ONEOK INC /NEW/ - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019.
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
![okelogoa20.jpg](https://www.sec.gov/Archives/edgar/data/0001039684/000103968419000076/okelogoa20.jpg)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, par value of $0.01 | OKE | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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 ☒ 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 ☒
On October 21, 2019, the Company had 413,084,650 shares of common stock outstanding.
This page intentionally left blank.
2
ONEOK, Inc.
TABLE OF CONTENTS
Page No. | ||
As used in this Quarterly Report, references to “we,” “our” or “us” refer to ONEOK, Inc., an Oklahoma corporation, and its predecessors, divisions, and subsidiaries, unless the context indicates otherwise.
The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements. Forward-looking statements may include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “scheduled,” “should,” “will,” “would” and other words and terms of similar meaning. Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations “Forward-Looking Statements,” in this Quarterly Report and under Part I, Item 1A, “Risk Factors,” in our Annual Report.
INFORMATION AVAILABLE ON OUR WEBSITE
We make available, free of charge, on our website (www.oneok.com) copies of our Annual Reports, Quarterly Reports, Current Reports on Form 8-K, amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and reports of holdings of our securities filed by our officers and directors under Section 16 of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Director Independence Guidelines, Bylaws and the written charter of our Audit Committee also are available on our website, and we will provide copies of these documents upon request.
In addition to our filings with the SEC and materials posted on our website, we also use social media platforms as additional channels of distribution to reach public investors. Information contained on our website, posted on our social media accounts, and any corresponding applications, are not incorporated by reference into this report.
3
GLOSSARY
The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:
$1.5 Billion Term Loan Agreement | The senior unsecured delayed-draw three-year $1.5 billion term loan agreement dated November 19, 2018 |
$2.5 Billion Credit Agreement | ONEOK’s $2.5 billion revolving credit agreement, as amended |
AFUDC | Allowance for funds used during construction |
Annual Report | Annual Report on Form 10-K for the year ended December 31, 2018 |
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 |
DJ | Denver-Julesburg |
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 |
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 |
MMBbl | Million barrels |
MMBbl/d | Million barrels per day |
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 |
Northern Border Pipeline | Northern Border Pipeline Company, a 50 percent-owned joint venture |
NYMEX | New York Mercantile Exchange |
NYSE | New York Stock Exchange |
ONEOK | ONEOK, Inc. |
ONEOK Partners | ONEOK Partners, L.P. |
OPIS | Oil Price Information Service |
Overland Pass Pipeline | Overland Pass Pipeline Company, LLC, a 50 percent-owned joint venture |
PHMSA | United States Department of Transportation Pipeline and Hazardous Materials Safety Administration |
POP | Percent of Proceeds |
Quarterly Report(s) | Quarterly Report(s) on Form 10-Q |
Roadrunner | Roadrunner Gas Transmission, LLC, a 50 percent-owned joint venture |
S&P | S&P Global Ratings |
SCOOP | South Central Oklahoma Oil Province, an area in the Anadarko Basin in Oklahoma |
SEC | Securities and Exchange Commission |
Series E Preferred Stock | Series E Non-Voting, Perpetual Preferred Stock, par value $0.01 per share |
STACK | Sooner Trend Anadarko Canadian Kingfisher, an area in the Anadarko Basin in Oklahoma |
West Texas LPG | West Texas LPG pipeline and Mesquite pipeline |
WTI | West Texas Intermediate |
WTLPG | West Texas LPG Pipeline Limited Partnership |
XBRL | eXtensible Business Reporting Language |
4
This page intentionally left blank.
5
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONEOK, Inc. and Subsidiaries | |||||||||||||||
CONSOLIDATED STATEMENTS OF INCOME | |||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(Unaudited) | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Thousands of dollars, except per share amounts) | |||||||||||||||
Revenues | |||||||||||||||
Commodity sales | $ | 1,947,834 | $ | 3,083,625 | $ | 6,567,634 | $ | 8,578,891 | |||||||
Services | 315,394 | 310,265 | 933,127 | 877,605 | |||||||||||
Total revenues (Note L) | 2,263,228 | 3,393,890 | 7,500,761 | 9,456,496 | |||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | 1,414,528 | 2,560,765 | 4,996,699 | 7,104,609 | |||||||||||
Operations and maintenance | 218,305 | 206,247 | 632,332 | 589,465 | |||||||||||
Depreciation and amortization | 121,430 | 107,383 | 350,552 | 317,908 | |||||||||||
General taxes | 26,830 | 24,124 | 91,257 | 81,263 | |||||||||||
(Gain) loss on sale of assets | (16 | ) | (163 | ) | 2,882 | (348 | ) | ||||||||
Operating income | 482,151 | 495,534 | 1,427,039 | 1,363,599 | |||||||||||
Equity in net earnings from investments (Note I) | 37,576 | 39,313 | 115,175 | 116,070 | |||||||||||
Allowance for equity funds used during construction | 15,792 | 2,294 | 45,175 | 3,328 | |||||||||||
Other income | 6,643 | 5,072 | 21,685 | 7,667 | |||||||||||
Other expense | (6,065 | ) | (3,404 | ) | (14,024 | ) | (11,104 | ) | |||||||
Interest expense (net of capitalized interest of $27,610, $8,326, $73,601 and $15,498, respectively) | (129,577 | ) | (121,910 | ) | (362,490 | ) | (351,131 | ) | |||||||
Income before income taxes | 406,520 | 416,899 | 1,232,560 | 1,128,429 | |||||||||||
Income taxes | (97,365 | ) | (102,983 | ) | (274,234 | ) | (266,285 | ) | |||||||
Net income | 309,155 | 313,916 | 958,326 | 862,144 | |||||||||||
Less: Net income attributable to noncontrolling interests | — | 657 | — | 3,329 | |||||||||||
Net income attributable to ONEOK | 309,155 | 313,259 | 958,326 | 858,815 | |||||||||||
Less: Preferred stock dividends | 275 | 275 | 825 | 825 | |||||||||||
Net income available to common shareholders | $ | 308,880 | $ | 312,984 | $ | 957,501 | $ | 857,990 | |||||||
Basic earnings per common share (Note G) | $ | 0.75 | $ | 0.76 | $ | 2.32 | $ | 2.09 | |||||||
Diluted earnings per common share (Note G) | $ | 0.74 | $ | 0.75 | $ | 2.31 | $ | 2.07 | |||||||
Average shares (thousands) | |||||||||||||||
Basic | 413,816 | 412,117 | 413,443 | 411,400 | |||||||||||
Diluted | 415,578 | 414,847 | 415,277 | 414,035 |
See accompanying Notes to Consolidated Financial Statements.
6
ONEOK, Inc. and Subsidiaries | |||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
(Unaudited) | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Thousands of dollars) | |||||||||||||||
Net income | $ | 309,155 | $ | 313,916 | $ | 958,326 | $ | 862,144 | |||||||
Other comprehensive income (loss), net of tax | |||||||||||||||
Change in fair value of derivatives, net of tax of $22,050, $1,054, $59,679 and $(3,204), respectively | (73,822 | ) | (3,526 | ) | (199,795 | ) | 10,729 | ||||||||
Derivative amounts reclassified to net income, net of tax of $2,673, $(5,752), $8,654 and $(12,962), respectively | (8,952 | ) | 19,261 | (29,748 | ) | 43,397 | |||||||||
Change in retirement and other postretirement benefit plan obligations, net of tax of $(737), $(966), $(2,172) and $(2,714), respectively | 2,465 | 3,236 | 7,271 | 9,086 | |||||||||||
Other comprehensive income (loss) of unconsolidated affiliates, net of tax of $1,314, $(442), $3,164 and $(1,578), respectively | (4,399 | ) | 1,480 | (10,593 | ) | 5,281 | |||||||||
Total other comprehensive income (loss), net of tax | (84,708 | ) | 20,451 | (232,865 | ) | 68,493 | |||||||||
Comprehensive income | 224,447 | 334,367 | 725,461 | 930,637 | |||||||||||
Less: Comprehensive income attributable to noncontrolling interests | — | 657 | — | 3,329 | |||||||||||
Comprehensive income attributable to ONEOK | $ | 224,447 | $ | 333,710 | $ | 725,461 | $ | 927,308 |
See accompanying Notes to Consolidated Financial Statements.
7
ONEOK, Inc. and Subsidiaries | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
September 30, | December 31, | |||||||
(Unaudited) | 2019 | 2018 | ||||||
Assets | (Thousands of dollars) | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 673,309 | $ | 11,975 | ||||
Accounts receivable, net | 718,708 | 818,958 | ||||||
Materials and supplies | 192,933 | 141,174 | ||||||
Natural gas and NGLs in storage | 283,545 | 296,667 | ||||||
Commodity imbalances | 19,327 | 29,050 | ||||||
Other current assets | 79,763 | 100,808 | ||||||
Total current assets | 1,967,585 | 1,398,632 | ||||||
Property, plant and equipment | ||||||||
Property, plant and equipment | 20,948,267 | 18,030,963 | ||||||
Accumulated depreciation and amortization | 3,585,411 | 3,264,312 | ||||||
Net property, plant and equipment | 17,362,856 | 14,766,651 | ||||||
Investments and other assets | ||||||||
Investments in unconsolidated affiliates | 870,511 | 969,150 | ||||||
Goodwill and intangible assets | 960,808 | 967,142 | ||||||
Other assets | 174,147 | 130,096 | ||||||
Total investments and other assets | 2,005,466 | 2,066,388 | ||||||
Total assets | $ | 21,335,907 | $ | 18,231,671 |
8
ONEOK, Inc. and Subsidiaries | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
(Continued) | ||||||||
September 30, | December 31, | |||||||
(Unaudited) | 2019 | 2018 | ||||||
Liabilities and equity | (Thousands of dollars) | |||||||
Current liabilities | ||||||||
Current maturities of long-term debt (Note D) | $ | 7,650 | $ | 507,650 | ||||
Accounts payable | 1,129,849 | 1,116,337 | ||||||
Commodity imbalances | 103,185 | 110,197 | ||||||
Accrued taxes | 79,358 | 61,337 | ||||||
Accrued interest | 122,063 | 161,377 | ||||||
Finance lease liability (Note K) | 1,901 | 1,765 | ||||||
Other current liabilities | 123,146 | 149,773 | ||||||
Total current liabilities | 1,567,152 | 2,108,436 | ||||||
Long-term debt, excluding current maturities (Note D) | 12,479,452 | 8,873,334 | ||||||
Deferred credits and other liabilities | ||||||||
Deferred income taxes | 418,736 | 219,731 | ||||||
Finance lease liability (Note K) | 24,801 | 26,244 | ||||||
Other deferred credits | 626,860 | 424,383 | ||||||
Total deferred credits and other liabilities | 1,070,397 | 670,358 | ||||||
Commitments and contingencies (Note J) | ||||||||
Equity (Note E) | ||||||||
ONEOK shareholders’ equity: | ||||||||
Preferred stock, $0.01 par value: authorized and issued 20,000 shares at September 30, 2019, and December 31, 2018 | — | — | ||||||
Common stock, $0.01 par value: authorized 1,200,000,000 shares, issued 445,016,234 shares and outstanding 413,076,116 shares at September 30, 2019; issued 445,016,234 shares and outstanding 411,532,606 shares at December 31, 2018 | 4,450 | 4,450 | ||||||
Paid-in capital | 7,448,099 | 7,615,138 | ||||||
Accumulated other comprehensive loss (Note F) | (421,104 | ) | (188,239 | ) | ||||
Retained earnings | — | — | ||||||
Treasury stock, at cost: 31,940,118 shares at September 30, 2019, and 33,483,628 shares at December 31, 2018 | (812,539 | ) | (851,806 | ) | ||||
Total equity | 6,218,906 | 6,579,543 | ||||||
Total liabilities and equity | $ | 21,335,907 | $ | 18,231,671 |
See accompanying Notes to Consolidated Financial Statements.
9
This page intentionally left blank.
10
ONEOK, Inc. and Subsidiaries | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
Nine Months Ended | ||||||||
September 30, | ||||||||
(Unaudited) | 2019 | 2018 | ||||||
(Thousands of dollars) | ||||||||
Operating activities | ||||||||
Net income | $ | 958,326 | $ | 862,144 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 350,552 | 317,908 | ||||||
Equity in net earnings from investments | (115,175 | ) | (116,070 | ) | ||||
Distributions received from unconsolidated affiliates | 121,176 | 125,824 | ||||||
Deferred income taxes | 269,488 | 264,509 | ||||||
Share-based compensation expense | 28,038 | 23,963 | ||||||
Allowance for equity funds used during construction | (45,175 | ) | (3,328 | ) | ||||
Other, net | (1,200 | ) | (3,250 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 100,250 | 117,876 | ||||||
Natural gas and NGLs in storage | 13,122 | (91,170 | ) | |||||
Accounts payable | (162,806 | ) | (41,837 | ) | ||||
Commodity imbalances, net | 2,711 | 15,379 | ||||||
Accrued interest | (39,314 | ) | (23,562 | ) | ||||
Risk-management assets and liabilities | (93,244 | ) | 66,966 | |||||
Other assets and liabilities, net | (59,904 | ) | 1,098 | |||||
Cash provided by operating activities | 1,326,845 | 1,516,450 | ||||||
Investing activities | ||||||||
Capital expenditures (less allowance for equity funds used during construction) | (2,739,338 | ) | (1,309,655 | ) | ||||
Contributions to unconsolidated affiliates | (3,290 | ) | (831 | ) | ||||
Distributions received from unconsolidated affiliates in excess of cumulative earnings | 82,171 | 19,613 | ||||||
Proceeds from sale of assets and other, net | 12,583 | 1,053 | ||||||
Cash used in investing activities | (2,647,874 | ) | (1,289,820 | ) | ||||
Financing activities | ||||||||
Dividends paid | (1,079,379 | ) | (983,068 | ) | ||||
Distributions to noncontrolling interests | — | (3,500 | ) | |||||
Borrowing (repayment) of short-term borrowings, net | — | (494,673 | ) | |||||
Issuance of long-term debt, net of discounts | 4,185,435 | 1,245,773 | ||||||
Debt financing costs | (29,777 | ) | (11,301 | ) | ||||
Repayment of long-term debt | (1,055,436 | ) | (930,738 | ) | ||||
Issuance of common stock | 19,333 | 1,195,128 | ||||||
Acquisition of noncontrolling interests | — | (195,000 | ) | |||||
Other | (57,813 | ) | (1,980 | ) | ||||
Cash provided by (used in) financing activities | 1,982,363 | (179,359 | ) | |||||
Change in cash and cash equivalents | 661,334 | 47,271 | ||||||
Cash and cash equivalents at beginning of period | 11,975 | 37,193 | ||||||
Cash and cash equivalents at end of period | $ | 673,309 | $ | 84,464 |
See accompanying Notes to Consolidated Financial Statements.
11
ONEOK, Inc. and Subsidiaries | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||||||||||||||||
ONEOK Shareholders’ Equity | ||||||||||||||||||
(Unaudited) | Common Stock Issued | Preferred Stock Issued | Common Stock | Preferred Stock | Paid-in Capital | |||||||||||||
(Shares) | (Thousands of dollars) | |||||||||||||||||
January 1, 2019 | 445,016,234 | 20,000 | $ | 4,450 | $ | — | $ | 7,615,138 | ||||||||||
Cumulative effect adjustment for adoption of ASU 2016-02 (Note A) | — | — | — | — | — | |||||||||||||
Net income | — | — | — | — | — | |||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | — | — | — | — | |||||||||||||
Common stock issued | — | — | — | — | (24,779 | ) | ||||||||||||
Common stock dividends - $0.86 per share (Note E) | — | — | — | — | (17,438 | ) | ||||||||||||
Other | — | — | — | — | (45,074 | ) | ||||||||||||
March 31, 2019 | 445,016,234 | 20,000 | $ | 4,450 | $ | — | $ | 7,527,847 | ||||||||||
Net income | — | — | — | — | — | |||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | — | — | — | — | |||||||||||||
Common stock issued | — | — | — | — | 6,335 | |||||||||||||
Common stock dividends - $0.865 per share (Note E) | — | — | — | — | (45,728 | ) | ||||||||||||
Other | — | — | — | — | 7,004 | |||||||||||||
June 30, 2019 | 445,016,234 | 20,000 | $ | 4,450 | $ | — | $ | 7,495,458 | ||||||||||
Net income | — | — | — | — | — | |||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | — | — | — | — | |||||||||||||
Common stock issued | — | — | — | — | 4,238 | |||||||||||||
Common stock dividends - $0.89 per share (Note E) | — | — | — | — | (58,960 | ) | ||||||||||||
Other | — | — | — | — | 7,363 | |||||||||||||
September 30, 2019 | 445,016,234 | 20,000 | $ | 4,450 | $ | — | $ | 7,448,099 |
12
ONEOK, Inc. and Subsidiaries | ||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued) | ||||||||||||||||
ONEOK Shareholders’ Equity | ||||||||||||||||
(Unaudited) | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Equity | ||||||||||||
(Thousands of dollars) | ||||||||||||||||
January 1, 2019 | $ | (188,239 | ) | $ | — | $ | (851,806 | ) | $ | 6,579,543 | ||||||
Cumulative effect adjustment for adoption of ASU 2016-02 (Note A) | — | (67 | ) | — | (67 | ) | ||||||||||
Net income | — | 337,208 | — | 337,208 | ||||||||||||
Other comprehensive income (loss) | (81,285 | ) | — | — | (81,285 | ) | ||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | (275 | ) | — | (275 | ) | ||||||||||
Common stock issued | — | — | 31,039 | 6,260 | ||||||||||||
Common stock dividends - $0.86 per share (Note E) | — | (336,866 | ) | — | (354,304 | ) | ||||||||||
Other | — | — | — | (45,074 | ) | |||||||||||
March 31, 2019 | $ | (269,524 | ) | $ | — | $ | (820,767 | ) | $ | 6,442,006 | ||||||
Net income | — | 311,963 | — | 311,963 | ||||||||||||
Other comprehensive income (loss) | (66,872 | ) | — | — | (66,872 | ) | ||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | (275 | ) | — | (275 | ) | ||||||||||
Common stock issued | — | — | 5,391 | 11,726 | ||||||||||||
Common stock dividends - $0.865 per share (Note E) | — | (311,688 | ) | — | (357,416 | ) | ||||||||||
Other | — | — | — | 7,004 | ||||||||||||
June 30, 2019 | $ | (336,396 | ) | $ | — | $ | (815,376 | ) | $ | 6,348,136 | ||||||
Net income | — | 309,155 | — | 309,155 | ||||||||||||
Other comprehensive income (loss) | (84,708 | ) | — | — | (84,708 | ) | ||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | (275 | ) | — | (275 | ) | ||||||||||
Common stock issued | — | — | 2,837 | 7,075 | ||||||||||||
Common stock dividends - $0.89 per share (Note E) | — | (308,880 | ) | — | (367,840 | ) | ||||||||||
Other | — | — | — | 7,363 | ||||||||||||
September 30, 2019 | $ | (421,104 | ) | $ | — | $ | (812,539 | ) | $ | 6,218,906 |
13
ONEOK, Inc. and Subsidiaries | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued) | ||||||||||||||||||
ONEOK Shareholders’ Equity | ||||||||||||||||||
(Unaudited) | Common Stock Issued | Preferred Stock Issued | Common Stock | Preferred Stock | Paid-in Capital | |||||||||||||
(Shares) | (Thousands of dollars) | |||||||||||||||||
January 1, 2018 | 423,166,234 | 20,000 | $ | 4,232 | $ | — | $ | 6,588,878 | ||||||||||
Cumulative effect adjustment for adoption of ASUs (a) | — | — | — | — | — | |||||||||||||
Net income | — | — | — | — | — | |||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||
Preferred stock dividends - $13.75 per share | — | — | — | — | (275 | ) | ||||||||||||
Common stock issued | 21,850,000 | — | 218 | — | 1,169,247 | |||||||||||||
Common stock dividends - $0.77 per share | — | — | — | — | (11,960 | ) | ||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | |||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | |||||||||||||
Other | — | — | — | — | (10,717 | ) | ||||||||||||
March 31, 2018 | 445,016,234 | 20,000 | $ | 4,450 | $ | — | $ | 7,735,173 | ||||||||||
Net income | — | — | — | — | — | |||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||
Preferred stock dividends - $13.75 per share | — | — | — | — | 275 | |||||||||||||
Common stock issued | — | — | — | — | 4,535 | |||||||||||||
Common stock dividends - $0.795 per share | — | — | — | — | (46,827 | ) | ||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | |||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | |||||||||||||
Other | — | — | — | — | 6,778 | |||||||||||||
June 30, 2018 | 445,016,234 | 20,000 | $ | 4,450 | $ | — | $ | 7,699,934 | ||||||||||
Net income | — | — | — | — | — | |||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | |||||||||||||
Preferred stock dividends - $13.75 per share | — | — | — | — | — | |||||||||||||
Common stock issued | — | — | — | — | 4,721 | |||||||||||||
Common stock dividends - $0.825 per share | — | — | — | — | (26,845 | ) | ||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | |||||||||||||
Acquisition of noncontrolling interests | — | — | — | — | (21,220 | ) | ||||||||||||
Other | — | — | — | — | 6,083 | |||||||||||||
September 30, 2018 | 445,016,234 | 20,000 | $ | 4,450 | $ | — | $ | 7,662,673 |
14
ONEOK, Inc. and Subsidiaries | ||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued) | ||||||||||||||||||||
ONEOK Shareholders’ Equity | ||||||||||||||||||||
(Unaudited) | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Noncontrolling Interests in Consolidated Subsidiaries | Total Equity | |||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||
January 1, 2018 | $ | (188,530 | ) | $ | — | $ | (876,713 | ) | $ | 157,485 | $ | 5,685,352 | ||||||||
Cumulative effect adjustment for adoption of ASUs (a) | (38,101 | ) | 39,803 | — | 17 | 1,719 | ||||||||||||||
Net income | — | 264,508 | — | 1,541 | 266,049 | |||||||||||||||
Other comprehensive income (loss) | 51,939 | — | — | — | 51,939 | |||||||||||||||
Preferred stock dividends - $13.75 per share | — | — | — | — | (275 | ) | ||||||||||||||
Common stock issued | — | — | 13,228 | — | 1,182,693 | |||||||||||||||
Common stock dividends - $0.77 per share | — | (304,311 | ) | — | — | (316,271 | ) | |||||||||||||
Distributions to noncontrolling interests | — | — | — | (1,500 | ) | (1,500 | ) | |||||||||||||
Contributions from noncontrolling interests | — | — | — | 10,263 | 10,263 | |||||||||||||||
Other | — | — | — | — | (10,717 | ) | ||||||||||||||
March 31, 2018 | $ | (174,692 | ) | $ | — | $ | (863,485 | ) | $ | 167,806 | $ | 6,869,252 | ||||||||
Net income | — | 281,048 | — | 1,131 | 282,179 | |||||||||||||||
Other comprehensive income (loss) | (3,897 | ) | — | — | — | (3,897 | ) | |||||||||||||
Preferred stock dividends - $13.75 per share | — | (550 | ) | — | — | (275 | ) | |||||||||||||
Common stock issued | — | — | 2,550 | — | 7,085 | |||||||||||||||
Common stock dividends - $0.795 per share | — | (280,498 | ) | — | — | (327,325 | ) | |||||||||||||
Distributions to noncontrolling interests | — | — | — | (1,500 | ) | (1,500 | ) | |||||||||||||
Contributions from noncontrolling interests | — | — | — | 6,186 | 6,186 | |||||||||||||||
Other | — | — | — | — | 6,778 | |||||||||||||||
June 30, 2018 | $ | (178,589 | ) | $ | — | $ | (860,935 | ) | $ | 173,623 | $ | 6,838,483 | ||||||||
Net income | — | 313,259 | — | 657 | 313,916 | |||||||||||||||
Other comprehensive income (loss) | 20,451 | — | — | — | 20,451 | |||||||||||||||
Preferred stock dividends - $13.75 per share | — | (275 | ) | — | — | (275 | ) | |||||||||||||
Common stock issued | — | — | 4,708 | — | 9,429 | |||||||||||||||
Common stock dividends - $0.825 per share | — | (312,984 | ) | — | — | (339,829 | ) | |||||||||||||
Distributions to noncontrolling interests | — | — | — | (500 | ) | (500 | ) | |||||||||||||
Acquisition of noncontrolling interests | — | — | — | (173,780 | ) | (195,000 | ) | |||||||||||||
Other | — | — | — | — | 6,083 | |||||||||||||||
September 30, 2018 | $ | (158,138 | ) | $ | — | $ | (856,227 | ) | $ | — | $ | 6,652,758 |
(a) - Includes cumulative effect for adoption of the following: ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” and ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”
See accompanying Notes to Consolidated Financial Statements.
15
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 2018 year-end Consolidated Balance Sheet data was derived from our audited Consolidated Financial Statements but does not include all disclosures required by GAAP. Certain reclassifications and revisions have been made in the prior-year Consolidated Financial Statements to conform to the current year presentation. See Note E for additional information. These unaudited Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements in our Annual Report.
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 or in our Annual Report were assessed and determined to be either not applicable or clarifications of ASUs listed below. Except as discussed below or in our Annual Report, there have been no new accounting pronouncements that have become effective or have been issued that are of significance or potential significance to us. The following table provides a brief description of recently adopted 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 | |||
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 adopted this standard on January 1, 2019, using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative adjustment to equity. We recorded an immaterial cumulative effect for the adoption of the new standard and recorded $17.5 million of right-of-use assets and $17.4 million of lease liabilities related to operating leases that were not previously recorded on our Consolidated Balance Sheets. Our finance lease assets and liabilities of $28.1 million and $28.0 million, respectively, did not change as a result of adopting this standard. See Note K for additional disclosures. | |||
ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” | The standard aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. | First quarter 2019 | The impact of adopting this standard was not material. |
Goodwill Impairment Review - We assess our goodwill for impairment at least annually as of July 1. At July 1, 2019, we assessed qualitative factors to determine whether it was more likely than not that the fair value of each of our reporting units was less than its carrying amount. After assessing qualitative factors (including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance), we determined that it was more likely than not that the fair value of each reporting unit was greater than its respective carrying value, no further testing was necessary and goodwill was not considered impaired.
B. | FAIR VALUE MEASUREMENTS |
Determining Fair Value - For our fair value measurements, we utilize market prices, third-party pricing services, present value methods and standard option valuation models to determine the price we would receive from the sale of an asset or the transfer of a liability in an orderly transaction at the measurement date. 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 may utilize modeling techniques using NYMEX-settled pricing data and implied forward LIBOR curves. Inputs into our fair value estimates include commodity-exchange prices, data obtained from third-party pricing services,
16
LIBOR and other liquid money-market instrument rates. Our financial commodity derivatives are generally settled through a NYMEX or Intercontinental Exchange (ICE) clearing broker account with daily margin requirements. We validate our valuation inputs with third-party information and settlement prices from other sources, where available.
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 the implied forward LIBOR yield curve. The fair value of our forward-starting interest-rate swaps is determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest-rate swap settlements. We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using counterparty-specific bond yields. 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 materially from our estimates.
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. These balances are composed predominantly of exchange-traded derivative contracts for natural gas and crude oil. |
• | Level 2 - fair value measurements are based on significant observable pricing inputs, including quoted prices for similar assets and liabilities in active markets and inputs from third-party pricing services supported with corroborative evidence. These balances are composed of over-the-counter interest-rate derivatives. |
• | 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 and third-party pricing services. These balances are composed predominantly of exchange-cleared and over-the-counter derivatives for natural gas basis and NGLs. Our commodity derivatives are generally valued using forward quotes provided by third-party pricing services that are validated with other market data. We believe any measurement uncertainty at September 30, 2019, is immaterial as our Level 3 fair value measurements are based on unadjusted pricing information from broker quotes and third-party pricing services. We do not believe that our Level 3 fair value estimates have a material impact on our results of operations, as our derivatives are accounted for as hedges. |
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:
September 30, 2019 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net | ||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | 12,267 | $ | — | $ | 68,049 | $ | 80,316 | $ | (40,413 | ) | $ | 39,903 | ||||||||||
Physical contracts | — | — | 579 | 579 | — | 579 | |||||||||||||||||
Total derivative assets | $ | 12,267 | $ | — | $ | 68,628 | $ | 80,895 | $ | (40,413 | ) | $ | 40,482 | ||||||||||
Derivative liabilities | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | — | $ | — | $ | (40,413 | ) | $ | (40,413 | ) | $ | 40,413 | $ | — | |||||||||
Interest-rate contracts | — | (276,865 | ) | — | (276,865 | ) | — | (276,865 | ) | ||||||||||||||
Total derivative liabilities | $ | — | $ | (276,865 | ) | $ | (40,413 | ) | $ | (317,278 | ) | $ | 40,413 | $ | (276,865 | ) |
(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 September 30, 2019, we held no cash and posted $1.9 million of cash with various counterparties, which is included in other current assets in our Consolidated Balance Sheet.
17
December 31, 2018 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net | ||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | 10,812 | $ | — | $ | 69,165 | $ | 79,977 | $ | (32,739 | ) | $ | 47,238 | ||||||||||
Physical contracts | — | — | 1,142 | 1,142 | — | 1,142 | |||||||||||||||||
Interest-rate contracts | — | 19,005 | — | 19,005 | — | 19,005 | |||||||||||||||||
Total derivative assets | $ | 10,812 | $ | 19,005 | $ | 70,307 | $ | 100,124 | $ | (32,739 | ) | $ | 67,385 | ||||||||||
Derivative liabilities | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | (2,916 | ) | $ | — | $ | (29,823 | ) | $ | (32,739 | ) | $ | 32,739 | $ | — | ||||||||
Interest-rate contracts | — | (99,260 | ) | — | (99,260 | ) | — | (99,260 | ) | ||||||||||||||
Total derivative liabilities | $ | (2,916 | ) | $ | (99,260 | ) | $ | (29,823 | ) | $ | (131,999 | ) | $ | 32,739 | $ | (99,260 | ) |
(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, 2018, we held no cash and posted $0.8 million of cash with various counterparties, which is included in other current assets in our Consolidated Balance Sheet.
The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Derivative Assets (Liabilities) | 2019 | 2018 | 2019 | 2018 | |||||||||||
(Thousands of dollars) | |||||||||||||||
Net assets (liabilities) at beginning of period | $ | 19,274 | $ | (23,501 | ) | $ | 40,484 | $ | (32,838 | ) | |||||
Total changes in fair value: | |||||||||||||||
Included in net income (a) | — | (22 | ) | — | (122 | ) | |||||||||
Included in other comprehensive income (loss) (b) | 8,941 | (7,554 | ) | (12,269 | ) | 1,883 | |||||||||
Net assets (liabilities) at end of period | $ | 28,215 | $ | (31,077 | ) | $ | 28,215 | $ | (31,077 | ) |
(a) - Included in commodity sales revenues/cost of sales and fuel in our Consolidated Statements of Income.
(b) - Included in change in fair value of derivatives in our Consolidated Statements of Comprehensive Income.
Changes in fair value include the realization of our derivative contracts through maturity. During the three and nine months ended September 30, 2019 and 2018, there were no transfers in or out of Level 3 of the fair value hierarchy.
Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. Our cash and cash equivalents are composed of bank and money market accounts and are classified as Level 1. Our short-term borrowings are classified as Level 2 since the estimated fair value of the short-term borrowings can be determined using information available in the commercial paper market.
The estimated fair value of our consolidated long-term debt, including current maturities, was $13.7 billion and $9.6 billion at September 30, 2019, and December 31, 2018, respectively. The book value of our consolidated long-term debt, including current maturities, was $12.5 billion and $9.4 billion at September 30, 2019, and December 31, 2018, respectively. The estimated fair value of the aggregate long-term debt 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.
C. | 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 processed, purchased and sold. We are also subject to the risk of interest-rate fluctuation in the normal course of business. We use physical-forward purchases and sales and financial derivatives to secure a certain price for a portion of our natural gas, condensate and NGL products; to reduce our exposure to commodity price and interest-rate fluctuations; and to achieve more predictable cash flows. We follow established policies and procedures
18
to assess risk and approve, monitor and report our risk-management activities. We have not used these instruments for trading purposes.
Commodity price risk - Commodity price risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in the price of natural gas, NGLs and condensate. We may use the following commodity derivative instruments to reduce 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.
In our Natural Gas Gathering and Processing segment, we are exposed to commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with our POP with fee contracts. Under certain POP with fee contracts, our fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. We also are exposed to basis risk between the various production and market locations where we buy and sell commodities. As part of our hedging strategy, we use the previously described commodity derivative financial instruments and physical-forward contracts to reduce the impact of price fluctuations related to natural gas, NGLs and condensate.
In our Natural Gas Liquids segment, we are primarily exposed to commodity price risk resulting from the relative values of the various NGL products to each other, the value of NGLs in storage and the relative value of NGLs to natural gas. We are also exposed to location price differential risk as a result of the relative value of NGL purchases at one location and sales at another location, primarily related to our optimization and marketing activities. As part of our hedging strategy, we utilize physical-forward contracts and commodity derivative financial instruments to reduce the impact of price fluctuations related to NGLs.
In our Natural Gas Pipelines segment, we are exposed to commodity price risk because our intrastate and interstate pipelines consume natural gas in operations and retain natural gas from our customers for operations or as part of our fee for services provided. When the amount consumed in operations differs from the amount provided by our customers, our pipelines must buy or sell natural gas, or store or use natural gas from inventory, which can expose this segment to commodity price risk depending on the regulatory treatment for this activity. To the extent that commodity price risk in our Natural Gas Pipelines segment is not mitigated by fuel cost-recovery mechanisms, we may use physical-forward sales or purchases to reduce the impact of natural gas price fluctuations. At September 30, 2019, and December 31, 2018, there were no financial derivative instruments with respect to our natural gas pipeline operations.
Interest-rate risk - We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. In 2019, we entered into $625 million of forward-starting interest-rate swaps to hedge the variability of interest payments on a portion of our forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued. We also settled $1.8 billion of our forward-starting interest-rate swaps related to our underwritten public offerings of $1.25 billion senior unsecured notes in March 2019 and $2.0 billion senior unsecured notes in August 2019.
At September 30, 2019, and December 31, 2018, we had forward-starting interest-rate swaps with notional amounts totaling $1.8 billion and $3.0 billion, respectively, to hedge the variability of interest payments on a portion of our forecasted debt issuances. At September 30, 2019, and December 31, 2018, we had interest-rate swaps with notional amounts totaling $1.3 billion to hedge the variability of our LIBOR-based interest payments. All of our interest-rate swaps are designated as cash flow hedges.
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.
19
Fair Values of Derivative Instruments - All derivatives measured at fair value at September 30, 2019, and December 31, 2018, were designated as hedging instruments. See Note B for a discussion of the inputs associated with our fair value measurements. The following table sets forth the fair values of our derivative instruments presented on a gross basis for the periods indicated:
September 30, 2019 | December 31, 2018 | ||||||||||||||||
Location in our Consolidated Balance Sheets | Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||
(Thousands of dollars) | |||||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||
Commodity contracts (a) | |||||||||||||||||
Financial contracts | Other current assets | $ | 72,995 | $ | (36,186 | ) | $ | 78,891 | $ | (31,793 | ) | ||||||
Other assets | 7,321 | (4,227 | ) | 1,086 | (946 | ) | |||||||||||
Physical contracts | Other current assets | 579 | — | 1,142 | — | ||||||||||||
Interest-rate contracts | Other current assets/other current liabilities | — | (14,672 | ) | 19,005 | (15,012 | ) | ||||||||||
Other deferred credits | — | (262,193 | ) | — | (84,248 | ) | |||||||||||
Total derivatives designated as hedging instruments | $ | 80,895 | $ | (317,278 | ) | $ | 100,124 | $ | (131,999 | ) |
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us.
Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
September 30, 2019 | December 31, 2018 | |||||||||||||||
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 | — | (39.6 | ) | — | (29.9 | ) | |||||||||
- Crude oil and NGLs (MMBbl) | Futures, forwards, swaps and options | 9.2 | (20.1 | ) | 6.5 | (13.8 | ) | |||||||||
Basis | ||||||||||||||||
- Natural gas (Bcf) | Futures and swaps | — | (39.6 | ) | — | (29.9 | ) | |||||||||
Interest-rate contracts (Billions of dollars) | Swaps | $ | 3.1 | $ | — | $ | 4.3 | $ | — |
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 - The following table sets forth the unrealized change in fair value of cash flow hedges in other comprehensive income (loss) for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||
Derivatives in Cash Flow Hedging Relationships | September 30, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Commodity contracts | $ | 32,169 | $ | (30,783 | ) | $ | 43,877 | $ | (56,246 | ) | |||||
Interest-rate contracts | (128,041 | ) | 26,203 | (303,351 | ) | 70,179 | |||||||||
Total unrealized change in fair value of cash flow hedges in other comprehensive income (loss) | $ | (95,872 | ) | $ | (4,580 | ) | $ | (259,474 | ) | $ | 13,933 |
20
The following table sets forth the effect of cash flow hedges on net income for the periods indicated:
Derivatives in Cash Flow Hedging Relationships | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income | Three Months Ended | Nine Months Ended | |||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Thousands of dollars) | ||||||||||||||||
Commodity contracts | Commodity sales revenues/ cost of sales and fuel | $ | 18,528 | $ | (20,630 | ) | $ | 52,624 | $ | (42,430 | ) | |||||
Interest-rate contracts | Interest expense | (6,903 | ) | (4,383 | ) | (14,222 | ) | (13,929 | ) | |||||||
Total change in fair value of cash flow hedges reclassified from accumulated other comprehensive loss into net income | $ | 11,625 | $ | (25,013 | ) | $ | 38,402 | $ | (56,359 | ) |
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 use internally developed credit ratings for counterparties that do not have a credit rating.
Our financial commodity derivatives are generally settled through a NYMEX or Intercontinental Exchange (ICE) clearing broker account with daily margin requirements. However, we may enter into financial derivative instruments that contain provisions that require us to maintain an investment-grade credit rating from S&P and/or Moody’s. If our credit ratings on our senior unsecured long-term debt were to decline below investment grade, the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions. There were no financial derivative instruments with contingent features related to credit risk at September 30, 2019.
The counterparties to our derivative contracts typically consist 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 September 30, 2019, the credit exposure from our derivative assets is with investment-grade companies in the financial services sector.
21
D. | DEBT |
The following table sets forth our consolidated debt for the periods indicated:
September 30, 2019 | December 31, 2018 | |||||||
(Thousands of dollars) | ||||||||
Commercial paper outstanding | $ | — | $ | — | ||||
Senior unsecured obligations: | ||||||||
$500,000 at 8.625% due March 2019 | — | 500,000 | ||||||
$300,000 at 3.8% due March 2020 | — | 300,000 | ||||||
$1,500,000 term loan, variable rate, due November 2021 | 1,250,000 | 550,000 | ||||||
$700,000 at 4.25% due February 2022 | 547,397 | 547,397 | ||||||
$900,000 at 3.375% due October 2022 | 900,000 | 900,000 | ||||||
$425,000 at 5.0% due September 2023 | 425,000 | 425,000 | ||||||
$500,000 at 7.5% due September 2023 | 500,000 | 500,000 | ||||||
$500,000 at 2.75% due September 2024 | 500,000 | — | ||||||
$500,000 at 4.9% due March 2025 | 500,000 | 500,000 | ||||||
$500,000 at 4.0% due July 2027 | 500,000 | 500,000 | ||||||
$800,000 at 4.55% due July 2028 | 800,000 | 800,000 | ||||||
$100,000 at 6.875% due September 2028 | 100,000 | 100,000 | ||||||
$700,000 at 4.35% due March 2029 | 700,000 | — | ||||||
$750,000 at 3.4% due September 2029 | 750,000 | — | ||||||
$400,000 at 6.0% due June 2035 | 400,000 | 400,000 | ||||||
$600,000 at 6.65% due October 2036 | 600,000 | 600,000 | ||||||
$600,000 at 6.85% due October 2037 | 600,000 | 600,000 | ||||||
$650,000 at 6.125% due February 2041 | 650,000 | 650,000 | ||||||
$400,000 at 6.2% due September 2043 | 400,000 | 400,000 | ||||||
$700,000 at 4.95% due July 2047 | 700,000 | 700,000 | ||||||
$1,000,000 at 5.2% due July 2048 | 1,000,000 | 450,000 | ||||||
$750,000 at 4.45% due September 2049 | 750,000 | — | ||||||
Guardian Pipeline | ||||||||
Weighted average 7.85% due December 2022 | 23,220 | 28,957 | ||||||
Total debt | 12,595,617 | 9,451,354 | ||||||
Unamortized portion of terminated swaps | 15,461 | 16,750 | ||||||
Unamortized debt issuance costs and discounts | (123,976 | ) | (87,120 | ) | ||||
Current maturities of long-term debt | (7,650 | ) | (507,650 | ) | ||||
Long-term debt | $ | 12,479,452 | $ | 8,873,334 |
$2.5 Billion Credit Agreement - In May 2019, we extended the term of our $2.5 Billion Credit Agreement by one year to June 2024. Our $2.5 Billion Credit Agreement is a 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 $2.5 Billion 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 at September 30, 2019. 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. Thereafter, the covenant will decrease to 5.0 to 1. At September 30, 2019, we had no borrowings outstanding, our ratio of indebtedness to adjusted EBITDA was 4.2 to 1, and we were in compliance with all covenants under our $2.5 Billion Credit Agreement.
Debt Issuances - In August 2019, we completed an underwritten public offering of $2.0 billion senior unsecured notes consisting of $500 million, 2.75% senior notes due 2024; $750 million, 3.4% senior notes due 2029; and $750 million, 4.45% senior notes due 2049. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.97 billion. A portion of the proceeds were, and the remainder will be, used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
22
In March 2019, we completed an underwritten public offering of $1.25 billion senior unsecured notes consisting of $700 million, 4.35% senior notes due 2029 and an additional issuance of $550 million of our existing 5.2% senior notes due 2048. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, and exclusive of accrued interest, were $1.23 billion. The proceeds were used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
In November 2018, we entered into our $1.5 Billion Term Loan Agreement with a syndicate of banks, which was fully drawn as of June 30, 2019. We repaid $250 million of our outstanding balance in August 2019 and have $1.25 billion drawn as of September 30, 2019. Our $1.5 Billion Term Loan Agreement matures in November 2021 and bears interest at LIBOR plus 112.5 basis points based on our current credit ratings. The agreement contains substantially the same covenants as those contained in our $2.5 Billion Credit Agreement. The proceeds were used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
Debt Repayments - In September 2019, we redeemed our $300 million, 3.8% senior notes due March 2020 at a redemption price of $308.0 million, including the outstanding principal, plus accrued and unpaid interest, with cash on hand from our public offering of $2.0 billion senior unsecured notes in August 2019. In connection with this early redemption, we incurred a $2.7 million loss on extinguishment of debt, which is included in other expense in our Consolidated Statements of Income for the three and nine months ended September 30, 2019.
In August 2019, we repaid $250 million of our $1.5 Billion Term Loan Agreement with cash on hand.
In March 2019, we repaid our $500 million, 8.625% senior notes at maturity with a combination of cash on hand and short-term borrowings.
For additional discussion of our $2.5 Billion Credit Agreement and our $1.5 Billion Term Loan Agreement, see Note F of the Notes to Consolidated Financial Statements in our Annual Report.
E. | EQUITY |
Noncontrolling Interests - In July 2018, we acquired the remaining 20% interest that we did not own in WTLPG for $195 million with cash on hand. We are now the sole owner of the West Texas LPG pipeline system. In our consolidated statement of cash flows for the nine months ended September 30, 2018, our acquisition of noncontrolling interests in WTLPG should have been classified as a financing activity instead of an investing activity. The consolidated statement of cash flows for the nine months ended September 30, 2018, has been revised to reflect this change in classification to financing, which was not material to our consolidated financial statements.
Equity Issuances - In July 2017, we established an “at-the-market” equity program for the offer and sale from time to time of our common stock up to an aggregate amount of $1 billion. The program allows us to offer and sell our common stock at prices we deem appropriate through a sales agent. Sales of our common stock may be made by means of ordinary brokers’ transactions on the NYSE, in block transactions or as otherwise agreed to between us and the sales agent. We are under no obligation to offer and sell common stock under the program. No shares have been sold through our “at-the-market” equity program since December 2017.
In January 2018, we completed an underwritten public offering of 21.9 million shares of our common stock, generating net proceeds of $1.2 billion. We used the net proceeds from this offering to fund capital expenditures and for general corporate purposes, which included repaying a portion of our outstanding indebtedness.
Dividends - Holders of our common stock share equally in any dividend declared by our board of directors, subject to the rights of the holders of outstanding preferred stock. Dividends paid on our common stock in February 2019, May 2019 and August 2019 were $0.86, $0.865 and $0.89 per share, respectively. A dividend of $0.915 per share was declared for shareholders of record at the close of business on November 4, 2019, payable November 14, 2019.
The Series E Preferred Stock pays 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% per year. We paid dividends for the Series E Preferred Stock of $0.3 million in February 2019, May 2019 and August 2019. Dividends totaling $0.3 million were declared for the Series E Preferred Stock and are payable November 14, 2019.
23
F. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following table sets forth the balance in accumulated other comprehensive loss for the period indicated:
Risk- Management Assets/Liabilities (a) | Retirement and Other Postretirement Benefit Plan Obligations (a) (b) | Risk- Management Assets/Liabilities of Unconsolidated Affiliates (a) | Accumulated Other Comprehensive Loss (a) | |||||||||||||
(Thousands of dollars) | ||||||||||||||||
January 1, 2019 | $ | (64,660 | ) | $ | (121,785 | ) | $ | (1,794 | ) | $ | (188,239 | ) | ||||
Other comprehensive loss before reclassifications | (199,795 | ) | (63 | ) | (10,567 | ) | (210,425 | ) | ||||||||
Amounts reclassified to net income | (29,748 | ) | 7,334 | (26 | ) | (22,440 | ) | |||||||||
Other comprehensive income (loss) | (229,543 | ) | 7,271 | (10,593 | ) | (232,865 | ) | |||||||||
September 30, 2019 | $ | (294,203 | ) | $ | (114,514 | ) | $ | (12,387 | ) | $ | (421,104 | ) |
(a) - All amounts are presented net of tax.
(b) - Includes amounts related to supplemental executive retirement plan.
The following table sets forth information about the balance of accumulated other comprehensive loss at September 30, 2019, representing unrealized gains (losses) related to risk-management assets and liabilities:
Risk- Management Assets/Liabilities (a) | ||||
(Thousands of dollars) | ||||
Commodity derivative instruments expected to be realized within the next 27 months (b) | $ | 30,258 | ||
Settled interest-rate swaps to be recognized over the life of the long-term, fixed-rate debt (c) | (111,275 | ) | ||
Interest-rate swaps with future settlement dates expected to be amortized over the life of long-term debt | (213,186 | ) | ||
Accumulated other comprehensive loss at September 30, 2019 | $ | (294,203 | ) |
(a) - All amounts are presented net of tax.
(b) - Based on September 30, 2019, commodity prices, we will realize $27.9 million in net gains, net of tax, over the next 12 months and $2.4 million in net gains, net of tax, thereafter.
(c) - Losses of $19.7 million, net of tax, will be reclassified into earnings during the next 12 months as the hedged items affect earnings.
The remaining amounts in accumulated other comprehensive loss relate primarily to our retirement and other postretirement benefit plan obligations, which are expected to be amortized over the average remaining service period of employees participating in these plans.
24
The following table sets forth the effect of reclassifications from accumulated other comprehensive loss to net income for the periods indicated:
Details about Accumulated Other Comprehensive Loss Components | Three Months Ended | Nine Months Ended | Affected Line Item in the Consolidated Statements of Income | |||||||||||||||
September 30, | September 30, | |||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
(Thousands of dollars) | ||||||||||||||||||
Risk-management assets/liabilities | ||||||||||||||||||
Commodity contracts | $ | 18,528 | $ | (20,630 | ) | $ | 52,624 | $ | (42,430 | ) | Commodity sales revenues/cost of sales and fuel | |||||||
Interest-rate contracts | (6,903 | ) | (4,383 | ) | (14,222 | ) | (13,929 | ) | Interest expense | |||||||||
11,625 | (25,013 | ) | 38,402 | (56,359 | ) | Income before income taxes | ||||||||||||
(2,673 | ) | 5,752 | (8,654 | ) | 12,962 | Income taxes | ||||||||||||
$ | 8,952 | $ | (19,261 | ) | $ | 29,748 | $ | (43,397 | ) | Net income | ||||||||
Retirement and other postretirement benefit plan obligations (a) | ||||||||||||||||||
Amortization of net loss | $ | (3,232 | ) | $ | (4,592 | ) | $ | (9,696 | ) | $ | (13,776 | ) | Other income (expense) | |||||
Amortization of unrecognized prior service credit | 57 | 415 | 171 | 1,245 | Other income (expense) | |||||||||||||
(3,175 | ) | (4,177 | ) | (9,525 | ) | (12,531 | ) | Income before income taxes | ||||||||||
731 | 961 | 2,191 | 2,882 | Income taxes | ||||||||||||||
$ | (2,444 | ) | $ | (3,216 | ) | $ | (7,334 | ) | $ | (9,649 | ) | Net income | ||||||
Risk-management assets/liabilities of unconsolidated affiliates | ||||||||||||||||||
Interest-rate contracts | $ | (59 | ) | $ | 52 | $ | 34 | $ | 71 | Equity in net earnings from investments | ||||||||
13 | (12 | ) | (8 | ) | (16 | ) | Income taxes | |||||||||||
$ | (46 | ) | $ | 40 | $ | 26 | $ | 55 | Net income | |||||||||
Total reclassifications for the period | $ | 6,462 | $ | (22,437 | ) | $ | 22,440 | $ | (52,991 | ) | Net income |
(a) - These components of accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note H for additional detail of our net periodic benefit cost.
G. | EARNINGS PER SHARE |
The following tables set forth the computation of basic and diluted EPS for the periods indicated:
Three Months Ended September 30, 2019 | ||||||||||
Income | Shares | Per Share Amount | ||||||||
(Thousands, except per share amounts) | ||||||||||
Basic EPS | ||||||||||
Net income available for common stock | $ | 308,880 | 413,816 | $ | 0.75 | |||||
Diluted EPS | ||||||||||
Effect of dilutive securities | — | 1,762 | ||||||||
Net income available for common stock and common stock equivalents | $ | 308,880 | 415,578 | $ | 0.74 |
25
Three Months Ended September 30, 2018 | ||||||||||
Income | Shares | Per Share Amount | ||||||||
(Thousands, except per share amounts) | ||||||||||
Basic EPS | ||||||||||
Net income attributable to ONEOK available for common stock | $ | 312,984 | 412,117 | $ | 0.76 | |||||
Diluted EPS | ||||||||||
Effect of dilutive securities | — | 2,730 | ||||||||
Net income attributable to ONEOK available for common stock and common stock equivalents | $ | 312,984 | 414,847 | $ | 0.75 |
Nine Months Ended September 30, 2019 | ||||||||||
Income | Shares | Per Share Amount | ||||||||
(Thousands, except per share amounts) | ||||||||||
Basic EPS | ||||||||||
Net income available for common stock | $ | 957,501 | 413,443 | $ | 2.32 | |||||
Diluted EPS | ||||||||||
Effect of dilutive securities | — | 1,834 | ||||||||
Net income available for common stock and common stock equivalents | $ | 957,501 | 415,277 | $ | 2.31 |
Nine Months Ended September 30, 2018 | ||||||||||
Income | Shares | Per Share Amount | ||||||||
(Thousands, except per share amounts) | ||||||||||
Basic EPS | ||||||||||
Net income attributable to ONEOK available for common stock | $ | 857,990 | 411,400 | $ | 2.09 | |||||
Diluted EPS | ||||||||||
Effect of dilutive securities | — | 2,635 | ||||||||
Net income attributable to ONEOK available for common stock and common stock equivalents | $ | 857,990 | 414,035 | $ | 2.07 |
H. | EMPLOYEE BENEFIT PLANS |
The following tables set forth the components of net periodic benefit cost (income) for our retirement and other postretirement benefit plans for the periods indicated:
Retirement Benefits | |||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Components of net periodic benefit cost | |||||||||||||||
Service cost | $ | 1,954 | $ | 1,832 | $ | 5,862 | $ | 5,496 | |||||||
Interest cost | 5,126 | 4,408 | 15,378 | 13,224 | |||||||||||
Expected return on plan assets | (5,892 | ) | (5,969 | ) | (17,676 | ) | (17,907 | ) | |||||||
Amortization of net loss | 3,158 | 4,258 | 9,474 | 12,774 | |||||||||||
Net periodic benefit cost | $ | 4,346 | $ | 4,529 | $ | 13,038 | $ | 13,587 |
26
Other Postretirement Benefits | |||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Components of net periodic benefit cost | |||||||||||||||
Service cost | $ | 117 | $ | 211 | $ | 351 | $ | 633 | |||||||
Interest cost | 509 | 527 | 1,527 | 1,581 | |||||||||||
Expected return on plan assets | (570 | ) | (672 | ) | (1,710 | ) | (2,016 | ) | |||||||
Amortization of prior service credit | (57 | ) | (415 | ) | (171 | ) | (1,245 | ) | |||||||
Amortization of net loss | 74 | 334 | 222 | 1,002 | |||||||||||
Net periodic benefit cost (income) | $ | 73 | $ | (15 | ) | $ | 219 | $ | (45 | ) |
I. | UNCONSOLIDATED AFFILIATES |
Equity in Net Earnings from Investments - The following table sets forth our equity in net earnings (loss) from investments for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Northern Border Pipeline | $ | 16,102 | $ | 16,486 | $ | 50,593 | $ | 48,863 | |||||||
Overland Pass Pipeline | 15,481 | 16,081 | 48,340 | 48,714 | |||||||||||
Roadrunner | 7,421 | 6,303 | 19,836 | 16,803 | |||||||||||
Other | (1,428 | ) | 443 | (3,594 | ) | 1,690 | |||||||||
Equity in net earnings from investments | $ | 37,576 | $ | 39,313 | $ | 115,175 | $ | 116,070 |
Unconsolidated Affiliates Financial Information - The following table sets forth summarized combined financial information of our unconsolidated affiliates for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Income Statement | |||||||||||||||
Revenues | $ | 151,210 | $ | 160,962 | $ | 471,461 | $ | 471,641 | |||||||
Operating expenses | $ | 69,783 | $ | 69,004 | $ | 217,287 | $ | 205,525 | |||||||
Net income | $ | 74,341 | $ | 85,361 | $ | 234,154 | $ | 247,754 | |||||||
Distributions paid to us (a) | $ | 44,357 | $ | 47,197 | $ | 203,347 | $ | 145,437 |
(a) - As determined by the Northern Border Pipeline Management Committee, we received an additional distribution of $50.0 million from Northern Border Pipeline during the nine months ended September 30, 2019.
We incurred expenses in transactions with unconsolidated affiliates of $41.9 million and $37.5 million for the three months ended September 30, 2019 and 2018, respectively, and $124.2 million and $113.2 million for the nine months ended September 30, 2019 and 2018, respectively, primarily related to Overland Pass Pipeline and Northern Border Pipeline. Accounts payable to our equity-method investees at September 30, 2019, and December 31, 2018, were $13.8 million and $14.7 million, respectively.
We have an operating agreement with Roadrunner that provides for reimbursement or payment to us for management services and certain operating costs. Reimbursements and payments from Roadrunner included in operating income in our Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018, were not material.
27
J. | COMMITMENTS AND CONTINGENCIES |
Environmental Matters and Pipeline Safety - The operation of pipelines, plants and other facilities for the gathering, processing, transportation and storage of natural gas, NGLs, condensate and other products is subject to numerous and complex laws and regulations pertaining to health, safety and the environment. As an owner and/or operator of these facilities, we must comply with laws and regulations that relate to facility/pipeline safety and integrity as well as air and water quality, hazardous and solid waste management and disposal, cultural resource protection and other environmental matters. The cost of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with these laws and regulations and safety standards. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and potentially criminal enforcement measures, including citizen suits, which can include the assessment of monetary penalties, the imposition of remedial requirements and the issuance of injunctions or restrictions on operation or construction. Management believes that, based on currently known information, compliance with these laws and regulations will not have a material adverse effect on our results of operations, financial condition or cash flows.
Legal Proceedings - Gas Index Pricing Litigation - As previously reported, we and our affiliate, ONEOK Energy Services Company, L.P., along with several other energy companies, were named as defendants in multiple lawsuits arising from alleged market manipulation or false reporting of natural gas prices to natural gas-index publications alleged to have occurred prior to 2003.
In September 2019, we settled Sinclair Oil Corporation v. ONEOK Energy Services Company, L.P. (filed in the United States District Court for the District of Wyoming) for an immaterial amount with cash on hand. This was the last remaining case arising from the Gas Index Pricing Litigation.
Other Legal Proceedings - We are a party to various other litigation matters and claims that have arisen in the normal course of our operations. While the results of these litigation matters and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable final outcome of such matters will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.
K. | LEASES |
Adoption of ASC Topic 842: Leases - We adopted Topic 842 using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative-effect adjustment to retained earnings as of January 1, 2019. Results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods.
Practical Expedients and Policies Elected - We applied the short-term policy election, which allows us to exclude from recognition leases with an initial term of 12 months or less. We elected the hindsight expedient, which allows us to use hindsight in assessing lease term; the package of practical expedients permitted under the guidance, which among other things, allows us to carry forward the historical lease classification; and the land easement expedient, which allows us to apply the guidance prospectively at adoption for land easements on existing agreements.
Adoption - Adoption of Topic 842 resulted in new operating lease assets and lease liabilities on our Consolidated Balance Sheet of $17.5 million and $17.4 million, respectively, as of January 1, 2019. The difference between the lease assets and lease liabilities was recorded as an adjustment to the beginning balance of retained earnings, which represents the cumulative impact of adopting the standard. Our accounting for finance leases did not change. Adoption of Topic 842 did not materially impact our Consolidated Financial Statements.
Leases - We lease certain buildings, warehouses, office space, land and equipment, including pipeline equipment, rail cars and information technology equipment. Our lease payments are generally straight-line and the exercise of lease renewal options, which vary in term, is at our sole discretion. We include renewal periods in a lease term if we are reasonably certain to exercise available renewal options. Our lease agreements do not include any residual value guarantees or material restrictive covenants.
Through ONEOK Leasing Company, L.L.C. and ONEOK Parking Company, L.L.C., we own an office building and a parking garage and lease excess space in these facilities to affiliates and others. Our consolidated lease income is not material.
28
The following table sets forth information about our supplemental cash flows:
Nine Months Ended | ||||
September 30, 2019 | ||||
(Thousands of dollars) | ||||
Cash paid for amounts included in the measurement of lease liabilities | ||||
Operating cash flows for operating leases | $ | 4,972 | ||
Financing cash flows for finance lease | $ | 1,307 | ||
Right-of-use assets obtained in exchange for operating lease liabilities (noncash) | $ | 3,663 |
The following table sets forth information about our lease assets and liabilities included in our Consolidated Balance Sheet for the period indicated:
Leases | Location in our Consolidated Balance Sheet | September 30, 2019 | |||
(Thousands of dollars) | |||||
Assets | |||||
Operating leases | Other assets | $ | 16,176 | ||
Finance lease | Property, plant and equipment | 28,286 | |||
Finance lease | Accumulated depreciation | (1,037 | ) | ||
Total leased assets | $ | 43,425 | |||
Liabilities | |||||
Current | |||||
Operating leases | Other current liabilities | $ | 2,624 | ||
Finance lease | Finance lease liability | 1,901 | |||
Noncurrent | |||||
Operating leases | Other deferred credits | 13,790 | |||
Finance lease | Finance lease liability | 24,801 | |||
Total lease liabilities | $ | 43,116 |
The following table sets forth information about our leases for the periods indicated:
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | At September 30, 2019 | |||||||||
Location in our Consolidated Statement of Income | Lease Cost | Weighted-Average Remaining Lease Term | Weighted-Average Discount Rate (a) | ||||||||
(Thousands of dollars) | (Years) | ||||||||||
Operating leases | Operations and maintenance | $ | 1,751 | $ | 5,402 | 10.1 | 4.58% | ||||
Finance lease | 9.1 | 10.00% | |||||||||
Amortization of lease assets | Depreciation and amortization | 283 | 849 | ||||||||
Interest on lease liabilities | Interest expense | 675 | 2,058 | ||||||||
Total lease cost | $ | 2,709 | $ | 8,309 |
(a) - Our weighted-average discount rates represent the rate implicit in the lease or our incremental borrowing rate for a term equal to the remaining term of the lease.
29
The following table sets forth the maturity of our lease liabilities as of September 30, 2019:
Finance Lease | Operating Leases | |||||||
(Millions of dollars) | ||||||||
Remainder of 2019 | $ | 1.1 | $ | 1.3 | ||||
2020 | 4.5 | 2.4 | ||||||
2021 | 4.5 | 2.0 | ||||||
2022 | 4.5 | 2.0 | ||||||
2023 | 4.5 | 1.9 | ||||||
2024 and beyond | 21.6 | 11.1 | ||||||
Total lease payments | 40.7 | 20.7 | ||||||
Less: Interest | 14.0 | 4.3 | ||||||
Present value of lease liabilities | $ | 26.7 | $ | 16.4 |
Our future lease payments presented under the previous accounting standard as of December 31, 2018, are not materially different than those presented above.
L. | REVENUES |
Accounting Policies - Our revenue recognition policy is described in Note A of the Notes to Consolidated Financial Statements in our Annual Report.
Contract Assets and Contract Liabilities - The following tables set forth the balances in contract assets and contract liabilities for the periods indicated:
Contract Assets | (Millions of dollars) | |||
Balance at December 31, 2018 (a) | $ | 6.2 | ||
Amounts invoiced in excess of revenue recognized | (0.9 | ) | ||
Net additions | 0.8 | |||
Balance at September 30, 2019 (b) | $ | 6.1 |
(a) - Contract assets of $1.7 million and $4.5 million are included in other current assets and other assets, respectively, in our Consolidated Balance Sheets.
(b) - Contract assets of $2.4 million and $3.7 million are included in other current assets and other assets, respectively, in our Consolidated Balance Sheets.
Contract Liabilities | (Millions of dollars) | |||
Balance at December 31, 2018 (a) | $ | 31.7 | ||
Revenue recognized included in beginning balance | (15.2 | ) | ||
Net additions | 28.9 | |||
Balance at September 30, 2019 (b) | $ | 45.4 |
(a) - Contract liabilities of $15.6 million and $16.1 million are included in other current liabilities and other deferred credits, respectively, in our Consolidated Balance Sheets.
(b) - Contract liabilities of $25.2 million and $20.2 million are included in other current liabilities and other deferred credits, respectively, in our Consolidated Balance Sheets.
Receivables from Customers and Revenue Disaggregation - Substantially all of the balances in accounts receivable on our Consolidated Balance Sheets at September 30, 2019, and December 31, 2018, relate to customer receivables. Revenues sources are disaggregated in Note M.
Practical Expedients - We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) variable consideration on contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
30
Transaction Price Allocated to Unsatisfied Performance Obligations - The following table presents aggregate value allocated to unsatisfied performance obligations as of September 30, 2019, and the amounts we expect to recognize in revenue in future periods, related primarily to firm transportation and storage contracts with remaining contract terms ranging from one month to 24 years:
Expected Period of Recognition in Revenue | (Millions of dollars) | |||
Remainder of 2019 | $ | 101.5 | ||
2020 | 335.6 | |||
2021 | 286.3 | |||
2022 | 228.3 | |||
2023 and beyond | 952.5 | |||
Total estimated transaction price allocated to unsatisfied performance obligations | $ | 1,904.2 |
The table above excludes variable consideration allocated entirely to wholly unsatisfied performance obligations, wholly unsatisfied promises to transfer distinct goods or services that are part of a single performance obligation and consideration we determine to be fully constrained. The amounts we determined to be fully constrained relate to future sales obligations under long-term sales contracts where the transaction price is not known and minimum volume agreements, which we consider to be fully constrained until invoiced.
M. | SEGMENTS |
Segment Descriptions - Our operations are divided into three reportable business segments, as follows:
• | our Natural Gas Gathering and Processing segment gathers, treats and processes natural gas; |
• | our Natural Gas Liquids segment gathers, treats, fractionates and transports NGLs and stores, markets and distributes NGL products; and |
• | our Natural Gas Pipelines segment operates regulated interstate and intrastate natural gas transmission pipelines and natural gas storage facilities. |
Other and eliminations consist of corporate costs, the operating and leasing activities of our headquarters building and related parking facility and eliminations necessary to reconcile our reportable segments to our Consolidated Financial Statements.
Accounting Policies - The accounting policies of the segments are described in Note A of the Notes to Consolidated Financial Statements in our Annual Report.
31
Operating Segment Information - The following tables set forth certain selected financial information for our operating segments for the periods indicated:
Three Months Ended September 30, 2019 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||
(Thousands of dollars) | |||||||||||||||
NGL and condensate sales | $ | 244,932 | $ | 1,746,630 | $ | — | $ | 1,991,562 | |||||||
Residue natural gas sales | 185,303 | — | 231 | 185,534 | |||||||||||
Gathering, processing and exchange services revenue | 42,795 | 105,179 | — | 147,974 | |||||||||||
Transportation and storage revenue | — | 46,407 | 108,384 | 154,791 | |||||||||||
Other | 3,182 | 2,291 | 12,933 | 18,406 | |||||||||||
Total revenues (c) | 476,212 | 1,900,507 | 121,548 | 2,498,267 | |||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (210,739 | ) | (1,438,206 | ) | (381 | ) | (1,649,326 | ) | |||||||
Operating costs | (91,227 | ) | (114,903 | ) | (40,170 | ) | (246,300 | ) | |||||||
Equity in net earnings (loss) from investments | (1,837 | ) | 15,890 | 23,523 | 37,576 | ||||||||||
Noncash compensation expense and other | 2,883 | 4,174 | (701 | ) | 6,356 | ||||||||||
Segment adjusted EBITDA | $ | 175,292 | $ | 367,462 | $ | 103,819 | $ | 646,573 | |||||||
Depreciation and amortization | $ | (55,781 | ) | $ | (50,419 | ) | $ | (14,330 | ) | $ | (120,530 | ) | |||
Capital expenditures | $ | 245,745 | $ | 738,038 | $ | 27,767 | $ | 1,011,550 |
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $379.7 million, of which $315.7 million related to revenues within the segment, and cost of sales and fuel of $129.5 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $72.3 million and cost of sales and fuel of $5.1 million.
(c) - Intersegment revenues for the Natural Gas Gathering and Processing segment totaled $244.2 million. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
Three Months Ended September 30, 2019 | Total Segments | Other and Eliminations | Total | |||||||||
(Thousands of dollars) | ||||||||||||
Reconciliations of total segments to consolidated | ||||||||||||
NGL and condensate sales | $ | 1,991,562 | $ | (230,080 | ) | $ | 1,761,482 | |||||
Residue natural gas sales | 185,534 | (567 | ) | 184,967 | ||||||||
Gathering, processing and exchange services revenue | 147,974 | — | 147,974 | |||||||||
Transportation and storage revenue | 154,791 | (2,594 | ) | 152,197 | ||||||||
Other | 18,406 | (1,798 | ) | 16,608 | ||||||||
Total revenues (a) | $ | 2,498,267 | $ | (235,039 | ) | $ | 2,263,228 | |||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (1,649,326 | ) | $ | 234,798 | $ | (1,414,528 | ) | ||||
Operating costs | $ | (246,300 | ) | $ | 1,165 | $ | (245,135 | ) | ||||
Depreciation and amortization | $ | (120,530 | ) | $ | (900 | ) | $ | (121,430 | ) | |||
Equity in net earnings from investments | $ | 37,576 | $ | — | $ | 37,576 | ||||||
Capital expenditures | $ | 1,011,550 | $ | 7,624 | $ | 1,019,174 |
(a) - Noncustomer revenue for the three months ended September 30, 2019, totaled $89.0 million related primarily to gains from commodity derivative contracts.
32
Three Months Ended September 30, 2018 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||
(Thousands of dollars) | |||||||||||||||
NGL and condensate sales | $ | 501,163 | $ | 2,861,896 | $ | — | $ | 3,363,059 | |||||||
Residue natural gas sales | 245,474 | — | 763 | 246,237 | |||||||||||
Gathering, processing and exchange services revenue | 41,101 | 116,833 | — | 157,934 | |||||||||||
Transportation and storage revenue | — | 45,251 | 98,031 | 143,282 | |||||||||||
Other | 3,517 | 2,308 | 6,400 | 12,225 | |||||||||||
Total revenues (c) | 791,255 | 3,026,288 | 105,194 | 3,922,737 | |||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (542,463 | ) | (2,544,854 | ) | (2,384 | ) | (3,089,701 | ) | |||||||
Operating costs | (90,970 | ) | (101,126 | ) | (36,543 | ) | (228,639 | ) | |||||||
Equity in net earnings from investments | 74 | 16,450 | 22,789 | 39,313 | |||||||||||
Noncash compensation expense and other | 1,703 | 2,268 | 1,050 | 5,021 | |||||||||||
Segment adjusted EBITDA | $ | 159,599 | $ | 399,026 | $ | 90,106 | $ | 648,731 | |||||||
Depreciation and amortization | $ | (49,223 | ) | $ | (43,688 | ) | $ | (13,625 | ) | $ | (106,536 | ) | |||
Capital expenditures | $ | 213,034 | $ | 444,780 | $ | 31,522 | $ | 689,336 |
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $316.0 million, of which $276.4 million related to revenues within the segment, and cost of sales and fuel of $132.7 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $65.9 million and cost of sales and fuel of $5.5 million.
(c) - Intersegment revenues for the Natural Gas Gathering and Processing segment totaled $519.7 million. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
Three Months Ended September 30, 2018 | Total Segments | Other and Eliminations | Total | |||||||||
(Thousands of dollars) | ||||||||||||
Reconciliations of total segments to consolidated | ||||||||||||
NGL and condensate sales | $ | 3,363,059 | $ | (526,398 | ) | $ | 2,836,661 | |||||
Residue natural gas sales | 246,237 | — | 246,237 | |||||||||
Gathering, processing and exchange services revenue | 157,934 | — | 157,934 | |||||||||
Transportation and storage revenue | 143,282 | (2,370 | ) | 140,912 | ||||||||
Other | 12,225 | (79 | ) | 12,146 | ||||||||
Total revenues (a) | $ | 3,922,737 | $ | (528,847 | ) | $ | 3,393,890 | |||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (3,089,701 | ) | $ | 528,936 | $ | (2,560,765 | ) | ||||
Operating costs | $ | (228,639 | ) | $ | (1,732 | ) | $ | (230,371 | ) | |||
Depreciation and amortization | $ | (106,536 | ) | $ | (847 | ) | $ | (107,383 | ) | |||
Equity in net earnings from investments | $ | 39,313 | $ | — | $ | 39,313 | ||||||
Capital expenditures | $ | 689,336 | $ | 4,967 | $ | 694,303 |
(a) - Noncustomer revenue for the three months ended September 30, 2018, totaled $(17.7) million related primarily to losses from derivatives on commodity contracts.
33
Nine Months Ended September 30, 2019 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||
(Thousands of dollars) | |||||||||||||||
NGL and condensate sales | $ | 890,021 | $ | 5,826,297 | $ | — | $ | 6,716,318 | |||||||
Residue natural gas sales | 725,672 | — | 1,242 | 726,914 | |||||||||||
Gathering, processing and exchange services revenue | 126,073 | 309,571 | — | 435,644 | |||||||||||
Transportation and storage revenue | — | 141,384 | 317,555 | 458,939 | |||||||||||
Other | 11,287 | 7,313 | 36,682 | 55,282 | |||||||||||
Total revenues (c) | 1,753,053 | 6,284,565 | 355,479 | 8,393,097 | |||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (971,397 | ) | (4,914,452 | ) | (3,785 | ) | (5,889,634 | ) | |||||||
Operating costs | (271,236 | ) | (340,274 | ) | (113,043 | ) | (724,553 | ) | |||||||
Equity in net earnings (loss) from investments | (4,660 | ) | 49,406 | 70,429 | 115,175 | ||||||||||
Noncash compensation expense and other | 8,399 | 12,618 | 1,931 | 22,948 | |||||||||||
Segment adjusted EBITDA | $ | 514,159 | $ | 1,091,863 | $ | 311,011 | $ | 1,917,033 | |||||||
Depreciation and amortization | $ | (162,014 | ) | $ | (143,166 | ) | $ | (42,653 | ) | $ | (347,833 | ) | |||
Total assets | $ | 6,546,417 | $ | 11,662,489 | $ | 2,083,773 | $ | 20,292,679 | |||||||
Capital expenditures | $ | 674,115 | $ | 1,969,138 | $ | 77,861 | $ | 2,721,114 |
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $1.0 billion, of which $853.0 million related to revenues within the segment, and cost of sales and fuel of $364.9 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $214.7 million and cost of sales and fuel of $14.4 million.
(c) - Intersegment revenues for the Natural Gas Gathering and Processing segment totaled $897.9 million. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
Nine Months Ended September 30, 2019 | Total Segments | Other and Eliminations | Total | |||||||||
(Thousands of dollars) | ||||||||||||
Reconciliations of total segments to consolidated | ||||||||||||
NGL and condensate sales | $ | 6,716,318 | $ | (878,958 | ) | $ | 5,837,360 | |||||
Residue natural gas sales | 726,914 | (567 | ) | 726,347 | ||||||||
Gathering, processing and exchange services revenue | 435,644 | — | 435,644 | |||||||||
Transportation and storage revenue | 458,939 | (7,578 | ) | 451,361 | ||||||||
Other | 55,282 | (5,233 | ) | 50,049 | ||||||||
Total revenues (a) | $ | 8,393,097 | $ | (892,336 | ) | $ | 7,500,761 | |||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (5,889,634 | ) | $ | 892,935 | $ | (4,996,699 | ) | ||||
Operating costs | $ | (724,553 | ) | $ | 964 | $ | (723,589 | ) | ||||
Depreciation and amortization | $ | (347,833 | ) | $ | (2,719 | ) | $ | (350,552 | ) | |||
Equity in net earnings from investments | $ | 115,175 | $ | — | $ | 115,175 | ||||||
Total assets | $ | 20,292,679 | $ | 1,043,228 | $ | 21,335,907 | ||||||
Capital expenditures | $ | 2,721,114 | $ | 18,224 | $ | 2,739,338 |
(a) - Noncustomer revenue for the nine months ended September 30, 2019, totaled $129.9 million related primarily to gains from commodity derivative contracts.
34
Nine Months Ended September 30, 2018 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||
(Thousands of dollars) | |||||||||||||||
NGL and condensate sales | $ | 1,362,159 | $ | 7,884,183 | $ | — | $ | 9,246,342 | |||||||
Residue natural gas sales | 709,089 | — | 5,861 | 714,950 | |||||||||||
Gathering, processing and exchange services revenue | 122,331 | 296,561 | — | 418,892 | |||||||||||
Transportation and storage revenue | — | 143,741 | 289,646 | 433,387 | |||||||||||
Other | 6,596 | 8,202 | 19,390 | 34,188 | |||||||||||
Total revenues (c) | 2,200,175 | 8,332,687 | 314,897 | 10,847,759 | |||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (1,478,044 | ) | (7,009,438 | ) | (10,475 | ) | (8,497,957 | ) | |||||||
Operating costs | (272,931 | ) | (289,328 | ) | (104,692 | ) | (666,951 | ) | |||||||
Equity in net earnings from investments | 948 | 49,456 | 65,666 | 116,070 | |||||||||||
Noncash compensation expense and other | 6,868 | 9,789 | 3,701 | 20,358 | |||||||||||
Segment adjusted EBITDA | $ | 457,016 | $ | 1,093,166 | $ | 269,097 | $ | 1,819,279 | |||||||
Depreciation and amortization | $ | (145,120 | ) | $ | (128,993 | ) | $ | (41,320 | ) | $ | (315,433 | ) | |||
Total assets | $ | 5,811,140 | $ | 9,632,212 | $ | 2,109,897 | $ | 17,553,249 | |||||||
Capital expenditures | $ | 433,605 | $ | 786,635 | $ | 71,897 | $ | 1,292,137 |
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $910.3 million, of which $784.8 million related to revenues within the segment, and cost of sales and fuel of $379.5 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $198.4 million and cost of sales and fuel of $20.4 million.
(c) - Intersegment revenues for the Natural Gas Gathering and Processing segment totaled $1.4 billion. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
Nine Months Ended September 30, 2018 | Total Segments | Other and Eliminations | Total | |||||||||
(Thousands of dollars) | ||||||||||||
Reconciliations of total segments to consolidated | ||||||||||||
NGL and condensate sales | $ | 9,246,342 | $ | (1,383,864 | ) | $ | 7,862,478 | |||||
Residue natural gas sales | 714,950 | (778 | ) | 714,172 | ||||||||
Gathering, processing and exchange services revenue | 418,892 | (21 | ) | 418,871 | ||||||||
Transportation and storage revenue | 433,387 | (6,959 | ) | 426,428 | ||||||||
Other | 34,188 | 359 | 34,547 | |||||||||
Total revenues (a) | $ | 10,847,759 | $ | (1,391,263 | ) | $ | 9,456,496 | |||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (8,497,957 | ) | $ | 1,393,348 | $ | (7,104,609 | ) | ||||
Operating costs | $ | (666,951 | ) | $ | (3,777 | ) | $ | (670,728 | ) | |||
Depreciation and amortization | $ | (315,433 | ) | $ | (2,475 | ) | $ | (317,908 | ) | |||
Equity in net earnings from investments | $ | 116,070 | $ | — | $ | 116,070 | ||||||
Total assets | $ | 17,553,249 | $ | 358,065 | $ | 17,911,314 | ||||||
Capital expenditures | $ | 1,292,137 | $ | 17,518 | $ | 1,309,655 |
(a) - Noncustomer revenue for the nine months ended September 30, 2018, totaled $(32.1) million related primarily to losses from derivatives on commodity contracts.
35
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Reconciliation of net income to total segment adjusted EBITDA | |||||||||||||||
Net income | $ | 309,155 | $ | 313,916 | $ | 958,326 | $ | 862,144 | |||||||
Add: | |||||||||||||||
Interest expense, net of capitalized interest | 129,577 | 121,910 | 362,490 | 351,131 | |||||||||||
Depreciation and amortization | 121,430 | 107,383 | 350,552 | 317,908 | |||||||||||
Income taxes | 97,365 | 102,983 | 274,234 | 266,285 | |||||||||||
Noncash compensation expense | 9,757 | 5,829 | 20,412 | 27,195 | |||||||||||
Other corporate costs and noncash items (a) | (20,711 | ) | (3,290 | ) | (48,981 | ) | (5,384 | ) | |||||||
Total segment adjusted EBITDA | $ | 646,573 | $ | 648,731 | $ | 1,917,033 | $ | 1,819,279 |
(a) - Includes equity AFUDC related to our capital-growth projects.
N. | SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION |
ONEOK and ONEOK Partners are issuers of certain public debt securities. We, ONEOK Partners and the Intermediate Partnership guarantee the indebtedness of ONEOK and ONEOK Partners. The Intermediate Partnership holds all of ONEOK Partners’ partnership interests and equity in its subsidiaries, as well as a 50 percent interest in Northern Border Pipeline. In lieu of providing separate financial statements for each subsidiary issuer and guarantor, we have included the accompanying condensed consolidating financial statements based on Rule 3-10 of the SEC’s Regulation S-X. We have presented each of the parent and subsidiary issuers in separate columns in this single set of condensed consolidating financial statements.
For purposes of the following footnote:
• | we are referred to as “Parent Issuer and Guarantor” |
• | ONEOK Partners is referred to as “Subsidiary Issuer and Guarantor” |
• | the Intermediate Partnership is referred to as “Guarantor Subsidiary” and |
• | the “Non-Guarantor Subsidiaries” are all subsidiaries other than the Guarantor Subsidiary and Subsidiary Issuer and Guarantor. |
The following unaudited supplemental condensed consolidating financial information is presented on an equity-method basis reflecting the separate accounts of ONEOK, ONEOK Partners and the Intermediate Partnership, the combined accounts of the Non-Guarantor Subsidiaries, the combined consolidating adjustments and eliminations, and our consolidated amounts for the periods indicated.
36
Condensed Consolidating Statements of Income and Comprehensive Income
Three Months Ended September 30, 2019 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Commodity sales | $ | — | $ | — | $ | — | $ | 1,947.8 | $ | — | $ | 1,947.8 | |||||||||||
Services | — | — | — | 316.0 | (0.6 | ) | 315.4 | ||||||||||||||||
Total revenues | — | — | — | 2,263.8 | (0.6 | ) | 2,263.2 | ||||||||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | — | — | — | 1,414.5 | — | 1,414.5 | |||||||||||||||||
Operating expenses | (0.7 | ) | — | — | 367.8 | (0.6 | ) | 366.5 | |||||||||||||||
(Gain) loss on sale of assets | — | — | 0.1 | (0.1 | ) | — | — | ||||||||||||||||
Operating income | 0.7 | — | (0.1 | ) | 481.6 | — | 482.2 | ||||||||||||||||
Equity in net earnings from investments | 470.2 | 476.1 | 476.2 | 29.1 | (1,414.0 | ) | 37.6 | ||||||||||||||||
Other income (expense), net | 11.1 | 75.4 | 78.1 | 8.0 | (156.2 | ) | 16.4 | ||||||||||||||||
Interest expense, net | (78.4 | ) | (78.1 | ) | (78.1 | ) | (51.2 | ) | 156.2 | (129.6 | ) | ||||||||||||
Income before income taxes | 403.6 | 473.4 | 476.1 | 467.5 | (1,414.0 | ) | 406.6 | ||||||||||||||||
Income taxes | (94.4 | ) | — | — | (3.0 | ) | — | (97.4 | ) | ||||||||||||||
Net income | 309.2 | 473.4 | 476.1 | 464.5 | (1,414.0 | ) | 309.2 | ||||||||||||||||
Less: Preferred stock dividends | 0.3 | — | — | — | — | 0.3 | |||||||||||||||||
Net income available to common shareholders | $ | 308.9 | $ | 473.4 | $ | 476.1 | $ | 464.5 | $ | (1,414.0 | ) | $ | 308.9 | ||||||||||
Net income | $ | 309.2 | $ | 473.4 | $ | 476.1 | $ | 464.5 | $ | (1,414.0 | ) | $ | 309.2 | ||||||||||
Other comprehensive income (loss), net of tax | (94.4 | ) | 12.4 | 7.9 | 5.0 | (15.6 | ) | (84.7 | ) | ||||||||||||||
Comprehensive income | $ | 214.8 | $ | 485.8 | $ | 484.0 | $ | 469.5 | $ | (1,429.6 | ) | $ | 224.5 |
37
Three Months Ended September 30, 2018 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Commodity sales | $ | — | $ | — | $ | — | $ | 3,083.6 | $ | — | $ | 3,083.6 | |||||||||||
Services | — | — | — | 310.8 | (0.5 | ) | 310.3 | ||||||||||||||||
Total revenues | — | — | — | 3,394.4 | (0.5 | ) | 3,393.9 | ||||||||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | — | — | — | 2,560.8 | — | 2,560.8 | |||||||||||||||||
Operating expenses | 2.0 | — | — | 336.3 | (0.5 | ) | 337.8 | ||||||||||||||||
Gain on sale of assets | — | — | — | (0.2 | ) | — | (0.2 | ) | |||||||||||||||
Operating income | (2.0 | ) | — | — | 497.5 | — | 495.5 | ||||||||||||||||
Equity in net earnings from investments | 457.3 | 457.1 | 457.1 | 30.1 | (1,362.3 | ) | 39.3 | ||||||||||||||||
Other income (expense), net | 9.3 | 80.3 | 80.3 | (5.3 | ) | (160.6 | ) | 4.0 | |||||||||||||||
Interest expense, net | (49.1 | ) | (80.3 | ) | (80.3 | ) | (72.8 | ) | 160.6 | (121.9 | ) | ||||||||||||
Income before income taxes | 415.5 | 457.1 | 457.1 | 449.5 | (1,362.3 | ) | 416.9 | ||||||||||||||||
Income taxes | (102.3 | ) | — | — | (0.7 | ) | — | (103.0 | ) | ||||||||||||||
Net income | 313.2 | 457.1 | 457.1 | 448.8 | (1,362.3 | ) | 313.9 | ||||||||||||||||
Less: Net income attributable to noncontrolling interests | — | — | — | 0.7 | — | 0.7 | |||||||||||||||||
Net income attributable to ONEOK | 313.2 | 457.1 | 457.1 | 448.1 | (1,362.3 | ) | 313.2 | ||||||||||||||||
Less: Preferred stock dividends | 0.2 | — | — | — | — | 0.2 | |||||||||||||||||
Net income available to common shareholders | $ | 313.0 | $ | 457.1 | $ | 457.1 | $ | 448.1 | $ | (1,362.3 | ) | $ | 313.0 | ||||||||||
Net income | $ | 313.2 | $ | 457.1 | $ | 457.1 | $ | 448.8 | $ | (1,362.3 | ) | $ | 313.9 | ||||||||||
Other comprehensive income (loss), net of tax | 23.4 | (3.7 | ) | (8.1 | ) | (7.3 | ) | 16.2 | 20.5 | ||||||||||||||
Comprehensive income | 336.6 | 453.4 | 449.0 | 441.5 | (1,346.1 | ) | 334.4 | ||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | — | 0.7 | — | 0.7 | |||||||||||||||||
Comprehensive income attributable to ONEOK | $ | 336.6 | $ | 453.4 | $ | 449.0 | $ | 440.8 | $ | (1,346.1 | ) | $ | 333.7 |
38
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Commodity sales | $ | — | $ | — | $ | — | $ | 6,567.6 | $ | — | $ | 6,567.6 | |||||||||||
Services | — | — | — | 934.8 | (1.6 | ) | 933.2 | ||||||||||||||||
Total revenues | — | — | — | 7,502.4 | (1.6 | ) | 7,500.8 | ||||||||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | — | — | — | 4,996.7 | — | 4,996.7 | |||||||||||||||||
Operating expenses | (0.7 | ) | — | — | 1,076.5 | (1.6 | ) | 1,074.2 | |||||||||||||||
Loss on sale of assets | — | — | 2.7 | 0.2 | — | 2.9 | |||||||||||||||||
Operating income | 0.7 | — | (2.7 | ) | 1,429.0 | — | 1,427.0 | ||||||||||||||||
Equity in net earnings from investments | 1,392.9 | 1,405.6 | 1,408.3 | 87.1 | (4,178.7 | ) | 115.2 | ||||||||||||||||
Other income (expense), net | 26.3 | 232.8 | 235.5 | 29.3 | (471.0 | ) | 52.9 | ||||||||||||||||
Interest expense, net | (198.1 | ) | (235.5 | ) | (235.5 | ) | (164.4 | ) | 471.0 | (362.5 | ) | ||||||||||||
Income before income taxes | 1,221.8 | 1,402.9 | 1,405.6 | 1,381.0 | (4,178.7 | ) | 1,232.6 | ||||||||||||||||
Income taxes | (263.5 | ) | — | — | (10.8 | ) | — | (274.3 | ) | ||||||||||||||
Net income | 958.3 | 1,402.9 | 1,405.6 | 1,370.2 | (4,178.7 | ) | 958.3 | ||||||||||||||||
Less: Preferred stock dividends | 0.8 | — | — | — | — | 0.8 | |||||||||||||||||
Net income available to common shareholders | $ | 957.5 | $ | 1,402.9 | $ | 1,405.6 | $ | 1,370.2 | $ | (4,178.7 | ) | $ | 957.5 | ||||||||||
Net income | $ | 958.3 | $ | 1,402.9 | $ | 1,405.6 | $ | 1,370.2 | $ | (4,178.7 | ) | $ | 958.3 | ||||||||||
Other comprehensive income (loss), net of tax | (226.0 | ) | (9.0 | ) | (22.5 | ) | (20.6 | ) | 45.3 | (232.8 | ) | ||||||||||||
Comprehensive income | $ | 732.3 | $ | 1,393.9 | $ | 1,383.1 | $ | 1,349.6 | $ | (4,133.4 | ) | $ | 725.5 |
39
Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Commodity sales | $ | — | $ | — | $ | — | $ | 8,578.9 | $ | — | $ | 8,578.9 | |||||||||||
Services | — | — | — | 879.1 | (1.5 | ) | 877.6 | ||||||||||||||||
Total revenues | — | — | — | 9,458.0 | (1.5 | ) | 9,456.5 | ||||||||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | — | — | — | 7,104.6 | — | 7,104.6 | |||||||||||||||||
Operating expenses | 3.3 | — | — | 986.8 | (1.5 | ) | 988.6 | ||||||||||||||||
Gain on sale of assets | — | — | — | (0.3 | ) | — | (0.3 | ) | |||||||||||||||
Operating income | (3.3 | ) | — | — | 1,366.9 | — | 1,363.6 | ||||||||||||||||
Equity in net earnings from investments | 1,226.6 | 1,231.2 | 1,231.2 | 86.2 | (3,659.1 | ) | 116.1 | ||||||||||||||||
Other income (expense), net | 23.1 | 234.9 | 234.9 | (23.3 | ) | (469.8 | ) | (0.2 | ) | ||||||||||||||
Interest expense, net | (129.2 | ) | (234.9 | ) | (234.9 | ) | (221.9 | ) | 469.8 | (351.1 | ) | ||||||||||||
Income before income taxes | 1,117.2 | 1,231.2 | 1,231.2 | 1,207.9 | (3,659.1 | ) | 1,128.4 | ||||||||||||||||
Income taxes | (258.4 | ) | — | — | (7.9 | ) | — | (266.3 | ) | ||||||||||||||
Net income | 858.8 | 1,231.2 | 1,231.2 | 1,200.0 | (3,659.1 | ) | 862.1 | ||||||||||||||||
Less: Net income attributable to noncontrolling interests | — | — | — | 3.3 | — | 3.3 | |||||||||||||||||
Net income attributable to ONEOK | 858.8 | 1,231.2 | 1,231.2 | 1,196.7 | (3,659.1 | ) | 858.8 | ||||||||||||||||
Less: Preferred stock dividends | 0.8 | — | — | — | — | 0.8 | |||||||||||||||||
Net income available to common shareholders | $ | 858.0 | $ | 1,231.2 | $ | 1,231.2 | $ | 1,196.7 | $ | (3,659.1 | ) | $ | 858.0 | ||||||||||
Net income | $ | 858.8 | $ | 1,231.2 | $ | 1,231.2 | $ | 1,200.0 | $ | (3,659.1 | ) | $ | 862.1 | ||||||||||
Other comprehensive income (loss), net of tax | 65.6 | 4.0 | (6.9 | ) | (8.0 | ) | 13.8 | 68.5 | |||||||||||||||
Comprehensive income | 924.4 | 1,235.2 | 1,224.3 | 1,192.0 | (3,645.3 | ) | 930.6 | ||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interest | — | — | — | 3.3 | — | 3.3 | |||||||||||||||||
Comprehensive income attributable to ONEOK | $ | 924.4 | $ | 1,235.2 | $ | 1,224.3 | $ | 1,188.7 | $ | (3,645.3 | ) | $ | 927.3 |
40
Condensed Consolidating Balance Sheets
September 30, 2019 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
Assets | (Millions of dollars) | ||||||||||||||||||||||
Current assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 673.3 | $ | — | $ | — | $ | — | $ | — | $ | 673.3 | |||||||||||
Accounts receivable, net | — | — | — | 718.7 | — | 718.7 | |||||||||||||||||
Materials and supplies | — | — | — | 192.9 | — | 192.9 | |||||||||||||||||
Natural gas and NGLs in storage | — | — | — | 283.5 | — | 283.5 | |||||||||||||||||
Other current assets | 12.3 | — | — | 86.8 | — | 99.1 | |||||||||||||||||
Total current assets | 685.6 | — | — | 1,281.9 | — | 1,967.5 | |||||||||||||||||
Property, plant and equipment | |||||||||||||||||||||||
Property, plant and equipment | 160.0 | — | — | 20,788.3 | — | 20,948.3 | |||||||||||||||||
Accumulated depreciation and amortization | 97.6 | — | — | 3,487.8 | — | 3,585.4 | |||||||||||||||||
Net property, plant and equipment | 62.4 | — | — | 17,300.5 | — | 17,362.9 | |||||||||||||||||
Investments and other assets | |||||||||||||||||||||||
Investments | 6,554.5 | 3,932.2 | 10,986.9 | 770.6 | (21,373.7 | ) | 870.5 | ||||||||||||||||
Intercompany receivable | 8,099.1 | 6,897.7 | — | — | (14,996.8 | ) | — | ||||||||||||||||
Other assets | 134.8 | — | — | 1,001.1 | (0.9 | ) | 1,135.0 | ||||||||||||||||
Total investments and other assets | 14,788.4 | 10,829.9 | 10,986.9 | 1,771.7 | (36,371.4 | ) | 2,005.5 | ||||||||||||||||
Total assets | $ | 15,536.4 | $ | 10,829.9 | $ | 10,986.9 | $ | 20,354.1 | $ | (36,371.4 | ) | $ | 21,335.9 | ||||||||||
Liabilities and equity | |||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||
Current maturities of long-term debt | $ | — | $ | — | $ | — | $ | 7.7 | $ | — | $ | 7.7 | |||||||||||
Accounts payable | 9.5 | — | — | 1,120.3 | — | 1,129.8 | |||||||||||||||||
Other current liabilities | 96.4 | 63.5 | — | 269.7 | — | 429.6 | |||||||||||||||||
Total current liabilities | 105.9 | 63.5 | — | 1,397.7 | — | 1,567.1 | |||||||||||||||||
Intercompany payable | — | — | 7,054.7 | 7,942.1 | (14,996.8 | ) | — | ||||||||||||||||
Long-term debt, excluding current maturities | 8,419.6 | 4,044.3 | — | 15.6 | — | 12,479.5 | |||||||||||||||||
Deferred credits and other liabilities | |||||||||||||||||||||||
Deferred income taxes | 297.9 | — | — | 121.7 | (0.9 | ) | 418.7 | ||||||||||||||||
Other deferred credits | 494.1 | — | — | 157.6 | — | 651.7 | |||||||||||||||||
Total deferred credits and other liabilities | 792.0 | — | — | 279.3 | (0.9 | ) | 1,070.4 | ||||||||||||||||
Commitments and contingencies | |||||||||||||||||||||||
Equity | 6,218.9 | 6,722.1 | 3,932.2 | 10,719.4 | (21,373.7 | ) | 6,218.9 | ||||||||||||||||
Total liabilities and equity | $ | 15,536.4 | $ | 10,829.9 | $ | 10,986.9 | $ | 20,354.1 | $ | (36,371.4 | ) | $ | 21,335.9 |
41
December 31, 2018 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
Assets | (Millions of dollars) | ||||||||||||||||||||||
Current assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 12.0 | $ | — | $ | — | $ | — | $ | — | $ | 12.0 | |||||||||||
Accounts receivable, net | — | — | — | 819.0 | — | 819.0 | |||||||||||||||||
Materials and supplies | — | — | — | 141.2 | — | 141.2 | |||||||||||||||||
Natural gas and NGLs in storage | — | — | — | 296.7 | — | 296.7 | |||||||||||||||||
Other current assets | 29.1 | — | — | 100.6 | — | 129.7 | |||||||||||||||||
Total current assets | 41.1 | — | — | 1,357.5 | — | 1,398.6 | |||||||||||||||||
Property, plant and equipment | |||||||||||||||||||||||
Property, plant and equipment | 145.5 | — | — | 17,885.5 | — | 18,031.0 | |||||||||||||||||
Accumulated depreciation and amortization | 92.0 | — | — | 3,172.3 | — | 3,264.3 | |||||||||||||||||
Net property, plant and equipment | 53.5 | — | — | 14,713.2 | — | 14,766.7 | |||||||||||||||||
Investments and other assets | |||||||||||||||||||||||
Investments | 6,153.5 | 3,548.1 | 9,721.6 | 791.1 | (19,245.1 | ) | 969.2 | ||||||||||||||||
Intercompany receivable | 5,308.6 | 7,701.5 | 1,528.0 | — | (14,538.1 | ) | — | ||||||||||||||||
Other assets | 115.9 | — | — | 982.3 | (1.0 | ) | 1,097.2 | ||||||||||||||||
Total investments and other assets | 11,578.0 | 11,249.6 | 11,249.6 | 1,773.4 | (33,784.2 | ) | 2,066.4 | ||||||||||||||||
Total assets | $ | 11,672.6 | $ | 11,249.6 | $ | 11,249.6 | $ | 17,844.1 | $ | (33,784.2 | ) | $ | 18,231.7 | ||||||||||
Liabilities and equity | |||||||||||||||||||||||
Current liabilities | |||||||||||||||||||||||
Current maturities of long-term debt | $ | — | $ | 500.0 | $ | — | $ | 7.7 | $ | — | $ | 507.7 | |||||||||||
Accounts payable | 31.3 | — | — | 1,085.0 | — | 1,116.3 | |||||||||||||||||
Other current liabilities | 123.2 | 81.0 | — | 280.2 | — | 484.4 | |||||||||||||||||
Total current liabilities | 154.5 | 581.0 | — | 1,372.9 | — | 2,108.4 | |||||||||||||||||
Intercompany payable | — | — | 7,701.5 | 6,836.6 | (14,538.1 | ) | — | ||||||||||||||||
Long-term debt, excluding current maturities | 4,510.7 | 4,341.4 | — | 21.2 | — | 8,873.3 | |||||||||||||||||
Deferred credits and other liabilities | |||||||||||||||||||||||
Deferred income taxes | 112.3 | — | — | 108.4 | (1.0 | ) | 219.7 | ||||||||||||||||
Other deferred credits | 315.6 | — | — | 135.2 | — | 450.8 | |||||||||||||||||
Total deferred credits and other liabilities | 427.9 | — | — | 243.6 | (1.0 | ) | 670.5 | ||||||||||||||||
Commitments and contingencies | |||||||||||||||||||||||
Equity | 6,579.5 | 6,327.2 | 3,548.1 | 9,369.8 | (19,245.1 | ) | 6,579.5 | ||||||||||||||||
Total liabilities and equity | $ | 11,672.6 | $ | 11,249.6 | $ | 11,249.6 | $ | 17,844.1 | $ | (33,784.2 | ) | $ | 18,231.7 |
42
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Operating activities | |||||||||||||||||||||||
Cash provided by operating activities | $ | 761.9 | $ | 897.3 | $ | 50.6 | $ | 1,615.0 | $ | (1,998.0 | ) | $ | 1,326.8 | ||||||||||
Investing activities | |||||||||||||||||||||||
Capital expenditures | (17.8 | ) | — | — | (2,721.5 | ) | — | (2,739.3 | ) | ||||||||||||||
Contributions to unconsolidated affiliates | — | — | — | (3.3 | ) | — | (3.3 | ) | |||||||||||||||
Other investing activities | — | — | 72.5 | 22.2 | — | 94.7 | |||||||||||||||||
Cash used in investing activities | (17.8 | ) | — | 72.5 | (2,702.6 | ) | — | (2,647.9 | ) | ||||||||||||||
Financing activities | |||||||||||||||||||||||
Dividends paid | (1,079.4 | ) | (999.0 | ) | (999.0 | ) | — | 1,998.0 | (1,079.4 | ) | |||||||||||||
Intercompany borrowings (advances), net | (2,874.4 | ) | 904.1 | 875.9 | 1,094.4 | — | — | ||||||||||||||||
Issuance of long-term debt, net of discounts | 4,185.4 | — | — | — | — | 4,185.4 | |||||||||||||||||
Repayment of long-term debt | (250.0 | ) | (799.7 | ) | — | (5.7 | ) | — | (1,055.4 | ) | |||||||||||||
Issuance of common stock | 19.3 | — | — | — | — | 19.3 | |||||||||||||||||
Other | (83.7 | ) | (2.7 | ) | — | (1.1 | ) | — | (87.5 | ) | |||||||||||||
Cash provided by financing activities | (82.8 | ) | (897.3 | ) | (123.1 | ) | 1,087.6 | 1,998.0 | 1,982.4 | ||||||||||||||
Change in cash and cash equivalents | 661.3 | — | — | — | — | 661.3 | |||||||||||||||||
Cash and cash equivalents at beginning of period | 12.0 | — | — | — | — | 12.0 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 673.3 | $ | — | $ | — | $ | — | $ | — | $ | 673.3 |
43
Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
(Unaudited) | Parent Issuer & Guarantor | Subsidiary Issuer & Guarantor | Guarantor Subsidiary | Combined Non-Guarantor Subsidiaries | Consolidating Entries | Total | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Operating activities | |||||||||||||||||||||||
Cash provided by operating activities | $ | 964.4 | $ | 993.8 | $ | 48.9 | $ | 1,507.4 | $ | (1,998.0 | ) | $ | 1,516.5 | ||||||||||
Investing activities | |||||||||||||||||||||||
Capital expenditures | (15.0 | ) | — | — | (1,294.7 | ) | — | (1,309.7 | ) | ||||||||||||||
Contributions to unconsolidated affiliates | — | — | (0.5 | ) | (0.3 | ) | — | (0.8 | ) | ||||||||||||||
Other investing activities | — | — | 10.8 | 9.9 | — | 20.7 | |||||||||||||||||
Cash used in investing activities | (15.0 | ) | — | 10.3 | (1,285.1 | ) | — | (1,289.8 | ) | ||||||||||||||
Financing activities | |||||||||||||||||||||||
Dividends paid | (983.1 | ) | (999.0 | ) | (999.0 | ) | — | 1,998.0 | (983.1 | ) | |||||||||||||
Distributions to noncontrolling interests | — | — | — | (3.5 | ) | — | (3.5 | ) | |||||||||||||||
Intercompany borrowings (advances), net | (1,640.5 | ) | 930.2 | 939.8 | (229.5 | ) | — | — | |||||||||||||||
Borrowing (repayment) of short-term borrowings, net | (494.7 | ) | — | — | — | — | (494.7 | ) | |||||||||||||||
Issuance of long-term debt, net of discounts | 1,245.8 | — | — | — | — | 1,245.8 | |||||||||||||||||
Repayment of long-term debt | — | (925.0 | ) | — | (5.7 | ) | — | (930.7 | ) | ||||||||||||||
Issuance of common stock | 1,195.1 | — | — | — | — | 1,195.1 | |||||||||||||||||
Acquisition of noncontrolling interests | (195.0 | ) | — | — | — | — | (195.0 | ) | |||||||||||||||
Other, net | (29.7 | ) | — | — | 16.4 | — | (13.3 | ) | |||||||||||||||
Cash used in financing activities | (902.1 | ) | (993.8 | ) | (59.2 | ) | (222.3 | ) | 1,998.0 | (179.4 | ) | ||||||||||||
Change in cash and cash equivalents | 47.3 | — | — | — | — | 47.3 | |||||||||||||||||
Cash and cash equivalents at beginning of period | 37.2 | — | — | — | — | 37.2 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 84.5 | $ | — | $ | — | $ | — | $ | — | $ | 84.5 |
44
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our unaudited Consolidated Financial Statements and the Notes to Consolidated Financial Statements in this Quarterly Report, as well as our Annual Report.
RECENT DEVELOPMENTS
Please refer to the “Financial Results and Operating Information” and “Liquidity and Capital Resources” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report for additional information.
Business Update and Market Conditions - We operate primarily fee-based businesses in each of our three reportable segments, and we expect our consolidated earnings to be approximately 85% fee-based in 2019. We are connected to supply in growing basins and have significant basin diversification, including the Williston, Permian, Powder River and DJ Basins and the STACK and SCOOP areas. While our Natural Gas Gathering and Processing and Natural Gas Liquids segments generate primarily fee-based earnings, those segments’ results of operations are exposed to volumetric risk. Our exposure to volumetric risk can result from declining well productivity, reduced drilling activity, severe weather disruptions, operational outages and ethane rejection.
Volumes increased across our operating regions in our Natural Gas Gathering and Processing and Natural Gas Liquids segments in the first nine months of 2019, compared with the same period in 2018, as a result of our completed capital-growth projects, continued drilling and producer improvements in production due to enhanced completion techniques, offset partially by natural production declines. Since the beginning of 2018, we have spent more than $4 billion on our capital-growth projects that include NGL pipelines, NGL fractionators, natural gas processing plants and related natural gas infrastructure supported by a combination of long-term primarily fee-based contracts, volume commitments and/or acreage dedications. Our NGL projects in the Gulf Coast also allow flexibility to construct additional NGL fractionators, storage and, potentially, new export facilities in the future. We expect these projects to meet the needs of natural gas processors and producers and the petrochemical industry that require additional midstream infrastructure to accommodate increasing supply and demand in the areas in which we operate.
In recent quarters, we have experienced fluctuating NGL location price differentials due to increased supply, increased demand in the Mid-Continent region, infrastructure constraints and slower demand growth in the Gulf Coast due primarily to delays in the startup of petrochemical facilities and constrained NGL exports. In the third quarter 2019, the Conway-to-Mont Belvieu OPIS price differential for ethane in ethane/propane mix averaged $0.08 per-gallon, compared with $0.24 per-gallon in the third quarter 2018, which resulted in lower earnings from our optimization and marketing activities in our Natural Gas Liquids segment in the three and nine months ended September 30, 2019, compared with the same periods in 2018. We expect these NGL location price differentials to continue to fluctuate, but remain relatively narrow, for the remainder of the year.
Rocky Mountain Region - We expect each of our business segments to benefit from increased production in this region, which includes the Williston, Powder River and DJ Basins. In our Natural Gas Gathering and Processing segment, gathered and processed volumes in this region increased in the first nine months of 2019, compared with the same period in 2018, due primarily to increased producer productivity and new well connections. Our Demicks Lake I natural gas processing plant was placed in service in October 2019, and we expect it to quickly reach its 200 MMcf/d capacity due to more than 300 MMcf/d of natural gas currently flaring by producers on our dedicated acreage due primarily to lack of natural gas processing capacity. With continued volume growth expected, we are constructing our 200 MMcf/d Demicks Lake II natural gas processing plant and expanding our Bear Creek plant by 200 MMcf/d. These projects will increase our total processing capacity to more than 1.6 Bcf/d in the Williston Basin, which is expected to help producers meet North Dakota’s natural gas capture targets, add incremental NGLs to our NGL gathering system and deliver natural gas to our 50 percent-owned Northern Border Pipeline. In our Natural Gas Liquids segment, the volume growth in this region has resulted in our Bakken NGL pipeline and the Overland Pass Pipeline, of which we own 50%, operating at or near full capacity. We are in the final stages of constructing our Elk Creek pipeline to support expected supply growth and provide needed infrastructure to transport NGLs out of the region to the Mid-Continent with connectivity to the Gulf Coast.
In July 2019, we completed the southern section of our Elk Creek pipeline, allowing NGL production from the Powder River Basin to be transported to existing Mid-Continent NGL facilities in Bushton, Kansas, creating capacity on our Bakken NGL pipeline to transport additional NGL volumes from the Williston Basin. We expect our Elk Creek pipeline to reach 100 MBbl/d in the first quarter 2020 due to a combination of growth in volumes from our processing plants, third-party processing plants and volumes currently transported by rail. In April 2019, we also announced a project to extend our Bakken NGL pipeline into
45
an area of the Williston Basin with limited access to raw feed NGL pipeline takeaway capacity. This project will provide connectivity for third-party processing plants to key NGL market centers as well as provide additional volumes to our Elk Creek pipeline. To accommodate expected volumes, we are expanding our Mid-Continent NGL fractionation facilities by 65 MBbl/d and constructing an extension of our Arbuckle II pipeline farther north along with additional NGL gathering infrastructure to increase connectivity with our Elk Creek pipeline.
STACK and SCOOP - As producers continue to develop the STACK and SCOOP areas in Oklahoma, we expect continued demand for our services from producers that need takeaway capacity for natural gas and NGLs out of the Mid-Continent region. In our Natural Gas Gathering and Processing segment, natural gas gathered and processed volumes increased in this region in the first nine months of 2019, compared with the same period in 2018, due primarily to new well connections. In our Natural Gas Liquids segment, we are the largest NGL takeaway provider in the STACK and SCOOP areas where volumes continued to increase in the first nine months of 2019, compared with the same period in 2018. We are constructing our Arbuckle II pipeline to support expected supply growth and transport NGLs to the Gulf Coast market center, as well as an expansion of our Arbuckle II pipeline to a total capacity of 500 MBbl/d. Our Natural Gas Pipelines segment transports natural gas from more than 30 natural gas processing plants in Oklahoma. We completed expansions to provide increased westbound transportation services from the STACK area and a 150 MMcf/d eastbound expansion from the STACK and SCOOP areas to an eastern Oklahoma interstate pipeline delivery point.
Permian Basin - We expect our Natural Gas Liquids and Natural Gas Pipelines business segments to continue to benefit from increased production in the Permian Basin from the highly productive Delaware and Midland Basins. In our Natural Gas Liquids segment, we are well-positioned in the Permian Basin through our West Texas LPG pipeline system. Due to the recent expansion of the system and new plant connections, volumes increased in the first nine months of 2019, compared with the same period in 2018. We expect volumes to continue to increase on our West Texas LPG pipeline system as our second and third expansions are completed, which will increase the mainline capacity out of the Permian Basin by 80 MBbl/d and 40 MBbl/d, respectively, as well as connect our West Texas LPG pipeline with our Arbuckle II pipeline. These projects are expected to position our West Texas LPG pipeline system for significant NGL volume growth and are backed by long-term acreage and/or plant dedications. In our Natural Gas Pipelines segment, our Roadrunner joint venture and our WesTex pipeline are well-positioned to serve growth in the Permian Basin. The Roadrunner pipeline connects with our existing natural gas pipeline and storage infrastructure in Texas and, together with our completed WesTex intrastate natural gas pipeline expansion project, creates future opportunities for us to deliver natural gas to Mexico and transport natural gas to other markets in the region.
Gulf Coast - Demand for NGLs is expected to increase at the Mont Belvieu, Texas, NGL market center as new world-scale ethylene production projects, petrochemical plant expansions and NGL export facilities continue to be completed. NGL supply growth and new NGL pipelines recently completed or being constructed, including our Elk Creek pipeline, Arbuckle II pipeline and West Texas LPG pipeline projects, are increasing NGL deliveries to Mont Belvieu, Texas. While we have significant NGL fractionation and storage assets in this area, additional capacity is needed to accommodate expected volume growth. To respond to this need, we are constructing two additional 125 MBbl/d fractionators with related infrastructure in Mont Belvieu, Texas, MB-4 and MB-5, which are both fully contracted. Following the completion of MB-4 and MB-5, we expect our Gulf Coast NGL fractionation capacity to be approximately 600 MBbl/d and more than 1 MMBbl/d across our entire system. Our MB-5 project also includes system expansions that provide infrastructure capacity to support additional assets as we continue to evaluate opportunities for fractionation, storage and, potentially, export facilities to meet the supply and demand for NGLs.
Ethane Demand - We expect the amount of ethane delivered to our system to continue to fluctuate as NGL supply continues to increase, petrochemical companies complete expansion projects and exports increase. While these volumes decreased to 350 MBbl/d in the third quarter 2019, compared with 400 MBbl/d in the third quarter 2018, due primarily to increased ethane rejection in the Mid-Continent region, ethane volumes under long-term contracts delivered to our NGL system have generally been increasing since 2017, primarily as a result of NGL demand increasing from exports and petrochemical companies completing ethylene production projects and plant expansions. Our NGL capital-growth projects are expected to help alleviate system constraints, enabling additional NGLs, including ethane, to reach the Mont Belvieu, Texas, market center.
46
Growth Projects - Our announced large capital-growth projects that have recently been completed or are currently under construction are outlined in the table below:
Project | Scope | Approximate Costs (a) | Expected Completion |
Natural Gas Gathering and Processing | (In millions) | ||
Demicks Lake I plant and related infrastructure | 200 MMcf/d processing plant and related gathering infrastructure in the core of the Williston Basin | $400 | Completed October 2019 |
Supported by acreage dedications with long-term primarily fee-based contracts | |||
Demicks Lake II plant and related infrastructure | 200 MMcf/d processing plant and related gathering infrastructure in the core of the Williston Basin | $410 | First Quarter 2020 |
Supported by acreage dedications with long-term primarily fee-based contracts | |||
Bear Creek plant expansion and related infrastructure | 200 MMcf/d processing plant expansion in the Williston Basin and related gathering infrastructure | $405 | First Quarter 2021 |
Supported by acreage dedications and primarily fee-based contracts | |||
Natural Gas Liquids | |||
Elk Creek pipeline and related infrastructure | 900-mile NGL pipeline from the Williston Basin to the Mid-Continent region, with capacity of up to 240 MBbl/d, and related infrastructure | $1,400 | Fourth Quarter 2019 (b) |
Anchored by long-term contracts supported primarily by minimum volume commitments | |||
Expansion capability up to 400 MBbl/d with additional pump facilities | |||
Arbuckle II pipeline and related infrastructure | 530-mile NGL pipeline from the STACK area to Mont Belvieu, Texas, with initial capacity up to approximately 400 MBbl/d, and related infrastructure | $1,360 | First Quarter 2020 |
Supported by long-term contracts | |||
Expansion capability up to 1,000 MBbl/d | |||
West Texas LPG pipeline expansion and Arbuckle II connection | Increasing mainline capacity by 80 MBbl/d with additional pump facilities and pipeline looping | $295 | First Quarter 2020 |
Connecting West Texas LPG pipeline system to the Arbuckle II pipeline | |||
Supported by long-term dedicated production from six third-party processing plants expected to produce up to 60 MBbl/d | |||
MB-4 fractionator and related infrastructure | 125 MBbl/d NGL fractionator in Mont Belvieu, Texas, and related infrastructure, which includes additional NGL storage in Mont Belvieu | $575 | First Quarter 2020 (c) |
Fully contracted with long-term contracts | |||
Bakken NGL pipeline extension | 75-mile NGL pipeline in the Williston Basin connecting to a third-party processing plant | $100 | Fourth Quarter 2020 |
Supported by a long-term contract with a minimum volume commitment | |||
Arbuckle II extension project and additional gathering infrastructure | Provide additional takeaway capacity in the STACK area | $240 | First Quarter 2021 |
Allow increasing volumes on the Elk Creek pipeline access to fractionation capacity at Mont Belvieu | |||
Arbuckle II pipeline expansion | Increasing mainline capacity with additional pump facilities | $60 | First Quarter 2021 |
Increases capacity to 500 MBbl/d | |||
MB-5 fractionator and related infrastructure | 125 MBbl/d NGL fractionator in Mont Belvieu, Texas, and related infrastructure, which includes additional NGL storage in Mont Belvieu | $750 | First Quarter 2021 |
Fully contracted with long-term contracts | |||
West Texas LPG pipeline expansion | Increasing mainline capacity by 40 MBbl/d | $145 | First Quarter 2021 |
Supported by long-term dedicated production from third-party processing plants expected to produce up to 45 MBbl/d | |||
Mid-Continent fractionation facility expansions | 65 MBbl/d of expansions at our Mid-Continent NGL facilities | $150 | First Quarter 2021 (d) |
(a) - Excludes capitalized interest/AFUDC.
(b) - In July 2019, we completed the southern section of the pipeline.
(c) - We expect to complete 75 MBbl/d ahead of schedule in the fourth quarter 2019, with the remaining 50 MBbl/d to be completed in the first quarter 2020.
(d) - We expect to complete 15 MBbl/d in the third quarter 2020, with the remaining 50 MBbl/d expected to be completed in the first quarter 2021.
47
Debt Issuances - In August 2019, we completed an underwritten public offering of $2.0 billion senior unsecured notes consisting of $500 million, 2.75% senior notes due 2024; $750 million, 3.4% senior notes due 2029; and $750 million, 4.45% senior notes due 2049. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.97 billion. A portion of the proceeds were, and the remainder will be, used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
In March 2019, we completed an underwritten public offering of $1.25 billion senior unsecured notes consisting of $700 million, 4.35% senior notes due 2029 and an additional issuance of $550 million of our existing 5.2% senior notes due 2048. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, and exclusive of accrued interest, were $1.23 billion. During the six months ended June 30, 2019, we drew the remaining $950 million under our $1.5 Billion Term Loan Agreement. The proceeds were used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
Dividends - In February 2019, May 2019 and August 2019 we paid quarterly dividends of $0.86 per share ($3.44 per share on an annualized basis), $0.865 per share ($3.46 per share on an annualized basis) and $0.89 per share ($3.56 per share on an annualized basis), respectively, with increases of 12%, 9% and 8% compared with the respective quarters in the prior year. We declared a quarterly dividend of $0.915 per share ($3.66 per share on an annualized basis) in October 2019. The quarterly dividend will be paid November 14, 2019, to shareholders of record at the close of business on November 4, 2019.
Goodwill Impairment Review - We assess our goodwill for impairment at least annually as of July 1. At July 1, 2019, we assessed qualitative factors to determine whether it was more likely than not that the fair value of each of our reporting units was less than its carrying amount. After assessing qualitative factors (including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance), we determined that it was more likely than not that the fair value of each reporting unit was greater than its respective carrying value, and no further testing was necessary.
FINANCIAL RESULTS AND OPERATING INFORMATION
Consolidated Operations
Selected Financial Results - The following table sets forth certain selected financial results for the periods indicated:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | ||||||||||||||||||||
September 30, | September 30, | 2019 vs. 2018 | 2019 vs. 2018 | ||||||||||||||||||||
Financial Results | 2019 | 2018 | 2019 | 2018 | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Revenues | |||||||||||||||||||||||
Commodity sales | $ | 1,947.8 | $ | 3,083.6 | $ | 6,567.6 | $ | 8,578.9 | $ | (1,135.8 | ) | $ | (2,011.3 | ) | |||||||||
Services | 315.4 | 310.3 | 933.2 | 877.6 | 5.1 | 55.6 | |||||||||||||||||
Total revenues | 2,263.2 | 3,393.9 | 7,500.8 | 9,456.5 | (1,130.7 | ) | (1,955.7 | ) | |||||||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | 1,414.5 | 2,560.8 | 4,996.7 | 7,104.6 | (1,146.3 | ) | (2,107.9 | ) | |||||||||||||||
Operating costs | 245.1 | 230.4 | 723.6 | 670.7 | 14.7 | 52.9 | |||||||||||||||||
Depreciation and amortization | 121.4 | 107.4 | 350.6 | 317.9 | 14.0 | 32.7 | |||||||||||||||||
(Gain) loss on sale of assets | — | (0.2 | ) | 2.9 | (0.3 | ) | (0.2 | ) | (3.2 | ) | |||||||||||||
Operating income | $ | 482.2 | $ | 495.5 | $ | 1,427.0 | $ | 1,363.6 | $ | (13.3 | ) | $ | 63.4 | ||||||||||
Equity in net earnings from investments | $ | 37.6 | $ | 39.3 | $ | 115.2 | $ | 116.1 | $ | (1.7 | ) | $ | (0.9 | ) | |||||||||
Interest expense, net of capitalized interest | $ | (129.6 | ) | $ | (121.9 | ) | $ | (362.5 | ) | $ | (351.1 | ) | $ | 7.7 | $ | 11.4 | |||||||
Net income | $ | 309.2 | $ | 313.9 | $ | 958.3 | $ | 862.1 | $ | (4.7 | ) | $ | 96.2 | ||||||||||
Adjusted EBITDA | $ | 649.8 | $ | 650.2 | $ | 1,919.7 | $ | 1,822.4 | $ | (0.4 | ) | $ | 97.3 | ||||||||||
Capital expenditures | $ | 1,019.2 | $ | 694.3 | $ | 2,739.3 | $ | 1,309.7 | $ | 324.9 | $ | 1,429.6 |
See reconciliation of net income to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel in our Consolidated Statements of Income, and, therefore, the impact is largely offset between these line items.
48
Operating income decreased for the three months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | a decrease of $46.8 million in optimization and marketing earnings due primarily to wide location price differentials in the third quarter 2018 in our Natural Gas Liquids segment; |
• | a decrease of $17.1 million in exchange services related to higher unfractionated NGLs in inventory in our Natural Gas Liquids segment; |
• | an increase of $14.7 million in operating costs due primarily to higher materials, ad valorem taxes and spending on routine maintenance projects; |
• | an increase of $14.0 million in depreciation expense due to capital projects placed in service; and |
• | a decrease of $12.3 million due primarily to lower realized NGL and natural gas prices, net of hedges, in our Natural Gas Gathering and Processing segment; offset partially by |
• | an increase of $67.6 million due to volume growth primarily in the Williston Basin and STACK and SCOOP areas in our Natural Gas Gathering and Processing segment and the Rocky Mountain region and the Permian Basin, offset partially by $23.9 million in lower volumes in the Mid-Continent region due primarily to increased ethane rejection in our Natural Gas Liquids segment; |
• | an increase of $31.0 million due to higher average fee rates primarily in the Permian Basin in our Natural Gas Liquids segment; and |
• | an increase of $15.9 million from higher transportation services due primarily to firm transportation capacity contracted due to our completed expansion projects in our Natural Gas Pipelines segment. |
Operating income increased for the nine months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | an increase of $184.1 million due to volume growth primarily in the Rocky Mountain region, STACK and SCOOP areas and the Permian Basin in our Natural Gas Liquids segment and the Williston Basin and STACK and SCOOP areas in our Natural Gas Gathering and Processing segment; |
• | an increase of $73.2 million due to higher average fee rates primarily in the Permian Basin and Rocky Mountain region in our Natural Gas Liquids segment; and |
• | an increase of $50.6 million from higher transportation services due primarily to firm transportation capacity contracted due to our completed expansion projects in our Natural Gas Pipelines segment; offset partially by |
• | a decrease of $57.2 million in optimization and marketing earnings due primarily to wide location price differentials in the prior year, particularly in the third quarter 2018 in our Natural Gas Liquids segment; |
• | an increase of $52.9 million in operating costs due primarily to higher employee-related costs associated with labor and benefits and spending on routine maintenance projects; |
• | an increase of $45.9 million due primarily to rail transportation costs in our Natural Gas Liquids segment; |
• | an increase of $32.7 million in depreciation expense due to capital projects placed in service; and |
• | a decrease of $27.7 million in exchange services due primarily to narrower product price differentials and higher unfractionated NGLs in inventory in our Natural Gas Liquids segment. |
Net income decreased for the three months ended September 30, 2019, compared with the same period in 2018, due primarily to the items discussed above, offset partially by higher allowance for equity funds used during construction related to our capital-growth projects. Net income increased for the nine months ended September 30, 2019, compared with the same period in 2018, due to the items discussed above and higher allowance for equity funds used during construction related to our capital-growth projects. The three and nine months ended September 30, 2019 were impacted by higher interest expense related to our underwritten public debt offerings in March and August 2019.
Capital expenditures increased for the three and nine months ended September 30, 2019, compared with the same periods in 2018, due primarily to spending on our announced capital-growth projects.
Additional information regarding our financial results and operating information is provided in the following discussion for each of our segments.
Natural Gas Gathering and Processing
Overview - Our Natural Gas Gathering and Processing segment provides midstream services to producers in North Dakota, Montana, Wyoming, Kansas and Oklahoma. Raw natural gas is typically gathered at the wellhead, compressed and transported through pipelines to our processing facilities. Processed natural gas, usually referred to as residue natural gas, is then
49
recompressed and delivered to natural gas pipelines, storage facilities and end users. The NGLs separated from the raw natural gas are sold and delivered through NGL pipelines to fractionation facilities for further processing.
Our Natural Gas Gathering and Processing segment’s earnings are primarily fee-based, but we have some direct commodity price exposure related primarily to POP contracts. To mitigate the impact of this commodity price exposure, we have hedged a significant portion of our Natural Gas Gathering and Processing segment’s commodity price risk for the remainder of 2019 and 2020. This segment has substantial long-term acreage dedications in some of the most productive areas of the Williston Basin and Mid-Continent region, specifically the STACK and SCOOP areas, which helps to mitigate volumetric risk.
Growth Projects - Our Natural Gas Gathering and Processing segment is investing in growth projects in NGL-rich areas, including the Bakken Shale and Three Forks formations in the Williston Basin, that we expect will enable us to meet the needs of crude oil and natural gas producers in those areas. See “Growth Projects” in the “Recent Developments” section for discussion of our announced capital-growth projects.
For a discussion of our capital expenditure financing, see “Capital Expenditures” in the “Liquidity and Capital Resources” section.
Selected Financial Results - The following table sets forth certain selected financial results for our Natural Gas Gathering and Processing segment for the periods indicated:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | ||||||||||||||||||||
September 30, | September 30, | 2019 vs. 2018 | 2019 vs. 2018 | ||||||||||||||||||||
Financial Results | 2019 | 2018 | 2019 | 2018 | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
NGL sales | $ | 198.2 | $ | 451.7 | $ | 743.8 | $ | 1,206.7 | $ | (253.5 | ) | $ | (462.9 | ) | |||||||||
Condensate sales | 46.7 | 49.5 | 146.2 | 155.5 | (2.8 | ) | (9.3 | ) | |||||||||||||||
Residue natural gas sales | 185.3 | 245.5 | 725.7 | 709.1 | (60.2 | ) | 16.6 | ||||||||||||||||
Gathering, compression, dehydration and processing fees and other revenue | 46.0 | 44.6 | 137.4 | 128.9 | 1.4 | 8.5 | |||||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (210.7 | ) | (542.5 | ) | (971.4 | ) | (1,478.0 | ) | (331.8 | ) | (506.6 | ) | |||||||||||
Operating costs, excluding noncash compensation adjustments | (87.4 | ) | (88.4 | ) | (259.2 | ) | (262.9 | ) | (1.0 | ) | (3.7 | ) | |||||||||||
Equity in net earnings (loss) from investments | (1.8 | ) | — | (4.7 | ) | 0.9 | (1.8 | ) | (5.6 | ) | |||||||||||||
Other | (1.0 | ) | (0.8 | ) | (3.6 | ) | (3.2 | ) | (0.2 | ) | (0.4 | ) | |||||||||||
Adjusted EBITDA | $ | 175.3 | $ | 159.6 | $ | 514.2 | $ | 457.0 | $ | 15.7 | $ | 57.2 | |||||||||||
Capital expenditures | $ | 245.7 | $ | 213.0 | $ | 674.1 | $ | 433.6 | $ | 32.7 | $ | 240.5 |
See reconciliation of net income to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
Adjusted EBITDA increased $15.7 million for the three months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | an increase of $22.3 million due primarily to natural gas volume growth in the Williston Basin and STACK and SCOOP areas, offset partially by natural production declines; and |
• | an increase of $6.7 million due to unfavorable contract settlements in the prior year; offset partially by |
• | a decrease of $12.3 million due primarily to lower realized NGL and natural gas prices, net of hedges. |
Adjusted EBITDA increased $57.2 million for the nine months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | an increase of $74.4 million due primarily to natural gas volume growth in the Williston Basin and STACK and SCOOP areas, offset partially by natural production declines; and |
• | a decrease of $3.7 million in operating costs due primarily to lower outside services and materials and supplies, offset partially by higher employee-related costs due to growth of our operations; offset partially by |
50
• | a decrease of $13.4 million due primarily to lower realized NGL and natural gas prices, net of hedges; and |
• | a decrease of $5.6 million due primarily to lower equity in net earnings from investments due to a decrease in supply volumes in the dry natural gas area of the Powder River Basin. |
Capital expenditures increased for the three and nine months ended September 30, 2019, compared with the same periods in 2018, due to our announced capital-growth projects.
Selected Operating Information - The following table sets forth selected operating information for our Natural Gas Gathering and Processing segment for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Operating Information (a) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Natural gas gathered (BBtu/d) | 2,825 | 2,582 | 2,742 | 2,516 | |||||||||||
Natural gas processed (BBtu/d) (b) | 2,624 | 2,447 | 2,544 | 2,366 | |||||||||||
NGL sales (MBbl/d) | 233 | 195 | 223 | 195 | |||||||||||
Residue natural gas sales (BBtu/d) (b) | 1,206 | 1,145 | 1,189 | 1,046 | |||||||||||
Average fee rate ($/MMBtu) | $ | 0.92 | $ | 0.92 | $ | 0.92 | $ | 0.90 |
(a) - Includes volumes for consolidated entities only.
(b) - Includes volumes we processed at company-owned and third-party facilities.
Our natural gas gathered and processed volumes increased for the three and nine months ended September 30, 2019, compared with the same periods in 2018, due primarily to our capital-growth projects and continued producer improvements in production due to enhanced completion techniques, offset partially by natural production declines.
Commodity Price Risk - See discussion regarding our commodity price risk under “Commodity Price Risk” in Item 3, Quantitative and Qualitative Disclosures about Market Risk in this Quarterly Report.
Natural Gas Liquids
Overview - Our Natural Gas Liquids segment owns and operates facilities that gather, fractionate, treat and distribute NGLs and store NGL products, primarily in Oklahoma, Kansas, Texas, New Mexico and the Rocky Mountain region, which includes the Williston, Powder River and DJ Basins, where we provide midstream services to producers of NGLs and deliver those products to the two primary market centers, one in the Mid-Continent in Conway, Kansas, and the other in the Gulf Coast in Mont Belvieu, Texas. We own or have an ownership interest in FERC-regulated NGL gathering and distribution pipelines in Oklahoma, Kansas, Texas, New Mexico, Montana, North Dakota, Wyoming and Colorado, and terminal and storage facilities in Missouri, Nebraska, Iowa and Illinois. We also own FERC-regulated NGL distribution pipelines in Kansas, Missouri, Nebraska, Iowa, Illinois and Indiana that connect our Mid-Continent assets with Midwest markets, including Chicago, Illinois. A portion of our ONEOK North System transports refined petroleum products, including unleaded gasoline and diesel, from Kansas to Iowa. The majority of the pipeline-connected natural gas processing plants in Oklahoma, Kansas and the Texas Panhandle are connected to our NGL gathering systems. We own and operate truck- and rail-loading and -unloading facilities connected to our NGL fractionation and pipeline assets.
Growth Projects - Our Natural Gas Liquids segment invests in projects to transport, fractionate, store and deliver to the market center NGL supply from shale and other resource development areas. Our growth strategy is focused around connecting diversified supply basins from the Rocky Mountain region through the Mid-Continent region and the Permian Basin with NGL product demand from the petrochemical industry and NGL export demand in the Gulf Coast. Growing crude oil, natural gas and NGL production together with higher petrochemical and export demand have resulted in us making additional capital investments to expand our infrastructure and alleviate system constraints. See “Growth Projects” in the “Recent Developments” section for discussion of our announced capital-growth projects.
In the nine months ended September 30, 2019, we connected seven third-party natural gas processing plants to our NGL system, five in the Mid-Continent region, one in the Permian Basin and one in the Rocky Mountain region. In addition, five third-party natural gas processing plants connected to our system were expanded, two in the Mid-Continent region, two in the Permian Basin and one in the Rocky Mountain region.
For a discussion of our capital expenditure financing, see “Capital Expenditures” in the “Liquidity and Capital Resources” section.
51
Selected Financial Results - The following table sets forth certain selected financial results for our Natural Gas Liquids segment for the periods indicated:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | ||||||||||||||||||||
September 30, | September 30, | 2019 vs. 2018 | 2019 vs. 2018 | ||||||||||||||||||||
Financial Results | 2019 | 2018 | 2019 | 2018 | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
NGL and condensate sales | $ | 1,746.6 | $ | 2,861.9 | $ | 5,826.3 | $ | 7,884.2 | $ | (1,115.3 | ) | $ | (2,057.9 | ) | |||||||||
Exchange service revenues and other | 107.5 | 119.1 | 316.9 | 304.8 | (11.6 | ) | 12.1 | ||||||||||||||||
Transportation and storage revenues | 46.4 | 45.3 | 141.4 | 143.7 | 1.1 | (2.3 | ) | ||||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (1,438.2 | ) | (2,544.9 | ) | (4,914.5 | ) | (7,009.4 | ) | (1,106.7 | ) | (2,094.9 | ) | |||||||||||
Operating costs, excluding noncash compensation adjustments | (109.3 | ) | (97.5 | ) | (322.9 | ) | (275.2 | ) | 11.8 | 47.7 | |||||||||||||
Equity in net earnings from investments | 15.9 | 16.5 | 49.4 | 49.5 | (0.6 | ) | (0.1 | ) | |||||||||||||||
Other | (1.4 | ) | (1.4 | ) | (4.7 | ) | (4.4 | ) | — | (0.3 | ) | ||||||||||||
Adjusted EBITDA | $ | 367.5 | $ | 399.0 | $ | 1,091.9 | $ | 1,093.2 | $ | (31.5 | ) | $ | (1.3 | ) | |||||||||
Capital expenditures | $ | 738.0 | $ | 444.8 | $ | 1,969.1 | $ | 786.6 | $ | 293.2 | $ | 1,182.5 |
See reconciliation of net income to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
Adjusted EBITDA decreased $31.5 million for the three months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | a decrease of $46.8 million in optimization and marketing due primarily to wide location price differentials in the third quarter 2018; and |
• | an increase of $11.8 million in operating costs due primarily to spending on routine maintenance projects; offset partially by |
• | an increase of $27.8 million in exchange services due to $45.3 million in higher volumes primarily in the Rocky Mountain region and the Permian Basin and $31.0 million in higher average fee rates primarily in the Permian Basin, offset partially by $23.9 million in lower volumes in the Mid-Continent region due primarily to increased ethane rejection, $17.1 million related to higher unfractionated NGLs in inventory, $7.2 million due primarily to narrower product price differentials and $3.7 million due primarily to higher rail transportation costs. |
Adjusted EBITDA was relatively unchanged for the nine months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | a decrease of $57.2 million in optimization and marketing due to a decrease of $77.1 million related to wide location price differentials in the prior year, particularly in the third quarter 2018, offset partially by higher marketing earnings of $9.0 million related primarily to the sale of NGL products previously held in inventory, $7.8 million in increased optimization volume and $3.1 million in higher earnings related primarily to product price differentials; and |
• | an increase of $47.7 million in operating costs due primarily to higher employee-related costs associated with labor and benefits and spending on routine maintenance projects; offset partially by |
• | an increase of $109.0 million in exchange services due to $109.7 million in higher volumes primarily in the Rocky Mountain region, STACK and SCOOP areas and the Permian Basin, $73.2 million in higher average fee rates primarily in the Permian Basin and Rocky Mountain region, offset partially by $45.9 million due primarily to higher rail transportation costs, $18.5 million due primarily to narrower product price differentials and $9.2 million related to higher unfractionated NGLs in inventory. |
Capital expenditures increased for the three and nine months ended September 30, 2019, compared with the same periods in 2018, due primarily to our announced capital-growth projects.
52
Selected Operating Information - The following table sets forth selected operating information for our Natural Gas Liquids segment for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
Operating Information | 2019 | 2018 | 2019 | 2018 | |||||||||||
Raw feed throughput (MBbl/d) (a) | 1,086 | 1,056 | 1,074 | 1,001 | |||||||||||
NGLs transported-gathering lines (MBbl/d) (b) | 998 | 956 | 974 | 905 | |||||||||||
NGLs fractionated (MBbl/d) (c) | 710 | 732 | 728 | 707 | |||||||||||
Average Conway-to-Mont Belvieu OPIS price differential - ethane in ethane/propane mix ($/gallon) | $ | 0.08 | $ | 0.24 | $ | 0.08 | $ | 0.16 |
(a) - Represents physical raw feed volumes on which we charge a fee for transportation and/or fractionation services.
(b) - Includes volumes for consolidated entities only.
(c) - Includes volumes at company-owned and third-party facilities.
Volumes increased for the three months ended September 30, 2019, compared with the same period in 2018, primarily in the Rocky Mountain region and the Permian Basin, as a result of increased production, offset partially by lower volumes in the Mid-Continent region due primarily to increased ethane rejection. Volumes increased for the nine months ended September 30, 2019, compared to the same period in 2018, primarily in the Rocky Mountain region, STACK and SCOOP areas and the Permian Basin. While overall volumes increased, a portion of the contractual fees associated with those volumes gathered and fractionated was previously being earned under contracts with minimum volume obligations.
Natural Gas Pipelines
Overview - Our Natural Gas Pipelines segment provides transportation and storage services to end users through its wholly owned assets and its 50% ownership interests in Northern Border Pipeline and Roadrunner.
Our natural gas pipelines primarily serve end users, such as natural gas distribution and electric-generation companies, that require natural gas to operate their businesses regardless of location price differentials. The development of shale and other resource areas has continued to increase available natural gas supply, and we expect producers to demand incremental transportation services in the future as additional supply is developed.
Growth Projects - We expanded our natural gas pipeline infrastructure in Oklahoma and the Permian Basin. The projects included an eastbound expansion of our ONEOK Gas Transportation system by 150 MMcf/d from the STACK and SCOOP areas to an interstate pipeline delivery point in eastern Oklahoma, a westbound expansion of our ONEOK Gas Transportation system by 100 MMcf/d from the STACK area to multiple interstate pipeline delivery points in western Oklahoma and an expansion of our WesTex Transmission system by 300 MMcf/d from the Permian Basin to interstate pipeline delivery points in the Texas Panhandle. Additionally, we completed an expansion project on our Roadrunner joint venture to make the pipeline bidirectional, which resulted in approximately 1.0 Bcf/d of eastbound transportation capacity from the Delaware Basin to the Waha area.
53
Selected Financial Results - The following table sets forth certain selected financial results and operating information for our Natural Gas Pipelines segment for the periods indicated:
Three Months Ended | Nine Months Ended | Three Months | Nine Months | ||||||||||||||||||||
September 30, | September 30, | 2019 vs. 2018 | 2019 vs. 2018 | ||||||||||||||||||||
Financial Results | 2019 | 2018 | 2019 | 2018 | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||
Transportation revenues | $ | 93.0 | $ | 84.5 | $ | 270.4 | $ | 245.4 | $ | 8.5 | $ | 25.0 | |||||||||||
Storage revenues | 15.4 | 13.6 | 47.2 | 44.3 | 1.8 | 2.9 | |||||||||||||||||
Residue natural gas sales and other revenues | 13.1 | 7.1 | 37.9 | 25.2 | 6.0 | 12.7 | |||||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (0.4 | ) | (2.4 | ) | (3.8 | ) | (10.5 | ) | (2.0 | ) | (6.7 | ) | |||||||||||
Operating costs, excluding noncash compensation adjustments | (38.6 | ) | (35.4 | ) | (108.1 | ) | (100.2 | ) | 3.2 | 7.9 | |||||||||||||
Equity in net earnings from investments | 23.5 | 22.8 | 70.4 | 65.7 | 0.7 | 4.7 | |||||||||||||||||
Other | (2.2 | ) | (0.1 | ) | (3.0 | ) | (0.8 | ) | (2.1 | ) | (2.2 | ) | |||||||||||
Adjusted EBITDA | $ | 103.8 | $ | 90.1 | $ | 311.0 | $ | 269.1 | $ | 13.7 | $ | 41.9 | |||||||||||
Capital expenditures | $ | 27.8 | $ | 31.5 | $ | 77.9 | $ | 71.9 | $ | (3.7 | ) | $ | 6.0 |
See reconciliation of net income to adjusted EBITDA in the “Adjusted EBITDA” section.
Adjusted EBITDA increased $13.7 million for the three months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | an increase of $15.9 million from higher transportation services due primarily to firm transportation capacity contracted due to our completed expansion projects; offset partially by |
• | an increase of $3.2 million in operating costs due primarily to materials and ad valorem taxes due to the growth of our operations. |
Adjusted EBITDA increased $41.9 million for the nine months ended September 30, 2019, compared with the same period in 2018, primarily as a result of the following:
• | an increase of $50.6 million from higher transportation services due primarily to firm transportation capacity contracted due to our completed expansion projects; and |
• | an increase of $4.7 million from higher equity in net earnings due primarily to increased firm transportation capacity contracted on Roadrunner; offset partially by |
• | an increase of $7.9 million in operating costs due primarily to employee-related costs and ad valorem taxes due to the growth of our operations; and |
• | a decrease of $7.2 million from lower net retained fuel and timing of equity gas sales. |
Capital expenditures decreased for the three months ended September 30, 2019, compared with the same period in 2018, due primarily to timing of maintenance projects. Capital expenditures increased for the nine months ended September 30, 2019, compared with the same period in 2018, due primarily to capital-growth projects.
Selected Operating Information - The following table sets forth selected operating information for our Natural Gas Pipelines segment for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
Operating Information (a) | 2019 | 2018 | 2019 | 2018 | |||||||
Natural gas transportation capacity contracted (MDth/d) | 7,628 | 6,812 | 7,568 | 6,747 | |||||||
Transportation capacity contracted | 98 | % | 96 | % | 98 | % | 95 | % |
(a) - Includes volumes for consolidated entities only.
Natural gas transportation capacity contracted increased for the three and nine months ended September 30, 2019, compared with the same periods in 2018, due to our completed expansion projects on our ONEOK Gas Transportation and WesTex Transmission systems, which are both substantially contracted.
54
Roadrunner, in which we have a 50% ownership interest, has contracted all of its westbound capacity through 2041.
Northern Border Pipeline, in which we have a 50% ownership interest, has contracted substantially all of its long-haul transportation capacity through the fourth quarter 2020.
In June 2019, our subsidiary, Viking Gas Transmission Company, filed a proposed change in rates pursuant to Section 4 of the Natural Gas Act with the FERC. The FERC is currently reviewing the filing. The ultimate outcome of the filing cannot be predicted. We do not expect the ultimate outcome to impact materially our results of operations.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure of our financial performance. Adjusted EBITDA is defined as net income adjusted for interest expense, depreciation and amortization, noncash impairment charges, income taxes, allowance for equity funds used during construction, noncash compensation expense and other noncash items. We believe this non-GAAP financial measure is useful to investors because it and similar measures are used by many companies in our industry as a measurement of financial performance and is commonly employed by financial analysts and others to evaluate our financial performance and to compare financial performance among companies in our industry. Adjusted EBITDA should not be considered an alternative to net income, earnings per share or any other measure of financial performance presented in accordance with GAAP. Additionally, this calculation may not be comparable with similarly titled measures of other companies.
The following table sets forth a reconciliation of net income, the nearest comparable GAAP financial performance measure, to adjusted EBITDA for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Reconciliation of net income to adjusted EBITDA | (Thousands of dollars) | |||||||||||||||
Net income | $ | 309,155 | $ | 313,916 | $ | 958,326 | $ | 862,144 | ||||||||
Add: | ||||||||||||||||
Interest expense, net of capitalized interest | 129,577 | 121,910 | 362,490 | 351,131 | ||||||||||||
Depreciation and amortization | 121,430 | 107,383 | 350,552 | 317,908 | ||||||||||||
Income taxes | 97,365 | 102,983 | 274,234 | 266,285 | ||||||||||||
Noncash compensation expense | 9,757 | 5,829 | 20,412 | 27,195 | ||||||||||||
Equity AFUDC and other noncash items | (17,532 | ) | (1,834 | ) | (46,357 | ) | (2,305 | ) | ||||||||
Adjusted EBITDA | $ | 649,752 | $ | 650,187 | $ | 1,919,657 | $ | 1,822,358 | ||||||||
Reconciliation of segment adjusted EBITDA to adjusted EBITDA | ||||||||||||||||
Segment adjusted EBITDA: | ||||||||||||||||
Natural Gas Gathering and Processing | $ | 175,292 | $ | 159,599 | $ | 514,159 | $ | 457,016 | ||||||||
Natural Gas Liquids | 367,462 | 399,026 | 1,091,863 | 1,093,166 | ||||||||||||
Natural Gas Pipelines | 103,819 | 90,106 | 311,011 | 269,097 | ||||||||||||
Other | 3,179 | 1,456 | 2,624 | 3,079 | ||||||||||||
Adjusted EBITDA | $ | 649,752 | $ | 650,187 | $ | 1,919,657 | $ | 1,822,358 |
CONTINGENCIES
See Note J of the Notes to Consolidated Financial Statements in this Quarterly Report for a discussion of developments concerning the Gas Index Pricing Litigation.
Other Legal Proceedings - We are a party to various litigation matters and claims that have arisen in the normal course of our operations. While the results of these litigation matters and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable final outcome of such matters will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.
55
LIQUIDITY AND CAPITAL RESOURCES
General - Our primary sources of cash inflows are operating cash flows, proceeds from our commercial paper program and our $2.5 Billion Credit Agreement, debt issuances and the issuance of common stock for our liquidity and capital resources requirements. In addition, we expect cash outflows related to (i) capital expenditures, (ii) interest and repayment of debt maturities and (iii) dividends paid to shareholders. We expect our cash outflows related to capital expenditures and dividends paid to increase due to our announced capital-growth projects and higher anticipated dividends per share, subject to board of directors’ approval.
We expect our sources of cash inflow to provide sufficient resources to finance our operations, capital expenditures and quarterly cash dividends, including expected future dividend increases. Our $2.5 Billion Credit Agreement, which expires in June 2024, and cash on hand from our August 2019 debt issuance provide significant liquidity to fund capital expenditures and repay existing indebtedness. We may access the capital markets to issue debt or equity securities as we consider prudent to provide additional liquidity to refinance existing debt, improve credit metrics or to fund capital expenditures. Although we expect to continue to fund capital projects primarily with cash from operations, short-term borrowings and long-term debt, we continue to have access to $550 million available through our “at-the-market” equity program and the ability to issue equity and other securities under our universal shelf registration statement.
We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. For additional information on our interest-rate swaps, see Note C of the Notes to Consolidated Financial Statements in this Quarterly Report.
Cash Management - We use a centralized cash management program that concentrates the cash assets of our operating subsidiaries in joint accounts for the purposes of providing financial flexibility and lowering the cost of borrowing, transaction costs and bank fees. Our centralized cash management program provides that funds in excess of the daily needs of our operating subsidiaries are concentrated, consolidated or otherwise made available for use by other entities within our consolidated group. Our operating subsidiaries participate in this program to the extent they are permitted pursuant to FERC regulations or their operating agreements. Under the cash management program, depending on whether a participating subsidiary has short-term cash surpluses or cash requirements, we provide cash to the subsidiary or the subsidiary provides cash to us.
Short-term Liquidity - Our principal sources of short-term liquidity consist of cash generated from operating activities, distributions received from our equity-method investments, proceeds from our commercial paper program and our $2.5 Billion Credit Agreement. As of September 30, 2019, we are in compliance with all covenants of our $2.5 Billion Credit Agreement.
At September 30, 2019, we had $673.3 million of cash and cash equivalents and $2.5 billion of borrowing capacity under our $2.5 Billion Credit Agreement.
As of September 30, 2019, we had a working capital surplus of $400.4 million (defined as current assets less current liabilities). Generally, our working capital is influenced by several factors, including, among other things: (i) the timing of (a) debt and equity issuances, (b) the funding of capital expenditures, (c) scheduled debt payments, and (d) the collection and payment of accounts receivable and payable; and (ii) the volume and cost of inventory and commodity imbalances. We may have working capital deficits in future periods as we continue to finance our capital-growth projects and repay long-term debt, often initially with short-term borrowings. Our decision to utilize short-term borrowings rather than long-term debt, due to more favorable interest rates, may also contribute to a working capital deficit.
For additional information on our $2.5 Billion Credit Agreement, see Note D of the Notes to Consolidated Financial Statements in this Quarterly Report.
Long-term Financing - In addition to our principal sources of short-term liquidity discussed above, we expect to fund our longer-term financing requirements by issuing long-term notes. Other options to obtain financing include, but are not limited to, issuance of common stock, loans from financial institutions, issuance of convertible debt securities or preferred equity securities, asset securitization and the sale and lease-back of facilities.
Debt Issuances - In August 2019, we completed an underwritten public offering of $2.0 billion senior unsecured notes consisting of $500 million, 2.75% senior notes due 2024; $750 million, 3.4% senior notes due 2029; and $750 million, 4.45% senior notes due 2049. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.97 billion. A portion of the proceeds were, and the remainder will be, used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
56
In March 2019, we completed an underwritten public offering of $1.25 billion senior unsecured notes consisting of $700 million, 4.35% senior notes due 2029 and an additional issuance of $550 million of our existing 5.2% senior notes due 2048. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, and exclusive of accrued interest, were $1.23 billion. The proceeds were used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
In November 2018, we entered into our $1.5 Billion Term Loan Agreement with a syndicate of banks, which was fully drawn as of June 30, 2019. We repaid $250 million of our outstanding balance in August 2019 and have $1.25 billion drawn as of September 30, 2019. Our $1.5 Billion Term Loan Agreement matures in November 2021 and bears interest at LIBOR plus 112.5 basis points based on our current credit ratings. The agreement contains substantially the same covenants as those contained in our $2.5 Billion Credit Agreement. The proceeds were used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
Debt Repayments - In September 2019, we redeemed our $300 million, 3.8% senior notes due March 2020 at a redemption price of $308.0 million, including the outstanding principal, plus accrued and unpaid interest, with cash on hand from our public offering of $2.0 billion senior unsecured notes in August 2019.
In August 2019, we repaid $250 million of our $1.5 Billion Term Loan Agreement with cash on hand.
In March 2019, we repaid our $500 million, 8.625% senior notes at maturity with a combination of cash on hand and short-term borrowings.
For additional information on our long-term debt, see Note D of the Notes to Consolidated Financial Statements in this Quarterly Report.
Capital Expenditures - We classify expenditures that are expected to generate additional revenue, return on investment or significant operating efficiencies as capital-growth expenditures. Maintenance capital expenditures are those capital expenditures required to maintain our existing assets and operations and do not generate additional revenues. Maintenance capital expenditures are made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives. Our capital expenditures are financed typically through operating cash flows, short- and long-term debt and the issuance of equity.
Capital expenditures, excluding AFUDC and capitalized interest, were $2.7 billion and $1.3 billion for the nine months ended September 30, 2019 and 2018, respectively.
We expect our total 2019 growth capital expenditures to range from $3.5 billion to $3.7 billion and our maintenance capital expenditures to range from $185 million to $205 million, excluding AFUDC and capitalized interest. See discussion of our announced capital-growth projects in the “Recent Developments” section.
Credit Ratings - Our long-term debt credit ratings as of October 21, 2019, are shown in the table below:
Rating Agency | Long-Term Rating | Short-Term Rating | Outlook |
Moody’s | Baa3 | Prime-3 | Positive |
S&P | BBB | A-2 | Stable |
Our credit ratings, which are investment grade, may be affected by a material change in our financial ratios or a material event affecting our business and industry. The most common criteria for assessment of our credit ratings are the debt-to-EBITDA ratio, interest coverage, business risk profile and liquidity. If our credit ratings were downgraded, our cost to borrow funds under our $2.5 Billion Credit Agreement and our $1.5 Billion Term Loan Agreement would increase and a potential loss of access to the commercial paper market could occur. In the event that we are unable to borrow funds under our commercial paper program and there has not been a material adverse change in our business, we would continue to have access to our $2.5 Billion Credit Agreement, which expires in 2024. An adverse credit rating change alone is not a default under our $2.5 Billion Credit Agreement or our $1.5 Billion Term Loan Agreement. We do not expect a downgrade in our credit rating to have a material impact on our results of operations.
In the normal course of business, our counterparties provide us with secured and unsecured credit. In the event of a downgrade in our credit ratings or a significant change in our counterparties’ evaluation of our creditworthiness, we could be required to provide additional collateral in the form of cash, letters of credit or other negotiable instruments as a condition of continuing to
57
conduct business with such counterparties. We may be required to fund margin requirements with our counterparties with cash, letters of credit or other negotiable instruments.
Dividends - Holders of our common stock share equally in any dividend declared by our board of directors, subject to the rights of the holders of outstanding preferred stock. Dividends paid on our common stock in February 2019, May 2019 and August 2019 were $0.86 per share, $0.865 per share and $0.89 per share, respectively. A dividend of $0.915 per share was declared for the shareholders of record at the close of business on November 4, 2019, payable November 14, 2019.
Our Series E Preferred Stock pays 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% per year. We paid dividends for the Series E Preferred Stock of $0.3 million in February 2019, May 2019 and August 2019. Dividends totaling $0.3 million were declared for the Series E Preferred Stock and are payable November 14, 2019.
For the nine months ended September 30, 2019, cash flows from operations exceeded cash dividends paid by $247.5 million. We expect our cash flows from operations to continue to sufficiently fund our cash dividends. To the extent operating cash flows are not sufficient to fund our dividends, we may utilize short- and long-term debt and issuances of equity, as necessary or appropriate.
CASH FLOW ANALYSIS
We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that affect net income but do not result in actual cash receipts or payments during the period and for operating cash items that do not impact net income. These reconciling items can include depreciation and amortization, impairment charges, allowance for equity funds used during construction, gain or loss on sale of assets, deferred income taxes, net undistributed earnings from equity-method investments, share-based compensation expense, other amounts and changes in our assets and liabilities not classified as investing or financing activities.
The following table sets forth the changes in cash flows by operating, investing and financing activities for the periods indicated:
Variances | |||||||||||
Nine Months Ended | 2019 vs. 2018 | ||||||||||
September 30, | Favorable (Unfavorable) | ||||||||||
2019 | 2018 | ||||||||||
(Millions of dollars) | |||||||||||
Total cash provided by (used in): | |||||||||||
Operating activities | $ | 1,326.8 | $ | 1,516.5 | $ | (189.7 | ) | ||||
Investing activities | (2,647.9 | ) | (1,289.8 | ) | (1,358.1 | ) | |||||
Financing activities | 1,982.4 | (179.4 | ) | 2,161.8 | |||||||
Change in cash and cash equivalents | 661.3 | 47.3 | 614.0 | ||||||||
Cash and cash equivalents at beginning of period | 12.0 | 37.2 | (25.2 | ) | |||||||
Cash and cash equivalents at end of period | $ | 673.3 | $ | 84.5 | $ | 588.8 |
Operating Cash Flows - Operating cash flows are affected by earnings from our business activities and changes in our operating assets and liabilities. Changes in commodity prices and demand for our services or products, whether because of general economic conditions, changes in supply, changes in demand for the end products that are made with our products or increased competition from other service providers, could affect our earnings and operating cash flows. Our operating cash flows can also be impacted by changes in our natural gas and NGL inventory balances, which are driven primarily by commodity prices, supply, demand and the operation of our assets.
Cash flows from operating activities, before changes in operating assets and liabilities for the nine months ended September 30, 2019, increased $94.3 million, compared with the same period in 2018. This increase is due primarily to higher earnings resulting from volume growth primarily in the Rocky Mountain region, STACK and SCOOP areas and the Permian Basin in our Natural Gas Liquids segment and the Williston Basin and STACK and SCOOP areas in our Natural Gas Gathering and Processing segment, as discussed in “Financial Results and Operating Information.”
58
The changes in operating assets and liabilities decreased operating cash flows $239.2 million for the nine months ended September 30, 2019, compared with an increase of $44.8 million for the same period in 2018. This change is due primarily to the change in the fair value of our risk-management assets and liabilities; the change in accounts receivable, accounts payable, and other accruals and deferrals resulting from the timing of receipt of cash from customers and payments to vendors, suppliers and other third parties; and the change in natural gas and NGLs in storage, which varies from period to period and varies with the changes in commodity prices.
Investing Cash Flows - Cash used in investing activities for the nine months ended September 30, 2019, increased $1.4 billion compared with the same period in 2018, due primarily to increased capital expenditures related to our capital-growth projects.
Financing Cash Flows - Cash from financing activities for the nine months ended September 30, 2019, increased $2.2 billion compared with the same period in 2018, due primarily to the issuance of $3.25 billion in senior unsecured notes, the $700 million net draw on our $1.5 Billion Term Loan Agreement and the repayment of short-term borrowings in 2018, offset partially by a decrease due to issuances of common stock in 2018.
REGULATORY, ENVIRONMENTAL AND SAFETY MATTERS
Environmental Matters - We are subject to a variety of historical preservation and environmental laws and/or regulations that affect many aspects of our present and future operations. Regulated activities include, but are not limited to, those involving air emissions, storm water and wastewater discharges, handling and disposal of solid and hazardous wastes, wetlands and waterways preservation, cultural resource protection, hazardous materials transportation, and pipeline and facility construction. These laws and regulations require us to obtain and/or comply with a wide variety of environmental clearances, registrations, licenses, permits and other approvals. Failure to comply with these laws, regulations, licenses and permits may expose us to fines, penalties and/or interruptions in our operations that could be material to our results of operations. For example, if a leak or spill of hazardous substances or petroleum products occurs from pipelines or facilities that we own, operate or otherwise use, we could be held jointly and severally liable for all resulting liabilities, including response, investigation and cleanup costs, which could affect materially our results of operations and cash flows. In addition, emissions controls and/or other regulatory or permitting mandates under the Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities. We cannot assure that existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us.
Additional information about our regulatory, environmental and safety matters can be found in “Regulatory, Environmental and Safety Matters” under Part I, Item 1, Business, in our Annual Report.
IMPACT OF NEW ACCOUNTING STANDARDS
See Note A of the Notes to Consolidated Financial Statements in this Quarterly Report for discussion of new accounting standards.
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of our Consolidated Financial Statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements. These estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ from our estimates.
Information about our estimates and critical accounting policies is included under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Estimates and Critical Accounting Policies,” in our Annual Report.
FORWARD-LOOKING STATEMENTS
Some of the statements contained and incorporated in this Quarterly Report are forward-looking statements as defined under federal securities laws. The forward-looking statements relate to our anticipated financial performance (including projected operating income, net income, capital expenditures, cash flows and projected levels of dividends), liquidity, management’s plans and objectives for our future capital-growth projects and other future operations (including plans to construct additional natural gas and NGL pipelines and processing facilities and related cost estimates), our business prospects, the outcome of regulatory and legal proceedings, market conditions and other matters. We make these forward-looking statements in reliance
59
on the safe harbor protections provided under federal securities legislation and other applicable laws. The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.
Forward-looking statements include the items identified in the preceding paragraph, the information concerning possible or assumed future results of our operations and other statements contained or incorporated in this Quarterly Report identified by words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “scheduled,” “should,” “will,” “would” and other words and terms of similar meaning.
One should not place undue reliance on forward-looking statements. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Those factors may affect our operations, markets, products, services and prices. In addition to any assumptions and other factors referred to specifically in connection with the forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement include, among others, the following:
• | competition from other United States and foreign energy suppliers and transporters, as well as alternative forms of energy, including, but not limited to, solar power, wind power, geothermal energy and biofuels such as ethanol and biodiesel; |
• | the capital intensive nature of our businesses; |
• | the profitability of assets or businesses acquired or constructed by us; |
• | risks of marketing, trading and hedging activities, including the risks of changes in energy prices or the financial condition of our counterparties; |
• | the uncertainty of estimates, including accruals and costs of environmental remediation; |
• | the effects of changes in governmental policies and regulatory actions, including changes with respect to income and other taxes, pipeline safety, environmental compliance, climate change initiatives and authorized rates of recovery of natural gas and natural gas transportation costs; |
• | the impact on drilling and production by factors beyond our control, including the demand for natural gas and crude oil; producers’ desire and ability to drill and obtain necessary permits; reserve performance; and capacity constraints on the pipelines that transport crude oil, natural gas and NGLs from producing areas and our facilities; |
• | difficulties or delays experienced by trucks, railroads or pipelines in delivering products to or from our terminals or pipelines; |
• | the effects of weather and other natural phenomena, including climate change, on our operations, demand for our services and energy prices; |
• | changes in demand for the use of natural gas, NGLs and crude oil because of market conditions caused by concerns about climate change; |
• | the impact of unforeseen changes in interest rates, debt and equity markets, inflation rates, economic recession and other external factors over which we have no control, including the effect on pension and postretirement expense and funding resulting from changes in equity and bond market returns; |
• | our indebtedness and guarantee obligations could make us vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantages compared with our competitors that have less debt or have other adverse consequences; |
• | actions by rating agencies concerning our credit; |
• | the results of administrative proceedings and litigation, regulatory actions, rule changes and receipt of expected clearances involving any local, state or federal regulatory body, including the FERC, the National Transportation Safety Board, the PHMSA, the EPA and CFTC; |
• | our ability to access capital at competitive rates or on terms acceptable to us; |
• | risks associated with adequate supply to our gathering, processing, fractionation and pipeline facilities, including production declines that outpace new drilling or extended periods of ethane rejection; |
• | the risk that material weaknesses or significant deficiencies in our internal controls over financial reporting could emerge or that minor problems could become significant; |
• | the impact and outcome of pending and future litigation; |
• | the timing and extent of changes in energy commodity prices; |
• | the ability to market pipeline capacity on favorable terms, including the effects of: |
– | future demand for and prices of natural gas, NGLs and crude oil; |
– | competitive conditions in the overall energy market; |
– | availability of supplies of United States natural gas and crude oil; and |
– | availability of additional storage capacity; |
60
• | performance of contractual obligations by our customers, service providers, contractors and shippers; |
• | the timely receipt of approval by applicable governmental entities for construction and operation of our pipeline and other projects and required regulatory clearances; |
• | our ability to acquire all necessary permits, consents or other approvals in a timely manner, to promptly obtain all necessary materials and supplies required for construction, and to construct gathering, processing, storage, fractionation and transportation facilities without labor or contractor problems; |
• | the mechanical integrity of facilities operated; |
• | demand for our services in the proximity of our facilities; |
• | our ability to control operating costs and make cost-saving changes; |
• | acts of nature, sabotage, terrorism or other similar acts that cause damage to our facilities or our suppliers’, customers’ or shippers’ facilities; |
• | economic climate and growth in the geographic areas in which we do business; |
• | the risk of a prolonged slowdown in growth or decline in the United States or international economies, including liquidity risks in United States or foreign credit markets; |
• | the impact of recently issued and future accounting updates and other changes in accounting policies; |
• | the possibility of future terrorist attacks or the possibility or occurrence of an outbreak of, or changes in, hostilities or changes in the political conditions throughout the world; |
• | the risk of increased costs for insurance premiums, security or other items as a consequence of terrorist attacks; |
• | risks associated with pending or possible acquisitions and dispositions, including our ability to finance or integrate any such acquisitions and any regulatory delay or conditions imposed by regulatory bodies in connection with any such acquisitions and dispositions; |
• | the impact of uncontracted capacity in our assets being greater or less than expected; |
• | the ability to recover operating costs and amounts equivalent to income taxes, costs of property, plant and equipment and regulatory assets in our state and FERC-regulated rates; |
• | the composition and quality of the natural gas and NGLs we gather and process in our plants and transport on our pipelines; |
• | the efficiency of our plants in processing natural gas and extracting and fractionating NGLs; |
• | the impact of potential impairment charges; |
• | the risk inherent in the use of information systems in our respective businesses, implementation of new software and hardware, and the impact on the timeliness of information for financial reporting; |
• | our ability to control construction costs and completion schedules of our pipelines and other projects; and |
• | the risk factors listed in the reports we have filed and may file with the SEC, which are incorporated by reference. |
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also have material adverse effects on our future results. These and other risks are described in greater detail in Part I, Item 1A, Risk Factors, in our Annual Report and in our other filings that we make with the SEC, which are available via the SEC’s website at www.sec.gov and our website at www.oneok.com. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Any such forward-looking statement speaks only as of the date on which such statement is made, and other than as required under securities laws, we undertake no obligation to update publicly any forward-looking statement whether as a result of new information, subsequent events or change in circumstances, expectations or otherwise.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our quantitative and qualitative disclosures about market risk are consistent with those discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report.
COMMODITY PRICE RISK
As part of our hedging strategy, we use commodity derivative financial instruments and physical-forward contracts described in Note C of the Notes to Consolidated Financial Statements in this Quarterly Report to reduce the impact of near-term price fluctuations of natural gas, NGLs and condensate.
Although our businesses are primarily fee-based, in our Natural Gas Gathering and Processing segment, we are exposed to commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with our POP with fee contracts. Under certain POP with fee contracts, our contractual fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. We are exposed to basis risk between the various production and market locations where we buy and sell commodities.
61
The following tables set forth hedging information for our Natural Gas Gathering and Processing segment’s forecasted equity volumes for the periods indicated:
Three Months Ending December 31, 2019 | |||||||||
Volumes Hedged | Average Price | Percentage Hedged | |||||||
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | 7.6 | $ | 0.71 | / gallon | 66% | ||||
Condensate (MBbl/d) - WTI-NYMEX | 2.6 | $ | 58.55 | / Bbl | 74% | ||||
Natural gas (BBtu/d) - NYMEX and basis | 82.0 | $ | 2.30 | / MMBtu | 71% |
Year Ending December 31, 2020 | |||||||||
Volumes Hedged | Average Price | Percentage Hedged | |||||||
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | 7.0 | $ | 0.58 | / gallon | 57% | ||||
Condensate (MBbl/d) - WTI-NYMEX | 2.0 | $ | 53.61 | / Bbl | 50% | ||||
Natural gas (BBtu/d) - NYMEX and basis | 87.5 | $ | 2.47 | / MMBtu | 81% |
Our Natural Gas Gathering and Processing segment’s commodity price sensitivity is estimated as a hypothetical change in the price of NGLs, crude oil and natural gas at September 30, 2019. Condensate sales are typically based on the price of crude oil. Assuming normal operating conditions, we estimate the following for our forecasted equity volumes:
• | a $0.01 per-gallon change in the composite price of NGLs, excluding ethane, would change adjusted EBITDA for the three months ending December 31, 2019, and for the year ending December 31, 2020, by approximately $0.4 million and $1.9 million, respectively; |
• | a $1.00 per-barrel change in the price of crude oil would change adjusted EBITDA for the three months ending December 31, 2019, and for the year ending December 31, 2020, by approximately $0.3 million and $1.4 million, respectively; and |
• | a $0.10 per-MMBtu change in the price of residue natural gas would change adjusted EBITDA for the three months ending December 31, 2019, and for the year ending December 31, 2020, by approximately $1.1 million and $4.0 million, respectively. |
These estimates do not include any effects of hedging or effects on demand for our services or natural gas processing plant operations that might be caused by, or arise in conjunction with, commodity price fluctuations. For example, a change in the gross processing spread may cause a change in the amount of ethane extracted from the natural gas stream, impacting gathering and processing financial results for certain contracts.
INTEREST-RATE RISK
We are exposed to interest-rate risk through borrowings under our $2.5 Billion Credit Agreement, $1.5 Billion Term Loan Agreement, commercial paper program and long-term debt issuances. Future increases in LIBOR, corporate commercial paper rates or corporate bond rates could expose us to increased interest costs on future borrowings. 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. In 2019, we entered into $625 million of forward-starting interest-rate swaps to hedge the variability of interest payments on a portion of our forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued. We also settled $1.8 billion of our forward-starting interest-rate swaps related to our underwritten public offerings of $1.25 billion senior unsecured notes in March 2019 and $2.0 billion senior unsecured notes in August 2019.
At September 30, 2019, and December 31, 2018, we had forward-starting interest-rate swaps with notional amounts totaling $1.8 billion and $3.0 billion, respectively, to hedge the variability of interest payments on a portion of our forecasted debt issuances. At September 30, 2019, and December 31, 2018, we had interest-rate swaps with notional amounts totaling $1.3 billion to hedge the variability of our LIBOR-based interest payments. All of our interest-rate swaps are designated as cash flow hedges.
See Note C of the Notes to Consolidated Financial Statements in this Quarterly Report for more information on our hedging activities.
62
COUNTERPARTY CREDIT RISK
We assess the creditworthiness of our counterparties on an ongoing basis and require security, including prepayments and other forms of collateral, when appropriate. Certain of our counterparties may be impacted by a relatively low commodity price environment and could experience financial problems, which could result in nonpayment and/or nonperformance, which could impact adversely our results of operations.
The creditworthiness of our counterparties and our customer concentration are consistent with those discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report.
ITEM 4. | CONTROLS AND PROCEDURES |
Quarterly Evaluation of Disclosure Controls and Procedures - Our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report based on the evaluation of the controls and procedures required by Rule 13a-15(e) and 15d-15(e) of the Exchange Act.
Changes in Internal Control Over Financial Reporting - There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Additional information about our legal proceedings is included in Note J of the Notes to Consolidated Financial Statements in this Quarterly Report and under Note N of the Notes to Consolidated Financial Statements in our Annual Report.
ITEM 1A. | RISK FACTORS |
Our investors should consider the risks set forth in Part I, Item 1A, Risk Factors, of our Annual Report that could affect us and our business. Although we have tried to discuss key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance. Investors should consider carefully the discussion of risks and the other information included or incorporated by reference in this Quarterly Report, including “Forward-Looking Statements,” which are included in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
Not applicable.
ITEM 6. | EXHIBITS |
Readers of this report should not rely on or assume the accuracy of any representation or warranty or the validity of any opinion contained in any agreement filed as an exhibit to this Quarterly Report, because such representation, warranty or opinion may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent an allocation of risk between parties in the particular transaction, may be qualified by materiality standards that differ from what may be
63
viewed as material for securities law purposes, or may no longer continue to be true as of any given date. All exhibits attached to this Quarterly Report are included for the purpose of complying with requirements of the SEC. Other than the certifications made by our officers pursuant to the Sarbanes-Oxley Act of 2002 included as exhibits to this Quarterly Report, all exhibits are included only to provide information to investors regarding their respective terms and should not be relied upon as constituting or providing any factual disclosures about us, any other persons, any state of affairs or other matters.
The following exhibits are filed as part of this Quarterly Report:
Exhibit No. | Exhibit Description |
3.1 | |
3.2 | |
4.1 | |
4.2 | |
4.3 | |
10.1 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document. |
101.DEF | Inline XBRL Taxonomy Extension Definitions Document. |
101.LAB | Inline XBRL Taxonomy Label Linkbase Document. |
101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document. |
64
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101). |
Attached as Exhibit 101 to this Quarterly Report are the following Inline XBRL-related documents: (i) Document and Entity Information; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018; (iv) Consolidated Balance Sheets at September 30, 2019, and December 31, 2018; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018; (vi) Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2019 and 2018; and (vii) Notes to Consolidated Financial Statements.
65
SIGNATURE
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ONEOK, Inc. | ||
Registrant | ||
Date: October 30, 2019 | By: | /s/ Walter S. Hulse III |
Walter S. Hulse III | ||
Chief Financial Officer, Treasurer and | ||
Executive Vice President, Strategic Planning | ||
and Corporate Affairs | ||
(Principal Financial Officer) |
66