanying Notes to Consolidated Financial Statements.

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ONEOK, Inc. and Subsidiaries
 
 
 
 
 
 
 
CONSOLIDATED STATEMENT 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, 2013
$
2,059,024

 
$
(1,039,773
)
 
$
2,102,841

 
$
4,232,450

Net income
112,521

 

 
53,184

 
165,705

Other comprehensive income (loss)

 

 
(7,526
)
 
(13,881
)
Common stock issued

 
29,323

 

 
2,831

Common stock dividends - $0.36 per share
(73,781
)
 

 

 
(73,781
)
Issuance of common units of ONEOK Partners

 

 
11,616

 
14,572

Distributions to noncontrolling interests

 

 
(90,336
)
 
(90,336
)
Other

 

 

 
(33,427
)
March 31, 2013
$
2,097,764

 
$
(1,010,450
)
 
$
2,069,779

 
$
4,204,133


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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 presentation of the results for the interim periods presented.  All such adjustments are of a normal recurring nature. The 2012 year-end consolidated balance sheet data was derived from our audited financial statements but does not include all disclosures required by GAAP.  These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements in our Annual Report.  Due to the seasonal nature of our business, the results of operations for the three months ended March 31, 2013, are not necessarily indicative of the results that may be expected for a 12-month period.

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

Stock Split - In June 2012, we completed a two-for-one split of our common stock. We have adjusted all share and per-share amounts contained herein to be presented on a post-split basis.

Recently Issued Accounting Standards Update - In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires presentation in a single location, either in a single note or parenthetically on the face of the financial statements, of the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source. This guidance is effective for our interim and annual periods beginning on January 1, 2013, and is applied prospectively. We adopted this guidance with this Quarterly Report, and it did not impact our financial position or results of operations. See Note H for additional disclosures.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which increases disclosures about offsetting assets and liabilities. In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging. New disclosures are required to enable users of financial statements to understand significant quantitative differences in balance sheets prepared under GAAP and International Financial Reporting Standards related to the offsetting of financial instruments, including derivatives. The existing GAAP guidance allowing balance sheet offsetting remains unchanged. This guidance is effective for interim and annual periods beginning on January 1, 2013, and is applied retrospectively for all comparative periods presented. We adopted this guidance beginning with this Quarterly Report, and it did not impact our financial position or results of operations. See Note C for additional disclosures.

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 expect the impact of this guidance to be immaterial when we adopt it for our annual assessments in July 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 and recognized a gain on the sale of approximately $13.5 million, net of taxes of $8.3 million. The financial information of ONEOK Energy Marketing Company is reflected as discontinued operations in this Quarterly Report. For the month ended January 31, 2012, ONEOK Energy Marketing Company had revenues of $27.6 million and pre-tax income of $1.2 million.


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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 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 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 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:
 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting
 
Total - Net
 
(Thousands of dollars)
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives (a)
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
36,414

 
$
5,147

 
$
8,351

 
$
49,912

 
$
(40,680
)
 
$
9,232

Physical contracts

 
907

 
2,452

 
3,359

 
(92
)
 
3,267

Interest-rate contracts

 
17,711

 

 
17,711

 

 
17,711

Total derivatives
36,414

 
23,765

 
10,803

 
70,982

 
(40,772
)

30,210

Trading securities (b)
7,859

 

 

 
7,859

 

 
7,859

Available-for-sale investment securities (c)
1,842

 

 

 
1,842

 

 
1,842

Total assets
$
46,115

 
$
23,765

 
$
10,803

 
$
80,683

 
$
(40,772
)
 
$
39,911

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 
 
 

 
 

Derivatives (a)
 
 
 

 
 

 
 
 
 

 
 

Commodity contracts
 
 
 
 
 
 
 
 
 
 
 

Financial contracts
$
(40,357
)
 
$
(578
)
 
$
(8,681
)
 
$
(49,616
)
 
$
45,734

 
$
(3,882
)
Physical contracts

 
(2,505
)
 
(4,467
)
 
(6,972
)
 
92

 
(6,880
)
Total derivatives
(40,357
)
 
(3,083
)
 
(13,148
)
 
(56,588
)
 
45,826

 
(10,762
)
Fair value of firm commitments (d)

 

 
(535
)
 
(535
)
 

 
(535
)
Total liabilities
$
(40,357
)
 
$
(3,083
)
 
$
(13,683
)
 
$
(57,123
)
 
$
45,826

 
$
(11,297
)
(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 March 31, 2013, we held $1.3 million of cash collateral and had posted $27.7 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.


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Table of Contents

 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total - Gross
 
Netting
 
Total - Net
 
(Thousands of dollars)
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives (a)
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
69,957

 
$
10,780

 
$
7,107

 
$
87,844

 
$
(51,602
)
 
$
36,242

Physical contracts

 
2,083

 
2,032

 
4,115

 
(151
)
 
3,964

Interest-rate contracts

 
10,923

 

 
10,923

 

 
10,923

Total derivatives
69,957

 
23,786

 
9,139

 
102,882

 
(51,753
)
 
51,129

Trading securities (b)
5,978

 

 

 
5,978

 

 
5,978

Available-for-sale investment securities (c)
2,027

 

 

 
2,027

 

 
2,027

Total assets
$
77,962

 
$
23,786

 
$
9,139

 
$
110,887

 
$
(51,753
)
 
$
59,134

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 
 
 

 
 

Derivatives (a)
 
 
 

 
 

 
 
 
 

 
 
Commodity contracts
 
 
 
 
 
 
 
 
 
 
 
Financial contracts
$
(35,172
)
 
$
(1,737
)
 
$
(7,177
)
 
$
(44,086
)
 
$
33,878

 
$
(10,208
)
Physical contracts

 

 
(279
)
 
(279
)
 
151

 
(128
)
Total derivatives
(35,172
)
 
(1,737
)
 
(7,456
)
 
(44,365
)
 
34,029

 
(10,336
)
Fair value of firm commitments (d)

 

 
(1,280
)
 
(1,280
)
 

 
(1,280
)
Total liabilities
$
(35,172
)
 
$
(1,737
)
 
$
(8,736
)
 
$
(45,645
)
 
$
34,029

 
$
(11,616
)
(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, 2012, we held $17.7 million of cash collateral and had posted $4.5 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.

Our Level 1 fair value amounts are based on unadjusted quoted prices in active markets including NYMEX-settled prices and actively quoted prices for equity securities.  These balances are comprised predominantly of exchange-traded derivative contracts for natural gas and crude oil.   Also included in Level 1 are equity securities.

Our Level 2 fair value amounts 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.

Our Level 3 fair value amounts are based on inputs that may include one or more unobservable inputs including internally developed basis curves that incorporate observable and unobservable market data, NGL price curves from 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.  These balances categorized as Level 3 are comprised of derivatives for natural gas and natural gas liquids.  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 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.


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Table of Contents

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)
January 1, 2013
$
1,683

 
$
(1,280
)
 
$
403

Total realized/unrealized gains (losses):
 
 
 

 
 

Included in earnings (a)
(4,033
)
 
745

 
(3,288
)
Included in other comprehensive income (loss)
(1,902
)
 

 
(1,902
)
Transfers into Level 3
294

 

 
294

Transfers out of Level 3
1,613

 

 
1,613

March 31, 2013
$
(2,345
)
 
$
(535
)
 
$
(2,880
)
Total gains (losses) for the period included in earnings attributable to the change in
unrealized gains (losses) relating to assets and liabilities still held at
March 31, 2013 (a)
$
(185
)
 
$
177

 
$
(8
)
(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)
(4,801
)
 
3,513

 
(1,288
)
Included in other comprehensive income (loss)
5,785

 

 
5,785

Sale of discontinued operations
(3,636
)
 

 
(3,636
)
Transfers out of Level 3
(4,504
)
 

 
(4,504
)
March 31, 2012
$
17,948

 
$
(3,770
)
 
$
14,178

Total gains (losses) for the period included in earnings attributable to the change
in unrealized gains (losses) relating to assets and liabilities still held at
March 31, 2012 (a)
$
(4,687
)
 
$
1,498

 
$
(3,189
)
(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 March 31, 2013.
 
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 $7.3 billion at March 31, 2013, and $7.5 billion at December 31, 2012.  The book value of long-term debt, including current maturities, was $6.5 billion at March 31, 2013, and December 31, 2012.  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

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 condensate.  We use commodity derivative instruments such as futures, physical-forward contracts, swaps and options to mitigate the commodity-price risk associated with a portion of the forecasted purchases and sales of commodities and natural gas and natural gas liquids in storage.  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 may use physical-forward transactions, which result in a 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, at times, interest-rate swaps.

The following derivative instruments are used to manage our exposure to these risks:
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. This transfers 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.

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 managed actively, 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.

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Table of Contents

The use of these derivative instruments and the associated recovery of these costs have been approved by the OCC, KCC and regulatory authorities in certain of our Texas jurisdictions.

ONEOK Partners has 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. At March 31, 2013, and December 31, 2012, ONEOK Partners had forward-starting interest-rate swaps 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.

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.


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Table of Contents

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:
 
March 31, 2013
 
 
December 31, 2012
 
 
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
$
15,292

 
 
$
(16,980
)
 
 
$
47,516

(b)
 
$
(4,885
)
 
Physical contracts
51

 
 
(3,341
)
 
 
56

 
 
(126
)
 
Interest-rate contracts
17,711

 
 

 
 
10,923

 
 

 
Total derivatives designated as hedging instruments
33,054

 
 
(20,321
)
 
 
58,495

 
 
(5,011
)
 
Derivatives not designated as hedging instruments
 

 
 
 

 
 
 

 
 
 

 
Commodity contracts
 

 
 
 

 
 
 

 
 
 

 
Nontrading instruments


 
 
 
 
 
 

 
 
 

 
Financial contracts
12,503

 
 
(9,018
)
 
 
24,970

 
 
(25,009
)
 
Physical contracts
3,308

 
 
(3,631
)
 
 
4,059

 
 
(153
)
 
Trading instruments
 

 
 
 

 
 
 

 
 
 

 
Financial contracts
22,117

 
 
(23,618
)
 
 
15,358

 
 
(14,192
)
 
Total derivatives not designated as hedging instruments
37,928

 
 
(36,267
)
 
 
44,387

 
 
(39,354
)
 
Total derivatives
$
70,982

 
 
$
(56,588
)
 
 
$
102,882

 
 
$
(44,365
)
 
(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 $16.9 million of derivative net assets and ineffectiveness associated with cash flow hedges of inventory related to certain financial contracts that were used to hedge forecasted purchases and sales of natural gas. The deferred gains associated with these assets have been reclassified from accumulated other comprehensive income (loss).



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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 our continuing and discontinued operations for the periods indicated:
 
 
 
March 31, 2013
 
December 31, 2012
 
Contract
Type
 
Purchased/
Payor
 
Sold/
Receiver
 
Purchased/
Payor
 
Sold/
Receiver
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
Fixed price
 
 
 
 
 
 
 
 
 
- Natural gas (Bcf)
Futures, forwards and swaps
 
0.7

 
(67.0
)
 

 
(85.1
)
- Crude oil and NGLs (MMbbl)
Futures, forwards and swaps
 

 
(3.5
)
 

 
(1.1
)
Basis
 
 
 

 
 

 
 

 
 

- Natural gas (Bcf)
Futures, forwards and swaps
 
0.7

 
(56.3
)
 

 
(56.3
)
Interest-rate contracts (Millions of dollars)
Forward-starting
swaps
 
$
400.0

 
$

 
$
400.0

 
$

 
 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 

 
 

 
 

 
 

Basis
 
 
 

 
 

 
 

 
 

- Natural gas (Bcf)
Futures, forwards and swaps
 
65.6

 
(65.6
)
 
59.1

 
(59.1
)
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
 

 
 

 
 

Fixed price
 
 
 

 
 

 
 

 
 

- Natural gas (Bcf)
Futures, forwards and swaps
 
108.6

 
(107.3
)
 
60.7

 
(60.4
)
 
Options
 
92.5

 
(75.5
)
 
102.1

 
(100.8
)
Basis
 
 
 

 
 

 
 

 
 

- Natural gas (Bcf)
Futures, forwards and swaps
 
82.2

 
(84.0
)
 
80.2

 
(81.7
)
Index
 
 
 

 
 

 
 

 
 

- Natural gas (Bcf)
Futures, forwards and swaps
 
23.6

 
(19.0
)
 
20.3

 
(22.3
)
 
These notional amounts are used to summarize the volume of financial instruments; however, they do not reflect the extent to which the positions offset one another and consequently do not reflect our actual exposure to market or credit risk.

Cash Flow Hedges - Our Energy Services and ONEOK Partners segments use derivative instruments to hedge the cash flows associated with anticipated purchases and sales of natural gas, NGLs and condensate and cost of fuel used in the transportation of natural gas.  Accumulated other comprehensive income (loss) at March 31, 2013, includes losses of approximately $1.1 million, net of tax, related to these hedges that will be recognized within the next 33 months as the forecasted transactions affect earnings.  If prices remain at current levels, we will recognize $0.9 million in net losses over the next 12 months, and we will recognize net losses of $0.2 million thereafter.  The amount deferred in accumulated other comprehensive income (loss) attributable to our settled interest-rate swaps is a loss of $55.8 million, net of tax, which will be recognized over the life of the long-term, fixed-rate debt. We expect that losses of $5.4 million will be reclassified into earnings during the next 12 months as the hedged items affect earnings. The remaining amounts in accumulated other comprehensive income (loss) are attributable primarily to ONEOK Partners’ forward-starting interest-rate swaps with settlement dates greater than 12 months, which will be amortized to interest expense over the life of long-term, fixed-rate debt upon issuance of ONEOK Partners debt.

For the three months ended March 31, 2012, net margin in our Consolidated Statement of Income includes losses of $29.9 million related to certain financial contracts that were used to hedge forecasted purchases of natural gas.  As a result of the continued decline in natural gas prices, the combination of the cost basis of the forecasted purchases of inventory and the financial contracts exceeded the amount expected to be recovered through sales of that inventory after considering related sales hedges, which required reclassification of the loss from accumulated other comprehensive loss to current period earnings.


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Table of Contents

The following table sets forth the effects 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,
2013
 
2012
 
(Thousands of dollars)
Commodity contracts
$
(24,398
)
 
$
45,565

Interest-rate contracts
6,788

 
21,102

Total unrealized gain (loss) recognized in other comprehensive income (loss) on derivatives (effective portion)
$
(17,610
)
 
$
66,667


The following table sets forth the effect of cash flow hedges on our Consolidated Statements of Income for the periods indicated:
Derivatives in Cash Flow
Hedging Relationships
Location of Gain (Loss) Reclassified from 
Accumulated Other Comprehensive Income
(Loss) into Net Income (Effective Portion)
Three Months Ended
March 31,
2013
 
2012
 
 
(Thousands of dollars)
Commodity contracts
Revenues
$
5,434

 
$
62,369

Commodity contracts
Cost of sales and fuel
(13,987
)
 
(61,977
)
Interest-rate contracts
Interest expense
(3,437
)
 
(827
)
Total loss reclassified from accumulated other comprehensive income (loss) into net income on
derivatives (effective portion)
$
(11,990
)
 
$
(435
)
 
Ineffectiveness related to our cash flow hedges was not material for the three months ended March 31, 2013 and 2012.  In the event that it becomes probable that a forecasted transaction will not occur, we will discontinue cash flow hedge treatment, which will affect earnings.  For the three months ended March 31, 2013 and 2012, there were no gains or losses due to the discontinuance of cash flow hedge treatment as a result of the underlying transactions being no longer probable.

Other Derivative Instruments - The following table sets forth the effect of our derivative instruments that are not part of a hedging relationship in our Consolidated Statements of Income for our continuing and discontinued operations for the periods indicated:
Derivatives Not Designated as
Hedging Instruments
Location of Gain (Loss)
Three Months Ended
March 31,
2013
 
2012
 
 
(Thousands of dollars)
Commodity contracts - trading
Revenues
$
(1,662
)
 
$
315

Commodity contracts - nontrading (a)
Cost of sales and fuel
633

 
2,963

Total gain (loss) recognized in income on derivatives
$
(1,029
)
 
$
3,278

(a) - Amounts are presented net of deferred gains (losses) associated with derivatives entered into by our Natural Gas Distribution segment.

Our Natural Gas Distribution segment held no natural gas call options at March 31, 2013, and held call options with premiums totaling $9.6 million at December 31, 2012.  The premiums are recorded in other current assets as these contracts are included in, and recoverable through, the monthly purchased-gas cost mechanism.  We realized a loss of $6.6 million for the three months ended March 31, 2013, and an immaterial loss for the three months ended March 31, 2012, associated with the decline in the value and expiration of option contracts, which are deferred as part of our unrecovered purchase-gas costs.

Fair Value Hedges - Our Energy Services segment uses basis swaps to hedge the fair value of location price differentials related to certain firm transportation commitments.  Cost of sales and fuel in our Consolidated Statements of Income includes losses of $0.1 million and gains of $0.5 million for the three months ended March 31, 2013 and 2012, respectively, related to the change in fair value of derivatives designated as fair value hedges.  Revenues include gains of $0.3 million and losses of $1.8 million for the three months ended March 31, 2013 and 2012, respectively, to recognize the change in fair value of the related hedged firm commitments.  The ineffectiveness related to these hedges was not material for the three months ended March 31, 2013 and 2012.


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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.

Some of our derivative instruments contain provisions that require us to maintain an investment-grade credit rating from S&P and/or Moody’s.  If our credit ratings on 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.  The aggregate fair value of all financial derivative instruments with contingent features related to credit risk that were in a net liability position at March 31, 2013, was not material.

The counterparties to our derivative contracts consist primarily of major energy companies, LDCs, electric utilities, financial institutions and commercial and industrial end-users.  This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected 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, 2013, the net credit exposure from our derivative assets is primarily with investment-grade companies in the financial and utility sectors.

E.
CREDIT FACILITIES AND SHORT-TERM NOTES PAYABLE

ONEOK Credit Agreement - The ONEOK Credit Agreement, which is scheduled to expire in March 2018, contains certain financial, operational and legal covenants.  Among other things, these covenants include maintaining ONEOK’s stand-alone debt-to-capital ratio of no more than 67.5 percent at the end of any calendar quarter, limitations on the ratio of indebtedness secured by liens and indebtedness of subsidiaries to consolidated net tangible assets, a requirement that ONEOK maintains the power to control the management and policies of ONEOK Partners, and a limit on new investments in master limited partnerships. The ONEOK Credit Agreement also contains customary affirmative and negative covenants, including covenants relating to liens, investments, fundamental changes in the nature of ONEOK’s businesses, transactions with affiliates, the use of proceeds and a covenant that limits ONEOK’s ability to restrict its subsidiaries’ ability to pay dividends.  The debt covenant calculations in the ONEOK Credit Agreement exclude the debt of ONEOK Partners.  In the event of a breach of certain covenants by ONEOK, amounts outstanding under the ONEOK Credit Agreement may become due and payable immediately. At March 31, 2013, ONEOK’s stand-alone debt-to-capital ratio, as defined by the ONEOK Credit Agreement, was 49.3 percent, and ONEOK was in compliance with all covenants under the ONEOK Credit Agreement.

Under the terms of the ONEOK Credit Agreement, ONEOK may request an increase in the size of the facility to an aggregate of $1.7 billion from $1.2 billion by either commitments from new lenders or increased commitments from existing lenders. The ONEOK Credit Agreement is available for general corporate purposes, including repayment of ONEOK’s commercial paper notes, if necessary.  Amounts outstanding under the commercial paper program reduce the borrowing capacity under the ONEOK Credit Agreement. 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. Borrowings, if any, will accrue at LIBOR plus 137.5 basis points, and the annual facility fee is 20 basis points based on our current credit rating.

At March 31, 2013, ONEOK had $551.3 million of commercial paper outstanding and $1.9 million in letters of credit issued, leaving approximately $646.8 million of credit available under the ONEOK Credit Agreement.

In March 2013, we amended the ONEOK Credit Agreement to extend its maturity to March 28, 2018, from April 5, 2016, and reduce the facility fee and interest-rate margins for any borrowings after the amendment’s effective date.

ONEOK Partners Credit Agreement - 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 of the acquisition and the two following quarters.  Upon breach of certain covenants by ONEOK Partners in the ONEOK Partners Credit Agreement, amounts outstanding under the ONEOK

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Partners Credit Agreement, if any, may become due and payable immediately.  At March 31, 2013, ONEOK Partners’ ratio of indebtedness to adjusted EBITDA was 3.3 to 1, and ONEOK Partners was in compliance with all covenants under the ONEOK Partners Credit Agreement.

The ONEOK Partners Credit Agreement includes a $100 million sublimit for the issuance of standby letters of credit and also features an option that allows ONEOK Partners to request an increase in the size of the facility to an aggregate of $1.7 billion from $1.2 billion by either commitments from new lenders or increased commitments from existing lenders.  The ONEOK Partners Credit Agreement is available for general partnership purposes.  Amounts outstanding under our commercial paper program reduce the borrowing capacity under the ONEOK Partners Credit Agreement.  At March 31, 2013, ONEOK Partners had no commercial paper outstanding, no letters of credit issued and no borrowings under the ONEOK Partners Credit Agreement.

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. Borrowings, if any, will accrue at LIBOR plus 130 basis points, and the annual facility fee is 20 basis points based on ONEOK Partners current credit rating. ONEOK Partners Credit Agreement is guaranteed fully and unconditionally by the Intermediate Partnership. Borrowings under the ONEOK Partners Credit Agreement are nonrecourse to ONEOK.
 
Neither ONEOK nor ONEOK Partners guarantees the debt or other similar commitments to unaffiliated parties, and ONEOK does not guarantee the debt, commercial paper or other similar commitments of ONEOK Partners.

F.
LONG-TERM DEBT

In January 2012, we completed an underwritten public offering of $700 million, 4.25-percent senior notes due 2022.  The net proceeds from the offering, after deducting underwriting discounts and offering expenses, were approximately $694.3 million.

ONEOK Partners repaid its $350 million, 5.9-percent senior notes at maturity in April 2012 with a portion of the proceeds from its March 2012 equity issuance.

G.
EQUITY

The following table sets forth the changes in equity attributable to us and our noncontrolling interests, including other comprehensive income, net of tax, for the periods indicated:
 
Three Months Ended
 
Three Months Ended
 
March 31, 2013

March 31, 2012
 
ONEOK
Shareholders’
Equity
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
Total
Equity
 
ONEOK
Shareholders’
Equity
 
Noncontrolling
Interests in
Consolidated
Subsidiaries
 
Total
Equity
 
(Thousands of dollars)
Beginning balance
$
2,129,609

 
$
2,102,841

 
$
4,232,450

 
$
2,238,573

 
$
1,561,159

 
$
3,799,732

Net income
112,521

 
53,184

 
165,705

 
122,865

 
110,597

 
233,462

Other comprehensive income (loss)
(6,355
)
 
(7,526
)
 
(13,881
)
 
27,276

 
13,564

 
40,840

Common stock issued
2,831

 

 
2,831

 
2,561

 

 
2,561

Common stock dividends
(73,781
)
 

 
(73,781
)
 
(63,375
)
 

 
(63,375
)
Issuance of common units of ONEOK Partners
2,956

 
11,616

 
14,572

 
(51,100
)
 
510,835

 
459,735

Distributions to noncontrolling interests

 
(90,336
)
 
(90,336
)
 

 
(72,852
)
 
(72,852
)
Other
(33,427
)
 

 
(33,427
)
 
(20,648
)
 

 
(20,648
)
Ending balance
$
2,134,354

 
$
2,069,779

 
$
4,204,133

 
$
2,256,152

 
$
2,123,303

 
$
4,379,455

 
Dividends - Dividends paid on our common stock to shareholders of record at the close of business on January 31, 2013, were $0.36 per share.  A dividend of $0.36 per share was declared for shareholders of record on April 30, 2013, payable May 15, 2013.

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


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H.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table sets forth the balance in accumulated other comprehensive income (loss) for the period indicated:
 
Unrealized Gains
(Losses) on Energy
Marketing and
Risk Management
Assets/Liabilities (a)
 
Unrealized
Holding Gains (Losses)
on Investment
Securities (a)
 
Pension and
Postretirement
Benefit Plan
Obligations (a)
 
Accumulated
Other
Comprehensive
Income (Loss) (a)
 
(Thousands of dollars)
January 1, 2013
$
(55,030
)
 
$
1,034

 
$
(162,802
)
 
$
(216,798
)
Other comprehensive income (loss) before
reclassifications
(6,274
)
 
(62
)
 
(18,720
)
 
(25,056
)
Amounts reclassified from accumulated other
comprehensive income (loss)
7,443

 

 
11,258

 
18,701

Net current-period other comprehensive income
(loss) attributable to ONEOK
1,169

 
(62
)

(7,462
)
 
(6,355
)
March 31, 2013
$
(53,861
)
 
$
972

 
$
(170,264
)
 
$
(223,153
)
(a) All amounts are presented net of tax.

The following table sets forth the effect of reclassifications from accumulated other comprehensive income (loss) on our Consolidated Statements of Income for the three months ended March 31, 2013:
Details about Accumulated Other
Comprehensive Income (Loss) Components
 
Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Statement of Income
 
 
(Thousand of dollars)
 
 
Unrealized gains (losses) on energy marketing and
risk management assets/liabilities
 
 
 
 
Commodity contracts
 
$
(5,434
)
 
Revenues
Commodity contracts
 
13,987

 
Cost of sales and fuel
Interest rate contracts
 
3,437

 
Interest expense
 
 
11,990

 
Income before income taxes
 
 
(4,695
)
 
Income tax expense
 
 
7,295

 
Net income
Noncontrolling interest
 
(148
)
 
Less: Net income attributable to
noncontrolling interest
 
 
$
7,443

 
Net income attributable to ONEOK
 
 
 
 
 
Pension and postretirement benefit plan
obligations (a)
 
 
 
 
Amortization of net loss
 
19,727

 
 
Amortization of unrecognized prior service cost
 
(1,438
)
 
 
Amortization of unrecognized net asset at
adoption
 
$
71

 
 
 
 
18,360

 
Income before income taxes
 
 
(7,102
)
 
Income tax expense
 
 
$
11,258

 
Net income attributable to ONEOK
 
 
 
 
 
Total reclassifications for the period attributable to
ONEOK
 
$
18,701

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


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I.
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, 2013
 
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
$
112,521

 
205,479

 
$
0.55

Diluted EPS from continuing operations
 

 
 

 
 

Effect of dilutive securities

 
3,979

 
 

Income from continuing operations attributable to ONEOK available for common
stock and common stock equivalents
$
112,521

 
209,458

 
$
0.54


 
Three Months Ended March 31, 2012
 
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
$
108,853

 
207,617

 
$
0.52

Diluted EPS from continuing operations
 

 
 

 
 

Effect of dilutive securities

 
4,235

 
 

Income from continuing operations attributable to ONEOK available for common
stock and common stock equivalents
$
108,853

 
211,852

 
$
0.51

There were no option shares excluded from the calculation of diluted EPS for the three months ended March 31, 2013 and 2012.

J.
EMPLOYEE BENEFIT PLANS

The following table sets forth the components of net periodic benefit cost for our pension and postretirement benefit plans for the periods indicated:
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
 
(Thousands of dollars)
Components of net periodic benefit cost
 
 
 
 
 
 
 
Service cost
$
5,736

 
$
5,325

 
$
1,145

 
$
1,240

Interest cost
13,612

 
14,809

 
2,911

 
3,473

Expected return on assets
(20,318
)
 
(20,689
)
 
(3,065
)
 
(2,671
)
Amortization of unrecognized net asset at adoption

 

 
71

 
718

Amortization of unrecognized prior service cost
230

 
242

 
(1,668
)
 
(2,063
)
Amortization of net loss
16,570

 
12,111

 
3,157

 
3,296

Net periodic benefit cost
$
15,830

 
$
11,798

 
$
2,551

 
$
3,993



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K.
UNCONSOLIDATED AFFILIATES

Equity Earnings from Investments - The following table sets forth our equity earnings from investments for the periods indicated.  All amounts in the table below are equity earnings from investments in our ONEOK Partners segment:
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(Thousands of dollars)
Northern Border Pipeline
$
16,390

 
$
20,231

Overland Pass Pipeline Company
2,899

 
5,317

Fort Union Gas Gathering
3,869

 
4,208

Bighorn Gas Gathering
712

 
1,165

Other
1,985

 
3,699