Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 6, 2014)
  • 10-Q (May 7, 2014)
  • 10-Q (Nov 6, 2013)
  • 10-Q (Jul 31, 2013)
  • 10-Q (May 1, 2013)
  • 10-Q (Oct 31, 2012)

 
8-K

 
Other

ONEOK 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form_10-q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

X  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
OR
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________.


Commission file number   001-13643



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


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


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


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

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

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

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

On October 27, 2011, the Company had 102,989,141 shares of common stock outstanding.
 
Page No.
     
 
     
 
5
     
 
6-7
     
 
9
     
 
10-11
     
 
12
     
 
13-33
     
34-55
     
56
     
57
     
 
     
57
     
57
     
58
     
58
     
58
     
58
     
58-59
     
 
60

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,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled” and other words and terms of similar meaning.  Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved.  Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations “Forward-Looking Statements,” 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 on our website copies of our Annual Report, 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.  Our website and any contents thereof are not incorporated by reference into this report.

We also make available on our website the Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T.  In accordance with Rule 402 of Regulation S-T, the Interactive Data Files shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

GLOSSARY

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

 
AFUDC
Allowance for funds used during construction
 
Annual Report
Annual Report on Form 10-K for the year ended December 31, 2010
 
ASU
Accounting Standards Update
 
Bbl
Barrels, 1 barrel is equivalent to 42 United States gallons
 
Bbl/d
Barrels per day
 
BBtu/d
Billion British thermal units per day
 
Bcf
Billion cubic feet
 
Bcf/d
Billion cubic feet per day
 
Btu(s)
British thermal units, a measure of the amount of heat required to raise the
    temperature of one pound of water one degree Fahrenheit
 
Bushton Plant
Bushton Gas Processing Plant
 
CFTC
Commodities Futures Trading Commission
 
Clean Air Act
Federal Clean Air Act, as amended
 
Clean Water Act
Federal Water Pollution Control Act Amendments of 1972, as amended
 
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
 
EBITDA
Earnings before interest expense, income taxes, depreciation and amortization
 
EPA
United States Environmental Protection Agency
 
Exchange Act
Securities Exchange Act of 1934, as amended
 
FASB
Financial Accounting Standards Board
 
FERC
Federal Energy Regulatory Commission
 
GAAP
Accounting principles generally accepted in the United States of America
 
KCC
Kansas Corporation Commission
 
KDHE
Kansas Department of Health and Environment
 
LDCs
Local distribution companies
 
LIBOR
London Interbank Offered Rate
 
MBbl
Thousand barrels
 
MBbl/d
Thousand barrels per day
 
Mcf
Thousand cubic feet
 
MDth/d
Thousand dekatherms per day
 
Midwestern Gas Transmission
Midwestern Gas Transmission Company
 
MMBbl
Million barrels
 
MMBtu
Million British thermal units
 
MMBtu/d
Million British thermal units per day
 
MMcf
Million cubic feet
 
MMcf/d
Million cubic feet per day
 
Moody’s
Moody’s Investors Service, Inc.
 
Natural Gas Policy Act
Natural Gas Policy Act of 1978, as amended
 
NGL products
Marketable natural gas liquid purity products, such as ethane, ethane/propane
    mix, propane, iso-butane, normal butane and natural gasoline
 
NGL(s)
Natural gas liquid(s)
 
Northern Border Pipeline
Northern Border Pipeline Company
 
NYMEX
New York Mercantile Exchange
 
OBPI
ONEOK Bushton Processing, L.L.C., formerly ONEOK Bushton Processing,
    Inc.
 
OCC
Oklahoma Corporation Commission
 
ONEOK
ONEOK, Inc.
 
ONEOK 2011 Credit Agreement
ONEOK’s five-year, $1.2 billion revolving credit agreement dated April 5, 2011
 
ONEOK Credit Agreement
ONEOK’s amended and restated $1.2 billion revolving credit agreement dated
    July 14, 2006
 
ONEOK Partners
ONEOK Partners, L.P.
 
ONEOK Partners 2011 Credit Agreement
ONEOK Partners’ five-year, $1.2 billion revolving credit agreement dated
    August 1, 2011
 
ONEOK Partners Credit Agreement 
ONEOK Partners' $1.0 billion amended and restated revolving credit agreement
    dated March 30, 2007
                                                              
 
 
ONEOK Partners GP
ONEOK Partners GP, L.L.C., a wholly owned subsidiary of ONEOK and the
    sole general partner of ONEOK Partners
 
OPIS
Oil Price Information Service
 
Overland Pass Pipeline Company
Overland Pass Pipeline Company LLC
 
Quarterly Report(s)
Quarterly Report(s) on Form 10-Q
 
RRC
Railroad Commission of Texas
 
S&P
Standard & Poor’s Financial Services LLC
 
SEC
Securities and Exchange Commission
 
Securities Act
Securities Act of 1933, as amended
 
XBRL
eXtensible Business Reporting Language

 
 
                     
                     
ONEOK, Inc. and Subsidiaries
                     
                     
                 
 
Three Months Ended
   
Nine Months Ended
 
 
September 30,
   
September 30,
 
(Unaudited)
2011
   
2010
   
2011
   
2010
 
 
(Thousands of dollars, except per share amounts)
 
                       
Revenues
$ 3,595,191     $ 2,942,703     $ 10,976,555     $ 9,673,802  
Cost of sales and fuel
  3,061,198       2,491,333       9,287,365       8,145,035  
Net margin
  533,993       451,370       1,689,190       1,528,767  
Operating expenses
                             
Operations and maintenance
  186,935       183,893       581,338       542,643  
Depreciation and amortization
  75,986       77,234       234,201       230,600  
General taxes
  22,122       19,465       77,026       67,643  
Total operating expenses
  285,043       280,592       892,565       840,886  
Gain (loss) on sale of assets
  (69 )     16,126       (791 )     15,068  
Operating income
  248,881       186,904       795,834       702,949  
Equity earnings from investments (Note J)
  32,029       29,390       93,665       71,182  
Allowance for equity funds used during construction
  759       266       1,625       748  
Other income
  124       6,710       1,027       4,966  
Other expense
  (13,318 )     (2,097 )     (13,571 )     (5,338 )
Interest expense
  (73,841 )     (70,907 )     (228,688 )     (222,788 )
Income before income taxes
  194,634       150,266       649,892       551,719  
Income taxes
  (33,754 )     (29,965 )     (154,900 )     (158,324 )
Net income
  160,880       120,301       494,992       393,395  
Less:  Net income attributable to noncontrolling interests
  100,559       65,006       249,399       141,837  
Net income attributable to ONEOK
$ 60,321     $ 55,295     $ 245,593     $ 251,558  
                               
Earnings per share of common stock (Note H)
                             
Net earnings per share, basic
$ 0.58     $ 0.52     $ 2.33     $ 2.37  
Net earnings per share, diluted
$ 0.57     $ 0.51     $ 2.28     $ 2.34  
                               
Average shares of common stock (thousands)
                             
Basic
  103,303       106,443       105,220       106,310  
Diluted
  105,970       107,651       107,727       107,415  
                               
Dividends declared per share of common stock
$ 0.56     $ 0.46     $ 1.60     $ 1.34  
See accompanying Notes to Consolidated Financial Statements.
                         
 
 
ONEOK, Inc. and Subsidiaries
         
         
 
September 30,
   
December 31,
 
(Unaudited)
2011
   
2010
 
Assets
(Thousands of dollars)
Current assets
         
Cash and cash equivalents
$ 148,407     $ 31,034  
Accounts receivable, net
  1,141,132       1,332,726  
Gas and natural gas liquids in storage
  658,059       708,933  
Commodity imbalances
  105,884       94,854  
Energy marketing and risk management assets (Notes B and C)
  56,301       61,940  
Other current assets
  202,260       149,558  
Total current assets
  2,312,043       2,379,045  
               
Property, plant and equipment
             
Property, plant and equipment
  10,709,417       9,854,485  
Accumulated depreciation and amortization
  2,690,104       2,541,302  
Net property, plant and equipment
  8,019,313       7,313,183  
               
Investments and other assets
             
Goodwill and intangible assets
  1,016,044       1,022,894  
Energy marketing and risk management assets (Notes B and C)
  24,232       1,921  
Investments in unconsolidated affiliates (Note J)
  1,224,397       1,188,124  
Other assets
  575,095       594,008  
Total investments and other assets
  2,839,768       2,806,947  
Total assets
$ 13,171,124     $ 12,499,175  
See accompanying Notes to Consolidated Financial Statements.
             
 
 
ONEOK, Inc. and Subsidiaries
         
CONSOLIDATED BALANCE SHEETS
         
 
September 30,
   
December 31,
 
(Unaudited)
2011
   
2010
 
Liabilities and equity
(Thousands of dollars)
 
Current liabilities
         
Current maturities of long-term debt
$ 365,253     $ 643,236  
Notes payable (Note D)
  650,000       556,855  
Accounts payable
  1,241,633       1,215,468  
Commodity imbalances
  236,365       288,494  
Energy marketing and risk management liabilities (Notes B and C)
  130,993       22,800  
Other current liabilities
  352,520       424,259  
Total current liabilities
  2,976,764       3,151,112  
               
Long-term debt, excluding current maturities (Note E)
  4,532,053       3,686,542  
               
Deferred credits and other liabilities
             
Deferred income taxes
  1,386,959       1,171,997  
Energy marketing and risk management liabilities (Notes B and C)
  1,135       2,221  
Other deferred credits
  592,153       566,462  
Total deferred credits and other liabilities
  1,980,247       1,740,680  
               
Commitments and contingencies (Note L)
             
               
Equity (Note F)
             
ONEOK shareholders' equity:
             
Common stock, $0.01 par value:
             
authorized 300,000,000 shares; issued 122,895,643 shares and outstanding
             
102,982,759 shares at September 30, 2011; issued 122,815,636 shares and
             
outstanding 106,815,582 shares at December 31, 2010
  1,229       1,228  
Paid-in capital
  1,404,087       1,392,671  
Accumulated other comprehensive loss (Note G)
  (174,573 )     (108,802 )
Retained earnings
  1,903,056       1,826,800  
Treasury stock, at cost: 19,912,884 shares at September 30, 2011 and
             
16,000,054 shares at December 31, 2010
  (947,839 )     (663,274 )
Total ONEOK shareholders' equity
  2,185,960       2,448,623  
               
Noncontrolling interests in consolidated subsidiaries
  1,496,100       1,472,218  
               
Total equity
  3,682,060       3,920,841  
Total liabilities and equity
$ 13,171,124     $ 12,499,175  
See accompanying Notes to Consolidated Financial Statements.
             


 







This page intentionally left blank.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
ONEOK, Inc. and Subsidiaries
         
Nine Months Ended
 
 
September 30,
 
(Unaudited)
2011
   
2010
 
 
(Thousands of dollars)
 
Operating Activities
         
Net income
$ 494,992     $ 393,395  
Depreciation and amortization
  234,201       230,600  
Allowance for equity funds used during construction
  (1,625 )     (748 )
Loss (gain) on sale of assets
  791       (15,068 )
Equity earnings from investments
  (93,665 )     (71,182 )
Distributions received from unconsolidated affiliates
  87,151       69,889  
Deferred income taxes
  200,961       94,997  
Share-based compensation expense
  39,297       15,949  
Other
  (1,260 )     3,853  
Changes in assets and liabilities:
             
Accounts receivable
  194,631       567,141  
Gas and natural gas liquids in storage
  26,975       (158,873 )
Accounts payable
  (401 )     (363,285 )
Commodity imbalances, net
  (63,159 )     (71,840 )
Unrecovered purchased gas costs
  (28,676 )     72,431  
Energy marketing and risk management assets and liabilities
  (12,705 )     118,319  
Fair value of firm commitments
  (18,204 )     (91,575 )
Other assets and liabilities
  (29,685 )     (33,972 )
Cash provided by operating activities
  1,029,619       760,031  
Investing Activities
             
Capital expenditures (less allowance for equity funds used during construction)
  (862,310 )     (356,289 )
Distributions received from unconsolidated affiliates
  16,158       9,342  
Contributions to unconsolidated affiliates
  (51,686 )     (1,313 )
Proceeds from sale of assets
  951       424,740  
Other
  -       2,968  
Cash provided by (used in) investing activities
  (896,887 )     79,448  
Financing Activities
             
Borrowing (repayment) of notes payable, net
  93,145       (555,485 )
Issuance of debt, net of discounts
  1,295,450       -  
Long-term debt financing costs
  (10,986 )     -  
Payment of debt
  (724,405 )     (259,648 )
Repurchase of common stock
  (300,108 )     (5 )
Issuance of common stock
  7,142       9,357  
Issuance of common units, net of discounts
  -       322,701  
Dividends paid
  (169,337 )     (142,426 )
Distributions to noncontrolling interests
  (206,260 )     (192,889 )
Cash used in financing activities
  (15,359 )     (818,395 )
Change in cash and cash equivalents
  117,373       21,084  
Cash and cash equivalents at beginning of period
  31,034       29,399  
Cash and cash equivalents at end of period
$ 148,407     $ 50,483  
See accompanying Notes to Consolidated Financial Statements.
 
 
 
ONEOK, Inc. and Subsidiaries
                     
                   
                       
                       
 
ONEOK Shareholders' Equity
 
                   
Accumulated
 
 
Common
               
Other
 
 
Stock
   
Common
   
Paid-in
   
Comprehensive
 
(Unaudited)
Issued
   
Stock
   
Capital
   
Loss
 
 
(Shares)
 
(Thousands of dollars)
 
                       
December 31, 2010
  122,815,636     $ 1,228     $ 1,392,671     $ (108,802 )
Net income
  -       -       -       -  
Other comprehensive loss
  -       -       -       (65,771 )
Repurchase of common stock
  -       -       -       -  
Common stock issued
  80,007       1       11,416       -  
Common stock dividends -
                             
$1.60 per share
  -       -       -       -  
Distributions to noncontrolling interests
  -       -       -       -  
September 30, 2011
  122,895,643     $ 1,229     $ 1,404,087     $ (174,573 )
See accompanying Notes to Consolidated Financial Statements.
                         
 
 
ONEOK, Inc. and Subsidiaries
                     
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
                   
(Continued)
                     
                       
 
ONEOK Shareholders' Equity
             
             
Noncontrolling
       
             
Interests in
       
 
Retained
   
Treasury
   
Consolidated
   
Total
 
(Unaudited)
Earnings
   
Stock
   
Subsidiaries
   
Equity
 
 
(Thousands of dollars)
 
                       
December 31, 2010
$ 1,826,800     $ (663,274 )   $ 1,472,218     $ 3,920,841  
Net income
  245,593       -       249,399       494,992  
Other comprehensive loss
  -       -       (19,257 )     (85,028 )
Repurchase of common stock
  -       (300,108 )     -       (300,108 )
Common stock issued
  -       15,543       -       26,960  
Common stock dividends -
                             
  $1.60 per share
  (169,337 )     -       -       (169,337 )
Distributions to noncontrolling interests
  -       -       (206,260 )     (206,260 )
September 30, 2011
$ 1,903,056     $ (947,839 )   $ 1,496,100     $ 3,682,060  
 
 
ONEOK, Inc. and Subsidiaries
                     
                     
                 
 
Three Months Ended
   
Nine Months Ended
 
 
September 30,
   
September 30,
 
(Unaudited)
2011
   
2010
   
2011
   
2010
 
 
(Thousands of dollars)
 
                       
Net income
$ 160,880     $ 120,301     $ 494,992     $ 393,395  
Other comprehensive income (loss), net of tax
                             
Unrealized gains (losses) on energy marketing and risk management
                             
assets/liabilities, net of tax of $14,194, $(24,044), $10,487 and
                             
$(47,571), respectively
  (37,842 )     39,808       (38,004 )     97,334  
Realized gains in net income, net of tax of $10,193, $13,119,
                             
$22,127 and $21,889, respectively
  (15,814 )     (23,091 )     (32,522 )     (34,866 )
Unrealized holding losses on available-for-sale securities,
                             
net of tax of $31, $65, $234 and $234, respectively
  (331 )     (104 )     (370 )     (370 )
Change in pension and postretirement benefit plan liability, net of tax
                             
of $2,947, $2,533, $8,842 and $7,599, respectively
  (4,672 )     (4,016 )     (14,017 )     (12,048 )
Other, net of tax of $11, $(11), $73 and $(34), respectively
  (18 )     18       (115 )     53  
Total other comprehensive income (loss), net of tax
  (58,677 )     12,615       (85,028 )     50,103  
Comprehensive income
  102,203       132,916       409,964       443,498  
Less:  Comprehensive income attributable to noncontrolling interests
  85,189       64,403       230,142       163,595  
Comprehensive income attributable to ONEOK
$ 17,014     $ 68,513     $ 179,822     $ 279,903  
See accompanying 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 presentation of the results for the interim periods presented.  All such adjustments are of a normal recurring nature.  The 2010 year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.  These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements in our Annual Report.  Due to the seasonal nature of our business, the results of operations for the three and nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for a 12-month period.
  
Our significant accounting policies are consistent with those disclosed in Note A of the Notes to Consolidated Financial Statements in our Annual Report.

Goodwill and Indefinite-lived Intangible Assets Impairment Tests> - We assess our goodwill and indefinite-lived intangible assets for impairment at least annually on July 1.  Our July 1, 2011, estimates of the fair value of each of our reporting units and indefinite-lived assets significantly exceeded their carrying values.  Accordingly, no impairment charges were necessary.

Recently Issued Accounting Standards Updates - >In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires separate disclosure of purchases, sales, issuances and settlements in the reconciliation of our Level 3 fair value measurements.  We adopted this guidance with our March 31, 2011, Quarterly Report, and the impact was not material.  Other provisions of ASU 2010-06 were adopted in 2010.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS),” which provides a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS.  This new guidance changes some fair value measurement principles and disclosure requirements.  We are evaluating the impact of this guidance, which will be adopted beginning with our March 31, 2012, Quarterly Report.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income,” which provides two options for presenting items of net income, comprehensive income and total comprehensive income, by either creating one continuous statement of comprehensive income or two separate consecutive statements and requires certain other disclosures.  We are evaluating the impact of this guidance, which will be adopted beginning with our March 31, 2012, Quarterly Report.
 
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” which permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.  An entity may also resume performing the qualitative assessment in any subsequent period.  We are evaluating the impact of this guidance, which will be adopted beginning with our July 1, 2012, goodwill impairment test.

B.           FAIR VALUE MEASUREMENTS

Determining Fair Value> - We define fair value as the price that would be received from the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date.  We use the market and income approaches to determine the fair value of our assets and liabilities and consider the markets in which the transactions are executed.  While many of the contracts in our portfolio are executed in liquid markets where price transparency exists, some contracts are executed in markets for which market prices may exist, but the market may be relatively inactive.  This results in limited price transparency that requires management’s judgment and assumptions to estimate fair values.  Inputs into our fair value estimates include commodity exchange prices, over-the-counter quotes, volatility, historical correlations of pricing data and LIBOR, and other liquid money market instrument rates.  We also utilize internally developed basis curves that incorporate observable and unobservable market data.  We validate our valuation inputs with third-party information and
 
 
settlement prices from other sources, where available.  In addition, as prescribed by the income approach, we compute the fair value of our derivative portfolio by discounting the projected future cash flows from our derivative assets and liabilities to present value using interest-rate yields to calculate present-value discount factors derived from LIBOR, Eurodollar futures and interest-rate swaps.  We also take into consideration the potential impact on market prices of liquidating positions in an orderly manner over a reasonable period of time under current market conditions.  We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using specific and sector bond yields and also monitoring the credit default swap markets.  Although we use our best estimates to determine the fair value of the derivative contracts we have executed, the ultimate market prices realized could differ from our estimates, and the differences could be material.

Recurring Fair Value Measurements> - The following tables set forth our recurring fair value measurements for the periods indicated:
 
 
September 30, 2011
 
 
Level 1
   
Level 2
   
Level 3
   
Netting
   
Total
 
Assets
(Thousands of dollars)
 
Derivatives (a)
                           
Commodity contracts
                           
Financial contracts
$ 217,739     $ 32,689     $ 56,505     $ -     $ 306,933  
Physical contracts
  -       10,225       16,220       -       26,445  
Netting
  -       -       -       (252,845 )     (252,845 )
Total derivatives
  217,739       42,914       72,725       (252,845 )     80,533  
Trading securities (b)
  5,814       -       -       -       5,814  
Available-for-sale investment securities (c)
  1,971       -       -       -       1,971  
Total assets
$ 225,524     $ 42,914     $ 72,725     $ (252,845 )   $ 88,318  
                                       
Liabilities
                                     
Derivatives (a)
                                     
Commodity contracts
                                     
Financial contracts
$ (192,313 )   $ (1,985 )   $ (44,058 )   $ -     $ (238,356 )
Physical contracts
  -       (1,001 )     (2,934 )     -       (3,935 )
Netting
  -       -       -       222,416       222,416  
Interest-rate contracts
  -       (112,253 )     -       -       (112,253 )
Total derivatives
  (192,313 )     (115,239 )     (46,992 )     222,416       (132,128 )
Fair value of firm commitments (d)
  -       -       (11,331 )     -       (11,331 )
Total liabilities
$ (192,313 )   $ (115,239 )   $ (58,323 )   $ 222,416     $ (143,459 )
(a) - Included in our Consolidated Balance Sheets as energy marketing and risk management assets and liabilities on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At September 30, 2011, we held $30.4 million of cash collateral from various counterparties.
(b) - Included in our Consolidated Balance Sheets as other current assets.
 
(c) - Included in our Consolidated Balance Sheets as other assets.
 
(d) - Included in our Consolidated Balance Sheets as other current liabilities and other deferred credits.
 

 
December 31, 2010
 
 
Level 1
   
Level 2
   
Level 3
   
Netting
   
Total
 
Assets
(Thousands of dollars)
 
Derivatives (a)
                           
Commodity contracts
                           
Financial contracts
$ 127,789     $ 1,755     $ 152,639     $ -     $ 282,183  
Physical contracts
  -       13,185       20,391       -       33,576  
Netting
  -       -       -       (251,898 )     (251,898 )
Total derivatives
  127,789       14,940       173,030       (251,898 )     63,861  
Trading securities (b)
  7,591       -       -       -       7,591  
Available-for-sale investment securities (c)
  2,574       -       -       -       2,574  
Total assets
$ 137,954     $ 14,940     $ 173,030     $ (251,898 )   $ 74,026  
                                       
Liabilities
                                     
Derivatives (a)
                                     
Commodity contracts
                                     
Financial contracts
$ (64,768 )   $ (3,241 )   $ (119,430 )   $ -     $ (187,439 )
Physical contracts
  -       (3,763 )     (4,334 )     -       (8,097 )
Netting
  -       -       -       170,515       170,515  
Total derivatives
  (64,768 )     (7,004 )     (123,764 )     170,515       (25,021 )
Fair value of firm commitments (d)
  -       -       (29,536 )     -       (29,536 )
Total liabilities
$ (64,768 )   $ (7,004 )   $ (153,300 )   $ 170,515     $ (54,557 )
(a) - Included in our Consolidated Balance Sheets as energy marketing and risk management assets and liabilities on a net basis. We net derivative assets and liabilities, including cash collateral, when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At December 31, 2010, we held $82.5 million of cash collateral and posted $1.1 million of cash collateral with various counterparties.
(b) - Included in our Consolidated Balance Sheets as other current assets.
 
(c) - Included in our Consolidated Balance Sheets as other assets.
 
(d) - Included in our Consolidated Balance Sheets as other current liabilities and other deferred credits.
 
 
Our Level 1 fair value measurements are based on NYMEX-settled prices and actively quoted prices for equity securities.  These balances are comprised predominantly of exchange-traded derivative contracts, including futures and certain options for natural gas and crude oil, which are valued based on unadjusted quoted prices in active markets.  Also included in Level 1 are equity securities.

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

Our Level 3 inputs include internally developed basis curves incorporating observable and unobservable market data, NGL price curves from a pricing service, historical correlations of NGL product prices to published NYMEX crude oil prices, market volatilities derived from the most recent NYMEX close spot prices and forward LIBOR curves, and adjustments for the credit risk of our counterparties.  We corroborate the data on which our fair value estimates are based using our market knowledge of recent transactions, analysis of historical correlations and validation with independent broker quotes or a pricing service.  The derivatives categorized as Level 3 include natural gas basis swaps, swing swaps, options, other commodity swaps and physical forward contracts.  Also included in Level 3 are the fair values of firm commitments.  We do not believe that our Level 3 fair value estimates have a material impact on our results of operations, as the majority of our derivatives are accounted for as hedges for which ineffectiveness is not material.

 
The following tables set forth the reconciliation of our Level 3 fair value measurements for the periods indicated:
 
 
Derivative
Assets (Liabilities)
   
Fair Value of
Firm Commitments
   
Total
 
 
(Thousands of dollars)
 
July 1, 2011
$ 23,858     $ (21,212 )   $ 2,646  
   Total realized/unrealized gains (losses):
                     
       Included in earnings (a)
  (5,444 )     9,881       4,437  
       Included in other comprehensive income (loss)
  9,717       -       9,717  
   Transfers into Level 3
  1,284       -       1,284  
   Transfers out of Level 3
  (3,682 )     -       (3,682 )
September 30, 2011
$ 25,733     $ (11,331 )   $ 14,402  
                       
Total gains (losses) for the period included in
   earnings attributable to the change in unrealized
   gains (losses) relating to assets and liabilities
   still held as of September 30, 2011 (a)
$ 14,115     $ (3,229 )   $ 10,886  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
         
 
 
Derivative
Assets
(Liabilities)
   
Fair Value of
Firm
Commitments
   
Total
 
 
(Thousands of dollars)
 
July 1, 2010
$ 89,112     $ (65,653 )   $ 23,459  
   Total realized/unrealized gains (losses):
                     
        Included in earnings (a)
  (12,885 )     22,608       9,723  
        Included in other comprehensive income (loss)
  (8,161 )     -       (8,161 )
   Transfers into Level 3
  -       -       -  
   Transfers out of Level 3
  (3,483 )     -       (3,483 )
September 30, 2010
$ 64,583     $ (43,045 )   $ 21,538  
                       
Total gains (losses) for the period included in
   earnings attributable to the change in unrealized
   gains (losses) relating to assets and liabilities
   still held as of September 30, 2010 (a)
$ 15,542     $ (8,655 )   $ 6,887  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
         
 
 
Derivative
Assets (Liabilities)
   
Fair Value of
Firm Commitments
   
Total
 
 
(Thousands of dollars)
 
January 1, 2011   $ 49,266     $ (29,536 )   $ 19,730  
Total realized/unrealized gains (losses):
                     
Included in earnings (a)
  (28,352 )     18,205       (10,147 )
Included in other comprehensive income (loss)
  1,160       -       1,160  
Transfers into Level 3
  4,739       -       4,739  
Transfers out of Level 3
  (1,080 )     -       (1,080 )
September 30, 2011
$ 25,733     $ (11,331 )   $ 14,402  
                         
Total gains (losses) for the period included in
 earnings attributable to the change in unrealized
 gains (losses) relating to assets and liabilities
 still held as of September 30, 2011 (a)
$ 20,620     $ (6,978 )   $ 13,642  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
         
 
 
Derivative
Assets
 (Liabilities)
   
Fair Value of
Firm
Commitments
   
Total
 
 
(Thousands of dollars)
 
January 1, 2010
$ 136,694     $ (134,620 )   $ 2,074  
   Total realized/unrealized gains (losses):
                     
        Included in earnings (a)
  (69,241 )     91,575       22,334  
        Included in other comprehensive income (loss)
  13,544       -       13,544  
   Transfers into Level 3
  1,342       -       1,342  
   Transfers out of Level 3
  (17,756 )     -       (17,756 )
September 30, 2010
$ 64,583     $ (43,045 )   $ 21,538  
                       
Total gains (losses) for the period included in
   earnings attributable to the change in unrealized
   gains (losses) relating to assets and liabilities
   still held as of September 30, 2010 (a)
$ 15,513     $ 208     $ 15,721  
(a) - Reported in revenues and cost of sales and fuel in our Consolidated Statements of Income.
         
 
Realized/unrealized gains (losses) include the realization of our derivative contracts through maturity and changes in fair value of our hedged firm commitments.  We recognize transfers into and out of Level 3 as of the end of each reporting period.  Transfers into Level 3 represent existing assets or liabilities that were previously categorized at a higher level for which the unobservable inputs became a more significant portion of the fair value estimates.  Transfers out of Level 3 represent existing assets and liabilities that were classified previously as Level 3 for which the observable inputs became a more significant portion of the fair value estimates.

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

The estimated fair value of our consolidated long-term debt, including current maturities, was $5.4 billion at September 30, 2011, and $4.7 billion at December 31, 2010.  The book value of long-term debt, including current maturities, was $4.9 billion and $4.3 billion at September 30, 2011, and December 31, 2010, respectively.  The estimated fair value of long-term debt has been determined using quoted market prices of ONEOK’s and ONEOK Partners’ senior notes or similar issues with similar terms and maturities.
 
 
C.           RISK MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES

Our Energy Services and ONEOK Partners segments are exposed to various risks that we manage by periodically entering into derivative instruments.  These risks include the following:
 
·  
Commodity price risk - We are exposed to the risk of loss in cash flows and future earnings arising from adverse changes in the price of natural gas, NGLs and crude oil.  We use commodity derivative instruments such as futures, physical forward contracts, swaps and options to reduce the commodity price risk associated with a portion of the forecasted purchases and sales of commodities and natural gas and natural gas liquids in storage.  Commodity price volatility may have a significant impact on the fair value of our derivative instruments as of a given date;
·  
Basis risk - We are exposed to the risk of loss in cash flows and future earnings arising from adverse changes in the price differentials between pipeline receipt and delivery locations.  Our firm transportation capacity allows us to purchase natural gas at a pipeline receipt point and sell natural gas at a pipeline delivery point.  As market conditions permit, our Energy Services segment periodically enters into basis swaps between the transportation receipt and delivery points in order to protect the fair value of these location price differentials related to our firm commitments;
·  
Currency exchange rate risk - As a result of our Energy Services segment’s activities in Canada, we are exposed to the risk of loss in cash flows and future earnings from adverse changes in currency exchange rates on our commodity purchases and sales, primarily related to our firm transportation and storage contracts that are transacted in a currency other than our functional currency, the United States dollar.  To reduce our exposure to exchange-rate fluctuations, we use physical forward transactions, which result in an actual two-way flow of currency on the settlement date in which we exchange United States dollars for Canadian dollars with another party; and
·  
Interest-rate risk - We are also subject to fluctuations in interest rates.  We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and, at times, interest-rate swaps.
 
The following derivative instruments are used to manage our exposure to these risks:
 
·  
Futures contracts - Standardized exchange-traded contracts to purchase or sell natural gas and crude oil at a specified price, requiring delivery on or settlement through the sale or purchase of an offsetting contract by a specified future date under the provisions of exchange regulations;
·  
Forward contracts - Commitments to purchase or sell natural gas, crude oil or NGLs for physical delivery at some specified time in the future.  We also use currency forward contracts to manage our currency exchange rate risk.  Forward contracts are different from futures in that forwards are customized and nonexchange traded;
·  
Swaps - Financial trades involving the exchange of payments based on two different pricing structures for a commodity or other instrument.  In a typical commodity swap, parties exchange payments based on changes in the price of a commodity or a market index, while fixing the price they effectively pay or receive for the physical commodity.  As a result, one party assumes the risks and benefits of movements in market prices, while the other party assumes the risks and benefits of a fixed price for the commodity.  Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts; and
·  
Options - Contractual agreements that give the holder the right, but not the obligation, to buy or sell a fixed quantity of a commodity, at a fixed price, within a specified period of time.  Options may either be standardized and exchange traded or customized and nonexchange traded.

Our objectives for entering into such contracts include but are not limited to:
 
·  
reducing the variability of cash flows by locking in the price for all or a portion of anticipated index-based physical purchases and sales, transportation fuel requirements, asset management transactions and customer-related business activities;
·  
locking in a price differential to protect the fair value between transportation receipt and delivery points and to protect the fair value of natural gas or NGLs that are purchased in one month and sold in a later month;
·  
reducing our exposure to fluctuations in interest and foreign currency exchange rates; and
·  
reducing variability in cash flows from changes in interest rates associated with forecasted debt issuances.

Our Energy Services segment also enters into derivative contracts for financial trading purposes primarily to capitalize on opportunities created by market volatility, weather-related events, supply-demand imbalances and market liquidity inefficiencies, which allow us to capture additional margin.  Financial trading activities are executed generally using financially settled derivatives and are normally short term in nature.

With respect to the net open positions that exist within our marketing and financial trading operations, fluctuating commodity prices can impact our financial position and results of operations.  The net open positions are actively managed, and the impact of the changing prices on our financial condition at a point in time is not necessarily indicative of the impact of price movements throughout the year.

Our Distribution segment also uses derivative instruments to hedge the cost of anticipated natural gas purchases during the winter heating months to protect our customers from upward volatility in the market price of natural gas.  The use of these derivative instruments and the associated recovery of these costs have been approved by the OCC, KCC and regulatory authorities in certain of our Texas jurisdictions.

At September 30, 2011, we and ONEOK Partners had forward-starting interest-rate swaps that have been designated as cash flow hedges of the variability of interest payments on a portion of forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued.  At December 30, 2010, we and ONEOK Partners did not have any interest-rate swap agreements.

Accounting Treatment

We record all derivative instru