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, 2022.
OR
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________.
Commission file number 001-13643
ONEOK, Inc.
(Exact name of registrant as specified in its charter)
| Oklahoma | 73-1520922 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
100 West Fifth Street, | Tulsa, | OK | 74103 | ||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
Registrant’s telephone number, including area code (918) 588-7000
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 24, 2022, the Company had 446,953,842 shares of common stock outstanding.
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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 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,” “target,” “guidance,” “intend,” “may,” “might,” “outlook,” “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,” and Part II, Item 1A, “Risk Factors,” in this Quarterly Report and under Part I, Item 1A, “Risk Factors,” in our Annual Report.
INFORMATION AVAILABLE ON OUR 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, Corporate Sustainability Report and the written charters of our Board Committees 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.
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GLOSSARY
The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:
| $2.5 Billion Credit Agreement | ONEOK’s $2.5 billion revolving credit agreement, as amended and restated | ||||
| AFUDC | Allowance for funds used during construction | ||||
| Annual Report | Annual Report on Form 10-K for the year ended December 31, 2021 | ||||
| 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 | ||||
| Btu | British thermal unit | ||||
| CFTC | U.S. Commodity Futures Trading Commission | ||||
| Clean Air Act | Federal Clean Air Act, as amended | ||||
| COVID-19 | Coronavirus disease 2019, including variants thereof | ||||
| DJ | Denver-Julesburg | ||||
| EBITDA | Earnings before interest expense, income taxes, depreciation and amortization | ||||
| EPA | United States Environmental Protection Agency | ||||
| EPS | Earnings per share of common stock | ||||
| ESG | Environmental, social and governance | ||||
| Exchange Act | Securities Exchange Act of 1934, as amended | ||||
| FERC | Federal Energy Regulatory Commission | ||||
| Fitch | Fitch Ratings, Inc. | ||||
| GAAP | Accounting principles generally accepted in the United States of America | ||||
| Guardian Pipeline | Guardian Pipeline, L.L.C., a wholly owned subsidiary of ONEOK, Inc. | ||||
| Guardian Term Loan Agreement | Guardian Pipeline’s senior unsecured three-year $120 million term loan agreement dated June 24, 2022 | ||||
| GHG | Greenhouse gas | ||||
| Homeland Security | United States Department of Homeland Security | ||||
| ICE | Intercontinental Exchange | ||||
| 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% owned joint venture | ||||
| NYMEX | New York Mercantile Exchange | ||||
| ONEOK | ONEOK, Inc. | ||||
| ONEOK Partners | ONEOK Partners, L.P., a wholly owned subsidiary of ONEOK, Inc. | ||||
| OPIS | Oil Price Information Service | ||||
| Overland Pass Pipeline | Overland Pass Pipeline Company, LLC, a 50% 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% 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 | ||||
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| Series E Preferred Stock | Series E Non-Voting, Perpetual Preferred Stock, par value $0.01 per share | ||||
| SOFR | Secured Overnight Financing Rate | ||||
| STACK | Sooner Trend Anadarko Canadian Kingfisher, an area in the Anadarko Basin in Oklahoma | ||||
| Term SOFR | The forward-looking term rate based on SOFR | ||||
| Viking | Viking Gas Transmission Company, a wholly owned subsidiary of ONEOK, Inc. | ||||
| WTI | West Texas Intermediate | ||||
| XBRL | eXtensible Business Reporting Language | ||||
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) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
(Thousands of dollars, except per share amounts) | |||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Commodity sales | $ | 5,563,535 | $ | 4,204,792 | $ | 16,319,549 | $ | 10,115,674 | |||||||||||||||
| Services | 349,996 | 331,383 | 1,035,312 | 1,004,144 | |||||||||||||||||||
| Total revenues (Note J) | 5,913,531 | 4,536,175 | 17,354,861 | 11,119,818 | |||||||||||||||||||
| Cost of sales and fuel (exclusive of items shown separately below) | 4,772,674 | 3,449,127 | 14,016,621 | 7,937,616 | |||||||||||||||||||
| Operations and maintenance | 238,414 | 225,364 | 683,507 | 644,841 | |||||||||||||||||||
| Depreciation and amortization | 157,102 | 154,542 | 468,717 | 468,583 | |||||||||||||||||||
| General taxes | 47,770 | 39,753 | 144,058 | 126,132 | |||||||||||||||||||
| Other operating (income) expense, net | (1,630) | (470) | (8,649) | (1,446) | |||||||||||||||||||
| Operating income | 699,201 | 667,859 | 2,050,607 | 1,944,092 | |||||||||||||||||||
| Equity in net earnings from investments (Note H) | 39,180 | 28,573 | 111,150 | 87,613 | |||||||||||||||||||
| Allowance for equity funds used during construction | 734 | 247 | 1,699 | 1,485 | |||||||||||||||||||
| Other income (expense), net | (8,296) | 1,287 | (31,142) | (4,228) | |||||||||||||||||||
Interest expense (net of capitalized interest of $16,288, $6,083, $41,527 and $16,621, respectively) | (166,939) | (184,049) | (509,744) | (554,529) | |||||||||||||||||||
| Income before income taxes | 563,880 | 513,917 | 1,622,570 | 1,474,433 | |||||||||||||||||||
| Income taxes | (132,129) | (121,899) | (385,270) | (354,100) | |||||||||||||||||||
| Net income | 431,751 | 392,018 | 1,237,300 | 1,120,333 | |||||||||||||||||||
| Less: Preferred stock dividends | 275 | 275 | 825 | 825 | |||||||||||||||||||
| Net income available to common shareholders | $ | 431,476 | $ | 391,743 | $ | 1,236,475 | $ | 1,119,508 | |||||||||||||||
| Basic EPS (Note G) | $ | 0.96 | $ | 0.88 | $ | 2.76 | $ | 2.51 | |||||||||||||||
| Diluted EPS (Note G) | $ | 0.96 | $ | 0.88 | $ | 2.76 | $ | 2.50 | |||||||||||||||
Average shares (thousands) | |||||||||||||||||||||||
| Basic | 447,677 | 446,634 | 447,417 | 446,288 | |||||||||||||||||||
| Diluted | 448,217 | 447,635 | 448,268 | 447,117 | |||||||||||||||||||
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) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| Net income | $ | 431,751 | $ | 392,018 | $ | 1,237,300 | $ | 1,120,333 | |||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
Change in fair value of derivatives, net of tax of $(31,749), $39,299, $(16,951) and $81,134, respectively | 106,289 | (131,566) | 56,747 | (271,622) | |||||||||||||||||||
Derivative amounts reclassified to net income, net of tax of $(16,116), $(19,845), $(56,876) and $(42,722), respectively | 53,953 | 66,438 | 190,411 | 143,029 | |||||||||||||||||||
Change in retirement and other postretirement benefit plan obligations, net of tax of $(873), $(1,355), $(2,651) and $(4,009), respectively | 2,922 | 4,538 | 8,874 | 13,423 | |||||||||||||||||||
Other comprehensive income of unconsolidated affiliates, net of tax of $(1,230), $(60), $(4,733) and $(1,429), respectively | 4,118 | 197 | 15,846 | 4,783 | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 167,282 | (60,393) | 271,878 | (110,387) | |||||||||||||||||||
| Comprehensive income | $ | 599,033 | $ | 331,625 | $ | 1,509,178 | $ | 1,009,946 | |||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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| ONEOK, Inc. and Subsidiaries | ||||||||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||||||||
| September 30, | December 31, | |||||||||||||
(Unaudited) | 2022 | 2021 | ||||||||||||
| Assets | (Thousands of dollars) | |||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 22,215 | $ | 146,391 | ||||||||||
| Accounts receivable, net | 1,729,192 | 1,441,786 | ||||||||||||
| Materials and supplies | 155,158 | 153,019 | ||||||||||||
| NGLs and natural gas in storage | 538,018 | 427,880 | ||||||||||||
| Commodity imbalances | 39,526 | 39,609 | ||||||||||||
| Other current assets | 281,213 | 165,689 | ||||||||||||
| Total current assets | 2,765,322 | 2,374,374 | ||||||||||||
Property, plant and equipment | ||||||||||||||
| Property, plant and equipment | 24,727,153 | 23,820,539 | ||||||||||||
| Accumulated depreciation and amortization | 4,937,352 | 4,500,665 | ||||||||||||
| Net property, plant and equipment | 19,789,801 | 19,319,874 | ||||||||||||
Investments and other assets | ||||||||||||||
| Investments in unconsolidated affiliates | 803,807 | 797,613 | ||||||||||||
| Goodwill and net intangible assets | 755,474 | 763,295 | ||||||||||||
| Other assets | 324,839 | 366,457 | ||||||||||||
| Total investments and other assets | 1,884,120 | 1,927,365 | ||||||||||||
| Total assets | $ | 24,439,243 | $ | 23,621,613 | ||||||||||
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| ONEOK, Inc. and Subsidiaries | ||||||||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||||||||
| (Continued) | ||||||||||||||
| September 30, | December 31, | |||||||||||||
(Unaudited) | 2022 | 2021 | ||||||||||||
Liabilities and equity | (Thousands of dollars) | |||||||||||||
| Current liabilities | ||||||||||||||
| Current maturities of long-term debt (Note D) | $ | 925,000 | $ | 895,814 | ||||||||||
| Short-term borrowings (Note D) | 901,277 | — | ||||||||||||
| Accounts payable | 1,658,904 | 1,332,391 | ||||||||||||
| Commodity imbalances | 254,076 | 309,054 | ||||||||||||
| Accrued interest | 120,424 | 235,602 | ||||||||||||
| Operating lease liability | 12,417 | 13,783 | ||||||||||||
| Other current liabilities | 266,540 | 397,975 | ||||||||||||
| Total current liabilities | 4,138,638 | 3,184,619 | ||||||||||||
Long-term debt, excluding current maturities (Note D) | 11,950,660 | 12,747,636 | ||||||||||||
Deferred credits and other liabilities | ||||||||||||||
| Deferred income taxes | 1,592,697 | 1,166,690 | ||||||||||||
| Operating lease liability | 69,676 | 75,636 | ||||||||||||
| Other deferred credits | 375,303 | 431,869 | ||||||||||||
| Total deferred credits and other liabilities | 2,037,676 | 1,674,195 | ||||||||||||
Commitments and contingencies (Note I) | ||||||||||||||
Equity (Note E) | ||||||||||||||
| ONEOK shareholders’ equity: | ||||||||||||||
Preferred stock, $0.01 par value: authorized and issued 20,000 shares at September 30, 2022, and December 31, 2021 | — | — | ||||||||||||
Common stock, $0.01 par value: authorized 1,200,000,000 shares; issued 474,916,234 shares and outstanding 446,947,691 shares at September 30, 2022; issued 474,916,234 shares and outstanding 446,138,177 shares at December 31, 2021 | 4,749 | 4,749 | ||||||||||||
| Paid-in capital | 7,218,495 | 7,213,861 | ||||||||||||
| Accumulated other comprehensive loss (Note F) | (199,473) | (471,351) | ||||||||||||
| Retained earnings | — | — | ||||||||||||
Treasury stock, at cost: 27,968,543 shares at September 30, 2022, and 28,778,057 shares at December 31, 2021 | (711,502) | (732,096) | ||||||||||||
| Total equity | 6,312,269 | 6,015,163 | ||||||||||||
| Total liabilities and equity | $ | 24,439,243 | $ | 23,621,613 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
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| ONEOK, Inc. and Subsidiaries | ||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||
| Nine Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
(Unaudited) | 2022 | 2021 | ||||||||||||
(Thousands of dollars) | ||||||||||||||
| Operating activities | ||||||||||||||
| Net income | $ | 1,237,300 | $ | 1,120,333 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 468,717 | 468,583 | ||||||||||||
| Equity in net earnings from investments | (111,150) | (87,613) | ||||||||||||
| Distributions received from unconsolidated affiliates | 109,655 | 88,389 | ||||||||||||
| Deferred income taxes | 344,812 | 344,808 | ||||||||||||
| Other, net | 45,914 | 57,479 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable | (260,213) | (687,031) | ||||||||||||
| NGLs and natural gas in storage, net of commodity imbalances | (165,033) | (280,839) | ||||||||||||
| Accounts payable | 296,510 | 756,072 | ||||||||||||
| Risk-management assets and liabilities | 47,009 | (254,163) | ||||||||||||
| Other assets and liabilities, net | (148,015) | (34,856) | ||||||||||||
| Cash provided by operating activities | 1,865,506 | 1,491,162 | ||||||||||||
Investing activities | ||||||||||||||
| Capital expenditures (less allowance for equity funds used during construction) | (886,041) | (490,329) | ||||||||||||
| Distributions received from unconsolidated affiliates in excess of cumulative earnings | 18,014 | 19,188 | ||||||||||||
| Other, net | 4,171 | (4,286) | ||||||||||||
| Cash used in investing activities | (863,856) | (475,427) | ||||||||||||
Financing activities | ||||||||||||||
| Dividends paid | (1,253,402) | (1,250,204) | ||||||||||||
| Short-term borrowings, net | 901,277 | — | ||||||||||||
| Issuance of long-term debt | 120,000 | — | ||||||||||||
| Repayment of long-term debt | (895,814) | (68,787) | ||||||||||||
| Other, net | 2,113 | 3,097 | ||||||||||||
| Cash used in financing activities | (1,125,826) | (1,315,894) | ||||||||||||
| Change in cash and cash equivalents | (124,176) | (300,159) | ||||||||||||
| Cash and cash equivalents at beginning of period | 146,391 | 524,496 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 22,215 | $ | 224,337 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
11
| ONEOK, Inc. and Subsidiaries | ||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||||||||||||||||||||||||||||||
(Unaudited) | Preferred Stock Issued | Common Stock Issued | Preferred Stock | Common Stock | Paid-in Capital | |||||||||||||||||||||||||||
(Shares) | (Thousands of dollars) | |||||||||||||||||||||||||||||||
| January 1, 2022 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,213,861 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||
| Other comprehensive income (Note F) | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | (5,325) | |||||||||||||||||||||||||||
Common stock dividends - $0.935 per share (Note E) | — | — | — | — | (26,264) | |||||||||||||||||||||||||||
| Other, net | — | — | — | — | (5,289) | |||||||||||||||||||||||||||
| March 31, 2022 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,176,983 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||
| Other comprehensive income (Note F) | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | 7,039 | |||||||||||||||||||||||||||
Common stock dividends - $0.935 per share (Note E) | — | — | — | — | (3,553) | |||||||||||||||||||||||||||
| Other, net | — | — | — | — | 9,988 | |||||||||||||||||||||||||||
| June 30, 2022 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,190,457 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||
| Other comprehensive income (Note F) | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | 3,701 | |||||||||||||||||||||||||||
Common stock dividends - $0.935 per share (Note E) | — | — | — | — | 13,555 | |||||||||||||||||||||||||||
| Other, net | — | — | — | — | 10,782 | |||||||||||||||||||||||||||
| September 30, 2022 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,218,495 | ||||||||||||||||||||||||
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| ONEOK, Inc. and Subsidiaries | ||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued) | ||||||||||||||||||||||||||
(Unaudited) | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Equity | ||||||||||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||||||||
| January 1, 2022 | $ | (471,351) | $ | — | $ | (732,096) | $ | 6,015,163 | ||||||||||||||||||
| Net income | — | 391,171 | — | 391,171 | ||||||||||||||||||||||
| Other comprehensive income (Note F) | 3,679 | — | — | 3,679 | ||||||||||||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | (275) | — | (275) | ||||||||||||||||||||||
| Common stock issued | — | — | 11,730 | 6,405 | ||||||||||||||||||||||
Common stock dividends - $0.935 per share (Note E) | — | (390,896) | — | (417,160) | ||||||||||||||||||||||
Other, net | — | — | — | (5,289) | ||||||||||||||||||||||
| March 31, 2022 | $ | (467,672) | $ | — | $ | (720,366) | $ | 5,993,694 | ||||||||||||||||||
| Net income | — | 414,378 | — | 414,378 | ||||||||||||||||||||||
| Other comprehensive income (Note F) | 100,917 | — | — | 100,917 | ||||||||||||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | (275) | — | (275) | ||||||||||||||||||||||
| Common stock issued | — | — | 6,544 | 13,583 | ||||||||||||||||||||||
Common stock dividends - $0.935 per share (Note E) | — | (414,103) | — | (417,656) | ||||||||||||||||||||||
Other, net | — | — | — | 9,988 | ||||||||||||||||||||||
| June 30, 2022 | $ | (366,755) | $ | — | $ | (713,822) | $ | 6,114,629 | ||||||||||||||||||
| Net income | — | 431,751 | — | 431,751 | ||||||||||||||||||||||
| Other comprehensive income (Note F) | 167,282 | — | — | 167,282 | ||||||||||||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | (275) | — | (275) | ||||||||||||||||||||||
| Common stock issued | — | — | 2,320 | 6,021 | ||||||||||||||||||||||
Common stock dividends - $0.935 per share (Note E) | — | (431,476) | — | (417,921) | ||||||||||||||||||||||
| Other, net | — | — | — | 10,782 | ||||||||||||||||||||||
| September 30, 2022 | $ | (199,473) | $ | — | $ | (711,502) | $ | 6,312,269 | ||||||||||||||||||
13
| ONEOK, Inc. and Subsidiaries | ||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued) | ||||||||||||||||||||||||||||||||
(Unaudited) | Preferred Stock Issued | Common Stock Issued | Preferred Stock | Common Stock | Paid-in Capital | |||||||||||||||||||||||||||
(Shares) | (Thousands of dollars) | |||||||||||||||||||||||||||||||
| January 1, 2021 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,353,396 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred stock dividends - $13.75 per share | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | (10,159) | |||||||||||||||||||||||||||
Common stock dividends - $0.935 per share | — | — | — | — | (30,234) | |||||||||||||||||||||||||||
| Other, net | — | — | — | — | (7,729) | |||||||||||||||||||||||||||
| March 31, 2021 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,305,274 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred stock dividends - $13.75 per share | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | 7,115 | |||||||||||||||||||||||||||
Common stock dividends - $0.935 per share | — | — | — | — | (74,765) | |||||||||||||||||||||||||||
| Other, net | — | — | — | — | 9,710 | |||||||||||||||||||||||||||
| June 30, 2021 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,247,334 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | |||||||||||||||||||||||||||
Preferred stock dividends - $13.75 per share | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | 3,237 | |||||||||||||||||||||||||||
Common stock dividends - $0.935 per share | — | — | — | — | (25,204) | |||||||||||||||||||||||||||
| Other, net | — | — | — | — | 9,888 | |||||||||||||||||||||||||||
| September 30, 2021 | 20,000 | 474,916,234 | $ | — | $ | 4,749 | $ | 7,235,255 | ||||||||||||||||||||||||
14
| ONEOK, Inc. and Subsidiaries | ||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued) | ||||||||||||||||||||||||||
(Unaudited) | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Equity | ||||||||||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||||||||
| January 1, 2021 | $ | (551,449) | $ | — | $ | (764,298) | $ | 6,042,398 | ||||||||||||||||||
| Net income | — | 386,176 | — | 386,176 | ||||||||||||||||||||||
| Other comprehensive income | 85,853 | — | — | 85,853 | ||||||||||||||||||||||
Preferred stock dividends - $13.75 per share | — | (275) | — | (275) | ||||||||||||||||||||||
| Common stock issued | — | — | 16,836 | 6,677 | ||||||||||||||||||||||
Common stock dividends - $0.935 per share | — | (385,901) | — | (416,135) | ||||||||||||||||||||||
Other, net | — | — | — | (7,729) | ||||||||||||||||||||||
| March 31, 2021 | $ | (465,596) | $ | — | $ | (747,462) | $ | 6,096,965 | ||||||||||||||||||
| Net income | — | 342,139 | — | 342,139 | ||||||||||||||||||||||
| Other comprehensive loss | (135,847) | — | — | (135,847) | ||||||||||||||||||||||
Preferred stock dividends - $13.75 per share | — | (275) | — | (275) | ||||||||||||||||||||||
| Common stock issued | — | — | 7,208 | 14,323 | ||||||||||||||||||||||
Common stock dividends - $0.935 per share | — | (341,864) | — | (416,629) | ||||||||||||||||||||||
Other, net | — | — | — | 9,710 | ||||||||||||||||||||||
| June 30, 2021 | $ | (601,443) | $ | — | $ | (740,254) | $ | 5,910,386 | ||||||||||||||||||
| Net income | — | 392,018 | — | 392,018 | ||||||||||||||||||||||
| Other comprehensive loss | (60,393) | — | — | (60,393) | ||||||||||||||||||||||
Preferred stock dividends - $13.75 per share | — | (275) | — | (275) | ||||||||||||||||||||||
| Common stock issued | — | — | 2,961 | 6,198 | ||||||||||||||||||||||
Common stock dividends - $0.935 per share | — | (391,743) | — | (416,947) | ||||||||||||||||||||||
Other, net | — | — | — | 9,888 | ||||||||||||||||||||||
| September 30, 2021 | $ | (661,836) | $ | — | $ | (737,293) | $ | 5,840,875 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
15
ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 2021 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 have been made in the prior year Consolidated Financial Statements to conform to the current year presentation. These unaudited Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements in our Annual Report.
Goodwill Impairment Review - We assess our goodwill for impairment at least annually as of July 1, unless events or changes in circumstances indicate an impairment may have occurred before that time. At July 1, 2022, we assessed qualitative factors to determine whether it was more likely than not that the fair value of reporting units with goodwill are less than their carrying amount. After assessing qualitative factors (including macroeconomic conditions, industry and market considerations, costs and overall financial performance), we determined that it was more likely than not that the fair value of the Natural Gas Pipelines and Natural Gas Liquids reporting units were not less than their respective carrying value, that no further testing was necessary and that goodwill was not considered impaired.
Medford Incident - On July 9, 2022, a fire occurred at our 210 MBbl/d Medford, Oklahoma, natural gas liquids fractionation facility. All personnel were safe and accounted for with evacuations of local residents taken as a precautionary measure. While the facility remains inoperable, we continue to provide midstream services through our integrated NGL pipeline system between the Mid-Continent and Gulf Coast regions, along with our fractionation and storage assets and arrangements with industry peers. We are cooperating with government agencies, as applicable, and we continue our efforts to determine the cause of the event and expect the Medford facility to remain out of service for an extended period. Subject to the terms and conditions of our insurance policies and any applicable sub-limits, we have property damage and business interruption coverage with a combined per occurrence limit of $2 billion and deductibles of $5 million per occurrence for property damage and a 45-day waiting period per occurrence for business interruption coverage. As a result of our insurance coverage, we do not expect the Medford incident will have a material effect on our financial condition, results of operations or cash flows. However, the timing of insurance proceeds may impact our results in a given quarter or year.
In September 2022, we received notice that our insurers agreed to pay an unallocated first installment of insurance proceeds of $100 million. As of November 2, 2022, we have received approximately $45 million of this amount and expect to receive the remainder within the next 30 days. We have applied the cash received to the outstanding insurance receivables discussed below.
In third quarter 2022, we recorded a partial impairment charge of $6.7 million, which represents the value associated with certain Medford facility property, based on our limited assessments to date and related estimates and assumptions. We recorded a receivable of $6.7 million that was probable of recovery and fully offsets our property losses. Any insurance proceeds attributable to property damage in excess of our recognized property losses are considered a gain contingency and not recognized until realizable.
Our business interruption insurance provides coverage including, but not limited to (i) incurred costs and losses that are either unavoidable or incurred to mitigate or reduce losses and (ii) lost earnings. We record receivables for incurred costs and losses related to our business interruption coverage for the amount probable of recovery, not to exceed the actual losses incurred. Lost earnings claims under our business interruption coverage are considered a gain contingency and not recognized until realizable. In the three and nine months ended September 30, 2022, we recorded receivables of $21.7 million, related primarily to third-party fractionation costs incurred subsequent to the 45-day business interruption waiting period, that are probable of recovery, with an offset to the income statement where the actual losses incurred were recorded. The following table sets forth the impact of this business interruption insurance by income statement caption for the three and nine months ended September 30, 2022:
16
| September 30, 2022 | ||||||||
| (Thousands of dollars) | ||||||||
| Commodity sales revenue (a) | $ | 17,618 | ||||||
| Services revenue | $ | 1,249 | ||||||
| Cost of sales and fuel | $ | 2,856 | ||||||
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 discussed herein or in our Annual Report were assessed and determined to be either not applicable or clarifications of ASUs previously issued. There have been no new accounting pronouncements that have become effective or have been issued that are of significance or potential significance to us.
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.
Many of the contracts in our derivative portfolio are executed in liquid markets where price transparency exists. Our financial commodity derivatives are generally settled through a NYMEX or 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 SOFR, LIBOR or other yield curve, as appropriate. 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 exchange-cleared derivatives to hedge natural gas basis and NGL price risk at certain market locations and 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 commodity price curves that incorporate market data from broker quotes and third-party pricing services. These balances are composed predominantly of exchange-cleared and over-the-counter derivatives to hedge NGL price risk at certain market locations. These 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, 2022, is immaterial as our Level 3 fair value measurements are based on unadjusted pricing information from broker quotes and third-party pricing services.
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 based on the lowest level input that is significant to the fair value measurement in its entirety.
17
Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:
| September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net | ||||||||||||||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||||||||||||||
| Derivative assets | |||||||||||||||||||||||||||||||||||
| Commodity contracts | |||||||||||||||||||||||||||||||||||
| Financial contracts | $ | 10,959 | $ | 134,356 | $ | 91,384 | $ | 236,699 | $ | (236,699) | $ | — | |||||||||||||||||||||||
| Interest-rate contracts | — | 67,377 | — | 67,377 | — | 67,377 | |||||||||||||||||||||||||||||
| Total derivative assets | $ | 10,959 | $ | 201,733 | $ | 91,384 | $ | 304,076 | $ | (236,699) | $ | 67,377 | |||||||||||||||||||||||
Derivative liabilities | |||||||||||||||||||||||||||||||||||
| Commodity contracts | |||||||||||||||||||||||||||||||||||
| Financial contracts | $ | (112,578) | $ | (104,047) | $ | (40,132) | $ | (256,757) | $ | 256,757 | $ | — | |||||||||||||||||||||||
| Total derivative liabilities | $ | (112,578) | $ | (104,047) | $ | (40,132) | $ | (256,757) | $ | 256,757 | $ | — | |||||||||||||||||||||||
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheet 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, 2022, we held no cash and posted $110.0 million of cash with various counterparties, including $20.1 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $89.9 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheet.
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net | ||||||||||||||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||||||||||||||
| Derivative assets | |||||||||||||||||||||||||||||||||||
| Commodity contracts | |||||||||||||||||||||||||||||||||||
| Financial contracts | $ | 22,019 | $ | 172,833 | $ | 9,309 | $ | 204,161 | $ | (204,161) | $ | — | |||||||||||||||||||||||
| Total derivative assets | $ | 22,019 | $ | 172,833 | $ | 9,309 | $ | 204,161 | $ | (204,161) | $ | — | |||||||||||||||||||||||
Derivative liabilities | |||||||||||||||||||||||||||||||||||
| Commodity contracts | |||||||||||||||||||||||||||||||||||
| Financial contracts | $ | (67,226) | $ | (112,922) | $ | (123,592) | $ | (303,740) | $ | 303,740 | $ | — | |||||||||||||||||||||||
| Interest-rate contracts | — | (145,524) | — | (145,524) | — | (145,524) | |||||||||||||||||||||||||||||
| Total derivative liabilities | $ | (67,226) | $ | (258,446) | $ | (123,592) | $ | (449,264) | $ | 303,740 | $ | (145,524) | |||||||||||||||||||||||
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheet 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, 2021, we held no cash and posted $157.0 million of cash with various counterparties, including $99.6 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $57.4 million of cash collateral in excess of derivative net liability positions 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) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| Net liabilities at beginning of period | $ | (110,396) | $ | (121,750) | $ | (114,283) | $ | (31,321) | |||||||||||||||
| Total changes in fair value: | |||||||||||||||||||||||
| Settlements included in net income (a) | 39,446 | 46,797 | 78,932 | 28,028 | |||||||||||||||||||
| New Level 3 derivatives included in other comprehensive income (loss) (b) | (360) | (23,151) | 73,168 | (129,805) | |||||||||||||||||||
| Unrealized change included in other comprehensive income (loss) (b) | 122,562 | (69,104) | 13,435 | (34,110) | |||||||||||||||||||
| Net assets (liabilities) at end of period | $ | 51,252 | $ | (167,208) | $ | 51,252 | $ | (167,208) | |||||||||||||||
(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.
18
During the three and nine months ended September 30, 2022 and 2021, 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. We have investments associated with our supplemental executive retirement plan and nonqualified deferred compensation plan that are carried at fair value and primarily are composed of exchange-traded mutual funds classified as Level 1.
The estimated fair value of our consolidated long-term debt, including current maturities, was $11.5 billion and $15.6 billion at September 30, 2022, and December 31, 2021, respectively. The book value of our consolidated long-term debt, including current maturities, was $12.9 billion and $13.6 billion at September 30, 2022, and December 31, 2021, respectively. The estimated fair value of the aggregate senior notes outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our consolidated long-term debt is classified as Level 2.
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 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;
•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; and
•Collars - Combination of a purchased put option and a sold call option, which places a floor and ceiling price for commodity sales being hedged.
We may also use other instruments to mitigate commodity price risk.
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 fee with POP contracts. Under certain fee with POP contracts, our fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. In certain commodity price environments, our contractual fees on these fee with POP contracts may increase or decrease, which would impact the average fee rate in our Natural Gas Gathering and Processing segment. 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
19
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 primarily exposed to commodity price risk on our intrastate pipelines because they 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 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, 2022, and December 31, 2021, there were no financial derivative instruments with respect to our natural gas pipeline operations.
Interest-rate risk - We may 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.
At September 30, 2022, and December 31, 2021, we had forward-starting interest-rate swaps with notional amounts totaling $1.1 billion to hedge the variability of interest payments on a portion of our forecasted debt issuances. All of our interest-rate swaps are designated as cash flow hedges.
Fair Values of Derivative 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, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Location in our Consolidated Balance Sheets | Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments | (Thousands of dollars) | ||||||||||||||||||||||||||||
| Commodity contracts (a) | |||||||||||||||||||||||||||||
| Financial contracts (b) | $ | 236,699 | $ | (256,757) | $ | 204,161 | $ | (303,740) | |||||||||||||||||||||
| Interest-rate contracts | Other current assets/liabilities | 67,377 | — | — | (145,524) | ||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | 304,076 | $ | (256,757) | $ | 204,161 | $ | (449,264) | |||||||||||||||||||||
(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.
(b) - At September 30, 2022, and December 31, 2021, our derivative net liability positions under master-netting arrangements for financial contracts were fully offset by cash collateral of $20.1 million and $99.6 million, respectively.
Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
| September 30, 2022 | December 31 2021 | |||||||||||||
| Contract Type | Net Purchased/Payor (Sold/Receiver) | |||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||
| Cash flow hedges | ||||||||||||||
| Fixed price | ||||||||||||||
- Natural gas (Bcf) | Futures | (46.4) | (32.3) | |||||||||||
- Crude oil and NGLs (MMBbl) | Futures | (12.4) | (10.0) | |||||||||||
| Basis | ||||||||||||||
- Natural gas (Bcf) | Futures | (46.3) | (30.5) | |||||||||||
Interest-rate contracts (Billions of dollars) | Swaps | $ | 1.1 | $ | 1.1 | |||||||||
20
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 | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| Commodity contracts | $ | 69,430 | $ | (171,665) | $ | (139,203) | $ | (410,572) | |||||||||||||||
| Interest-rate contracts | 68,608 | 800 | 212,901 | 57,816 | |||||||||||||||||||
| Total unrealized change in fair value of cash flow hedges in other comprehensive income (loss) | $ | 138,038 | $ | (170,865) | $ | 73,698 | $ | (352,756) | |||||||||||||||
The following table sets forth the effect of cash flow hedges on net income for the periods indicated:
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 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, Fitch 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, 2022.
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, 2022, the credit exposure from our derivative assets is with investment-grade companies in the financial services sector.
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D. DEBT
The following table sets forth our consolidated debt for the periods indicated:
| September 30, 2022 | December 31, 2021 | |||||||||||||
(Thousands of dollars) | ||||||||||||||
Commercial paper outstanding, bearing a weighted average interest rate of 3.8% as of September 30, 2022 | $ | 901,277 | $ | — | ||||||||||
| Senior unsecured obligations: | ||||||||||||||
$900,000 at 3.375% due October 2022 | — | 895,814 | ||||||||||||
$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 | ||||||||||||
$500,000 at 4.9% due March 2025 | 500,000 | 500,000 | ||||||||||||
$400,000 at 2.2% due September 2025 | 387,000 | 387,000 | ||||||||||||
$600,000 at 5.85% due January 2026 | 600,000 | 600,000 | ||||||||||||
$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 | 700,000 | ||||||||||||
$750,000 at 3.4% due September 2029 | 714,251 | 714,251 | ||||||||||||
$850,000 at 3.1% due March 2030 | 780,093 | 780,093 | ||||||||||||
$600,000 at 6.35% due January 2031 | 600,000 | 600,000 | ||||||||||||
$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 | 689,006 | 689,006 | ||||||||||||
$1,000,000 at 5.2% due July 2048 | 1,000,000 | 1,000,000 | ||||||||||||
$750,000 at 4.45% due September 2049 | 672,530 | 672,530 | ||||||||||||
$500,000 at 4.5% due March 2050 | 443,015 | 443,015 | ||||||||||||
$300,000 at 7.15% due January 2051 | 300,000 | 300,000 | ||||||||||||
| Guardian Pipeline | ||||||||||||||
$120,000 term loan, variable rate, due June 2025 | 120,000 | — | ||||||||||||
| Total debt | 13,882,172 | 13,756,709 | ||||||||||||
| Unamortized portion of terminated swaps | 10,308 | 11,596 | ||||||||||||
| Unamortized debt issuance costs and discounts | (115,543) | (124,855) | ||||||||||||
| Current maturities of long-term debt | (925,000) | (895,814) | ||||||||||||
| Short-term borrowings (a) | (901,277) | — | ||||||||||||
| Long-term debt | $ | 11,950,660 | $ | 12,747,636 | ||||||||||
(a) - Individual issuances of commercial paper under our commercial paper program generally mature in 90 days or less.
$2.5 Billion Credit Agreement - In June 2022, we amended and restated our $2.5 Billion Credit Agreement, extending its maturity to June 2027. Our $2.5 Billion Credit Agreement is a revolving credit facility and contains certain customary conditions for borrowing, as well as customary financial, affirmative and negative covenants. Among other things, beginning in June 2022, these covenants include maintaining a ratio of consolidated net 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). In the first quarter 2022, we acquired assets for $30 million, which allowed us to elect an acquisition adjustment period under our $2.5 Billion Credit Agreement and, as a result, increased our leverage ratio covenant to 5.5 to 1 for the first quarter 2022 and the two following quarters. Thereafter, the covenant will decrease to 5.0 to 1. As of September 30, 2022, we had no outstanding borrowings, our ratio of consolidated net indebtedness to adjusted EBITDA was 3.9 to 1, and we were in compliance with all covenants under our $2.5 Billion Credit Agreement.
The $2.5 Billion Credit Agreement includes a $100 million sublimit for the issuance of standby letters of credit and a $200 million sublimit for swingline loans. Under the terms of the $2.5 Billion Credit Agreement, we may request up to an
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aggregate $1.0 billion increase in the size of the facility, upon satisfaction of customary conditions, including receipt of commitments from new lenders or increased commitments from existing lenders. The $2.5 Billion Credit Agreement contains provisions for an applicable margin rate and an annual facility fee, both of which adjust with changes in our credit ratings. Borrowings, if any, will accrue at Term SOFR plus an applicable margin based on our credit ratings at the time of determination plus an adjustment of 10 basis points. Under our current credit ratings, the applicable margin on any borrowings would be 110 basis points. We are required to pay an annual facility fee equal to the daily amount of aggregate commitments under the $2.5 Billion Credit Agreement times an applicable rate based on our credit rating at the time of determination. Under our current credit ratings, the applicable rate is 15 basis points. We have the option to request two one-year maturity extensions, subject to lender approvals. The $2.5 Billion Credit Agreement also contains various customary events of default, the occurrence of which could result in a termination of the lenders’ commitments and the acceleration of all of our obligations thereunder.
Guardian Term Loan Agreement - In June 2022, Guardian Pipeline entered into a $120 million unsecured term loan agreement. The Guardian Term Loan Agreement matures in June 2025, and bears interest at Term SOFR plus an applicable margin based on Guardian Pipeline’s credit rating at the time of determination plus an adjustment of 10 basis points. Under Guardian Pipeline’s current credit ratings, the applicable margin is 112.5 basis points. The Guardian Term Loan Agreement allows prepayment of all or any portion outstanding without penalty or premium. During the second quarter 2022, Guardian Pipeline drew the full $120 million available under the agreement and used the proceeds to repay intercompany debt with ONEOK. The Guardian Term Loan Agreement contains certain affirmative and negative covenants, as well as customary events of default, the occurrence of which could result in a termination of lenders’ commitments and the accelerations of all of Guardian Pipeline’s obligations thereunder. Guardian Pipeline is in compliance with all covenants under the Guardian Term Loan Agreement.
Debt Repayments - In July 2022, we redeemed the remaining $895.8 million of our $900 million, 3.375% senior notes due October 2022 at 100% of the principal amount, plus accrued and unpaid interest, with cash on hand and short-term borrowings.
Debt Guarantees - ONEOK, ONEOK Partners and the Intermediate Partnership have cross guarantees in place for ONEOK’s and ONEOK Partners’ indebtedness. The Guardian Term Loan Agreement is not guaranteed by ONEOK, ONEOK Partners or the Intermediate Partnership.
E. EQUITY
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 Series E Preferred Stock. Dividends paid on our common stock in February 2022, May 2022 and August 2022 were $0.935 per share. A common stock dividend of $0.935 per share was declared for shareholders of record at the close of business on November 1, 2022, payable November 14, 2022.
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 2022, May 2022, and August 2022. Dividends totaling $0.3 million were declared for the Series E Preferred Stock and are payable November 14, 2022.
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F. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table sets forth the balance in accumulated other comprehensive loss for the period indicated, net of tax:
| Risk- Management Assets/Liabilities | Retirement and Other Postretirement Benefit Plan Obligations (a) | Risk- Management Assets/Liabilities of Unconsolidated Affiliates | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||||||||
| January 1, 2022 | $ | (352,315) | $ | (107,659) | $ | (11,377) | $ | (471,351) | ||||||||||||||||||
| Other comprehensive income before reclassifications | 56,747 | 170 | 14,958 | 71,875 | ||||||||||||||||||||||
| Amounts reclassified to net income (b) | 190,411 | 8,704 | 888 | 200,003 | ||||||||||||||||||||||
| Other comprehensive income | 247,158 | 8,874 | 15,846 | 271,878 | ||||||||||||||||||||||
| September 30, 2022 | $ | (105,157) | $ | (98,785) | $ | 4,469 | $ | (199,473) | ||||||||||||||||||
(a) - Includes amounts related to supplemental executive retirement plan.
(b) - See Note C for details of amounts reclassified to net income for risk-management assets/liabilities.
The following table sets forth information about the balance of accumulated other comprehensive loss at September 30, 2022, representing unrealized gains (losses) related to risk-management assets and liabilities, net of tax:
| Risk- Management Assets/Liabilities | ||||||||
(Thousands of dollars) | ||||||||
| Commodity derivative instruments expected to be realized within the next 27 months (a) | $ | (15,711) | ||||||
| Settled interest-rate swaps to be recognized over the life of the long-term, fixed-rate debt (b) | (141,326) | |||||||
Interest-rate swaps with future settlement dates expected to be amortized over the life of long-term debt | 51,880 | |||||||
| Accumulated other comprehensive loss at September 30, 2022 | $ | (105,157) | ||||||
(a) - Based on commodity prices on September 30, 2022, we expect net losses of $14.7 million, net of tax, will be reclassified into earnings during the next 12 months.
(b) - We expect net losses of $19.0 million, net of tax, will be reclassified into earnings during the next 12 months.
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.
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, 2022 | |||||||||||||||||
| Income | Shares | Per Share Amount | |||||||||||||||
(Thousands, except per share amounts) | |||||||||||||||||
| Basic EPS | |||||||||||||||||
| Net income available for common stock | $ | 431,476 | 447,677 | $ | 0.96 | ||||||||||||
| Diluted EPS | |||||||||||||||||
| Effect of dilutive securities | — | 540 | |||||||||||||||
| Net income available for common stock and common stock equivalents | $ | 431,476 | 448,217 | $ | 0.96 | ||||||||||||
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| Three Months Ended September 30, 2021 | |||||||||||||||||
| Income | Shares | Per Share Amount | |||||||||||||||
(Thousands, except per share amounts) | |||||||||||||||||
| Basic EPS | |||||||||||||||||
| Net income available for common stock | $ | 391,743 | 446,634 | $ | 0.88 | ||||||||||||
| Diluted EPS | |||||||||||||||||
| Effect of dilutive securities | — | 1,001 | |||||||||||||||
| Net income available for common stock and common stock equivalents | $ | 391,743 | 447,635 | $ | 0.88 | ||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||
| Income | Shares | Per Share Amount | |||||||||||||||
(Thousands, except per share amounts) | |||||||||||||||||
| Basic EPS | |||||||||||||||||
| Net income available for common stock | $ | 1,236,475 | 447,417 | $ | 2.76 | ||||||||||||
| Diluted EPS | |||||||||||||||||
| Effect of dilutive securities | — | 851 | |||||||||||||||
| Net income available for common stock and common stock equivalents | $ | 1,236,475 | 448,268 | $ | 2.76 | ||||||||||||
| Nine Months Ended September 30, 2021 | |||||||||||||||||
| Income | Shares | Per Share Amount | |||||||||||||||
(Thousands, except per share amounts) | |||||||||||||||||
| Basic EPS | |||||||||||||||||
| Net income available for common stock | $ | 1,119,508 | 446,288 | $ | 2.51 | ||||||||||||
| Diluted EPS | |||||||||||||||||
| Effect of dilutive securities | — | 829 | |||||||||||||||
| Net income available for common stock and common stock equivalents | $ | 1,119,508 | 447,117 | $ | 2.50 | ||||||||||||
H. UNCONSOLIDATED AFFILIATES
Equity in Net Earnings from Investments - The following table sets forth our equity in net earnings from investments for the periods indicated:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (Thousands of dollars) | |||||||||||||||||||||||
| Northern Border Pipeline | $ | 16,744 | $ | 14,634 | $ | 53,216 | $ | 47,459 | |||||||||||||||
| Roadrunner | 9,600 | 8,056 | 28,041 | 23,407 | |||||||||||||||||||
| Overland Pass Pipeline | 10,486 | 5,241 | 23,379 | 12,952 | |||||||||||||||||||
| Other | 2,350 | 642 | 6,514 | 3,795 | |||||||||||||||||||
| Equity in net earnings from investments | $ | 39,180 | $ | 28,573 | $ | 111,150 | $ | 87,613 | |||||||||||||||
We incurred expenses in transactions with unconsolidated affiliates of $25.4 million and $16.2 million for the three months ended September 30, 2022 and 2021, respectively, and $55.5 million and $44.2 million for the nine months ended September 30, 2022 and 2021, respectively, primarily related to Northern Border Pipeline and Overland Pass Pipeline. Revenue earned and accounts receivable from, and accounts payable to, our equity-method investees were not material.
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 all periods presented were not material.
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I. COMMITMENTS AND CONTINGENCIES
Environmental Matters and Pipeline Safety - The operation of pipelines, plants and other facilities for the gathering, processing, fractionation, 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 air and water quality, hazardous and solid waste management and disposal, cultural resource protection and other environmental and safety matters. The cost of planning, designing, constructing and operating pipelines, plants and other facilities must incorporate compliance with these laws, 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 does not believe that, based on currently known information, a material risk of noncompliance with these laws and regulations exists that will affect adversely our consolidated results of operations, financial condition or cash flows.
Legal Proceedings - We are a party to various legal proceedings that have arisen in the normal course of our operations. While the results of these proceedings cannot be predicted with certainty, we believe the reasonably possible losses from such proceedings, individually and in the aggregate, are not material. Additionally, we believe the probable final outcome of such proceedings will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.
J. REVENUES
Contract Assets and Contract Liabilities - Our contract asset balances at the beginning and end of the period primarily relate to our firm service transportation and storage contracts with tiered rates, which are not material. The following table sets forth the balances in contract liabilities for the periods indicated:
| Contract Liabilities | (Millions of dollars) | |||||||
| Balance at December 31, 2021 (a) | $ | 51.5 | ||||||
| Revenue recognized included in beginning balance | (34.7) | |||||||
| Net additions | 46.6 | |||||||
| Balance at September 30, 2022 (b) | $ | 63.4 | ||||||
(a) - Contract liabilities of $35.3 million and $16.2 million are included in other current liabilities and other deferred credits, respectively, in our Consolidated Balance Sheet.
(b) - Contract liabilities of $34.6 million and $28.8 million are included in other current liabilities and other deferred credits, respectively, in our Consolidated Balance Sheet.
Receivables from Customers and Revenue Disaggregation - Substantially all of the balances in accounts receivable on our Consolidated Balance Sheets at September 30, 2022, and December 31, 2021, relate to customer receivables. Revenues sources are disaggregated in Note K.
Transaction Price Allocated to Unsatisfied Performance Obligations - 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.
The following table presents aggregate value allocated to unsatisfied performance obligations as of September 30, 2022, 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 two months to 22 years:
| Expected Period of Recognition in Revenue | (Millions of dollars) | |||||||
| Remainder of 2022 | $ | 105.4 | ||||||
| 2023 | 409.3 | |||||||
| 2024 | 346.1 | |||||||
| 2025 | 253.5 | |||||||
| 2026 and beyond | 1,052.4 | |||||||
| Total estimated transaction price allocated to unsatisfied performance obligations | $ | 2,166.7 | ||||||
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
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long-term sales contracts where the transaction price is not known and minimum volume agreements, which we consider to be fully constrained until invoiced.
K. 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 transports and stores natural gas via regulated intrastate and interstate 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, the activity of our wholly owned captive insurance company, which began in April 2022, and eliminations necessary to reconcile our reportable segments to our Consolidated Financial Statements.
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, 2022 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| NGL and condensate sales | $ | 990,020 | $ | 4,749,230 | $ | — | $ | 5,739,250 | |||||||||||||||
| Residue natural gas sales | 824,558 | — | 2,889 | 827,447 | |||||||||||||||||||
| Gathering, processing and exchange services revenue | 36,571 | 139,302 | — | 175,873 | |||||||||||||||||||
| Transportation and storage revenue | — | 39,884 | 133,789 | 173,673 | |||||||||||||||||||
| Other | 7,453 | 2,533 | 250 | 10,236 | |||||||||||||||||||
| Total revenues (c) | 1,858,602 | 4,930,949 | 136,928 | 6,926,479 | |||||||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | (1,460,727) | (4,316,327) | (4,460) | (5,781,514) | |||||||||||||||||||
| Operating costs | (98,197) | (144,586) | (43,823) | (286,606) | |||||||||||||||||||
| Equity in net earnings from investments | 1,676 | 11,159 | 26,345 | 39,180 | |||||||||||||||||||
| Noncash compensation expense and other | 2,512 | 3,648 | 2,096 | 8,256 | |||||||||||||||||||
| Segment adjusted EBITDA | $ | 303,866 | $ | 484,843 | $ | 117,086 | $ | 905,795 | |||||||||||||||
| Depreciation and amortization | $ | (65,107) | $ | (75,558) | $ | (15,344) | $ | (156,009) | |||||||||||||||
| Capital expenditures | $ | 104,754 | $ | 169,175 | $ | 39,644 | $ | 313,573 | |||||||||||||||
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $671.8 million, of which $620.9 million related to revenues within the segment, and cost of sales and fuel of $205.0 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $73.2 million and cost of sales and fuel of $10.3 million.
(c) - Intersegment revenues are primarily commodity sales, which are based on the contracted selling price that is generally index-based and settled monthly, and for the Natural Gas Gathering and Processing segment totaled $1.0 billion. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
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| Three Months Ended September 30, 2022 | Total Segments | Other and Eliminations | Total | |||||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||
| Reconciliations of total segments to consolidated | ||||||||||||||||||||
| NGL and condensate sales | $ | 5,739,250 | $ | (1,005,882) | $ | 4,733,368 | ||||||||||||||
| Residue natural gas sales | 827,447 | — | 827,447 | |||||||||||||||||
| Gathering, processing and exchange services revenue | 175,873 | — | 175,873 | |||||||||||||||||
| Transportation and storage revenue | 173,673 | (2,214) | 171,459 | |||||||||||||||||
| Other | 10,236 | (4,852) | 5,384 | |||||||||||||||||
| Total revenues (a) | $ | 6,926,479 | $ | (1,012,948) | $ | 5,913,531 | ||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (5,781,514) | $ | 1,008,840 | $ | (4,772,674) | ||||||||||||||
| Operating costs | $ | (286,606) | $ | 422 | $ | (286,184) | ||||||||||||||
| Depreciation and amortization | $ | (156,009) | $ | (1,093) | $ | (157,102) | ||||||||||||||
| Equity in net earnings from investments | $ | 39,180 | $ | — | $ | 39,180 | ||||||||||||||
| Capital expenditures | $ | 313,573 | $ | 13,158 | $ | 326,731 | ||||||||||||||
(a) - Noncustomer revenue for the three months ended September 30, 2022, totaled $(56.5) million related primarily to losses from derivatives on commodity contracts.
| Three Months Ended September 30, 2021 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| NGL and condensate sales | $ | 815,993 | $ | 3,853,078 | $ | — | $ | 4,669,071 | |||||||||||||||
| Residue natural gas sales | 370,801 | — | 19 | 370,820 | |||||||||||||||||||
| Gathering, processing and exchange services revenue | 35,395 | 133,574 | — | 168,969 | |||||||||||||||||||
| Transportation and storage revenue | — | 40,465 | 120,294 | 160,759 | |||||||||||||||||||
| Other | 6,294 | 2,499 | 167 | 8,960 | |||||||||||||||||||
| Total revenues (c) | 1,228,483 | 4,029,616 | 120,480 | 5,378,579 | |||||||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (913,931) | (3,377,903) | (344) | (4,292,178) | |||||||||||||||||||
| Operating costs | (95,210) | (128,809) | (41,020) | (265,039) | |||||||||||||||||||
| Equity in net earnings from investments | 499 | 5,384 | 22,690 | 28,573 | |||||||||||||||||||
| Noncash compensation expense and other | 9,816 | 3,871 | 920 | 14,607 | |||||||||||||||||||
| Segment adjusted EBITDA | $ | 229,657 | $ | 532,159 | $ | 102,726 | $ | 864,542 | |||||||||||||||
| Depreciation and amortization | $ | (63,750) | $ | (74,986) | $ | (14,821) | $ | (153,557) | |||||||||||||||
| Capital expenditures | $ | 80,839 | $ | 53,778 | $ | 24,587 | $ | 159,204 | |||||||||||||||
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $618.8 million, of which $567.7 million related to revenues within the segment, and cost of sales and fuel of $160.0 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $72.4 million and cost of sales and fuel of $3.9 million.
(c) - Intersegment revenues are primarily commodity sales, which are based on the contracted selling price that is generally index-based and settled monthly, and for the Natural Gas Gathering and Processing segment totaled $837.7 million. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
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| Three Months Ended September 30, 2021 | Total Segments | Other and Eliminations | Total | |||||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||
| Reconciliations of total segments to consolidated | ||||||||||||||||||||
| NGL and condensate sales | $ | 4,669,071 | $ | (838,279) | $ | 3,830,792 | ||||||||||||||
| Residue natural gas sales | 370,820 | — | 370,820 | |||||||||||||||||
| Gathering, processing and exchange services revenue | 168,969 | — | 168,969 | |||||||||||||||||
| Transportation and storage revenue | 160,759 | (3,500) | 157,259 | |||||||||||||||||
| Other | 8,960 | (625) | 8,335 | |||||||||||||||||
| Total revenues (a) | $ | 5,378,579 | $ | (842,404) | $ | 4,536,175 | ||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (4,292,178) | $ | 843,051 | $ | (3,449,127) | ||||||||||||||
| Operating costs | $ | (265,039) | $ | (78) | $ | (265,117) | ||||||||||||||
| Depreciation and amortization | $ | (153,557) | $ | (985) | $ | (154,542) | ||||||||||||||
| Equity in net earnings from investments | $ | 28,573 | $ | — | $ | 28,573 | ||||||||||||||
| Capital expenditures | $ | 159,204 | $ | 7,003 | $ | 166,207 | ||||||||||||||
(a) - Noncustomer revenue for the three months ended September 30, 2021, totaled $(178.7) million related primarily to losses from derivatives on commodity contracts.
| Nine Months Ended September 30, 2022 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| NGL and condensate sales | $ | 3,033,568 | $ | 14,308,502 | $ | — | $ | 17,342,070 | |||||||||||||||
| Residue natural gas sales | 2,035,330 | — | 30,254 | 2,065,584 | |||||||||||||||||||
| Gathering, processing and exchange services revenue | 104,072 | 415,073 | — | 519,145 | |||||||||||||||||||
| Transportation and storage revenue | — | 126,988 | 387,211 | 514,199 | |||||||||||||||||||
| Other | 17,558 | 7,920 | 689 | 26,167 | |||||||||||||||||||
| Total revenues (c) | 5,190,528 | 14,858,483 | 418,154 | 20,467,165 | |||||||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | (4,147,901) | (12,948,769) | (22,196) | (17,118,866) | |||||||||||||||||||
| Operating costs | (289,376) | (416,491) | (126,231) | (832,098) | |||||||||||||||||||
| Equity in net earnings from investments | 4,906 | 24,986 | 81,258 | 111,150 | |||||||||||||||||||
| Noncash compensation expense and other | 12,607 | 11,624 | 5,610 | 29,841 | |||||||||||||||||||
| Segment adjusted EBITDA | $ | 770,764 | $ | 1,529,833 | $ | 356,595 | $ | 2,657,192 | |||||||||||||||
| Depreciation and amortization | $ | (192,960) | $ | (225,865) | $ | (46,633) | $ | (465,458) | |||||||||||||||
| Investments in unconsolidated affiliates | $ | 28,262 | $ | 413,877 | $ | 361,668 | $ | 803,807 | |||||||||||||||
| Total assets | $ | 7,079,315 | $ | 14,987,107 | $ | 2,204,942 | $ | 24,271,364 | |||||||||||||||
| Capital expenditures | $ | 321,469 | $ | 444,875 | $ | 82,135 | $ | 848,479 | |||||||||||||||
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $1.9 billion, of which $1.7 billion related to revenues within the segment, and cost of sales and fuel of $503.3 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $240.5 million and cost of sales and fuel of $32.6 million.
(c) - Intersegment revenues are primarily commodity sales, which are based on the contracted selling price that is generally index-based and settled monthly, and for the Natural Gas Gathering and Processing segment totaled $3.1 billion. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
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| Nine Months Ended September 30, 2022 | Total Segments | Other and Eliminations | Total | |||||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||
| Reconciliations of total segments to consolidated | ||||||||||||||||||||
| NGL and condensate sales | $ | 17,342,070 | $ | (3,095,907) | $ | 14,246,163 | ||||||||||||||
| Residue natural gas sales | 2,065,584 | (332) | 2,065,252 | |||||||||||||||||
| Gathering, processing and exchange services revenue | 519,145 | — | 519,145 | |||||||||||||||||
| Transportation and storage revenue | 514,199 | (6,356) | 507,843 | |||||||||||||||||
| Other | 26,167 | (9,709) | 16,458 | |||||||||||||||||
| Total revenues (a) | $ | 20,467,165 | $ | (3,112,304) | $ | 17,354,861 | ||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (17,118,866) | $ | 3,102,245 | $ | (14,016,621) | ||||||||||||||
| Operating costs | $ | (832,098) | $ | 4,533 | $ | (827,565) | ||||||||||||||
| Depreciation and amortization | $ | (465,458) | $ | (3,259) | $ | (468,717) | ||||||||||||||
| Equity in net earnings from investments | $ | 111,150 | $ | — | $ | 111,150 | ||||||||||||||
| Investments in unconsolidated affiliates | $ | 803,807 | $ | — | $ | 803,807 | ||||||||||||||
| Total assets | $ | 24,271,364 | $ | 167,879 | $ | 24,439,243 | ||||||||||||||
| Capital expenditures | $ | 848,479 | $ | 37,562 | $ | 886,041 | ||||||||||||||
(a) - Noncustomer revenue for the nine months ended September 30, 2022, totaled $(363.9) million related primarily to losses from derivatives on commodity contracts.
| Nine Months Ended September 30, 2021 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| NGL and condensate sales | $ | 1,874,183 | $ | 9,097,512 | $ | — | $ | 10,971,695 | |||||||||||||||
| Residue natural gas sales | 940,850 | — | 115,478 | 1,056,328 | |||||||||||||||||||
| Gathering, processing and exchange services revenue | 101,221 | 376,429 | — | 477,650 | |||||||||||||||||||
| Transportation and storage revenue | — | 127,057 | 365,578 | 492,635 | |||||||||||||||||||
| Other | 15,422 | 38,161 | 682 | 54,265 | |||||||||||||||||||
| Total revenues (c) | 2,931,676 | 9,639,159 | 481,738 | 13,052,573 | |||||||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | (2,019,723) | (7,838,141) | (10,901) | (9,868,765) | |||||||||||||||||||
| Operating costs | (266,237) | (382,012) | (121,843) | (770,092) | |||||||||||||||||||
| Equity in net earnings from investments | 2,669 | 14,078 | 70,866 | 87,613 | |||||||||||||||||||
| Noncash compensation expense and other | 15,254 | 14,994 | 3,737 | 33,985 | |||||||||||||||||||
| Segment adjusted EBITDA | $ | 663,639 | $ | 1,448,078 | $ | 423,597 | $ | 2,535,314 | |||||||||||||||
| Depreciation and amortization | $ | (198,050) | $ | (223,679) | $ | (43,786) | $ | (465,515) | |||||||||||||||
| Investments in unconsolidated affiliates | $ | 25,734 | $ | 417,573 | $ | 353,926 | $ | 797,233 | |||||||||||||||
| Total assets | $ | 6,725,753 | $ | 14,898,568 | $ | 2,129,406 | $ | 23,753,727 | |||||||||||||||
| Capital expenditures | $ | 177,362 | $ | 225,766 | $ | 73,540 | $ | 476,668 | |||||||||||||||
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $1.8 billion, of which $1.6 billion related to revenues within the segment, and cost of sales and fuel of $449.1 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $323.2 million and cost of sales and fuel of $20.5 million.
(c) - Intersegment revenues are primarily commodity sales, which are based on the contracted selling price that is generally index-based and settled monthly, and for the Natural Gas Gathering and Processing segment totaled $1.9 billion. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
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| Nine Months Ended September 30, 2021 | Total Segments | Other and Eliminations | Total | |||||||||||||||||
(Thousands of dollars) | ||||||||||||||||||||
| Reconciliations of total segments to consolidated | ||||||||||||||||||||
| NGL and condensate sales | $ | 10,971,695 | $ | (1,920,483) | $ | 9,051,212 | ||||||||||||||
| Residue natural gas sales | 1,056,328 | — | 1,056,328 | |||||||||||||||||
| Gathering, processing and exchange services revenue | 477,650 | — | 477,650 | |||||||||||||||||
| Transportation and storage revenue | 492,635 | (10,541) | 482,094 | |||||||||||||||||
| Other | 54,265 | (1,731) | 52,534 | |||||||||||||||||
| Total revenues (a) | $ | 13,052,573 | $ | (1,932,755) | $ | 11,119,818 | ||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | (9,868,765) | $ | 1,931,149 | $ | (7,937,616) | ||||||||||||||
| Operating costs | $ | (770,092) | $ | (881) | $ | (770,973) | ||||||||||||||
| Depreciation and amortization | $ | (465,515) | $ | (3,068) | $ | (468,583) | ||||||||||||||
| Equity in net earnings from investments | $ | 87,613 | $ | — | $ | 87,613 | ||||||||||||||
| Investments in unconsolidated affiliates | $ | 797,233 | $ | — | $ | 797,233 | ||||||||||||||
| Total assets | $ | 23,753,727 | $ | 118,604 | $ | 23,872,331 | ||||||||||||||
| Capital expenditures | $ | 476,668 | $ | 13,661 | $ | 490,329 | ||||||||||||||
(a) - Noncustomer revenue for the nine months ended September 30, 2021, totaled $(386.9) million related primarily to losses from derivatives on commodity contracts.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
| Reconciliation of net income to total segment adjusted EBITDA | |||||||||||||||||||||||
| Net income | $ | 431,751 | $ | 392,018 | $ | 1,237,300 | $ | 1,120,333 | |||||||||||||||
| Add: | |||||||||||||||||||||||
| Interest expense, net of capitalized interest | 166,939 | 184,049 | 509,744 | 554,529 | |||||||||||||||||||
| Depreciation and amortization | 157,102 | 154,542 | 468,717 | 468,583 | |||||||||||||||||||
| Income taxes | 132,129 | 121,899 | 385,270 | 354,100 | |||||||||||||||||||
| Noncash compensation expense | 15,229 | 12,978 | 52,976 | 37,086 | |||||||||||||||||||
| Other corporate costs and equity AFUDC | 2,645 | (944) | 3,185 | 683 | |||||||||||||||||||
| Total segment adjusted EBITDA | $ | 905,795 | $ | 864,542 | $ | 2,657,192 | $ | 2,535,314 | |||||||||||||||
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.
Market Conditions and Business Update - We experienced earnings growth in the third quarter 2022, compared with the third quarter 2021, due primarily to higher realized commodity prices, net of hedging, and increased producer activity in the Rocky Mountain region in our Natural Gas Gathering and Processing segment, and higher storage rates in our Natural Gas Pipelines segment. We also benefited from completed capital-growth projects, highlighting our extensive and integrated assets that are located in some of the most productive shale basins in the United States. Although the energy industry has experienced many commodity cycles, we have positioned ourselves to reduce exposure to direct commodity price volatility. Each of our three reportable segments are primarily fee-based, and we expect our consolidated earnings to be approximately 90% fee-based in 2022. While our Natural Gas Gathering and Processing segment’s earnings are primarily fee-based, we have direct commodity price exposure related primarily to fee with POP contracts, and we have hedged approximately 70% of our
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forecasted equity volumes for the remainder of 2022 and 2023. In addition, our Natural Gas Gathering and Processing and Natural Gas Liquids segments are exposed to volumetric risk as a result of drilling and completion activity, severe weather disruptions, operational outages, global crude oil, NGL and natural gas demand and normal volumetric well declines, which are offset partially by rising gas-to-oil ratios. Our Natural Gas Pipelines segment is not exposed to significant volumetric risk due to nearly all of our capacity being subscribed under long-term, firm fee-based contracts.
Medford Incident - On July 9, 2022, a fire occurred at our 210 MBbl/d Medford, Oklahoma, natural gas liquids fractionation facility. All personnel were safe and accounted for with evacuations of local residents taken as a precautionary measure. While the facility remains inoperable, we continue to provide midstream services through our integrated NGL pipeline system between the Mid-Continent and Gulf Coast regions, along with our fractionation and storage assets and arrangements with industry peers. We are cooperating with government agencies, as applicable, and we continue our efforts to determine the cause of the event and expect the Medford facility to remain out of service for an extended period. Subject to the terms and conditions of our insurance policies and any applicable sub-limits, we have property damage and business interruption coverage with a combined per occurrence limit of $2 billion and deductibles of $5 million per occurrence for property damage and a 45-day waiting period per occurrence for business interruption coverage. Net income for the three and nine months ended September 30, 2022, includes the unfavorable impact of our $5 million property deductible and approximately $30 million of losses incurred associated with the 45-day waiting period for business interruption coverage. As a result of our insurance coverage, we do not expect the Medford incident will have a material effect on our financial condition, results of operations or cash flows. However, the timing of insurance proceeds may impact our results in a given quarter or year.
In September 2022, we received notice that our insurers agreed to pay an unallocated first installment of insurance proceeds of $100 million. As of November 2, 2022, we have received approximately $45 million of this amount and expect to receive the remainder within the next 30 days. We have applied the cash received to the outstanding insurance receivables discussed below.
In third quarter 2022, we recorded a partial impairment charge of $6.7 million, which represents the value associated with certain Medford facility property, based on our limited assessments to date and related estimates and assumptions. This impairment charge is fully offset by an insurance receivable.
Our business interruption insurance provides coverage including, but not limited to (i) incurred costs and losses that are either unavoidable or incurred to mitigate or reduce losses and (ii) lost earnings. We record receivables for incurred costs and losses related to our business interruption coverage for the amount probable of recovery, not to exceed the actual losses incurred. In the three and nine months ended September 30, 2022, we recorded receivables of $21.7 million, related primarily to third-party fractionation costs incurred subsequent to the 45-day business interruption waiting period, that are probable of recovery, and fully offset the actual losses incurred.
Geopolitical events and supply chain - Recent geopolitical events have disrupted global supply chains and have caused volatile commodity prices for natural gas, NGLs and crude oil. The United States has banned the import of Russian oil and other energy commodities, and European countries have taken steps to reduce imports of Russian oil and natural gas. In addition, a continued Gulf Coast LNG facility outage has further disrupted the overseas and domestic natural gas markets, and the Organization of Petroleum Exporting Countries (OPEC) has recently agreed to cut production from August 2022 levels. These events have highlighted the importance of a strong national energy supply and infrastructure supporting the United States economy and national security. We operate an integrated, reliable, resilient and diversified network of NGL and natural gas gathering, processing, fractionation, storage and transportation assets connecting supply in the Rocky Mountain, Mid-Continent, Permian and Gulf Coast regions with key market centers. We believe our assets are well positioned to provide midstream services to producers and end-use markets as they respond to domestic and international demand.
Inflation - Inflation in the United States increased significantly in late 2021 and 2022. This rise in inflation has generally resulted in higher costs in 2022. Although it is expected that this trend will continue, we do not expect a material impact on our results of operations as we believe the fee escalators or fuel recovery mechanisms on many of our natural gas liquids and natural gas gathering and processing contracts offset the increase in costs.
Severe weather - In the second quarter 2022, we experienced two separate severe weather events in the Rocky Mountain region that brought disruptions to our operations. Our employees in the region were well prepared and made the necessary operational adjustments to maintain the safety of our employees, their families and our assets. Blizzard conditions and region-wide power outages negatively impacted the gathered and processed volumes in our Natural Gas Gathering and Processing segment, and NGL volumes delivered to and transported by our Natural Gas Liquids segment, including volumes from third parties, in April and May 2022. By the end of June, volumes returned to pre-outage levels.
See Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk, in this Quarterly Report for more information on our exposure to market risk.
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Natural Gas - In our Natural Gas Gathering and Processing segment, we benefited from higher realized commodity prices, net of hedging, and increased gathered and processed volumes in the third quarter 2022, compared with the third quarter 2021, due primarily to increased producer activity in the Rocky Mountain region and SCOOP and STACK areas of Oklahoma.
In our Natural Gas Pipelines segment, continued demand from local distribution companies, electric-generation facilities and large industrial companies resulted in low-cost expansions that position us well to provide additional services to our customers. In April 2022, we completed a 1.1 Bcf expansion of our Texas natural gas storage facilities’ capacities, and the expansion is fully subscribed through 2032. We are currently expanding the injection capabilities of our Oklahoma natural gas storage facilities resulting in the ability to utilize and subscribe an additional 4 Bcf of our existing storage capacity, with expected completion in second quarter 2023. As of September 2022, we have subscribed approximately 90% of the 4 Bcf of storage capacity through 2029 and continue to market the remaining capacity. In addition, we have begun the electrification of certain compression assets for Viking to improve the reliability of our operations while lowering our greenhouse gas emissions from this equipment. This project is expected to cost approximately $95 million and to be completed in the third quarter 2023. Viking will seek to recover its investment in the project through a future proposed change in rates.
NGLs - In our Natural Gas Liquids segment, NGL volumes remained relatively unchanged in the third quarter 2022, compared with the third quarter 2021, due primarily to increased NGL production and higher ethane volumes from incentivized ethane recovery in the Rocky Mountain region, offset by decreased NGL production and lower ethane volumes recovered in the Mid-Continent region.
Ethane Production - Price differentials between ethane and natural gas can cause natural gas processors to extract ethane or leave it in the natural gas stream, known as ethane rejection. As a result of these ethane economics, ethane volumes on our system can fluctuate. In September 2022, ethane prices decreased relative to natural gas prices, as overall demand decreased, and were further impacted by unplanned petrochemical plant outages. This resulted in higher ethane rejection across most basins, including the areas where we operate. As these plants come back online and demand for feedstock returns, we expect improvement in ethane economics, however price fluctuations are expected to continue. Ethane volumes under long-term contracts delivered to our NGL system remained relatively unchanged at an average of 455 MBbl/d in the third quarter 2022, compared with 455 MBbl/d in the third quarter 2021. However, ethane volumes increased in the Rocky Mountain region in the third quarter 2022, compared with the third quarter 2021, due primarily to our incentivizing some processors to recover ethane in the region. This increase was offset by lower ethane volumes in the Mid-Continent region due to ethane economics. We estimate that there are more than 225 MBbl/d of discretionary ethane, consisting of more than 125 MBbl/d in the Rocky Mountain region and approximately 100 MBbl/d in the Mid-Continent region, that can be recovered and transported on our system.
Growth Projects - We announced plans in late 2021 to restart construction on our 200 MMcf/d Demicks Lake III natural gas processing plant in the Williston Basin and our 125 MBbl/d MB-5 fractionator in Mont Belvieu, Texas, which are now expected to be completed in the first quarter 2023 and second quarter 2023, respectively. See “Executive Summary” in Part I, Item 1, Business and “Recent Developments” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report for more information on our growth projects.
Sustainability and Social Responsibility - In 2021 and 2022, we qualified for inclusion in the S&P Global Sustainability Yearbook and received a perfect score of 100 in the Human Rights Campaign Corporate Equality Index. In 2022, we received an MSCI Inc. ESG rating of AAA. In 2021, we were named to JUST Capital’s list of Top 100 U.S. Companies Supporting Healthy Families and Communities and received an ESG Risk Rating placing us in the top 10% in the refiners and pipelines industry assessed by Sustainalytics. We continue to look for ways to reduce our GHG emissions and utilize more efficient technologies. We are evaluating the development of renewable energy and low-carbon projects, including opportunities that may complement our extensive midstream assets and expertise.
Energy Venture Capital Opportunity - We recently announced a new agreement between us and several other Oklahoma energy companies and organizations to fund an effort to transform the state into a hub for energy technology startups. The effort aims to invest a total of up to $60 million, of which we will fund a portion, to attract startups to the region by providing access to early-stage venture capital and other resources.
Debt Repayments - In July 2022, we redeemed the remaining $895.8 million of our $900 million, 3.375% senior notes due October 2022 at 100% of the principal amount, plus accrued and unpaid interest, with cash on hand and short-term borrowings.
Dividends - In February 2022, May 2022 and August 2022, we maintained and paid a quarterly common stock dividend of $0.935 per share ($3.74 per share on an annualized basis), which is consistent with the respective quarters in the prior year. We
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declared a quarterly common stock dividend of $0.935 per share ($3.74 per share on an annualized basis) in October 2022. The quarterly common stock dividend will be paid November 14, 2022, to shareholders of record at the close of business on November 1, 2022.
Goodwill Impairment Review - We assess our goodwill for impairment at least annually as of July 1, unless events or changes in circumstances indicate an impairment may have occurred before that time. At July 1, 2022, we assessed qualitative factors to determine whether it was more likely than not that the fair value of reporting units with goodwill are less than their carrying amount. After assessing qualitative factors (including macroeconomic conditions, industry and market considerations, costs and overall financial performance), we determined that it was more likely than not that the fair value of the Natural Gas Pipelines and Natural Gas Liquids reporting units was not less than their respective carrying value, that no further testing was necessary, and that goodwill was not considered impaired.
FINANCIAL RESULTS AND OPERATING INFORMATION
How We Evaluate Our Operations
Management uses a variety of financial and operating metrics to analyze our performance. Our consolidated financial metrics include: (1) operating income; (2) net income; (3) diluted EPS; and (4) adjusted EBITDA. We evaluate segment operating results using adjusted EBITDA and our operating metrics, which include various volume and rate statistics that are relevant for the respective segment. These operating metrics allow investors to analyze the various components of segment financial results in terms of volumes and rate/price. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. For additional information on our operating metrics, see the respective segment subsections of this “Financial Results and Operating Information” section.
Non-GAAP Financial Measures - 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 certain 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, EPS 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.
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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, | 2022 vs. 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||||
| Financial Results | 2022 | 2021 | 2022 | 2021 | $ Increase (Decrease) | $ Increase (Decrease) | |||||||||||||||||||||||||||||
(Millions of dollars, except per share amounts) | |||||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Commodity sales | $ | 5,563.5 | $ | 4,204.8 | $ | 16,319.5 | $ | 10,115.7 | 1,358.7 | 6,203.8 | |||||||||||||||||||||||||
| Services | 350.0 | 331.4 | 1,035.3 | 1,004.1 | 18.6 | 31.2 | |||||||||||||||||||||||||||||
| Total revenues | 5,913.5 | 4,536.2 | 17,354.8 | 11,119.8 | 1,377.3 | 6,235.0 | |||||||||||||||||||||||||||||
Cost of sales and fuel (exclusive of items shown separately below) | 4,772.7 | 3,449.1 | 14,016.6 | 7,937.6 | 1,323.6 | 6,079.0 | |||||||||||||||||||||||||||||
| Operating costs | 286.1 | 265.2 | 827.5 | 770.9 | 20.9 | 56.6 | |||||||||||||||||||||||||||||
Depreciation and amortization | 157.1 | 154.5 | 468.7 | 468.6 | 2.6 | 0.1 | |||||||||||||||||||||||||||||
| Other operating (income) expense, net | (1.6) | (0.5) | (8.6) | (1.4) | 1.1 | 7.2 | |||||||||||||||||||||||||||||
| Operating income | $ | 699.2 | $ | 667.9 | $ | 2,050.6 | $ | 1,944.1 | 31.3 | 106.5 | |||||||||||||||||||||||||
Equity in net earnings from investments | $ | 39.2 | $ | 28.6 | $ | 111.2 | $ | 87.6 | 10.6 | 23.6 | |||||||||||||||||||||||||
Interest expense, net of capitalized interest | $ | (166.9) | $ | (184.0) | $ | (509.7) | $ | (554.5) | (17.1) | (44.8) | |||||||||||||||||||||||||
| Net income | $ | 431.8 | $ | 392.0 | $ | 1,237.3 | $ | 1,120.3 | 39.8 | 117.0 | |||||||||||||||||||||||||
| Diluted EPS | $ | 0.96 | $ | 0.88 | $ | 2.76 | $ | 2.50 | 0.08 | 0.3 | |||||||||||||||||||||||||
Adjusted EBITDA | $ | 902.4 | $ | 865.2 | $ | 2,652.3 | $ | 2,533.1 | 37.2 | 119.2 | |||||||||||||||||||||||||
| Capital expenditures | $ | 326.7 | $ | 166.2 | $ | 886.0 | $ | 490.3 | 160.5 | 395.7 | |||||||||||||||||||||||||
See reconciliation of net income to adjusted EBITDA in the “Non-GAAP Financial Measures” 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, except where noted.
Operating income increased $31.3 million for the three months ended September 30, 2022, compared with the same period in 2021, primarily as a result of the following:
•Natural Gas Gathering and Processing - increases of $51.6 million due primarily to higher realized commodity prices, net of hedging, and average fee rates and $31.7 million from higher volumes; and
•Natural Gas Pipelines - an increase of $14.4 million in storage services due primarily to higher storage rates; offset by
•Natural Gas Liquids - a decrease of $45.0 million in optimization and marketing due primarily to lower earnings on sales of purity NGLs held in inventory and narrower location and commodity price differentials. Quarterly results were also impacted by approximately $30 million of incurred costs and losses related to the 45-day business interruption coverage waiting period for the Medford incident; and
•Consolidated Operating Costs - an increase of $20.9 million due primarily to higher outside services and property taxes.
Operating income increased $106.5 million for the nine months ended September 30, 2022, compared with the same period in 2021, primarily as a result of the following:
•Natural Gas Liquids - an increase of $152.3 million in exchange services related primarily to higher average fee rates, higher volumes, wider commodity price differentials and the unfavorable impact of Winter Storm Uri in the first quarter 2021, offset partially by higher fuel and power costs and third-party fractionation costs, and $39.2 million in lower optimization and marketing earnings. Results include the impact of approximately $30 million of incurred costs and losses related to the 45-day business interruption coverage waiting period for the Medford incident; and
•Natural Gas Gathering and Processing - an increase of $77.8 million due primarily to higher realized NGL and condensate prices, net of hedging, and average fee rates and $52.8 million from higher volumes in the Rocky Mountain region; offset by
•Natural Gas Pipelines - a decrease of $134.7 million due to the impact of Winter Storm Uri in the first quarter 2021, offset partially by increases of $59.8 million due primarily to higher storage, pricing on compression and transportation services; and
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•Consolidated Operating Costs - an increase of $56.6 million due primarily to higher outside services, materials and supplies expense and property taxes.
Net income and diluted EPS increased for the three months and nine months ended September 30, 2022, compared with the same periods in 2021, due primarily to the items discussed above, lower interest expense related to increased capitalized interest and lower debt balances and higher equity in net earnings from investments. These increases were offset partially by higher income taxes and losses related to the mark-to-market of investments associated with certain benefit plan investments.
Capital expenditures increased for the three and nine months ended September 30, 2022, compared with the same periods in 2021, due primarily to our capital-growth projects, including the construction of our Demicks Lake III natural gas processing plant, our MB-5 fractionator and the Viking compression 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 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 fee with POP contracts. Under certain fee with POP contracts, our contractual fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. 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 2022 and 2023. This segment has substantial long-term acreage dedications in some of the most productive areas of the Williston Basin, which helps to mitigate long-term volumetric risk.
Selected Financial Results and Operating Information - The following tables set forth certain selected financial results and operating information 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, | 2022 vs. 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||||
| Financial Results | 2022 | 2021 | 2022 | 2021 | $ Increase (Decrease) | $ Increase (Decrease) | |||||||||||||||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||||||||||||||
| NGL and condensate sales | $ | 990.0 | $ | 816.0 | $ | 3,033.6 | $ | 1,874.2 | 174.0 | 1,159.4 | |||||||||||||||||||||||||
| Residue natural gas sales | 824.6 | 370.8 | 2,035.3 | 940.9 | 453.8 | 1,094.4 | |||||||||||||||||||||||||||||
Gathering, compression, dehydration and processing fees and other revenue | 44.0 | 41.7 | 121.6 | 116.6 | 2.3 | 5.0 | |||||||||||||||||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (1,460.7) | (913.9) | (4,147.9) | (2,019.7) | 546.8 | 2,128.2 | |||||||||||||||||||||||||||||
Operating costs, excluding noncash compensation adjustments | (94.7) | (91.3) | (278.7) | (254.0) | 3.4 | 24.7 | |||||||||||||||||||||||||||||
| Equity in net earnings from investments | 1.7 | 0.5 | 4.9 | 2.7 | 1.2 | 2.2 | |||||||||||||||||||||||||||||
| Other | (1.0) | 5.9 | 2.0 | 2.9 | (6.9) | (0.9) | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 303.9 | $ | 229.7 | $ | 770.8 | $ | 663.6 | 74.2 | 107.2 | |||||||||||||||||||||||||
| Capital expenditures | $ | 104.8 | $ | 80.8 | $ | 321.5 | $ | 177.4 | 24.0 | 144.1 | |||||||||||||||||||||||||
See reconciliation of net income to adjusted EBITDA in the “Non-GAAP Financial Measures” 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.
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Adjusted EBITDA increased $74.2 million for the three months ended September 30, 2022, compared with the same period in 2021, primarily as a result of the following:
•an increase of $51.6 million due primarily to higher realized commodity prices, net of hedging, and average fee rates; and
•an increase of $31.7 million from higher volumes due primarily to increased producer activity in the Rocky Mountain region; offset by
•a decrease of $7.3 million due to a gain on the partial sale of an equity investment in 2021.
Adjusted EBITDA increased $107.2 million for the nine months ended September 30, 2022, compared with the same period in 2021, primarily as a result of the following:
•an increase of $77.8 million due primarily to higher realized NGL and condensate prices, net of hedging, and average fee rates;
•an increase of $52.8 million from higher volumes due primarily to increased producer activity in the Rocky Mountain region, offset partially by volume declines in the Mid-Continent region and the impact of severe weather in the Rocky Mountain region in the second quarter 2022; and
•an increase of $5.3 million due to a contract settlement in 2022; offset by
•an increase of $24.7 million in operating costs due primarily to higher materials and supplies expense due primarily to the growth of our operations and higher outside services; and
•a decrease of $7.3 million due to a gain on the partial sale of an equity investment in 2021.
Capital expenditures increased for the three and nine months ended September 30, 2022, compared with the same periods in 2021, due primarily to growth projects, including our Demicks Lake III project.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| Operating Information (a) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Natural gas gathered (BBtu/d) | 3,006 | 2,757 | 2,824 | 2,693 | |||||||||||||||||||
Natural gas processed (BBtu/d) (b) | 2,743 | 2,549 | 2,590 | 2,471 | |||||||||||||||||||
Average fee rate ($/MMBtu) | $ | 1.16 | $ | 1.02 | $ | 1.09 | $ | 1.04 | |||||||||||||||
(a) - Includes volumes for consolidated entities only.
(b) - Includes volumes we processed at company-owned and third-party facilities.
Our natural gas gathered and natural gas processed volumes increased for the three and nine months ended September 30, 2022, compared with the same periods in 2021, due primarily to increased producer activity in the Rocky Mountain region and SCOOP and STACK areas of Oklahoma, with the nine months ended September 30, 2022 negatively impacted by severe weather in the Rocky Mountain region in the second quarter 2022.
Our average fee rate increased for the three and nine months ended September 30, 2022, compared with the same periods in 2021, due primarily to increased contribution of volumes on higher fee contracts in the Williston Basin and inflation-based escalators on most contracts. Also, for certain fee with POP contracts, our contractual fees increased due to production volumes, delivery pressures, or commodity prices relative to specified contractual thresholds.
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. 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 Kansas, Nebraska, Iowa and Illinois. We have a 50% ownership interest in Overland Pass Pipeline, which operates an interstate NGL pipeline originating in Wyoming and Colorado and terminating in Kansas. The majority of the pipeline-connected natural gas processing plants in the Williston Basin, Oklahoma, Kansas and the Texas Panhandle are connected to our NGL gathering systems. We lease rail cars and own and operate truck- and rail-loading and -unloading facilities connected
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to our NGL fractionation, storage and pipeline assets. 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.
In the nine months ended September 30, 2022, we connected one raw feed truck terminal in the Mid-Continent region to our NGL system and one third-party natural gas processing plant in the Permian Basin connected to our system was expanded.
Selected Financial Results and Operating Information - The following tables set forth certain selected financial results and operating information for our Natural Gas Liquids segment for the periods indicated:
| Three Months Ended | Nine Months Ended | Three Months | Nine Months | ||||||||||||||||||||||||||||||||
| September 30, | September 30, | 2022 vs. 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||||
| Financial Results | 2022 | 2021 | 2022 | 2021 | $ Increase (Decrease) | $ Increase (Decrease) | |||||||||||||||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||||||||||||||
| NGL and condensate sales | $ | 4,749.2 | $ | 3,853.1 | $ | 14,308.5 | $ | 9,097.5 | 896.1 | 5,211.0 | |||||||||||||||||||||||||
| Exchange service revenues and other | 141.8 | 136.0 | 423.0 | 414.6 | 5.8 | 8.4 | |||||||||||||||||||||||||||||
| Transportation and storage revenues | 39.9 | 40.5 | 127.0 | 127.1 | (0.6) | (0.1) | |||||||||||||||||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (4,316.3) | (3,377.9) | (12,948.8) | (7,838.1) | 938.4 | 5,110.7 | |||||||||||||||||||||||||||||
| Operating costs, excluding noncash compensation adjustments | (138.7) | (122.4) | (398.5) | (359.5) | 16.3 | 39.0 | |||||||||||||||||||||||||||||
Equity in net earnings from investments | 11.2 | 5.4 | 25.0 | 14.1 | 5.8 | 10.9 | |||||||||||||||||||||||||||||
| Other | (2.3) | (2.5) | (6.4) | (7.6) | 0.2 | 1.2 | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 484.8 | $ | 532.2 | $ | 1,529.8 | $ | 1,448.1 | (47.4) | 81.7 | |||||||||||||||||||||||||
| Capital expenditures | $ | 169.2 | $ | 53.8 | $ | 444.9 | $ | 225.8 | 115.4 | 219.1 | |||||||||||||||||||||||||
See reconciliation of net income to adjusted EBITDA in the “Non-GAAP Financial Measures” 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 for the three and nine months ended September 30, 2022, includes $21.7 million in accruals of business interruption insurance recoveries and an approximately $30 million unfavorable impact from the 45-day business interruption coverage waiting period related to the Medford incident.
Adjusted EBITDA decreased $47.4 million for the three months ended September 30, 2022, compared with the same period in 2021, primarily as a result of the following:
•a decrease of $45.0 million in optimization and marketing due primarily to lower earnings on sales of purity NGLs held in inventory and narrower location and commodity price differentials. We expect an earnings benefit of approximately $17 million on the forward sales of inventory over the next two quarters; and
•an increase of $16.3 million in operating costs due primarily to higher property taxes associated with our completed capital-growth projects and higher outside services; offset by
•an increase of $10.1 million in exchange services due primarily to:
◦$62.6 million in higher average fee rates, primarily as a result of inflation-based and fuel cost escalators in our contracts, and
◦$21.4 million in higher volumes primarily in the Rocky Mountain region, partially offset by lower volumes in the Mid-Continent region, offset by
◦$50.9 million in higher costs, primarily fuel and power costs as well as third-party fractionation costs. A portion of the third-party fractionation costs relate to the 45-day Medford incident business interruption coverage waiting period,
◦$11.2 million related to lower earnings on unfractionated NGLs held in inventory, and
◦$10.7 million in narrower commodity price differentials and lower related volumes.
Adjusted EBITDA increased $81.7 million for the nine months ended September 30, 2022, compared with the same period in 2021, primarily as a result of the following:
•an increase of $106.1 million in exchange services (excluding the impact of Winter Storm Uri discussed below) due primarily to:
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◦$159.8 million in higher average fee rates, primarily as a result of inflation-based and fuel cost escalators in our contracts,
◦$64.4 million in higher volumes primarily in the Rocky Mountain region and Permian Basin, partially offset by lower volumes in the Mid-Continent region, and
◦$26.8 million related to wider commodity price differentials and higher related volumes, offset by
◦$129.3 million in higher costs, primarily fuel and power costs and third-party fractionation costs. A portion of the third-party fractionation costs relate to the 45-day Medford incident business interruption coverage waiting period, and
◦$12.9 million related to the recognition of proceeds previously considered a gain contingency in the second quarter 2021; and
•an increase of $46.2 million in exchange services due to the unfavorable impact of Winter Storm Uri in the first quarter 2021; offset by
•a decrease of $39.2 million in optimization and marketing due primarily to nonrecurring activities in the first quarter 2021 during Winter Storm Uri, and lower earnings on sales of purity NGLs held in inventory; offset partially by wider location and commodity price differentials. We expect an earnings benefit of approximately $17 million on the forward sales of inventory over the next two quarters; and
•an increase of $39.0 million in operating costs due primarily to higher property taxes associated with our completed capital-growth projects and higher outside services.
Capital expenditures increased for the three and nine months ended September 30, 2022, compared with the same periods in 2021, due primarily to capital-growth projects, including our MB-5 fractionator.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| Operating Information | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Raw feed throughput (MBbl/d) (a) | 1,278 | 1,275 | 1,252 | 1,174 | |||||||||||||||||||
Average Conway-to-Mont Belvieu OPIS price differential - ethane in ethane/propane mix ($/gallon) | $ | 0.03 | $ | 0.00 | $ | 0.04 | $ | (0.01) | |||||||||||||||
(a) - Represents physical raw feed volumes for which we provide transportation and/or fractionation services.
We generally expect ethane volumes to increase or decrease with overall NGL production. However, ethane volumes may experience growth or decline greater than overall NGL production due to ethane economics causing producers to extract or reject ethane.
Volumes remained relatively unchanged for the three months ended September 30, 2022, compared with the same period in 2021, due primarily to increased NGL production and higher ethane volumes from incentivized ethane recovery in the Rocky Mountain region, which were offset by decreased NGL production and lower ethane recovery due to ethane economics in the Mid-Continent region.
Volumes increased for the nine months ended September 30, 2022, compared with the same period in 2021, due primarily to increased NGL production in the Rocky Mountain region and Permian Basin, and higher ethane volumes from incentivized ethane recovery in the Rocky Mountain region, offset partially by decreased ethane recovery in the Mid-Continent region due to ethane economics. Volumes have also benefited from the unfavorable impact of Winter Storm Uri in the first quarter 2021, offset partially by the impact of severe winter weather in the Rocky Mountain region in 2022.
Natural Gas Pipelines
Overview - Our Natural Gas Pipelines segment, through its wholly owned assets primarily in Oklahoma, Texas and the upper Midwest, provides transportation and storage services to end users, such as natural gas distribution and electric-generation companies, that require natural gas to operate their businesses regardless of location price differentials. We have 50% ownership interests in Northern Border Pipeline and Roadrunner, which provide transportation services to various end users. Our assets are connected to key supply areas and demand centers, including supply areas in Canada and the United States via our intrastate and interstate natural gas pipelines and Northern Border Pipeline, and export markets in Mexico via Roadrunner which enable us to provide essential natural gas transportation and storage services.
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Selected Financial Results and Operating Information - The following tables set 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, | 2022 vs. 2021 | 2022 vs. 2021 | ||||||||||||||||||||||||||||||||
| Financial Results | 2022 | 2021 | 2022 | 2021 | $ Increase (Decrease) | $ Increase (Decrease) | |||||||||||||||||||||||||||||
(Millions of dollars) | |||||||||||||||||||||||||||||||||||
| Transportation revenues | $ | 100.2 | $ | 101.2 | $ | 301.6 | $ | 313.0 | (1.0) | (11.4) | |||||||||||||||||||||||||
| Storage revenues | 33.6 | 19.1 | 85.6 | 52.6 | 14.5 | 33.0 | |||||||||||||||||||||||||||||
| Residue natural gas sales and other revenues | 3.1 | 0.2 | 30.9 | 116.1 | 2.9 | (85.2) | |||||||||||||||||||||||||||||
| Cost of sales and fuel (exclusive of depreciation and operating costs) | (4.5) | (0.3) | (22.2) | (10.9) | 4.2 | 11.3 | |||||||||||||||||||||||||||||
| Operating costs, excluding noncash compensation adjustments | (42.4) | (39.2) | (121.5) | (115.4) | 3.2 | 6.1 | |||||||||||||||||||||||||||||
| Equity in net earnings from investments | 26.3 | 22.7 | 81.3 | 70.9 | 3.6 | 10.4 | |||||||||||||||||||||||||||||
| Other | 0.8 | (1.0) | 0.9 | (2.7) | 1.8 | 3.6 | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 117.1 | $ | 102.7 | $ | 356.6 | $ | 423.6 | 14.4 | (67.0) | |||||||||||||||||||||||||
| Capital expenditures | $ | 39.6 | $ | 24.6 | $ | 82.1 | $ | 73.5 | 15.0 | 8.6 | |||||||||||||||||||||||||
See reconciliation of net income to adjusted EBITDA in the “Non-GAAP Financial Measures” section.
Adjusted EBITDA increased $14.4 million for the three months ended September 30, 2022, compared with the same period in 2021, due primarily to higher storage rates.
Adjusted EBITDA decreased $67.0 million for the nine months ended September 30, 2022, compared with the same period in 2021, primarily as a result of the following:
•a decrease of $134.7 million due to the impact of Winter Storm Uri in the first quarter 2021 on natural gas sales of volumes previously held in inventory, interruptible transportation revenue and park and loan revenue; offset by
•an increase of $31.9 million in storage services due primarily to higher storage rates;
•an increase of $14.1 million due primarily to higher pricing on compression services and higher average prices on natural gas sales of volumes previously held in inventory, excluding the impact of Winter Storm Uri in the first quarter 2021 noted above;
•an increase of $13.8 million in transportation services due primarily to higher interruptible revenue, excluding the impact of Winter Storm Uri in the first quarter 2021 noted above, and higher firm transportation rates; and
•an increase of $10.4 million from higher equity in net earnings from investments due primarily to increased volumes on Northern Border Pipeline and higher firm transportation rates on Roadrunner.
Capital expenditures increased for the three and nine months ended September 30, 2022, compared with the same periods in 2021, due primarily to capital-growth projects, including the Viking compression projects, and timing of maintenance capital projects.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| Operating Information (a) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Natural gas transportation capacity contracted (MDth/d) | 7,318 | 7,335 | 7,367 | 7,353 | |||||||||||||||||||
| Transportation capacity contracted | 92 | % | 94 | % | 93 | % | 94 | % | |||||||||||||||
(a) - Includes volumes for consolidated entities only.
In April 2022, the FERC initiated a review of Guardian Pipeline’s rates pursuant to Section 5 of the Natural Gas Act. In August 2022, Guardian Pipeline reached a settlement in principle with the participants in the Section 5 rate case that, if approved by the FERC, will result in a future reduction of rates. We do not expect the reduced rates to impact materially our results of operations.
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Non-GAAP Financial Measures
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, | |||||||||||||||||||||||||
| (Unaudited) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Reconciliation of net income to adjusted EBITDA | (Thousands of dollars) | |||||||||||||||||||||||||
| Net income | $ | 431,751 | $ | 392,018 | $ | 1,237,300 | $ | 1,120,333 | ||||||||||||||||||
| Add: | ||||||||||||||||||||||||||
| Interest expense, net of capitalized interest | 166,939 | 184,049 | 509,744 | 554,529 | ||||||||||||||||||||||
| Depreciation and amortization | 157,102 | 154,542 | 468,717 | 468,583 | ||||||||||||||||||||||
| Income taxes | 132,129 | 121,899 | 385,270 | 354,100 | ||||||||||||||||||||||
| Noncash compensation expense (a) | 15,229 | 12,978 | 52,976 | 37,086 | ||||||||||||||||||||||
| Equity AFUDC | (734) | (246) | (1,699) | (1,485) | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 902,416 | $ | 865,240 | $ | 2,652,308 | $ | 2,533,146 | ||||||||||||||||||
| Reconciliation of segment adjusted EBITDA to adjusted EBITDA | ||||||||||||||||||||||||||
| Segment adjusted EBITDA: | ||||||||||||||||||||||||||
| Natural Gas Gathering and Processing | $ | 303,866 | $ | 229,657 | $ | 770,764 | $ | 663,639 | ||||||||||||||||||
| Natural Gas Liquids | 484,843 | 532,159 | 1,529,833 | 1,448,078 | ||||||||||||||||||||||
| Natural Gas Pipelines | 117,086 | 102,726 | 356,595 | 423,597 | ||||||||||||||||||||||
| Other | (3,379) | 698 | (4,884) | (2,168) | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 902,416 | $ | 865,240 | $ | 2,652,308 | $ | 2,533,146 | ||||||||||||||||||
(a) - Includes losses of $4.4 million and $0.9 million for the three months ended September 30, 2022 and 2021, respectively, and a loss of $19.4 million and a benefit of $4.2 million for the nine months ended September 30, 2022 and 2021, respectively, related to the mark-to-market of investments associated with certain benefit plan investments.
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.
As a result of the fire at our Medford, Oklahoma fractionation facility on July 9, 2022, we expect future cash flows to include cash outflows related to incurred costs and losses and cash inflows from proceeds from our business interruption and property damage insurance policies. We will request interim insurance payments toward our loss, but it is difficult to predict the timing or amount of such payments.
We expect our sources of cash inflows to provide sufficient resources to finance our operations, quarterly cash dividends, capital expenditures and maturities of long-term debt. We believe we have sufficient liquidity due to our $2.5 Billion Credit Agreement, which expires in June 2027, and access to $1.0 billion available through our “at-the-market” equity program. As of the date of this report, no shares have been sold through our “at-the-market” equity program.
We may 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.
Guarantees and Cash Management - We and ONEOK Partners are issuers of certain public debt securities. We guarantee certain indebtedness of ONEOK Partners, and ONEOK Partners and the Intermediate Partnership guarantee certain of our indebtedness. The guarantees in place for our and ONEOK Partners’ indebtedness are full, irrevocable, unconditional and absolute joint and several guarantees to the holders of each series of outstanding securities. Liabilities under the guarantees rank equally in right of payment with all existing and future senior unsecured indebtedness. As ONEOK Partners and the Intermediate Partnership are consolidated subsidiaries of ONEOK, separate financial statements for the guarantors are not required as long as the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. The Intermediate Partnership holds all of ONEOK Partners’ interests and equity in its subsidiaries, which are nonguarantors, and substantially all the assets and operations reside with nonguarantor operating subsidiaries. Therefore, as allowed under Rule 13-01, we have excluded the summarized financial information for each issuer and guarantor as the combined financial information of the subsidiary issuer and parent guarantor, excluding our ownership of
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all the interests in ONEOK Partners, reflect no material assets, liabilities or results of operations, apart from the guaranteed indebtedness. For additional information on our and ONEOK Partners’ indebtedness, see Note D of the Notes to Consolidated Financial Statements in this Quarterly Report.
We use a centralized cash management program that concentrates the cash assets of our nonguarantor 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, 2022, we had a working capital deficit of $1,373.3 million (defined as current assets less current liabilities). Although 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 repayments, and (d) accounts receivable and payable; and (ii) the volume and cost of inventory and commodity imbalances, our working capital deficit at September 30, 2022, was driven primarily by short term borrowings used to repay existing indebtedness and current maturities of long-term debt. We may have working capital deficits in future periods as we continue to repay long-term debt. We do not expect this working capital deficit to have an adverse impact to our cash flows or operations.
In June 2022, we amended and restated our $2.5 Billion Credit Agreement, which matures in June 2027. As of September 30, 2022, we were in compliance with all covenants of the $2.5 Billion Credit Agreement.
At September 30, 2022, we had no borrowings under the $2.5 Billion Credit Agreement and $22.2 million of cash and cash equivalents.
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, as needed. Other options to obtain financing include, but are not limited to, issuing 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.
Guardian Term Loan Agreement - In June 2022, Guardian Pipeline entered into a $120 million unsecured term loan agreement. During the second quarter 2022, Guardian Pipeline drew the full $120 million available under the agreement and used the proceeds to repay intercompany debt with ONEOK.
Debt Repayments - In July 2022, we redeemed the remaining $895.8 million of our $900 million, 3.375% senior notes due October 2022 at 100% of the principal amount, plus accrued and unpaid interest, with 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 growth capital 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 and short- and long-term debt.
Capital expenditures, excluding AFUDC, were $886.0 million and $490.3 million for the nine months ended September 30, 2022 and 2021, respectively.
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We expect total capital expenditures, excluding AFUDC and capitalized interest, of approximately $1.2 billion in 2022. Our expected 2022 capital expenditures increased relative to previous estimates due primarily to acceleration of spend on our MB-5 fractionator and smaller projects that were not previously planned for 2022, such as the Viking compression electrification project in our Natural Gas Pipelines segment.
Credit Ratings - Our long-term debt credit ratings as of October 24, 2022, 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 | ||||||||
| Fitch | BBB | F2 | 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 could 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 2027. An adverse credit rating change alone is not a default under our $2.5 Billion Credit Agreement.
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 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 common stock dividends declared by our Board of Directors, subject to the rights of the holders of outstanding preferred stock. In February 2022, May 2022 and August 2022 we paid a common stock dividend of $0.935 per share ($3.74 per share on an annualized basis). A common stock dividend of $0.935 per share was declared for the shareholders of record at the close of business on November 1, 2022, payable November 14, 2022.
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 2022, May 2022, and August 2022. Dividends totaling $0.3 million were declared for the Series E Preferred Stock and are payable November 14, 2022.
For the nine months ended September 30, 2022, our cash flows from operations exceeded dividends paid by $612.1 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 cash on hand or other sources of short- and long-term liquidity to fund a portion of our dividends.
CONTINGENCIES
See Note I of the Notes to Consolidated Financial Statements in this Quarterly Report for discussion of regulatory and environmental matters.
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.
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The following table sets forth the changes in cash flows by operating, investing and financing activities for the periods indicated:
| Variances | |||||||||||||||||
| Nine Months Ended | 2022 vs. 2021 | ||||||||||||||||
| September 30, | Favorable (Unfavorable) | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
(Millions of dollars) | |||||||||||||||||
| Total cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 1,865.5 | $ | 1,491.1 | $ | 374.4 | |||||||||||
| Investing activities | (863.9) | (475.4) | (388.5) | ||||||||||||||
| Financing activities | (1,125.8) | (1,315.9) | 190.1 | ||||||||||||||
| Change in cash and cash equivalents | (124.2) | (300.2) | 176.0 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 146.4 | 524.5 | (378.1) | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 22.2 | $ | 224.3 | $ | (202.1) | |||||||||||
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 NGLs and natural gas 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, 2022, increased $103.3 million compared with the same period in 2021, due primarily to higher net income resulting from higher exchange services in our Natural Gas Liquids segment and higher realized NGL and condensate prices, net of hedging, higher average fee rates and higher volumes from increased production in our Natural Gas Gathering and Processing segment. These increases were offset partially by the impact of Winter Storm Uri in our Natural Gas Pipelines segment in the first quarter 2021, as discussed in “Financial Results and Operating Information.”
The changes in operating assets and liabilities decreased operating cash flows $229.7 million for the nine months ended September 30, 2022, compared with a decrease of $500.8 million for the same period in 2021. This change is due primarily to changes in accounts receivable resulting from the timing of receipt of cash from customers and NGLs and natural gas in inventory, both of which vary from period to period and with changes in commodity prices, and changes in risk management assets and liabilities; offset partially by changes in accounts payable, which also vary from period to period with changes in commodity prices, and from the timing of payments to vendors, suppliers and other third parties and changes in other assets and liabilities.
Investing Cash Flows - Cash used in investing activities for the nine months ended September 30, 2022, increased $388.5 million, compared with the same period in 2021, due primarily to capital expenditures related to our capital-growth projects.
Financing Cash Flows - Cash used in financing activities for the nine months ended September 30, 2022, decreased $190.1 million, compared with the same period in 2021, due primarily to short-term borrowings and the issuance of long-term debt in the second quarter 2022; offset partially by the repayment of long-term debt.
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, wildlife conservation, cultural resources 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, reputational harm and/or interruptions in our operations that could be material to our results of operations or financial condition. 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 payment of fees and unexpected capital expenditures at our facilities. We cannot assure that existing environmental statutes and regulations will not be revised or that
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new regulations will not be adopted or become applicable to us. We also cannot assure that existing permits will not be revised or cancelled, potentially impacting facility construction activities or ongoing operations.
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.
CRITICAL ACCOUNTING ESTIMATES
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 critical accounting estimates is included under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates,” 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, processing and fractionation 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 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 and other statements in this Quarterly Report regarding our environmental, social and other sustainability targets, plans and goals are not an indication that these statements are required to be disclosed in our filings with the SEC, or that we will continue to make similar statements in the same extent or manner in future filings. In addition, historical, current and forward-looking environmental, social and sustainability-related statements may be based on standards and processes for measuring progress that are still developing and that continue to evolve, and assumptions that are subject to change in the future.
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,” “target,” “guidance,” “intend,” “may,” “might,” “outlook,” “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:
•the length, severity and reemergence of a pandemic or other health crisis, such as the COVID-19 pandemic and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it, which may (as with COVID-19) precipitate or exacerbate one or more of the factors herein, reduce the demand for natural gas, NGLs and crude oil and significantly disrupt or prevent us and our customers and
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counterparties from operating in the ordinary course for an extended period and increase the cost of operating our business;
•operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruption;
•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; regulatory compliance; reserve performance; and capacity constraints and/or shut downs on the pipelines that transport crude oil, natural gas and NGLs from producing areas and our facilities;
•risks associated with adequate supply to our gathering, processing, fractionation and pipeline facilities, including production declines that outpace new drilling, the shutting-in of production by producers, actions taken by federal, state or local governments to require producers to prorate or to cut their production levels as a way to address any excess market supply situations or extended periods of ethane rejection;
•demand for our services and products in the proximity of our facilities;
•economic climate and growth in the geographic areas in which we operate;
•the risk of a slowdown in growth or decline in the United States or international economies, including liquidity risks in United States or foreign credit markets;
•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, including the current conflict in Ukraine and the surrounding region;
•performance of contractual obligations by our customers, service providers, contractors and shippers;
•the effects of changes in governmental policies and regulatory actions, including changes with respect to income and other taxes, pipeline safety, environmental compliance, cybersecurity, climate change initiatives, emissions credits, carbon offsets, carbon pricing, production limits and authorized rates of recovery of natural gas and natural gas transportation costs;
•changes in demand for the use of natural gas, NGLs and crude oil because of the development of new technologies or other market conditions caused by concerns about climate change;
•the impact of the transformation to a lower-carbon economy, including the timing and extent of the transformation, as well as the expected role of different energy sources, including natural gas, NGLs and crude oil, in such a transformation;
•the pace of technological advancements and industry innovation, including those focused on reducing GHG emissions and advancing other climate-related initiatives, and our ability to take advantage of those innovations and developments;
•the effectiveness of our risk-management function, including mitigating cyber- and climate-related risks;
•our ability to identify and execute opportunities, and the economic viability of those opportunities, including those relating to renewable natural gas, carbon capture, use and storage, other renewable energy sources such as solar and wind and alternative low carbon fuel sources such as hydrogen;
•the ability of our existing assets and our ability to apply and continue to develop our expertise to support the growth of, and transformation to, various renewable and alternative energy opportunities, including through the positioning and optimization of our assets;
•our ability to efficiently reduce our GHG emissions (both Scope 1 and 2 emissions), including through the use of lower carbon power alternatives, management practices and system optimizations;
•the necessity to focus on maintaining and enhancing our existing assets while reducing our Scope 1 and 2 GHG emissions;
•the effects of weather and other natural phenomena and the effects of climate change (including physical and transformation-related effects) on our operations, demand for our services and energy prices;
•acts of nature, sabotage, terrorism or other similar acts that cause damage to our facilities or our suppliers’, customers’ or shippers’ facilities;
•the inability of insurance proceeds to cover all liabilities or incurred costs and losses, or lost earnings, resulting from a loss;
•delays in receiving insurance proceeds from covered losses;
•the risk of increased costs for insurance premiums;
•increased costs associated with insurance coverage, security or other items as a consequence of terrorist attacks;
•the timing and extent of changes in energy commodity prices, including changes due to production decisions by other countries, such as the failure of countries to abide by agreements to reduce production volumes;
•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 ability to market pipeline capacity on favorable terms, including the effects of:
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– 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;
•the efficiency of our plants in processing natural gas and extracting and fractionating NGLs;
•the composition and quality of the natural gas and NGLs we gather and process in our plants and transport on our pipelines;
•risks of marketing, trading and hedging activities, including the risks of changes in energy prices or the financial condition of our counterparties;
•our ability to control operating costs and make cost-saving changes;
•the risks inherent in the use of information systems in our respective businesses and those of our counterparties and service providers, including cyber-attacks, which, according to experts, have increased in volume and sophistication since the beginning of the COVID-19 pandemic; implementation of new software and hardware; and the impact on the timeliness of information for financial reporting;
•the timely receipt of approval by applicable governmental entities for construction and operation of our pipeline and other projects and required regulatory clearances;
•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 results of governmental actions, administrative proceedings and litigation, regulatory actions, executive orders, rule changes and receipt of expected clearances involving any local, state or federal regulatory body, including the FERC, the National Transportation Safety Board, Homeland Security, the PHMSA, the EPA and the CFTC;
•the mechanical integrity of facilities and pipelines operated;
•the capital-intensive nature of our businesses;
•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;
•actions by rating agencies concerning our credit;
•our indebtedness and guarantee obligations could cause adverse consequences, including making us vulnerable to general adverse economic and industry conditions, limiting our ability to borrow additional funds and placing us at competitive disadvantages compared with our competitors that have less debt;
•our ability to access capital at competitive rates or on terms acceptable to us;
•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;
•our ability to control construction costs and completion schedules of our pipelines and other projects;
•difficulties or delays experienced by trucks, railroads or pipelines in delivering products to or from our terminals or pipelines;
•the uncertainty of estimates, including accruals and costs of environmental remediation;
•the impact of uncontracted capacity in our assets being greater or less than expected;
•the impact of potential impairment charges;
•the profitability of assets or businesses acquired or constructed by us;
•the 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 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 impact of recently issued and future accounting updates and other changes in accounting policies; and
•the risk factors listed in the reports we have filed, which are incorporated by reference, and may file with the SEC.
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 affect adversely 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.
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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk discussed below includes forward-looking statements and represents an estimate of possible changes in future earnings that could occur assuming hypothetical future movements in interest rates or commodity prices. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur since actual gains and losses will differ from those estimated based on actual fluctuations in interest rates or commodity prices and the timing of transactions.
We are exposed to market risk due to commodity price and interest-rate volatility. Market risk is the risk of loss arising from adverse changes in market rates and prices. We may use financial instruments, including forward sales, swaps, options and futures, to manage the risks of certain identifiable or anticipated transactions and achieve more predictable cash flows. Our risk-management function follows policies and procedures established by our Risk Oversight and Strategy Committee to monitor our natural gas, condensate and NGL marketing activities and interest rates to ensure our hedging activities mitigate market risks and comply with approved thresholds or limits. We do not use financial instruments for trading purposes.
We utilize a sensitivity analysis model to assess the risk associated with our derivative portfolio. The sensitivity analysis measures the potential change in fair value of our derivative instruments based upon a hypothetical 10% movement in the underlying commodity prices or interest rates. In addition to these variables, the fair value of our derivative portfolio is influenced by fluctuations in the notional amounts of the instruments and the discount rates used to determine the present values. Because we enter into these derivative instruments for the purpose of mitigating the risks that accompany certain of our business activities, as described below, the change in the market value of our derivative portfolio would typically be offset largely by a corresponding gain or loss on the hedged item.
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 fee with POP contracts. Under certain fee with POP contracts, our contractual fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. In certain commodity price environments, our contractual fees on these fee with POP contracts may increase or decrease, which would impact the average fee rate in our Natural Gas Gathering and Processing segment. We are exposed to basis risk between the various production and market locations where we buy and sell commodities.
The following table presents the effect a hypothetical 10% change in the underlying commodity prices would have on the estimated fair value of our commodity derivative instruments as of the dates indicated:
| Commodity Contracts | September 30, 2022 | December 31, 2021 | |||||||||
(Millions of dollars) | |||||||||||
| Crude oil and NGLs | $ | 50.3 | $ | 40.6 | |||||||
| Natural gas | 25.1 | 11.5 | |||||||||
| Total change in estimated fair value of commodity contracts | $ | 75.4 | $ | 52.1 | |||||||
Our sensitivity analysis represents an estimate of the reasonably possible gains and losses that would be recognized on our commodity derivative contracts assuming hypothetical movements in future market prices and is not necessarily indicative of actual results that may occur. Actual gains and losses may differ from estimates due to actual fluctuations in market prices, as well as changes in our commodity derivative portfolio during the year.
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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, 2022 | ||||||||||||||||||||
| Volumes Hedged | Average Price | Percentage Hedged | ||||||||||||||||||
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | 11.6 | $ | 0.95 | / gallon | 68% | |||||||||||||||
Condensate (MBbl/d) - WTI-NYMEX | 1.6 | $ | 63.26 | / Bbl | 72% | |||||||||||||||
Natural gas (BBtu/d) - NYMEX and basis | 109.5 | $ | 3.11 | / MMBtu | 76% | |||||||||||||||
| Year Ending December 31, 2023 | ||||||||||||||||||||
| Volumes Hedged | Average Price | Percentage Hedged | ||||||||||||||||||
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | 10.7 | $ | 1.23 | / gallon | 67% | |||||||||||||||
Condensate (MBbl/d) - WTI-NYMEX | 1.7 | $ | 85.48 | / Bbl | 67% | |||||||||||||||
Natural gas (BBtu/d) - NYMEX and basis | 99.2 | $ | 3.50 | / MMBtu | 75% | |||||||||||||||
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, 2022. 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, 2022, and for the year ending December 31, 2023, by approximately $0.7 million and $2.5 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, 2022, and for the year ending December 31, 2023, by approximately $0.2 million and $0.9 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, 2022, and for the year ending December 31, 2023, by approximately $1.3 million and $4.8 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, commercial paper program and long-term debt issuances. Future increases in commercial paper rates or bond rates could expose us to increased interest costs on future borrowings. We may 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.
At September 30, 2022, and December 31, 2021, we had forward-starting interest-rate swaps with notional amounts totaling $1.1 billion to hedge the variability of interest payments on a portion of our forecasted debt issuances. All of our interest-rate swaps are designated as cash flow hedges.
The following table presents the effect of a 10% hypothetical change in interest rates on the estimated fair value of our interest-rate derivative instruments as of the dates indicated:
| September 30, 2022 | December 31, 2021 | ||||||||||
(Millions of dollars) | |||||||||||
| Forward-starting interest-rate swaps | $ | 43.6 | $ | 19.6 | |||||||
Our sensitivity analysis represents an estimate of the reasonably possible gains and losses that would be recognized on our interest-rate derivative contracts assuming hypothetical movements in future interest rates and is not necessarily indicative of
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actual results that may occur. Actual gains and losses may differ from estimates due to actual fluctuations in interest rates, as well as changes in our interest-rate derivative portfolio during the year.
See Note C of the Notes to Consolidated Financial Statements in this Quarterly Report for more information on our hedging activities.
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.
In our Natural Gas Gathering and Processing and Natural Gas Pipelines segments, the creditworthiness of our counterparties, which are primarily investment grade, is consistent with that discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report. In our Natural Gas Liquids segment, for the nine months ended September 30, 2022, and twelve months ended December 31, 2021, approximately 85% and 70%, respectively, of commodity sales were made to customers rated investment-grade by S&P, approved through comparable internal counterparty analysis, or were secured by letters of credit or other collateral.
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 Rules 13a-15(b) and 15d-15(b) 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, 2022, 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 I 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 operations are subject to operational hazards and unforeseen interruptions, which could affect adversely our business and for which we may not be adequately insured.
Our operations are subject to all the risks and hazards typically associated with the operation of natural gas and NGL gathering, transportation and distribution pipelines, storage facilities and processing and fractionation facilities, which include, but are not limited to, leaks, pipeline ruptures, the breakdown or failure of equipment or processes and the performance of facilities below expected levels of capacity and efficiency. For example, on July 9, 2022, a fire occurred at our 210 MBbl/d Medford, Oklahoma, natural gas liquids fractionation facility. All personnel were safe and accounted for with evacuations of local residents taken as a precautionary measure, and we expect the Medford facility to remain out of service for an extended period. While the facility remains inoperable, we continue to provide midstream services through our integrated NGL pipeline system between the Mid-Continent and Gulf Coast regions, along with our fractionation and storage assets and arrangements with industry peers; however, there can be no assurance that these activities will mitigate impacts over the long term. Other operational hazards and unforeseen interruptions include adverse weather conditions, infectious disease including a pandemic, cybersecurity attacks, geopolitical reactions, accidents, explosions, fires, the collision of equipment with our pipeline facilities (for example, this may occur if a third party were to perform excavation or construction work near our facilities) and catastrophic events such as tornados, hurricanes, earthquakes, floods and other similar events beyond our control. Extreme cold weather can result in supply reductions from producer wellhead freeze-offs, as well as power curtailments or outages, any of which can negatively impact our business, results of operations, financial position and cash flows. Further, the United States
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government warned that energy assets, specifically the nation’s pipeline infrastructure, may be targets of terrorist attacks. An act of terrorism could target our facilities, those of our suppliers or customers or those of other pipelines. A casualty occurrence may result in injury or loss of life, extensive property damage or environmental damage. Liabilities incurred and interruptions to the operations of our pipeline or other facilities caused by such an event could reduce our revenues and increase expenses, thereby impairing our ability to meet our obligations.
Premiums and deductibles for certain insurance policies can increase substantially, and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. Consequently, we may not be able to renew existing insurance policies or purchase other desirable insurance on commercially reasonable terms, if at all. Insurance proceeds may not be adequate to cover all liabilities or incurred costs and losses or lost earnings, and we are not fully insured against all risks inherent to our business. If we were to incur a significant liability for which we were not fully insured, it could affect adversely our business, results of operations, financial position and cash flows. Further, the proceeds of any such insurance may not be paid in a timely manner.
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 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 | |||||
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| 10.1 | |||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 22.1 | |||||
| 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. | ||||
| 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, 2022 and 2021; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021; (iv) Consolidated Balance Sheets at September 30, 2022, and December 31, 2021; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; (vi) Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2022 and 2021; and (vii) Notes to Consolidated Financial Statements.
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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: November 2, 2022 | By: | /s/ Walter S. Hulse III | ||||||
| Walter S. Hulse III | ||||||||
| Chief Financial Officer, Treasurer and | ||||||||
| Executive Vice President, Investor Relations | ||||||||
| and Corporate Development | ||||||||
| (Principal Financial Officer) | ||||||||
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